Korea’s rapid ascent from destitution to catch up with OECD average per capita income (Figure 1.1) was founded on competition- and export-friendly reforms, sound macroeconomic policies and a strong commitment to education. Exports continue to shape Korea’s economic fortunes. Demand normalisation after the pandemic led to semiconductor production overcapacity and the global inflation shock related to Russia’s war of aggression against Ukraine generally lowered the demand for goods, holding back growth in 2023. Now, with inflation falling back and renewed demand for computer chips to power a wave of investment in artificial intelligence, exports are again driving growth. Trade dependencies have created disruptions which have so far been manageable, but diversification can reduce risk. Employment has increased almost continually since early 2021, unemployment remains low, and the initial shocks from inflation, higher interest rates and falling housing prices that were holding back consumption are abating. Monetary policy easing is on the horizon, while the government plans to improve the fiscal balance. All in all, growth should strengthen, but high household debt remains a concern.

This Survey argues that after serving the country well for decades, the export-oriented growth model needs a decisive upgrade for Korea to catch up with best-performing OECD countries in terms of incomes, environmental sustainability and well-being. Manufacturing exports are and should remain an important source of growth, but the domestic economy has considerable untapped potential. Productivity gaps between large and small companies and between manufacturing and services are due in part to weak competition in considerable segments of the domestic economy. A cobweb of support schemes and regulations exists to support the SME sector in which 85% of employment is found. Institutional change to systematically consolidate business supports and regulations would facilitate productivity catch-up by levelling the playing-field in the domestic market and incentivise SMEs to grow. There is also room to further open up to foreign investment and trade and reduce public interventions in the economy (Chapter 3). Productivity gaps are mirrored in labour market duality with large differences in pay, job quality and social protection. Bringing SME productivity closer to that of large companies by means of pro-competition reforms, while reducing gaps in employment protection and social protection would increase the purchasing power of SME employees, notably those who are today earning low incomes in precarious jobs.

The fertility rate of 0.72 child per woman in 2023 is the lowest in the world. It implies that today’s parent generation is set to outnumber their children’s generation by roughly three to one, and their grandchildren’s generation by nine to one, with dire consequences for labour supply and public finances. Duality, seniority-based pay and insufficient protection against discrimination exacerbate earnings losses related to temporary child-related absences from working life, and combining work and family is difficult due to inflexible working practices. The career costs of childbirth are largely borne by mothers due to prevailing gender norms, leading women to postpone or renounce family formation. Private tutoring expenditure is also high as parents want their children on the winning side of productivity gaps and labour market dualities. Korea has strengthened family policies considerably over time, but turning around the situation requires broad structural reform to product and labour markets, completing family policies, and changing norms and practices (Chapter 5; Figure 1.2).

Concerns of adding cost to business and reducing external competitiveness have also so far stood in the way of tightening climate policies sufficiently to align them with Korea’s climate targets. The economy is emission-intensive and remains reliant on coal (Figure 1.3). In the current system, the carbon price from the emissions trading scheme is not fully reflected in electricity generation. The government has raised electricity prices considerably to better reflect the true cost of energy, but they remain regulated and vary across categories of end users. A decision on allocations to the emissions trading scheme is to be made in the near future. Giving more room to the market to set prices by means of deregulation and tightening of the emissions trading scheme is the least-cost way of reaching climate targets, even though it would visibly raise the cost of energy and polluting for some (Chapter 4).

An upgraded growth model should be based on growing incomes by a combination of productivity catch-up and reducing labour market duality, strengthening the social safety net, and boosting employment, including by enabling both mothers and fathers to balance career and family. Concrete policies include: boosting competition by reducing unnecessary public support, regulations and other barriers to domestic and foreign competition while intensifying efforts against market power abuse; reducing rigid employment protection while protecting people and incentivising risk-taking by strengthening the social insurance system; making labour practices more conducive to work-life balance by legislation, enforcement and a strengthened social dialogue; meeting inevitable ageing by increasing immigration and lengthening working lives; and continuing education reforms to dampen pressures on children and parents. Taken together, this would boost average incomes and let more thereof accrue to those who will spend it, in particular today’s low-income households and households with children, thereby revitalising private consumption as an additional growth engine for the coming decades (Table 1.1).

Against this background, the main messages of this Survey are:

• Fiscal policy needs to align with long-term pressures from rapid ageing in line with the proposed fiscal rule. Conditional on inflation approaching the target, monetary policy easing could start towards late 2024.

• Strengthening fair competition on a level playing field would boost productivity among SMEs. Reforms should go in the direction of limiting by law or other institutional arrangements aid to companies except in explicitly allowed cases, reducing state interventions and facilitating foreign trade and investment in the domestic economy.

• 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 meeting its 2030 emission reduction target, while a failure to do so would put the target in question. Building on planned electricity market reforms, Korea should move towards a market-based system where the true cost of energy and emissions is fully reflected in electricity supply and use.

• Society needs to support young women and men to have the number of children they desire by filling gaps in family policies and social insurance, forcefully fighting discrimination, lowering housing and education costs and reforming labour markets to better balance career and family. Inevitable ageing should be met by lengthening working lives, mobilising underutilised labour resources and expanding immigration.