President Moon Jae-in’s administration has been trying to shore up the country’s economic growth rate above 2 percent this year. It seems to be concerned that any lower figure will throw cold water on the ruling party’s prospects in the general elections set for April.
The government plans to announce its growth outlook for next year in mid-December. But Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, recently said all efforts would be made to achieve a growth rate of 2.3 percent in 2020.
Experts caution that it will be difficult to reach the government’s growth goals, given deteriorating economic conditions at home and abroad.
Even if the government-set targets are met, the country would see its gross domestic product increase at a far slower pace than its potential growth rate for two consecutive years. The Bank of Korea has put the country’s potential growth rate -- the maximum growth an economy could achieve through all factors of production without prompting inflation -- at 2.5-2.6 percent for 2019-2020. Korea’s economy expanded 2.7 percent in 2018.
What is further worrisome is that the growth potential of Asia’s fourth-largest economy has been weakening at a steep pace since the 2000s. From 5-5.2 percent during 2001-2005, it fell to 4.1-4.2 percent in 2006-2010, 3-3.4 percent in 2011-2015 and 2.7-2.8 percent in 2016-2020.
A weakening of traditional manufacturing industries coupled with low birthrate and rapidly-aging population are behind the downward trend in growth potential. Anti-corporate policies pursued by the Moon administration since it assumed office in 2017 has accelerated the slackening of Korea’s growth potential.
According to recent data from the Organization for Economic Cooperation and Development, Korea recorded a 0.4 percentage point fall in potential growth rate over the past two years, the third-steepest drop among the 36 member states of the group. Over the cited period, 18 OECD member countries, including the US and Japan, saw an expansion in their growth potential.
The state-run think tank Korea Development Institute last week cut its growth outlook for this year to 2 percent from its previous forecast of 2.4 percent. With most private institutions predicting Korea’s economy would expand far below 2 percent in 2019, the KDI certainly tried to stay in line with the government’s growth projection.
Still, the institute warned of the possibility of the country’s growth potential weakening sharply, noting a steep decline in the private sector’s contribution to economic growth.
In the third quarter of this year, when the economy grew 0.4 percent from three months earlier, declining private investment peeled 0.7 percentage point off the growth rate, with private consumption making zero contribution, according to BOK data released last month.
The value of investments by Korea’s top 30 conglomerates fell 17 percent in the January-September period from a year earlier to a combined 54.33 trillion won ($46.61 billion), showed separate data released Sunday by CEO Score, a market research firm.
To bolster short-term growth, Korea needs a mix of monetary policy easing and expansionary fiscal expenditure. The central bank, which slashed its policy rate by a quarter percentage point to 1.25 percent -- the lowest level since June 2016 -- is expected to make at least one additional rate cut in the next six months.
It should be noted, however, that there will be limits to the effect of such stimulus measures, given that the potential growth rate is continuing to fall.
Key to boosting growth potential is to improve productivity, as shown in the US and other advanced economies that have seen their growth potential expand in recent years.
To help raise productivity, the government should accelerate regulatory, labor and structural reforms, which would lead to reinvigorating corporate activity and market vitality.
The Moon administration has so far shown no signs of changing its ill-conceived policies that have dragged down growth and exacerbated income inequality. Before it is too late, it should abandon its preoccupation with fiscal spending and reluctance to push for reforms.
Otherwise, the government might do irrecoverable damage to the economy by letting its potential growth rate slide more sharply by adhering to policies that place political interests ahead of economic good sense.