Jon Pareliussen
Volker Ziemann
Junhah Kim
OECD Economic Surveys: Korea 2026
Abstract
Semiconductor exports have been driving growth, despite the energy price shock. Construction and other manufacturing sectors continue to struggle. Monetary easing and expansionary fiscal policy boosted private consumption. Housing prices in the Seoul area rebounded after a severe correction. Tightened mortgage lending restrictions helped contain housing demand and safeguard financial stability. To improve housing affordability, policies need to strengthen supply. Monetary policy should look through temporary inflationary pressures from the energy price shock but may need to tighten somewhat to contain long-term inflation expectations. Fiscal crisis support should prioritise targeted support to vulnerable households and businesses while preserving incentives to save energy. Strengthening fiscal institutions can help keep the debt burden manageable in the future as decades of demographic tailwinds are starting to reverse. Reforms reprioritising spending and the tax system and improving the functioning of labour and product markets can strengthen growth and ease the pain of necessary fiscal adjustments.
Following Korea’s accession to the OECD in 1996, GDP per capita increased from three-quarters of the OECD average to the average (Figure 1.1, Panel A). Openness to trade has been a central part of Korea’s growth story, with the share of exports almost doubling from 24% of GDP to 44%. Manufacturing has maintained a prominent role but has shifted towards high-tech, high-value-added production. Entertainment, cosmetics and food, which currently represent a small share of exports, are growing rapidly. Against this backdrop, new trade barriers and an increasingly fraught relationship between its biggest trading partners, the United States and China, create challenges. The increasing specialisation in semiconductor exports boosts growth and tax revenues but may also increase exposure to external shocks and cyclical volatility.
Source: OECD Economic Outlook (database); and the World Bank.
Great strides were also made towards improved wellbeing, with life expectancies for both women and men moving from below the OECD average in 1996 to well above in 2024 (Figure 1.1, Panel B). The work-life balance has improved, with annual work hours falling rapidly from 43% above the average to only 7% above over the same period (Panel C). As a consequence, hourly productivity has improved from 37% of the OECD average to 74%, leaving significant room for improvement to catch up with high performers including the United States and Germany (Panel D). Korea has reduced child poverty from well above the OECD average in 2011 to one of the lowest rates in the OECD in 2022. Old-age poverty was also reduced although it remains high relative to most OECD countries, in part a legacy of Korea’s relatively recent and rapid socio-economic transformation (OECD, 2026[1]).
Over the past three decades, population ageing has emerged as a defining challenge. The number of children each woman is expected to have over her lifetime (Total Fertility Rate) fell rapidly from around six in 1960 to 0.72 in 2023 before it increased to 0.80 in 2025. Due to decades of very low birth rates and increasing life expectancy, the age structure of the population has inverted. After decades of expansion, the labour force as a share of the population is set to contract within a few years, with profound consequences for growth and public finances (OECD, 2024[2]). These developments underscore the need to strengthen fiscal institutions (see below) and secure sufficient public revenues while minimising distortions to growth and work incentives in the tax system (Chapter 2).
Low fertility is a result of a number of factors, including changes in economic conditions and social norms. Changes in women’s perceived duty to marry and have children, rising incomes for both genders, increasingly gender-equal opportunities in education and working life, and families increasingly relying on two incomes have all influenced decisions related to family formation and childbirth. At the same time, challenges remain in balancing work and child-rearing due to factors such as long working hours and limited workplace flexibility. The largest gender wage gap in the OECD contributes to push mothers and fathers into traditional gender roles (Pareliussen et al., 2025[3]).
The employment rate of women with children in Korea was 56% in 2021, lower than the OECD average of 71%, indicating difficulties in maintaining career continuity during childbirth and child-rearing periods. However, it has shown rapid improvement since, reaching 64% in 2025, likely aided by strengthened family policies over the past couple of decades. These include the introduction of free childcare for all from 2013 and considerable measures to strengthen the work-life balance since, including recent increases to childcare leave benefits, an extended childcare leave period when both parents take leave, and the expansion of paternity leave. The working-hour reduction reform, which was phased in from 2018 to 2021, represents a major shift (Pareliussen et al., 2025[3]). These initiatives have made it easier to combine work and family and have thereby contributed positively to fertility. However, it is too soon to conclude that the small uptick in fertility since 2023 is a trend shift, as it largely reflects cohort effects and a post-COVID catch-up in marriages and births.
The dual labour market also leads to excessive competition among young people to enter prestigious universities and thereby secure good jobs. Substantial public and private resources are invested in schooling and tutoring. There are signs that young people are not acquiring the right skills, as their competencies depreciate rapidly with age and many struggle to find employment (Chapter 3). The cost to adolescent well-being is likely high, illustrated by a rising trend in child and adolescent suicide that runs counter to global patterns (OECD, 2026[1]). The race to enter top universities and a shortage of quality jobs are among the main reasons why young adults keep moving from Korea’s regions towards the capital region, where agglomeration effects expand economic opportunity. However, congestion and high housing costs reinforce fertility and wellbeing challenges (Chapter 4). Strengthening regional hubs as growth engines while complementing family policies with labour market reforms, including by moving away from seniority-based pay, reducing duality between regular and irregular workers and strengthening efforts to eliminate gender discrimination in wages, would boost well-being and increase the chances of a structural fertility rebound.
The prices of oil and natural gas have spiked following the onset of the conflict in the Middle East, fuelling inflation and weighing on the short-term economic outlook. The Korean economy was starting to recover after a period of negative real wage growth, monetary policy tightening to contain inflation and a housing contraction, when former president Yoon declared emergency martial law on 3 December 2024. Consumer and business confidence plunged, denting domestic demand and leading to GDP contracting in the first quarter of 2025. Political uncertainty lingered after the President was suspended from his duties until the Constitutional Court unanimously upheld his impeachment in April. By the time presidential elections were held in June 2025, consumer confidence had been restored, helped by the new administration’s promise of expansionary fiscal policy with cash handouts to households and an ongoing monetary policy easing cycle.
Following the unsettled start of 2025, growth became increasingly broad-based and momentum gradually strengthened, although with considerable quarterly volatility. Private consumption growth picked up, supported by expansionary fiscal policy (Figure 1.2). Exports of advanced semiconductors, which are shielded from US tariffs for now, have remained an important support to exports and growth. Continued strong demand for Korean semiconductors is reflected in sharp price increases and an overall improvement in terms of trade, despite rising energy prices and a currency weakening since the summer of 2025.
Source: Bank of Korea; OECD Economic Outlook database.
The government’s quick implementation of crisis response measures following the onset of the conflict in the Middle East is expected to limit the adverse effects on the economy and people’s livelihoods. A maximum sales price on gasoline and diesel was introduced on 13 March. The caps are dynamic, with a mechanism to adjust the cap every two weeks in reflection of international energy prices, thereby smoothing the feed-through of international prices to domestic retail prices rather than completely disconnecting retail prices permanently from market fundamentals. The government has also decided to extend a temporary fuel tax cut implemented by the previous government, lowering taxes on gasoline by 15% and on diesel by 25% below their statutory levels. A supplementary budget of around 1% of GDP included transfers to households in the form of consumption coupons targeted by income and region. Appropriations for the existing energy voucher programme, which distributes lump-sum payments to support low-income households with their energy bills, were strengthened. Transfers to local government were increased, and policy loans and guarantees to SMEs expanded. While energy price regulations and fuel tax cuts shield the economy to an extent from the exceptional circumstances created by the closure of the Strait of Hormuz, they entail considerable fiscal costs, distort incentives and also benefit households with higher incomes. If the shock persists, targeted support to vulnerable households and viable businesses designed to maintain incentives to save energy, such as the energy voucher programme, should be prioritised within the overall crisis response package, while the price caps and tax cuts put in place should be gradually phased out.
A number of additional measures have been implemented to ensure market and financial stability. Nuclear plant utilisation rates are to be raised to over 80% from the current 70% levels, and restrictions on coal-fired power generation are temporarily lifted. Energy conservation measures include a rotation system for public vehicles and staggered commuting hours for public and large enterprises. The top fifty petroleum-consuming companies are developing plans to reduce energy usage and large companies are voluntarily participating in energy reduction efforts such as vehicle rotation systems. Efforts to monitor fair market competition and prevent collusion in fuel distribution have been strengthened. The government is participating in international efforts to release strategic reserves. It has signalled its willingness to draw down reserves of oil and exercise priority purchase rights to secure 20 million barrels jointly stockpiled on Korean soil. Exports of refined petroleum products have been capped at their 2025 level, although this cap has not been binding.
The government has made efforts to minimise potential supply disruptions to industrial inputs dependent on supply from the Middle East through its emergency economic response system. The government established and operated a crisis response task force to closely monitor key items and swiftly implement measures as needed. In the case of naphtha, emergency supply and demand adjustment measures were introduced, including export restrictions, and raw materials were prioritised for the healthcare sector and other key industries. Efforts to secure supplies, including supporting the diversification of naphtha and alternative feedstock imports, helped improve supply conditions. For urea, measures included a ban on hoarding, the pre-emptive release of public stockpiles and supporting the diversification of urea imports for car manufacturing.
