Korea sets sights on creating another miracle
| Author | Tarhan Feyzioglu |
| Position | IMF Asia and Pacific Department |
| Pages | 341-353 |
Page 341
Korea achieved spectacular growth and turned a poor agricultural economy into an industrial powerhouse. But significant longer-term problems loom: output growth potential is slowing as the population ages rapidly, capital accumulation decelerates, and productivity growth falls.
To reverse this, Korea needs to further integrate with the global economy by deregulating and opening up its financial and service sectors and labor market and creating a knowledge-based, advanced-technology economy.
Page 352
In the 50 years since Korea had its first Article IV consultation with the Fund, the country has relied on outward-oriented policies to achieve spectacular growth and turned a poor agricultural economy into an industrial powerhouse. Looking ahead, Korea faces major longer-term challenges stemming from rapid population aging and growing income inequality. Dealing with these challenges formed the crux of this year's Article IV discussions between the IMF and the authorities.
To all appearances, the "Goldilocks" period that Korea enjoyed from early 2005 until early 2006 has come to an end. During that period, growth was at a 6 percent rate on the back of strong exports and consumption, while inflation declined to 1½-2 percent. In the past few months, however, the economy has been slowing, as the consumption boom has matured.
The IMF anticipates a soft landing, with GDP growth declining to an estimated 5 percent in 2006 and 4.3 percent in 2007 (see table). But the risks are to the downside. In particular, a serious slowdown in the United States would have a major impact, because Korea's exports are 40 percent of GDP and the United States is Korea's largest market after China. Also, a tightening of global liquidity and the associated higher lending rates would hurt households and small and medium-sized enterprises, which are heavily indebted. To guard against these risks, the authorities are maintaining a neutral fiscal stance and a data-dependent monetary policy, under which interest rates will be adjusted based on the accumulating signs of where the economy is heading.
Beyond these immediate challenges, longer-term problems loom. With the population aging more rapidly than in any other OECD country, labor supply growth has begun to slow, and the absolute size of the labor force should...
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