South Korea

   

Economic Policies

#14
Key Findings
With the government focusing on job creation and welfare expansion, South Korea falls into the upper-middle ranks (rank 14) with regard to economic policy. Its score on this measure has declined by 0.1 point relative to 2014.

While growth rates have been moderate and stable in recent years, the rate declined to 2.7% in 2018. Current account surpluses have been high. The central bank supported the fiscal expansion with interest-rate cuts. The minimum wage has increased by nearly 11%, but the government has promised to limit future increases.

General unemployment rates remain very low and stable at just 3.1%, but the youth unemployment rate is considerably higher. The Moon government has sought to reduce share of non-regular jobs; however, the number of non-regular workers in fact increased in 2019, hitting a record of 36% of all salaried workers.

Tax rates are low. The overall tax base is narrow, and redistributive effects are weak. The government ran a primary surplus of almost 2% of GDP during the review period. Public debt is moderate and sustainable at the national level, but an increasing number of local governments and public enterprises are struggling due to insufficient revenues. R&D expenditures are very substantial.

Economy

#29

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’s economic growth has slowed since 2018 due to flagging exports and investments. Annual GDP growth was 2.7% in 2018, down 0.5 percentage points as compared to 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 minimum wage was increased by 10.9% in 2019. Following protest by business groups, President Moon promised to limit future minimum-wages. To stimulate the economy, the government has increased public investment, with the central bank supporting the fiscal expansion with interest rate cuts. 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. Another promise to engage in deregulation has not yet had any tangible results. High levels of household debt remain a major economic problem, and the government has implemented various comparatively modest measures aimed at cooling down the real-estate sector. Unresolved trade conflicts with Japan and the United States, and continued trade conflicts with China sparked by the U.S. deployment of anti-ballistic missiles within South Korea represented the largest external challenges to the country’s economy at the end of 2019.

Citations:
OECD data. https://www.oecd-ilibrary.org/economics/country-statistical-profile-korea-2019-3_g2g9e588-en
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).
Hankyoreh. 2019. “S. Korea has 3rd highest social conflict index among OECD countries.” Retrieved from http://www.hani.co.kr/arti/english_edition/e_national/912156.html

Labor Markets

#17

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
In August 2019, South Korea posted its lowest unemployment rate since November 2013, with the figure falling to just 3.1 percent from 4.1 percent in August 2018. Total jobs increased by 146,000 to 27.2 million over this period. However, the August 2019 employment rate of 61.4% remains below the OECD average, and the employment rate for women in particular is comparatively low. Youth unemployment rates are considerably higher than those among the population more generally. The Moon administration has placed a top priority on the creation of high-quality jobs and a reduction in the share of non-regular jobs. Moon established a job-creation commission tasked with decreasing the number of non-regular workers, while promising to reduce working hours and increase the minimum wage to KRW 10,000 by 2020. Despite the government’s efforts, however, the number of non-regular workers has increased, hitting a record high of 7.5 million, or 36% of all salaried workers in 2019. This paradoxical result, unexpectedly reflecting an increase in the share of non-regular workers in the economy, is partly attributed to government policies distributing a large share of resources to vulnerable classes in the short term. Although this increase is partly due to a change in measurement strategies, it seems clear that President Moon has underperformed with regard to one of his signature policies. The Moon administration also 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.

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
Trading Economics. 2019. South Korea Employment Rate. Retrieved from https://tradingeconomics.com/south-korea/employment-rate.
Trading Economics. 2019. South Korea Unemployment Rate. Retrieved from https://tradingeconomics.com/south-korea/unemployment-rate.

Taxes

#21

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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
Korea has a competitive tax system with relatively low tax rates by international standards. The country’s tax system is also 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 26.9% of GDP in 2017. In 2018, South Korea’s tax revenues increased by 9.3% compared to 2017, giving the government greater scope for public investment. One weakness of the Korean tax system is that the country’s tax base is comparably narrow, with nearly half the population (48.5%) paying no income taxes due to the very high exemption rate. In addition, taxes do not contribute to the amelioration of social inequalities, as redistributive effects are among the lowest in the OECD. Political calculations have prevented any recent government from trying to lower the tax exemption rate. Similarly, Korean taxes are not effective in promoting environmental sustainability, as electricity taxes are among the lowest in the OECD. By contrast, fossil-fuel and nuclear energy sources are heavily subsidized.
In March 2019, the European Union removed South Korea from its gray list of “non-cooperative jurisdictions for tax purposes.”

Citations:
Korea Times, April 21, 2019, Korea’s tax burden soars to record-high in 2018, https://www.koreatimes.co.kr/www/biz/2019/04/488_267520.html
OECD data, https://data.oecd.org/tax/tax-revenue.htm

Budgets

#25

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 40.7% in 2018. During the period under review, Korea ran a healthy primary surplus of almost 2% of GDP, giving the government the leeway to implement its plans to increase public investment and social spending. In 2020, the Moon government plans to increase spending to a total of KRW 513.5 trillion ($438.5 billion), a 9.3% hike compared to 2019. While debt at the national level is generally sustainable, an increasing number of local governments and 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
Trading Economics. 2019. “South Korea Government Debt to GDP.” Retrieved from https://tradingeconomics.com/south-korea/government-debt-to-gdp.
Yonhap. 2019. “Moon vows strong education, prosecution reform for fairness in aftermath of Cho Kuk case.” The Korea Herald, October 22. Retrieved from http://www.koreaherald.com/view.php?ud=20191022000715

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. Korea’s public R&D spending-to-GDP ratio is the highest in the world, while its private R&D outlay is the second highest. The country’s internet broadband and mobile-phone infrastructures are among the world’s best, and it was one of the first worldwide to establish a comprehensive 5G infrastructure. In July 2019, Korea already had almost 2 million subscribers to its 5G mobile network. The country 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. Moon’s government has prioritized labor-friendly policies and income-led growth, while paying less attention to innovation-led growth. Moreover, initiatives within the sharing economy have been repeatedly frustrated due to political resistance and burdensome regulation.

Citations:
Yoon, Young-sil. 2018. “S. Korea’s R&D Spending to GDP ratio highest in the World.” Business Korea, November 28. Retrieved from http://www.businesskorea.co.kr/news/articleView.html?idxno=26955.
Korea Times, September 3, 2019, 5G subscribers in Korea near 2 million in July: data, http://www.koreatimes.co.kr/www/tech/2019/09/133_275002.html

Global Financial System

#29

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. 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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