[2017-4] Analysis of Factors Causing Growth Potential to Decline, with a Focus on Production Efficiency

Changes Increases Efficiency Production Potential Quantitative Global
Research Department(02-759-4172)

Korea's growth potential rate has declined since the Global Financial Crisis, led particularly by total factor productivity (TFP). The pace of decline in Korea's TFP has been faster than those of other OECD countries, and the weakening TFP has been one of the major factors causing per capita GDP differences between Korea and other advanced countries. In a situation where it is almost impossible to expand growth potential through quantitative increases in capital and labor, it is most important to improve productivity to enhance growth potential. Changes in TFP can be divided into those caused by technical advances (technical advance factors) and those triggered by changes in production efficiency (efficiency factors). This paper decomposes how the TFPs of OECD countries have changed before and after the Global Financial Crisis, and analyzes factors causing differences among these countries, particularly in terms of efficiency.

A decomposition of the changes in OECD countries' TFPs through a stochastic frontier model shows that Korea's TFP declined by an annual average of 2.0 percentage points after the crisis, and this is estimated to have been attributable to a 0.6 percentage point decrease in efficiency factors and to a 1.4 percentage point decrease in technical advance factors. This paper compares these estimates with those of OECD countries, divided into two groups depending on per capita income. The technical advance factors of these groups declined by an annual average of 1.5 and 1.4 percentage points each, both showing similar movements to those of Korea, although in Korea the technical advance factors declined faster than efficiency factors. Efficiency factors, meanwhile, decreased faster in Korea than in the two OECD groups, suggesting that weakening efficiency is one of the major factors causing a slowdown in Korea's TFP.

Next, this paper analyzes factors causing differences in efficiency among OECD countries. The results show that such differences are related closely with market regulations and the protection of intellectual property rights. As for market regulations, in particular, the degree of regulation complexity and also of the protection of vested corporate interests seem to have statistically significant effects on such international differences. While the level of Korea's market regulations have significantly improved from the past, it remains higher than those of OECD countries, and the environment for intellectual property right protection remains unfavorable. Going forward, in order to enhance Korea's productivity, it is necessary to ease market regulations and improve the environment for intellectual property right protection.

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