Pre-emptive measures to address rising volatility in financial and foreign exchange markets have been implemented, including instructing financial authorities to stand ready to expand the 100 trillion-won (USD 66.8 billion) market stabilisation fund if necessary. Exchange rate volatility has increased due to the crisis, but is likely to ease if the geopolitical situation stabilises. The KRW weakened against the dollar in the fourth quarter of 2025, mainly due to increased overseas investment by residents and market expectations of further KRW depreciation. Since then, measures have been introduced to lower volatility risks related to capital outflows and to reverse market expectations of further KRW depreciation. Key measures are the introduction of Reshoring Investment Accounts (RIA) with tax incentives to sell overseas stocks and reinvest in domestic capital markets, and the National Pension Service’s New Framework with more active foreign exchange hedging, diversified dollar funding, and closer coordination with national economic stability goals. Foreign investment in domestic capital markets shifted to net inflows for both stocks and bonds in April 2026. The implemented measures, along with Korea’s inclusion in the FTSE World Government Bond Index, solid performance by major corporations and increased dollar sales by key exporters amid the global semiconductor boom, contributed to this shift. Even so, KRW remains weak against the US dollar.
1.2.1. Inflation pressures were weak before the energy crisis
In early 2025, before the onset of the conflict in the Middle East, headline and core CPI inflation were both on target, and inflation expectations of professionals were well-anchored (Figure 1.3, Panel A). The Bank of Korea embarked on an easing cycle in the fourth quarter of 2024 as both headline and core consumer prices were coming down to the 2% inflation target after a period of high inflation triggered by Russia’s war of aggression against Ukraine and post-COVID supply chain disturbances (Panels B and C). The Bank of Korea cut the Base Rate in steps from 3.5% in October 2024 to 2.5% in May 2025 (Panel D). It has stayed put since then.
The conflict in the Middle East has raised energy prices. As price pressures propagate throughout the economy from more energy-intensive sectors such as manufacturing and agriculture to less energy-intensive ones, including the services sector, even a relatively short-lived energy price shock will raise inflation for some time. The risk that this propagation of the price shock becomes entrenched depends on the size and persistence of the original shock, but also on current economic conditions. CPI inflation increased to 2.6% in April and 3.1% in May, with government measures damping the inflationary impulse of energy prices. Core inflation remained close to target at 2.2% in April, but rose to 2.5% in May. In contrast to the situation in 2022, the inflationary pressure from domestic demand remains weak, with GDP well below its estimated level of potential and private consumption well below its pre-COVID share of GDP. Assuming that the energy supply shock will be relatively short-lived, the risk of an inflationary price-wage spiral is fairly low. Real wage growth has been weak, and there were no signs of mounting wage pressures in 2025, with year-on-year real wage growth of well below 3% in the fourth quarter of 2025. Furthermore, the potential to increase labour supply of young adults, women and elderly workers remains considerable, thereby limiting potential wage pressures.
Note: Panel D: shaded area denotes the OECD projection in Economic Outlook No. 119.
Source: OECD, Prices and Purchasing Power Parities (database); OECD, Economic Outlook (database); and Bank of Korea.
In line with the Bank of Korea’s monetary policy mandates which include financial stability, rising housing prices in the Seoul area are considered one of the major factors in monetary policy execution. As discussed below, the Korean government considers housing price increases in the Seoul area excessive, and has strengthened a suite of macroprudential policy instruments in response. Monetary policy would be a blunt instrument to address housing prices. The cost of a tighter monetary policy than what is dictated by the inflation target can be high and includes lower activity, higher unemployment and a possible de-anchoring of inflation expectations. Taking these considerations into account, the Bank of Korea has not directly addressed housing prices through monetary policy. Rather, in coordination with macroprudential policy, it has adjusted the timing and pace of rate cuts to avoid stimulating expectations of further increases in housing prices.
Monetary policy should look through the energy shock, but needs to act if long-term inflation expectations risk becoming de-anchored. On balance, the Bank of Korea should consider raising the Base Rate by 25 basis points in the short term, while standing ready to tighten further if long-term inflation expectations drift too high.
1.2.2. Fiscal policy is supportive
Two supplementary budgets, together amounting to approximately 1% of GDP, boosted household spending from the third quarter of 2025, following two years of sluggish consumption. Around half of the stimulus came in the form of consumption coupons. A supplementary budget of around 1% of GDP was implemented in the first half of 2026 to counter the energy crisis (see above).
The July 2025 consumption coupon release provided all citizens with a base payment of KRW 150 000 (USD 102), with higher amounts (up to KRW 450 000) for low-income groups and residents of rural or nonmetropolitan areas. The second release in September 2025 amounted to KRW 100 000. The second tranche excluded the top 10% of income earners (based on health insurance premium tiers), as well as high-wealth individuals. The coupons were delivered upon application via card points, prepaid cards and local currency apps. Coupon use was limited to small local businesses. Almost all eligible individuals applied and received the coupons, and almost all of the amount distributed was spent before expiry. Directly subsidising consumption at a time when consumer sentiment was dented gave an important boost to consumption and small businesses, notably within the hospitality sector.
Supplementary budgets are mostly used in times of crises and weak demand, but not always. For example, the largest emergency budget amendment in Korea’s history (2.9% of GDP) was enacted in the summer of 2022 at a time when the post-pandemic recovery was already solidly underway (OECD, 2024[2]). A more structural and lasting way to support consumption, notably during downturns, would be to strengthen automatic fiscal stabilisers and reduce the need for precautionary savings by filling gaps in the social safety net while also ensuring support to households is timely. These include expanding employment insurance coverage, removing the family obligation rule (a means test that also accounts for income of direct relatives and their spouses) for receipt of the Basic Livelihood Support healthcare benefits and further reforming the pension system to secure adequate old-age income as discussed below (OECD, 2022[4]). Structural reforms to reduce labour market duality and the importance of seniority in career progression, and to end the practice of early “honorary” retirements (Chapter 3), would further reduce the need for precautionary savings and thereby raise consumption today (OECD, 2024[2]).
Over time, increased spending when the economy is weak, be it from automatic stabilisers or supplementary budgets, needs to be balanced by savings when the economy is strong. After underpinning growth for seven decades, population age structure dynamics are now turning into a drag on output and public finances, underlining the urgency of measures to bring down the structural deficit. The recent fiscal boost added to the public deficit in 2025, and the government had planned to maintain deficits at similar levels in 2026 and 2027. However, considering a strong projected rebound in tax revenues, partly due to the semiconductor cycle, there should be room to narrow fiscal deficits. The energy crisis, along with a considerable negative output gap and the ratio of private consumption to GDP remaining well below pre-COVID levels, justifies some fiscal support in the near term in line with the government’s plans. However, if growth picks up and the output gap narrows as forecast, the government should tighten fiscal policy in the medium term, and the inflationary impulse of fiscal policy needs to be considered in the context of the energy price shock. To ensure fiscal sustainability in the long term, the government should commit to long-term fiscal sustainability and strengthen fiscal institutions, as further discussed below.
1.2.3. The labour market holds up, but with some weak spots
Employment grew steadily in 2025 (Figure 1.4, Panel A), supported by women increasing their labour market participation and older women staying active for longer (Panel B). Job creation was concentrated in health and the public sector. Retail and wholesale trade picked up towards the end of the year, while construction and manufacturing employment receded (Panel C). Regular employment levelled out in 2025 after gradually increasing for the past few years (Panel D).
Note: Data for Panels B and D have been seasonally adjusted by OECD
Source: Bank of Korea; and Ministry of Data and Statistics.
The unemployment rate hovered around historically low levels of 2.5-3.0% most of 2025, but jumped from 2.8% in November to 3.3% in December 2025 before falling back to 2.9% in the first quarter of 2026. The December spike was likely driven by increased seasonality related to public works programmes. These programmes, typically targeting older workers (60+), were boosted during the Covid-19 pandemic and have continued growing since. Due to their expansion, the rates of total employment and unemployment have become less accurate gauges of the state of the economy and the labour market (Lee, Jeong and Song, 2026[5]). These jobs typically last less than 11 months, with hiring concentrated in January. Employment therefore falls, while job search and measured labour force participation increase in December and January, intensifying seasonality.
1.2.4. Growth is projected to strengthen
Against this background, GDP is projected to strengthen to 2.6% in 2026 and 1.9% in 2027. Assuming that monetary policy remains on hold, headline inflation is set to reach 2.6% in 2026 before falling back to the target in late 2027, as the effects of the energy supply shock fade. Employment will continue its trend of gradual expansion, largely due to increased labour market participation of women and older workers. Fiscal policy will remain supportive. Consumption will continue a gradual recovery in 2026-27, driven by a resilient labour market, the ongoing impact of interest rate cuts, some spillover to household income from the semiconductor cycle and fiscal support in response to the energy crisis. Private investment will contract in the near term amid heightened uncertainty, but should pick up in the second half of 2026 as domestic demand increases and housing construction bottoms out. Exports will continue to support growth, but their contribution is expected to slow in the medium term. Advanced semiconductors will continue to lead, while many non-IT exports will continue to face challenges from foreign government’s tariff policies and weaker demand overseas (Table 1.1).
