South Korea

   

Economic Policies

#15
Key Findings
With the new administration focusing on labor-market transformation, South Korea falls into the upper-middle ranks (rank 15) with regard to economic policy. Its score on this measure is unchanged relative to 2014.

Growth rates have been moderate but stable in recent years. Current account surpluses have been high. The central bank has been cautious in raising interest rates.

General unemployment rates remain very low and stable, but the youth unemployment rate is considerably higher. The Moon government has placed a high priority on reducing the share of irregular jobs, starting by transferring irregular public-sector employees into permanent employment. The minimum wage has been increased, and a new rule caps allowable weekly working hours.

Tax rates are low. The income-tax rate for those with high incomes has increased, but the overall tax base is narrow. Public debt is moderate but rising despite health primary budget surpluses. R&D expenditure remains substantial, with the Moon government making significant investments in key technologies.

Economy

#27

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 2.8% in 2016 and 3.1% in 2017. Korea also posted record current-account surpluses in 2018, signaling a high degree of international competitiveness. 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. 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 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. Despite increasing interest rates in the United States, along with healthy growth and inflation rates, the Bank of Korea has been very cautious in increasing interest rates by just 0.25% to 1.5% in November 2017. With the country still overly dependent on exports for economic growth, the global protectionist trend and the ongoing crisis conditions in many emerging economies are casting a cloud over the Korean economy. On the other hand, conflicts with North Korea and China have subsided.

Citations:
OECD data, https://data.oecd.org/korea.htm
Gardner, E. (2018, September 06). Korea GDP Q2 2018. Retrieved from https://www.focus-economics.com/countries/korea/news/gdp/comprehensive-data-shows-that-the-economy-maintained-its-growth-momentum-in
Yonhap News Agency. (2018, June 17). S. Korea’s household debt growth 3rd-fastest in the world last year: BOK. Retrieved from http://english.yonhapnews.co.kr/news/2018/06/17/0200000000AEN20180617002800320.html
Lee, J. (2018, April). Exports Drive South Korea’s Return to GDP Growth in 1Q. Retrieved from https://www.bloomberg.com/news/articles/2018-04-25/south-korea-economy-rebounds-in-1st-quarter-after-contraction
Sang-young Rhyu, “Moon Jae-in and the Politics of Reform in South Korea,” Global Asia, Vol.13, No.3 (September 2018).

Labor Markets

#19

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 unemployment rate rose to 4.2% in August 2018, up from 3.7% in 2017. While this is still low in international comparison, the prevailing expectation was that the Moon administration would bring down unemployment. Rates are also substantially higher within specific segments of society, such as among youth (10.5%). According to the OECD, South Korea performs relatively poorly with regard to several aspects of job quality and labor-market inclusiveness. The employment rate of 66.6% still remains below the OECD average, and the employment rate among women in particular is comparatively low. Nearly 40% of employees at South Korean conglomerates are irregular workers, a fact that highlights the country’s issues with insufficient job security and low job quality.
The 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. In a first step, the minimum wage was raised by 16.4% in 2018 to KRW 7530. Businesses and the media immediately blamed the steep minimum-wage increase for the weak pace of job creation, although it is still too early to say whether this relationship is indeed significant. The Moon administration substantially reduced the maximum allowed weekly working hours from 68 to 52 hours, a change that is expected to increase productivity and employee well-being, although implementation of the new rule has been slow.
The Moon 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 2018, the National Assembly approved a supplementary budget of KRW 3.9 trillion that is focused on the creation of jobs for young adults. 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, https://www.oecd.org/korea/Employment-Outlook-Korea-EN.pdf
The Korea Herald. (2018, June 15). S. Korea’s jobless rate rises in May, job creation lowest in over 8 yrs. Retrieved from http://www.koreaherald.com/view.php?ud=20180615000129
Kim, C. (2018, August 28). South Korea proposes record budget lifeline for jobs, welfare in 2019. Retrieved from https://www.reuters.com/article/us-southkorea-economy-budget/south-korea-proposes-record-budget-lifeline-for-jobs-welfare-in-2019-idUSKCN1LD02Y
Lee, J., Cho, M., & Kim, H. (2018, September 12). Vanishing Jobs Growth Spells Deep Trouble for South Korea’s President. Retrieved from https://www.bloomberg.com/news/articles/2018-09-12/vanishing-jobs-growth-spells-deep-trouble-for-korean-president

