The OECD has recently published two reports on Korea that offer valuable advice to Korean politicians as well as government policymakers. One is the latest OECD economic survey of Korea while the other is the first OECD assessment of the Korean government’s urban policy.
The OECD Economic Survey of Korea 2012 focuses on the two key challenges confronting the Korean economy ― sustaining economic growth in the face of rapid population aging and improving social cohesion by reducing inequality and relative poverty.
The report’s central point is that Korea should prepare for the coming demographic headwind. Due to rapid population aging, it warns, Korea will soon face a sharp drop in labor inputs, which could accelerate the decline of its growth potential.
It reminds us that Korea’s working-age population will start to fall from 2017. The nation’s labor force is expected to peak in 2022 but, according to Statistics Korea, the number of prime-age workers between 25 and 49 has already started to fall.
The emphasis on the demographic trend ― and its implications for economic growth ― should be taken seriously by politicians, who only talk about expanding welfare services in disregard of the nation’s sputtering growth machine.
To sustain growth, the OECD urges the Korean government to increase the labor force participation of three underemployed groups ― women, the elderly and youth ― while at the same time improving labor productivity, especially in services.
The report makes one notable point regarding a better use of labor force. According to the OECD, Korea is one of the few countries that have not legislated a minimum mandatory retirement age, leaving firms free to set the age as low as they wish.
As a result, most workers leave firms at a relatively young age, which is a waste of human capital. Hence the report proposes that a minimum retirement age be legislated and gradually raised to the pension eligibility age. Ultimately, it says, the government should abolish firm’s right to set a mandatory retirement age.
The report also offers tips on tax policy. Given the growing demand for welfare services, Korea will be required to increase taxes. The OECD urges Korea to adopt pro-growth measures and avoid raising taxes on labor and corporate income, which reduces employment, saving and capital investment, thereby lowering potential growth.
It also advises Korea to keep direct taxes low and increase tax revenue through indirect taxes, including value-added tax. This approach would reduce the Korean tax system’s already low redistributive impact. Yet it notes that redistribution can be achieved by expanding the earned income tax credit scheme and introducing well-targeted social spending programs.
While stressing the need to sustain growth potential, the report also calls on the Korean government to expand social spending, as economic growth alone is not enough to alleviate inequality and poverty.
Despite continued economic growth, poverty has increased in Korea. As the report notes, relative poverty ― the percentage of the population with income less than half the median income ― rose to 15 percent in 2008, the seventh-highest in the OECD.
Korea has scope to increase social expenditure, which amounted to 7.6 percent of GDP in 2007, well below the OECD average of 19 percent. But the OECD counsels Korea to be cautious about introducing new welfare schemes as they are difficult to abolish once established.
It also exhorts the nation to adopt well-targeted welfare programs rather than pursue universal schemes. For instance, the OECD is against introducing half-price tuition for all college students, although the proposal has widespread public support.
It rightly points out that universally subsidizing tuition fees would encourage even more students to go to university, worsening the problem of overemphasis on tertiary education and the mismatch between the jobs desired by young people and those actually available for them.
Sustaining economic growth is also one of the main themes of the OECD Urban Policy Review of Korea 2012. Noting that policies designed to create a more balanced regional development at the expense of the largest cities often failed in several OECD countries, it advises Korea to develop a specific strategy to enhance Seoul’s international competitiveness rather than try to decentralize its functions.
Korean politicians need to bear the OECD’s recommendations in mind as they are based on the experiences of its member countries. Promoting policies that run counter to its insights is not only foolish but will put the nation’s future in peril.
