A Rational Path to 3% Potential Growth: From “Market Control” to “Market Expansion”

The 3% Potential Growth Target and the Background of Korea’s Growth

The new government’s 3% potential growth target is a clear compass for helping the Korean economy break out of entrenched low growth and make a renewed leap forward. However, the larger and more long-term the goal, the more sophisticated the policy instruments must be. There is a growing risk that recently proposed, implemented, and debated measures—including corporate governance regulations (amendments to the Commercial Act), strongly punitive sanctions (surcharges under the Occupational Safety and Health Act), industry-specific regulations in the platform, content, and health sectors, and discussions of higher corporate taxes and inheritance taxes—could, beyond their stated policy aims of fairness, safety, shareholder protection, and protecting small merchants, cumulatively shrink the very environment in which investment, innovation, and entrepreneurship operate.

Through its growth strategy, the government has set out a goal of 3% potential growth along with “technology-driven, fair, and sustainable growth.” In its 2025 Article IV consultation, the IMF likewise emphasized the importance of “structural reform, regulatory improvement, and productivity enhancement to raise potential growth,” and assessed the new government’s growth strategy as aiming for 3% potential growth.

However, if the policy message’s “direction” (growth) and the policy tools’ “impression” (stronger regulation and burdens) both intensify at the same time, firms, investors, entrepreneurs, and the labor market receive conflicting signals. One says, “Invest,” while the other signals, “Risk has increased.” In such a situation, the more rational the economic actor, the more likely they are to delay major decisions and move conservatively. Regardless of the intentions of growth policy, this can weaken the engines of investment, innovation, and productivity.

Accordingly, this article does not advance the simplistic slogan that “deregulation alone is the answer.” Rather, it addresses a problem of policy coherence: in order to genuinely achieve such policy goals as fairness, safety, and shareholder protection, regulatory and tax design must also be realigned in a market-friendly way.

Korea has experienced rapid growth through industrialization and crisis recovery on the basis of private-sector investment, entrepreneurship, and external openness. But today, amid demographic change, slowing productivity, and pressure for industrial restructuring, the country has entered a phase in which its medium- to long-term growth potential is weakening.

The IMF stresses that Korea’s rapid aging could negatively affect growth, but that this need not become an inescapable “economic destiny” if institutions are reformed so that labor and capital can move into more productive sectors and barriers to business activity are lowered.

This is where the meaning of a 3% potential growth rate becomes clear. Potential growth cannot be raised through short-term stimulus alone. It rises only when total factor productivity (TFP), labor supply, and capital accumulation improve together. Therefore, the more difficult the goal, the more the policy package must answer the following questions:

• Is it increasing the predictability of investment returns?

• Is innovation taking place not through loopholes in law and regulation, but on the basis of institutional support?

• Are labor, safety, platform, and governance rules achieving both “harm prevention” and “the continuity of innovation”?

Recent legislative trends are sending mixed signals on these questions. In particular, when tighter regulation proceeds simultaneously on multiple fronts, the cumulative effect—regardless of the legitimate aims of each law—can weaken the growth engine.

Diagnosis of Recent Legislative and Policy Trends and Their Economic Spillover Effects

1) Amendments to the Commercial Act: the goal of stronger shareholder protection and the cost of “legal uncertainty”

Through a partial amendment on July 22, 2025 (Act No. 20991), the Commercial Act expanded directors’ duty of loyalty from being owed only to “the company” to being owed to “the company and its shareholders,” and explicitly codified the duties to protect the interests of all shareholders and to treat all shareholders fairly. It also revised the so-called 3% voting cap in the appointment and dismissal of audit committee members at listed companies, designing different rules depending on whether the audit committee member is an outside director, including whether the largest shareholder and specially related persons are counted together and how the 3% cap is applied.

Then, on February 25, an amendment to the Commercial Act mandating the cancellation of treasury shares also passed the National Assembly plenary session. The intent of these changes is clear: to protect minority shareholders from controlling shareholder-centered decision-making and to raise confidence in the capital market. Yet the stronger the legal norm, the greater the potential economic cost. First, board discretion may be transformed into litigation risk. Concerns have been raised that the mixed terminology and parallel structure of obligations in the amended provisions could create interpretive confusion and heighten litigation risk. Second, in Korea, corporate decision-making can lead not only to civil liability but also to criminal risk, such as debates over breach of trust charges. In that context, stronger shareholder protection can directly lead to more hesitant decision-making.