Annual percentage changes unless specified, volume (2020 prices)
1. Contribution to changes in real GDP; 2. As a percentage of potential GDP; 3. As a percentage of labour force; 4. Excluding food and energy; 5. As a percentage of GDP; 6. National Accounts basis, excluding unfunded liabilities of government-employee pension funds.
Source: OECD Economic Outlook 119.
This projection assumes a relatively swift re-opening of the Hormuz Strait, with energy prices peaking in the second quarter of 2026 before gradually declining over the forecast horizon. Higher energy prices for longer would reduce growth and increase inflation and might trigger additional monetary policy tightening. The conflict in the Middle East, trade barriers and shifts in global supply chains could weigh more heavily on exports and damp business investment more than currently forecast. Supply chain dependencies on critical inputs beyond energy could lead to shortages due to the war or other geopolitical events. Korea’s stockpiles and efforts to secure key commodities are likely sufficient to secure supply to high-value-added uses in the near term (see below), although more prolonged disruptions could still pose supply risks and trigger rationing. Strong demand for advanced semiconductors could raise growth more than projected. Growth could also be higher than projected if the main assumption about gradually easing tensions in the Middle East holds and households consume a larger share of their rising income and public transfers than assumed.
A selection of low-probability events with potentially severe consequences is listed in Table 1.2. More abrupt decoupling into trade blocs centred on the United States and China, Korea’s two main trade partners, would require a costly reconfiguration of supply chains but would also create economic opportunity by limiting supply from other countries. The high share of semiconductor exports increases exposure to developments in the global semiconductor market beyond the cyclical fluctuations in demand discussed below. Technological developments making Korean semiconductors less competitive would weaken a long-standing engine of growth and tax revenue. Another longstanding source of tail risk relates to North Korea. North Korea’s economy, North-South cooperation and related risks to South Korea’s economy are discussed in more detail in Annex A. A severe failure of critical infrastructure is unlikely given Korea’s preparedness and in-built redundancies. However, the fire at the Daejeon Government Data Centre in September 2025 revealed the risks and costs associated with temporary disruptions to digital public services. The incident also caused the loss of some data due to an insufficient backup system.
The government’s economic growth strategy, published in 2025, focuses on three main areas: promoting an AI transformation; advancing 15 flagship projects to build a highly innovative economy and revitalising the real economy and people’s livelihoods. Building on this, economic policy priorities for 2026 were published in January, centred on macroeconomic stimulus and structural reforms aimed at strengthening Korea’s long-term growth potential (Box 1.1).
In its ‘2026 Economic Growth Strategy’ report released in January this year, the Korean government presented four key directions for its economic policy:
(1) Proactive macroeconomic management: The government plans to stimulate economic activity through macroeconomic policies, including an 8.1% year-on-year increase in fiscal spending and KRW 70 trillion (2.7% of GDP) in investment by public institutions, with the aim of boosting consumption, investment and exports. At the same time, it intends to implement measures to stabilise prices and manage risks by ensuring stability in the foreign exchange, real estate and financial markets. To encourage the repatriation of overseas assets, the government plans to offer a one-year temporary capital gains tax reduction for investments in domestic stocks following the sale of foreign equities. The government also aims to expand the supply of modular housing to boost housing provision.
(2) Boosting potential growth: The government intends to strengthen the competitiveness of strategic industries such as semiconductors, defence and biotechnology. For example, in the biotechnology sector, the government plans to support the development and launch of new drugs by streamlining clinical trials and data submission requirements and shortening the approval timelines by increasing the number of review staff. To build a hyper-innovative economy, the government aims to promote a comprehensive AI-driven transformation across technology, industry and human capital. Accelerating greenhouse gas reduction and expanding renewable energy supply to advance the green transition is another objective. The government plans to support 15 leading projects, including graphene and green hydrogen. These will be supported through a wide range of measures, such as regulatory easing (including special regulatory exemptions for data utilisation), financial guarantees, demand creation through pilot public procurement and expanded tax incentives for investment and R&D. A Strategic Export Finance Fund is to be established to support large-scale projects in sectors with intensified international competition for contracts, such as defence and nuclear power. The government plans to improve foreign access to the Korean won and develop a roadmap for the internationalisation of the won to expand demand, including from cross-border won payments and offshore won finance.
(3) Promoting balanced growth and reducing polarisation: The government has designated “region-led growth” as a top priority. It plans to expand the regional industries and infrastructure significantly. The competitiveness of regional universities is to be boosted by expanding employment-guaranteed contract-based academic programs that link universities and leading regional firms engaged in strategic industries for the region. Measures are to be introduced to stimulate investment and consumption in local areas, along with various preferential policies for regional development. For example, the government has extended the period of corporate and income tax reductions for companies relocating to certain regional areas for up to 15 years. To boost regional consumption, the government plans to issue 200 000 discount vouchers for accommodation in regional areas. To promote “growth for all,” the government intends to strengthen co-operation between large corporations and SMEs, enhance the competitiveness of venture firms and small businesses and build an ecosystem that supports entrepreneurship and business re-entry.
(4) Strengthening the foundations for a major economic leap forward: The government plans to implement comprehensive regulatory reform. Regulations that arise as firms grow in size are to be reviewed, and the rationalisation of economic penalties pursued as a first step. Next, the government aims to establish a sovereign wealth fund with an initial capital of KRW 20 trillion (13.6 billion USD), funded in part through shares in public institutions. To strengthen the management of state-owned assets, the government has introduced a requirement for prior reporting to the National Assembly for any sale of state property exceeding KRW 30 billion, and has, in principle, prohibited discounted sales. The government also plans to broaden the revenue base by streamlining tax exemptions and reductions, while reinforcing the management of tax arrears. In addition, the government will reform the functions of public institutions, such as completing the integration of two state-owned railway companies (KTX and SRT) within the year and improving the public procurement system by expanding public purchasing of innovative products and reforming bidding rules to prevent excessively low-price bids.
Source: 2026 Economic Growth Strategy, Ministry of Economy and Finance (2026)
A number of the policy priorities, including those streamlining regulations, removing incentives for firms to stay small and reducing tax expenditures, align well with OECD advice in this and previous Surveys. The integration of two state-owned railway companies (KTX and SRT) may lead to economies of scale if well-implemented, but opening the rail sector and other network sectors to competition would give a more consequential boost to Korea’s growth potential. Others, such as temporary tax reductions and the use of discount vouchers – a short-term fiscal boost – to address structural regional imbalances, come with a fiscal cost and should be replaced by better-targeted structural policies going forward.
The single most important policy to reduce greenhouse gas emissions is the Government’s recent decision to reduce allocations to the Emissions Trading System proportionately to Korea’s national emission-reduction commitments (Chapter 2). Aligning electricity prices with production costs, including carbon pricing, while providing means-tested support to vulnerable households, decoupled from their energy consumption, would support these efforts by incentivising energy savings and reducing overall costs (OECD, 2024. The government’s plans for additional support and incentives to specific projects expanding renewable energy supply and advancing the green transition may also help if they are efficiently delivered and targeted to address well-defined market imperfections.
1.3.1. Complement macroprudential tools to lift housing supply responsiveness
Housing price increases in the Seoul area have become a major policy issue, even though composition effects explain a sizeable share of the observed increase in transaction-based prices. Real house prices adjusted for size and quality are back to their pre-COVID level in Seoul and even well below it outside Seoul (Box 1.2). Even so, strong demand for high-quality, well-located housing is increasing affordability pressures for many households, especially in the Seoul area (Figure 1.5). While the household debt-to-GDP ratio continued its gradual decline from the peak of over 99% in 2021 to below 90% in 2025, it remains among the highest in the OECD. High household debt leaves households vulnerable to adverse shocks, such as income volatility or increased interest rates, damping consumption and making debt a major source of macroeconomic vulnerability (OECD, 2024[2]). Rising housing and rent prices also mean that a larger share of household income is absorbed by housing costs, potentially holding back consumption and the allocation of capital to more productive sectors.
Share of a median-income household's income required to purchase a median-priced home1
1. It is assumed that the home is acquired using a fully amortising mortgage.
Source: Korea Housing Finance Corporation.
Recent housing price dynamics in Korea point to a growing divergence between transaction-based indices and house sale price indices adjusted for quality, size and location (Figure 1.6). In contrast to transaction-based prices, the survey-based house sales indices from the Real Estate Board of Korea revalue a fixed, representative sample of the housing, thereby suppressing compositional shifts and smoothing short-term market fluctuations. The observed wedge between the two indices suggests a shift in transactions toward larger, higher-priced dwellings rather than a generalised price increase across all segments, while the number of transactions is trending down.
