The crisis that has hit emerging-market economies around the world may not yet be over, but the “policy courage” that the South Korean people and the Seoul government have shown in reaction to it is already bearing fruit. South Korea has impressed its OECD partners by turning the crisis into an opportunity for fundamental reforms that touch nearly every aspect of the economy. The range of these reforms, and the speed with which they have been introduced over the past 14 months, are virtually unparalleled in the recent experience of any other OECD country.
Reforms are not yet complete, however, and the transition to a market-based economy is still in progress. Forecasts of positive growth this year, after a 5 percent contraction of the Korean economy last year, should not be allowed to weaken the commitment or the sense of urgency. Here, too, other OECD countries are watching the Korean experience with close attention.
Perhaps the greatest challenge is to reduce the still-high levels of excess capacity and debt in the corporate sector. How should policymakers reconcile the need for quick restructuring of the corporate sector with the objective of reducing government involvement in business decision-making? From an OECD perspective, it is important that the South Korean government create a framework that will encourage market-driven restructuring while limiting the direct involvement of the state.
Full rehabilitation of the financial sector is another key priority. The Seoul government has already committed considerable resources to the banking sector. But more funds may be necessary depending on how many loans eventually become nonperforming.
Meanwhile, unemployment, which reached almost 8 percent at the end of 1998, is a serious problem. The ongoing restructuring of firms faced with excess capacity and high levels of debt will reduce the demand for workers. Public-work jobs may provide a temporary solution to assist the unemployed, but it is essential to maintain an environment that encourages job creation in the private sector as it emerges from the difficult restructuring progress. At the same time, it will be important to provide sufficient assistance to the unemployed in order to sustain social cohesion and limit the rise in poverty.
It is important that South Korea should learn the lessons provided by the experiences of other OECD countries. Any permanent expansion of South Korea’s social safety net should not be so generous as to undermine the incentives to work and save.
A related issue is reform to improve trade union and collective bargaining rights such as freedom of association and collective bargaining, to bring them into line with internationally accepted standards. Such reform was part of commitments undertaken by South Korea when it joined the Organization for Economic Cooperation and Development. The South Korean government has already undertaken significant reforms such as the package of March 1997, and the compromise agreement reached by the Presidential Tripartite Commission in February of last year. Nevertheless a number of issues still need to be resolved, and South Korea’s OECD partners look forward to seeing progress in this area.
There is also a need for regulatory reform in South Korea, as there is in almost all other OECD countries. The government’s leadership role in directing the development of the country has left South Korea with a high degree of regulation. Regulatory reform — which encompasses both better regulation and deregulation — benefits consumers by improving quality and choice and reducing prices in many sectors, while opening up new business opportunities for firms. The positive economy-wide effects of regulatory reform will help Korea as it emerges from the crisis.
Finally, South Korea needs to improve the efficiency of its public sector. While South Korea has traditionally maintained a cautious fiscal-policy stance that has limited budget deficits, there has been a sharp rise in government debt in the wake of the crisis. The policies needed to assist the unemployed, restructure the financial sector and improve social infrastructure may put additional pressure on public finances during the next few years.
As the economic recovery strengthens, it will be important to reduce the government deficit in order to avoid a runup in public debt that would have negative long-term consequences. Increasing public-sector efficiency can play a key role in helping to limit government outlays and balance the budget.
This is an ambitious agenda for further reform in South Korea. I believe that the OECD is well-placed to assist South Korean policymakers in each of the areas that I have discussed.
I also want to emphasize that, if the OECD hopes it can help South Korea, it is already certain that South Korea helps the OECD. South Korea has followed a remarkable development path. The contribution of this experience to debates among OECD members has been extremely valuable and will continue to be so. Although South Korea has been an OECD member for only two years, it already demonstrates enthusiasm and leadership across a broad range of policy questions.
South Korea has been an active participant in the OECD’s project to develop principles of corporate governance. In addition, it is helping OECD to engage nonmember countries, especially in Asia: Next month, the Korean Development Institute and the government will host with OECD in Seoul, a major conference on “Corporate Governance in Asia: A Comparative Perspective.” The issue of corporate governance is of great importance in all OECD countries, but it is particularly important in Asia. In hosting this conference, the Korean authorities demonstrate their awareness of the lessons to be drawn in this area in the wake of the Asian crisis.
Elsewhere, South Korea has played a strong role in the development of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. It has ratified the convention and will be one of the 12 founding countries when it enters into force Feb. 15. South Korea fielded a skillful team to the negotiations, and helped all members to solve many difficult technical legal problems.
In April, it will be one of the principle examiners of Germany’s antibribery laws — as part of the process to ensure that each party to the convention does a good job of implementation.
The South Korean Ministry of Finance and Economy has established with OECD a tax center at Chonan. This center offers workshops on difficult issues of tax policy to experts from some 18 countries throughout Asia. It enables OECD countries to share their experience with Asian countries and provides the only place where Asian tax experts can meet regularly.
These are only three examples of how South Korea has quickly become a very valuable contributor to OECD. I could cite many more.
In conclusion, the progress of South Korea during the past year in overcoming the crisis is remarkable. The success is due, in part, to the effective implementation of reforms in a wide range of areas. While a resumption of economic growth appears close at hand, the priority should remain on following through on South Korea’s ambitious reform agenda. The objective of the OECD is to assist South Korea in the transition to a new economic paradigm.
Successful reform will create a solid foundation for long-term growth and accelerate the convergence of income levels in South Korea to those in the most advanced OECD countries. In the meantime, other OECD members can admire South Korea’s determination to reform and be grateful to South Korea for the impressive contributions it is already making to work at the OECD.
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