Ultimately, if the Commercial Act amendments are to achieve their goal of improving capital market confidence, stronger accountability must be accompanied by predictable guidelines and safeguards against excessive litigation. Otherwise, productivity-enhancing activities such as investment, M&A, and restructuring may be discouraged.

2) Occupational Safety and Health Act surcharges: the goal of stronger safety and the adverse effects of a “punitive design”

Preventing industrial accidents is of the utmost importance. But what matters is how results are achieved. A recent controversial amendment to the Occupational Safety and Health Act (introduced by a lawmaker: 2025. 11. 10., Bill No. 2214045) proposed that when three or more workers die within a year due to violations of occupational safety and health obligations, a surcharge of up to 5% of operating profit be imposed in addition to criminal punishment, with repeated violations subject to a 10% increase.

It is also confirmed that on February 12, 2026, the relevant standing committee disposed of the bill in the form of “rejection with an alternative reflected.” This design has three problems. First, the predictability of sanctions is low. Even for the same accident, the surcharge could vary greatly depending on a company’s operating profit, and where operating profit is difficult to calculate, a separate standard such as a cap of KRW 3 billion is being discussed. Second, contrary to the stated aim of encouraging greater safety investment at industrial sites, the shock of cash outflows may first reduce firms’ capacity to invest. Third, if one is to claim policy effectiveness for such a surcharge, it must be accompanied by the outcome indicator of reduced industrial accidents, yet the system’s effectiveness has not been proven. Some reporting, based on trends in casualties since the Serious Accidents Punishment Act took effect, raises the issue that “stronger punishment alone may have limited effects.” As one actual estimate, media reports have suggested that applying a surcharge of 5% of operating profit to 22 companies that would have met the threshold since the Serious Accidents Punishment Act took effect in January 2022 (three or more deaths annually) could amount to about KRW 690 billion over three years, or KRW 230 billion annually. This figure is merely a reference for policy decisions, not the “actual amount to be imposed,” and may vary by company and by case (the exact administrative calculation standard has not been specified). Even so, what the estimate shows is the possibility that a punitive design could affect not only “safety” but also investment, employment, and supply chains.

3) Platform regulatory legislation: balancing fairness goals with innovation and welfare

In the platform economy, the interests of small merchants, consumers, delivery workers, and participating merchants intersect. Accordingly, there is a need to establish a fair trading order. But the effects on welfare differ depending on the regulatory method.

Among the bills currently under discussion, the Online Platform Fairness Act contains a broad range of obligations, prior prohibition regulations, and enforcement tools, including monopoly regulation, delivery of contracts, prior notice, separate management of sales proceeds, prohibitions on unfair practices and retaliatory measures, and damages liability, including the possibility of treble damages in cases of retaliation. The bill related to platform service fees for food delivery services (Bill No. 2215046, 2025. 12. 9.) includes the introduction of “preferential commission rates,” a cap on delivery commissions, guaranteed choice over delivery methods and allocation of delivery fees, mandatory disclosure of information, a ban on disadvantageous treatment, and grounds for sanctions such as surcharges and administrative fines for noncompliance.

The policy goals behind this legislation—addressing commissions, unfair practices, and information asymmetry—are understandable. But from the standpoint of growth policy, the following transmission channels must be examined. The stronger the nature of price and fee controls, the more platforms may respond by passing costs on, reducing services, restricting participation, or altering advertising and settlement structures, though the specific scale of cost pass-through is unspecified. As compliance costs and legal liabilities rise, entry by startups and small and medium-sized platforms may become even more difficult, and there is also a risk that market concentration around large firms will intensify. The key is not “no regulation,” but ex post regulation and data-based enforcement—sanctioning actual harm or actual anticompetitive conduct once it occurs. Excessive ex ante regulation can slow the pace of innovation and paradoxically worsen consumer welfare.

4) The spread of sector-specific platform regulation: the so-called “Doctor Now Prevention Act” and holdback debates

Platform regulation is spreading beyond competition law into medicine and content. For example, an amendment to the Pharmaceutical Affairs Act (Bill No. 2205513, 2024. 11. 13.), concerning platforms that transmit prescriptions for telemedicine, aims to prevent brokers and similar intermediaries from obtaining pharmaceutical wholesaler licenses and to prohibit inducement to specific pharmacies. This debate strongly reflects the public-interest goal of preserving the order of pharmaceutical distribution and preventing conflicts of interest, but it is also necessary to review the side effects that can arise when business models for innovative services are finely restricted by law, including reduced investment, restricted competition, and incentives to circumvent regulation. In medicine and pharmaceuticals in particular, where regulation is already strong, a phased approach of “permit-experiment-evaluate-expand” is all the more important.

