Korean Economy's Paradigm Shifts to Sustainable Growth
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Korean Economy's Paradigm Shifts to Sustainable Growth
Deputy Prime Minister Kim leads Korean delegation to 2017 Annual Meetings of IMF & WBG

26(Tue), Sep, 2017

Deputy Prime Minister Kim Dong-yeon talks with IMF Managing Director Christine Lagarde during their meeting in Seoul. (Photo: MOSF)

Deputy Prime Minister and Minister of Strategy and Finance Kim Dong-yeon will participate in the 2017 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG) slated for Oct. 13-15 in Washington, D.C. 

Deputy Prime Minister Kim will head a Korean delegation to the annual meetings.

The delegation includes the governor of the Bank of Korea and heads and representatives of commercial banks, including Shinhan Financial Group, Kookmin Financial Group, Hana Financial Group, NH Financial Group, Woori Bank, Korea Development Bank, IBK, and Korea Eximbank as well as representatives of other financial institutions and the financial industry, including the Korea Financial Investment Association.

The annual meetings bring together central bankers, ministers of finance and development, private sector executives, and academics to discuss progress on the work of the IMF and the World Bank Group.

Also featured are seminars, regional briefings, press conferences, and many other events focused on the global economy, international development, and the world's financial markets.

Paradigm Shifted for Sustainable Growth 

The economy has rapidly lost growth momentum since the 1995 Asian financial crisis. The economy is in a complex situation where low growth continues and income inequality worsens due to structural problems. It is time to shift the country’s growth paradigm to sustainable growth.

Increased household income will be a new driver of growth. The virtuous cycle of employment-distribution-growth will be restored. Participants will be rewarded more fairly according to what they contribute. The economy will be able to maintain 3 percent growth potential as regulations are changed in favor of fair competition and innovative SMEs.

Wage-led Growth

Work to increase households’ disposable income

The government will work to achieve a 10,000 won per hour minimum wage with the Minimum Wage Discussion Group: Discussions will include financial support for small merchants. 

It will strive to reduce basic living costs, such as housing, healthcare, transportation, communications and education expenses: it will provide as many as 50,000 public housing units downtown, and introduce a new type of reverse mortgages, sale &leaseback, in which home owners can sell their homes and continue to live in their homes by leasing them back Secure the income of the vulnerable group by strengthening social safety nets. It will work to improve income distribution to the OECD average by expanding the eligibility for basic social security recipients and increasing EITC. It will increase unemployment insurance: make unemployment insurance mandatory for all employees and raise the unemployment insurance benefits to the OECD average Increase education investment to provide every Korean child with opportunities to grow qualified professionals.

It will reform public education in a way to develop creative human resources and help them prepare for their future careers,; increase public education support for it to cover the entire period from daycare centers to colleges,; introduce a system in which the socially vulnerable can have opportunities, such as through special admissions and increased educational support for low-income families.

Make the economy work for job creation

Pursue growth through job creation

The government will redesign its policy tools, including budgets and taxes, in a way to promote job creation.

Job creation will be the top priority in allocating budgets: stricter job creation evaluation standards will be adopted and the outcomes will be reflected in planning budgets

Tax codes will be revised in a way to promote job creation: increased tax incentives will be given when companies increase employment, shift temporary positions to permanent positions and raise wages.

Companies creating jobs, regardless of their nationalities, will receive prioritized support.

Promote decent employment

The government will work to reduce temporary workers: it announces types of jobs which cannot be done by temporary workers, and increase burdens of hiring temporary workers,; and it will achieve the 1,800 annual work hours, such as by lowering the legal limit on weekly work hours from 68 to 52

Expand job markets

Budgets for expanding job markets will be increased at a faster pace than the total budget increase. It will introduce innovative job training programs, such as work place job training to educate high quality workforce, job training programs specified to self-employed businesses and middle-aged job seekers, and job training for high tech workforce, designed to prepare themselves for the 4th industrial revolution.

The government will strengthen tailored support: (Young adults) Public institutions will be obliged to fill more than 5 percent of their total positions with young adults, and SMEs will receive government’s extra incentives for hiring young adults, (Women) Woman job seekers will be able to use a total of 175 employment centers nationwide, mothers will be able to work reduced hours for an extended period of time, and entitlements during the maternity leave will be doubled for the first three months, (Middle-aged job seekers) The government will strengthen employment support for those wanting to change jobs as well as seeking jobs, and will increase social services jobs.

