The Korean economy is likely to underperform unless the burden of excessive education and housing costs is relieved, according to McKinsey Global Institute’s latest report.

“Korea needs to reboot and make some fundamental changes to go to the next level. It’s like a high-performing Formula One racer making a much-needed pit stop to stay ahead of the rest and come out on top,” said Choi Won-sik, director and chief of McKinsey & Company’s Seoul office who co-authored the report.

Titled “Beyond Korean Style: Shaping a New Growth Formula,” the report was initiated by the McKinsey Seoul office led by Choi, while the research was jointly conducted with the McKinsey Global Institute.

Without such changes, Choi predicted that “the growing inequality will become an even bigger social problem and growth will be stagnant.”

Ironically, the report noted, areas that were once the engines behind its economic success ― a highly educated workforce and booming housing market have fueled the economy for the past five or six decades ― are now keeping the country back, especially middle-income families.

Noting that up to 8 percent of Korea’s GDP is spent on education, with the college education rate higher in Korea than almost any other country despite university degrees providing little advantage, alternatives were suggested.

Suh Dong-rok, a partner who co-authored the report, stressed that top companies, professional firms and SME associations should get together and “develop the right curricula that can lead directly to employment.”

Advancing the service and SME sectors, which produce most new jobs but pay far less than manufacturing firms and are swamped with tiny mom-and-pop stores, is another problem needing to be solved, the report said.

This is because by 2030, advanced countries will rely increasingly on the service sector ― which provides up to one-third of their exports ― and it is essential that Korea keep up with this trend, Choi of McKinsey said.

Even now, the productivity of Korean services is only about 40 percent of that of manufacturing industries, the report noted, comparing it to the smaller gap in other countries.

To make houses more affordable for middle-income households, the study supported replacing the current short-term mortgages with ones with longer terms and higher loan-to-value limits to reduce loan payments by an estimated 9 trillion won ($8 billion) annually.

By Kim Ji-hyun  (jemmie@heraldcorp.com)