In the content sector as well, the legal codification of “holdback” is under discussion. An amendment to the Motion Pictures and Video Products Act (Bill No. 2212929, 2025. 9. 12.) proposes a new provision allowing supply or provision through online video and similar means only after up to six months have passed following the end of theatrical release. Another amendment (Bill No. 2214148, 2025.2025. 11. 12.) presents a “flexible design” that does not fix the period in the statute but delegates it to Presidential Decree. The two approaches share the same goal—order in film distribution and recovery of investment in the film industry—but differ substantially in the intensity of ex ante regulation and market adaptability. Here too, it is necessary to consider how to harmonize such measures with the basic principles of growth policy, namely preserving incentives for innovation and investment.

5) The paradox of controlling the real estate market: it only drives up Gangnam housing prices

From last year through the present, the new government has clearly maintained a market-control stance in real estate, rolling out a series of high-intensity measures including tighter mortgage regulations, additional designation of land transaction permit zones, and expanded tax burdens such as the resumption of heavy capital gains taxes. When the government targets prices by tightening lending, raising taxes, and restricting transactions, the market does not stabilize—it freezes, and where transactions disappear, only distorted price signals and uncertainty remain. In areas like Gangnam, where demand is hard to substitute and supply is limited, regulation does not necessarily lead to falling prices; instead, it only reinforces scarcity and strengthens the market’s ability to hold up. In the process, lending restrictions and high transaction taxes first exclude those with limited cash resources, shifting the market into a “cash-centered structure,” repeating balloon effects and concentration, and widening regional and class disparities. In the end, an approach that tries to manage the market through design fails to lower prices while restricting liquidity and freedom of movement and even blocking supply channels, thereby increasing long-term instability. If the goal is housing stability, the priority should not be to intensify controls but to establish the principles of predictable rules and expanded housing supply.

6) Expanding price controls and direct intervention in such areas as public sanitary pads, sugar levies, and school uniform prices

Recent trends also show stronger direct government intervention in everyday policies, including expanded free provision of public sanitary pads, discussions on introducing a sugar levy, and moves toward price regulation prompted by controversy over school uniforms costing KRW 600,000. The intent is clear. The social objectives—protecting vulnerable groups, improving health, and reducing educational costs—are fully understandable. But if direct intervention in prices, consumer choice, and production structures is repeated, the market’s autonomous adjustment function may weaken. For example, if certain items are provided free of charge, a structure of fiscal dependence may become entrenched, and indirect taxation in the form of levies may lead to reduced consumption and weakened industrial competitiveness.

Attempts to manage prices administratively may produce a short-term sense of stability, but in the long term it is hard to rule out side effects such as lower quality, reduced supply, and cost pass-through in other forms. The need for welfare and protection cannot be denied, but if the methods continue to expand in ways that replace market functions, it is necessary to examine whether they are colliding with the foundations of growth. Growth and welfare should form a virtuous cycle, and this requires policy design that also respects price signals and the competitive order.

7) The tax environment: the “signal effect” of higher corporate taxes and inheritance tax reform debates

The tax system sends direct signals to investment and entrepreneurship. There are reports that, by passage in the National Assembly plenary session on December 2, 2025, an amendment to the Corporate Tax Act was finalized that raises the corporate tax rate by 1 percentage point across all tax brackets. While citing fiscal sustainability and tax equity, the government also released explanatory materials stating its intention to reinvest the additional revenue into innovation, including R&D, startups, and workforce development.

The issue here is not the abstract justification for tax increases themselves, but rather the sequence and design at a time when the target is 3% potential growth. The OECD has empirically shown that corporate taxation can have a negative relationship with investment.

That is, in a phase where the goal is to boost investment and innovation and thereby raise growth potential, an increase in the corporate tax rate may partially offset the government’s intended expansion of innovation investment by sending a signal of a higher tax burden.

Inheritance tax is more complex. An amendment to the Inheritance Tax and Gift Tax Act preannounced on March 19, 2025 proposes rationalizing the tax system by introducing an inheritance acquisition tax that shifts the tax base from the “decedent’s total estate” to the “assets acquired by each heir.” At the same time, various lawmaker-sponsored bills have been introduced in parallel on such issues as the top tax rate, premium valuation of major shareholders’ shares, and expansion of deductions for business succession. Inheritance tax reform is easily drawn into the political frame of “tax cuts for the rich,” but from the standpoint of growth policy, the key question is this: where business succession has a public-interest dimension in preserving continuity in jobs, technology, and supply chains, how should the system be designed to secure tax equity without undermining property rights and investment incentives? The longer this debate drags on, the more conservatively firms and capital will behave—for example, by delaying investment and accumulating liquidity—and this can conflict with the target of 3% potential growth.

