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Productivity led growth for Korea

The factors that generated growth in South Korea for 25 years actually impeded the country’s ability to recover from its 1997 financial crisis. Deregulating services, lowering import and foreign direct investment barriers, and improving corporate governance could bring the economy back.

Objectives and Approach

The purpose of this study is to look beyond Korea’s financial turmoil and assess the country’s output potential under alternate economic policy scenarios.

Aggregate Analysis

Overall, Korea appears to have followed Japan’s path of rapid growth through additional inputs rather than the US and W. European path of relying more on slower growth through productivity improvements. The aggregate evidence suggests that government policies affecting both capital and labor markets, as well as competitive intensity in product markets, have contributed to low productivity growth.

Automotive Sector

The Korean automotive industry has emerged as the the fifth-largest automobile producer in the world. The dramatic growth can be attributed to a combination of export and captive domestic market growth, backed by strong government support and good corporate initiatives.

Construction Sector

Korean construction companies build more multi-family homes than American ones, which build more single-family homes that are of a higher value and, therefore, contributes to higher productivity overall. Korean companies have also not implemented best practice process management or design for manufacturing.

Food Sector

The overall Korean processed food industry shows low productivity performance, reaching only 46 percent of US levels in 1995. Limited competitive pressures and corporate incentives based on growth rather than profit and the main causes for the poor performance.

Personal Financial Services Sector

With labor productivity of the personal financial services sector 24 percent lower than US levels, the industry needs to improve its operations. Branches should not simply be an access point of taking deposits and operators need to transfer customers to more efficient electronic payment systems. In addition, the government should not be involved in appointing branch managers.

Retail Sector

Mom and pop shops make up the vast majority of retail stores in Korea, dragging down the productivity average of more modern and efficient stores. Restrictive zoning and land development laws limit land use and the prohibition of foreign direct investment in department stores and malls has added to the problem.

Steel Sector

Korea’s steel industry operates at 111 percent productivity compared to a benchmarked 100 percent for the US. Leaner operation of minimills and reduction in protective tariffs can push the sector to even higher levels of productivity.

Telecommunication Service Sector

Speedy development of networks has catapulted Korea to a place among world leaders. But operators and regulators can still improve productivity by creating an environment that stimulates increased use of the telephone systems and promotes competition.

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