Korea: improve competition and address social protection gaps to underpin recovery, says OECD
Korea’s economic recovery from COVID-19 is well anchored, driven by consumption, employment and export growth and with less direct exposure than some other economies to risks from Russia’s war of aggression in Ukraine, according to a new OECD report.
The latest OECD Economic Survey of Korea says that following its skilful management of the pandemic, Korea should now turn to long-standing challenges and focus on structural reforms to address population ageing, raising youth employment, closing gaps in social protection and fostering business dynamism.
With a rapidly ageing population underscoring the need for fiscal consolidation, plans to adopt a new, more stringent, fiscal rule are welcome, the Survey says. Korea should also start to phase out support that keeps unproductive small and medium-sized firms alive. That, along with streamlining regulations, could help to boost competition and reduce productivity gaps between large and small companies that drive discrepancies in living standards.
Korea saw one of the smallest GDP contractions among OECD countries in 2020, followed by a strong export-led rebound in 2021 and early 2022. Employment has surpassed pre-crisis levels and high demand for Korean goods means GDP growth is set to continue, albeit at a slower pace given the pressures on global growth. The Survey sees GDP growth at 2.8% in 2022 and 2.3% in 2023, with inflation subsiding back to below 4% in 2023 after peaking at 6.3% in July 2022 as the war in Ukraine raised inflationary pressures globally.
Korea has limited trade and financial linkages with Ukraine and Russia and has sizable quantities of oil and gas in storage. However, a dependence on the two countries for raw materials such as rare gases used to produce semiconductors has highlighted the need for resilience and diversification in the sourcing of key inputs for industry. Greening electricity production can boost resilience of energy supply and is needed to reach ambitious emission targets.
Closing gaps in job security and social protection should also be a priority in a country where only half of the labour force currently has access to unemployment benefits. This can be attained by relaxing employment protection for regular workers and expanding employment insurance and social protection for non-regular workers. Korea’s tax and benefit system could also be improved to boost work incentives, especially for low-income workers. Addressing these challenges would facilitate youth employment, reduce gender gaps, boost earnings for older workers and underpin long-term growth.