Economic Policies
#12Key Findings
With the pandemic having had a relatively light economic impact, South Korea falls into the upper-middle ranks (rank 12) with regard to economic policy. Its score on this measure is unchanged relative to its 2014 level.
South Korea weathered the COVID-19 crisis well, with an economic downturn of just 0.9% of GDP in 2020. Growth returned to 4% in 2021. Healthy public finances allowed for a large economic stimulus of about 11% of GDP. Much of the response was focused on enhancing the social safety net or accelerating the digital and green economic transitions.
Unemployment rates remained stable and modest, rising from 3.8% in 2019 to about 4% in 2020, and falling again to 3.6% in 2021. However, the employment rate is low, especially among women, and the incidence of non-regular work, which is paid less and receives fewer benefits than regular jobs, is increasing.
Tax revenues are considerably lower as a share of GDP than the OECD average. The government deficit was just 2.3% of GDP in 2020 despite the large fiscal stimulus. Debt has increased to 51% of GDP. New fiscal rules taking effect in 2025 will limit debt to 60% of GDP and deficits to 3% of GDP. The government invests heavily in research and development.
South Korea weathered the COVID-19 crisis well, with an economic downturn of just 0.9% of GDP in 2020. Growth returned to 4% in 2021. Healthy public finances allowed for a large economic stimulus of about 11% of GDP. Much of the response was focused on enhancing the social safety net or accelerating the digital and green economic transitions.
Unemployment rates remained stable and modest, rising from 3.8% in 2019 to about 4% in 2020, and falling again to 3.6% in 2021. However, the employment rate is low, especially among women, and the incidence of non-regular work, which is paid less and receives fewer benefits than regular jobs, is increasing.
Tax revenues are considerably lower as a share of GDP than the OECD average. The government deficit was just 2.3% of GDP in 2020 despite the large fiscal stimulus. Debt has increased to 51% of GDP. New fiscal rules taking effect in 2025 will limit debt to 60% of GDP and deficits to 3% of GDP. The government invests heavily in research and development.
Graph View
Graph View
How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
10
9
9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
8
7
6
7
6
Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
5
4
3
4
3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
South Korea has weathered the COVID-19 crisis well, with an economic downturn of just 0.9% in 2020 (among the smallest declines in the OECD); and economic growth of 4% in 2021 (which outpaces its average growth rate of 2.9% over the period 2013-2019). Strong demand for Korean digital technology exports (particularly semiconductors and IT products) in the pandemic era and robust, counter-cyclical government spending have helped stabilize the Korean economy.
From the outset, the Moon government’s cornerstone economic initiative was the “people-centered economy,” which focused on job creation, income-driven growth and welfare expansion. Aligned with this priority, one of the three pillars of Korea’s New Deal-based response to COVID-19 was to enhance the social safety net (the Human New Deal). The other two pillars – the Digital New Deal and Green New Deal – focus on accelerating Korea’s economic transformation in line with the Fourth Industrial Revolution.
The government has also promised to reform the country’s business environment by reforming the dominant business conglomerates (chaebol). While progress has been slow and further delayed given the country’s reliance on chaebol-produced exports to lead economic recovery (from the pandemic-induced downturn), Korea has introduced regulatory sandboxes (including 21 regulation-free zones) since 2019 to facilitate market entry and access for new and small firms.
High levels of household debt remain a major economic problem. Korea’s household debt-to-GDP ratio reached a high of 104% in 2021 – the highest among 37 major economies. A significant portion of Korea’s household debt has gone into the real estate sector, which remains overheated despite the Moon administration’s attempt to regulate the market to make housing more affordable. The Korean stock market remains shallow (few high-quality stocks), volatile and speculative. As the U.S. and China remain mired in trade rivalry, Korea is attempting to pursue strategic autonomy by expanding and balancing its economic networks, including via its New Northern and New Southern Policies.
Citations:
Andre, Christophe. “The Korean Economy: Resilient but Facing Challenges.” ECOSCOPE Blog, August 11, 2020. https://oecdecoscope.blog/2020/08/11/the-korean-economy-resilient-but-facing-challenges/.
Beom, Jinwoan. “2021 In Review: South Korea’s Economy and COVID-19.” Korea Economic Institute of America, Peninsula Blog, December 23, 2021. https://keia.org/the-peninsula/2021-in-review-south-koreas-economy-and-covid-19/.
