Korea’s economy could start to shrink from 2040s without dramatic changes, study warns

People walk past Gwanghwamun Square in Seoul, May 7. Yonhap

The Korean economy could start to shrink approximately 10 years from now if its current population structure and productivity persist, a study by the Bank of Korea (BOK) showed, Monday.

In a report titled, “Korea ranked second in the world for R&D, yet productivity stagnates,” the central bank’s Economic Research Institute noted that the Korean economy is likely to face a phase of “negative growth” in the 2040s unless the country achieves dramatic changes, such as a significant rebound in the birthrate or substantial improvements in productivity.

The country’s ultra-low birthrate was the most prominent reason for the gloomy outlook. After peaking at 51.84 million in 2020, Korea’s total population has been on a continuous decline and is expected to fall to 50.06 million in 2040 and to 37.18 million in 2070.

Furthermore, the report highlights that overall economic innovations, crucial to counteracting such demographic challenges, are currently inadequate.

The average annual productivity growth rate of companies saw a significant decline, dropping from an average of 6.1 percent in 2001-2010 to just 0.5 percent in 2011-2020.

The productivity growth rate of innovative firms, such as those filing patents in the U.S., also experienced a sharp decline, falling from an average of 8.2 percent to 1.3 percent during the same period.

These declines occurred despite increased spending on R&D by Korean companies, which ranked second among Organization for Economic Cooperation and Development (OECD) members. This spending accounted for 4.1 percent of Korea’s gross domestic product (GDP) in 2022.

“The rise in the quantity of innovative output, particularly among large corporations, did not align with an improvement in quality,” the report said.

Even though the top 5 percent of large corporations by number of employees have driven the increase in overall R&D expenditures and patent applications, the figures indicating actual productivity, such as number of patent citations, have noticeably declined since the mid-2000s and have not returned to previous levels.

For small- and medium-sized enterprises, difficulties in securing funding have contributed to a slowdown in productivity growth, which had been robust prior to the 2010s. Additionally, the entry of new companies with high innovation potential has decreased.

The report attributed the lack of qualitative improvements in corporate innovation to the reduced proportion of spending on basic research since the 2010s, which decreased from 14 percent of their annual spending in 2010 to 11 percent in 2021.

Based on this analysis, the report urged the strengthening of basic research, enhancing the supply of venture capital to fund innovation and creating favorable social conditions to nurture innovative entrepreneurs.

“Using a structural model to estimate the effects of various policy scenarios, we found that strengthening basic research through increased funding and expanded industry-academia collaboration could raise the economic growth rate by 0.18 카지노사이트 percentage point,” the report said. “Improving funding conditions and increasing the entry of new firms could boost the growth rate by 0.07 percentage point.”

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