OECD says Korea needs structural reform

FE Team | Published: June 23, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Anna Fifield in Seoul
The South Korean government must move beyond piecemeal financial liberalisation and institute fundamental structural reforms to generate new economic momentum, the Organisation for Economic Co-operation and Development says.
In particular, Seoul should try to be more attractive to foreign investors and less protectionist, the Paris-based organisation said in its latest survey of the world's 10th largest economy.
The report is critical of several key government policies - from its efforts to cool the real estate market to its attempts to create foreign investment zones - and also questions the Bank of Korea's habit of tightening monetary policy despite stable inflation.
Like previous reports, the OECD urges the Korean government to let an efficient market develop rather than constantly responding to short-term fluctuations with intrusive policies.
"Korea remains one of the fastest growing economies in the OECD area," the report said, but it warned that growth was lop-sided, with exports strong but domestic demand sluggish, exacerbating imbalances between the manufacturing and service sectors.
"These problems, combined with slowing inputs of capital and labour, raise concern that Korea's growth potential is declining while per capita incomes are still one-third below the OECD average," it said.
The report said many of Korea's problems could be alleviated through greater integration into the world economy.
"Despite progress during the past decade, Korea remains relatively isolated in terms of imports of manufactured products, the stock of inward foreign direct investment and the inflow of foreign workers,"it said. It also noted economic nationalism was rising and "a significant segment of the Korean population questions the benefits of foreign investment" and free trade.
Although the government has been trying to attract foreign investment, FDI inflows declined in 2005 and 2006, while foreign ownership of listed companies fell from a peak of 42 per cent in 2004 to 37 per cent at the end of last year.
Korea ranked 24th - out of 29 - in the OECD in 2005 in terms of attracting foreign direct investment, reaping just $11.2bn last year.
"The government has a strong objective of raising FDI but it is concentrating on creating special zones," Randall Jones, head of the Korea desk at the OECD, told the FT. "The key is really improving the overall business environment."
The report said that addressing these issues goes beyond trade and investment liberalisation to include structural reforms, such as regulatory changes in product markets and the introduction of market principles in agriculture and social services.
The OECD questioned the government's policies targeting the housing market.
Although the rise in nationwide house prices has been relatively small compared with other developed countries, the government has introduced five real estate policy packages over the past 18 months, most aimed at boosting supply.
"Despite the merits of the objective of stabilising housing prices, some of these policies have the potential to create substantial harm if allowed to persist in the long term as they tend to reduce the supply of housing," the report said.
The OECD also questioned the Bank of Korea's used of monetary policy to try to cool the housing market, calling the interest rate rises "a blunt instrument for influencing real estate prices".
But the OECD applauded the authorities' willingness to let the Korean currency appreciate over the last year.
The Bank of Korea's intervention in the foreign exchange market has slowed sharply over the last year and the OECD said there was no need for continued reserve accumulation. Foreign reserves now total $247bn, or 27 per cent of GDP, more than double Korea's short-term foreign debt.
If financial authorities wanted to further moderate upward pressure on the exchange rate they should relax barriers to capital outflows, the report said.
"The objective should be to create a level playing field between foreign and domestic investment opportunities, while avoiding measures, such as the expansion of public support for overseas investment, which encourageoutflows in the short run," the report said.