“Global Debt Monitor.” The Institute of International Finance. Accessed January 18, 2022. https://www.iif.com/Research/Capital-Flows-and-Debt/Global-Debt-Monitor.
Kim, Won-chul, and Mi-na Kim. “[News Analysis] Universal Basic Income Taking Center Stage of S. Korea’s Political Discourse.” Hankyoreh, June 9, 2020. http://english.hani.co.kr/arti/english_edition/e_national/948602.html.
OECD. “Economic Outlook No 110 – December 2021: Korea.” Accessed January 18, 2022. https://stats.oecd.org/index.aspx?queryid=72631.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
OECD. “OECD Economic Policy Reforms 2021: Going for Growth Shaping A Vibrant Recovery,” April 14, 2021. https://www.oecd.org/economy/going-for-growth/.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
Rafiq, Sohrab, and Andrew Swiston. “Mountains after Mountains: Korea Is Containing Covid-19 and Looking Ahead.” IMF, April 29, 2021. https://www.imf.org/en/News/Articles/2021/04/29/na042921-mountains-after-mountains-korea-is-containing-covid-19-and-looking-ahead.
Ryu, Sang-young. “Moon Jae-in and the Politics of Reform in South Korea.” Global Asia 13, no. 3, September 2018. https://www.globalasia.org/v13no3/cover/moon-jae-in-and-the-politics-of-reform-in-south-korea_sang-young-rhyu.
“S. Korea’s Household Debt-GDP Ratio Highest Worldwide: Report.” Yonhap News Agency, November 14, 2021. https://en.yna.co.kr/view/AEN20211115000700320.
From the outset, the Moon government’s cornerstone economic initiative was the “people-centered economy,” which focused on job creation, income-driven growth and welfare expansion. Aligned with this priority, one of the three pillars of Korea’s New Deal-based response to COVID-19 was to enhance the social safety net (the Human New Deal). The other two pillars – the Digital New Deal and Green New Deal – focus on accelerating Korea’s economic transformation in line with the Fourth Industrial Revolution.
The government has also promised to reform the country’s business environment by reforming the dominant business conglomerates (chaebol). While progress has been slow and further delayed given the country’s reliance on chaebol-produced exports to lead economic recovery (from the pandemic-induced downturn), Korea has introduced regulatory sandboxes (including 21 regulation-free zones) since 2019 to facilitate market entry and access for new and small firms.
High levels of household debt remain a major economic problem. Korea’s household debt-to-GDP ratio reached a high of 104% in 2021 – the highest among 37 major economies. A significant portion of Korea’s household debt has gone into the real estate sector, which remains overheated despite the Moon administration’s attempt to regulate the market to make housing more affordable. The Korean stock market remains shallow (few high-quality stocks), volatile and speculative. As the U.S. and China remain mired in trade rivalry, Korea is attempting to pursue strategic autonomy by expanding and balancing its economic networks, including via its New Northern and New Southern Policies.
Citations:
Andre, Christophe. “The Korean Economy: Resilient but Facing Challenges.” ECOSCOPE Blog, August 11, 2020. https://oecdecoscope.blog/2020/08/11/the-korean-economy-resilient-but-facing-challenges/.
Beom, Jinwoan. “2021 In Review: South Korea’s Economy and COVID-19.” Korea Economic Institute of America, Peninsula Blog, December 23, 2021. https://keia.org/the-peninsula/2021-in-review-south-koreas-economy-and-covid-19/.
“Global Debt Monitor.” The Institute of International Finance. Accessed January 18, 2022. https://www.iif.com/Research/Capital-Flows-and-Debt/Global-Debt-Monitor.
Kim, Won-chul, and Mi-na Kim. “[News Analysis] Universal Basic Income Taking Center Stage of S. Korea’s Political Discourse.” Hankyoreh, June 9, 2020. http://english.hani.co.kr/arti/english_edition/e_national/948602.html.
OECD. “Economic Outlook No 110 – December 2021: Korea.” Accessed January 18, 2022. https://stats.oecd.org/index.aspx?queryid=72631.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
OECD. “OECD Economic Policy Reforms 2021: Going for Growth Shaping A Vibrant Recovery,” April 14, 2021. https://www.oecd.org/economy/going-for-growth/.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
Rafiq, Sohrab, and Andrew Swiston. “Mountains after Mountains: Korea Is Containing Covid-19 and Looking Ahead.” IMF, April 29, 2021. https://www.imf.org/en/News/Articles/2021/04/29/na042921-mountains-after-mountains-korea-is-containing-covid-19-and-looking-ahead.
