FKI "South Korea's Economic Freedom Ranked 25th, Expansion of Government Size is a Burden"

Source: Federation of Korean Industries

[Asia Economy Reporter Changhwan Lee] Over the past decade, South Korea's overall economic freedom of activity has increased. However, the expanding government size and strengthening labor market regulations under the current administration are analyzed to be burdensome to economic activities.

The Federation of Korean Industries (FKI) announced on the 31st the results of analyzing the Economic Freedom Index rankings published annually by the U.S. think tank, the Heritage Foundation.

According to the analysis, South Korea's overall economic freedom index score this year was 74 points, ranking 25th out of 180 countries worldwide. South Korea's ranking has steadily risen over the past decade, from 34th in 2011 to 27th in 2018.

This year, the top spot was taken by Singapore (89.4 points). Hong Kong (89.1 points), which had held the undisputed number one position for the past decade, lost its lead due to the U.S.-China trade dispute.

Following were New Zealand (84.1 points), Australia (82.6 points), and Switzerland (82.0 points). North Korea was rated the lowest at 180th place (4.2 points).

However, the FKI emphasized that the three items representing government size?tax burden, government spending, and fiscal health?all declined in ranking in both the short and long term, indicating that economic autonomy is relatively shrinking due to the expansion of government size in South Korea.

The FKI evaluated that since 2017, increases in the top corporate tax rate and income tax rate, expansion of government spending, and deterioration of fiscal health have been factors causing the decline in economic autonomy rankings.

The tax burden category improved gradually from 125th place in 2011 to 118th in 2018 but dropped to 158th this year. The ranking fell by 40 places in the past three years.

In fact, the tax burden ratio, which refers to the total tax ratio relative to GDP, has gradually increased from 18.8% in 2017 to 20.0% in 2019. Additionally, social security contribution expenditures have risen due to the expansion of various welfare programs, increasing the national burden rate from 25.4% in 2017 to 27.3% in 2019. The top corporate tax rate also rose from 22% to 25% in 2018.

The government spending category fell from 84th place in 2011 to 101st in 2020. It was ranked between 70th and 90th in the mid-2010s but dropped out of the top 100 in 2020, indicating that economic freedom has declined recently due to increased government spending. The fiscal health category also dropped four places from 21st in 2018 to 25th this year.

Among detailed categories, labor market freedom steadily rose after ranking 146th in 2014, peaking at 100th in 2018, but has declined over the past three years to 112th this year, dropping 12 places.

The Heritage Foundation stated in its report, "South Korea's rigid labor regulations ultimately result in unfavorable outcomes for both labor and management."

Additionally, South Korea's trade freedom ranking has gradually improved from 122nd in 2011 to 71st this year. The Heritage Foundation attributed this rise to South Korea's continuous efforts toward trade liberalization, such as expanding free trade agreement (FTA) partner countries.

Kim Bongman, head of international cooperation at the FKI, said, "Although some increase was inevitable due to COVID-19, the rapid rise in fiscal spending and national debt is turning the government into a 'big government,' so speed control is necessary. If tax burdens and government spending increase and fiscal health deteriorates, it will ultimately reduce our economy's growth potential and become a burden on future generations."

He added, "Despite many domestic and international difficulties this year, such as COVID-19 and unprecedented heavy rains, to overcome these challenging times, we must innovate regulations, reduce tax burdens, and enhance labor flexibility and market openness."

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