Events regarding central bank policy meetings attract huge attention not only from professional investors but also from many others outside the financial industry in most countries, including South Korea. This attention is understandable, as their policy decisions -- usually concerning short-term interest rates -- impact everyday economic activities across the country indiscriminately.

In addition to the policy decision and its underlying factors, the head of the central bank frequently comments on other subjects regarding the economy. This was the case last week when the head of the South Korean central bank called for more efforts to contain the country’s falling potential growth rate.

During his news conference on monetary policy, Gov. Rhee Chang-yong of the Bank of Korea expressed his hope that the country would find common ground on ways to improve the potential growth rate through structural reforms. He dismissed as “very passive” an attitude of taking for granted that the country would follow in the footsteps of Japan.

“I think it's a very passive attitude to think we have to repeat the same 20 years that Japan went through because of population aging and other issues,” Rhee said. He was referring to findings by research reports that South Korea’s potential economic growth rate has more than halved to about 2 percent from 5 percent a decade ago.

He was alluding to Japan’s so-called ‘two lost decades,’ which began in the early 1990s when its growth plunged to an average of 0.8 percent from 4.4 percent in the 1980s, as the country suffered economic contractions during five out of 20 years. This decline was largely attributed to the bursting of asset bubbles coupled with an aging population and falling productivity.

Rhee’s comment came after data showed that South Korea’s economy, which had achieved a stellar rise from the rubble of war to become Asia’s fourth-largest in a couple of generations, grew just 1.4 percent in 2023. It was the worst growth in the country’s modern history, excluding crisis periods, and there are fears that this year’s growth will again stand below 2 percent.

The potential growth rate is an estimate that the economy would have achieved if labor and capital had been employed at their maximum sustainable rates. In South Korea, the working-age population has been shrinking for several years, and therefore, the potential growth rate has no other option but to fall, if other things are held constant.

There is almost nothing that we can do about the demographic structure, at least in the short run, but the issue lies with the phrase “if other things are held constant.” The impact on the potential growth rate can be offset if an economy achieves productivity growth through innovation or structural reforms, but South Korea has been failing in these areas, too.

South Korea’s labor productivity lags behind that of global peers, standing 8 percent below the Organization for Economic Cooperation and Development average, 14 percent below the Group of Seven major economies’ average, and 38 percent below that of the United States, according to data from the Korea Productivity Center.

The situation is especially serious in the service industries, whose labor productivity lags far behind that of global peers, with the gap widening, according to the same data. Rhee stopped short of specifying sectors that need urgent reform or issues that need to be tackled first, apparently because the news conference was on monetary policy.

Rhee’s comments follow his rare meeting earlier this month with Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok at the central bank. The two agencies announced that the top economic policymakers, along with senior officials, had agreed to join forces to find ways to counter the falling potential growth rate.

Details from the meeting contained few surprises, but it was noteworthy because it upgraded their consultative meeting arrangement to one headed by the leaders, and Choi visited the Bank of Korea as the first finance minister to do so since 2018. This represents their agreement that the structural reforms of the economy are an urgent task.

Except for crisis periods, the heads of the two agencies tried to avoid holding meetings in the past to ensure that the government stayed away from the central bank’s monetary policy. But the recent meeting between Choi and Rhee indicates that the central bank’s neutrality has been well-founded and that structural reforms pose such a serious threat.

The meeting is a welcome development for the country in that sense, but it is premature to expect everything to change soon simply because the two agencies agreed to do so. There is an increasing tendency in South Korea for other organizations in charge of dealing with public opinion and social cohesion to fail to function properly.

In particular, the country’s legislative and judiciary systems, as a whole, are struggling to prove that they are functioning effectively toward achieving social unity. The term ‘social capital’ refers to a set of shared values or resources that allow individuals to work together in a group to effectively achieve a common purpose.

South Korea definitely lacks social capital in that sense, but there is nothing in the world that is too late to be fixed. The first test -- and opportunity -- will be the April parliamentary election, as the outcome will show whether South Koreans are ready to learn from their own mistakes and those made by others.

By Yoo Choon-sik

Yoo Choon-sik worked as chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.