Korea’s growth potential halves since 1997 crisis

South Korea’s growth potential has been almost cut in half since the economy survived the Asian financial crisis, data showed Tuesday, sparking concerns over the lack of drivers for future growth.

The potential growth rate of Asia’s fourth-largest economy is estimated at an annual 3.7 percent as of this year, compared with 6.1 percent tallied just before the outbreak of the financial turmoil, according to data by the Bank of Korea, Statistics Korea and the Financial Supervisory Service.

The figure declined to the 4 percent range in 2000, before further retreating to the 3 percent level, the data showed. The potential growth rate refers to the maximum possible rate at which an economy can expand without triggering inflation.

On Nov. 21, 1997, Korea signed an memorandum of understanding with the International Monetary Fund for a $35 billion bailout fund after Michel Camdessus, the then managing director of the IMF, paid a covert visit to Seoul five days earlier.

The crisis wrecked the country with massive layoffs and corporate failures. The local currency tumbled to 2,000 won against the U.S. dollar, putting the economy on the brink of a default. The Korean economy shrank 5.7 percent on-year in 1998.

The economy has made a remarkable turnaround in the past 15 years since the financial crisis, with per-capital gross domestic product surpassing the $20,000 mark in 2007, 2010 and 2011.

Foreign exchange reserves, which had virtually dried up in 1997, grew by 16-fold to $323.5 billion as of the end of October.

In spite of the swift recovery, experts warned South Korea now faces a low-growth phase that spawns a lot of socio-economic discrepancies such as high unemployment and a yawning income gap between rich and poor.

The Gini index, a gauge of a country’s income inequality, rose to 0.313 in 2011 from 0.264 in 1997. A figure closer to one indicates more inequality.

Given the protracted global downturn, experts said that Korea should embrace the reality of low growth and find a way to boost overall productivity. With a relatively small market, the country needs to consider ways to nurture smaller firms and the service industry, as it has done with manufacturers to grow into a global player, they said.

“Korea is a different economy from what it used to be before the crisis. Fostering growth of service companies and smaller businesses is a must,” said Kwon Soon-woo, a chief economist at Samsung Economic Research Institute.

The South Korean economy is predicted to grow 2.4 percent this year, with a 3 percent growth foreseen for next year. In an effort to boost the economy, the central bank cut the benchmark rate twice this year to 2.75 percent.
 
(Yonhap News)