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By Kim Yoo-chul
Short-term prospects for the Korean economy are good with an uptick in world trade and fiscal policy driving growth. However, widening wage inequality and high household debt are weighing on the economy, an Organization for Economic Cooperation and Development (OECD) survey reported Wednesday.
"Korea faces risks including high household debt. A rapid rise in wage costs could weaken competitiveness if productivity gains fail to keep pace. Household debt has risen to 180 percent of disposable household income, far above the OECD average, in part due to structural factors," the organization said.
The OECD said the government was seeking to reduce increases in household debt to an annual 8.2 percent, which would still imply a further rise relative to GDP. However, it added the risk to the financial sector was "limited."
"The delinquency rate on household loans is low and the capital adequacy ratio for banks is high. Moreover, 70 percent of household debt is held by the top 40 percent of income earners and household debt is backed by a rise in assets," the survey said.
But low-income earners or households could be vulnerable to rising interest rates.
"Workers in the bottom 10 percent of the income distribution have seen virtually no wage growth during the past two decades. Consequently, wage inequality is high and increasing in Korea," it said, adding labor productivity is low in Korea with regard to its high labor input relative to other OECD countries in 2016.
The survey noted the country's traditional model of growth led by exports produced by chaebol is losing steam, and that unbalanced growth driven by exports and manufacturing has led to economic and social polarization.
Beyond "chaebol reform," the survey identified measures that will enhance dynamism and productivity growth in small- and medium-sized enterprises, including regulatory reform, better access to credit and changes to the insolvency framework.
Another issue the country is facing is that it ranks below the OECD average on subjective "well-being."
"Korea scores low on the gender-wage gap, working hours and air pollution. The large gender wage gap and long working hours inhibit female employment. Other factors are weak enforcement of the right to maternity leave and women's concentration in low-paid non-regular jobs despite their relatively high-level of education," the survey said.
The OECD recommended the government apply a wide range of potential reforms in order to boost "well-being," including expanding female employment, removing the non-regular worker classification, reducing poverty among the elderly and halting greenhouse gas emissions.
It said Korea's short-term economic prospects were "good" after the Asia's fourth-largest economy rebounded in 2017 after years of subpar growth.
"Output growth will remain close to Korea's 3 percent potential growth rate this year and throughout next year. Sustained growth of world trade will boost Korean exports, offsetting some slowing in domestic demand. But slack in the labor market continues to limit private consumption. Higher oil prices pushed inflation toward the 2 percent inflation target and the current account surplus remains large," the survey concluded.
