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Medium and long-term Industrial Structure Projection taking into account the 4th Industrial Revolution

Author Lee, Jinmyon et al Date 2018.12.05 Page

The purpose of this study is to conduct mid to long-term projection on economic and industrial changes, taking into account the 4th Industrial Revolution which is projected to bring about transformation even difficult to predict in the economy and industry in general as well as considering changes in the economic environment in and outside the country. In particular, this study will conduct analysis on growth potential of industries that are at the forefront of the impact of the 4th Industrial Revolution by setting up a series of scenarios. By doing so, this study aims to provide basic quantitative information to come up with various countermeasures and policies for the Korean economy and industrial sectors in withstanding and overcoming the challenges in the 4th Industrial Revolution era.  


At the initial stages of research, this paper reviewed relevant prior studies such as Germany’s labor market projection, Japan’s future projection in the Society 5.0 era and KIET’s industrial projecton. Through this, we found out implications for the mid-to-long term projection of the Korean economy in consideration of the 4th Industrial Revolution, and also set the direction of basis, methodology and scenarios for the quantitative projection.  


After setting the ground for the projection, econometric model and statistical database for quantitative forecast was established. First, statistical database in the form of Input-Output matrix was updated for the period of 1995 to 2017, and for major exogenous variables, it was extended to 2035, reflecting projection of major forecast agencies such as Global Insight and OECD. KIET- Dynamic Inter-Industry Macroeconomic Model 12 (KIET-DIMM12), the econometric model greatly revised and updated in 2012 with the expansion of industrial classifications and the addition of household budget and consumption modules, was updated into KIET-DIMM18 by re-estimating of behavioral equations and reflecting recent economic circumstances. KIET-DIMM18 has 5 sub-blocks of macro-economy, demand/supply, price/technology, external economy and consumption. It is in the form of simultaneous equation connected with identical equations that are in line with 700 behavioral equations and economic theories.  


Since the launch of KIET-DIMM18, preliminary projections using the model and qualitative assessment by industry exports were carried out repetitively to confirm the baseline. Also, we formed growth scenarios for each industry directly affected by the impact of the 4th Industrial Revolution and conducted analysis on them. In particular, this study set up a scenario converging manufacturing and service industries and conducted an analysis on the scenario, subdividing it into manufacturing-led and service-led ones.  


Forecast result showed that economic growth rates vary based on scenarios, but slowdown trend is projected to continue. After recording 3% of average annual growth rates (AAGR) for the decade starting from 2005, the AAGR for 2015 to 2025 is projected to slow down to 2.7% (AAGR). That said, the converged scenario of manufacturing and service industries showed that it will grow 2.85% per annum for the same period. When the positive effect of the 4th Industrial Revolution is truly in swing from 2025 to 2035, service-led is forecast to grow by 2.2% and manufacturing-led, by 2.12%, recording gap compared to baseline 0.19%p and 0.27%p, respectively. Projection by industry shows strong growth rates for manufacturing sector compared to the baseline in the scenario taking into account the 4th Industrial Revolution. This is driv- en by the fact that the growth of positive effects of the 4th Industrial Revolution mainly comes from manufacturing sector and SOC, and its influence reaches the service industry at some level.  


When taking a close look at specific sectors of the manufacturing in- dustry, industries that serve as the foundation of the 4th Industrial Revolution such as semi-conductor, electronic devices, precision instrument and machinery show strong growth rates. Fine Chemistry which include bio industry, of course incorporate medicine and medi- cal supplies, is projected to witness stable growth continuously. Meanwhile, the service industry is continuously hovering above the growth rates of any existing industry, not to mention about the manufacturing industry. This robust growth is expected to result in an increase in the share of service industry in the economy in general, even though a strong growth momentum of the manufacturing industry. Among the service industry, sub-sectors considered to have strong correlations with the 4th Industrial Revolution that include information, communication service, business service, culture and entertainment services industry are forecast to display remarkable growth.