[THE INVESTOR] A South Korean think tank has warned that South Korea will suffer deterioration of growth potential in the coming decade, predicting a 1 percentage point drop or more by 2030.

The nation’s potential growth rate posted 3.2 percent per annum between 2011 and 2015. Hyundai Research Institute projected that the rate will continue to fall to 2.7 percent between 2016 and 2020, 2.3 percent between 2021 and 2025 and 2 percent between 2026 and 2030.

Korea’s potential growth rate was 3.9 percent between 2006 and 2010, but its industrial prowess, built on manufacturing and heavy industries over the past decades, has been declining rapidly. Cases in point are the shipbuilding and shipping sectors, which have fallen from the once proud engines of Korea’s export-driven economy to sources of woe.

Some policymakers claimed the protracted slowdown in the global economy was partly to blame for the decline of the industries that once buttressed the Korean economy. But it is no coincidence that the Korean economy has been stuck in a low-growth trap, as its traditionally strong industries like shipbuilding, steel and petrochemicals are losing competitiveness.

This means the time has come for the Korean economy to redraw its industrial map to lessen its dependency on traditional industries and nurture new industries like artificial intelligence, electric vehicles and driverless cars, big data, financial technology and biotechnology.

Government policies on the new industries should be different from those that needed to build industries such as shipbuilding, automobiles, electronics and steel.

Also important is eliminating government regulations and paving the way for small and medium-sized enterprises to assume greater roles in the development of the new industries.

Policymakers should contemplate the situation that Korea was ranked 12th among 35 member countries of the Organization for Economic Cooperation and Development in 2015 gross domestic product growth. This marks the first time that its OECD growth ranking has not been inside the top 10 since 2006.

South Korea has faced a critical barrier in exports to China over the past decade as the Asian superpower has tightened its policy to curb imports of intermediate goods.

Korea had enjoyed huge shipments of intermediate products, including knockdowns -- assembled in China by its cheap labor workforce -- from the late 1970s to the late 1990s.

The giant importer, however, began restricting intermediate goods under its policy of revamping the broker trade structure, which generally yields low added value, starting from 1999.

The Bank of Korea has reported that China scaled back the ratio of intermediate goods in its total imports from 53.7 percent in 1998 to 32.8 percent in 2014. Despite the worsening situation, Korea has yet to diversify its exports. Unfinished goods took up 73 percent of Korea’s total exports to its largest export destination at the end of 2014.

A significant point is that China’s industrial competitiveness is growing rapidly. There is a mounting possibility that Chinese intermediate goods will replace Korean products in the coming years in many manufacturing segments.

The manufacturing sector saw its potential growth range between 7.9 percent and 8.9 percent in the 1990s. After posting 6.9 percent between 2001 and 2005, the sector, Korea’s core growth engine, posted 5.8 percent between 2006 and 2010 and 4.4 percent between 2011 and 2015.

(theinvestor@heraldcorp.com)