South Korea's Potential Growth Rate Falls Below 2% for the First Time… A Signal of Economic Weakness

1️⃣ Why Did South Korea's Potential Growth Rate Drop Below 2%?

The OECD has projected that South Korea's potential growth rate will reach only 1.98% by 2026.
Major domestic research institutions also predict growth in the 1% range,
indicating a significant sign of economic weakness for the country.

📉 What is the Potential Growth Rate?

• It is the maximum growth rate an economy can achieve without causing inflation.
• It represents the optimal utilization of labor, capital, and technology.

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2️⃣ Why Is the Potential Growth Rate Declining?

✅ 1. Low Birth Rate and Aging Population – The Workforce is Shrinking

South Korea's low birth rate and aging population are reducing the size of its working-age population.

• Working-age population:
  • This refers to people aged 15 to 64 who are capable of participating in economic activities.
  • When this population shrinks, the labor supply decreases, ultimately lowering the economic growth rate.

📌 For example:

• In 2017, South Korea's potential growth rate was 3.00%,
  but it is projected to drop to 1.98% by 2026.
• This marks the seventh-largest decline among OECD member countries.
• As the labor force decreases, the productivity of the economy also falls.

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✅ 2. Stagnation of Total Factor Productivity (TFP) – Declining Efficiency

• What is Total Factor Productivity (TFP)?
  • TFP measures the increase in productivity driven by technological innovation, institutional improvements,
    and factors beyond traditional labor and capital.
  • Simply put, it represents the ability to create more value with the same amount of resources.

📌 The problem?

• In South Korea, the pace of technological innovation is slowing,
  and its labor market remains rigid, hindering improvements in TFP.
• This lack of productivity growth is a critical factor in reducing the nation's economic potential.

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✅ 3. Weak Domestic Consumption and Global Economic Slowdown

• Domestic consumption and investment are shrinking,
  causing the domestic market to lose momentum.
• At the same time, U.S. interest rate hikes and
  the Chinese economic slowdown are putting pressure on South Korea's exports.

📌 Why is Weak Domestic Consumption a Problem?

• When businesses cut back on investments and consumers spend less,
  the main engine of economic growth stalls.
• This leads to a cycle of job reduction and income stagnation, worsening the economic slowdown.

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3️⃣ Why Structural Reform is Necessary

KDI (Korea Development Institute) emphasized that structural

reform is essential to maintain South Korea's economic growth.

📌 What is Structural Reform?

• It refers to improving inefficient economic structures.
• Key goals include flexibility in wage systems and restructuring the labor market
  to enhance labor efficiency and productivity.

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✅ 1. Labor Market Flexibility

• South Korea's labor market is known for its rigid structure and a significant gap between regular and irregular workers.
• By improving flexibility, companies can hire more easily,
  and the overall productivity of the economy can increase.

✅ 2. Technological Innovation and Digital Transformation

• Economic growth does not simply come from adding more workers.
• Technological innovation and digital transformation are needed to boost productivity.
• This includes Artificial Intelligence (AI), Big Data, and robotic automation.

✅ 3. Stimulating Domestic Demand through Fiscal Policy

• If the government invests in infrastructure projects and public job programs,
  it can create jobs, leading to increased consumption and a positive economic cycle.

📌 Real-world example:

• When the government initiates large-scale infrastructure projects or public job programs,
  people get jobs, increase spending, and the economy revitalizes.
• If the Bank of Korea (BOK) lowers interest rates, the burden of mortgage and business loans is reduced,
  encouraging home purchases and business investments.

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4️⃣ Conclusion – How Can South Korea's Economy Recover?

South Korea's declining potential growth rate is due to a combination of low birth rates, aging population,
stagnant productivity, and weak domestic consumption.

However, there are solutions:

1. Labor Market Reforms – Create an environment where companies can hire more easily.
2. Technological Innovation and Digital Transformation – Boost productivity with advanced technologies.
3. Aggressive Government Investment – Stimulate the domestic market and encourage consumption.

💡 An economy doesn't grow on its own.
Now is the time to address structural issues,
enhance productivity, and regain growth potential.