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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of Korea published on 17 December 2008.
Promoting growth also requires measures to boost productivity in the service sector…
With the slower expansion of the working-age population, sustaining growth depends primarily on increasing productivity, which is currently only 34% of the US level. The large gap mainly stems from Korea’s service sector, where productivity has fallen to 60% of that in manufacturing. The problems in services are closely related to the difficulties facing SMEs, which account for 91% of service-sector employment. Extensive public support for SMEs, including financial assistance, has blunted competitive pressure, slowed the pace of restructuring, in contrast to large firms, and reduced the efficiency of resource allocation. Over the longer run, the wide range of government programmes, which numbered 163 in 2007 and cost 0.7% of GDP, should be scaled back and streamlined. Other support, notably policy loans and credit guarantees, should also be cut. Remaining support should be focused more on start ups than on existing firms. While recent government measures have moved in this direction, more efforts should be made in the longer term to scale back and streamline support for SMEs.
Labour productivity growth in manufacturing and services
Comparison of large corporations and SMEs
…through regulatory reform and competition policy…
Faster labour productivity growth also requires strengthening competition through regulatory reform and competition policy. Despite progress during the past decade, around one-third of business lines in the service sector remain subject to entry barriers (on top of registration and declaration requirements). International comparisons indicate that entry barriers and product market regulations are relatively high in Korea. The newly-created Presidential Council on National Competitiveness should focus on the key barriers that restrict competition. In addition, competition policy should be further strengthened. First, although financial penalties have risen, their deterrent effect is still weaker than in most other OECD countries, indicating a need for further increases. In addition, criminal penalties, which are rarely applied, should be used more frequently. Second, the investigative powers of the competition authority, the Korea Fair Trade Commission, need to be expanded. Third, the number of exemptions from the competition law, including for SMEs, should be further scaled back.
…and increased openness to international competition…
Greater openness to the world economy is another priority to boost productivity in services. The stock of FDI in Korea is the third lowest in the OECD area and inflows have fallen since 2004. Moreover, the share of inward FDI in services is the third lowest OECD-wide. Consequently, foreign affiliates accounted for only 8% of service-sector turnover and 4% of employment in 2004, well below the OECD averages of 19% and 10%, respectively. Strengthening international competition requires reducing barriers to FDI, including foreign ownership ceilings in key services, and liberalising product market regulations. In addition, it is important to foster a foreign investment-friendly climate by enhancing the transparency of tax and regulatory policies and reforming the labour market. Moreover, the incentives for foreign investment in the Free Economic Zones should be extended more broadly within the service sector. In the area of trade, Korea is negotiating Free Trade Agreements with the European Union, Canada and Mexico. These agreements should be broad-based, including services as well as goods.
The flow of inward FDI to Korea by sector
Source: Ministry of Knowledge Economy.
…while addressing barriers in key service industries
It is important to address factors limiting productivity in key services that are expanding rapidly:
Financial sector: Korea is introducing a “big bang” in 2009 to reduce segmentation in the securities industry, with a view to becoming a financial hub for Asia. It is critical to ensure that enhanced supervisory capacity, with a functional emphasis, precedes market growth and innovation. Caution is called for in easing ownership restrictions on banks that separate industrial and financial capital.
Business services: constraints on entry, form of practice, advertising and foreign participation have limited the size of this sector and should be relaxed. For example, the decision to cap total enrolment in law schools at 2 000, despite the fact that the number of lawyers per capita in Korea is only a quarter of the OECD average, restricts competition and keeps prices high.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. A Korean version is also available (pdf format). It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Korea 2008 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 S. Jones and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.