Productivity-Driven Growth Is the Answer

A prosperous life can be achieved through economic growth, because wages and incomes rise as the economy grows. That is why high wages and incomes are indicators of a wealthy society.

Then how can wages and incomes be raised? The answer lies in increasing productivity. When productivity rises, the wages and incomes of economic actors naturally increase. As higher productivity boosts business profits, not only do wage earners and investors see their incomes rise, but business expansion can also create new jobs.

However, wages and incomes must not be forced upward while neglecting productivity improvement, because doing so can damage the economy’s cycle of circulation. Increases in wages and incomes that are not accompanied by productivity growth are not sustainable in the long run.

Our government is expanding policy measures aimed at artificially raising wages and incomes. But their effects are mostly negative, because they create unseen costs and reduce jobs, thereby diminishing benefits for the economy as a whole.

Our economy has already passed the stage in which growth depended on quantitative increases in the factors of production. We have now reached a structure in which growth is possible and wages and incomes can rise only when productivity improves. In particular, productivity growth in agriculture and services is urgently needed. Only then can high-wage jobs increase.

For that to happen, entry and exit in the agriculture and service sectors must be allowed to occur actively. With the existing business structure, it is difficult to expect productivity gains and innovation. If the number of businesses increases while remaining tied to existing business models, this will not expand the market; it will only increase the frequency of entry and exit and lead to wasted capital. Above all, institutional reform is needed to remove regulations related to entry and exit so that new businesses capable of innovation through the use of capital and technology can enter the market.

In a market environment where new businesses can freely enter and compete, innovation can occur that raises productivity and wages. Through that process, good jobs are created in the sector, the market expands, and income is generated. But subsidies for incumbent businesses that remain complacent in outdated business structures and rely on government protection barriers block all of this.

Now is the time to abolish the various protection and support policies for incumbent businesses that survive by depending on government protection and subsidies. Such excessive protection policies become entry barriers for existing firms and prevent new businesses from entering. Protection policies do nothing but block innovation and market expansion in the sector and keep it trapped in a low-productivity structure.

Growth led by productivity is the right answer. The same is true of the population issue. Our society has passed the period of population expansion and has now entered a stage of stability. A low population growth rate does not have to mean low growth. The population issue as well should be addressed through productivity growth.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 생산성주도 성장이 답이다

Author: Sung-no Choi

Date: 2018-09-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=11132