A state-run analysis institute has analyzed that, much like Japan, Korea is experiencing a decline in productiveness progress as the principle issue behind falling capital profitability, resulting in a shift from home funding to abroad funding. Accordingly, consultants level out that structural reforms equivalent to labor market flexibilization have to be urgently pursued to reverse the entrenched low progress.
The Korea Improvement Institute (KDI) identified on Nov. 4 that “Korea’s web abroad funding (present account surplus) has been increasing because the mid-2000s, when home funding returns started to systematically fall under abroad funding returns.” The institute attributed Korea’s earnings stability turning constructive within the 2010s to the buildup of web abroad funding, which elevated web international belongings and raised abroad funding returns in comparison with home funding returns. Accordingly, the earnings stability’s share of nationwide earnings steadily expanded from -0.7% in 2000 to 1.2% in 2024, whereas the Gross Home Product (GDP) share decreased by the identical quantity (1.9 proportion factors).
Japan skilled this phenomenon many years earlier. For the reason that Eighties, Japan has seen capital profitability decline and home and abroad funding returns reverse, resulting in elevated abroad funding.
The issue is that the conversion of home funding to abroad funding has considerably decreased financial vitality, whereas a substantial portion of nationwide earnings has turn out to be depending on funding returns from abroad. KDI expressed concern, stating, “The long run decline in labor enter as a result of reducing working-age inhabitants may act as an element that reduces home capital profitability and will probably additional develop web abroad funding,” and “productiveness slowdown not solely instantly reduces GDP but additionally amplifies the adverse influence on GDP by roughly 1.5 occasions by inflicting a lower in home capital inventory.”
KDI’s advice is that financial structural reform aimed toward enhancing productiveness should proceed to strengthen the vitality of the home economic system. Kim Jun-hyung, a KDI analysis fellow, suggested, “If productiveness slowdown continues, adverse impacts could develop, notably for financial entities with excessive dependence on labor earnings,” and “There’s a must create an setting the place promising progressive corporations can enter the market whereas marginal corporations are eradicated, whereas constructing a versatile labor market to induce productiveness enhancements throughout the economic system.”
