How can Korea Boost Potential Output to Ensure Continued Income Convergence?

Korea's rapid growth has slowed in recent years, suggesting lower potential growth. This paper uses anarray of techniques, including statistical filters, a multivariate model and the production function, toestimate Korea's potential growth. The main finding is that trend growth has fallen from around4¾ percent during 2000-07 to around 3¼ -3½ percent by 2011-12. Absent reforms, it is projected tofall further to around 2 percent by 2025, primarily due to declining working-age population. However,Korea's potential growth can be maintained at a higher level by putting in place a comprehensivestructural reform agenda, including increased female and youth labor force participation, liberalizationof product and labor market regulation. Staff simulations suggest that such reforms could lift potentialgrowth by around 1¼ percentage point over the next decade, maintaining potential growth at around3¼ percent, counteracting the effect of population aging, and enabling Korea to continue to converge toincome levels of the United States.