OECD warns of sharp decline in Korea's growth

The Organization for Economic Cooperation and Development (OECD) has projected that South Korea’s potential growth rate will fall below 2 percent for the first time this year, reaching only 1.9 percent. This follows earlier projections by domestic institutions, such as the Korea Development Institute (KDI) and the National Assembly Budget Office, which had already lowered the country’s potential growth rate to the one percent range. This marks the first time the OECD has warned of South Korea’s potential growth rate plunging into the one percent range. Notably, the OECD expects the potential growth rate, which was still around 2.2 percent as recently as last year, to drop sharply by 0.3 percentage points this year alone. This indicates that the country’s fundamental economic strength is being depleted at a rapid pace.

The potential growth rate refers to the maximum rate of economic growth a country can achieve by utilizing all its productive factors, such as labor, capital, and technology, without triggering inflation. While it is natural for the potential growth rate to slow as an economy matures, South Korea’s decline has been alarmingly steep. Since the 2000s, the country has been unable to escape a pattern of its potential growth rate dropping by one percentage point every five years. South Korea has even fallen behind the U.S., whose economy is 15 times larger, and has been unable to catch up for several years. Among the G7 countries, only Japan, which is mired in its own “Lost Three Decades,” has experienced a decline in potential growth rate comparable to South Korea’s since 2021.

This situation is attributed to South Korea’s failure to address its low birth rates, aging population, and the need to fundamentally overhaul its economic structure through structural reforms. Aside from the externally forced reforms during the Asian financial crisis, the country has rarely undertaken meaningful structural reform. Successive administrations have pledged reforms in labor, education, pensions, and regulatory innovation, but many of these efforts have remained mere rhetoric. As a result, despite a shrinking workforce due to low birth rates and an aging population, as well as declining capital investment, South Korea’s high-cost, low-efficiency economic structure has persisted. Consequently, the country’s labor productivity ranks near the bottom, 33rd out of 38 OECD countries. Moreover, South Korea has failed to cultivate new industries that could become growth engines, leaving its export structure stagnant for the past 20 years.

Meanwhile, major advanced economies, including the U.S., which raised its potential growth rate to 2.5 percent last year, have successfully reversed declines through technological innovation and flexible labor market policies. South Korea, too, must create conditions that enable innovative companies to pioneer new markets and improve productivity by overhauling wage systems and easing rigid labor regulations. Now is not the time to focus on issues like revising the Yellow Envelope Act or introducing a 4.5-day workweek, as these could hinder corporate innovation and growth. With the global economic landscape being reshaped by the AI revolution and the tariff wars initiated by the Trump administration, this moment could be South Korea’s last chance to restructure its industrial base and implement structural reforms.