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Title Analysis of the Determining Factors of Revitalized Domestic Demand

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Analysis of the Determining Factors of Revitalized Domestic Demand

As Korea has recently entered a low-growth trajectory, society is increasingly interested in ways to boost domestic demand as a means to maintain growth. The idea of revitalizing domestic demand stems from recognizing the difficulty of actively responding to the changing external environment via current export-led growth, and therefore pursuing economic procyclicality among consumption, investment, growth, employment and income. Such suggestions are gaining sympathy as the quality of life is closely linked with increases in consumption, while economic growth depends on economic procyclicality based on increased investment. In relation to this, NABO reviewed the causes of the discussions on boosting domestic demand, examined relevant foreign cases and analyzed the factors that affect the proportion of domestic demand, private consumption as well as investment by comparing relevant overseas case studies. Consequently, it was confirmed through such research that measures to boost domestic consumption were not always successful and that is not easy to induce economic procyclicality until the proportion of domestic demand reaches a certain critical point. For instance, over the past decade, the Korean national-disposable-income-to-GDP ratio and propensity to consume have declined more than the OECD average. During the same period, Korean purchasing power improved less than the OECD average, contributing to sluggish private consumption growth. Furthermore, the proportion of Korea’s investment-to-GDP has remained stagnant since the mid-2000s, indicating that the country’s future growth potential is weakening. In particular, increasing the proportion of investment in the services industry, which has a high correlation with economic growth volatility, is a major task on the path to ensuring revitalized economic growth as well as boosting domestic demand. The outcome of the analysis from this report is expected to be utilized when taking into account the determining factors used in boosting domestic demand, so that any reaction may be mitigated while enhancing policy effectiveness.

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