Although Korea has seen its economic growth rates come down from the stratospheric heights of previous decades, it remains, by any advanced-country yardstick, a successful economic performer. Korea’s real GDP rose by 5 percent in 2006, with inflation well-contained at about 2 percent for the year. Only a mild slowdown is expected this year, in line with a decline in growth in its key trading partners, the United States, the European Union, and Japan. Moreover, although unanticipated shocks—such as a more rapid than anticipated cooling of the U.S. economy—could have important effects on the Korean economy, fundamental structural changes since the Asian crisis a decade ago leave Korea well-placed to weather such developments successfully.

Beyond the next few years, however, Korea’s challenges appear to be considerably more daunting. A rapidly aging population will require large public outlays for pensions and health care. In addition, the expected decline in the labor force, combined with the ongoing shift of workers from manufacturing to services, where productivity is much lower, will make it difficult for Korea to maintain growth rates in the current range. And growing inequality is challenging policymakers to find ways to ensure that economic growth benefits all. Although these challenges will all require significant changes, Korea’s economic history clearly gives confidence that they will all be met successfully.