An analysis found that if loans concentrated in the household sector flow to corporations, Korea's long-term economic growth rate would rise by 0.2 percentage point (p).
The Bank of Korea on the 9th published a report titled "Shifting funding flows to the institutional sector of production and growth vitality." The report was written by Deputy Minister Hwang Indo, Jang Hoon, and researcher Kim Wooseok of the Financial and Monetary Research Department at the Bank of Korea's Economic Research Institute.
According to the research team, within Korea's total private credit (household credit + corporations credit), the share of corporations credit, which belongs to the institutional sector of production, has been steadily declining. The share of corporations credit, which was about 80% in 1975, fell to 53.4% in 2020. Private credit is a concept that adds the money (loans) that households and corporations borrow from financial institutions or other private institutional sectors and transactions on account (trade credit).
Analyzing data from 43 countries from 1975 to last year, the research team found that even when the size of private credit is the same, a higher share of corporations credit clearly improves the long-term growth rate. Unlike household credit, which has a weak connection to production, corporations credit directly contributes to growth by expanding investment and boosting productivity.
Based on this, an additional analysis by the research team showed that, with the size of private credit unchanged, if household credit relative to gross domestic product (GDP) is reduced from 90.1% to 80.1% and corporations credit is increased, the long-term growth rate rises by about 0.2 percentage point. For example, if an economy grows an average of 1.9% per year, credit reallocation would raise the growth rate to 2.1%.
The research team said, "To raise the economic growth rate by shifting funding flows from the nonproduction institutional sector to the production institutional sector, the lending incentive structure of financial institutions must be adjusted."