Fair competition

Remove unfair practices

The government will work to get rid of unfair business practices between the owners and contractors, or buyers and suppliers,; and  will get rid of unfair practices in the capital market, such as stock manipulation and accounting fraud, to make the market more transparent and to protect investors.

Improve corporate governance to create a level playing field

It will regulate transactions between parent companies and subsidiaries, and work to reduce cross shareholding in large conglomerates. Affiliates of insurance holding companies will be under stricter voting restriction.

Small shareholders will be able to voice through multiple derivative actions, electronic voting and cumulative voting.

Pursue shared growth and protect small merchants

Large shopping malls will be under business restriction, in addition to large supermarkets.

It will work on business models for shared growth: Promote profit sharing between large enterprises and SME contractors, and encourage large companies to share their distribution networks with SMEs.

Growth through innovation

Promote cooperation and innovation to develop SMEs as the country’s growth engine

The government will support establishing networks that promote economies of scale for SMEs to enhance competitiveness. I will introduce cooperative SMEs and remove barriers interrupting cooperation between SMEs.

Prepare for the 4th industrial revolution

It launched a presidential committee on the 4th industrial revolution in August. The government will promote demand-based R&D programs, and work to develop the intelligence technologies, such as AI and IoT, to help them catch up with the most advanced as fast as possible.

Pursue opening to global markets and going to overseas markets

The government will strengthen FTAs with ASEAN and India, and work on starting new FTA negotiations and striking new trade deals, to prepare for protectionism and move beyond China. 

It will provide foreign companies with one trillion won worth of financing by the end of 2018 to encourage them to import products made by Korean SMEs, which is aimed at increasing the share of exports to total sales in SMEs to more than 40 percent.

It will promote young adult overseas employment: Improve K-Move centers and work to increase entry level professional jobs available to Korea’s young adults in international financial institutions.

Lay a Solid Foundation for Economic Policy Implementation

Household debt management

The government will lower the household debt increase to single digit growth within 2017. It will promote the restructuring of mortgages in non-bank financial institutions into long-term loans with an amortization schedule.

Work for housing market stability

The government will work to avoid volatility in the housing market. It will implement flexible and region-specific measures when necessary, and improve the eligibility standard for new home buyers to help the market work in favor of those who need a house to live.

Preemptive and Strong restructuring

The government will carry out industrial risk assessment, liquidate potentially insolvent companies and work to improve competitiveness of the industry.

Seek policy innovation to support the new paradigm

The government will increase fiscal investment to help overcome low growth and income polarization. It will study the effect of fiscal expenditures on distribution,;  increase social expenditures taking into account ageing population, which were 10.4 percent to GDP in 2016.

Taxation focuses on distribution: High income earners and large asset owners will be subject to higher taxes.

It will deliberately implement fiscal measures taking into consideration business cycles: Strengthen automatic stabilizers.

Promote venture capital through increased financing

It will increase financing to encourage venture capital to invest at every stage of startup, growth and exit.

Economic Policies in the 2nd Half of 2017 and Outlooks

The global economy is expected to continue to grow as both advanced economies and emerging economies are recovering. Risks linger, as oil prices continue to fall, major economies are likely to shift their monetary policy trends, and protectionism has been spreading. The Korean economy is expected to continue to recover, but growth momentum will likely weaken. Employment growth is expected to decelerate, and consumer prices will likely remain stable, but there are risks of prices becoming volatile if the weather conditions are unfavorable.

Economic policies in the 2nd half

The government will swiftly implement the supplementary budget: it will work to spend 70% of the supplementary budget by the end of 3rd quarter.

It will boost domestic consumption: Spend 100 billion won on replacing heating or cooling equipment at welfare centers with energy efficient one, extend the VAT refund for foreign tourists’ plastic surgery expenses to the end of 2019, promote the use of tourist attractions for staging performance, work to introduce ‘Chque Vacances’ in which corporations and employees reserve funds for employees’ travel expenses and the government provides matching funds for the accumulation, and increase national holidays.

It will promote corporate investment: Revise ‘the tax on excess corporate cash reserves’ and the KDB to launch a 2 trillion won worth of corporate investment support program.