This compositional effect mechanically pushes up transaction-based price indices even in the absence of strong quality-adjusted price growth, particularly in the Seoul Metropolitan Area (SMA). As a result, transaction-based price indicators may overstate the breadth of housing market pressures, as transactions are increasingly concentrated in higher-priced, and not necessarily representative, segments. Conversely, survey-based house sale price indices may understate affordability concerns, as they track average price changes across the overall housing stock, thereby masking the intensity of price increases in high-demand segments where affordability pressures are most acute.
Note: The Seoul Metropolitan Area encompasses the cities of Seoul, Incheon and Gyeonggi province.
Source: Ministry of Data and Statistics and Real Estate Board of Korea.
In response to the imbalance between demand and supply, particularly in Seoul, the government has intensified efforts to expand housing supply. These include the rollout of major supply initiatives in late 2025 and early 2026 and the creation of a ministerial-level task force to expedite delivery (Box 1.3). The roadmap represents a comprehensive attempt to ease supply constraints in the SMA through a combination of increased construction targets, urban land mobilisation and regulatory reform. This could help alleviate the supply squeeze in Seoul, where housing starts have declined sharply in recent years (Figure 1.7). However, given the long lead times associated with housing development, the impact on prices and affordability is likely to materialise only gradually. In the meantime, demand-side policies have also been strengthened to account for concerns about high household indebtedness and potential risks to financial stability.
Number of annual housing starts, in thousands
Note: The Seoul metropolitan area encompasses the cities of Seoul, Incheon and Gyeonggi province.
Source: Ministry of Data and Statistics.
The Korean authorities have intensified efforts to address structural housing shortages in the Seoul Metropolitan Area (SMA), where demand has persistently outpaced supply. Central to this strategy is a roadmap to deliver around 1.35 million housing units by 2030, implying a significant increase in annual supply relative to recent trends. The strategy combines measures to accelerate delivery in existing public housing pipelines, expand development capacity on public land, mobilise underused urban sites, and remove barriers to private redevelopment.
In the public housing segment, measures focus both on accelerating delivery and expanding supply. Execution is being sped up through strengthened on-site management and dispute resolution, with increases in construction starts, pre-sales, and earlier move-ins in third-phase new towns. Total public housing supply capacity is planned to be expanded with around 372 000 units to be initiated by 2030 in SMA, supported by more intensive land use and the conversion of non-residential land to residential use.
Other policies aim to mobilise underused urban sites, including obsolete public buildings and idle land, contributing to additional construction starts (at least 35 000 units per year). The Urban Public Housing Complex Project is also being strengthened by increasing the permitted floor area ratio (up to 140% of the legal maximum) and making the scheme permanent, with around 50 000 units expected to be initiated by 2030.
Institutional reforms are also intended to unlock private-sector supply. These include streamlining approval procedures, easing constraints on redevelopment and reconstruction projects, and expanding public-private partnerships in urban regeneration. Efforts to strengthen coordination - such as a dedicated housing supply coordination body within the Ministry of Land, Infrastructure and Transport - aim to reduce implementation bottlenecks and bring projects to market more quickly.
Source: Ministry of Land, Infrastructure and Transport (MOLIT).
Innovations in the macroprudential framework over 2024-25, with successive tightening of borrower-based measures (Table 1.3) have limited the housing price increase and helped contain household debt along with systemic risk. The initial focus on loan-to-value (LTV) and debt service ratios was broadened to include stressed debt service ratios (DSRs), stricter loan-to-income constraints and regional differentiation through the designation of regulated areas. In Seoul and selected Gyeonggi districts, the LTV limit has been reduced to 40%, although higher limits - typically up to 70% - are available for first-time homebuyers and certain policy-supported borrowers.
Source: Financial Services Commission.
These measures have help contain household debt and remain relevant in segments where typical mortgage limits still support access to housing - reflected in a median apartment price of around KRW 1 billion in Seoul and loan caps of up to KRW 600 million for typical end-users outside the most expensive districts. However, the average price for normal-sized apartments in popular districts, including Gangnam, Seocho and Yongsan, is above the KRW 2.5 billion upper limit for mortgage loan caps. This limits mortgages to a maximum of KRW 200 million, resulting in an effective LTV limit of 8% or lower. In these segments, transactions are increasingly driven by buyers who are less sensitive to credit conditions.
When the current pressures on the housing market abate, such as when current efforts to boost supply begin to pay off, refocusing macroprudential policy on well-calibrated debt serviceability-based frameworks, such as stressed debt service ratio (DSR) requirements and loan-to-income constraints, could anchor borrowing decisions more predictably to income and interest-rate fundamentals if applied consistently over time (Bank of Korea, 2025[6]). Indeed, when credit limits are set independently of borrowers’ repayment capacity, as with LTV caps, they can constrain access to housing finance for households with stable incomes but limited accumulated wealth, while buyers who are less reliant on mortgage credit are less affected. Restrictions on mortgage credit may also alter portfolio choices by discouraging investment in housing relative to other assets.
Credit restrictions can delay housing construction projects, especially when relocation or bridge financing depends on access to housing finance, thereby exacerbating demand-supply mismatches. Reports suggest that redevelopment sites in Seoul face difficulties securing relocation financing under the current strict loan-to-value caps, which risks delaying construction projects if these credit constraints persist. However, under the current regulatory framework this risk is mitigated. Borrowers in these areas are classified as non-homeowners during the loan application process and are therefore eligible for relocation loans of up to 600 million KRW, as well as additional Jeonse (lump-sum deposit) loans of up to 500 million KRW, bringing total credit access up to 1.1 billion KRW. Given average Jeonse prices in Seoul, 1.1 billion KRW is sufficient to relocate under a Jeonse arrangement.
While macroprudential tools apply to both banks and deposit-taking non-banks, remaining differences in calibration, exemptions and enforcement continue to create scope for credit migration between the two (Bank of Korea, 2025[6]; OECD, 2024[2]). Narrowing the regulatory gaps between non-bank financial institutions and banks and unifying regulatory responsibility under the Financial Supervisory Service would improve the effectiveness of the macroprudential framework (OECD, 2024[2]). Recent policy initiatives move in this direction. In December 2025, the authorities announced a package to strengthen the prudential framework for real estate project finance, including higher developer equity requirements and enhanced prudential standards for PF exposures, particularly in non-bank financial institutions.
The authorities have implemented a number of policies aimed at damping short-term speculative transactions and reorienting housing towards primary residence use. Measures include minimum holding-period requirements, including a three-year resale restriction in Seoul compared to one year in other regions, stricter loan-to-value limits and outright LTV prohibitions for multiple homeowners and tax surcharges on additional properties. The impact of such policies on the rental market should be assessed through a balanced perspective on both supply and demand dynamics. These policies may reduce housing cost pressures in the short term, including rents. However, by raising the cost of supplying rental housing from multiple home-owners, such policies risk weighing on the private rental market, particularly in high-demand areas where rental supply plays an important role in housing affordability. Tenure preferences typically evolve over the lifecycle, reflecting household formation, employment mobility, family size and retirement considerations (Caldera Sánchez and Andrews, 2011[7]). In a medium-term perspective, moving towards a tenure-neutral framework would support labour mobility and allocative efficiency, especially in a dynamic metropolitan economy (OECD, 2024[8]), but could still differentiate between primary residences and vacant housing and secondary residences. Meanwhile, it may be worth exploring various rental housing supply models by diversifying suppliers of rental housing beyond multi-homeowners in the long term.
Ultimately, persistent affordability challenges in high-demand metropolitan areas are best addressed by fostering the supply responsiveness of housing construction through structural reforms that reduce regulatory frictions, ensure tax and tenure neutrality, improve land-use efficiency and strengthen the conditions for timely housing delivery (OECD, 2024[8]). Against this backdrop, government efforts to expand housing supply in the Seoul Metropolitan Area are promising (Box 1.3). Chapter 2 further discusses how moving from transaction-based towards recurrent property taxes can make housing markets more efficient while delivering powerful tools to foster inclusiveness and residential mobility. Chapter 4 elaborates on how inclusionary zoning, density bonuses, improved project finance conditions, and better-located social and affordable housing can make housing supply more elastic with respect to demand.
1.3.2. Ageing pressures call for structural reforms and a prudent fiscal framework
While warranted, fiscal stimulus in 2025 and the government’s plans to maintain a supportive fiscal policy stance in 2026 and 2027, underscore the importance of long-term fiscal sustainability. The structural deficit increased to around 2% of GDP in 2025 (Figure 1.8 Panel A). The government projects that the managed fiscal balance (i.e. the fiscal balance excluding net contributions to social security funds) will remain in deficit by around 4% of GDP in the coming years. Fiscal pressures from population ageing (Panel B) are increasingly putting public finances at risk, requiring a strengthening of fiscal discipline.
Source: OECD Economic Outlook Database.