Taxes

#16

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 26.3% of GDP in 2016. In 2018, South Korea’s tax income recorded an increase of 5.5% as compared to 2017, giving the government greater scope for public investment. The Moon administration also increased the tax rate on those with taxable income above KRW 500 million ($445,700) from 40% to 42%. The government will additionally add a new 25% corporate-income tax bracket for companies with taxable income exceeding KRW 200 billion and above. One weakness of the Korean tax system is that the country’s tax base is comparably narrow, with nearly half the population paying no income taxes due to the very high exemption rate.
In December 2017, the European Union added South Korea to its black list of “non-cooperative jurisdictions for tax purposes,” mostly because of “harmful preferential tax regimes” within the country’s special economic zones. After protest from the Korean government, the EU subsequently shifted Korea to its “grey list,” which encompasses countries that have made promises to improve cooperation.

Citations:
Kim, Boram, August 2, 2017: S.Korea implements tax hike policy to back income-led growth. Yonhap News.
The Korea Herald. (2018, August 05). S. Korea’s tax burden to exceed 20% in 2018. Retrieved from http://www.koreaherald.com/view.php?ud=20180805000018
OECD data, https://data.oecd.org/tax/tax-revenue.htm

Budgets

#26

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
6
South Korea’s public finances remain sound, and public debt levels remain low in comparison to those of most other OECD countries. National debt as a share of gross domestic product (GDP) was 40.4% in 2018, up from 39.5% in 2017. During the period under review, Korea ran a healthy primary surplus of 1.3% of GDP, giving the government the leeway to implement its plans to increase public investment and social spending. Indeed, in 2018 the government budget saw its biggest increase in 10 years amid a cooling of the global economy. However, while debt at the national level is sustainable, many local governments and many public enterprises are struggling due to insufficient revenues.

Citations:
Kim, H. (2018, August 28). South Korea Plans Biggest Budget Increase in 10 Years. Retrieved from https://www.bloomberg.com/news/articles/2018-08-28/south-korea-plans-biggest-budget-increase-in-10-years
Lim, C. (2018, August 28). S. Korea to increase government spending on welfare and defense in 2019. Retrieved from http://www.ajudaily.com/view/20180828161521953
Yonhap News Agency. (2018, July 27). (LEAD) Finance minister calls for expansionary fiscal policy as growth slows. Retrieved from http://english.yonhapnews.co.kr/news/2018/07/27/0200000000AEN20180727005051320.html

Research, Innovation and Infrastructure

#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. 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. Korea has an excellent research infrastructure, with many world-class universities and research institutes that produce internationally competitive research and patents. What impedes innovation is mostly the Korean market’s oligopolistic structure, which makes it difficult for entrepreneurs and SMEs to succeed. The country has struggled to translate massive investments in research into productivity increases. Bureaucratic regulations remain intact in many areas.

Citations:
Policy Roadmap of the Moon Jae-in Administration, July 19 2017
Se-jung Oh, “The Crisis in South Korea’s Manufacturing Sector: Can its Fall be Stopped,” EAF Policy Debates, No.102 (August 7, 2018).

Global Financial System

#33

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 System
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, although the rate of non-performing loans remains low.
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 Moon administration, South Korea has focused its foreign policies on North Korea, along with the bilateral relationships with the United States and China that are most important in this area. The administration has correspondingly put less emphasis on multilateral coordination mechanisms such as the G-20.

Citations:
Lee, Jiyeun. 2018. “S.Korea’s Household Debt Hits Record $1,3 Trillion in 2017.” Bloomberg, February 22. Retrieved September 28, 2018 (https://www.bloomberg.com/news/articles/2018-02-22/s-korea-s-household-debt-hits-record-1-3-trillion-in-2017)
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