Ryu, Sang-young. “Moon Jae-in and the Politics of Reform in South Korea.” Global Asia 13, no. 3, September 2018. https://www.globalasia.org/v13no3/cover/moon-jae-in-and-the-politics-of-reform-in-south-korea_sang-young-rhyu.
“S. Korea’s Household Debt-GDP Ratio Highest Worldwide: Report.” Yonhap News Agency, November 14, 2021. https://en.yna.co.kr/view/AEN20211115000700320.
Graph View
How effectively does labor market policy address unemployment?
10
9
9
Successful strategies ensure unemployment is not a serious threat.
8
7
6
7
6
Labor market policies have been more or less successful.
5
4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Despite the COVID-19 pandemic, unemployment rates in Korea remained stable and modest. From 3.8% in 2019, unemployment rose to about 4% in 2020 before returning to 3.6% in 2021. However, while unemployment rates are relatively low, Korea’s employment rate (65.9% in 2020) is below the OECD average – with particularly low labor force participation rates among women (52.7% in 2020) and youth (27.1% in 2020). Some portion of these underrepresented groups become discouraged and drop out of the labor force altogether after long periods of un employment and/or underemployment. Hence there is the paradoxical combination of a low unemployment rate and a low employment rate. At the same time, Korean workers work the second-longest workweek in the OECD, and the rate of deaths related to overwork and industrial accidents is among the highest as well. In 2018, the Moon administration did substantially reduce the maximum allowed weekly working hours, from 68 to 52 hours, a change that is expected to increase productivity and employee well-being. This reform was implemented for firms with 300 or more employees in 2019; firms with 50 to 229 employees in 2020; and firms with between five and 49 employees in 2021.
The most serious and worsening structural issue is Korea’s dual labor market – that is, the coexistence of relatively stable and protected regular employees with precarious non-regular workers (e.g., sub-contracted workers, fixed-term workers, part-time workers). Despite the Moon administration’s attempt to create high-quality jobs and reduce the share of non-regular jobs, the incidence of non-regular employment has been increasing over the past few years. The share of non-regular workers among all workers rose to an all-time high of 38.4% in August 2021 – from 36% in 2019; 33% in 2010; and 27% in 2001. At least part of this increase has been attributed to the Moon administration’s creation of non-regular public sector jobs for senior citizens; as well as its minimum wage hike (see below) which incentivizes companies to hire young people as non-regular workers. Some criticize Moon’s policy for increasing unstable, low-quality jobs for both seniors and young people.
Non-regular workers earn only about 50% the average monthly wage of regular workers and have much lower rates of social benefits coverage. The Moon administration has tried to narrow the gap by increasing the minimum wage to KRW 10,000 by 2020. Accordingly, the minimum wage was increased by 16% in 2018 and 11% in 2019. But following protest by business groups and given COVID-19’s negative effect on small businesses, minimum wage hikes were more modest in 2020 and 2021 – 2.9% and 1.5%, respectively. The government has announced a 5.1% minimum wage hike for 2022, which will bring the minimum wage to KRW 9,160. As for social benefits, the coverage rate for regular workers ranges from 88% to 93% for pensions, health insurance and employment insurance; while the coverage rate for non-regular workers ranges from 38 to 49%. Women are disproportionately more likely to be non-regular workers – 45.3% of women workers are non-regular, compared to 29.3% of male workers – which likely contributes to Korea’s large (largest in the OECD) gender wage gap.
Overall, despite efforts over the past few years to improve labor market policy, reforms have been insufficient to address serious and worsening structural issues.
Citations:
Kim, Soo-yeon. “Non-Regular Workers Rise to over 38 Pct of Total amid Pandemic.” Yonhap News Agency, October 26, 2021. https://en.yna.co.kr/view/AEN20211026004700320.
Kim, Yon-se. “[News Focus] Widening Wage Gap Seen between Nonregular, Regular Jobs.” The Korea Herald, April 18, 2021. http://www.koreaherald.com/view.php?ud=20210418000075.
Korea Ministry of Employment and Labor. “Survey Report on Labor Conditions by Employment Type,” n.d.