Korea’s current fiscal framework has been repeatedly tested by revenue volatility and contingent spending pressures, underscoring the need for stronger institutional anchors. With corporate income tax accounting for a large share of total tax revenue, revenue is closely tied to the semiconductor cycle. That said, companies have some discretion in the timing of payments, which complicates revenue forecasting (OECD, 2024[2]). As spending pressures from ageing have begun to emerge, successive governments have tended to use cyclical revenue increases and positive revenue surprises in real time to finance structural spending increases. The most prominent and recent example of this was during the 2021-22 peak of the semiconductor cycle, when surging tax receipts were rapidly incorporated in supplementary budgets. This included spending on a Covid-related package amounting to 2.9% of GDP in mid-2022 in the midst of a solid post-pandemic recovery. When revenues declined in 2023–24, spending proved difficult to rein in. As a result, the government did not reach its self-imposed target for a 3% managed fiscal deficit. The government had planned to keep the fiscal balance largely unchanged. However, tax revenues are expected to rebound in 2026, in part reflecting the semiconductor cycle. The recently adopted supplementary budget in response to the energy crisis is fully financed by higher than projected tax revenues. KRW 1tn (USD 0.8bn) was used to pay down government debt.
Strengthened fiscal institutions could help the government make short- and medium-term fiscal decisions that underpin sustainable public finances in the long term. International experience and recent OECD analysis demonstrate that a clear fiscal framework, backed by independent oversight capable of evaluating macro-fiscal forecasts, assumptions and adherence, are associated with stronger fiscal discipline and accountability. While Korea’s National Assembly Budget Office (NABO) plays an important role as a parliamentary budget office, producing cost estimates and long-term projections, it currently lacks statutory independence and the mandate to function as a fully independent fiscal council. Korea currently lacks legally binding budget limits or expenditure ceilings consistent with OECD best practice (OECD, 2025[9]). Korea’s fiscal framework could be strengthened by setting longer-term objectives, aligning annual budgeting with long-term fiscal sustainability. Such a framework should allow for countercyclical fiscal policy and provide flexibility for severe crises. Decisions on mandatory expenditure targets and practical fiscal objectives should be anchored in a durable bipartisan consensus, after discussions in the National Assembly and in consultation with experts and stakeholders. An independent fiscal institution designated with a clear mandate to assess compliance could help build trust and ensure transparency (OECD, 2024[2]). A structured process to adapt the fiscal framework could be envisaged to regularly adjust it to changing circumstances, as is for example done in Sweden over an eight-year cycle (OECD, 2025[10]).
At the start of 2026, budget authority, including planning, execution, and the development of medium-/long-term fiscal strategy, was moved from the Ministry of Economy and Finance (MoEF) to a new Ministry of Planning and Budget (MoPB), operating under the Prime Minister’s Office. MoEF continues to oversee macroeconomic policy, taxation, government accounting and international finance. As this reform beds in, a dedicated budget ministry can strengthen oversight, but implementation needs to guard against any risk that the allocation of roles across ministries contributes to fiscal slippage.
There is scope to create fiscal space through a combination of tax and expenditure measures (Table 1.4). In the near term, fiscal consolidation should prioritise revenue and expenditure measures that can be implemented relatively quickly, are administratively feasible and minimise adverse effects on growth and equity. On the expenditure side, priority should be given to gradually scaling back SME subsidies, which are costly and often poorly targeted (OECD, 2024[2]). This should be complemented by conditioning support in crisis response zones on concrete, time-bound restructuring commitments, thereby reducing the risk of perpetuating non-viable business models (Chapter 4). Additional near-term savings can be achieved through health care spending efficiency gains informed by systematic spending reviews. Embedding systematic performance and programme budgeting in the health sector helps link resource allocations to outcomes, strengthens accountability for spending decisions, and supports the identification of efficiency gains (OECD, 2024[11]).
On the revenue side, broadening the personal income tax base by rationalising tax expenditures, while simplifying, and ultimately moving towards uniform taxation of corporate income regardless of company size could bolster tax collection and reduce unintended distortions. Expanding auctioning of allowances under the emissions trading system (ETS) would generate revenue while reinforcing carbon price incentives and boosting market liquidity. Phasing out the temporary fuel tax cut introduced in 2021 and the fuel price cap once the acute phase of the energy crisis is passed would support near-term consolidation efforts. A gradual shift from transaction taxes to recurrent property taxation could also contribute to broadening the tax base and strengthening subnational fiscal autonomy (Chapters 2 and 4). Taken together, these near-term actions would create fiscal space of about 2.9 % of GDP by 2032, supporting debt stabilisation and anchoring fiscal policy credibility (Table 1.4).
Percentage point differences with respect to the scenario under current policies
Note: The total measures in this table correspond to the improvement in the fiscal balance required to move from the scenario under current policies to the prudent fiscal framework that offsets ageing-related fiscal pressures and progressively reduces the structural deficit by 2 percentage points from 2027 to 2030. Estimated fiscal impacts are indicative and should be interpreted as orders of magnitude rather than point forecasts. The magnitudes are informed by long-term fiscal sustainability and policy simulation exercises conducted by the National Assembly Budget Office (NABO), the Korea Development Institute (KDI), the OECD and the IMF.
Source: OECD calculations.
Over the long term, more structural adjustments are required to place public finances on a sustainable path amid ageing-related spending pressures. On the revenue side, broadening the VAT base by reviewing and simplifying exemptions and progressively increasing the VAT rate is a large potential source of additional revenue with limited efficiency losses when compared to the taxation of personal and corporate income, which are the other two major tax bases (Chapter 2). Further expansion of ETS auctioning, as free allocations are phased out, would generate substantial revenues, although the revenue base is set to diminish as Korea moves closer to its carbon-neutrality target. A further long-term rebalancing of the tax mix towards recurrent property taxation would yield sustained revenues and further strengthen the fiscal autonomy of subnational governments, facilitating more cost-efficient adaptation to demographic change (Chapter 4).
On the expenditure side, long-term savings hinge on sustained improvements in health care spending efficiency, continued scaling back of SME subsidies and the imposition of conditionality on crisis support. There is considerable scope to improve spending efficiency by strengthening the impact of performance budgeting and spending reviews (OECD, 2023[12]; OECD, 2023[13]). Korea has made considerable efforts to embed spending review recommendations in annual budgets and its medium-term fiscal plans. In October 2025, a continuous expenditure efficiency system was implemented, involving relevant ministries and independent experts. Within the long-standing fiscal programme performance evaluation system, ministry self-evaluations and decentralised assessments have been unified into a single system, with evaluation results disclosed to the public. With these systems in place, expenditure ceilings can be enforced more effectively. Clear procedures should link review recommendations to annual and medium-term budget decisions, public reporting on follow-up actions, realised savings, and the justification for non-implementation.
Product- and labour-market reforms could boost growth and further reduce pressure on government expenditure. Korea could strengthen competition and productivity by reducing regulatory involvement in business operations. First, price controls continue to apply in many network industries, transport services and selected professional and retail activities. This is often achieved through ex-ante tariff approval, as is the case with electricity and rail (OECD, 2024[2]). Korea could gradually shift from price regulation toward ex-post oversight, limiting ex-ante controls to clearly defined public service obligations and vulnerable consumers, as is the guiding principle in various EU laws (OECD, 2025[14]). Second, barriers in network sectors persist through regulated prices and predominantly public provision of electricity and rail services, route-specific approval requirements that limit contestability, as well as limited mandatory disclosure of information on passive transport and telecommunication infrastructure, including location, available capacity and planned civil works (OECD, 2024[15]). International experience, including the liberalisation of intercity coach markets in Germany and France, suggests that easing entry restrictions and improving access to information on essential infrastructure can enhance competition without undermining public service objectives. Third, barriers in services, especially professional services, remain high due to restrictions on ownership, voting rights and inter-professional co-operation (Chapter 4).
Regarding labour market reforms, employment rates among women and older workers have been increasing, but there is room for further improvement. Policies to achieve this include reducing labour market dualism; shifting wage-setting and career progression away from a seniority-based system towards a system reflecting job characteristics such as skill requirements and the scope of responsibilities, as well as performance; aligning legal retirement and pension ages; and strengthening family and anti-discrimination policies to support continuous female employment. Together with reforms to hiring practices and workplace organisation that facilitate mobility, learning by doing, and the better use of skills at all ages, such measures could accelerate the convergence towards the employment rates observed in Japan, which rose after the implementation of similar policies to those advocated here (Chapter 3). In line with the government’s priorities, closer social dialogue and cooperation between unions, employers and government could facilitate such reforms. The recent amendments to the Trade Union and Labour Relations Adjustment Act (“the Yellow Envelope Law”) may facilitate social dialogue, particularly in subcontracting and other indirect-employment structures. In the initial phase of implementation, efforts are needed to enhance predictability. Combined, product- and labour-market reforms can increase GDP by 1.1% (8.8%) by 2032 (2060) and improve the fiscal balance by 0.2 (1.6) percentage points over the same horizons (Table 1.5).
