The future of the Korean Economy

Sehwa Lee, Taizo Suzuki, Wen-Ching Chuang

Overview of the Korean Economy

GDP/ Capita & GDP

GDP per capita ($, current prices)

6000

9000

12000

15000

18000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Real GDP growth rate (%)

-9

-6

-3

0

3

6

9

12

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Overview of the Korean Economy (Cont.) Inflation rate & Unemployment rate

Inflation

0

1

2

3

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Annu

al p

erce

nt c

hang

e

Unemployment rate (%)

0

1

2

3

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Challenges for the Future

Slowing GDP Growth

GDP Growth Rate(%)

-10.00

-5.00

0.00

5.00

10.00

15.00

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025 2029

Challenges for the Future (2)

Fertility Rate & Population Growth Rate

Total fertility rate

00.5

11.5

22.5

33.5

44.5

5

1970 1975 1980 1985 1990 1995 2000 2005

tota

l fe

rtil

ity

rate

South Korea Population Growth (%)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1981 1986 1991 1996 2001 2006 2011 2016 2021 2026 Source

The impacts of the changes in population growth rates

1) The sustainable growth rate at the steady state level

2) The changes in capital accumulation and income per worker

Sustainable growth rate (1)Investment, Depreciation

Capital per effective worker (k)

(n+g+δ) k

f(k)

sf(k)

k*

f(k*)

Sustainable growth rate (2)

1996 2005 2010 2020 2030

Population growth rate (n) % 0.96 0.44 0.30 0.30 0.00

Real GDP growth rate % 7.00 3.96

Technological Progress (g) % 6.04 3.52 3.52 3.52 3.52

Steady State growth rate of Y % 7.00 3.96 3.82 3.82 3.52

Steady State growth rate of Y/worker % 6.04 3.52 3.52 3.52 3.52

Sustainable growth rate (3) Note: As Y* = (y*)* (# of workers),

% Y*= % y*+ % (# of workers) ⊿ ⊿ ⊿labor force/population (%)

38

40

42

44

46

48

50

52

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

- The decline in the ratio of labor force per population will have a further negative impact on the growth rate.

The change in the standard of living (1)Assuming other things are all equal…

(n2+δ) k

Capital per worker (k)

(n1+δ) k

f(k)

sf(k)

k1*

f(k1*)

k2*

f(k2*)

Investment, Depreciation

Lower MPK But, still higher capital accumulation And, higher standard of living

The change in the standard of living (2)

Capital per worker (k)k2*k1*

f(k)

sf(k)

MPK1

MPK2Investment, Depreciation

The change in the standard of living (3)

Larger deficit w/ burden of social expense

Growing population w/o income

Smaller population of future generation

Lower Savings Rate??

The possible consequences of lower population growth

20

22

24

26

28

30

32

34

36

38

40

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

savi

ngs

rate

National saving rate

The change in the standard of living (4)The historical changes in national savings rate

28.00

30.00

32.00

34.00

36.00

38.00

0.00 0.50 1.00 1.50

Population growth rate

Sav

ings

rat

e

The change in the standard of living (5) The relationship between population growth rate and

national savings rate from 1990

Scenario 1: leading to lower standard of living

The change in the standard of living (6)

Capital per worker (k)

(n2+δ) k(n1+δ) k

s1f(k)

s2f(k)

k2* k1*

Investment, Depreciation

(n1+δ) k

s1f(k)

s2f(k)

k2*k1*

The change in the standard of living (7)

(n2+δ) k

Capital per worker (k)

Scenario 2: leading to higher standard of living

Investment, Depreciation

The change in the standard of living (8)Quantitative simulation 1 (w/o technology growth)

1996 2005 2010 2020 2030

Population growth rate(%) 0.96 0.44 0.30 0.30 0.00

Depreciation 0.114 0.154 0.143 0.143 0.143

Savings rate(%) 34.71 32.20 29.20 25.00 20.80

K/worker at the steady state 7.89 4.13 4.00 2.93 2.12

K/worker at the Golden rule steady state 16.36 9.96 11.73 11.73 12.23

(nn+δ) k

The change in the standard of living (9)Quantitative simulation 1 (w/o technology growth)

snf(k)

kn*

f(k2005*)

Capital per worker (k)

f(k)

f(k2010*)f(k2020*)f(k2030*)

The change in the standard of living (10)Quantitative simulation 2 (w technology growth)

1996 2005 2010 2020 2030

Population growth rate (%) 0.96 0.44 0.30 0.30 0.00

Depreciation 0.114 0.154 0.143 0.143 0.143

Savings rate (%) 34.71 32.30 29.20 25.00 20.80

Technological progress (%) 6.04 3.52 3.52 3.52 3.52

K/ effective worker at the steady state 3.56 2.77 2.60 1.90 1.36

K/ effective worker at the golden rule steady state 7.38 6.67 7.61 7.61 7.87

Y/ effective worker at the steady state 1.89 1.66 1.61 1.38 1.17

Number of effective workers per worker (2005=1) 1 1.23 1.74 2.46

Y/ worker at the steady state 1.66 1.98 2.40 2.88

The implications of our analysis

A low population growth rate has an adverse impact on sustainable growth at the steady state level

A lowering population growth rate, accompanied with a decreasing savings rate, has an adverse effect on the level of the standard of living

What should the government do?

1. Increase population growth rate

2. Change the labor structure

3. Improve the pace of technological advancement

4. Increase savings rate

Increase population growth rate

Increase fertility rate subsidy to families with children laws friendly to working mothers tax reductions day-care system

Change the labor structure

Now, only 47%-50% women participating in labor force

How to encourage more women to work ? Offer various training programs Again, day-care center

Extend the retirement age

Improve the pace of technological advancement

Provide tax reduction in R&D Provide grants for universities or research

institutes Enforce patent laws, property right

protection regulations

Increase savings rate

Tax reduction may be an effective policy to increase private savings

What kinds of tax should be reduced? capital gains tax estate tax and corporate income tax…

Questions?

Thank you