Korea National Statistics Office. “‘Economically Active Population Survey (EAPS) Supplementary Results of the Economically Active Population Survey by Employment Type,” n.d.
OECD. “Gender Wage Gap.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/employment/gender-wage-gap/indicator/english_7cee77aa-en.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
OECD. “OECD Economic Policy Reforms 2021: Going for Growth Shaping A Vibrant Recovery,” April 14, 2021. https://www.oecd.org/economy/going-for-growth/.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
The Donga Ilbo. “Non-Regular Workers Surge to Historic High,” October 28, 2021. https://www.donga.com/en/article/all/20211028/3012508/1.
The most serious and worsening structural issue is Korea’s dual labor market – that is, the coexistence of relatively stable and protected regular employees with precarious non-regular workers (e.g., sub-contracted workers, fixed-term workers, part-time workers). Despite the Moon administration’s attempt to create high-quality jobs and reduce the share of non-regular jobs, the incidence of non-regular employment has been increasing over the past few years. The share of non-regular workers among all workers rose to an all-time high of 38.4% in August 2021 – from 36% in 2019; 33% in 2010; and 27% in 2001. At least part of this increase has been attributed to the Moon administration’s creation of non-regular public sector jobs for senior citizens; as well as its minimum wage hike (see below) which incentivizes companies to hire young people as non-regular workers. Some criticize Moon’s policy for increasing unstable, low-quality jobs for both seniors and young people.
Non-regular workers earn only about 50% the average monthly wage of regular workers and have much lower rates of social benefits coverage. The Moon administration has tried to narrow the gap by increasing the minimum wage to KRW 10,000 by 2020. Accordingly, the minimum wage was increased by 16% in 2018 and 11% in 2019. But following protest by business groups and given COVID-19’s negative effect on small businesses, minimum wage hikes were more modest in 2020 and 2021 – 2.9% and 1.5%, respectively. The government has announced a 5.1% minimum wage hike for 2022, which will bring the minimum wage to KRW 9,160. As for social benefits, the coverage rate for regular workers ranges from 88% to 93% for pensions, health insurance and employment insurance; while the coverage rate for non-regular workers ranges from 38 to 49%. Women are disproportionately more likely to be non-regular workers – 45.3% of women workers are non-regular, compared to 29.3% of male workers – which likely contributes to Korea’s large (largest in the OECD) gender wage gap.
Overall, despite efforts over the past few years to improve labor market policy, reforms have been insufficient to address serious and worsening structural issues.
Citations:
Kim, Soo-yeon. “Non-Regular Workers Rise to over 38 Pct of Total amid Pandemic.” Yonhap News Agency, October 26, 2021. https://en.yna.co.kr/view/AEN20211026004700320.
Kim, Yon-se. “[News Focus] Widening Wage Gap Seen between Nonregular, Regular Jobs.” The Korea Herald, April 18, 2021. http://www.koreaherald.com/view.php?ud=20210418000075.
Korea Ministry of Employment and Labor. “Survey Report on Labor Conditions by Employment Type,” n.d.
Korea National Statistics Office. “‘Economically Active Population Survey (EAPS) Supplementary Results of the Economically Active Population Survey by Employment Type,” n.d.
OECD. “Gender Wage Gap.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/employment/gender-wage-gap/indicator/english_7cee77aa-en.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
OECD. “OECD Economic Policy Reforms 2021: Going for Growth Shaping A Vibrant Recovery,” April 14, 2021. https://www.oecd.org/economy/going-for-growth/.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
The Donga Ilbo. “Non-Regular Workers Surge to Historic High,” October 28, 2021. https://www.donga.com/en/article/all/20211028/3012508/1.
Graph View
How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
10
9
9
Taxation policy fully achieves the objectives.
8
7
6
7
6
Taxation policy largely achieves the objectives.
5
4
3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
Korea is among the 10 OECD countries with the lowest tax rates. In 2020, tax revenues totaled about 28% of GDP, a marginal increase from 27% of GDP in 2019 and lower than the OECD average of 33.5% of GDP. That said, Korea has steadily been increasing its tax revenues (as a share of GDP).
