Korea : Economic Survey says reforms are needed for a stronger recovery
The next Economic Survey of Korea will be prepared for 2012.
An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared.
A Korean version of the Overview is also available.
Chapter 1: Sustaining the recovery from the global financial crisis by promoting Korea’s medium-term growth potential
Korea has achieved one of the strongest recoveries among OECD countries from the 2008 global recession, led by its robust export performance and the largest fiscal stimulus among member countries. The expansion is projected to continue through 2011 as the positive impact from external demand spreads further to the domestic economy. Sustaining high growth over the medium term requires narrowing the large labour productivity gap with more advanced OECD economies through reforms, particularly in services, where productivity is low. The priority is to strengthen competition by eliminating domestic entry barriers, accelerating regulatory reform, upgrading competition policy and reducing barriers to trade and inflows of foreign direct investment. Such measures should be accompanied by reforms to reduce labour market dualism, which has negative consequences for growth and equity. In addition, it is important to increase labour force participation, notably among women and older persons, not least to mitigate the impact of population.
Chapter 2: Macroeconomic policy: the exit from fiscal and monetary stimulus
Korea’s strong recovery from the global financial crisis stems in part from an effective macroeconomic policy response. The prompt withdrawal of fiscal stimulus in 2010 will help meet the medium-term fiscal plan for reducing budget deficits. Given the increase in government spending in the past, making the targets in the plan more binding is important to help achieve the fiscal target. In addition, the broadening of tax bases would be beneficial in this regard. While such policies would help limit government debt, it is also necessary to contain the rapidly rising debt of public corporations, in part by further progress in the 2008 privatisation programme. Monetary stimulus has also supported the recovery. Given the expected strength of output growth in 2010, it is important that the Bank of Korea not fall behind the curve in withdrawing monetary stimulus. Korea should continue its flexible exchange rate policy.
Chapter 3: Health-care reform in Korea
Korea’s health-care system has contributed to the marked improvement in health conditions, while limiting spending to one of the lowest levels in the OECD through high patient co-payments and limited coverage of public health insurance. However, spending is now increasing at the fastest rate in the OECD. With continued upward pressure, not least from rapid population ageing, it is essential to boost efficiency by reforming the payment system, reducing drug expenditures, shifting long-term care out of hospitals, promoting healthy ageing and introducing gatekeepers. As the heavy reliance on social insurance payments for health will be an increasing drag on employment as the population ages, it is necessary to raise the share of tax-based financing in conjunction with effective measures to keep spending in check. Measures to ensure adequate access for low-income households are a priority given the high out-of-pocket payments. Quality should be improved by enhancing transparency, promoting restructuring in the hospital sector and expanding the number of doctors.
Chapter 4: Korea’s green growth strategy: mitigating climate change and developing new growth engines
Korea’s greenhouse gas emissions almost doubled between 1990 and 2005, the highest growth rate in the OECD area. Korea recently set a target of reducing emissions by 30% by 2020 relative to a “business as usual” baseline, implying a 4% cut from the 2005 level. Achieving this objective in a cost-effective manner requires moving from a strategy based on voluntary commitments by firms to market-based instruments. The priority is to establish a comprehensive cap-and-trade scheme, supplemented, if necessary, by carbon taxes in areas not covered by trading. Achieving a significant cut in emissions requires a shift from energy-intensive industries to low-carbon ones. Korea is strongly committed to promoting green growth through its Five-Year Plan, which envisages spending 2% of GDP per year through 2013. One challenge is to ensure that these expenditures are efficiently targeted so as to develop green technologies, while avoiding the risks inherent in industrial policy.
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The OECD Secretariat's report was prepared by Randall S. Jones, Buyngseo Yoo and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.