McKinsey & Company released an economic diagnosis report titled “Korea’s Next S-Curve” on Dec. 11. This report comes ten years after the firm’s previous report titled “Beyond Korean style: Shaping a new growth formula,” suggesting that the South Korean economy has reached its growth limits.
In its report a decade ago, McKinsey likened the South Korean economy to a “frog in boiling water.” In the current report, however, McKinsey argues that it is time to take the frog out of the pot. The recommendation is to boldly implement a new economic growth model.
According to the report, McKinsey estimates that South Korea’s GDP in 2040 will be between US$3.2 trillion to 3.4 trillion . This projection is slightly higher, by about US$758.15 million, compared to forecasts presented in August by S&P at US$2.4 trillion and the UK’s EIU at US$2.2 trillion.
To achieve this, South Korea would need to experience a leap in its annual average economic growth rate to 4 percent by 2040. The Bank of Korea has forecast a growth rate of 1.4 percent for the economy this year. McKinsey also acknowledges the difficulty, stating, “A leap to a 4 percent economic growth rate is not easy in a situation where national growth is stagnant. However, it is possible with the introduction of innovative measures supporting a new formula for national economic growth.” McKinsey cited examples, mentioning that the United States experienced a contraction in growth in the 2 percent range from 1991 to 1995, but then rebounded to the 4 percent range from 1996 to 2000. Similarly, Germany faced a growth slowdown in the mid-1 percent range from 1991 to 2005 but approached a growth rate of 4 percent from 2006 to 2011.
In order to achieve a 4 percent growth rate for South Korea, McKinsey’s analysis suggests that companies with revenues of US$100 billion, US$10 billion, and US$1 billion need to increase by 5, 2, and 100, respectively. As of last year, only three companies in South Korea -- Samsung Electronics, Hyundai Motor, and SK Inc. -- surpassed the US$100 billion revenue mark. McKinsey particularly emphasized the need for growth in industries such as renewable energy, biotechnology, artificial intelligence (AI), mobility, and semiconductors.
McKinsey also advised that the productivity of small and medium-sized enterprises (SMEs) needs to double. According to the Korean Federation of Small and Medium Business, the productivity of South Korean SMEs is around 30 percent of that of large enterprises lower than the OECD average of 50 percent. McKinsey stated, “Considering that approximately 99 percent of businesses and about 80 percent of the workforce in South Korea are SMEs, the ripple effect of improving productivity per capita in SMEs would have a significant impact on the South Korean economy.”
It was also suggested that the size of the capital market, relative to GDP, should double. The size of South Korea’s capital market compared to its GDP from 2018 to 2022 was 9.5 percent, which is lower than the United States at 25 percent, the United Kingdom at 20.6 percent, and Japan at 11 percent. As part of these measures, McKinsey mentioned efforts such as policies to enhance shareholder value, governance improvements, and the advancement of the capital market, as well as diversification of capital sources through initiatives like increasing the share of foreign investment.
Additionally, McKinsey proposed several recommendations, including achieving a service sector share of 70 percent within the GDP, creating three or more globally leading clusters like the Boston Bio Cluster, introducing two or more new globally leading industries with a significant competitive edge, such as semiconductors and batteries, and nurturing 50,000 advanced AI professionals.
Ten years after the 2013 report addressing demographic imbalances, declining labor productivity, and the “Korea Discount” in the stock market, which refers to the undervaluation of the South Korean stock market, McKinsey noted, “A decade has passed, and the water temperature inside the pot has risen even further. Rather than waiting for it to cool down, it is necessary to take bold attempts and changes to bring the frog out of the pot and propel the economy into a new S-curve of growth.”