‘Economic basic strength’ decreased by 0.4%p in 4 years
“This is due to the low birth rate and the decrease in the working-age population.
The main reason is the slow pace of industrial restructuring.”
It was found that the potential growth rate, which corresponds to the basic strength of the Korean economy, fell by 0.4 percentage points compared to four years ago. Korea‘s potential growth rate, which fell behind that of the United States for the first time last year, is expected to be only 2.0% this year, lower than that of the United States for the second consecutive year.
According to the Ministry of Strategy and Finance on the 20th, Korea’s potential growth rate this year, estimated by the Organization for Economic Co-operation and Development (OECD), is 2.0%. This is a 0.4 percentage point decrease from 2020 (2.4%). Korea’s potential growth rate fell to 2.3% in 2022 and then to 2.0% last year. Potential growth rate is the maximum growth rate that can be achieved without stimulating prices by investing labor and capital, and usually refers to the ‘basic strength’ of the economy.
This is in contrast to the rebounding potential growth rate of the United States, whose economy is about 15 times larger than Korea’s. The United States’ potential growth rate increased from 1.9% in 2020 to 2021 to 2.0% in 2022. Last year, it was 2.1%, surpassing Korea (2.0%) for the first time since 2001 when potential growth rate statistics were calculated. The United States’ potential growth rate this year is 2.1%, which is 0.1 percentage point higher than Korea’s.
Some say it is unusual for Korea to have a lower potential growth rate than the United States. Potential growth rate is composed of labor, capital, total factor productivity, etc. This is because countries with higher income levels tend to have lower total factor productivity growth rates. Total factor productivity is an indicator of how much a country’s overall technology and social systems contribute to economic growth. There are limits to the national economy’s growth through labor and capital alone, so it is considered a key variable that determines the potential growth rate.
Not only the United States, but also major developed countries such as the United Kingdom and Germany have recently shown an upward trend in potential growth rates. Germany fluctuated from 0.7% in 2020 to 0.8% this year, and the UK rose from 0.9% in 2020 to 1.2% last year and 1.1% this year.
Unlike major developed countries, Korea’s potential growth rate continues to fall because the working-age population is decreasing due to low birth rate and worsening aging. In fact, according to Statistics Korea, the proportion of the working-age population aged 15 to 64 is expected to plummet from 70.2% in 2024 to 51.9% in 2050 and 45.8% in 2072. The slow pace of industrial restructuring is also considered one of the main reasons for the decline in Korea’s potential growth rate.
Lee Jeong-hee, a professor of economics at Chung-Ang University, pointed out, “In terms of labor force, we need to increase the birth rate by resolving issues such as jobs so that young people can have children.” He added, “In terms of industry, the growth rate will increase only if we diversify domestic major industries other than semiconductors and provide support so that they can develop.”
Sejong = Reporter So Seol-hee [email protected]
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