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dEcEmbEr 2008

Policy Brief

OrganisatiOn fOr EcOnOmic cO-OpEratiOn and dEvElOpmEnt

Economic Survey of Korea, 2008
What is the economic outlook for Korea? How should policy makers respond to the crisis? How should the tax system be reformed? How should property taxes be improved? What reforms would boost productivity in services? Can labour market reform boost both growth and equity? Howcan education become more effective? For further information For further reading Where to contact us? Summary
Korea has been hard-hit by the commodity price shock and the global financial crisis, which have slowed economic activity and pushed up inflation. The terms-of-trade loss reduced national income, thus damping domestic demand, while the slowdown in world trade has moderated Korea’s exportgrowth. Moreover, the sharp exchange rate depreciation and the intensification of the global financial market crisis have further dimmed the outlook. Although the recent fiscal stimulus is likely to help support growth, an economic rebound depends on a recovery in the world economy. In addition to these short-term difficulties, Korea faces a number of challenges to sustaining economic growth overthe medium term, notably tax reform, enhancing service sector productivity growth and reforming the labour market and education system. Macroeconomic policy has a difficult role to play. In the near term, monetary policy should focus on supporting activity and financial-market stability. Foreign exchange market intervention to support the won is likely to be costly and ineffective in the face ofglobal financial turmoil and should therefore be limited to smoothing operations. As conditions stabilise, monetary policy will need to give more weight to the risk that inflation may become entrenched well above the 2.5% to 3.5% target zone. While tax cuts and additional spending are helping cushion the downturn, fiscal policy in the medium term should focus on maintaining a strong governmentfinancial position in light of future spending pressures. Given planned tax cuts, this will call for reining in public outlays, which have grown rapidly in recent years. A comprehensive tax reform is essential. Government spending is one of the lowest in the OECD area, reflecting Korea’s relatively young population. However, the population is projected to age faster than in any other OECD country,putting considerable upward pressure on public expenditures in the long term. Tax reform is thus needed to meet the demand for higher revenue while, at the same time, promoting economic growth, addressing

This Policy Brief presents the assessment and recommendations of the 2008 OECD Economic Survey of Korea. The Economic and Development Review Committee, which is made up of the 30 member countriesand the European Commission, reviewed this Survey. The starting point for the Survey is a draft prepared by the Economics Department which is then modified following the Committee’s discussions, and issued under the responsibility of the Committee.

© OECD 2008

Policy Brief

EConoMiC SurvEy oF KorEA, 2008

rising income inequality and relative poverty and improving the local tax systemto provide more autonomy for local authorities. To achieve these goals, reform should rely primarily on higher consumption taxes and base broadening of income taxes for additional revenue, an in-work tax credit to meet distributional objectives and more use of local property-holding taxes to finance local authorities. Keeping direct tax rates low will promote growth. Enhancing service sectorproductivity is essential to sustain growth. Weak productivity gains in services – 60% of the economy – have been a major drag on growth. Boosting productivity requires strengthening competition by accelerating regulatory reform, focusing on removing entry barriers, and upgrading competition policy. Greater openness to international competition, by improving the climate for foreign direct investment...
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