Analysis of Koreas long-term growth process and lessons for sustainable development policy

Abstract

This paper analyzes Korea's growth process, not only rapid but also sustained for six decades at 6% per year. The sources of such growth were balanced among labor market demographic factors, capital investment, human capital accumulation, and productivity growth. However, the main engine of growth evolved sequentially, e.g., labor and human capital factors in the 1960s, capital deepening in the 1970s, and then productivity growth for the following periods. We found that major sources of the six-decade sustained growth were productivity growth and human capital accumulation rather than the expansion of labor force or capital investment. Counterfactual analysis of neoclassical growth model reveals that the accelerated productivity growth after the fast capital deepening was the key to Korea's long-term growth, avoiding the middle-income trap. Appropriate calibration of the neoclassical growth model allowing time-varying transitional growth parameters explains Korea's growth experience well and provides useful lessons for sustainable development policy.