IMF Staff Concludes 2017 Article IV Visit to Korea
An International Monetary Fund (IMF) staff team led by Tarhan Feyzioglu visited Seoul during November 1–14 to conduct discussions for the 2017 Article IV Consultation. Mr. Feyzioglu issued the following statement at the conclusion of the visit:
“Korea’s near-term outlook is improving despite elevated geopolitical tensions. After slowing in the second half of 2016, growth is picking up this year, led by a strong expansion in investment, especially in the IT and construction sectors. Export growth strengthened thanks to improving external conditions and high global demand for semiconductors. Private consumption growth picked up over the first three quarters of this year but remains below economic growth. Recovery has been supported by an accommodative monetary policy, with lending rates and long-term yields close to record lows. The unemployment rate is hovering around 3.8 percent (seasonally adjusted) but remains significantly higher for youth, at 10.0 percent (seasonally adjusted) in September.
“The cyclical recovery is expected to continue. GDP growth is projected at 3.2 percent in 2017, as the momentum in the first three quarters continues. In 2018, growth is forecast at around 3.0 percent, with private consumption growth benefitting from the large minimum wage increase and from policies supporting employment and social spending. Exports will benefit from the strong global trade. The current account surplus remains substantial and is projected to be 5.6 percent of GDP in 2017. Household debt is the main financial stability risk; nevertheless, macroprudential policies are effectively addressing the financial stability challenges so far.
“Structural headwinds hinder a return to strong and sustainable long-term growth. The potential growth rate has fallen from 7 percent in the early 1990s to below 3 percent. This reflects adverse demographics and slowing productivity growth, which is projected to continue over the longer term. Polarization and inequality are worsening. Old-age poverty is significantly higher than in the rest of the OECD, and the rate of unemployed and inactive youth is high. An inadequate safety net and duality in labor markets, and between small and medium enterprises (SMEs) and large companies, are key contributors to this inequality. Moreover, low social protection relative to the OECD average boosts precautionary saving, contributing to excessive external imbalances.
“The new government is implementing a comprehensive economic program to address low growth and income inequality. The program—labeled “a paradigm shift”—focuses on income-led growth, job creation, fair competition, and innovation.
“Fiscal policy needs to become significantly more expansionary to support growth and reduce excessive external imbalances. This should be achieved largely through higher expenditures on social policies and structural reforms, including targeted transfers to the most vulnerable, spending on childcare and Active Labor Market Policies. Korea has ample fiscal space to aim for a zero structural balance in the short and medium run without a risk to debt sustainability.
“The Bank of Korea should maintain its accommodative monetary stance. Inflationary pressures are weak, and the output gap is negative, with large uncertainty surrounding the estimates. Early and decisive action to ease the fiscal stance would facilitate a rebalancing of the policy mix.
“The current growth momentum represents an opportunity for ambitious reforms. With potential growth expected to continue its secular decline and labor productivity still at about 50 percent of that in the United States, the priority should be to boost employment and productivity growth. This would require reforms to address rigidities in product and labor markets, and policies to increase female labor market participation. Policy needs to support inclusive growth to counter growing income inequality. Fiscal and structural policies should facilitate rebalancing of the economy towards domestic demand.
“Korea should adopt ‘flexicurity’ as the basis for labor market policies. This involves three pillars: (i) more flexibility for regular workers; (ii) a strong and inclusive safety net for the unemployed; and (iii) Active Labor Market Policies. The fundamental principle of flexicurity is that it protects workers rather than jobs. This would create a new labor market structure that is essential to adapt to the demands of technological and structural change from the fourth industrial revolution. Flexicurity needs a strong foundation, particularly trust and ownership by all social partners, with all stakeholders being part of the social dialogue, including non-unionized workers, SMEs and the self-employed.
“Government’s plans that focus on supporting innovation and fostering productivity growth are welcome. Support networks are being put in place to foster innovation and reduce regulatory costs. Already, regulations have been eased in some network industries, such as railways and telecommunication. Reducing the regulatory burden further, to close the gap with the OECD frontier within 10 years, could raise annual potential growth by more than 0.3 percentage point over this period. Government policy towards SMEs should prioritize fostering growth and innovation, rather than shielding weaker firms.
Source: International Monetary Fund
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