Ministry of Finance and Economy http://www.mofe.go.kr
Government of the Republic of Korea
(On January 17, the Ministry of Finance and Economy released its economic policy directives for the year, as follows:)
For Koreans, the year 2000 will be remembered as the year that their nation fully pulled itself away from the economic crisis and paved a strong foundation for the knowledge-based economy of the 21st century.
In this regard, Korea's economic policy directives for the year aim to sustain a solid economic stabilization; complete reforms in the corporate, financial, labor, and public sectors; and build a strong foundation for the nation to become a top-notch global economy.
The following are the major economic policy directives for the year 2000:
l First, Korea will achieve a solid economic stabilization by operating macro-economic policies in a more flexible manner.
l Second, Korea will establish a full-fledged market economy by completing and internalizing the ongoing reforms in the corporate, financial, labor, and public sectors.
l Third, Korea will pursue policy measures aimed at achieving a more comprehensive and productive welfare system.
l Fourth, Korea will transform its economic system into one suitable for a knowledge-based era.
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Fifth, Korea will further liberalize its markets to foreigners and strengthen efforts to cooperate with foreign countries to cope more effectively with the fast-changing global economy.
1. Foundation for Economic Stabilization
Inflationary pressure stemming from the higher-than-expected economic growth, increased money supply in the course of the economic recovery and structural reforms, and rising oil prices has been a major concern. However, the government well knows that price stabilization is indispensable for both the sound market economy and the lives of the low-and middle-income earners. In this regard, price stabilization is the government's top economic priority this year. In addition, in order to brush off concerns regarding inflationary pressure and to establish a strong infrastructure for price stabilization, the government will contain the rise of consumer prices below three percent and the rise of long-term interest rates below a single digit.
In order to achieve these goals, the government will continue its efforts to monitor and analyze all the trends related with the real economy, financial market, and fiscal budget. The government will also maintain appropriate macroeconomic policies to sustain economic stabilization. On the demand side, the government will continue to maintain tightened fiscal policy in order to prevent inflationary pressure from escalating. The Bank of Korea will set price stabilization goals and implement appropriate monetary policy. On the capital market front, the government will buoy up bond markets. The government will also keep a closer eye on factors that may raise cost-push inflation.
(1) Operation of Flexible Macro-Economic Policies
A system will be established to analyze the real economy, the financial market, and fiscal spending. To provide an accurate and swift diagnosis of the economic situation, a coordination meeting will be held comprising representatives from the Ministry of Finance and Economy, Bank of Korea, Korea Development Institute, and The Federation of Korean Industries. The operations of the Korea Center for International Finance will be strengthened in order to more closely monitor both financial and foreign exchange markets. A fiscal information system aimed at reporting the implementation of fiscal budgets in real time will be further developed. The nation's liability management system will be established by the first half of 2000 in order to effectively develop and implement policies regarding the nation's liabilities.
In an attempt to maintain both low prices and low interest rates, the appropriate macroeconomic policy mix that best combines fiscal and monetary policies will be employed. For this purpose, the government will make efforts to achieve a balanced budget as soon as possible by reducing the fiscal deficit. When the domestic economy seems to be overheating, the consolidated budget deficit, if necessary, will be additionally reduced. In tandem with these efforts, a special Act aimed at reducing the fiscal deficit will be introduced.
The Bank of Korea in conjunction with the government will maintain an appropriate monetary policy in order to achieve this year's primary goal of price stabilization. In an effort to stabilize the prices, the central bank will set the yearly targets of the consumer price index below three percent and core inflation, which excludes food and energy, to 2.5±1 percent. The government will help stabilize interest rates by reducing the supply of government bonds, if more taxes are collected than anticipated.
