OREANDA-NEWS. An International Monetary Fund (IMF) mission led by Kalpana Kochhar visited Seoul during May 25–June 8 to conduct discussions for the 2016 Article IV Consultation. Ms. Kochhar issued the following statement at the conclusion of its visit:

“Korea has made remarkable economic progress over the past sixty years, but now, with income levels still short of the OECD frontier, potential growth has slowed, and in light of population aging, the government is paying increasing attention to inequality and poverty.

“At the same time, Korea is facing major structural headwinds including: rapid population aging; the economy’s heavy reliance on exports even as global trade slows; corporate vulnerabilities; labor market distortions; and lagging productivity, particularly in the service sector and among small and medium enterprises. We strongly support the priority that the Korean authorities have placed on structural reforms to counter these headwinds.

“Corporate restructuring has been an area of particular emphasis for the authorities. They are taking a proactive approach to address overcapacity and declining growth prospects, with a focus on certain sectors, many of which are facing problems worldwide. In tackling these issues, Korea has the opportunity to be a global leader.

“Efforts are underway to agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms, while ensuring an adequate social safety net to assist affected workers. At the same time, the authorities are preemptively making arrangements to safeguard the capital adequacy of the key policy banks throughout the process. The authorities share the view that fiscal policy should play the lead role and that any involvement by the Bank of Korea should be consistent with its mandate.

“Structural reforms in other areas are also of critical importance. Strong efforts are warranted to remove barriers between worker categories, boost labor force participation, and—building on the authorities’ efforts to promote a “creative economy”—address lagging productivity.

“Given Korea’s low public debt, there is space to use fiscal policy in a complementary fashion, both to cushion the impact of structural reforms and to incentivize such reforms. In addition, a carefully targeted expansion of social expenditure, sustained over the medium term, could yield multiple benefits. It would reduce poverty and would also promote stronger consumption-led growth, both by raising the disposable income available to the elderly and other vulnerable groups and by reducing the incentives of younger households to hold precautionary savings.

“To ensure fiscal sustainability in the face of long-term pressures from population aging, the expansion of social protection should be financed by an eventual increase in pension and health care contributions as well as in tax revenues, although this would not be needed for several years. The authorities’ strong focus on maintaining fiscal discipline is welcome and, indeed, could be made even stronger through a set of fiscal rules to ensure that debt remains at prudent levels well into the medium term.

“The mission wishes to express its deep gratitude to the authorities for their hospitality, gracious support, and constructive discussions.”