8th Talks on  Economic Issues

Deputy Prime Minister Kim presided over the 8th talks on current economic issues on Sept. 14. The meeting was held to address current challenges, such as household debt problems and North’s nuclear ambitions, before President Moon’s visit to the US and the FOMC meeting scheduled on Sept. 21. Top officers from the Bank of Korea, Financial Services Commission, Financial Supervisory Service, and Ministry of Land, Infrastructure and Transport, as well as top economic and social advisers from the Office of the President, participated in the talks.

Household debt problems 

The government will unveil measures to focus on strengthening support for landing of household debts. It will provide better support for low income capabilities and delinquency status ,; strengthen loan consulting services,; work for a soft landing of household debts and manage the percent,; work for low income households wanting to take out loans institutions’ strengthened risk management,; unveil the roadmap to provide better North related risks and financial market volatility. The government will strengthen cooperation among related ministries and institutions economy to be thoroughly prepared for while. 

It will continue the 24 hour monitoring provocation,; swiftly respond to market volatility ,; provide credit rating agencies and global investors ,; and work for financial market volatility and corporate confidence.                           

Production Grows due to Strong Exports

The economic recovery is expected to continue backed by strong exports and successful implementation of supplementary budgets. However, external and internal risks linger, such as trade issues, auto worker strikes and North related problems.

The government will strengthen its risk management, and will successfully carry out the new administration’s economic policies and supplementary budgets to create decent jobs and boost the real economy.

The Korean economy has seen all industry production edge up for the first time in four months backed by strong exports. However, a slowdown in facility investment puts pressure on the economy.

The economy added 313,000 jobs year-on-year in July. Employment in the manufacturing sector improved due to a low base effect, but job growth in the construction sector decelerated. Consumer prices in August rose at a faster pace than the previous month(up 2.2%up 2.6%, y-o-y) due to high vegetable prices and a low base effect from the previous summer when electricity rates were cut temporarily.

Mining and manufacturing production rebounded in July (down 0.5%up 1.9%, m-o-m) backed by strong automobile and electronic parts production, and service output rose for the second consecutive month (up 0.6%up 0.6%, m-o-m) as wholesale & retail increased. Retail sales rose for the second straight month in July (up 1.2%up 0.2%, m-o-m) backed by durable goods sales, such as communications devices, following the release of new smartphone models.

Facility investment fell in July (up 4.8%down 5.1%, m-o-m) due to a high base effect from the previous month when large investments were made on semiconductor manufacturing equipment. Construction investment rebounded (down 0.4%up 3.6%, m-o-m) after declining for three consecutive months. In July, the cyclical indicator of the coincident composite index stayed unchanged from the previous month at 100.7, and the cyclical indicator of the leading composite index rose 0.2 points to 101.7.

Exports increased for the tenth straight month in August (up 19.5% up 17.4%, y-o-y) backed by strong major export items, such as semiconductors and petroleum products. In August, Stock prices fell as investors withdrew returns following a strong rally and North related risks heightened. Both the dollar-won exchange rate and treasury bond yields rose.

Housing prices increased at a faster pace in August (up 0.18%up 0.25%, m-o-m) due to a price surge in the Seoul metropolitan area, and Jeonse (lump-sum deposits with no monthly payments) prices(up 0.06%up 0.08%, m-o-m)rose modestly.

External Debt Rises to $407.3 Bln; Soundness Indicators Remain Stable

Korea’s external debt amounted to US $407.3 billion as of the end of June 2017, an increase of US $1.7 billion from the previous quarter ― Short-term debt stood at $117.3 billion, up US $1.9 billion quarter-on-quarter while long-term debt amounted to US $290.0 billion, down US $0.3 billion quarter-on-quarter. External debt soundness indicators remain stable as the ratio of short-term debt to total external debt stayed low at 28.8 percent and the ratio of short-term external debt to foreign exchange reserves remained stable at 30.8 percent, although both indicators rose quarter-on-quarter, up 0.4 percentage points and 0.1 percentage points, respectively. 

The government will closely monitor the external debt situation to ensure that external soundness continues to be stable amid lingering uncertainties in the global financial market, such as monetary policy normalization in advanced economies and North-related geopolitical risks. 

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