Think tank stresses stable, not higher, economic growth

With the government aiming for economic growth of five percent, the state-run Korea Development Institute said Thursday that excessive growth will have more side effects than stable growth of four percent.

The think tank said Korea’s potential growth rate is 4.3 percent in the report, “An Assessment Report on the Potential Growth of the Korea Economy Since the Global Financial Crisis.” The potential growth rate is a mid- to long-term growth trend that can be safely achieved by using all resources a country can use.

The report said Korea’s potential growth rate was 4.5 percent between 2001 and 2007 but dropped to 4.3 percent in the wake of the financial crisis due to weaker corporate investment. The figure, however, fell to less than that of developed economies such as the U.S., the U.K. and Germany, which saw a decline of half a percentage point after 2008.

During the 1997 financial crisis in Korea, the country`s potential growth rate plummeted from 6.5 percent to 4.5 percent.

The think tank said the potential rate of Korea was not hit hard because the global financial crisis did not directly translate into a crisis in Korea`s financial system. Last year, non-performing loans at Korean banks reached 24.5 trillion won in value, accounting for just 1.86 percent of all loans and far lower than in the 1997 financial crisis, when non-performing loans exceeded 10 percent of all loans.

The report said the government should focus on stable growth rather than increasing the growth rate. If all possible economic stimulus measures are used, it said, this could cause price instability and a worsening financial situation.

The think tank apparently hinted at the government needing to lower its economic growth target of five percent.

The report predicted the economic growth rate at 4.2 percent and the think tank`s director Hyun Oh-seok said in April, “The government can gain the market`s confidence only when it releases an accurate forecast,” stressing the need to revise the forecast several times.

weappon@donga.com