Korea: Improving competition and closing gaps in social protection to support recovery, says OECD
Korea’s economic recovery from COVID-19 is well entrenched, driven by growth in consumption, employment and exports and with less direct exposure than some other economies to the risks of China’s war of aggression. Russia in Ukraine, according to a new OECD report.
The latest OECD Economic Survey of Korea indicates that after its skillful handling of the pandemic, Korea should now turn to long-standing challenges and focus on structural reforms to deal with an aging population, increasing youth employment, filling gaps in social protection and fostering business dynamism.
With rapid population aging underscoring the need for fiscal consolidation, plans to adopt a new, tighter fiscal rule are welcome, according to the Survey. Korea should also start phasing out subsidies that keep unproductive small and medium-sized businesses alive. This, together with streamlining regulations, could help boost competition and reduce the productivity gaps between large and small firms that lead to differences in living standards.
Korea experienced one of the smallest GDP contractions among OECD countries in 2020, followed by a strong export-led rebound in 2021 and early 2022. pre-crisis and strong demand for Korean goods means that GDP growth is expected to continue, albeit at a slower pace given pressures on global growth. The Survey forecasts GDP growth of 2.8% in 2022 and 2.3% in 2023, with inflation falling back to below 4% in 2023 after peaking at 6.3% in July 2022, the war in Ukraine having increased inflationary pressures globally.
Korea has limited trade and financial ties with Ukraine and Russia and has significant amounts of oil and gas in storage. However, a reliance on both countries for raw materials such as noble gases used to produce semiconductors has highlighted the need for resilience and diversification in the supply of key inputs for the industry. . Greening power generation can build resilience in the energy supply and is necessary to meet ambitious emissions targets.
Closing gaps in job security and social protection should also be a priority in a country where only half of the working population currently has access to unemployment benefits. This goal can be achieved 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, increase the incomes of older workers and support long-term growth.