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Korea’s two economic problems

Korea’s gross national income at purchasing power parity is close to the average of the EU.
Mar 18,2017
Since the global financial crisis, Korea’s growth rate remains below 3 percent. In the past, the country used to see more than 10 percent growth. When the growth was 5 percent, Koreans used to be disappointed and say it was a lost period. It was only a while ago that we were surprised to see the potential growth rate of 4 percent because it was too low. Right now, we hope that the economy actually grows over 3 percent. What has gone wrong?

Some say Korea has fallen into the middle income trap. In fact, many countries experienced a radical plunge after a skyrocketing growth rate when they reached a middle income stage. Many slowed down, and some fail to become advanced economies. The Republic of South Africa and Brazil are the representative examples of the countries that fell into the middle income trap.

How about Korea? Did it fall into the “absolute crisis” of low growth, as some may suggest recently? These concerns, however, are too extreme. We reached the $30,000 gross national income per capita at purchasing power parity a long time ago.

Furthermore, Korea’s gross national income per capita at purchasing power parity is close to the average of the European Union. International organizations such as the International Monetary Funds and the World Bank are classifying Korea as an advanced economy.

In fact, Korea is one of the few exceptions that did not fall into the middle income trap. An advanced country often has a low growth rate, and Korea’s growth rate is slowed down because it has become an advanced country.

Over the past century, the national income per capita of the United States grew an average 1.8 percent. Because Korea’s populations growth is nearly zero, an annual 2 percent growth means a faster growing economy than that of the United States.

There are still some regrets. Korea’s gross national income per capita at purchasing power parity is about two-thirds of that of the United States. If we are growing at the similar rate of the United States, we will never achieve the level of the United States.

If the U.S. economy continues to grow at the rate of 1.8 percent, and if our economy grows at the rate of 3 percent, we can only catch up with the United States in 35 years.

If we grow at 4 percent, it takes 20 years. For the next 20 to 30 years, we need a 3 to 4 percent annual growth. But the possibility is not that high and that is the real danger.

First is the matter of technological innovation. In economics, the slowdown of the total factor productivity is the key reason behind the middle income trap or a slowed growth at the early stage of an advanced economy.

When the economy is developed, quantitative growth of labor and capital are not enough to achieve further growth. Only technological innovation will increase the productivity to allow a country to become an advanced country and maintain sustainable growth.

For continuous technology innovation, Korea desperately needs to lift its protective shield and encourage competition. When there are protective measures, companies want to maintain them or reinforce them to secure profits rather than innovating technology to seek compensations. That is the so-called rent-seeking.

Protective shields can be created through various means, and in Korea, regulations and existence of conglomerates are the key. Regulations prevent companies’ free entry to markets; chaebols infringe fair competition by giving their affiliates all works. The problems are particularly serious in the service industry, where the country needs further growth.

Second is the issue of an aging society. Although the aging of society began later in Korea than other advanced countries, it is progressing with unprecedented speed. The aging of society not only reduces the working population but also increase the elderly population, increasing the economic burden.

Furthermore, the aging of the society lowers the vitality of an economy and stalls technology innovation.

While innovation of in economy is often done by new companies, and new companies are often created by the young. The aging of the society will reduce the young, stop the creation of new companies, slow down technology innovation and take away the economic vitality.

Unless Korea resolves these two problems, we will never become a more advanced economy. The new administration to be selected soon must reflect deeply to resolve these two issues.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, March 16, Page B9.

*The author is a professor of economics at Korea University.

Shin Kwan-ho