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IMF warns of growth declines for Korea soon

Feb 19,2018

A report by the International Monetary Fund (IMF) showed Sunday that Korea’s potential growth rate will hover in the low 2 percent levels in the 2020s and dip into the 1 percent range in the 2030s due to various factors.

The Washington-based global monetary organization said in its assessment of annual talks with Korean policy makers, Asia’s fourth-largest economy will face tough challenges in productivity and distortions in the country’s labor market.

It said Seoul needs to expand its social security net and do more to bolster its productivity, as well as reform the labor sector.

The IMF pointed out that while the economy has entered a recovery stage at present, its growth potential is steadily falling.

It said that while the country’s GDP grew by 3.2 percent in 2017, numbers will edge down to 3 percent this year and stand at 2.9 percent in 2019. Growth will further fall to 2.8 percent in 2020 and 2.7 percent in the following year before hitting 2.6 percent in 2022.

The organization said the country’s growth potential, as estimated based on “extended multivariate filters,” will stand around 2.2 percent in the 2020s and fall to around the 1 percent level in the 2030s.

To overcome such developments, the IMF said the country needs to improve its productivity and make it easier for people to find work. This entails structural reforms and expanded use of fiscal resources.

It said an injection of funds into infrastructure can positively affect productivity. It said support for child care and more aggressive labor policies can allow more people to join the work force, which is critical for pushing up growth potential.

The IMF said Korea needs to do more to ease restrictions related to production and hiring, and increase taxes on consumption and assets.

It claimed that if the country successfully pulls off necessary reforms in the coming years, its growth potential can move up 0.6 percentage point from what it would be without such changes.

The organization, moreover, said if the right choices are made, Korea’s long-term growth should improve and it will be less susceptible to external shocks since domestic growth will become more important. Korea currently is dependent on trade to fuel its growth.

It said that in the next decade the country’s current account surplus compared with the GDP will fall by around 2 percent and its fiscal deficit can rise 1.5-3 percentage points, which could cause the national debt to jump by some 30 percentage points.

The IMF, meanwhile, said that while the country can cope with a 16.4 percent increase in the minimum wage this year, further hikes need to be approached very carefully.

The base wage that employers must give to workers was increased to 7,530 won ($6.97) per hour from 6,470 in 2017.

It said the rise can boost consumption since it is backed by solid economic growth, although the pay increase can actually trigger unemployment and adversely affect the economy as a whole.

The global organization said that the government’s plans to provide employers with 3 trillion won to help pay for the hike in wages should be a temporary move to reduce the shock and should not be repeated. Yonhap