Korea s Recent Economic Trends

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1 Korea s Recent Economic Trends Minsoo Han Korea Institute for International Economic Policy 10 th Trilateral Workshop of PRI-CASS-KIEP - June 1, / 20

2 Outline Outline 1 Recent trends 2 Two issues regarding slow GDP growth in Korea 1 Corporate restructuring 2 Korea s export 2 / 20

3 Recent Trends GDP Korea s slow GDP growth (a) quarterly growth (b) annual growth Source: Bank of Korea 3 / 20

4 Recent Trends GDP: production side Here only focus on manufacturing, construction, and service Service 9 times and manufacturing 5 times bigger than construction Other smaller activities, e.g. utility (water, electricity, gas), agriculture, forestry, and fisheries Construction: strong growth; Service and Manufacturing: moderate and weak growth (a) quarter on quarter growth (b) year on year growth Source: Bank of Korea 4 / 20

5 Recent Trends GDP: expenditure side Growth in the 1 st quarter of 2016: Construction investment: 5.9% (8.7%); R&D investment: 0.1% (0.7%); export of services: 7.4% (8.0%),... Private consumption: -0.3% (2.1%); facilities investment: -5.9% (-3.0%); export of goods: -2.9% (-1.0%) (a) quarter on quarter growth (b) year on year growth Source: Bank of Korea 5 / 20

6 Two proximate factors accounting for sluggish GDP growth To summarize, the following would account for Korea s slow GDP growth Decrease in private consumption Decrease in facilities investment, especially in manufacturing Decrease in export of goods Among others, focus on Domestic side: corporate restructuring in manufacturing External side: low external demand for Korean exports 6 / 20

7 Corporate Restructuring Corporate restructuring On the domestic side, both A delay in restructuring of distressed firms Aftermath of restructuring could undercut the growth momentum in the Korean economy Here we think about necessity of corporate restructuring through the lens of allocative efficiency of resources across firms 7 / 20

8 Corporate Restructuring Measuring allocative efficiency Oh (2015): apply Hsieh and Klenow (2009) to Korean manufacturing firm level data In the absence of any distortions, more productive firms (large physical productivity) will hire more capital and labor Then the revenue productivity should be equalized across firms [ ] PY 1 σ 1 σ A σ 1 σ i l 1 σ i = w σ 1 τ i }{{} MRPL i : marginal revenue product of labor of firm i The extent to which it is not, we quantify the degree of allocative efficiency 8 / 20

9 Corporate Restructuring Cross-country comparison: China, Japan, Korea, and the US Source: Oh (2015), Hsieh and Klenow (2009), Hosono and Takizawa (2012) Note that periods are not identical and each country might have different standards for business classification Korea, similar to Japan and between the US. and China 9 / 20

10 Corporate Restructuring Trends in Korea s allocative efficiency Source: Oh (2015) s estimates from Mining and Manufacturing by Statistics Korea A downward trend since 1990 Mostly from intra-industry allocative efficiency, not from inter-industry allocative efficiency 10 / 20

11 Corporate Restructuring Accounting for Korea s TFP growth I Source: Oh (2015) Technological progress above would not only reflect technological progress Due to allocative inefficiency, we are losing additional 0.6% growth every year 11 / 20

12 Corporate Restructuring Accounting for Korea s TFP growth II Direct comparison with growth rate from national account is not plausible because the results come from nominal micro-level data So the effect might be over-evaluated But let s take the number 0.6% and conduct the simple exercise Korea s growth rate of GDP per capita from PWT6.1 between 1991 and 2011 (in production sided real GDP at chained PPP) g 1991,2011 = log((rgdpo/pop) 2011 log((rgdpo/pop) 1991 ) 20 = 2% Compound effect of seemingly small change in growth rate: 27 ( 70/2.6) years to double GDP per capita, when growing at 2%, 35 (= 70/2) years to double GDP per capita, when growing at 2.6% 12 / 20

13 Korea s Export Korea s exports have fallen Source: Jung (2016) s calculation based on the data from IMF WEO (April 2016) and Bank of Korea 13 / 20

14 Korea s Export Global investment slowdown Source: Jung (2016) s calculation based on the data from World Bank 14 / 20

15 Korea s Export Korea s exports depend on intermediate and capital goods Source: Jung (2016) s calculation based on the UN Comtrade data 15 / 20

16 Korea s Export Cyclical vs structural factor Global investment slowdown would have strong, negative impact on Korea s growth Then a natural question arises: Is the slump driven by short-term or structural factors? If it is cyclical, investment will recover with the global economy If it is also driven by structural factors, have to think about structural reform as well as standard fiscal and monetary policy 16 / 20

17 Korea s Export Factors for external investment slowdown Rising private debt in Asian countries China rebalancing Population aging in Korea s major trading partners 17 / 20

18 Korea s Export Asia s rising private debt after the GFC Source: BIS and IMF staff estimates There may not be a room for further investment via debt expansion Investment may shrink further with deleveraging 18 / 20

19 Korea s Export China rebalancing Impact on value-added exports to China due to a 1% increase (decrease) in China s consumption (investment) growth Source: IMF REO: Asia and Pacific (April 2016) s estimates 19 / 20

20 Korea s Export Population aging Working-age population (age 15-64) Source: OECD Increase in saving might boost GDP growth in the long run Decrease in MPC return on investment in the short and medium run 20 / 20