The Bank of Korea: "Regional Growth Gaps Due to 'Productivity'... Investment Should Focus on a Few Key Cities"

The Bank of Korea's Analysis of Regional Economic Growth Factors and Balanced Development Centered on Hub Cities
"51.7% of Interregional Growth Disparities Due to Productivity Gaps"
"Investment Should Focus on a Few Hub Cities"

Recent research has found that more than half of the growth gap between regions is due to productivity disparities. Considering future population decline, it has been suggested that concentrating investments in a few key hub cities would be more effective.

According to the report titled "Analysis of Regional Economic Growth Factors and Balanced Development Centered on Hub Cities," published by the Bank of Korea on the 19th, 51.7% of the recent widening growth gap between regions is attributed to productivity differences. South Korea's capital and Chungcheong regions have shown an average annual growth rate of 3.4% from 2011 to 2022. In contrast, the Southeast, Honam, and Daegyeong regions have exhibited sluggish growth with an average annual rate of 1.4%.

This has been revealed to stem from agglomeration economies resulting from the concentration of infrastructure such as large corporations and highly skilled labor in the capital and Chungcheong regions. Agglomeration economies refer to the benefits of increased productivity when companies and human resources are concentrated in one area. In fact, 95.5% of South Korea's top 30 companies are based in the capital region, and 100% of the top 10 comprehensive universities are located there, an unusual level compared to major countries. In Japan, 73.4% of the top 30 companies are in the capital region, and only 4 of the top 10 comprehensive universities are located there.

Jung Minsu, head of the Regional Economy Research Team at the Bank of Korea who authored the report, stated, "Productivity disparities further deepen the spatial concentration of labor and capital," adding, "Ultimately, this leads to polarization between the expanded capital region and other areas, and there is a significant risk of negative externalities such as low birth rates expanding nationwide."

Although policies for balanced regional development have been steadily pursued to alleviate concentration in the capital region, there has been a tendency for underinvestment in non-capital large cities. The ratio of investment expenditure to Gross Regional Domestic Product (GRDP) in basic local governments of non-capital large cities (Busan, Daegu, Gwangju, Daejeon) averaged 1.4%, significantly lower than that of mid-sized cities with populations over 200,000 (3.9%) and small cities/counties (16%).

Moreover, the relocation of public institutions based in the capital region had greater effects on production and employment creation in large cities due to economies of scale and human capital effects. However, since the relocated institutions were scattered across 10 different regions, achieving goals such as forming regional hubs was constrained.

Currently, the number of hub cities in South Korea is higher than in major foreign countries. In countries with a per capita GDP of over $30,000 and a population density of more than 200 people per square kilometer (such as Japan, Germany, the United Kingdom, and Italy), the number of non-capital hub cities per 100,000 square kilometers of national territory ranges from 2 to 6. This is fewer than the number of innovation cities in South Korea, which stands at 10.

The report analyzed that concentrating investments in regional hub cities to enhance productivity yields better outcomes for the economies of small and medium-sized cities and counties than improving productivity primarily in the capital region. In fact, the effect of regional productivity improvements on national GDP was 1.3% on average for non-capital large cities, which is higher than the 1.1% effect when productivity was improved mainly in the capital region.

Team leader Jung said, "During past periods of population growth, it was important to build infrastructure evenly across the entire country," but added, "As the population declines in the future and regional development funds become limited, there is a need to shift the paradigm toward balanced development centered on a few key hub cities that can maximize investment effects."

He continued, "Rather than having most non-capital regions decline similarly, it is a realistic direction to ensure that the agglomeration benefits centered on hub cities are evenly spread to surrounding areas."