Korea should also plan for prudent spending in 2023 to control inflation
By Kim Yoo-chul
The expansion of Korea's education system has played a significant role in the country's economic development. But the education system is now facing demographic headwinds and also needs improvements to meet the needs of the modern labor market.
In short, the country's labor productivity is low while labor inputs are high because the country saw remarkable economic growth in the latter half of the 20th century. This was made possible by state intervention in the economy, with a strict focus on labor and cash-intensive manufacturing industries in such a way so as to produce manufactured products for exports.
A core point behind the drastic economic development was the elite strategies implemented for higher education, leading Koreans to become obsessed with prestigious and socially recognized colleges, which were prioritized over efforts to gain real-world practical skills. According to critics, the country's economic achievement and education miracle resulted in a so-called education inflation situation because of the huge mismatch between skills taught in post-secondary education and skills desired by the public and private sectors.
| Hwang Hyun-jeong, an OECD economist |
Speaking to The Korea Times, an OECD economist said that the country may have to reform its education systems, stressing that educational reforms should focus on boosting the productivity of small and medium-sized enterprises (SMEs) and even wages.
“Educational reforms must be accompanied by measures to break down labor market dualism and raise SMEs productivity and wages, thereby encouraging young people with tertiary education to accept jobs in smaller firms rather than queueing for jobs in large firms and the public sector,” Hwang Hyun-jeong, who covers the Korean economy at the OECD, said in a recent interview.
Hwang added that the education system should encourage students to develop their individual interests and talents by providing a wider range of paths to success. “This requires reducing the emphasis on the standardized university entrance exam and allowing university students more flexibility in choosing and changing their field of study to reduce mismatches between the education system and the labor market,” she said.
According to OECD analysis, Korean students are typically ranked among the world's top level, but just right after they enter the workforce, their cognitive strengths begin to erode at the fastest pace among OECD nations mostly because of reduced competition, independency and the discontinuance of ongoing training.
“Education reforms so as to reduce the labor market mismatch need to overcome the widely held belief that the only path to success is a degree from a top university leading to a regular job at a large corporation or in the public sector. To gain admission to top-ranked universities, many students apply to departments that do not correspond to their interests and capabilities, resulting in sub-optimal use of talent,” according to the economist.
Recruitment managers at the country's leading companies often claim that the experience and skills they want have literally nothing to do with whether an applicant holds a bachelor's degree. The OECD said Korea is its only member nation where the level of correlation between courses taken in tertiary education and actual employment is nearing zero.
She said that the OECD doesn't expect any noticeable changes in the country's labor market conditions under the current administration compared to the previous Moon Jae-in administration, saying that higher productivity in the labor market and a better work-life balance are two sides of the same coin.
| Students wait before the start of the College Scholastic Ability Test (CSAT) at a school in Seoul, Nov. 17. The annual CSAT is the country's most important annual academic event, and the whole country grinds almost completely to a halt during the test hours. AP-Yonhap |
“In particular, family-friendly policies such as parental leave or flexible working hours are essential to increase female productivity. Because in the absence of such policies, highly skilled women might leave the workforce entirely or for an extended period, deteriorating their skills and thereby ending up in low-skill jobs. This suppresses aggregate economic productivity. Despite an abundance of well-educated women, Korea has the largest gender wage gap in the OECD. Strengthening work-life balance policies will be essential to increasing productivity in Korea,” according to her.
BOK should bring inflation back to its target quickly
The Korean economy, Asia's fourth-largest, is facing signs of slowing domestic growth because of the rising cost of living and its effects on household income. This has been pressuring the country's central bank ― the Bank of Korea ― to seek measures striking a balance between inflation and economic growth.
The OECD cut its growth forecast for the Korean economy next year to 1.8 percent, down significantly from the 2.7 percent forecasted for this year. The economist said its projection is a “reflection of a weaker outlook for trade partner countries, together with higher inflation and tighter monetary and financial conditions which will reduce purchasing power and take a toll on consumer spending and business investment.”
The OECD said Korea should bring inflation back to the target level as soon as possible. The country's inflation level was at 5.7 percent, significantly higher than the BOK's target of 2 percent, meaning that the BOK has more room to raise its benchmark rate, additionally, before pausing.
“Rate increases so far, and likely further increases in the future will help re-anchor inflation expectations and prevent inflation from spiraling out of control. High public spending also fuels inflation. The government is therefore right to plan for more prudent spending next year, reducing COVID-related supports. However, those who need it most, for example, low-income people and those hardest hit by inflation, may need some targeted support,” the economist said.
| A worker wearing a protective suit registers a woman for a COVID-19 test at a coronavirus testing site in Beijing, Nov. 10. A surge in COVID-19 cases has spurred lockdowns in the southern Chinese manufacturing hub of Guangzhou, adding to the financial pressure that has disrupted global supply chains and sharply slowed growth in the world's second-largest economy. AP-Yonhap |
Looking further ahead, Hwang said the government could improve the structure of the economy to boost economic growth by reducing the relatively wide productivity gaps between large and small companies.
“A large number of policies have been put in place to support SMEs. Each policy may have some justification if seen in isolation, but they all add up to a system that promotes the survival of low-productivity firms. A better way forward would be strengthening competition and supporting people and business dynamism,” according to her.
Regarding the estimated effects of China's recent announcement to ease its “dynamic zero-COVID” policy on the Korean economy, Hwang said that China's recent decision will have a limited impact.
“There are some upside risks to the outlook. We see the worst effects of China's zero-COVID policy and its real estate downturn as being in the past now, and the zero-COVID policy will be lifted gradually around the second quarter of next year. A faster relaxation of China's zero-COVID policy and/or a quicker end to Russia's illegal war of aggression against Ukraine may improve the economic outlook. But these moves are unlikely to give an immediate boost to Korean growth,” the OECD economist said.
“It will take some time for such upside surprises to feed through to inflation and interest rates and thereby increase private consumption and investment.”
China decided recently to shorten its quarantine requirements and simplify travel rules.