A Bank of Korea study found that if insolvent corporations had been cleaned up in a timely manner after the financial crisis, gross domestic product (GDP) would have risen an average of 0.5% per year and private investment would have increased 3.3%.
On the 12th, the Bank of Korea published a report titled "Why has our growth structurally fallen after the economic crisis?" The report was written by Investigation Bureau Comprehensive Research Team Vice Administrator Lee Jong-ung, Director Bu Yu-sin, and Researcher Baek Chang-in.
The research team said the structural slowdown in Korea's growth trend since the 1990s stems from a contraction in private consumption and investment, and traced the cause to delays in exiting insolvent corporations. It said an "hysteresis" effect emerged in which the overall dynamism of industries failed to recover as corporations with declining operating efficiency remained in the market.
The research team estimated that if the economic crisis had not led to a contraction in consumption and investment, Korea's investment and gross domestic product (GDP) would have sufficiently regained their pre-crisis trends. Accordingly, it identified factors behind the structural slowdown in corporate investment and analyzed how investment and GDP would have changed if high-risk corporations had exited.
First, the survey found that the hysteresis of investment was driven mainly by deteriorating profitability rather than financial constraints such as liquidity and collateral limits. Corporations with declining operating profits had significantly lower investment levels over the long term than those with increasing profits, and the gap between the groups was large in research and development and employment as well. This phenomenon occurred in the majority of corporations except for a small number of large corporations.
Based on the financial characteristics of actually exited corporations (interest coverage ratio, default risk ratio of speculative-grade corporate bonds, etc.), the research team estimated the exit probability of individual corporations and identified high-risk corporations for exit. The analysis found that in 2014–2019, immediately after the financial crisis, the share of high-risk corporations was about 4%. However, the share of corporations that actually exited (2%) was only half of that.
If high-risk corporations for exit had been replaced by normal corporations during the same period, domestic investment would have increased an average of 3.3% and GDP by 0.5%. Director Bu Yu-sin said, "If the replacing corporations had operated well, increasing employment and overall demand, the growth rate would have been larger."
A similar situation played out in 2022–2024 after the pandemic. During this period, the share of high-risk corporations for exit was tallied at 3.8%, similar to after the financial crisis. However, actual exits were only 0.4%. The analysis found that if the corporations slated for exit had been replaced by normal corporations within the industry, domestic investment would have increased 2.8% and GDP 0.4%.
Director Bu Yu-sin said, "The post-crisis slowdown in our economy's growth originated from sluggish investment due to deteriorating corporate revenue, but as the cleansing mechanism that could improve this did not function smoothly, investment hysteresis deepened."
Bu said, "To mitigate the structural growth trend, even if financial support is provided, we must support the economy's innovativeness and dynamism through the smooth market entry and exit of corporations," adding, "In addition to key industries such as semiconductors and automobiles, it is important to continue expanding future growth engines by promoting investment in new industries through regulatory easing."