Issue Focus

Korean economy shows a symptom of downturn in growth rate recently. Though it might be natural as its economic structure becomes mature, recent trend is enough to raise the suspicion that it has an inner structural limitation which deters its normal growth path. Based on this awareness, characteristics of the total production function in Korea is analyzed in this study by employing ‘production function approach’ and multi-variate time-series analysis. Through this study, the following conclusion to the problem of Korean economy is reached. Firstly, manufacturing business sector in Korea is losing its global compatibility, which causes the effect from other capital investment to have limited ripple effect over the whole economic system. Secondly, polarized labor market has the negative effect that the increase in labor productivity and the increase in wage connected to productivity tend to be only confined to the sector in labor market for large companies and public sector. Thirdly, the increase in total factor productivity does not induce quantative expansion of various capital and labor. This phenomenon suggests that there may be some kind of structural problem which encroaches upon the enhancement in productivity or efficiency in the economy. Based on the diagnosis, the following policy suggestions are made. Firstly, structural changes of national industries into technologies in the 4th Industrial Revolution and improvement of investment environment should be made. Core business sector should be identified and source technologies related need to be developed. Regulation improvement to vitalize private business activities also should be maintained. Secondly, efficiency in public and SMEs R&D investment needs to be raised. Government-driven R&D system where doubts about its performance are cast should be transformed into private-oriented. Thirdly, it is identified that increase in construction investment not only expands total production level but also accelerates equipment and intellectual investment. It means that construction can be utilized as a test-bed for new technologies trials. Fourthly, restructuring in Korean labor market should be made. Deregulation to soften the labor market and cost alleviation for companies should be propelled. Making working time and wage flexible and securing job stability for temporary workers should be sought together, which is meant to reduce the gap between labor productivity and wage.