In the financial market, the long-term interest rates will be stabilized within a one-digit level by addressing problems related to both the dismantled Daewoo Group and the investment trust firms with large exposure to the group, as well as by inviting a mechanism of low prices and low interest rates. For this purpose, the capital market will be activated so that domestic companies may be able to raise funds more easily through direct financing. In addition, special securities firms that specialize in bond transactions as well as 'Inter-Dealer Brokers' will be set up in order to activate bond markets, thereby helping to stabilize interest rates. Bond stabilization funds will be temporarily operated until the financial market is fully stabilized.
(2) Stabilization of Foreign Exchange Market to be Achieved
Supply and demand of foreign exchange will be stabilized through activating both foreign investment funds and foreign exchange stabilization funds. In conjunction with these efforts, the government will continue to slash foreign liabilities to remain as a net foreign creditor. Additionally, usable foreign exchange reserves will be expanded, taking into account movements of short-term funds and the volume of foreign liabilities.
(3) Factors of Cost-Push Inflation to be More Actively Monitored
Price stabilization policies may hit a snag due to the uncertainties looming in the international raw materials market. In order to cope with these external uncertainties more effectively, the government will prepare the necessary measures to stabilize the domestic prices.
In addition, lower prices will be induced by activating the market mechanism. A new distribution system will be introduced whereby open-pricing and large-scale discount stores prevail. In order to bring about more competition, the government will also generate an environment of increasing wages corresponding to the increased profitability.
2. Implementation of a Second Round of Restructuring
With the concerted efforts of the Korean people, the first round of restructuring has been completed without serious problems. However, restructuring to date has been implemented mostly by focusing on the hardware reforms. Therefore, from hereon, reforms will be implemented focusing on software in order for Korea to be reborn as a country with a top-notch market economy.
The second round of restructuring will focus on four aspects as follows:
l First, financial sector restructuring will be completed and a sound and specialized financial system constructed.
l Second, in the corporate sector, a transparent and accountable corporate management system will be developed.
l Third, a labor market will be organized to become more flexible.
l Fourth, in the public sector, the government will become more efficient and state-owned companies will be continuously reformed.
(1) Financial Sector Reforms
The soundness of financial institutions has much improved through the exit of non-viable institutions, the settlement of non-performing loans, and recapitalization. However, more should be done to raise the soundness of the institutions. In particular, as domestic financial institutions lack risk management skills, they are vulnerable to certain risks.
In this vein, financial restructuring will be completed this year and, at the same time, the reform of the financial market will be strengthened to lay the foundation for a specialized and sound financial system. To this end, relevant laws that may hamper the development of both bond and securities markets will be mended. Corporate governance of financial markets will be improved and forward-looking criteria introduced. In a bid to enhance the competitiveness of the financial sector, the set-ups of financial holding companies will be encouraged. The remaining restructuring of the troubled investment trust and insurance companies will be completed as soon as possible. In addition, measures to effectively recoup the public funds that the government injected into the financial sector will be prepared.
(2) Corporate Sector Reforms
Since the nation was plunged into the economic crisis, the government has revised relevant laws and regulations commensurate with international standards. The objectives of the revision were to help domestic companies maintain transparent operations. Based on the 1998 agreements between the government and the business sector, domestic companies have made strenuous efforts to improve their capital structures by both reducing their debt-to-equity ratios and by adopting debt-workout programs. As a result of these efforts, the average debt-to-equity ratios of Korea's four largest conglomerates - Hyundai, Samsung, LG, and SK - decreased to 252 percent in the first half of 1999 from 355 percent at the end of 1998 and 469 percent at the end of 1997.
The future plans of the corporate sector reforms are as follows:
l First, domestic companies' capital structures will be continuously improved and their core competencies further developed. In line with this, the monitoring functions of financial institutions will also be enhanced.
l Second, for a more effective implementation of debt-workout programs, relevant laws will be revised.
l Third, a transparent corporate governance system will be achieved and the accounting system will be revised so that decisions that may hurt shareholders' interests, i.e., relentless business expansion and assistance into non-viable affiliates, cannot be made easily.
l Fourth, unfair intra-group transactions will be restrained so as to enhance the competitiveness of domestic companies.
