KOREA FOCUS

 

Industrial upgrading refers to increasing either the economic growth rate or the productivity rate by shifting to an industrial structure with high added values and intra-industrial innovation. Higher productivity plays a key role in the effort. Improved intra-industrial productivity through technological innovation or smooth allocation of resources to industries that raise productivity rate or already possess high productivity contributes to productivity growth in the overall economy. 

 

An analysis of Korean economy`s growth by major growth factors such as net capital stock, labor and total factor productivity suggests an assortment of positive and negative trends. The Korean economy recorded a high growth rate of 6.5 percent on the annual average between 1971 and 2008, and the net capital stock`s contribution ratio peaked at 52.5 percent. Meanwhile, the total factor productivity`s contribution ratio was only 28.1 percent, indicating the nation`s economy has depended on investment-oriented growth so far.   

 

Net capital stock`s contribution ratio to growth stood at 66.0 percent in the 1970s, fell to 43.9 percent in the 1980s, rebounded in the 1990s, but plunged to 34.7 percent in the 2000s amid sluggish investment. Labor`s contribution ratio to growth reached 32.3 percent in the 1970s but declined to -1.1 percent in the late 1990s, when the Asian currency crisis hit the country. It has remained at 2.4 percent in the 2000s due mainly to slow job creation and reduced working hours, even though the economy recovered from the currency crisis.  

 

Total factor productivity`s contribution ratio to growth was 1.7 percent in the 1970s, soared to 34.6 percent in the 1980s, fell back to 24.5 percent in the early 1990s, but has risen since the late 1990s to reach 62.9 percent in the 2000s, far higher than the net capital stock`s contribution ratio.  

 

The sharp improvement in the total factor productivity`s growth rate and contribution ratio to economic growth in the 2000s compared with those in the 1990s could be significant in that it means the transition to a productivity-oriented, innovation-led economy. Still, there are limitations.  

 

First, although the total factor productivity`s growth rate and contribution ratio to economic growth have risen sharply, economic growth has not recovered significantly since the beginning of the 2000s. It fact, it has been stuck in an unsatisfactory range compared with the past.

 

Second, the role of total factor productivity has shown relative expansion during the 2000s, as the roles of capital and labor sharply shrank because of the protracted weak investment and insufficient job creation.     

 

Third, the improved growth rate of total factor productivity in the 2000s in comparison with the 1990s should be attributed more to the industrial restructuring and corporate management stress over efficiency since the Asian financial crisis rather than such dynamic factors as technological innovation and revitalized entrepreneurship.