Korea collects its tax revenues from: taxes on corporate income and gains (31%); social security contributions (28%); goods & services taxes (24%); property taxes (14%); and personal income taxes (0.3%). Korea ranks 26th (out of 37 ranked OECD countries) on the 2021 International Tax Competitiveness Index – a drop from 25th place in 2020, likely reflecting the increase in the top personal dividends tax rate from 40% to 44%. Relative to OECD averages, Korea has higher corporate and property tax rates, and lower tax rates on personal income and goods and services.
One weakness of the Korean tax system is that the country’s tax base is comparably narrow, with nearly half the population (48.5%) paying no income taxes due to the very high exemption rate. In addition, targeting of taxes and transfers is poor and does not contribute much to the amelioration of social inequalities. Less than 25% of social transfers target the poorest quintile; social transfers only contribute 5% to the total market income of the poorest quintile; and redistributive effects are among the lowest in the OECD. Political calculations have prevented recent governments from lowering the tax exemption rate. Similarly, Korean taxes are not effective in promoting environmental sustainability. With an average effective energy tax rate of 2.3%, Korea ranks 24th among 44 OECD and selected partner countries. It has no (zero) explicit tax rate on carbon; it does not provide tax-based carbon price signals for non-road emissions; and its electricity taxes are among the lowest in the OECD.
Korea is among the top 10 OECD countries with regard to having the most tax treaties in place – making it one of the more attractive tax regimes within the OECD for foreign investors. In 2021, Korea joined 130 countries in signing on to the new global tax plan to tax multinational companies at a minimum rate of 15% regardless of where they are headquartered and where they operate. The global tax plan will have the greatest impact on companies such as Google and Facebook, which have benefited from tax havens and the continued lack of effective tax regulation for digital services. On balance, Korea is likely to benefit from increased tax revenue from such companies, which have significant sales in Korea. While a few of Korea’s largest companies may be subject to higher taxes, the impact is not expected to be large since the Korean corporate tax regime already imposes more than 15% tax, and because Korea’s tax treaties protect Korean companies from double taxation.
Citations:
Causa, Orsetta, and Mikkel Hermansen. “Income Redistribution through Taxes and Transfers across OECD Countries.” OECD, December 21, 2017. https://doi.org/10.1787/bc7569c6-en.
“International Tax Competitiveness Index 2021.” Tax Foundation, October 18, 2021. https://taxfoundation.org/publications/international-tax-competitiveness-index/.
Lee, Ho-Jeong. “Samsung Electronics Could Be Hit by OECD Tax Plan.” Korea JoongAng Daily, July 5, 2021. https://koreajoongangdaily.joins.com/2021/07/05/business/economy/global-tax-reform-Google-Korea-Samsung-Electronics/20210705160400375.html.
Lee, Kyung-min. “Korea’s Tax Burden Soars to Record-High in 2018.” The Korea Times, April 21, 2019. https://www.koreatimes.co.kr/www/biz/2019/04/488_267520.html.
OECD. “Revenue Statistics 2021 : The Initial Impact of COVID-19 on OECD Tax Revenues,” December 6, 2021. https://www.oecd-ilibrary.org/sites/6e87f932-en/index.html?itemId=%2Fcontent%2Fpublication%2F6e87f932-en.
OECD. “Tax – Tax Revenue.” Accessed January 18, 2022. https://data.oecd.org/tax/tax-revenue.htm.
OECD. “Taxing Energy Use 2019: Country Note – Korea,” 2019. https://www.oecd.org/tax/tax-policy/taxing-energy-use-korea.pdf.
OECD. “Taxing Wages 2021,” April 29, 2021. https://www.oecd-ilibrary.org/sites/83a87978-en/index.html?itemId=%2Fcontent%2Fpublication%2F83a87978-en.
Korea collects its tax revenues from: taxes on corporate income and gains (31%); social security contributions (28%); goods & services taxes (24%); property taxes (14%); and personal income taxes (0.3%). Korea ranks 26th (out of 37 ranked OECD countries) on the 2021 International Tax Competitiveness Index – a drop from 25th place in 2020, likely reflecting the increase in the top personal dividends tax rate from 40% to 44%. Relative to OECD averages, Korea has higher corporate and property tax rates, and lower tax rates on personal income and goods and services.
