Low growth here to stay ---Demographics will limit economic expansion for years in Korea. KDI

A new report suggests that over five decades of continuous, high economic growth in Korea have come to en end.

An aging society is expected to dampen Korea’s potential economic growth, according to a study released yesterday by the Korea Development Institute.

There was some good news from the report: The impact of the global financial crisis in late 2008 was limited on the Korean economy and isn’t expected to be much of a drag on potential growth.

That differs from advanced economies such as the United States and United Kingdom, whose potential growth might dip as a result of the financial crisis.

The research institute said that the amount of insolvent bonds in the Korean banking industry at the end of last year reached 24.5 trillion won ($22.5 billion). This is only 1.86 percent of total loans, which is considered low.

It said that the Korean banking industry’s ability to maintain financial soundness helped ease possible negative effects on the nation’s potential growth from the global crisis.

Nevertheless, Korea’s aging society is a ticking time bomb for the country’s economic growth.

Immediately after the global financial crisis, potential growth fell to 4.3 percent, also partly due to falling productivity and facility investment.

Potential growth is the maximum growth that can be achieved nationally by fully utilizing labor, capital and technology without causing inflation to rise.

The KDI report said Korea’s potential growth rate between 2001 and 2007 was in the mid 4 percent range. However, it fell to the low 4 percent level because of falling productivity.

In fact, after the global crisis, labor’s contribution to the economy has grown 0.58 percentage points, but companies’ investments have fallen. Due to falling investment in construction and businesses’ lack of facility investment, the contribution of capital has fallen 0.44 percentage points.

There have been growing concerns that as Korea’s society ages, Asia’s fourth largest economy could enter an era of relatively low growth.

KDI advises that the government pursue stable growth.

It said a macroeconomic policy in which economic growth targets exceed the nation’s potential growth would bring about risks of inflation and threaten fiscal soundness.

The government’s economic target for this year is 5 percent.

 Source : http://joongangdaily.joins.com/article/view.asp?aid=2936454