Abstract

Korea is facing structural low growth, confronting limits in quantitative labor and capital inputs amidst depopulation, aging, and rising external uncertainties. This report diagnoses the current status and challenges of the Korean economy and proposes agendas for sustainable growth. To diagnose the economic status, we analyzed productivity and the growth contribution of input factors. After a period of slowdown in the 2010s, the Korean economy has recently shown signals of productivity improvement (2022-2024). Total Factor Productivity (TFP) is recovering, primarily driven by the ICT industry within the manufacturing sector -the epicenter of the previous slowdown- and is now leading growth. We also examined the potential of AI and digital transformation as new growth engines. While AI adoption is analyzed to drive innovative growth through cost reduction and TFP improvement, we confirmed that realizing immediate productivity gains in the real economy remains challenging. For AI and digital investments to translate into corporate productivity gains, complementary investments in intangible assets, such as organizational capital, are essential. While Korea ranks top among G7 nations in Innovative Property like R&D, it ranks lowest in organizational capital. Essentially, while the investment quantity is sufficient, the quality is problematic. As GVCs restructure from an efficiency focus to a security and value-oriented framework, we highlighted the necessity of structural economic reforms to manage supply chains and strengthen Domestic Value Added (DVA) for sustainable growth. AI and digital transformation present new challenges but hold the potential to overcome economic difficulties through productivity enhancement. To leverage this potential, change is imperative. In conclusion, we proposed two key agendas for sustainable growth: “Reorganization of Investment Strategies for the AI·Digital Era” and “Structural Reform to Expand Domestic Value Added within GVCs.”