South Korean economy would run under 2 percent growth from next year if it cannot sharply improve productivity, according to state think tank Korea Development Institute (KDI).

According to a KDI report, the country’s real gross domestic product (GDP) growth could average 1.7 percent during the next decade from 2020 to 2029, under the assumption that contribution level of total factor productivity remains at 0.7 percentage points.

Total factor productivity is an index that measures economic efficiency by reflecting elements that affect productivity excluding labor and resources such as technology, system, and resource allocation.

The contribution level of total factor productivity in Korea fell from 1.6 percentage points after 2000 to 0.7 percentage points after 2010.

Although there is possibility that the contribution level could fall further in the years to come, the KDI projected that annual average economic growth during 2020-2029 would stand at 1.7 percent based on current contribution level.

The KDI also projected Korea’s growth rate per capita to remain at an annual average of 1.6 percent during the next decade, assuming that physical capital contribution per employed would shrink to 0.7 percentage point due to slowdown in the economy.

The report comes after the GDP performed at its worst in a decade in the first quarter, falling 0.3 percent on quarter and gaining 1.8 percent on year. Institutes have since downgraded growth outlook for the country, with Moody’s Investors Service cutting its estimate to 2.1 percent and Nomura Securities to 1.8 percent.

If productivity improves, however, through innovation, Korea’s economy could expand at an annual average of 2.4 percent in the 2020s, KDI said. If contribution level of total factor productivity goes up to 1.2 percentage points, physical capital contribution per employed could also rise from 0.8 percentage point to 1 percentage point. The optimistic total factor productivity scenario is based on the assumption that Korea improves overall productivity through policy improvements such as those involving finance, labor, and corporate activity regulations.

The KDI also advised against stretch in fiscal budgeting as it could go wasted on the economy in a structural downturn.

By Kim Yeon-joo and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]