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The following OECD assessment and recommendations summarise Chapter 6 of the Economic survey of Korea published on 20 June 2007.
Korea should lift productivity growth through deeper integration in the world economy through inflows of FDI…
Increasing Korea’s links to the world economy is another important means of boosting productivity growth. At present, the stock of inward FDI, import penetration and the proportion of foreign workers in the labour force are relatively low in Korea compared to other OECD countries. Moreover, FDI inflows have slowed during the past few years despite policies to attract foreign investors. A better environment for FDI could be created by: 1) fostering a foreign investment-friendly environment and thereby encouraging more cross-border M&As; 2) further relaxing FDI restrictions, notably foreign ownership ceilings in key sectors; 3) reducing product market regulation, particularly in the service sector; and 4) improving the business environment by increasing the transparency of tax and regulatory policies and addressing the problem of contentious industrial relations. To attract foreign investors, the government has emphasised the creation of Free Economic Zones (FEZs) that offer tax incentives and preferential regulatory treatment to foreign investors. The benefits of these zones should be regularly evaluated to insure that they justify the costs and regulatory reform should be extended beyond the FEZs to the rest of the country to create a level playing field for domestic and foreign firms. Moreover, the emphasis on special zones should not distract policymakers from the top priority of improving the business climate, which would promote both domestic and foreign investment.
Korea's degree of integration in the world economy is relatively low
1. Imports of manufactures as per cent of domestic demand in 2003.
2. Stock of inward FDI as per cent of GDP in 2002.
3. Data for Australia, Canada and New Zealand (data refer to 2003) are for the foreign-born labour force. The data source is the Labour Force Survey or census in all countries except Japan and Korea, where the source is work permits.
4. Foreign residents with permission for employment. Excludes permanent and long-term residents, whose labour activity is not restricted.
5. Unweighted average of the 25 countries shown in this figure.
Source: OECD (2005), Economic Globalisation Indicators; OECD (2006), International Migration Outlook: SOPEMI 2006 Edition; and Ministry of Justice.
… increasing openness to trade…
The share of manufactured imports in domestic demand is among the lowest in the OECD area. It is important to lower protection and further harmonise regulations in line with international standards. Trade liberalisation should be pursued through multilateral trade negotiations, the preferred approach to reducing barriers, and participation in regional free trade agreements (FTAs). Although Korea is a latecomer to the worldwide surge in FTAs, it is now engaged in negotiations with a number of major trading partners. However, the high level of agricultural protection appears to be an obstacle to both multilateral agreements and FTAs. It is essential to reduce the level of protection granted to farmers, thereby providing significant benefits to Korean consumers. Furthermore, FTAs should include the service sector in order to help boost the relatively low level of productivity in this sector.
Government support for the agricultural sector in Korea is one of the highest in the OECD area
1. The producer support estimate is an indicator of the value of monetary transfers to agriculture resulting from agricultural policies. It is presented as a share of the total value of production at domestic producer prices.
2. The nominal protection coefficient is a measure of market protection defined as the ratio between the average prices paid by consumers and international price.
3. EU15 for 2003 and EU25 from 2004.
Source: OECD (2006a), Agricultural Policies in OECD Countries 2006: At a Glance, OECD, Paris.
… and liberalising inflows of foreign workers
Making greater use of foreign workers would also have economic benefits for Korea, in part by easing labour shortages in some sectors. Foreign workers account for less than 1% of the labour force, one of the lowest shares in the OECD. The number of unskilled workers allowed under the Employment Permit System should be increased and they should be permitted to work in the service sector. There is also a need for more high-skilled foreign workers, who account for only 6% of total foreign workers in Korea. This requires streamlining the immigration control system, which involves more than a dozen ministries. In sum, policy reforms to make greater use of goods, services, capital and human resources from abroad would help enhance Korea’s growth potential.
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.