by Il SaKong, Institute for Global Economics
Prepared remarks at a Peterson Institute event
April 18, 2008
It is a great privilege to speak before this distinguished audience.
As you know, President Lee Myung-bak, who pledged to be an "economic president" had a landslide victory in Korea's presidential election last year. Again in the general election just last week, the people of Korea gave President Lee a renewed mandate of reviving the economy by giving his party majority seats in Korea's National Assembly. So it is natural to expect that Korea's new government will put its policy priority on the economy.
Korea's per capita income last year came close to $20,000 US dollars, which is a miracle to say the least, considering where it was less than half a century ago. However, Koreans know very well there are nearly 40 countries with higher per capita income. More importantly, they know there is a long way for them to go to join the ranks of today's most advanced economies.
It is, therefore, imperative for the new government to enhance Korea's economic growth potential. Specifically speaking, the new government has to put policy priorities for increasing investment, both domestic and foreign, and enhancing the nation's overall economic efficiency, or total factor productivity (TFP), while doing its best to augment labor inputs.
2. The New Korean Government's Economic Policy Agenda: Creating a Business-friendly Environment
What I would like to do here today is provide you with a perspective from which you can see the new Korean government's economic policy priority areas.
Let me begin by drawing your attention to Korea's recent economic growth data. As shown in the slide, Korea's average growth rate for the 1991–95 period recorded 7.5 percent, but it slipped to 4.6 percent for the 2001–07 period.
From the growth accounting for both periods, you can see the contribution made by both labor and capital has been reduced. Considering Korea's rapidly aging population and shortened working hours, the reduced contribution by labor is not too surprising.
However, reduced contribution by capital needs an elaboration. The reduction is primarily due to sluggish plant and equipment investment. The contribution by capital increased 11.1 percent per annum during the 1990–96 period as compared to 4.6 percent during the 2001–06 period. As a result, plant and equipment investment as a percentage of GDP dropped from 13.8 percent to 9.7 percent during the same period.
To say the least, in this age of globalization the creation of a business-friendly environment is a necessity for robust investment. Unfortunately, however, it was not put on the top of the national agenda by previous governments during the last 10 years or so.
It is no accident that both domestic and foreign business communities see Korea's business environment unfavorably. For example, the World Bank's "Doing Business" survey ranked Korea 30 out of 178 countres, 110 in "starting a business." 106 in "paying taxes" and 131 in "employing workers."
The new government is going to put deregulation and regulatory reforms at the top of its policy agenda. In fact, one of the major tasks of the newly established National Competitiveness Council in the President's Office is regulatory reforms. This can be seen as a manifestation of the President's firm commitment to regulatory reforms.
According to a recent research report on deregulation by the Federation of Korean Industries (FKI), if about 1,600 regulations are either scrapped or eased, Korea's ranking in the World Bank's "Doing Business" survey can be elevated up to 15 from the current 30.
Government regulations exist across industries from manufacturing to services, including the financial sector. In deregulating them, global best practices and global standards will be our guiding principles, and our goal is to ensure a level playing field for firms of all sizes, both domestic and foreign.
In the area of taxes, in addition to the adjustment of Korea's tax regime and rates, the nation's tax administration will be made more transparent. Korean corporate taxpayers and foreign firms have been complaining about not only the high tax burden but also the complicated tax laws which are not written in a taxpayer-friendly way.
So we are set to simplify major tax laws. At the same time, all new and relevant existing tax laws will be made available in English for foreign investors.
The Korean government is well aware that countries around the world are competitively cutting or plan to cut their corporate tax rate. We also plan to reduce the corporate tax rate from 25 percent to 20 percent in the next five years. For small and medium companies, the corporate tax rate will be curtailed from the current 13 percent to 10 percent during the same period.
Labor Relations and Labor Market
Another area of reform needed to establish a business-friendly environment is labor relations. Korean labor relations are frequently perceived as confrontational and uncompromising. The World Bank's "Doing Business 2008" survey ranks Korea 131 out of 178 countries in "employing workers," indicating difficult labor relations. In this regard, let me remind you of the fact that the Korean history of collective bargaining is very short and began abruptly without much preparation in the late 1980s. One can say that Korea is still going through a trial and error process. The problem, however, has been the unreasonably high level of tolerance to illegal activities and disputes. Now, the new government is determined to strictly apply the rule of law.
I am pleased to report that the situation has begun to turn around. The number of illegal disputes has been on a steady decrease since its peak in 2004, with lost work days falling from 1.2 million days in 2006 to about half a million days in 2007.
Furthermore, Korea's largest labor federation—the Federation of Korean Trade Unions (FKTU)—recently declared "no illegal dispute" and full participation in the nationwide efforts in reviving the economy. To show the Federation's support for President Lee's endeavor to revive the economy, the FKTU president has joined the Korean delegation on its current visit to the United States along with Korean business leaders.
In response to cooperative initiatives on the part of labor unions, Korean business associations, too, publicly declared to do their part to enhance corporate social responsibility and improve corporate transparency and ethical standards.
Also, the Korean government will make every effort to make the labor market more flexible and encourage business firms to expand the performance-based wage system.
