OECD Recommendations and Challenges for the Korean Economy

Jung Kyu-cheol, Head of Economic Outlook Division, Korea Development Institute (KDI)

On August 11, the "2020 Organisation for Economic Co-operation and Development (OECD) Korea Economic Report" was published. The OECD releases a report every two years that comprehensively diagnoses the Korean economy and suggests policies. It is significant that the Korean economy is viewed from an external perspective. To summarize the report in one sentence, Korea was outstanding in overcoming the COVID-19 crisis, but faces difficult challenges in the medium to long term. The OECD report does not contain entirely new content. It includes issues and measures that have been continuously raised domestically. It is also similar to the "2020 Second Half Economic Policy Direction" announced by the government in June. This suggests that addressing persistent problems that are already known is more important than finding new challenges and preparing measures.

Experts agree that Korea will fare better against the shock of the novel coronavirus infection (COVID-19) compared to other major countries. This is because Korea possesses the three essential elements for crisis management: a quarantine system, swift and proactive government policies, and the formation of a national consensus and cooperation in responding to infectious diseases. If any one of these had been lacking, the state of the Korean economy would be very different from what it is now.

During the International Monetary Fund (IMF) foreign exchange crisis and the global financial crisis, Korea suffered from large-scale capital outflows. In the COVID-19 crisis, the financial market remained stable relative to the economic shock. Active fiscal and monetary policies, currency swap agreements, and global policy coordination such as emerging market debt repayment deferrals were effective in stabilizing international financial markets. Domestically, strengthening macroprudential policies such as housing-related loan regulations including Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios, as well as foreign exchange soundness regulations before the crisis, contributed to financial market stability.

Of course, the COVID-19 crisis is still ongoing. Although signs of easing domestic demand stagnation and a reduction in employment decline have appeared, it is not yet at a level to declare economic recovery. Policies to support the economy, maintain the economic system, and protect vulnerable groups must continue for the time being. In particular, the medium to long-term challenges presented by the OECD should be deeply considered. The OECD report identified employment policies to prepare for aging and the spread of digital technology as key tasks. Low birth rates and aging are undoubtedly the biggest challenges for the Korean economy. Korea’s aging speed is predicted to be faster than Japan’s, which has experienced severe aging.

Although growth rates are expected to rebound after overcoming the COVID-19 crisis, in the medium to long term, growth rates will continue to decline due to a shrinking labor supply. The decrease in creative and enterprising youth leads to a decline in economic vitality. To mitigate the reduction in labor supply and improve quality of life, female employment rates must be increased, but finding solutions is not easy. In a seniority-based wage system, companies are reluctant to employ older workers who require high wages. Older workers move from jobs where they can utilize their lifelong skills and experience to unfamiliar and less specialized jobs with lower satisfaction. Although extending retirement age accompanied by a wage peak system has been proposed, it has not yet been widely accepted.

The economic environment is rapidly changing due to the COVID-19 crisis. Productivity improvements using digital technology, as suggested by the OECD, will be emphasized. Building digital infrastructure is necessary and is also included in the Korean New Deal.

Fundamentally, the Korean economy must develop flexibility to adapt to change. For resources to be reallocated to emerging growth industries after COVID-19, companies in declining industries must exit. Expanding social safety nets such as eliminating employment blind spots and supporting the unemployed is necessary to create an environment where corporate restructuring proceeds smoothly. Additionally, to respond quickly to rapidly changing demand, educational system reforms such as increasing flexibility in university major selection must be implemented. Unlike economic stimulus policies, structural reform policies are difficult to achieve results in a short period. They may also involve short-term costs and conflicts. It is necessary to calmly proceed with the mindset that the trees planted now will bear fruit someday.

This content was produced with the assistance of AI translation services.