Percentage point differences with respect to the prudent fiscal scenario without structural reforms
1: Product and labour market reforms improve Korea’s PMR to match the OECD top 5 performers, alongside faster convergence in the female employment rate, reducing the male-female employment gap by half by 2060 relative to the baseline.
2: A comprehensive pension reform increases the legal retirement age to 68 by 2035, and raises it thereafter by two-thirds of life expectancy gains.
3: The population follows the 80% probabilistic demographic scenario from the 2024 World Population Prospects, assuming an increase of fertility rates of 0.5 points compared to the baseline and stronger net immigration. By 2060, the working-age population is projected to reach 25 million, compared with 20 million under the median demographic scenario in the Long-Term Model.
Source: OECD simulations based on OECD’s Long-Term Model.
Recent reforms to the National Pension Scheme include raising contribution rates from 9% of income to 13%, modestly increasing replacement rates from about 41.5% in 2025 to 43% and expanding pension credits for childbirth and military service. The reforms have improved long-term sustainability and postponed the expected depletion of the National Pension Fund by 7-8 years to the mid-2060s. However, as demographic pressures intensify and the high old-age poverty rate remains (OECD, 2025[16]), sustained efforts to strengthen long-term sustainability and old-age income protection are needed. Such efforts should also take into account the structural features of Korea’s pension system and labour market conditions affecting the quality of employment for older workers and pronounced gender gaps in lifetime earnings.
To mitigate the fiscal impact of ageing while improving social outcomes, a comprehensive pension reform that aligns the statutory pensionable age with gains in life expectancy and removes institutional barriers to longer careers would unlock Korea’s considerable latent labour supply at older ages. Pension accrual ends at the age of 59, while pensions can be drawn from the age of 63 (rising to 65 by 2033). By extending the period of contributions and reducing early exit incentives embedded in mandatory retirement and seniority-based wage-setting, the reform would simultaneously enhance pension adequacy, lower old-age poverty risks and mitigate demographic headwinds to potential growth over the long term (OECD, 2024[2]). OECD simulations suggest that such a pension reform could increase employment rates of 55-79 year-olds by 5 percentage points by 2060, lifting GDP by 1.9% relative to the no-reform baseline and improving the fiscal balance by 2.1 percentage points of potential GDP by 2060 - backed by higher contributions and lower age-related spending (Table 1.5).
Reforms recommended in the 2024 OECD Economic Survey of Korea, particularly those aimed at improving the work-life balance, closing gaps in family support systems and reducing the economic and opportunity costs of childbearing (OECD, 2024[2]), together with a strategy to increase immigration of skilled labour (Chapter 4), can help Korea mitigate its rapid ageing and move toward a demographic trajectory with higher fertility and net migration. Under the assumption of higher fertility and net migration (consistent with the United Nation's 2024 World Population Prospects 80% probabilistic scenario), the working-age population could reach 25 million in 2060, compared with 20 million under the median demographic scenario. The combination of these policy packages would boost GDP by about 1.5% by 2032 and improve the fiscal balance by an additional 0.4 percentage points by 2032, with longer-term effects even more sizeable (Table 1.5). This would alleviate the pressure arising from ageing, contributing to stabilising debt as a share of GDP over the projection horizon (Figure 1.9).
Gross government debt, share of GDP
Note: The scenarios focus on ageing-related fiscal pressures and abstract from other potential spending risks, including possible increases in defence expenditure associated with heightened geopolitical uncertainty and climate-related mitigation, adaptation and disaster-response costs over and above those already included in current official projections. The “Current policies” scenario assumes that additional fiscal pressure due to ageing is fully debt-financed. In the “Prudent fiscal framework” scenario, ageing-related spending needs and the current structural deficit are addressed through revenue and expenditure measures amounting to 2.9% of GDP in 2032 and 8.2% in 2026, as described in Table 1.4 The “Prudent fiscal framework and structural reforms” scenario adds a series of policy reform packages that increase real GDP and improve the fiscal balance by 0.4% in 2032 and 5.8% in 2060, as described in Table 1.5.
Source: OECD simulations based on OECD’s Long-Term Model.
1.3.3. Steps are taken to safeguard trade and attract foreign investment
Openness to trade has been a key strength and a key driver of Korea’s rise from poverty in the 1960s to a leading economy today. And this openness continues to benefit Korea today. Buttressing trade and investment further can give an additional boost to the economy and help in confronting ageing headwinds. However, specialisation and concentration of products and markets also create vulnerabilities. Trade exposure to the Middle East, the United States and China is a prominent example of such concerns. Exports to the United States accounted for 17% of total exports in 2025, while those to China were 18%. Indirect exposure through participation in global value chains is also considerable. In 2023, final demand in the United States originating in Korea reached 5.7% (of Korean GDP). The corresponding figure for China was 5.9%. Most Korean products were originally exported to the United States with zero tariff under the US-Korea Free Trade Agreement. However, most products including automobiles, steel and aluminium have experienced increased rates since 2025 following the United States’ tariff measures, while some tariffs were eventually lowered through the Korea Strategic Trade and Investment deal. The overall tariff increase has had little discernible impact on exports. This is partly due to semiconductors currently being exempt from the tariffs. On the other hand, car exports to the United States constituted just above 40% of total car exports in 2025, down from just below 50% in 2024, due to a combination of new tariffs and the introduction of new local production capacity. The deal with the United States on tariffs is conditional on USD 350 billion of Korean investment in the United States, of which USD 150 billion relates to cooperation on shipbuilding. The remaining investments are subject to the identification of viable projects and capped at USD 20 billion per year. The share of exports to China has fallen back somewhat over the past few years, reflecting weak domestic demand in China and increasing competition from domestic producers. Shifting value chains in response to trade barriers has also play a significant role. For example, exports to Vietnam increased by 7.6% from 2023 to 2025, driven largely by the semiconductor sector, accounting for 9% of total exports (Figure 1.10, Panel A), as US restrictions on trade in advanced semiconductors with China shifted value chains towards Korea and Vietnam. Trade with Chinese Taipei has more than doubled from 3% to 7% of total exports over the past two years, linked to the growing importance of value chains for advanced semiconductors, with Korea specialising in memory, packaging and materials and Chinese Taipei specialising in advanced fabrication and assembly. The share of electronics in trade has increased by 6 percentage points from 27% in 2023 to 33% in 2025 (Figure 1.10, Panel B).
2025
Source: Korea Customs Service.
Korean value chains are more exposed to disruptions in foreign inputs and foreign markets than the OECD average (Schwellnus et al., 2023[17]). It is largely in private companies’ self-interest to reduce risks stemming from supply chain dependencies. Private companies can mitigate supply-chain dependencies by diversifying their supply chains, building up inventories, or relocating production to the home country or to jurisdictions perceived as less risky. However, such measures are often costly and are typically undertaken only where they yield a net private benefit. This can give rise to negative externalities, as firms may underinvest in resilience relative to the socially optimal level. In some cases, the social costs of supply chain disruptions are higher than the private cost to companies, potentially justifying a role for the government.
Governments have a role in mapping and assessing risks at the national strategic and macroeconomic level and in coordinating measures to improve resilience. This can be achieved by identifying strategically important products, collecting and disseminating information on supply concentration, and stress-testing to identify potential supply chain bottlenecks. Korea has implemented a structured framework to identify and address supply chain vulnerabilities (Box 1.4) and continues to strengthen its international cooperation mechanisms. The Indo‑Pacific Economic Framework (IPEF), participation in the 2023 Supply Chain Agreement and the launch of the Critical Minerals Dialogue remain central to its multilateral response strategy for supply‑chain disruptions (OECD, 2024[2]; OECD, 2022[4]).
Korea's Framework Act on Supporting Supply Chain Stabilisation for Economic Security took effect in June 2024, followed by the approval of the First Master Plan for Supply Chain Stabilisation (2025-2027). Under this framework, “economic security items” are designated, with support extended for their stable introduction, production and stock management. It also includes an early warning system for economic security items and prepares crisis management manuals. A national goal of reducing reliance on any single country for a single product to below 50% by 2030 was established in 2023, but is now integrated into the national framework. A Supply Chain Stabilisation Committee consisting of ministers and private experts acts as a pan-governmental coordinating body. The basic plan will be updated every three years, with corresponding implementation plans under each ministry.
A Supply Chain Resilience Fund operated by the Export-Import Bank was launched in 2024 to support private firms in reinforcing their supply chains, including by diversifying their imports by country of origin, expanding domestic and foreign production, developing technology and expanding stockpiles. In August 2025, the government announced a package of approximately KRW 50 trillion (2% of GDP, USD 36 billion) dedicated to supply chain stabilisation. Funding comes from the Supply Chain Resilience Fund, the Export-Import Bank of Korea, Korea Development Bank, the Korea Credit Guarantee Fund and Korea Technology Finance Corporation. This policy financing aims to diversify import sources, expand reserves and reduce dependence on specific countries by lowering the financial burden of sourcing from alternative sources and domestic suppliers.
