 The economy of South Korea

is the 4th largest in Asia and the 11th largest in the world. It is a mixed economy dominated by family-owned
conglomerates called chaebols; however, the dominance of the chaebol is unlikely to last and engenders risk of
slowing down the transformation of Korean economy for the benefit of future generations.[ South Korea is known for
its spectacular rise from one of the poorest countries in the world to a developed, high-income country in just a few
generations. This economic growth is called by some a miracle, and described as the Miracle on the Han
River, which has brought South Korea to the ranks of elite countries in the OECD and the G-20. South Korea still
remains one of the fastest growing developed countries in the world following the Great Recession. It is included in
the group of Next Eleven countries that will dominate the global economy in the middle of the 21st century.
Economic Policy
South Korea has shown higher growth rates than the OECD average, with annual GDP growth of 2.6% in 2015
and 2.8% in 2016. Nonetheless, the country is struggling to adjust to a lower-growth environment. The Moon
administration has taken steps to reduce the country’s dependence on exports. 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. In July 2017, the parliament passed a supplementary budget of KRW 11 trillion; however,
in a break from previous governments’ policies, the Moon administration has shifted the focus of fiscal-stimulus efforts to
creating social-service jobs and improving the welfare system. 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. The Bank of Korea has kept
its benchmark interest rate at a record low of 1.25%, although it is expected that the new government will exercise less
pressure on the central bank than its predecessors to keep interest rates low. The level of household debt remains a major
economic problem, and the government has implemented various comparatively modest measures aimed at cooling down
the real-estate sector. With the country still overly dependent on exports for economic growth, further shadows have been
cast by the North Korea crisis, the economic sanctions imposed by China following the installment of a U.S. missile-
defense system (the Terminal High Altitude Area Defense (THAAD) system) in South Korea, and U.S. President Trump’s
attempt to renegotiate the Korea-U.S. free trade agreement. With reforms taking on a new character, South Korea scores
well (rank 10) with regard to economic policy. Its score on this measure has improved by 0.2 points relative to 2014.
 Growth rate policy
South Korea has shown higher growth rates than the OECD average, with annual GDP growth of 2.6% in 2015
and 2.8% in 2016. Nonetheless, the country is struggling to adjust to a lower-growth environment. The Moon
administration has taken steps to reduce the country’s dependence on exports. 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. In July 2017, the parliament passed a supplementary budget of KRW 11
trillion; however, in a break from previous governments’ policies, the Moon administration has shifted the focus of
fiscal-stimulus efforts to creating social-service jobs and improving the welfare system. 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. The Bank of Korea has kept its benchmark interest rate at a record low of 1.25%, although it is expected that
the new government will exercise less pressure on the central bank than its predecessors to keep interest rates low.
The level of household debt remains a major economic problem, and the government has implemented various
comparatively modest measures aimed at cooling down the real-estate sector. With the country still overly dependent
on exports for economic growth, further shadows have been cast by the North Korea crisis, the economic sanctions
imposed by China following the installment of a U.S. missile-defense system (the Terminal High Altitude Area
Defense (THAAD) system) in South Korea, and U.S. President Trump’s attempt to renegotiate the Korea-U.S. free
trade agreement. Growth rates are high by OECD standards, but lower than in the past. The Moon government is
seeking to reduce the country’s dependence on exports, and hopes to reform the country’s dominant business
conglomerates (chaebol). Recent fiscal-stimulus efforts have focused on the creation of social-service jobs and
improving the welfare system.
 Labor Market Policy

South Korea’s labor-market policy had succeeded in keeping the overall unemployment rate at a
comparatively low 3.8% as of June 2017, although the youth unemployment rate was much higher.
According to the OECD, South Korea performs relatively poorly with regard to several aspects of job
quality and labor-market inclusiveness. Moreover, the employment rate among women is comparatively
low. Nearly 40% of employees at South Korean conglomerates are irregular workers, a fact that highlights
the country’s issues with low job security and low job quality. General unemployment rates remain very
low and stable, but the youth unemployment rate is considerably higher. Precarious employment remains a
concern, and the new administration has put a top priority on reducing the share of irregular jobs.
 The newly elected Moon Jae-in administration has placed a top priority on the creation
of high-quality jobs and the reduction in the share of irregular jobs. Moon established a
job-creation commission tasked with decreasing the number of non-regular workers,
while promising to reduce working hours, increase the minimum wage to KRW 10,000
by 2020, and expand youth-employment quotas to include private companies. His
administration has also promised to create new public-sector jobs, and took a first
symbolic step by transferring irregular employees in the public sector into permanent
employment. The Ministry of Employment and Labor budget has increased by about
30% to KRW 23.7 trillion, and KRW 19.2 trillion has been allocated for job creation.
The funds dedicated to youth employment in particular have been significantly
expanded. In addition, the government has created specific labor policies for SMEs and
the public sector. For example, for every three young people hired by SMEs on a
regularized basis, the government now offers a “supplementary employment subsidy”
supporting the wage of one of the three. This so-called 2+1 employment policy is
designed to spur the creation of high-quality jobs for the young by reducing the wage
burden experienced by SMEs. The Moon government also has a plan to create more jobs
in the public sector through the expenditure of public funds.
