Korea has been among the fastest growing OECD economies during the past decade, driven by its traditional catch-up strategy led by exports. However, structural problems, such as a lagging service sector and weak SMEs, have constrained growth. A new growth strategy is needed to promote a creative economy in which ventures businesses and SMEs play a larger role. In addition, Korea has experienced a rise in relative poverty and income inequality, with 49% of the elderly in relative poverty. Policies to foster a creative economy, accompanied by greater emphasis on social cohesion, are needed to support the current upturn and enhance well-being.
Sustaining the economic expansion
Output growth of around 4% is projected in 2014-15, although Korea is vulnerable to external risks, while high household debt poses a headwind to growth. Inflation is projected to rise to the target zone of 2.5%‑3.5%. The fiscal situation remains strong with a general government budget surplus in 2012 and gross debt of less than 35% of GDP. If downside risks materialise, Korea has scope to further relax monetary policy and implement short-term fiscal stimulus.
A new economic paradigm for Korea: Fostering a creative economy
The return from Korea's large investment in R&D is limited by weaknesses in the innovation system and in framework conditions, reflecting stringent product market regulations and low inward foreign direct investment. Moreover, the creation of new enterprises is hampered by problems in the venture capital market and SME financing. The productivity gap between large firms and SMEs reflects weaknesses in services, where productivity is only about half of that in manufacturing. A comprehensive strategy to develop a creative economy, including measures to improve the innovation system and framework conditions and to develop a vibrant venture business sector and stronger SMEs, is a priority.
Policies to reduce inequality and promote social mobility
Korea's middle class is shrinking and its relative poverty rate is the eighth highest in the OECD. It is essential to address the underlying causes by reducing the share of non-regular workers. Education reform and policies to boost employment are also needed to enhance social mobility. Public social spending has a relatively small impact, particularly among the elderly, whose relative poverty rate is 49%. Policies to increase the coverage of the National Pension Scheme and ensure its sustainability, while promoting private savings for retirement, are needed. The Basic Old-Age Pension should be concentrated on the elderly living in absolute poverty.
For further information please contact the Korea Desk at the OECD Economics Department.
The OECD Secretariat's report was prepared by Randall S. Jones, Myungkoo Kim and Satoshi Urasawa under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.