BOK sees fall in growth potential

President Park Geun-hye said she feels worried whenever she thinks of “what our country will feed on 10 years later” during a New Year meeting with political and business leaders Monday. She made the remark while emphasizing the need to accelerate structural reforms to put the sluggish economy on track for solid long-term growth.

Park and other participants at the meeting should have also been reminded that the country’s working-age population is set to begin decreasing next year after peaking at 37.04 million this year. The number of people aged 15-64 in Korea is forecast to continue to drop to 32.89 million in 2030, 28.87 million in 2040 and 21.86 million in 2060, according to data from the state statistical office. Accordingly, the proportion of economically active people in the total population, which reached the highest level at 73.1 percent in 2012, is projected to shrink to 49.7 percent by 2060.

The lack of future growth engines and decreasing working-age population threaten to further undermine the growth potential of Asia’s fourth-largest economy struggling with declining exports and sluggish industrial activities.

The Bank of Korea on Wednesday forecast the country’s potential growth rate ― the maximum possible rate at which an economy can expand without triggering inflation ― would remain at 3-3.2 percent for the period between 2015 and 2018, down from 3.2-3.4 percent in 2011-14.

An earlier study by the Korea Development Institute, a state-funded think tank, predicted the rate would fall from 3.1 percent in 2011-15 to 3 percent in 2016-20, 2.5 percent in 2021-25, 1.8 percent in 2026-30 and 1.4 percent in 2031-35.

“It seems that the Korean economy is being drawn deeper into the phase of low growth since the 2008 global financial crisis,” said Shin Se-don, an economics professor at Sookmyung Women’s University in Seoul. He cautioned that in parallel with this downward trend, the country has been saddled with growing risks that threaten to push it into an economic crisis.

Government policymakers are poised to continue to prop up growth by bolstering domestic demand, which they hope will offset the negative impact from external factors, including a slowdown in China, rising U.S. interest rates and low oil prices.

But many economists note that mounting household debt, an increasing number of lossmaking and heavily indebted companies and other internal risks pose more critical challenges for the Korean economy. They indicate these problems should be addressed in a more urgent and persistent manner to prevent them from blowing up into an economic crisis, perhaps triggered by external shocks.

From this viewpoint, the most immediate and foremost task for policymakers should be restructuring companies saddled with overcapacity and massive debt and putting the brakes on the steep rise in household debt, which is estimated to have surpassed 1.2 quadrillion won ($1 trillion) last year.

“A fundamental recovery of the Korean economy can hardly be achieved with the policy measures that the government has taken so far,” said Chun Sung-in, an economics professor at Hongik University in Seoul.

He suggested efforts to search for new growth engines should be made on the basis of the work to defuse and settle immediate internal risks to the economy.

Experts stress the need to carry out broader reforms in four major areas ― labor, finance, education and the public sector ― to enhance the efficiency and competitiveness of the economy. They say the government needs to push for structural reforms in a bolder way even at the risk of holding back growth in the near term.

Expanding the country’s growth potential will also require a set of comprehensive, far-sighted and substantial measures that could resolve socioeconomic structural problems, many economists indicate.

The immigration policy needs to focus on accepting highly skilled young workers who can make more contributions to boosting the country’s competitiveness and easing pressures on its welfare system.

Chun said housing and education costs should be reduced as an essential part of efforts to boost the country’s fertility rate, which has been stuck at around 1.2 percent ― among the lowest in the world ― over the past several years.

Drastic deregulation and effective support for research and development are needed to help local corporations become more competitive and innovative. The services sector, in which productivity has stalled, should be further advanced.

Experts note boosting employment is necessary for increasing household income, which they say will be more instrumental over the long term in sustaining growth than measures to encourage consumer spending. The government plans to raise the employment rate to 70 percent by 2017 from 65.7 percent in 2015.

Yoo Byung-kyu, an official at the National Economic Advisory Council, indicated all major advanced economies recorded an employment rate of more than 70 percent when their per capita gross domestic product surpassed $40,000. Korea’s per capita GDP is estimated to remain at about $27,500 last year, down from $27,970 in 2014.



By Kim Kyung-ho
(khkim@heraldcorp.com)