Hints from International Comparisons

International cases do not show that any one country has “the” correct answer; rather, they reveal common elements in policy design that has achieved both growth and discipline. First, the United Kingdom operates a Better Regulation Framework to manage the flow of regulation and understand its effects, guiding procedures for evaluating the costs and impacts of regulatory actions on businesses and subjecting them to independent scrutiny. The key point is not “let us avoid regulation,” but that the country has institutionalized quality control for regulation through impact assessment and rigorous review. Second, Japan, through mechanisms such as regulatory sandboxes and the resolution of gray zones, combines a method of “test first, accumulate evidence, then improve the system” when new technologies and new businesses conflict with existing regulations. This is especially effective in rapidly changing industries such as platforms, AI, and biotech. Third, France has implemented tax adjustments to strengthen competitiveness, including applying a 25% corporate tax rate from 2022 onward, though the detailed structure differs depending on firm size and other rules. Fourth, the United States’ Tax Cuts and Jobs Act of 2017 lowered the top federal corporate tax rate from 35% to 21%. But this case shows not a simplistic formula of “lower tax rates equal growth,” but also the debates over distribution, fiscal effects, and effective tax rates that accompanied tax reform. What these cases commonly suggest is that, for regulation and taxation, design, implementation, and sequencing matter more for growth outcomes than broad direction alone.

Policy Shift Proposals for Achieving 3% Potential Growth

The question now is what should be changed. Below is a realistic package that seeks a market-friendly transition while also taking account of political and social constraints, including demands for fairness, safety, and redistribution.

1) Regulatory reform: negative regulation, ex post regulation, and making regulatory impact analysis substantive

Korea already operates procedures under the Framework Act on Administrative Regulations requiring regulatory impact analyses and internal review when regulations are newly introduced or strengthened. The OECD has also referred to improving Korea’s regulatory impact analysis system and recommended that broader costs, including indirect costs and macroeconomic effects, be reflected. In other words, what is needed is not “the introduction of a new system” but the substantive strengthening of the existing one.

The policy proposals are as follows. The principle of shifting to negative regulation should be clarified at the level of statutory language. Only a “list of prohibitions” should be specified, while the scope for permission and experimentation should be broadened. Platform regulation should be designed not as a broad ex ante prohibition of categories of conduct, but as ex post sanctions where restrictions on competition or consumer harm are actually confirmed. The obligations contained in platform intermediary transaction bills—contracts, notice, and transparency—should remain as minimum norms, but direct controls on prices and fees, such as caps or mandatory preferential rates, should be limited to phased or pilot projects, with expansion determined after data-based evaluation.

There is also a need to standardize, both qualitatively and quantitatively, not only direct costs but also indirect costs, potential investment contraction, and delays to innovation. Ex post evaluation should be made mandatory within 12 to 24 months after regulatory implementation, and sunset provisions and review should be institutionalized where goals are not met. Deferrals, exceptions, and phased application should be basic principles of regulatory design. Broad changes to the legal system, such as amendments to the Commercial Act, require time for the market to adapt, and the spillover effects on small and medium-sized firms and unlisted firms in particular should be separately assessed.

2) Tax reform: rearranging corporate tax, inheritance tax, and gift tax into an “investment-friendly order”

Corporate tax and inheritance and gift taxes are highly sensitive for investment and entrepreneurship. The OECD empirically shows a negative relationship between corporate taxation and investment. If the government has finalized or is pushing through a corporate tax increase, what matters even more than the increase itself are growth-friendly complementary measures and sequencing.

First, if adjustment of the corporate tax rate is unavoidable, policy financing and tax credits for investment, R&D, and productivity-enhancing investment should be strengthened, and deduction and carryforward rules should be refined so that effective tax rates do not spike for small and medium-sized firms and innovative companies. On the R&D tax side, the World Bank notes that R&D tax support tends to increase corporate R&D, but emphasizes that design and administration—including preventing abuse and aligning with goals—are important. Korea, too, places R&D innovation at the center of its “growth strategy.” Therefore, to offset the “burden signal” created by a corporate tax increase, the predictability and speed of the R&D tax system—shorter review periods, advance consulting, and standard guidelines—should be institutionalized.

