The Key Economic Challenges Facing Korea in the 21st Century

Abstract

After experiencing a severe financial crisis in 1997, Korea implemented a wide−ranging package of reforms that have helped to sustain economic growth during the past decade. However, there has been a deceleration of growth--from a 7.2% annual rate between 1998 and 2002 to 4.4% during 2002 to 2007. There remains considerable scope to sustain rapid growth by raising labor productivity, which is currently 60% below the US level. Narrowing the productivity gap requires meeting a number of challenges. First, Korea needs to enhance the return from its large investment in innovation by reforming its R&D framework and education system. Second, it is important to enhance the integration of Korea in the world economy to accelerate productivity growth. At present, Korea is relatively closed to inflows of foreign direct investment, trade and human resources from abroad. Third, Korea needs to cope with rapid population aging, which is projected to transform it from the second youngest population in the OECD area in 2000 to the fourth oldest in 2050. Aging is projected to significantly reduce the labor force and poses a serious fiscal challenge to cope with increased public spending for pensions and healthcare. Fourth, Korea needs to reverse the increasing share of non−regular workers, as labor market dualism creates both efficiency and equity concerns. Successfully meeting these challenges would enable Korea's per capita income--currently about two−thirds of the OECD average--to continue its convergence to the levels in the most advanced countries.