(3) Labor Sector Reforms
The labor market will be reorganized commensurate with the changing employment concepts. To this end, the government will encourage new systems, such as a manpower leasing systems, to be established as soon as possible. In addition, institutions related to working hours, wages, and severance pay will be revised to improve both labor market flexibility and workers' welfare.
In an effort to prevent a possible conflict between labor and management, the government will encourage both parties to conduct wage negotiations legally and peacefully. In addition, a gain-sharing system, an employee motivational technique whereby compensation is given for measurable performance gains, will be introduced.
(4) Public Sector Reforms
Reforms in the public sector have been implemented to create a small, but efficient and customer-oriented government. Continuing these reforms, the government will transform its organization into one suitable for a knowledge-based era.
As a first step, reforms will be implemented to the degree that people really feel the changed services in their daily lives. Second, a public sector incentive system will be consistently reformed until a more creative and competitive atmosphere is fully nurtured. Third, the government will set up an information sharing system and help its officials to zero-in on high value-added work. Fourth, state-run companies will be continuously reformed.
3. More Comprehensive and Productive Welfare System
While recovering from the economic crisis, the nation's income distribution has been aggravated. However, helped by the economic recovery and the comprehensive implementation of a productive welfare system, the income distribution has been improved since the first quarter of 1999.
This more comprehensive and productive welfare system aims at raising the quality of life for middle-and low-income earners and at building a compassionate society that cares for the disadvantaged. At the end of this year, the aggravated income distribution structure is expected to improve to the pre-crisis level.
As a first step, more jobs will be created in such high value-added industries that are related with middle-and small-sized venture capitals, tourism, and culture. Second, the social safety net will be expanded to guarantee people's basic living necessities and to reinforce social insurance. Third, in an attempt to improve the living quality of middle-and low-income earners, more houses and cultural facilities will be built. Fourth, an education training system will be considerably changed so as to educate people for the digital economy. Fifth, tax laws will be revised so that middle-and low-income earners may increase their wealth more easily.
(1) Creation of Two Million Jobs
By 2003, two million new jobs will be created and full employment will be achieved. These jobs will mainly be created in such high value-added industries as middle-and small-sized venture capitals, tourism, culture, and telecommunications.
(2) Expansion of Social Safety Net
In 2000, the government will increase its public assistance for the lowest-income households. For this purpose, the National Basic Life Protection Act will go into effect in October as scheduled. With the implementation of this Act, the number of families suffering from a lack of basic necessities will overwhelmingly decrease.
This year, the four national insurances - medical, unemployment, pension and industrial accident compensation - which are now operational, will be enhanced further to provide a solid life-long safety net for all participating citizens. From July 2000, industrial accident compensation insurance will be applied to all businesses regardless of the size of the workplace.
Assistance to protect temporary workers will also be made. The employment records of temporary workers will be compiled in the employment management system database, and the number of temporary workers eligible for unemployment insurance and the national pension will be greatly expanded.
(3) Improvement of Living Qualities of Middle-and Low Income Earners
By 2002, housing will be enhanced markedly for both potential home buyers and tenants, relieving anxiety about month-to-month rental payments. During this year, 500,000 new units will be built. When low-income workers buy a house, they will be able to take out a loan up to one-third of the purchase price. Lessees will be able to apply for a low-cost, long-term loan to cover up to one half of the deposit for housing rentals, i.e, chonse.
More than one percent of the government budget will be used to enrich cultural life through greater participation in tourism, sports and other leisure activities.
Assistance for the disadvantaged will be expanded. In order to facilitate female employment, nursery facilities will be expanded. Taking into account the fact that 1.15 million rural households are burdened with heavy farm loans, the government will reduce its interest payment obligations by 50 percent. The government is also willing to release 700,000 farming and fishing families from the financial obligations that resulted from unworkable cross-debt guarantees among themselves.