One weakness of the Korean tax system is that the country’s tax base is comparably narrow, with nearly half the population (48.5%) paying no income taxes due to the very high exemption rate. In addition, targeting of taxes and transfers is poor and does not contribute much to the amelioration of social inequalities. Less than 25% of social transfers target the poorest quintile; social transfers only contribute 5% to the total market income of the poorest quintile; and redistributive effects are among the lowest in the OECD. Political calculations have prevented recent governments from lowering the tax exemption rate. Similarly, Korean taxes are not effective in promoting environmental sustainability. With an average effective energy tax rate of 2.3%, Korea ranks 24th among 44 OECD and selected partner countries. It has no (zero) explicit tax rate on carbon; it does not provide tax-based carbon price signals for non-road emissions; and its electricity taxes are among the lowest in the OECD.
Korea is among the top 10 OECD countries with regard to having the most tax treaties in place – making it one of the more attractive tax regimes within the OECD for foreign investors. In 2021, Korea joined 130 countries in signing on to the new global tax plan to tax multinational companies at a minimum rate of 15% regardless of where they are headquartered and where they operate. The global tax plan will have the greatest impact on companies such as Google and Facebook, which have benefited from tax havens and the continued lack of effective tax regulation for digital services. On balance, Korea is likely to benefit from increased tax revenue from such companies, which have significant sales in Korea. While a few of Korea’s largest companies may be subject to higher taxes, the impact is not expected to be large since the Korean corporate tax regime already imposes more than 15% tax, and because Korea’s tax treaties protect Korean companies from double taxation.
Citations:
Causa, Orsetta, and Mikkel Hermansen. “Income Redistribution through Taxes and Transfers across OECD Countries.” OECD, December 21, 2017. https://doi.org/10.1787/bc7569c6-en.
“International Tax Competitiveness Index 2021.” Tax Foundation, October 18, 2021. https://taxfoundation.org/publications/international-tax-competitiveness-index/.
Lee, Ho-Jeong. “Samsung Electronics Could Be Hit by OECD Tax Plan.” Korea JoongAng Daily, July 5, 2021. https://koreajoongangdaily.joins.com/2021/07/05/business/economy/global-tax-reform-Google-Korea-Samsung-Electronics/20210705160400375.html.
Lee, Kyung-min. “Korea’s Tax Burden Soars to Record-High in 2018.” The Korea Times, April 21, 2019. https://www.koreatimes.co.kr/www/biz/2019/04/488_267520.html.
OECD. “Revenue Statistics 2021 : The Initial Impact of COVID-19 on OECD Tax Revenues,” December 6, 2021. https://www.oecd-ilibrary.org/sites/6e87f932-en/index.html?itemId=%2Fcontent%2Fpublication%2F6e87f932-en.
OECD. “Tax – Tax Revenue.” Accessed January 18, 2022. https://data.oecd.org/tax/tax-revenue.htm.
OECD. “Taxing Energy Use 2019: Country Note – Korea,” 2019. https://www.oecd.org/tax/tax-policy/taxing-energy-use-korea.pdf.
OECD. “Taxing Wages 2021,” April 29, 2021. https://www.oecd-ilibrary.org/sites/83a87978-en/index.html?itemId=%2Fcontent%2Fpublication%2F83a87978-en.
Graph View
To what extent does budgetary policy realize the goal of fiscal sustainability?
10
9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
South Korea’s healthy public finances and relatively low public debt levels provided the fiscal space for a large economic stimulus (about 11% of GDP) to mitigate the impact of COVID-19. Some of this stimulus was already planned before the pandemic as part of President Moon’s five-year plan for achieving a people-centered economy. Various pre- and post-COVID budget priorities have been folded into Korea’s New Deal. Beyond an immediate stimulus to the economy, the New Deal constitutes an opportunity to transition to innovative (Green New Deal, Digital New Deal) and inclusive (Human New Deal) growth. Accordingly, from an average government fiscal surplus of 1.5% of GDP for the period 2010-2019, Korea recorded a fiscal deficit of 2.3% of GDP in 2020. Government debt as a share of gross domestic product (GDP) was 51% in 2021 (11th lowest in the OECD), up from 48% in 2020 and 42% in 2019.
While budgetary oversight mechanisms are generally in place and any expenditure increase is subject to parliamentary approval, the unprecedented level of supplementary spending will need to be reined in as the economy normalizes. To ensure fiscal prudence in the long run, the government set new fiscal rules (effective 2025) limiting government debt to 60% of GDP and the consolidated fiscal balance deficit to 3% of GDP.
