Spicier growth kimchi

Ageing South Korea can still tone growth muscles

South Korea is attempting something audacious for a greying society. President Park Geun-hye has pledged to lift the economy's potential growth rate to four per cent a year by 2017, from a little more than 3.5 per cent now.

Park's plan, announced on February 25, includes raising the share of women in the workforce and boosting domestic demand to lessen the country's reliance on exports. But toning up muscles is hard when ageing has subdued growth. In the 1970s, when Korean GDP expanded nine per cent every year, labour hours swelled 0.9 per cent annually. Workforce growth is now stagnant - and shrinking in manufacturing. Since the 2008 crisis, the economy has expanded by just three per cent a year on average.

As long as the economy struggles to reach its potential, Korea faces the risk of deflation. Core inflation has been less than two per cent for almost two years, and household debt is 164 per cent of total disposable income. Were prices to start falling, the repayment burden, which Park wants to reduce by five percentage points of income by the end of her term, would become even more unbearable.

That's why Seoul needs to stress income growth, backed by productivity. The best strategy would be to try and replicate Korea's manufacturing success in services industries. It's odd that a country which is a front-runner in smartphones is a productivity laggard in retail and healthcare. Between 2000 and 2010, overall service-industry productivity slid by 0.2 per cent a year, while manufacturing became 1.2 per cent more productive.

Not only are factory workers more efficient than service providers, for every additional dollar of output, education in Korea burns more energy than shipbuilding. Ad agencies and law firms get less juice out of physical capital than automakers.

Inadequate competition, insufficient foreign investment and regulatory overkill all contribute to make Korea's services industries relative slackers. Fixing the problem means cutting red tape and introducing fiscal incentives. More productive use of capital, energy and workers will boost wages, allowing consumers to spend more even after paying down debt. The facelift won't put off ageing forever; but at least the society won't hit a self-made limit on prosperity.