In this report, an annual macroecomic model was constructed that is suitable for forecasting long-horizon korean economy and the forecasting results for korean economy until 2030 were also presented according to scenarios for the annual growth rate of total factor productivity. The model presented in this report emphasizes the role of total factor productivity since it plays an important role in an innovation-driven economy and it's role becomes more important in an economy as the economy becomes characterized as innovation-driven one. In addition the model also includes the government sector to analyze the effect of go- vernment expenditures and the nominal GDP share of corporate tax revenue on the long-run economic growth path.

These two main features of the model capture the major structural changes in Korean economy after the financial crisis occurred at the end of 1997. Korean Economy was said to be in the transition to the innovation-driven economy from factor input-driven one since the crisis. The nominal GDP shares of government expenditures and revenues started to grow quite rapidly after the crisis. As Korea turns into an aging society, the demand for government expenditures is expected to keep growing to meet the needs for social welfare. This implies that the share of government expenditures to nominal GDP can be hardly expected to stay at the current level or go down.

The forecasting was performed from 2007 to 2030 with three different scenarios for the growth rate of total factor productivity. The baseline for the growth rate of total factor productivity is 1.8% per annum that was the historical growth rate of total productivity over the period of 1971～2006. With this baseline scenario, GDP is expected to grow at the rate of 3.14% per annum. The best scenario assumes that TFP grows at the rate of 2.7% per annum, which is the annual growth rate of TFP for the period of 1981～1997. With this best scenario, it is expected for GDP to grow at the rate of 4.17% per annum. The worst scenario assumes that Korea fails to improve total factor productivity and ends up with the growth rate of only 0.7%, the annual growth rate over 1970's. For this case, the annual growth rate of GDP will be only 1.88%.

Based on the policy simulation results and the forecasting results with three different scenarios, we could sum up our findings into three major implications. The first one is that the improvement of total factor productivity has the most persistent and strong effect on the overall economic growth among other policy variables. The next implication is that the increase in total factor productivity has a negative effect on the economy, which happens in the labor hours. The demand for labor is substituted by the increase in total factor productivity, which possibly explains the problem known as “Jobless Growth” in Korea after the Crisis. The last implication is that 1% point decrease in the nominal GDP share of corporate tax revenue increase GDP more than 1% point increase in the share of government expenditures.