Report says the nation should take caution in developing social welfare programs


The Organization for Economic Cooperation and Development forecast Korea’s economic growth to be around 3.5 percent this year and 4.3 percent next year despite a slowdown in world trade.

If the global economy were to experience a serious downturn, Korea can respond with fiscal stimulus, given its strong fiscal position, and monetary policy easing, the OECD said in its 2012 economic survey.

The OECD said Korea faces two key challenges: sustaining economic growth in the face of rapid population ageing, and improving social cohesion by reducing inequality and relative poverty.

The OECD recommended that Korea step up efforts to raise labor market participation by women and young people as its working-age population is expected to decline from 2017.

“Korea’s population, currently the third-youngest in the OECD, is projected to be the second oldest by 2050. As a result, at current participation rates, the labor force would fall by nearly one-fifth by mid-century, while the number of elderly persons triples,” OECD secretary general Angel Gurria said in a press conference with Finance Minister Bahk Jae-wan in Seoul on Thursday.

“Participation of women aged 25 to 54 in the labor force is the third-lowest in the OECD. Increasing it requires a comprehensive approach, including reducing labor market dualism, increasing the availability of affordable, high-quality child care and making workplaces more family-friendly.”

Gurria added that Korea needs more flexible wage and employment systems, which would also help make better use of older workers, who tend to leave firms by age 55.

Gurria also urged Seoul to improve its education system, especially early childhood education, de-emphasize university education and upgrade vocational education to increase labor productivity.

He noted that Korea’s productivity in services has to catch up with that of the manufacturing sector and that reducing labor market dualism was a priority for achieving social cohesion.

“A dynamic services sector requires leveling the playing field with manufacturing and strengthening competition, including by eliminating domestic entry barriers, accelerating regulatory reform, and reducing barriers to trade and inflows of foreign direct investment,” he said.

“Policy reform to reduce labor market dualism should focus not only on reducing employment protection for workers on regular contracts but also on improving social insurance coverage and expanding training for non-regular workers.”

While noting that well-targeted increases in social spending were necessary, the OECD urged Korea to design social welfare programs carefully, given that population ageing alone would boost social spending to as high as 20 percent of GDP by 2050.

The OECD warned that an increase in welfare spending for the aging population and costs for possible rapprochement with North Korea could hurt South Korea’s fiscal soundness in the future.

“But financing higher social spending by hiking taxes should avoid increasing the tax burden on labor income and discouraging work,” Gurria said.

“Instead, relatively non-distorting taxes, such as the value-added tax and environmental taxes, should therefore be the main sources of revenue.”

Korea’s VAT rate is currently 10 percent, far below the OECD average of 18 percent. Environmental taxes raise already close to 3 percent of GDP, which is above the OECD average, but there is room for further increases, he said.

By Kim So-hyun (sophie@heraldcorp.com)