 Tax Policy
The South Korean tax system is 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 25% of GDP as of 2014. The Moon administration is expected to impose higher tax rates on
wealthy people and businesses that can afford to pay more, with the aim of paying for expanded job-creation and
social-welfare policies. In August 2017, the Ministry of Strategy and Finance announced new tax-reform proposals
designed to redistribute wealth and increase the tax-revenue base. Under these plans, the income-tax rate for those
whose taxable income exceeds KRW 500 million ($445,700) will be raised from the current 40% to 42%, with
people in the new income bracket of KRW 300 million to KRW 500 million to be subject to a tax rate of 40%. The
government will additionally add a new 25% corporate-income tax bracket for companies with taxable income
exceeding KRW 200 billion and above. If the bill is passed by the National Assembly, companies earning between
KRW 20 billion to KRW 200 billion will be subject to the current rate of 22%. Tax reform is hotly debated in South
Korea by various interest groups. For example, the country’s high tax-exemption rate of 48.5% is highly
controversial. Tax rates are low. The Moon administration is seeking to raise rates for high-income individuals and
companies. Public debt is moderate but rising. R&D expenditure remain substantial, with the Moon government
seeking to unify previously fragmented policies in the area.
 Budgetary Policy
Despite a substantial increase in public debt under the Park government, South Korea’s public finances
remain sound, and debt levels remain low compared to most other OECD countries. National debt as a share of gross
domestic product (GDP) was 38% as of the time of writing, up from 32% in 2012, with an additional rise to 39%
expected by the end of 2017. However, while debt at the national level is under control, many local governments are
struggling due to insufficien trevenues. In terms of the consolidated financial balance, which includes the nonprofit
state-run sector and pension funds, the nation’s assets reached KRW 1,962.1 trillion in 2016, with liabilities totaling
KRW 1,433.1 trillion. In terms of the fiscal balance excluding social-security funds, a measure more typically used to
estimate the soundness of fiscal management, Korea’s performance improved during the review period. The fiscal
deficit in this category was reduced to KRW 22.7 trillion from a KRW 38 trillion deficit in 2015. The 2016 deficit was
the smallest since 2011’s KRW 13.5 trillion shortfall, according to the Ministry of Strategy and Finance. However, the
new government’s planned expansion of welfare services could increase the fiscal burden. This has stimulated a
national discussion about fiscal sustainability. The plan is to double R&D funding for SMEs and expand venture funds
significantly to reach a total of KRW 5 trillion in 2022, from KRW 3.2 trillion as of 2016. When a business which has
already employed two young adults as regular workers hires one additional young regular employee, the government
will subsidize the wages for the third employee for three years. While applied research is very well developed in the
country, cutting-edge basic research of the kind that might lead to Nobel Prize-worthy discoveries, for example, is still
lacking. Moreover, the patent commercialization rate, despite the large number of patents registered by Korean firms,
is still low. Overall, South Korea needs to enhance the efficiency of its R & D sector.
 Research and Innovation Policy
The South Korean government invests heavily in research and development (R&D), particularly in fields
which can be directly commercialized. The current government plans to unify previously fragmented policies in
the area of R&D. A presidential committee on the so-called Fourth Industrial Revolution will be established,
and President Moon has said his administration will seek to actively harness new technologies and spur
innovation in order to create new jobs. The government’s science and technology strategy is encompassed in a
document entitled “A Nation of the People,” implying a focus on improving quality of life through the use of
technology. According to the 2018 budget allocation and adjustment plan, significant investments will be made
in core technologies, including artificial intelligence. The budget for research and development (R&D) will be
about KRW 920 billion, a 20% increase from 2017. KRW 399.2 billion will be invested in supporting science
and technology-based entrepreneurship in fields such as biotechnology and ICT, which are viewed as
candidates for revitalizing the private sector. In addition, KRW 321.1 billion will be used to support the
development of software professionals and cultivate the science and engineering graduates needed by
companies.
The plan is to double R&D funding for SMEs and expand venture funds significantly to reach a total of KRW 5
trillion in 2022, from KRW 3.2 trillion as of 2016. When a business which has already employed two young adults
as regular workers hires one additional young regular employee, the government will subsidize the wages for the
third employee for three years. While applied research is very well developed in the country, cutting-edge basic
research of the kind that might lead to Nobel Prize-worthy discoveries, for example, is still lacking. Moreover, the
patent commercialization rate, despite the large number of patents registered by Korean firms, is still low. Overall,
South Korea needs to enhance the efficiency of its R & D sector.
 Stabilizing Global Financial Markets
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 (NBFIs).
Household debt, largely resulting from real-estate price inflation over the last two decades, is a huge problem. 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 Park Geun-hye administration, South Korea became less globally oriented,
focusing instead on bilateral relations with the United States and its direct neighbors in East Asia. Thus far there are few
indications that the Moon administration will change this focus. Nor, at least as of the time of writing, had a clear
strategy emerged indicating how Korea would seek to contribute to the advancement of international institutions such as
the G-20. The Moon government was fully occupied with domestic issues in its early months. However, in the course of
addressing the Park Geun-hye and Choi Soon-sil scandals, the Korean government will be actively engaged in
combating money laundering and monitoring cross-border financial flows.