OECD Economic Survey on Korea Predicts an Improvement in Growth, Calls for More Reform
June 23, 2016
June 14, 2016 | Washington, DC
On June 14, 2016, the Korea Economic Institute of America hosted Randall Jones of the Organization for Economic Co-operation and Development (OECD) for a discussion of the 2016 OECD Economic Survey of Korea. Jones, who is head of the OECD’s Japan/Korea Desk, was joined by Koshy Mathai, Deputy Division Chief of the Asia and Pacific Department at the International Monetary Fund (IMF), who served as a discussant and offered further insights on Korea’s economic trajectory in the coming years.
With this year marking the 20th anniversary of Korea joining the OECD, there is a lot to be said about Korea’s rapid growth over the last few decades, Jones said.
"Korea's a much different country than many of our other countries," he said, referring to the OECD. "Korea brought a new breath of dynamism and rapid growth into the OECD."
But recently, sluggish growth has caused significant concern for Seoul. Annual economic growth reached 2.6 percent in 2015, putting Korea at 12th among the 34 members of the OECD.
"Korea's had a gradual deceleration of economic growth,” Jones said. “This is partly a sign of success, because as Korea has risen toward the front-running countries, it has gradually seen a slowdown in growth. It also reflects the deceleration in global trade during the past four to five years. But it also reflects some of the problems that Korea faces."
Among those are an aging population, unemployment and underemployment for youth, the disparity between regular and non-regular workers, and a lag in private consumption, according to Jones.
In its 2016 survey, the OECD projects 3.0 percent growth in Korean GDP in 2017, up from 2.7 in 2016. One reason for this is that the household savings rate, which had been shooting up over the past few years, should now begin to level off. This, Jones said, will boost domestic consumption.
However, issues that could negatively impact this projection would be a sluggish rebound in global trade, particularly if China continues to experience a slowdown. In addition, if Korean household debt continues to climb, that could keep private consumption down.
IMF expert Mathai said that Korea does have some options to cushion the blow of slow growth and get the economy moving again.
"The main idea that we were trying to push in our meetings with the Koreans was more on fiscal policy," he said. "We would say that Korea has a great deal of fiscal space – a lot more space to operate than many other countries. And while it faces lots of structural challenges, what it has that many other OECD countries don't have is a great deal of fiscal space in order to deal with these challenges."
His recommendation is to use fiscal stimulus in the short term, and then combine fiscal policy with structural reforms to spur long-term growth.
The most important thing in the long run, he said, is structural reforms, including labor market reforms, enhancing productivity in the services sector, and growing small and medium enterprises (SMEs). In addition, corporate restructuring is crucial.
"We've done some research that although there are short term dislocations, there can be quite significant positive effects both for employment and investment over the long run if this kind of restructuring can happen,” Mathai said. “For us, getting corporate restructuring underway is a major priority in order to secure the long-term growth of the economy."
Some positives in the OECD report include the fact that the Korean population, particularly the young generation, are highly educated and highly skilled. Korea also has high participation in the global value chain, and invests a significant amount in innovation as well as research and development. Finally, the Korean government runs a budget surplus and government debt is relatively low. If utilized well and coupled with much-needed reforms, Jones said, these factors should help the Korean economy continue to grow.
To read the report, please click here.
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