Second, inheritance and gift taxes should rationalize the tax system through the shift to an inheritance acquisition tax. But if the implementation date, deduction structure, and conditions for business succession remain uncertain, both firms and households will instead postpone decisions. The goal is to balance “preventing the hereditary transmission of wealth” and “maintaining business continuity.” Specifically, there is a need for: 1) reforming employment and investment requirements for business succession so that they are centered on outcomes rather than formality; 2) easing liquidity problems through tax deferral and installment payments; and 3) deciding contested issues such as premium valuation for major shareholders through an open regulatory impact analysis (RIA) that evaluates both economic effects and equity.

3) Labor and safety: designing for “preventive outcomes,” not simply stronger punishment

In industrial safety, what matters is not a system that makes it easy to punish firms, but a system that reduces accidents. The currently discussed surcharge linked to operating profit seeks a strong deterrent effect, but it simultaneously raises concerns about the predictability of sanctions and the weakening of firms’ investment capacity. The alternatives are as follows. First, through risk-based supervision, oversight resources should be concentrated on accident-prone and high-risk processes, while low-risk workplaces should shift toward self-regulation and consulting, minimizing compliance costs. Second, through safety investment incentives, tax credits and policy financing should be strengthened for investments in safety facilities and AI-based safety management so that prevention becomes not a “cost” but an “investment.” Third, for predictability in enforcement, the criteria for calculating surcharges and administrative sanctions should be made concrete, and detailed standards—such as “workplace-level criteria” and the reflection of accident fault and management standards—should be disclosed in order to reduce controversy over the fairness of linking sanctions to operating profit.

4) Capital markets and market expansion: linking potential growth to “investment-innovation-exports”

The IMF emphasizes that productivity enhancement, better capital allocation, and regulatory improvement are important for raising potential growth. In other words, it is not enough merely to adjust regulation and taxes; capital must flow to innovative firms, firms must expand global markets, and service-sector productivity must rise for 3% growth to become reality. To that end, the following are proposed. First, in the venture capital (VC)-scale-up-initial public offering (IPO) pipeline, the government should focus not on subsidies but on co-investment, matching, and improving the exit market, thereby strengthening private capital’s capacity to take risks. Second, to raise service-sector productivity, a new framework is needed to assess regulations, public services, and operational efficiency related to business activity. Given that improving service productivity has long been identified as a comparatively urgent task for Korea relative to its manufacturing competitiveness, reform of service-sector regulations—including licensing and permits, data, and professional regulation—can directly contribute to raising potential growth. Finally, support for overseas expansion should shift toward a market-expansion model: rather than short-term financial support, legal and compliance support should be strengthened for dealing with regulation, standards, certification, and trade risks, especially in platforms, content, and healthcare.

The center of gravity must shift from control and burdens to vitality and incentives

A free market order and a business-friendly environment are the foundation of growth. This is not a slogan advancing the interests of any particular group, but a condition for economic development proven by history. The government’s role is to refine laws and institutions so that this market order functions fairly. Its role is not to replace the market, but to support the market so that it functions properly.

To achieve 3% potential growth, policies on regulation, taxation, labor, and finance need to be realigned in a growth-friendly direction. The regulatory system should be shifted to a negative approach to raise the predictability of innovation, and the tax system should be rationalized in a direction that promotes long-term investment and capital accumulation. The labor market should secure flexibility centered on jobs and performance, and the capital market should improve its structure so that risk capital can flow smoothly into new industries. A market-expansion strategy to overcome the limits of domestic demand must also proceed in parallel. Service-sector productivity should be raised, and trade policy should be linked with industrial policy to support firms’ overseas expansion. It is important to build an institutional foundation so that firms can continue to pursue challenge and innovation at home while also competing in global markets.

Growth is not the product of policy will, but the result of the institutional environment. The stronger the signals of control and burden become, the more investment and innovation contract. Conversely, the more firmly the principles of predictability, autonomy, and fair competition are established, the more private-sector dynamism will recover. The new government’s 3% growth target is by no means an exaggerated slogan. But the path to it may be more realistic if sought in the direction of restoring market vitality.

Changes in laws and policies based on the market control and design now being pursued by the new government will make it harder to realize the fundamental goal of 3% potential growth. This is the moment to examine not just the intent or speed of policy, but its direction and ripple effects. Policymakers need to shift the center of gravity from the temptation of control to a dynamic economy, and from expanding burdens to strengthening incentives. Only on that balance can 3% growth become a reality rather than a declaration.

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Original title: 잠재성장률 3% 달성의 합리적 해법: ‘시장 통제’에서 ‘시장 확대’로

Author: Gwang yong Go

Date: 2026-04-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28782