The Korean Economy: Agenda for Competitiveness

1. The Korean Economy: Agenda for Competitiveness February 1, 2006 Joosung Jun

2. Background • GDP: $ 679.7 billion in 2004: 11th in OECD • Trade volume: $ 480 billion in 2004: 12th in the world • Manufacturing exports: 3.5% of the world, 8th largest • Per capita income: $14,100 in 2004: 24th in OECD • Labor productivity in manufacturing: 42.7% of the U.S. • Patents registered in the U.S.: 5th largest • Internet networking: 1st in the world • Kimchi is effective for SARS and Bird flu • “Han-Ryu (Korean wave)” in neighboring Asia

3. GrowthRates Source: IMF

4. Korean Economy: 2006 Forecast Source: KDI

5. Challenges • Globalization • China • Ageing population • Structural weaknesses (imbalances & rigidities)

6. Internationalisation of the Korean economy International trade1 Foreign shareholding of equities2 1 Exports and imports of goods and services in volume terms on a national accounts basis, divided by two, as a share of GDP. 2 Foreign share of market capitalisation, including KOSDAQ. 3 First half of the year. Source: Bank of Korea and Korea Exchange, KRX Review, OECD

7. China’s competitiveness gap with Korea Gap in terms of number of years, 2004 Source: KDB, Mckinsey

8. Labor cost comparison: China vs. Korea Hourly wages of workers in manufacturing sector (USD, 2004) Source: KDB, Mckinsey

9. Ageing Population (%) Note: percentage share by age group Source: Korea National Statistical Office

10. Ageing Population Note: (1), (2), (3): Percentage share by age group Source: Korea National Statistical Office

11. Competitiveness • Labor: rigidities, duel markets, youth/female unemp. • Capital: low efficiency • Productivity: Education, R&D • Government policy: globalization/democratization • Entrepreneurship: more competition locally/abroad • Infrastructure: broadly networked; costly education

12. Korea’s Potential Growth Rate Notes: 1 Assumes that Korea’s economic system and international openness remain at the current level. 2. Assumes that Korea’s economic system is improved through structural reform and increased international openness. Source: OECD(2005)

13. Competitiveness Index, Korea (overall) Source: IMD

14. Economic Performance Source: IMD

15. Government Efficiency Source: IMD

16. Business Efficiency Source: IMD

17. Infrastructure Source: IMD

18. Widening Gap (Polarization) • Have vs. Have-nots. • Seoul/metropolitan vs. Other regions • “Kang-nam (south of river)” vs. the Rest • Manufacturing vs. Service • IT vs. Non-IT • Large vs. SMEs • Regular (union) vs. Temporary workers

19. Income Distribution Gini’s coefficient (left scale) 80th/20th (right scale) Note: Urban working households Source: Korea National Statistical office

20. Structure of Korean Industry(Value-added share) Source: KIET

21. Industrial Divide (% growth in value-added) Source: Ministry of Finance and Economy

22. Profitability: Ordinary income to Sales (in percent)

23. Overall Strictness of Protection Against Dismissals in OECD Korea

24. Share of Non-Regular Workers

25. Public Finance • Continue ‘fiscal conservatism’? • Increasing demand: • Welfare: social safety net, public pensions • Defense: 3 % of GDP, 12% of budget (2005) • Unification: 30 to 300% of GDP • Limited revenue capacity • Narrow tax bases • Tax competition, evasion, resistance • Declining growth potential • Fiscal Risks • ‘Procyclical’ stance • Sustainability • Fragmented fiscal structure

26. Debt, Tax and Social Security Contribution (% of GDP) Source: Ministry of Finance and Economy, OECD

27. Medium-term Fiscal Plan, 2005-2009 (% of GDP) 1 Consolidated central government 2 Exclude Social Security Funds Source: Ministry of Planning and Budget

28. Trends in Tax Revenue, 1981-2003 (% of GDP)

29. Trends in Expenditure, 1981-2003 (% of GDP)

30. Foreign Direct Investment • New trends • M&A vs. Greenfield investment • Bilateral vs. One-way • Service/Financial vs. Manufacturing • Outsourcing, intangibles, clustering • Xenophobia or growth strategy? • Cases of abuse • Foreigners are driving stock market. • Conglomerates vs. foreign firms: tax base, SOB • China takes it all? • Complementary: supply-chain linkages • Exceptions: food processing, chemicals

31. Korea’s FDI Inflows, 1980-2004 (% of GDP) Source: Ministry of Commerce, Industry and Energy, Trends in Foreign Direct Investment and Major Statistics of Korean Economy, Various Issues.

32. Korea’s FDI Inflows by Source Countries, 1990-2003 (% of Korea’s total FDI Inflow) Source: Ministry of Commerce, Industry and Energy, Trends in Foreign Direct Investment.

33. Korea’s FDI Inflows by Sector, 1990-2003 (% of Korea’s total FDI Inflow) Source: Ministry of Commerce, Industry and Energy, Trends in Foreign Direct Investment.

34. China’s FDI inflows by Source Countries (% of GDP) Source: National Bureau of Statistics China, China Statistical Yearbook, Various Issues.

35. China’s FDI inflows by Source Countries (% of China’s total inflows) Source: National Bureau of Statistics China, China Statistical Yearbook, Various Issues.

36. Conclusions • Economic policy should be more effective. • Rent-seeking/pork-barrel should be contained. • Structural imbalances/rigidities should be properly addressed. • Education/R&D system should be improved. • North Korean impact should be minimized. (nuclear issue, unification cost)

37. 감사합니다.