While debt at the national level is generally sustainable, an increasing number of local governments and public enterprises are struggling due to insufficient revenues. Local governments differ quite substantially in their ability to provide public services as the central government is reluctant to support poorer local governments.
Citations:
Korea Ministry of Economy and Finance. “Government Announces Korean New Deal 2.0,” July 14, 2021. https://english.moef.go.kr/pc/selectTbPressCenterDtl.do?boardCd=N0001&seq=5173.
Lim, Chang-won. “S. Korea to Increase Government Spending on Welfare and Defense in 2019.” AJU Business Daily, August 28, 2018. http://www.ajudaily.com/view/20180828161521953.
OECD. “General Government Deficit.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/governance/general-government-deficit/indicator/english_77079edb-en.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
While budgetary oversight mechanisms are generally in place and any expenditure increase is subject to parliamentary approval, the unprecedented level of supplementary spending will need to be reined in as the economy normalizes. To ensure fiscal prudence in the long run, the government set new fiscal rules (effective 2025) limiting government debt to 60% of GDP and the consolidated fiscal balance deficit to 3% of GDP.
While debt at the national level is generally sustainable, an increasing number of local governments and public enterprises are struggling due to insufficient revenues. Local governments differ quite substantially in their ability to provide public services as the central government is reluctant to support poorer local governments.
Citations:
Korea Ministry of Economy and Finance. “Government Announces Korean New Deal 2.0,” July 14, 2021. https://english.moef.go.kr/pc/selectTbPressCenterDtl.do?boardCd=N0001&seq=5173.
Lim, Chang-won. “S. Korea to Increase Government Spending on Welfare and Defense in 2019.” AJU Business Daily, August 28, 2018. http://www.ajudaily.com/view/20180828161521953.
OECD. “General Government Deficit.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/governance/general-government-deficit/indicator/english_77079edb-en.
OECD. “OECD Economic Outlook, Volume 2020 Issue 2,” December 1, 2020. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2020/issue-2_39a88ab1-en.
OECD. “OECD Economic Outlook, Volume 2021 Issue 2,” December 1, 2021. https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2021/issue-2_66c5ac2c-en.
Graph View
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
10
9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
The South Korean government invests heavily in research and development (R&D), particularly in fields which can be directly commercialized. Korea’s R&D spending-to-GDP ratio, which is the second-highest in the OECD, seems to be paying off. Korea has led Bloomberg’s Innovation Index for seven of the nine years that the index has been published, including in 2021. Korea’s internet broadband and mobile-phone infrastructures are among the world’s best, and it was one of the first worldwide to establish a comprehensive 5G infrastructure. More recently, in response to COVID-19, Korea demonstrated its leadership and innovation capacity in health technology (e.g., contact-tracing, testing, vaccine manufacture). The country has an excellent research infrastructure, with many world-class universities and research institutes that produce internationally competitive research and patents.
One major impediment to innovation is the Korean market’s oligopolistic structure and bureaucratic regulations, which make it difficult for SMEs and new entrepreneurs to succeed. SMEs are constrained by a lack of skilled workers in digital fields, limited access to ICT training, and insufficient capacity to translate digital technologies into productivity increases.
The Moon administration aimed for more inclusive and income-led growth, facilitating this via regulatory sandboxes and bottom-up R&D projects that benefit SMEs, academics and other non-chaebol actors. There is increasing interest in and funding for research in areas that address domestic societal needs, such as pollution and aging, rather than just large-scale, top-down R&D to expand national economic output and exports. Basic research grants provided by Korea’s National Research Foundation are set to double by 2022.
Citations:
Jamrisko, Michelle, Wei Lu, and Alexandre Tanzi. “South Korea Leads World in Innovation as U.S. Exits Top Ten.” Bloomberg, February 3, 2021. https://www.bloomberg.com/news/articles/2021-02-03/south-korea-leads-world-in-innovation-u-s-drops-out-of-top-10.
OECD. “Gross Domestic Spending on R&D.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/industry-and-services/gross-domestic-spending-on-r-d/indicator/english_d8b068b4-en.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
Zastrow, Mark. “Boosting South Korea’s Basic Research.” Nature News. Nature Publishing Group, May 27, 2020. https://www.nature.com/articles/d41586-020-01464-9.