Source: OECD (2024[2]), updated.
Korea is committed to international cooperation and trade. As a member of the G20, Korea is actively engaged in shaping policy around global issues, such as international trade, financial stability and climate change mitigation. As a “middle power”, an economy with an exceptional development trajectory, and a country that has moved from an aid recipient to a donor, Korea is particularly active in bridging the gaps between leading economies and developing nations, notably in Southeast Asia. As an example, it is a founding member of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement, including the ten members of the Association of Southeast Asian Nations (ASEAN), Korea, China, Japan, Australia and New Zealand. Korea also continues to expand its network of bilateral trade agreements, most recently with the Gulf Cooperation Council, Ecuador, the United Arab Emirates and Guatemala. Establishing new trade agreements and further deepening existing ones is an important instrument to boost resilience.
The costs of restructuring supply chains can be very high, as such support will tend to favour exporting industries over those serving the domestic market, and resources channelled to incumbent industries inevitably raise hurdles for emerging ones competing for labour and capital, but lacking lobbying power (OECD, 2024[2]). As such, the scale and scope of such government intervention should be subject to careful cost-benefit analyses.
The energy crisis stemming from the conflict in the Middle East has highlighted the benefits of keeping stockpiles of oil, natural gas and other critical inputs. In addition to stocks held by the government, private companies and stockpiles under the International Joint Stockpile programme, allow Korea first drawing rights to oil stored in Korea by foreign oil companies in case of supply disruptions (OECD, 2024[2]). Total oil stockpiles are estimated to cover 208 days of net imports (in mid-March 2026). When also accounting for Korea’s re-exports of a large share of oil imports as refined products, these stockpiles are estimated to cover 70-80 days of total domestic demand, which nonetheless constitutes a considerable buffer. Stockpiles of natural gas are not disclosed. Maximum storage capacity corresponds to approximately 55 days of consumption. Actual stocks remain well above the legal minimum corresponding to 9 days of consumption, according to the government.
Accelerating investments in renewable energy would further reduce import dependencies and boost resilience to future energy shocks. As part of its response to the energy crisis, the government has announced that it will accelerate renewable energy deployment, increasing the share of renewables in power generation to over 20% ahead of the previously announced 2030 target date. To expand solar energy, it will mobilise all available measures, including “sunlight income villages,” rooftop solar in industrial complexes, agricultural solar projects, floating solar installations and border-region projects. For wind power, it will promote designated planning sites, streamline permitting through a one-stop approval system to shorten total project timelines through to completion and reform wind turbine safety inspection systems. A roadmap will be developed to gradually phase out 60 existing coal-fired power plants by 2040. Fuel shifting from gas to renewable thermal energy will be achieved within the framework of a new Heat Energy Management Act, that is yet to be enacted. Priority deployment of heat pumps are planned to be introduced in areas without city gas supply, and district heating systems currently relying on LNG-based generation are to be converted to run on renewable energy.
By addressing structural impediments, the government has succeeded in boosting foreign investments since taking office in 2025. Past policies implemented to attract foreign investments were largely focused on granting cash subsidies and tax breaks for foreign firms fulfilling criteria such as creating regional headquarters in Korea and investing in R&D and advanced technologies. The current government has implemented similar incentives, such as lowering the dividend tax rates and instituting tax incentives for the repatriation of overseas foreign exchange deposits and foreign equity investments. However, recent structural reforms to financial markets at no fiscal cost are likely to be the most effective approaches. A roadmap to enhance global investor access to KRW markets includes allowing KRW settlements among qualified financial institutions. If implemented smoothly, this could help clear a major barrier to Korea’s MSCI upgrade to Developed Market status, as limited access to KRW markets has long been a key impediment. Deregulation will also enable foreign retail investors to trade Korean equities through omnibus accounts (pooled accounts combining the assets and trades of multiple customers under the name of a single broker).
The most notable reform package is the recent corporate governance reforms, marking a significant shift toward strengthening shareholder protection, board independence and corporate accountability. The 2025 amendments to the Commercial Act expanded directors’ duty of loyalty from serving the company to explicitly serving all shareholders. They increased scrutiny of restructurings, mergers and related‑party transactions. The reforms also introduced mandatory hybrid shareholder meetings for large listed companies, enabling real‑time electronic participation and replacing the previous requirement to hold physical meetings at or near company headquarters. These provisions will be fully effective by January 2027. Board independence has been reinforced through a requirement that at least one‑third of the board consist of outside members, aligning Korea more closely with global governance practices. Cumulative voting in board elections has become mandatory to improve the influence of minority shareholders. Dominant shareholders’ voting power has been limited to 3% for all audit committee appointments, separate elections must be held for audit committee appointments and at least two audit committee members must be outside directors to enhance audit committee independence (Lin, 2025[18]).
The reforms have supported investor sentiment. The KOSPI index has reached record highs, reducing the so-called “Korea discount”, the valuation gap between Korean equities and equities in other developed markets (Figure 1.11). Korea’s new legislation marks a meaningful step forward for minority shareholder rights, particularly through cumulative voting and enhanced audit committee elections. However, its impact will ultimately depend on effective implementation by companies and intermediaries. Procedural, structural and technical hurdles, along with defensive practices by some companies may still be used to the benefit of controlling shareholders. Regulators, companies and shareholders will need to work collaboratively to implement these reforms effectively, to deliver their full potential (Lin, 2025[18]).
Source: Calculations based on data from FRED, Federal Reserve Bank of St. Louis and LSEG.
A trend towards improved governance is also reflected in a consistent improvement in Korea’s ranking on the Worldwide Governance Control of Corruption Indicator. Korea’s score has improved from 0.58 in 2013 to 0.89 in 2023, but remains below the OECD average of 1.09 (Figure 1.12, Panel A). Notable reforms have been carried out in this period. For example, the share of firms expecting to give gifts to public officials "to get things done" is lower than the OECD average (Panel B), which is widely attributed to the impact of the Improper Solicitation and Graft Act implemented in 2016 (popularly known as the Kim Young-ran Law). The Act on the Prevention of Conflict of Interest Related to the Duties of Public Servants, which came into effect in 2022, has had a positive impact by prohibiting public officials from seeking personal gains and by helping to ensure fairness in the performance of their public duties.
Source: The World Bank.
In 2021, the OECD Working Group on Bribery noted that while 22 out of its 36 Phase 4- recommendations had been fully or partially implemented, there was still much to be done. It welcomed Korea’s efforts to strengthen its capacity to enforce the prohibition on foreign bribery, but noted that Korea needed to train and provide adequate guidance to officials working on foreign bribery investigations to improve detection and enforcement. Korea was also urged to step up its level of foreign bribery enforcement and address key unimplemented recommendations concerning, among others, the false accounting offence and its anti-money laundering reporting framework.
Korea scores above the OECD average in many areas of the OECD public integrity and accountability indicator. For example, Korea outperforms the OECD average in its anti-corruption strategy, particularly in the disciplinary framework for civil servants and in integrity safeguards for the application of these frameworks in practice. The framework clearly defines offences, applies proportionate sanctions, and allows appeals to judicial bodies, with criminal cases referred to law enforcement. Implementation is supported by systematic training and an electronic case management system. (Figure 1.13, Panel A). Korea has notable strengths in accountability in public policy making, including conflict-of-interest safeguards, legislative stability and national policies on access to information and open data. Areas for improvement include the transparency of lobbying activities, the public share of financing for political parties and the scrutiny of legislative procedures (Figure 1.13, Panel B).
Note: Panel C shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD, Public Integrity Indicators; and OECD, Financial Action Task Force (FATF).
One of the main reasons for the high evaluation in information accessibility and open data is the information disclosure committee, which deliberates on and coordinates the establishment of policies related to information disclosure. This governance framework is based on the Act on the Disclosure of Information by Public Agencies, which clearly defines the principles, scope, procedures and exceptions for information disclosure, with the concept of “open by default” at its foundation. This is further confirmed by Korea’s top rankings among OECD countries in the 2022 Digital Government Index (DGI) and the Open, Useful, and Re-usable Data (OURdata) Index, which measures how well governments design open data policies (OECD, 2025[19]).
Korea’s anti-money laundering and counter-terrorist financing framework is generally supported by a sound legal and institutional foundation aligned with international standards (FATF, 2020[20]). However, further refinement of the sanctions implementation framework would be beneficial to strengthen responses to terrorism-related risks and the effective implementation of targeted financial sanctions (Figure 1.13, Panel C).
