South Korea

   

Economic Policies

#10
Key Findings
With reforms taking on a new character, South Korea scores well (rank 10) with regard to economic policy. Its score on this measure has improved by 0.2 points relative to 2014.

Growth rates are high by OECD standards, but lower than in the past. The Moon government is seeking to reduce the country’s dependence on exports, and hopes to reform the country’s dominant business conglomerates (chaebol). Recent fiscal-stimulus efforts have focused on the creation of social-service jobs and improving the welfare system.

General unemployment rates remain very low and stable, but the youth unemployment rate is considerably higher. Precarious employment remains a concern, and the new administration has put a top priority on reducing the share of irregular jobs.

Tax rates are low. The Moon administration is seeking to raise rates for high-income individuals and companies. Public debt is moderate but rising. R&D expenditure remain substantial, with the Moon government seeking to unify previously fragmented policies in the area.

Economy

#18

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
South Korea has shown higher growth rates than the OECD average, with annual GDP growth of 2.6% in 2015 and 2.8% in 2016. Nonetheless, the country is struggling to adjust to a lower-growth environment. The Moon administration has taken steps to reduce the country’s dependence on exports. The Moon government’s cornerstone economic initiative is the “people-centered economy,” which focuses on job creation, income-driven growth and welfare expansion. Key initiatives include the transition of precarious job contracts into permanent positions and a gradual increase in the minimum wage. In July 2017, the parliament passed a supplementary budget of KRW 11 trillion; however, in a break from previous governments’ policies, the Moon administration has shifted the focus of fiscal-stimulus efforts to creating social-service jobs and improving the welfare system. The government has also promised to reform the country’s business environment by reforming the dominant business conglomerates (chaebol), although few concrete plans have emerged. At the time of writing, the primary focus was on “self-regulation” by the chaebol. The Bank of Korea has kept its benchmark interest rate at a record low of 1.25%, although it is expected that the new government will exercise less pressure on the central bank than its predecessors to keep interest rates low. The level of household debt remains a major economic problem, and the government has implemented various comparatively modest measures aimed at cooling down the real-estate sector. With the country still overly dependent on exports for economic growth, further shadows have been cast by the North Korea crisis, the economic sanctions imposed by China following the installment of a U.S. missile-defense system (the Terminal High Altitude Area Defense (THAAD) system) in South Korea, and U.S. President Trump’s attempt to renegotiate the Korea-U.S. free trade agreement.

Citations:
OECD, Economic Survey of Korea 2016, http://www.oecd.org/korea/economic-survey-korea.htm Economic Democratization: Needs of the Times, BusinessKorea, June 20, 2013, http://www.businesskorea.co.kr/article/152/economic-democratization-needs-times
Park Warns South Korea: Change or Perish, The Diplomat, February 28, 2014, http://thediplomat.com/2014/02/park-warns-south-korea-change-or-perish/
Segye Ilbo
http://www.segye.com/content/html/2015/10/25/20151025002090.html?OutUrl=naver
Concerns grow over GDP contraction in Q4, Korea Times, October 19, 2016.
http://www.koreatimes.co.kr/www/news/biz/2016/10/488_216410.html
S. Korea has room for more fiscal spending, monetary easing to boost economy: OECD chief, Yonhap News, October 25, 2016.
http://english.yonhapnews.co.kr/national/2016/10/23/0302000000AEN20161023002300315.html

Labor Markets

#15

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
South Korea’s labor-market policy had succeeded in keeping the overall unemployment rate at a comparatively low 3.8% as of June 2017, although the youth unemployment rate was much higher. According to the OECD, South Korea performs relatively poorly with regard to several aspects of job quality and labor-market inclusiveness. Moreover, the employment rate among women is comparatively low. Nearly 40% of employees at South Korean conglomerates are irregular workers, a fact that highlights the country’s issues with low job security and low job quality.

The newly elected Moon Jae-in administration has placed a top priority on the creation of high-quality jobs and the reduction in the share of irregular jobs. Moon established a job-creation commission tasked with decreasing the number of non-regular workers, while promising to reduce working hours, increase the minimum wage to KRW 10,000 by 2020, and expand youth-employment quotas to include private companies. His administration has also promised to create new public-sector jobs, and took a first symbolic step by transferring irregular employees in the public sector into permanent employment. The Ministry of Employment and Labor budget has increased by about 30% to KRW 23.7 trillion, and KRW 19.2 trillion has been allocated for job creation. The funds dedicated to youth employment in particular have been significantly expanded. In addition, the government has created specific labor policies for SMEs and the public sector. For example, for every three young people hired by SMEs on a regularized basis, the government now offers a “supplementary employment subsidy” supporting the wage of one of the three. This so-called 2+1 employment policy is designed to spur the creation of high-quality jobs for the young by reducing the wage burden experienced by SMEs. The Moon government also has a plan to create more jobs in the public sector through the expenditure of public funds.

Citations:
OECD, Employment Outlook 2017, https://www.oecd.org/korea/Employment-Outlook-Korea-EN.pdf
Korea Herald, Korea’s youth unemployment rate rising fast: OECD data, http://www.koreaherald.com/view.php?ud=20170618000212
Ministry of Strategy and Finance. 2017 June Labor Trend in Korea. http://www.mosf.go.kr/nw/nes/detailNesDtaView.do?searchBbsId1=&searchNttId1=MOSF_000000000009840&menuNo=4010100
Hankyoreh, President Moon declares era of zero irregular employment at public institutions. http://english.hani.co.kr/arti/english_edition/e_national/794586.html.

