Korea’s Growth Prospects: Overcoming Demographics and COVID-19

IMF Working Papers, March 26, 2021

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Korea’s economy achieved high-income status after several decades of sustained high growth.
Population aging and shifts in global demand are headwinds for future growth.
The COVID-19 pandemic adds near-term effects on economic activity and raises the possibility of longer-term scarring.
Industry-level analysis indicates scope to raise productivity, especially in services where productivity gains have lagged.

Potential output growth slowed to about 2½ percent before the COVID-19 pandemic.
Potential output growth would have fallen to 2 percent by 2030, mainly due to demographic factors.
There is a possibility of scarring from the COVID-19 shock as adjustment frictions from structural rigidities interact with shifts in demand and supply patterns.
Scarring channels could lower investment and labor force participation.
Addressing structural rigidities could offset a large proportion of the expected downward pressure on potential output.

Facilitate structural transformation to provide offsetting upward momentum to potential growth.
Target reforms that reduce adjustment frictions to limit scarring from demand and supply shifts.
Prioritize policies to raise productivity in services where gains have lagged.
Implement measures to support investment and labor force participation during and after COVID-19 to prevent persistent output losses.

Demographic-driven decline in potential growth absent offsetting reforms.
Prolonged adjustment frictions could amplify COVID-19–related scarring, reducing investment and labor force participation.
Structural reforms that successfully raise productivity, particularly in services, can materially counteract downward pressure on potential output.

IMF Working Paper No. 2021/092, Andrew J Swiston, March 26, 2021.