The future of the Korean Economy Sehwa Lee, Taizo Suzuki, Wen-Ching Chuang

Overview of the Korean Economy GDP/ Capita & GDP

Overview of the Korean Economy (Cont.) Inflation rate & Unemployment rate

Challenges for the Future Slowing GDP Growth

Challenges for the Future (2) Fertility Rate & Population Growth Rate

The impacts of the changes in population growth rates 1) The sustainable growth rate at the steady state level 2) The changes in capital accumulation and income per worker

Sustainable growth rate (1) Investment, Depreciation Capital per effective worker (k) (n+g+δ) k f(k) sf(k) k* f(k*)

Sustainable growth rate (2) Population growth rate (n)% Real GDP growth rate% Technological Progress (g)% Steady State growth rate of Y% Steady State growth rate of Y/worker%

Sustainable growth rate (3) Note: As Y* = (y*)* (# of workers), % ⊿ Y*= % ⊿ y*+ % ⊿ (# of workers) - The decline in the ratio of labor force per population will have a further negative impact on the growth rate.

The change in the standard of living (1) Assuming other things are all equal… (n 2 +δ) k Capital per worker (k) (n 1 +δ) k f(k) sf(k) k1*k1* f(k 1 *) k2*k2* f(k 2 *) Investment, Depreciation

Lower MPK But, still higher capital accumulation And, higher standard of living The change in the standard of living (2) Capital per worker (k) k2*k2*k1*k1* f(k) sf(k) MPK 1 MPK 2 Investment, Depreciation

The change in the standard of living (3) Larger deficit w/ burden of social expense Growing population w/o income Smaller population of future generation Lower Savings Rate?? The possible consequences of lower population growth

The change in the standard of living (4) The historical changes in national savings rate

The change in the standard of living (5) The relationship between population growth rate and national savings rate from 1990

Scenario 1: leading to lower standard of living The change in the standard of living (6) Capital per worker (k) (n 2 +δ) k(n 1 +δ) k s 1 f(k) s 2 f(k) k2*k2*k1*k1* Investment, Depreciation

(n 1 +δ) k s 1 f(k) s 2 f(k) k2*k2*k1*k1* The change in the standard of living (7) (n 2 +δ) k Capital per worker (k) Scenario 2: leading to higher standard of living Investment, Depreciation

The change in the standard of living (8) Quantitative simulation 1 (w/o technology growth) Population growth rate(%) Depreciation Savings rate(%) K/worker at the steady state K/worker at the Golden rule steady state

(n n +δ) k The change in the standard of living (9) Quantitative simulation 1 (w/o technology growth) s n f(k) kn*kn* f(k 2005 *) Capital per worker (k) f(k) f(k 2010 *) f(k 2020 *) f(k 2030 *)

The change in the standard of living (10) Quantitative simulation 2 (w technology growth) Population growth rate (%) Depreciation Savings rate (%) Technological progress (%) K/ effective worker at the steady state K/ effective worker at the golden rule steady state Y/ effective worker at the steady state Number of effective workers per worker (2005=1) Y/ worker at the steady state

The implications of our analysis A low population growth rate has an adverse impact on sustainable growth at the steady state level A lowering population growth rate, accompanied with a decreasing savings rate, has an adverse effect on the level of the standard of living

What should the government do? 1. Increase population growth rate 2. Change the labor structure 3. Improve the pace of technological advancement 4. Increase savings rate

Increase population growth rate Increase fertility rate  subsidy to families with children  laws friendly to working mothers  tax reductions  day-care system

Change the labor structure Now, only 47%-50% women participating in labor force How to encourage more women to work ?  Offer various training programs  Again, day-care center Extend the retirement age

Improve the pace of technological advancement Provide tax reduction in R&D Provide grants for universities or research institutes Enforce patent laws, property right protection regulations

Increase savings rate Tax reduction may be an effective policy to increase private savings What kinds of tax should be reduced?  capital gains tax  estate tax  and corporate income tax…

Questions? Thank you