Republic of Korea
Date: 10 May 2012
The event will be held in Seoul , Republic of Korea , with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:
Mr. Jeffrey Sachs
Director, Earth Institute, Columbia University and
Special Advisor to the UN Secretary General
Mr. Jeong-Wha Lee
Senior Advisor to the President for International Economy and
G20 Sherpa of the Republic of Korea
Mr. Kilaparti Ramakrishna
ESCAP Subregional Office For East and North-East Asia
Country briefing note <download pdf file>
Growth moderates as global economic outlook deteriorates
In 2011, the economy expanded by 3.6% compared to the 6.1% growth recorded in 2010. While during the first half of 2011 the economy saw strong growth in household expenditure and exports, both sectors slumped during the second half due to the impact of the worsening debt crisis in Europe and persistently high inflation which dampened consumption. The real estate market remained flat throughout the year which resulted in a sharp rise in property rents as households shifted from buying to renting.
Overall current account surplus decreased to 2.2% of GDP in 2011 from 3.4% of GDP in 2010. The decrease resulted from weakness of exports during the later months as demand from major trading partners in Europe, the United States and especially China significantly decreased. Import growth was sustained at relatively high levels during the year.
The economy faces very strong headwinds in 2012 with the GDP growth rate projected to fall to 3.5%. Given the current trend of global weakness and uncertainty, the key policy challenge for the economy will be balancing inflation risk with short-term growth concerns, and coping with the slowdown in economic activity in China .
Inflationary pressure eases but risks remain
In 2011 the inflation rate remained well above the Bank of Korea's target range of 2-3% for most of the year despite the introduction of various price stabilization measures, which included freezing public utility prices and temporary reductions in custom tariffs. Consumer prices rose 4% in 2011 compared to 2.9% in the previous year mainly due to the rapid rise in the price of food and fuel.
To combat rising inflation, the Bank of Korea announced that it would increase the interest rates slowly and by small increments. However, growing concern over the global economy and deteriorating demand led to a halt in tightening by mid 2011. The main policy rate has been kept at 3.25% since July 2011.
Similarly to other sectors, FDI inflows registered strong growth during the first half of 2011 but tapered off in the second half. While large increases in FDI are not likely given the growing global economic uncertainty, recent free trade agreements (FTAs) with the European Union and the United States are likely to have a positive impact on FDI inflows.
The currency, which remained relatively weak against the currencies of major trading partners, ended the year lower by around 9% compared to 2010.
Fiscal situation improves as private sector replaces government stimulus
The budget surplus further increased in 2011 to 3% of GDP from 1.4% of GDP recorded in 2010. While the national government's budget stayed at a healthy level, a rapid rise in debt from state-owned enterprises is increasingly burdening the government. Particular, two of the largest state-owned enterprises, Korea Electric Power Corporation and Korea Land and Housing Corporation both experienced a soaring rise in debt in 2011 as the cap on electricity prices and depressed property markets respectively affected profitability.
Looking ahead, mounting pressure on the government to provide more comprehensive social protection programmes is likely to have an impact on the budget balance in coming years. Additionally, considering the country's rapidly ageing population, it will be imperative to monitor government debt levels closely.
Emerging socioeconomic challenges
One of the key concerns for policymakers is the issue of rapidly ballooning household debt. The gradual rise in interest rates since 2010 and fall in property prices compounded the household debt problem by increasing the debt servicing cost and simultaneously making it difficult to sell property assets to repay the debt. Moreover, data indicates that a large portion of household debt is owned by the lowest 20% income bracket, with their disposable income of debt ratio exceeding 300%. However, measures to curb further rises in household debt could have an adverse effect of stifling private consumption at a time when it is most needed to support the economy. Furthermore, making it more difficult to access credit formally, can lead to a boom in illegal lending arrangements carrying exorbitant interest rates.
Despite improving labour market conditions, wage increases have not kept up with the rising cost of living, contributing to increasing inequality. While growing inequality is a multifaceted and complex issue, driven by factors including demographic shifts and persistent income gaps between urban and rural areas, the primary driver of inequality is the shortage of decent jobs. In fact, available data show that between 2001-2008, average GDP growth was 4.4% in the Republic of Korea but average employment growth was much lower at 1.4% for the same period. Fundamentally, the creation of decent jobs has the most potential for reversing the trend of growing inequality. Also, addressing the education inequality or inequality in opportunity that prohibit social mobility is far more effective in narrowing the income gap than redistribution policies alone.
Policy brief: Living with high commodity prices <download pdf file>