In the face of rapid population aging and shortened working hours, Korea needs to increase labor market participation, particularly by facilitating that of women. The latest government report points to a low rate of labor market participation of Korean women. Their labor market participation stood at 54.7 percent, lower than the OECD average of 60.8 percent and the US rate of 69.3 percent, despite high female enrollment in tertiary education of 81.1 percent. Clearly, Korean female workers represent an underutilized resource that can greatly contribute to raising Korea's economic growth potential. To encourage female workers' participation in the labor market, the Korean government is making efforts to provide various incentives and improve childcare services.
Foreign Direct Investment
According to a 2007 report from the United Nations Conference on Trade and Development (UNCTAD), Korea ranked 115 in terms of the accumulated foreign direct investment (FDI) to GDP ratio while Korea's potential for attracting FDI ranked 17 out of 140 countries.
Inbound foreign direct investment has fallen for the last three years. Obviously, improvements in labor relations and regulatory reforms to create a business-friendly environment are not only for Korean firms but also for foreign firms.
In addition, being well aware that foreign investors are not fully satisfied with the current living environment in Korea, the government is geared toward improving educational, medical, and healthcare services and providing cultural facilities.
Along with this, the Korean government's lack of policy consistency has been a special concern for most foreign firms. The new government had a major organizational reform to make the government function more efficiently. The enhancement of policy consistency and predictability was one of the major purposes of the reorganization.
President Lee Myung-bak indicated in New York on his current trip to open a personal hotline with representatives of foreign business communities in Korea when he returns. He already did so for Korean business leaders. It is his serious gesture to show how important investors, both domestic and foreign, are to reviving the Korean economy.
3. Raising Economy-wide Efficiency
As previously indicated, improving TFP is on the top of the nation's economic agenda for the new government.
We know that TFP can be enhanced through various institutional reforms that will encourage entrepreneurship and systemic efficiency, and through intensified competition, especially coming from abroad in addition to technological advancement.
Rule of Law
It is known that a better implementation of the rule of law throughout the economy, the labor relations area in particular, can substantially increase Korea's economic growth potential. For example, a study by the Korea Development Institute (KDI) shows that all things being equal, once the Korean compliance of the rule of law is improved to the level of the OECD average, Korea can increase its annual growth by almost one percent.
I must tell you that the new government is committed to ensuring that the rule of law is respected throughout the whole society and to introducing relevant institutional reforms to meet global standards. The Korea-US FTA, once ratified, is expected to contribute greatly to upgrading Korea's institutional infrastructure in addition to providing well-known direct benefits.
Public Sector Reform
Public sector reform is another priority area for the new government. At this point, I can only tell you that we are currently engaged in sorting out public entities either to be privatized or reformed. However, it will not take too long before you see bold actions taken in this regard.
Educational Reform and Research and Development
You probably know that Korea sends more students to the United States than China and India. Good for Koreans! But the only problem is that they include a substantial number of primary and secondary school pupils. Apparently, their parents are not satisfied with the quality of education in Korea.
The new government aims to improve the quality of public education and provide diversified education services for those with special needs.
The key principles of this reform are autonomy and competition, allowing more leeway in student selection, ensuring more information disclosure and introducing teacher evaluation, among others.
One can argue that for the first time in its history Korea now has a competitive edge in global competition. This is simply because Korea has people who have the highest zeal for education, seeking knowledge in this knowledge-based economy era. Therefore, the right policy priority should be placed on educational reform, and the new government certainly will do that.
I must also mention that while producing valued human resources through reformed education, the Korean government has a plan to increase investment in research and development from 3.5 percent in 2007 to 5 percent of GDP by 2012.
4. A Concluding Remark
As late as the 1960s, very few people in the world ever thought Korea could pull itself out of poverty. This time around, too, I know there are many who are rather skeptical about the new government's ambitious goal of enhancing its economic growth potential from the current 5 percent to 7 percent in a relatively short period of time.
Nonetheless, I personally believe that the goal is achievable as the new government has the right set of policy priorities and determination.
Once we succeed, Korea will find its place in league with the most advanced nations within a decade's time.
Before closing, let me reiterate my sincere hope that the US business and financial community, with an early ratification of the KORUS FTA, will be able to fully participate in Korea's endeavor for mutual benefits.
Book: Witness to Transformation: Refugee Insights into North Korea January 2011
Peterson Perspective: North Korea's Immunity to Outside Pressure: Part I December 12, 2012
Policy Brief 10-1: The Winter of Their Discontent: Pyongyang Attacks the Market January 2010
Working Paper 10-2: Economic Crime and Punishment in North Korea March 2010
Paper: FTAs and the Future of US-Korean Trade Relations November 2009
Paper: Implementing the KORUS FTA: Key Challenges and Policy Proposals February 2008
Policy Brief 08-6: North Korea on the Precipice of Famine May 2008
Policy Brief 07-7: The Korea-US Free Trade Agreement: A Summary Assessment August 2007
Policy Brief 06-4: Negotiating the Korea–United States Free Trade Agreement June 2006
Working Paper 07-7: North Korea’s External Economic Relations August 2007
Book: Avoiding the Apocalypse: The Future of the Two Koreas June 2000
Book: Free Trade Between Korea and the United States? April 2001
Working Paper 08-4: Migration Experiences of North Korean Refugees: Survey Evidence from China March 2008