[Contribution] Korea's economic journey as OECD member

Vincent Koen

By Vincent Koen

In 2021, Korea celebrated the 25th anniversary of its OECD membership. There is indeed much to be proud of, even though momentous challenges, old and new, loom large.

Korea joined the OECD in 1996, after over three decades of stellar growth based on its export-oriented economy, its hard-working and increasingly well-educated workforce and high savings and investment rates. The so-called "Miracle on the Han River" had transformed one of the world's poorest countries at the end of the 1950-53 Korean War into an economy where per-capita income matched that of some European countries.

Nevertheless, it was still far below the OECD average in 1996. Over the past 25 years, Korea has carried out major economic reforms, aligned its policies on OECD best practices in many areas, increased its integration into the global economy and further enhanced its technological and human potential. GDP per capita converged to the OECD average and overtook Japan's, and Korea became the world's 10th-largest economy.

GDP per capita has caught up with the OECD average

Constant 1995 prices, in PPP dollars / Source: OECD National Accounts database

This much-admired success story has not been without bumps, however. Since becoming an OECD member, Korea's economy has faced three major external shocks: the Asian financial crisis of the late 1990s, the global financial crisis one decade later and the recent and still ongoing coronavirus pandemic.

As Korea joined the OECD, it was initiating an ambitious reform agenda to move towards a more market-based economy, building on recommendations from the first two "OECD Economic Surveys of Korea," published in 1994 and 1996. It involved greater exposure to competitive forces, better governance for financial institutions and corporates as well as a more flexible labor market coupled with stronger social protection.

Unfortunately, Korea was only at the beginning of its reform process when it was hit by the Asian financial crisis. Excessive, largely short-term and foreign exchange-denominated corporate debt made the Korean economy vulnerable to such an external shock. The exchange rate collapsed and 1998 witnessed a deep contraction and a surge in unemployment. The crisis, however, provided an impetus to accelerate OECD-inspired reforms, including corporate restructuring and deleveraging as well as greater openness to trade and foreign direct investment, with a continued build-up of human capital and stepped-up R&D efforts.

These reforms greatly strengthened the resilience of the Korean economy, which has weathered the 2008 global financial crisis and the COVID-19 shock better than most other OECD countries. While the impact of the pandemic was mitigated by an outstanding health policy response, strong economic institutions and a tradition of fiscal prudence also made it possible to stabilise financial markets promptly and provide timely fiscal support.

Even though the economy has rebounded, likely achieving around 4 percent GDP growth in 2021, Korea will need to overcome a number of obstacles to continue expanding faster than the OECD average and catching up with the leading OECD countries like the U.S.

A very rapidly aging population requires raising employment rates, notably for women and youth, who are generally highly educated and skilled, but whose talent and abilities are often under-utilized in the labor market. Prolonging the careers of older workers, notably through labor market reform and lifelong learning, is also decisive to boost labor input and productivity, as well as to reduce poverty.

Aging will also exert growing pressure on public finances. Korea's public debt ratio remains far below those of many other advanced economies, but the foreseeable demographically driven rise in pension and health and long-term care outlays will call for measures to increase fiscal revenue and contain other spending, but also to boost growth.

Key to achieving the latter is to trim the red tape that holds back innovators and entrepreneurs. In recent years, regulatory sandboxes have helped to do so in a number of sectors but more generalized progress will be needed on this front, including with respect to foreign investment.

At the same time, narrowing the aggregate productivity gap with the leading OECD economies requires that SMEs and the service sector become more productive. This will necessitate investments in technology and skills.

As highlighted by the dismal quality of the ambient air in Sejong and Seoul during the OECD staff's most recent visit to the country, the war on fine dust undertaken a few years ago needs to be stepped up. Korea's recent commitment to greater ambition with respect to the imperative to reduce carbon emissions is indeed vitally important.

The Korean New Deal, with its digitalization, green and social safety net pillars, complemented by a focus on regional development, seeks to address these challenges but will require sustained efforts over the long haul. Like over the past quarter century, Korea can continue to draw inspiration from successful reforms in other OECD member countries to design the best policies to achieve its goals. At the same time, the other OECD countries, as well as non-members, can continue to learn from Korea's outstanding economic performance to enhance their growth and innovation potential.

The writer is Head of Division, Country Studies at OECD.