The International Monetary Fund(IMF) has projected that South Korea's potential growth rate will hover at the low two percent levels in the 2020s and drop to the one percent range in the 2030s.
The IMF last Sunday released a report on its assessment of annual talks held with South Korean policymakers.
According to the report, South Korea's real growth domestic product(GDP), which rose to 3.2 percent last year, is predicted to slowly decrease to three percent this year and to 2.6 percent by 2022.
The IMF report said the country's growth potential will shrink to 2.2 percent in the 2020s and fall to around the one percent level in the 2030s due to a decrease in the labor population.
The agency offered the projections citing the rapidly aging society, low productivity in the service sector and distortions in the country's labor market.
The report said that Korea needs to expand its social security net, improve productivity and reform the labor sector.
It pointed out that while the Korean economy has entered a recovery stage, its growth potential is steadily falling.
Suggested efforts to overcome this include structural reform and expanded use of fiscal resources to boost productivity and increase labor market participation.
The IMF also called for strengthening the social security net.
It said that injecting funds into infrastructure, support for child care, aggressive labor policies, and investment in research and development can help raise productivity.
The report is viewed as a fair assessment of the current state of the Korean economy.
The IMF states that the Korean economy needs to adjust in accordance with industrial and demographic changes in order to continue sustainable growth.
The report stresses the need for structural reform to minimize the negative impact of the nation’s low birth rate and aging society. It projects that if the country conducts necessary reforms, its growth potential can rise by 0.6 percentage point annually over the next decade.
For this, South Korea is urged to ease restrictions related to production and hiring and increase taxes on consumption and assets.
Korea is also encouraged to raise childcare support to a quarter percent of its GDP and invest in labor policies accounting for half a percent of GDP.
The IMF also suggests a stronger social security system can facilitate income-led growth and improve the economic structure.