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2018 OECD Economic Surveys: Korea 2018

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Economic growth picked up in 2017, but reforms are needed to sustain Korea's convergence toward the income levels in the most advanced countries. Its labour productivity is only half of that in the top half of OECD countries, reflecting problems in the service sector. In addition, productivity in small and medium-sized enterprises (SMEs) in manufacturing is only one-third of that in large firms. The segmentation of the labour market between regular and non-regular workers has resulted in one of the highest levels of wage inequality among OECD countries. The employment rate of women is relatively low and the gender wage gap is the largest in the OECD. Korea faces the most rapid population ageing in the OECD area, which is projected to drive up government social spending from 10% of GDP to 26% by 2060. This Economic Survey of Korea assesses the country's recent macroeconomic performance and prospects. It also offers recommendations on how to achieve the government's objective of a paradigm shift from growth led by business groups (chaebols) to a greater role for SMEs and innovative start-ups through wide-ranging reforms to enhance competition, improve corporate governance, promote entrepreneurship and upgrade SME policies. This should be accompanied by labour market reforms to increase employment of women, youth and older persons and to break down dualism to achieve more inclusive growth.

SPECIAL FEATURES: REFORMING THE LARGE BUSINESS GROUPS; ENHANCING DYNAMISM IN SMES

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Economic co-operation with North Korea

After contracting in 2015, the North Korean economy grew 3.9% in 2016, the fastest rate since 1999, despite a further contraction in its foreign trade (). Manufacturing and mining (58% of GDP) were supported by the “speed battle” campaign of mass mobilisation to speed up production. The campaign included output quotas at state-owned enterprises, which required the accelerated use of resources. Agriculture also recovered following the 2015 drought. Continued marketisation through the dollarisation of the North Korean economy has supported economic activity and helped stabilise the unofficial exchange rate and the rice price (Lee, 2017a). Faster growth in 2016 boosted real GDP to its highest level since 1991. Nevertheless, per capita gross national income in the South is 21.9 times higher than in the North (), raising concern about the potential cost of economic rapprochement. Production and investment growth appears to have declined on a year-on-year basis in the first half of 2017, reflecting renewed droughts, the payback from the “speed battle” campaign and the tightening of sanctions (Lee, 2017b).

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