17/06/2014 - Korea needs to move away from its current economic model and implement a range of reforms to develop a creative economy that can sustain long-term growth, according to the latest OECD Economic Survey of Korea. The strategy should be accompanied by new measures to reduce income inequality and poverty, particularly among the elderly, the OECD said.
The Survey notes that Korea’s short-term economic outlook is positive, with growth of around 4% projected over the 2014-15 period. Its longer-term prospects, however, are limited by persistent structural problems, such as a lagging service sector and weak small and medium-sized enterprises (SMEs), reflecting the traditional growth strategy centred on exports by large chaebol companies. The OECD argues that Korea must promote innovation and narrow the productivity gaps between manufacturing and services and between large firms and SMEs, which account for 87% of total employment.
To make SMEs more efficient, the OECD recommends scaling back and streamlining government support to these firms, while concentrating it on enterprises at an early stage of development. Creation of a more dynamic venture capital sector is a second key priority for development of a creative economy, which should also aim to promote green growth and help Korea meet its greenhouse gas emission reduction target.
The Survey points out the importance of increasing returns on R&D investment, which is the largest in the OECD area as a share of GDP. This requires reforms across the entire innovation system to expand the role of universities, upgrade government research institutes and strengthen international linkages. Reducing product market regulations and barriers to foreign direct investment is also key for boosting the adoption of new technology.
To promote inclusive growth, Korea should take steps to reverse the decline in the middle class and reduce the high rate of relative poverty. This will require action aimed at the roots of inequality, notably reducing the high share of non-regular workers in the workforce. Breaking down labour market dualism is necessary to reduce high levels of wage inequality and enhance social mobility.
|Public social spending in Korea has a relatively small impact on income inequality and relative poverty, particularly among the elderly, whose 49% poverty rate is nearly four times the OECD average. The Survey recommends concentrating the Basic Old-Age Pension on the elderly living in absolute poverty.
Ensuring adequate income for the elderly requires an effective three-pillar system based on the National Pension Scheme, company pensions and individual savings. The National Pension Scheme should be made more effective, by expanding its coverage and maintaining the replacement rate at around 50%.
High household debt has adverse implications for equity, as well as for growth, as individuals with low income and credit ratings have limited access to financial markets and many are delinquent on their loans. Policies to expand market-based lending to such households and debt restructuring are essential, but moral hazard must be limited, the Survey said.
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