Korea and the IMF
KOREA: Economic Overview and Relations with the IMF
|Population:||around 49 million|
|Surface area (sq.km)||around 99,000|
|GDP (2005 prices, billions of won, 2009)||980,413|
|GDP growth (annual %)||0.2 (2009)|
|Current account balance (millions US$, 2009)||42,668|
|Major exports:||semiconductors, wireless telecommunications equipment, cars, computers, steel, ships, petrochemicals|
|Major export partners:||China, US, Japan, Hong Kong SAR|
|Reserves of foreign exchange (millions of US$ 2009)||269,995|
Korea holds a seat on the IMF’s Executive Board and it, along with the alternate Director from Australia, represents a constituency of 14 Asia-Pacific countries.
Over the past 40 years, Korea has achieved impressive rates of economic growth and has become a high-tech, industrialized economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Asia, it is now one of the world’s 20 largest economies and in 1996 became a member of the Organization for Economic Cooperation and Development (OECD).
Korea’s growth, however, became increasingly unsustainable in the run-up to the Asian crisis of 1997-98, partly due to the massive build-up in short-term foreign borrowing and high corporate leverage. This led to a deep economic slump during the Asian crisis, and a short-lived but nevertheless difficult period of adjustment for the Korean people. The IMF worked with the authorities to overcome the crisis, including through financial support.
The slump associated with the crisis was followed by a fast recovery, supported by the authorities’ adoption of wide-ranging economic reforms, including banking and corporate sector restructuring, financial liberalization, and greater openness to foreign investment and imports.
Korea and the global economic crisis
Korea benefitted from the comprehensive reforms and liberalization introduced since the Asian crisis, and a decade of strong growth. It entered the global economic crisis in 2008 with strong economic fundamentals, making it resilient to the adverse external shocks it suffered. The economy has rebounded impressively from the recession in the second half of 2008 and the country has since achieved one of the strongest recoveries among OECD countries. This has also been propelled by the normalization of international trade and Korea’s expansionary macroeconomic and financial sector policies.
The IMF predicts that output will grow well above its potential growth rate of around 4 percent in 2010—a strong recovery from the 0.2 percent growth in 2009 and one which is increasingly being led by private domestic demand. With less slack in the economy, the IMF believes there is scope to begin the process of scaling back macroeconomic stimulus. The authorities have already implemented significant fiscal withdrawal in 2010 and there is scope to begin the gradual normalization of monetary policy rates, which would still leave monetary policy supportive of the recovery.
Korea’s fiscal position is generally sound and provided the space for the significant stimulus implemented during the recent crisis. To meet the fiscal challenges associated with an aging population, the authorities should consolidate public finances over the medium term. In this context, the IMF welcomes the government’s aim to balance the central government budget, excluding social security funds, by 2013-14. It is now important to detail the needed consolidation measures.
Over the medium term, growth is projected to settle below pre-crisis levels, reflecting several factors: weaker export demand from advanced economies, an aging labor force, and the high indebtedness of Korean households and small and medium sized enterprises. To sustain growth over the medium term, the authorities should take steps to diversify away from the export sector to the non-tradable service sector. This requires reforms in a number of areas, including restructuring of small and medium-sized enterprises, increased competition in the service sector, and labor and social policy reforms supporting the transition on the supply side of the economy.
- Build a shared vision to support sustained economic growth in Asia, while drawing lessons from the past in a candid and constructive manner;
- Showcase Asia’s success in economic management, and highlight lessons for other regions;
- Examine Asia’s growth model, its prospects going forward, and the implications of change for the global economy;
- Discuss Asia’s role in the international community, including the IMF, in this process.
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