One major impediment to innovation is the Korean market’s oligopolistic structure and bureaucratic regulations, which make it difficult for SMEs and new entrepreneurs to succeed. SMEs are constrained by a lack of skilled workers in digital fields, limited access to ICT training, and insufficient capacity to translate digital technologies into productivity increases.
The Moon administration aimed for more inclusive and income-led growth, facilitating this via regulatory sandboxes and bottom-up R&D projects that benefit SMEs, academics and other non-chaebol actors. There is increasing interest in and funding for research in areas that address domestic societal needs, such as pollution and aging, rather than just large-scale, top-down R&D to expand national economic output and exports. Basic research grants provided by Korea’s National Research Foundation are set to double by 2022.
Citations:
Jamrisko, Michelle, Wei Lu, and Alexandre Tanzi. “South Korea Leads World in Innovation as U.S. Exits Top Ten.” Bloomberg, February 3, 2021. https://www.bloomberg.com/news/articles/2021-02-03/south-korea-leads-world-in-innovation-u-s-drops-out-of-top-10.
OECD. “Gross Domestic Spending on R&D.” Accessed January 18, 2022. https://www.oecd-ilibrary.org/industry-and-services/gross-domestic-spending-on-r-d/indicator/english_d8b068b4-en.
Pak, Mathilde. “Korea: Roadmap to Narrow Digital Gaps.” ECOSCOPE Blog, August 10, 2020. https://oecdecoscope.blog/2020/08/11/korea-roadmap-to-narrow-digital-gaps/.
Zastrow, Mark. “Boosting South Korea’s Basic Research.” Nature News. Nature Publishing Group, May 27, 2020. https://www.nature.com/articles/d41586-020-01464-9.
Graph View
To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of 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. Household debt, largely resulting from real estate price inflation over the last two decades, is a huge problem, although the rate of non-performing loans remains low.
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 Moon administration, South Korea has focused its foreign policies on North Korea, along with the bilateral relationships with the United States and China that are most important in this area. The administration has correspondingly put less emphasis on multilateral coordination mechanisms such as the G-20 – though engagement in G-20 seems to be growing with Korea’s proactive role in the global COVID-19 response.
One contribution by Korea to global financial stability is its early championing of macro-prudential measures such as currency management and capital controls to protect the country against speculative, destabilizing finance. In the aftermath of several major financial crises, Korea’s once unorthodox (and criticized) position of partial economic liberalization has been vindicated. Such macro-prudential measures are now put forward as viable tools by global economic governance institutions such as the G-20 and the IMF.
Citations:
Andre, Christophe. “The Korean Economy: Resilient but Facing Challenges.” ECOSCOPE Blog, August 11, 2020. https://oecdecoscope.blog/2020/08/11/the-korean-economy-resilient-but-facing-challenges/.
Kalinowski, Thomas. Why International Cooperation is Failing: How the Clash of Capitalisms Undermines the Regulation of Finance. Oxford University Press, 2019.
Yonhap News Agency. “S. Korea’s Household Debt-GDP Ratio Highest Worldwide: Report,” November 14, 2021. https://en.yna.co.kr/view/AEN20211115000700320.
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 Moon administration, South Korea has focused its foreign policies on North Korea, along with the bilateral relationships with the United States and China that are most important in this area. The administration has correspondingly put less emphasis on multilateral coordination mechanisms such as the G-20 – though engagement in G-20 seems to be growing with Korea’s proactive role in the global COVID-19 response.
One contribution by Korea to global financial stability is its early championing of macro-prudential measures such as currency management and capital controls to protect the country against speculative, destabilizing finance. In the aftermath of several major financial crises, Korea’s once unorthodox (and criticized) position of partial economic liberalization has been vindicated. Such macro-prudential measures are now put forward as viable tools by global economic governance institutions such as the G-20 and the IMF.
Citations:
Andre, Christophe. “The Korean Economy: Resilient but Facing Challenges.” ECOSCOPE Blog, August 11, 2020. https://oecdecoscope.blog/2020/08/11/the-korean-economy-resilient-but-facing-challenges/.
Kalinowski, Thomas. Why International Cooperation is Failing: How the Clash of Capitalisms Undermines the Regulation of Finance. Oxford University Press, 2019.
Yonhap News Agency. “S. Korea’s Household Debt-GDP Ratio Highest Worldwide: Report,” November 14, 2021. https://en.yna.co.kr/view/AEN20211115000700320.