Upgrading Korea’s growth model

By Jon Pareliussen, OECD Economics Department

After going through a soft patch, exports are again driving economic growth in Korea as demand for computer chips has soared to power a wave of investment in artificial intelligence. Korea’s export-oriented growth model has served the country well for decades, along with sound macroeconomic policies and a strong commitment to education. Even so, the 2024 OECD Economic Survey of Korea argues that Korea needs to upgrade its growth model to revitalise private consumption as an additional growth engine, to become greener, happier and halt the declining fertility trend.

Korea’s export-led growth model has changed over time. Past periods of reforms that boosted competition and exports at the same time were more successful with fewer negative side-effects than periods of more heavy-handed “dirigiste” industrial policy. However, export-oriented growth in any shape or form tilts society’s resources towards production, investments and exports and thereby away from consumption and leisure (Figure 1). For example, compared to the OECD average Korea spends a large share of GDP on supporting businesses while a comparably small share is used to support people through the social safety net. Energy, of which two-thirds is used in industry, is relatively cheap, while food and clothing are expensive in relative terms compared to OECD peers.

Figure 1. Exports drive growth

Real GDP level by component

Source: OECD Economic Surveys: Korea 2024.

Many of the large manufacturing-heavy business groups benefitting from export promotion policy in the past gained dominance in a shielded domestic market, contributing to large productivity gaps between large and small companies and between manufacturing and services. Eventually, to meet these imbalances, the government’s duty to support SMEs became enshrined in Korea’s constitution. Today a cobweb of support schemes and regulations supports the SME sector (Figure 2), in which 85% of employment is found, while SME productivity keeps lagging. Consolidating these supports would facilitate productivity catch-up by levelling the playing-field in the domestic market and incentivising SMEs to grow. Room remains to further open up to foreign investment and trade and reduce public interventions in the economy.

Figure 2. A cobweb of subsidies are available to SMEs

SME support programmes by entity

1. Ministry of Trade, Industry and Energy. 2. Ministry of Science and ICT. 3. Ministry of SMEs and Startups. 4. Ministry of Oceans and Fisheries. 5. Ministry of Agriculture, Food and Rural Affairs. 6. Ministry of Employment and Labor. 7. Ministry of Culture, Sports and Tourism. 8. Ministry of Environment. 9. Ministry of Land, Infrastructure and Transport. 10. Ministry of Economy and Finance. 11. Financial Services Commission. 12. Ministry of Interior and Safety. 13. Korean Intellectual Property Office. 14. Forest Service. 15. Public Procurement Service. 16. Ministry of Food and Drug Safety. 17. Communications Commission. 18. Customs Service.
Source: Ministry of SMEs and Startups.

Concerns of adding cost to business and reducing external competitiveness have also so far stood in the way of aligning climate policies sufficiently with Korea’s climate targets. Setting the overall cap of the emissions trading scheme in line with the 2030 target will take the country three-quarters of the way to meet its 2030 emission reduction target, while a failure to do so would put the target in question. Reforming electricity supply and use to a market-based system where the true cost of energy and emissions is fully reflected, would reduce the society-wide cost of the green transition.

Korea’s imbalances between producing and consuming are mirrored in mothers’ and fathers’ struggle to balance work and life (Figure 3). This is a key reason why Korea has the lowest birth rate in the world, falling to 0.72 child per woman in 2023. If carried forward, today’s young adults will outnumber their grandchildren by nine to one, with dire consequences for labour supply and public finances. The OECD Economic Survey of Korea discusses the complex structural causes of low fertility and argues that reversing the trend would require broad structural reforms to product and labour markets, filling gaps in family policies, and changing gendered norms and practices. Adapting to inevitable ageing requires postponing retirement, boosting female and youth labour participation and promoting work immigration.

Figure 3. Women increasingly participate in the labour market, where hours are long

1. Average usual weekly hours worked on the main job for full-time employed.
Source: Statistics Korea; and OECD Labour Force Statistics database.

An upgraded growth model building on these recommendations would boost average incomes and let more accrue to those who will spend more, in particular low-income households and households with children. Such reforms could revitalise private consumption as an additional growth engine and make Korea not only richer, but also greener, happier and more family-friendly.

Reference:

OECD (2024), OECD Economic Surveys: Korea 2024, OECD Publishing, Paris, https://doi.org/10.1787/c243e16a-en