Contribution Korea emerging from pandemic with strong economic outlook and chance to improve
By Jon Pareliussen
Following an extraordinary growth history since the end of the Korean War, Korea is now one of the world's leading economies ranking 10th in the world in terms of nominal GDP. Per capita output surpassed the Organization for Economic Cooperation and Development (OECD) average in 2020, after a very effective pandemic response, and the country has been repeatedly invited to G7 meetings considering its increasing importance in international society. Korea's short-term economic outlook is bright, despite a number of risks on the horizon. To continue its success story, Korea should strengthen investments in its people and in the environment.
The OECD Economic Outlook released last week portrays a cautiously optimistic global growth outlook, with continued recovery despite ongoing waves of COVID-19 and the Omicron variant menace.
But, the revival is unbalanced, with countries recovering at different paces, with some business sectors booming, while people and businesses more directly affected by the pandemic still face a difficult reality.
Some sectors, jobs, technologies and behaviors will not return to their pre-pandemic trends. Supply constraints, inflationary pressures, financial imbalances and potential policy missteps are all key concerns.
Korea's efficient handling of the pandemic made its test-and-trace regime an inspiration to the world and led to a comparatively mild GDP contraction in 2020.
Korea's GDP surpassed its pre-pandemic level already at the beginning of the year, and continues to recover towards pre-pandemic trends. Output is propelled by strong export growth, improving business investment and public support. Growth is set to reach 4 percent in 2021 and to remain robust in 2022 and 2023, averaging close to 3 percent.
Distancing measures, especially in the greater Seoul area, weighed on the services sector over the summer. However, following a rapid vaccination campaign, 80 percent of the total population was fully vaccinated by the end of November.
This is enabling a phased and cautious easing of restrictions on business operations and private gatherings.
Exports and business investments have been strong this year, owing to soaring global demand, notably for semiconductors, and employment is rising. Job recovery in in-person services has lagged behind, but is expected to rebound as distancing measures are less strict than earlier in the pandemic.
Export growth is projected to remain robust through 2023 on the back of strong global demand for major items such as IT products, machinery and petrochemicals even though supply bottlenecks and shortages causing delivery delays are likely to continue to hamper exports of some products.
Business investments are set for solid growth, thanks to strong demand for Korean products and planned government spending on key industries such as semiconductors, batteries and vaccines.
The annual rate of headline consumer price inflation rose to 3.7 percent in November, with core inflation, excluding food and energy, at 2.4 percent.
It is projected to recede, however, over the coming quarters. Monetary policy has been supportive throughout the pandemic, with the Bank of Korea's policy rate now standing at 1.0 percent, following hikes in August and November.
Monetary policy should look through the transient components of the ongoing inflation spike, but become less accommodative over time. A stronger prudential policy may be needed if household debt does not level off.
Meanwhile, efforts should be stepped up to supply more homes with a view to stabilizing housing prices.
Jon Pareliussen
Public spending continues to support the economy, with programs including cash relief, job creation and job retention schemes.
The 2022 budget of 608 trillion won entails an 8.9 percent increase compared to the 2021 original budget. The massive stimulus was the right medicine to reduce permanent economic damage from the pandemic, and medication needs to continue until the risk of relapse has faded.
Relatively low public debt leaves room for this continued fiscal support for the moment, but ageing pressures call for a future rebalancing of fiscal policy along with structural reform to reverse low fertility rates and demographic decline.
The pandemic led to a temporary strengthening and has precipitated a wider re-think of the social safety net.
Broadening employment insurance to all workers, strengthening pensions and introducing a sickness benefit scheme are all elements in making Korean society more inclusive.
Such policies can also help pave the way to reducing the gap between standard and non-standard-workers and moving towards “flexicurity,” a labor market where institutions protect workers rather than jobs and encourage the restructuring of companies needed to boost productivity and job quality.
Korea's greenhouse gas emissions peaked in 2019, just before the onset of the pandemic, and Korea pledged in the Glasgow COP to reduce emissions by 40 percent by 2030.
This is challenging, as are the pledges of many other countries who have shown international leadership and commitment.
Such a reduction over just a decade requires urgent policy action. In order to reduce the economic burden from the transition, policy instruments need to be efficient and flexible.
For Korea, the obvious choice would be to tighten the cap and limit free allocations to the emissions trading scheme (K-ETS), which covers approximately 70 percent of Korea's emissions.
Emissions not covered by K-ETS also need to be targeted, for example by taxing fuels by their carbon content upstream in the distribution chain. Increased public support for research, development and deployment of clean technologies can help ease the burden.
In conclusion, Korea has been rewarded for its very skillful handling of the COVID pandemic so far with strong growth performance and a positive outlook.
The winter wave, pushing infections and hospitalizations to all-time highs, can lead to further delays and even a temporary reversal of re-opening, and Omicron poses a further risk in the coming months.
However, the direction of travel is towards more vaccination, more immunity, and more growth. Korea should embrace the current challenges to build the foundations for vigorous inclusive and sustainable growth going forward.
The writer is head of the Korea desk, OECD Economics Department.