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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of Korea, published on 20 June 2007.
Korea remains one of the fastest growing economies in the OECD area. Strength in high-technology sectors and strong demand from China have supported export growth over the past four years despite sluggish domestic demand. This growth pattern has exacerbated imbalances between the manufacturing and service sectors and between large and small firms, thus increasing income inequality and aggravating structural weaknesses. These problems, combined with slowing inputs of capital and labour, raise concern that Korea’s growth potential is declining while per capita incomes are still one third below the OECD average. Sustaining the country’s growth potential is a key theme in the government’s Vision 2030 plan.
Monetary policy should focus on the medium-term inflation target. Concern about house prices is one reason for the tightening of monetary policy since late 2005. However, addressing house price increases by interest rate hikes puts upward pressure on the exchange rate and reduces both domestic demand and exports. The Bank of Korea should focus on achieving the 2.5% to 3.5% inflation target, which is currently not at risk, while the government should maintain a flexible exchange rate policy.
Housing policies should focus more on developing an efficient market than on controlling prices. Although the rise in nation-wide house prices in Korea has been relatively small compared to other OECD countries, the steep increase, especially for apartments in certain areas of the capital region, where nearly half of the population lives, prompted five real estate policy packages over the past 18 months. To meet its objective of stabilising house prices, the government plans to boost the construction of housing in the capital region, with the public sector playing a larger role. However, the government should begin to reduce the regulations that restrict the supply of housing, as greater reliance on the private sector would better match supply with consumer preferences. The real estate packages are also aimed at reducing “speculative” demand and cutting house prices by introducing price caps on new houses. Despite the merits of the objective of stabilising housing prices, some of these policies have the potential to create substantial harm if allowed to persist in the long term as they tend to reduce the supply of housing.
Maintaining a sound fiscal position is crucial in the face of exceptionally rapid population ageing. Indeed, the Vision 2030 plan projects that public social spending will rise from 6% of GDP at present to around the current OECD average of 21% by 2030. It is important to proceed cautiously in raising spending and aim at efficiency in each area, thereby limiting the necessary hike in the tax burden. Some priorities should be:
Removing obstacles to fertility, which has fallen to only 1.08, the lowest in the OECD area.
Encouraging higher labour participation by women to mitigate the impact of population ageing.
Shifting the focus from increased public provision of childcare and long-term care in favour of vouchers for households to boost competition and better meet consumer demands.
Expanding the means-tested benefit for the elderly, while promoting the new company pension system and reforming public occupational pension schemes.
Reforming the National Health Insurance to limit upward pressure on healthcare spending.
Addressing rising inequality and poverty by reducing the rising share of non-regular employees.
Strengthening the integration of Korea in the world economy is a priority. Despite progress during the past decade, Korea remains relatively isolated in terms of imports of manufactured products, the stock of inward foreign direct investment (FDI) and the inflow of foreign workers. Making fuller use of foreign goods and services, FDI and foreign workers is important to boost productivity growth, as well as to cope with labour shortages in small companies. Achieving this objective requires reducing barriers to FDI and imports, including agricultural products, and relaxing controls on inflows of foreign workers.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. The Policy Brief (pdf format) in Korean is also available. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Korea 2007 is available from:
For further information please contact the Korea Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Randall Jones, Taesik Yoon and Tadashi Yokoyama under the supervision of Willi Leibfritz and Stefano Scarpetta.