Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / How One Small Country Solved the Productivity Paradox
Transcript
- Lucas: So here's the puzzle: since the global financial crisis, productivity growth across most advanced economies has been sluggish — about one percent a year, maybe less. But one country quietly smashed through that ceiling, boosting output per hour worked by more than thirty percent in real terms between 2010 and 2024. Luna: Thirty percent? That's not a blip. Which country pulled that off? Lucas: South Korea. And it's a fascinating case because they did it while most of the rest of the developed world — the US, Germany, Japan, the UK — all flatlined. I'm Lucas. Luna: I'm Luna. And this is The Productivity Podcast. Lucas: Now, before we get into the numbers — and I've got some good ones — let me say something. If walking through the economy with us has made something click for you, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah. It keeps the show ad-free and lets us spend time digging into cases like this instead of chasing sponsors. So if it's ever saved you a headache or given you a good dinner-table fact, we appreciate it. Lucas: Exactly. And today's fact is a doozy. So let's start with the baseline. In 2010, South Korea's GDP per hour worked was about thirty dollars in real terms — roughly on par with Spain, behind the UK and Germany. By 2024, it was pushing forty dollars. That's a leap that took the US nearly two decades. Luna: Right, and that's not just from working more — it's from working smarter. Yet Korea also has the longest working hours in the OECD. So how do you make that trade-off? Lucas: That's the key tension. The productivity gains came from a very deliberate strategy. First, Korea doubled down on its existing strengths — semiconductors, shipbuilding, automobiles — but they pushed the frontier. Samsung's shift to extreme ultraviolet lithography for chipmaking in the late 2010s is a perfect example. That required huge capital investment, but it dramatically increased output per worker in their fabs. Luna: So it's not a services-led productivity boom. It's manufacturing, heavy industry, and exports. Which is interesting because most developed economies have seen productivity growth slow precisely as services became dominant. Lucas: Exactly. And Korea's government played a big role here. They have these 'productivity engines' — designated sectors where the state provides R&D subsidies, tax breaks, and infrastructure. It's not pure industrial policy in the old sense, but it's targeted. A 2023 study from the Korea Development Institute found that sectors receiving those incentives saw annual productivity growth of about four percent, versus one point five percent for the rest of the economy. Luna: So the policy worked, at least for those sectors. But what about the rest? If you're a small retailer or a restaurant in Seoul, are you seeing any of that gain? Lucas: That's the uncomfortable part. The productivity boom is very uneven. Korea's manufacturing sector is world-class — its output per hour in manufacturing is actually higher than Germany's now. But its services sector productivity is among the lowest in the OECD, barely above Greece. So you have this dual economy: a hyper-efficient export machine and a domestic service sector that's lagging. Luna: Which might explain the long hours. If services are less productive, you need more labor input to generate the same output. And culturally, there's pressure to be at the office late — even if you're not producing much. Lucas: Right. So the national productivity number looks great because semiconductors and ships are a big share of GDP. But the median worker in a coffee shop or a small construction firm might not feel more productive — they're just putting in the hours. Luna: So is Korea a model to follow? Or a cautionary tale? Lucas: I think it's both. On one hand, they showed that targeted investment in high-tech manufacturing can still generate real productivity gains, even in a low-growth global environment. On the other hand, their experience highlights a painful trade-off: boosting national productivity doesn't automatically raise living standards for everyone. Wages in Korea have grown slower than productivity over the past decade. Luna: That's the classic productivity paradox — just on a national scale. More output per hour, but the gains aren't shared. Lucas: Exactly. And there's another wrinkle. Korea's productivity growth has actually slowed since 2021. Partly because China has become more competitive in some of the same sectors, like shipbuilding and electronics. And partly because the easy gains from capital investment have been exhausted. Now they need to figure out how to boost services productivity, which is much harder. Luna: So what are they doing about it? I know there's been talk of reforming the service sector, but it's politically tough. Lucas: The current administration has pushed a few things. They're trying to increase competition in retail and professional services — opening up to foreign firms, reducing licensing barriers. And they're investing in digital infrastructure for small businesses. But it's early. The big structural issue is that many service industries are dominated by small, family-run firms with low capital intensity. You can't just throw money at them. Luna: Right. Compare that to a semiconductor fab where you can install a billion-dollar machine and instantly triple output per worker. In a restaurant, adding more technology doesn't change the fact that you still need a person to cook and serve. Lucas: Exactly. And that's the core challenge for any economy trying to follow Korea's path. Manufacturing productivity can be pushed through capital deepening and technological leaps. Services productivity often requires regulatory reform, better management practices, and — frankly — a different kind of innovation. Luna: So if I'm a policymaker in another country looking at Korea, what's the one thing I should take away? Lucas: I'd say: pick your bets carefully. Korea succeeded because it had existing strengths in sectors that were globally scalable and capital-intensive. It didn't try to reinvent its economy — it doubled down on what it was already good at, while accepting that the rest would lag. That's a pragmatic, if not entirely satisfying, approach. Luna: And the lesson for businesses? I think it's that productivity gains often come from specialization and scale, not from trying to be everything. Lucas: That's right. And also that measuring productivity at the national level can hide a lot. Korea's GDP per hour looks great, but if you're a worker in a low-productivity service job, you're not feeling the boom. You're just working longer hours for modest wage growth. Luna: So the next frontier for Korea is really services. Can they crack that? If they do, they might set a new standard. Lucas: That's the big open question. Some economists think they can — pointing to the rapid digitization of services during the pandemic, which did boost productivity in areas like online retail and fintech. But the broader service sector remains stubborn. I'll be watching. Luna: Me too. And on that note, if you want to dive deeper into the data, we've linked the KDI study and the OECD productivity database in the show notes. Lucas: Yeah, check those out. And if today's episode added to your understanding, you know where to find us. For now, I'm Lucas. Luna: And I'm Luna. Talk to you next time.