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IMF Says Korea Facing Low Growth

Posted December. 22, 2006 03:28,   


The International Monetary Fund (IMF) warned that the Korean economy would face serious difficulties in the future due to various risk factors such as labor shortages and low productivity of its service sector. The fund expected Korea’s growth potential would drop to an annual average of 2% by the middle of the 21st Century. The IMF said in its report under the title, Korea’s move toward a knowledge-based economy, that this paper acquired December 21, that Korea’s growth potential, which was 8% annually until just before the financial crisis, is projected to fall to an annual 2% in the middle of the 21st Century.

Regarding the risk factors that threaten the Korean economy, the report cited labor shortages caused by population aging and inflexibility of the labor market, reduction of competitiveness in the service sector, inefficient capital market and financial difficulties due to the expansion of the government’s welfare budget.

The economically active population in Korea ages 15 and over has been on the rise since 1980, but is expected to go down from around 2015.

That’s because population aging in Korea is developing most rapidly among the OECD member countries, and the labor market is mainly centered on regular workers, making the market extremely inflexible.

The fund also pointed out the drop in competitiveness of the service sector as one of the risk factors.

As of late last year, the production of the service sector accounted for about a half of Korea’s GDP and 2/3 of Korea’s total employees work in this sector. But the labor productivity of the field is merely half that of the manufacturing sector.

The report said, “Korea is the only country which has the productivity of the service sector this low compared to the manufacturing among the OECD countries. Korea became less competitive as the government is not fully open to the principle of market competition – for example, by allowing only non-profit organizations to operate schools or hospitals.”

It also said that Korea’s capital market needs change, and added companies suffer from financing as banks, insurers and securities companies are divided into all different sectors.

In addition, it warned that Korea’s welfare budget could increase to 15% of its GDP in the long term due to the aging population, and said the budget would worsen if the government does not reform the pension policy.

Meanwhile, the Korean government recently projected the growth potential between 2006 and 2030 at around 3.8%. In detail, the government said the potential would be 4.9% from 2006 to 2010, 4.3% between 2011 and 2020 and 2.8% between 2021 and 2030.

legman@donga.com sanhkim@donga.com