The International Monetary Fund (IMF) warned that Korea is faced with a number of large problems on its path to securing long-term growth, including old age, excess dependence on exports, excessive household debts and a twisted labor market, among others.
In a report on the annual regular talks held on the Korean economy, the IMF noted such problems as worsening demographics, deepening dependence on exports for growth, and an excessive rise in household debts as the biggest threats to long-term growth. The report also noted that other problems, such as challenges faced by corporations, low productivity and a distorted labor market, together with a weak social safety net, have been shaking the foundations of the Korean economy from in a long-term perspective.
The IMF, however, praised the Korean government’s moves to restructure its industrial base to overcome matters that might impede economic growth. Such remarks appeared to have confirmed the Korean government’s efforts to reform its economic growth structure. The IMF said that the government’s debt burden is low enough to ease various problems emanating from the restructuring of the industrial and business sectors through budgetary means.
Directors broadly agreed that, given Korea’s low public debt, fiscal support can be used to incentivize structural reforms, cushion any adverse effects, and support growth. They concurred that a carefully targeted expansion of social expenditure over the medium term could help reduce poverty and inequality and aid rebalancing by bolstering consumption and raising productivity. In this context, they acknowledged the authorities’ aim to safeguard long run fiscal sustainability, in view of future challenges arising from demographic change and possible reunification. A few directors noted that there is room to accommodate higher social spending in the medium term without being offset by additional revenue or expenditure cut. A few other directors felt that any additional spending should be budget neutral or met by a revenue enhancement. Directors welcomed the authorities’ consideration of a fiscal rule to anchor fiscal sustainability over the medium term.
Directors supported the authorities’ efforts on corporate restructuring, and urged timely implementation of such efforts for distressed firms while ensuring an adequate social safety net for affected workers. They welcomed the plan to recapitalize the policy banks, but stressed the importance of sufficient budgetary resources and the need to unwind the bridge financing provided by the Bank of Korea.
Directors concurred that labor market reforms are critical to address segmentation and boost female labor force participation. They underscored the need to promote competition in the service sector and among small and medium enterprises to raise productivity. They also welcomed the authorities’ strategy to develop a “creative economy” by fostering innovation.
Directors broadly agreed that fiscal and monetary policies should remain supportive, in view of the current weak conjuncture and downside risks, and welcomed the authorities’ announced fiscal stimulus and recent policy rate cut. A few directors, however, expressed caution regarding the effectiveness and potential implications of further fiscal and monetary stimulus. Directors recommended tightening and harmonizing macro-prudential standards across banks and nonbanks to contain risks from rising household debt.
Regarding the external sector, some directors called for a more explicit focus on reduction of the current account surplus. Directors stressed the need to continue to allow the exchange rate to move flexibly to facilitate rebalancing and adjustment to shocks. They recommended limiting intervention to addressing disorderly market conditions and encouraged disclosure of such interventions. Directors supported the authorities’ plan to ease capital flow management measures.
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A view of the entrance of the building in Washington D.C. where the IMF has offices.(Photos: IMF)
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