Taxes

#19

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
The South Korean tax system is fairly effective in generating sufficient public revenues without weakening the national economy’s competitive position. South Korea has one of the lowest tax rates in the OECD, with tax revenues totaling about 25% of GDP as of 2014. The Moon administration is expected to impose higher tax rates on wealthy people and businesses that can afford to pay more, with the aim of paying for expanded job-creation and social-welfare policies. In August 2017, the Ministry of Strategy and Finance announced new tax-reform proposals designed to redistribute wealth and increase the tax-revenue base. Under these plans, the income-tax rate for those whose taxable income exceeds KRW 500 million ($445,700) will be raised from the current 40% to 42%, with people in the new income bracket of KRW 300 million to KRW 500 million to be subject to a tax rate of 40%. The government will additionally add a new 25% corporate-income tax bracket for companies with taxable income exceeding KRW 200 billion and above. If the bill is passed by the National Assembly, companies earning between KRW 20 billion to KRW 200 billion will be subject to the current rate of 22%. Tax reform is hotly debated in South Korea by various interest groups. For example, the country’s high tax-exemption rate of 48.5% is highly controversial.

Citations:
Kim, Boram, August 2, 2017: S.Korea implements tax hike policy to back income-led growth. Yonhap News.
OECD (2016), Tax revenue (indicator). doi: 10.1787/d98b8cf5-en (Accessed on 30 October 2016)
“Government in dilemma over tax reform,” The Korea Times, July 22, 2016. http://www.koreatimes.co.kr/www/news/biz/2016/07/488_210083.html

Budgets

#16

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Despite a substantial increase in public debt under the Park government, South Korea’s public finances remain sound, and debt levels remain low compared to most other OECD countries. National debt as a share of gross domestic product (GDP) was 38% as of the time of writing, up from 32% in 2012, with an additional rise to 39% expected by the end of 2017. However, while debt at the national level is under control, many local governments are struggling due to insufficient revenues.
In terms of the consolidated financial balance, which includes the nonprofit state-run sector and pension funds, the nation’s assets reached KRW 1,962.1 trillion in 2016, with liabilities totaling KRW 1,433.1 trillion. In terms of the fiscal balance excluding social-security funds, a measure more typically used to estimate the soundness of fiscal management, Korea’s performance improved during the review period. The fiscal deficit in this category was reduced to KRW 22.7 trillion from a KRW 38 trillion deficit in 2015. The 2016 deficit was the smallest since 2011’s KRW 13.5 trillion shortfall, according to the Ministry of Strategy and Finance.
However, the new government’s planned expansion of welfare services could increase the fiscal burden. This has stimulated a national discussion about fiscal sustainability.

Citations:
Trading Economics, South Korea Government Budget, https://ko.tradingeconomics.com/south-korea/government-budget
Korea Herald. Korea’s debt-to-GDP ratio continues to rise in 2016. April 4, 2017. http://www.koreaherald.com/view.php?ud=20170404000704

Research and Innovation

#3

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
9
The South Korean government invests heavily in research and development (R&D), particularly in fields which can be directly commercialized. The current government plans to unify previously fragmented policies in the area of R&D. A presidential committee on the so-called Fourth Industrial Revolution will be established, and President Moon has said his administration will seek to actively harness new technologies and spur innovation in order to create new jobs. The government’s science and technology strategy is encompassed in a document entitled “A Nation of the People,” implying a focus on improving quality of life through the use of technology. According to the 2018 budget allocation and adjustment plan, significant investments will be made in core technologies, including artificial intelligence. The budget for research and development (R&D) will be about KRW 920 billion, a 20% increase from 2017. KRW 399.2 billion will be invested in supporting science and technology-based entrepreneurship in fields such as biotechnology and ICT, which are viewed as candidates for revitalizing the private sector. In addition, KRW 321.1 billion will be used to support the development of software professionals and cultivate the science and engineering graduates needed by companies.

The plan is to double R&D funding for SMEs and expand venture funds significantly to reach a total of KRW 5 trillion in 2022, from KRW 3.2 trillion as of 2016. When a business which has already employed two young adults as regular workers hires one additional young regular employee, the government will subsidize the wages for the third employee for three years. While applied research is very well developed in the country, cutting-edge basic research of the kind that might lead to Nobel Prize-worthy discoveries, for example, is still lacking. Moreover, the patent commercialization rate, despite the large number of patents registered by Korean firms, is still low. Overall, South Korea needs to enhance the efficiency of its R & D sector.

Citations:
Policy Roadmap of the Moon Jae-in Administration, July 19 2017

Global Financial System

#31

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
5
While the vulnerability of the Korean financial system has declined considerably since the 2008 crisis, risks still remain, particularly with regard to the country’s weakly regulated non-bank financial institutions (NBFIs). Household debt, largely resulting from real-estate price inflation over the last two decades, is a huge problem. With regard to international engagement, South Korea is implementing international financial-regulation rules such as the Basel III framework. Although it is a member of the G-20, it does not typically take the initiative or actively promote new regulations internationally. Under the Park Geun-hye administration, South Korea became less globally oriented, focusing instead on bilateral relations with the United States and its direct neighbors in East Asia. Thus far there are few indications that the Moon administration will change this focus. Nor, at least as of the time of writing, had a clear strategy emerged indicating how Korea would seek to contribute to the advancement of international institutions such as the G-20. The Moon government was fully occupied with domestic issues in its early months. However, in the course of addressing the Park Geun-hye and Choi Soon-sil scandals, the Korean government will be actively engaged in combating money laundering and monitoring cross-border financial flows.

Citations:
IMF. Republic of Korea : Financial System Stability Assessment. May 20, 2014.
Country Report No. 14/126 https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Republic-of-Korea-Financial-System-Stability-Assessment-41569.
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