Economic surveys and country surveillance

Economic Survey of Korea 2005: Executive Summary

 

The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of Korea 2005 published on 5 October 2005.

Korea’s rapid economic development has lifted its per capita income from one-third to two-thirds of the OECD average during the past two decades. The economy is changing profoundly as a result of the structural reform programme launched after the 1997 crisis and increasing integration with the world economy. However, the delayed recovery of domestic demand from the 2003 recession has created concern about Korea’s growth prospects over the medium term. Although there are signs of a rebound in domestic demand, sustaining high growth requires further progress in structural reform to boost productivity gains, as well as appropriate macroeconomic policies.

Macroeconomic policies should promote stability and balanced growth.

The medium-term inflation target should remain the focus of monetary policy. Market-friendly policies should be used to deal with real estate price increases in some areas, while keeping the short-term policy rate low until there is a sustained recovery in aggregate demand. With foreign exchange reserves surpassing $200 billion, more than three times short term foreign debt, the reduction in foreign exchange market intervention since the beginning of 2005 is appropriate to promote more balanced demand growth. The plans for fiscal stimulus, including public-private partnerships for infrastructure investment, should be pursued cautiously. The priority should be to limit increases in public spending and debt, given that population ageing is projected to be the most rapid in the OECD area. Reform of the public pension system is thus urgent to ensure its sustainability and limit the necessary rise in contribution rates.

Improving the relationship between levels of government is important to increase the efficiency of the public sector.

First, there should be a clear division of responsibility and an upgrading of the capacity of local governments to enable them to exercise more power. The general local governments should have more influence on education, while providing more support, through stronger linkages with the local education authorities, with a final aim of merger. Second, the complicated local tax system should be simplified, while reducing the large role of property transaction taxes, and local tax revenue should be expanded, while increasing local governments’ tax autonomy. Third, the shift from earmarked to block grants should continue, while simplifying the formula for the Local Share Tax. Fourth, increased autonomy at the local level should be accompanied by measures to ensure fiscal soundness. Fifth, the concerns about balanced regional development should be met through well-designed and transparent transfers, while addressing externalities due to concentration in the capital region through market-based instruments.

Upgrading the innovation framework is a key to faster productivity growth.

A number of reforms are needed to make sure that Korea obtains full value for money from its relatively large investment in R&D and education.

  • The R&D system should be upgraded by enhancing links between business, government, academic and foreign research institutes, with universities playing a greater role. Flexibility in allocating R&D funds is important to avoid excessive emphasis on areas identified as future growth engines. Market friendly policies should be used to encourage the risk capital market and the venture business sector.
  • Competition should be strengthened, particularly in the service sector where labour productivity is only about half of that in manufacturing to encourage the development and diffusion of innovation.
  • The tertiary education sector should be restructured based on increased competition between institutions, including those from abroad, to improve its quality. Funding for education needs to be rebalanced between levels to upgrade the quality of tertiary education, which has fallen during its period of rapid expansion.

Policies to improve the functioning of the labour market are essential, while encouraging greater labour force participation.

The rising share of non-regular workers, who account for a third of employees, raises both equity and efficiency concerns. Relaxing employment protection for regular workers and improving the coverage of the social safety net, especially for non-regular workers, would enhance flexibility and reduce labour market dualism. Family-friendly measures to boost the relatively low participation rate of prime-age women are key to coping with rapid population ageing. It is also important to raise the effective age of retirement of employees from around 50, in part by reforming the seniority-based wage system and replacing the retirement allowance with a company pension system.

Further restructuring of the corporate and financial sectors is required to increase efficiency.

hile the large business groups (chaebol) have improved their soundness, it is important to increase competition, further implement the new corporate governance framework and improve financial supervision to strengthen market forces and prevent corporate misconduct. Moreover, it is essential to remain open to foreign investment. The deteriorating performance of small and medium-sized enterprises (SMEs) makes the restructuring of this sector a priority, while reducing government lending guarantees. Addressing the problems in the non-bank financial sector, which is heavily exposed to SMEs, is also essential. Another priority is to encourage the development of the capital market, which would enhance growth in an ageing society. The privatisation of government-owned banks should continue.

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Return to the Economic Survey of Korea 2005

A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

To access the full version of the OECD Economic Survey of Korea:

  • Readers at subscribing institutions can go to SourceOECD, our online library.
  • Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
  • Government officials can go to  OLISnet's Publication Locator
  • Accredited journalists can go to their password-protected website .

For further information please contact the Korea Desk at the OECD Economics Department at webmaster@oecd.org.  The OECD Secretariat's report was prepared by Randall Jones, Yokoyama Tadashi and Yongchun Baek under the supervision of Wilhelm Leibfritz.

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