By Kim Jae-kyoung
The Korean economy is feared to suffer lethargic growth down the road.
Most economic indicators, including exports and investments, are pointing to a downturn, signaling that Asia's fourth-largest economy faces a rocky path.
The problem is this is not just a passing or cyclical phenomenon but the beginning of a long-term structural slowdown.
This means without structural reform, Korea will see a gradual decline in GDP growth, following in the footsteps of Japan that has suffered a decades-long slump.
In other words, the economy's growth potential, the GDP growth rate that can be achieved without causing inflation, will continue to fall in the coming years.
In a February report, the International Monetary Fund (IMF) warned that Korea's potential growth rate will hover at low 2 percent levels in the 2020s and dip to the 1 percent range in the 2030s due to low productivity and distortions in the country's labor market.
It forecast that the nation's GDP growth rate will slow to 3 percent in 2018 and 2.9 percent in 2019. It expects growth to further fall to 2.6 percent in 2022.
The IMF's concerns over growth potential are shared widely by global economists.
"Low productivity has been a problem for the Korean economy for a long time," said Sohn Sung-won, professor of economics at California State University-Channel Islands.
"Significantly reducing government regulations and providing incentives for small businesses to hire people?should help raise productivity and economic growth."
Antonio Fatas, economics professor at INSEAD Singapore Campus, concurred.
"The only way to stop this trend is to reform and open up the sectors where productivity remains incredibly low," he said.
"In the more advanced sectors where Korea is at the frontier, it is hard to see?productivity?growing faster than 1 percent or 1.5 percent. Korea needs to make an effort to catch up in the other sectors."
How to improve productivity
One of the critical issues here is how to improve productivity by fostering properly trained workers and fully utilizing the nation's manpower.
"Not properly utilizing young people in a labor market leads to human capital erosion and ultimately stifles an economy's potential," said Katrina Ell, an economist at Moody's Analytics.
James Rooney, professor of international finance at Sogang University, believes Korea has a heavily underutilized labor force and economically available population.
"A major factor is lack of the needed skill sets, and this is a huge educational, training, vocational preparation problem and opportunity," he said.
In his view, Korea won't be able to solve any problems with artificial employment solutions.
He explained the demand for suitably skilled workers is out there but the supply of qualified and properly trained workers is lacking, and it is neither because of a shortage of people nor because of a shortage of human talent.
"Korean companies are very weak at properly finding, using and developing the human talent that is available to them, for many reasons including weak and unimaginative management, regulations and technical labor barriers, social conditions and hierarchical attitudes, and others," he said.
Rooney pointed out these three points are the most urgent economic issues to be addressed, with enlightened leadership from President Moon Jae-in and his administration.
"The GDP growth rate forecast from the IMF does not surprise me, and absent real changes to address the issues stated above I can imagine the IMF will turn out to be correct," he said.
He thinks Korea's potential growth rate over the next decade should really be in the range of 4 percent to 6 percent.
"When Korea's GDP growth rate tracks at something less than half of China's we are not properly engaging with the real growth engine of the world economy," he said.
The Korean economy is feared to suffer lethargic growth down the road.
Most economic indicators, including exports and investments, are pointing to a downturn, signaling that Asia's fourth-largest economy faces a rocky path.
The problem is this is not just a passing or cyclical phenomenon but the beginning of a long-term structural slowdown.
This means without structural reform, Korea will see a gradual decline in GDP growth, following in the footsteps of Japan that has suffered a decades-long slump.
In other words, the economy's growth potential, the GDP growth rate that can be achieved without causing inflation, will continue to fall in the coming years.
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In a February report, the International Monetary Fund (IMF) warned that Korea's potential growth rate will hover at low 2 percent levels in the 2020s and dip to the 1 percent range in the 2030s due to low productivity and distortions in the country's labor market.
It forecast that the nation's GDP growth rate will slow to 3 percent in 2018 and 2.9 percent in 2019. It expects growth to further fall to 2.6 percent in 2022.
The IMF's concerns over growth potential are shared widely by global economists.
"Low productivity has been a problem for the Korean economy for a long time," said Sohn Sung-won, professor of economics at California State University-Channel Islands.
"Significantly reducing government regulations and providing incentives for small businesses to hire people?should help raise productivity and economic growth."
Antonio Fatas, economics professor at INSEAD Singapore Campus, concurred.
"The only way to stop this trend is to reform and open up the sectors where productivity remains incredibly low," he said.
"In the more advanced sectors where Korea is at the frontier, it is hard to see?productivity?growing faster than 1 percent or 1.5 percent. Korea needs to make an effort to catch up in the other sectors."
How to improve productivity
One of the critical issues here is how to improve productivity by fostering properly trained workers and fully utilizing the nation's manpower.
"Not properly utilizing young people in a labor market leads to human capital erosion and ultimately stifles an economy's potential," said Katrina Ell, an economist at Moody's Analytics.
James Rooney, professor of international finance at Sogang University, believes Korea has a heavily underutilized labor force and economically available population.
"A major factor is lack of the needed skill sets, and this is a huge educational, training, vocational preparation problem and opportunity," he said.
In his view, Korea won't be able to solve any problems with artificial employment solutions.
He explained the demand for suitably skilled workers is out there but the supply of qualified and properly trained workers is lacking, and it is neither because of a shortage of people nor because of a shortage of human talent.
"Korean companies are very weak at properly finding, using and developing the human talent that is available to them, for many reasons including weak and unimaginative management, regulations and technical labor barriers, social conditions and hierarchical attitudes, and others," he said.
Rooney pointed out these three points are the most urgent economic issues to be addressed, with enlightened leadership from President Moon Jae-in and his administration.
"The GDP growth rate forecast from the IMF does not surprise me, and absent real changes to address the issues stated above I can imagine the IMF will turn out to be correct," he said.
He thinks Korea's potential growth rate over the next decade should really be in the range of 4 percent to 6 percent.
"When Korea's GDP growth rate tracks at something less than half of China's we are not properly engaging with the real growth engine of the world economy," he said.
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