Trade between North Korea (The Democratic Republic of Korea, DPRK) and South Korea has dropped to practically zero due to a combination of sanctions, North Korea’s COVID lockdown and policy changes towards inter-Korean relations. South Korea remains constitutionally committed to peaceful reunification with North Korea. In contrast, North Korea has formally abandoned the reunification doctrine, revising its constitution to define the two Koreas as separate states and delineating the DPRK’s territory as adjacent to the Republic of Korea to the south.. Reunification could still occur, for example, in the event of regime change in the North, and would have significant macroeconomic and fiscal consequences for South Korea. While the DPRK’s prolonged economic stagnation and isolation reduce near-term spillovers to the South Korean economy, they also widen the structural gap between the two economies, increasing the potential costs of any future abrupt rapprochement or reunification. The fiscal burden associated with large-scale transfers, infrastructure investment and social integration would be significant, particularly given South Korea’s rapid population ageing and existing pressures on public finances (OECD, 2024[2]).
North Korea remains a centrally planned economy, with the state exercising direct control over production, distribution and resource allocation. Market mechanisms exist only informally and at the regime’s discretion. As a result of state control and constrained market-based activities, North Korea’s industry structure remains heavily oriented toward the primary sector, which still accounts for almost one third of national output (against less than 2% in South Korea, see Annex Figure 1.A.1). Services account for less than 30% of national output, less than half the share observed in its southern neighbour.
Share of nominal GDP, 2024
Source: Bank of Korea.
The scale of the economic and social divide between the two Koreas is stark across nearly all available indicators (Annex Table 1.A.1). North Korea’s nominal GNI is approximately KRW 44 trillion, less than 2% of South Korea’s level, while per capita GNI is almost 30 times lower, underscoring the pronounced gap in living standards. North Korea lags significantly in productive capacity and resource use, as evidenced by extremely low fertiliser application rates and electricity consumption per capita, both more than an order of magnitude below South Korean levels. Differences in trade intensities are even more significant, reflecting the DPRK’s isolation from global markets. Social and demographic indicators also point to structural weaknesses. Life expectancy is nearly 10 years lower. Lower greenhouse gas emissions per capita reflect limited industrial activity rather than environmental efficiency, with emissions scaled by GNI almost eight times higher in the North than in the South.
Source: World Development Indicator database (World Bank); Bank of Korea.
Disaggregated data underscore the narrow and highly specialised nature of North Korea’s external trade. The country’s strongest revealed presence is concentrated in a small number of niche products, notably tungsten ores and concentrates and labour-intensive manufactures such as wigs and related hair products, where North Korea accounts for a non-negligible share of global exports (13% resp. 8%, see Annex Figure 1.A.2). Beyond these categories, export market shares drop sharply and are largely confined to low-value-added or semi-processed materials, including basic metals, ferro-alloys and selected textile inputs. The absence of higher-value-added manufactured goods and technologically complex products reflects both weak industrial capacity and the impact of international sanctions.
Export market shares by product group, 2023
Source: Observatory of Economic Complexity.
Economic data remain scarce, inconsistent and politically filtered. The lack of a functioning financial system, the absence of a credible central bank and wide regional variation in prices and availability of goods further complicate economic assessment. As a result, reported growth figures should be interpreted as indicative of direction rather than magnitude. As such, indirect indicators and external estimates, particularly those produced by South Korean institutions - including the Bank of Korea (BOK), the Korea Development Institute or the Korea International Trade Association (KITA) - provide insights.
According to BOK estimates, North Korea’s economy accelerated in 2024, growing by 3.7% (following growth of +3.1% in 2023 and -0.2% in 2022), its fastest pace in eight years. The expansion was driven by industry, as manufacturing grew by 7.0% (with the heavy and chemical industries increasing by 10.7%), mining surged by 8.8% (the biggest gain since 1999), and construction increased by 12.3%. Agriculture, by contrast, contracted by 1.9%, while services rose by only 1.3%. Exports increased by 10.8% to USD 360 million, led by clocks (+294%), ore, slag and ash (+41%), and hats and wigs (+13%), while imports fell by 4.4% to USD 2.34 billion (Bank of Korea, 2025[21]).
After a decade of relative stability, the North Korean Won (KPW) depreciated sharply in 2024, settling at levels close to 40000 KPW per USD in early 2026 (Annex Figure 1.A.3). Substantial increases in official wages in parts of the state sector from late 2023, implemented alongside tighter controls on market activity and foreign-exchange transactions, appear to have increased demand for foreign currency while constraining its effective supply (Ward, Lankov and Kim, 2025[22]; Korea Development Institute, 2025[23]). This shift has been characterised by the suppression of jangmadang activity (informal market), the rollback of limited enterprise autonomy and the re-centralisation of price setting, distribution and foreign-exchange allocation under Cabinet authority (Lankov, 2026[24]).
Note: “FX” denotes the market exchange rate (KPW per USD), while “Rice” denotes the price in KPW for 1 kg of rice.
Source: Daily NK.
The revitalisation of the state grain distribution system has weakened private traders by monopolising food sales, while the criminalisation of foreign-currency use has reinforced currency substitution and widened the gap between official and market exchange rates (Haggard, Kim and Lee, 2025[25]). In the absence of productivity gains, state-directed wage increases have amplified monetary imbalances, with excess liquidity flowing into foreign currency and scarce goods; although expanded state-to-state trade with Russia has temporarily reduced reliance on private markets, it has reinforced administrative control rather than restoring market-based adjustment. As a result, distortions between official and unofficial segments of the economy have increased (Lankov, 2026[24]).
International sanctions continue to restrict formal trade, finance and investment. North Korea’s external economic relations remain heavily reliant on China, which accounts for around 98% of its official trade in 2024. Trade with China rebounded strongly since 2022, although volumes remain well below pre-2018 levels following China’s compliance with international sanctions. At the same time, economic cooperation with Russia has expanded significantly. Increased trade, food supplies and unreported revenue streams linked to military cooperation have helped alleviate shortages and improve foreign-exchange availability. While official trade figures suggest a modest uptick, unofficial operations have surged since 2023. High-resolution satellite imagery and intelligence assessments indicate that North Korea has dispatched around 20000 containers to Russia via the Rajin-Vostochny maritime corridor between 2023 and 2025. Total shipments by sea, rail and air are estimated to value up to $10 billion, representing a third of North Korea’s annual GDP. In return, Russia has bypassed UN oil caps by delivering more than 2 million barrels of refined petroleum from March 2024 to June 2025, while facilitating unreported financial flows to alleviate the North's chronic foreign-exchange shortages (Guseinova, 2025[26]).
The “20x10 policy”, announced in January 2024, commits the state to constructing industrial facilities in 20 cities or counties per year over a decade, with the stated aim of revitalising local economies and improving living standards (Korea Development Institute, 2025[23]). While framed as an economic development initiative, the policy is fundamentally political, and implementation feasibility remains uncertain. Chronic shortages of electricity, raw materials and skilled labour, combined with the prioritisation of military production, raise questions about whether newly built facilities can operate as planned.
Inter-Korean relations have entered a new phase characterised by durable political and economic decoupling combined with tactical de-escalation aimed at containing security risks. DPRK’s shift away from the long-standing reunification narrative in 2023 represents a qualitative break from earlier periods of tension in which engagement and cooperation at least formally remained part of diplomacy (Korea Development Institute, 2025[23]). The dismantling of symbolic and functional inter-Korean linkages, alongside increasingly explicit hostile framing, signals an intention to normalise separation rather than to use tension as leverage for negotiation.
Domestically, the DPRK has reinforced centralised control over economic governance and curtailed the scope of informal and market-based activity (see above). Externally, it has prioritised highly state-centric partnerships with Russia and China, notably in the defence, energy and strategic sectors, that reinforce regime security without benefiting the wider public. The expansion and diversification of these strategic ties have reduced the regime’s dependence on inter-Korean relations as a source of diplomatic legitimacy and economic leverage.
Against this backdrop, recent efforts by the South Korean government to reduce tensions have focused on tactical de-escalation and crisis management as pathways to political rapprochement. Measures aimed at preventing border incidents and managing escalation risks have contributed to a decline in reported incidents. In contrast to the deterrence-first approach of 2022-2024, the current administration has actively sought to revive direct liaison channels and military hotlines, including those along the Military Demarcation Line (MDL), to serve as a fundamental starting point for preventing accidental escalation (Green, 2025[27]).
The outlook for inter-Korean rapprochement remains uncertain. This is due to narrowing of policy space caused by the deepening alignment among South Korea, the United States and Japan. This is also because of North Korea’s adherence to its “hostile two-state” stance, and its continued lack of response to the South Korea government’s proposal for dialogue. At the same time, domestic interest in and support for inter-Korean unification are gradually declining. Due to the prolonged division, there is a growing trend among the public to be indifferent to unification or to avoid it, being satisfied with the current status quo. In particular, sceptical views toward unification are increasing among South Korea’s younger generations, posing a significant policy challenge for the South Korean government.
Over the longer term, a gradual and credible easing of tensions could generate a “peace dividend” for both countries through lower security risks, reduced defence spending pressures, improved investor confidence and expanded trade and infrastructure linkages. A carefully sequenced integration could unlock reconstruction investment and benefits arising from labour force complementarities, but would require substantial fiscal resources and institutional preparation.
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