On June 15th the OECD released Economic Survey of Korea 2010, the latest economic analysis of the nation. The report commends Korea for having one of the strongest post-2008 recoveries in the OECD, which was attributed to outstanding export performance and the largest fiscal stimulus package among OECD-member states. The publication consists of four sections addressing potential issues faced by the Korean economy.

According to OECD projections, the Korean economy will expand by 5.75 percent in 2010, and 4.75 percent in 2011. In order to attain comparable levels of growth in the medium-term, Korea has been advised to instate fiscal and taxation measures to increase national labor productivity levels. Currently, the service industry in particular has relatively low levels of productivity, and needs legislative assistance. Further, regulatory changes need to be carried out to reduce fiscal legislative barriers to domestic market entry, decrease obstacles for foreign direct investment, and upgrading competition policy. The use of fiscal policy is also recommended to increase the proportion of research and development activity carried out by national service sector firms.

The OECD attributes Korea’s impressive economic recovery to the Government’s strong and effective fiscal policies. The withdrawal of crisis-period stimulus measures is now recommended to ensure continued sustainable growth. The OECD added that any policy changes also provide a good opportunity for reforms to widen the national tax base, and instate firmer treatment of planned government spending targets.

Korea currently has one of the fastest aging working populations in the OECD, and the report demonstrates that without policy change, the tax-financed sections of the health system will become a large drain on Government reserves. As a remedy, the OECD proposed reforms to health payment systems, promotion of healthy aging, shifts in long-term care focus, and reduced spending on medications.

OECD forecast place Korea’s carbon-emission levels as the highest growing in the OECD over the 1990 to 2005 period. Although, the Korean Government also demonstrates great dedication to promoting a green economy. The OECD has recommended the establishment of a emissions capping and trading scheme for the economy, with possible supplementation by an additional carbon tax scheme.

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On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

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After a series of negotiations and two legal review meetings in July and September, the FTA between South Korea and the EU came to be initialed on the 15th of October. The FTA document was signed by Catherine Ashton, EU Trade Commissioner, and Kim Jong-hoon, South Korean Trade Minister, in a ceremony in Brussels.

The Free Trade Agreement is heralded as one of the most important agreements of its kind to be signed by the EU. Virtually all tariffs charged on the approximate €65 billion worth of trade between EU and South Korea will be eliminated within seven years of the official signing of the document. Estimates have placed the value of the agreement at €19 billion.

Remarking on the signing of the treaty, Catherine Ashton said “This is the first 21st century free trade agreement for the EU, creating deep economic ties with another developed economy. It will create new market opportunities for European companies in services, manufacturing and agriculture. This agreement is particularly important in the current economic climate, helping to fight the economic downturn and create new jobs.”

The FTA is scheduled to be presented to the EU member states in early 2010. Once it has been signed and agreed upon by the EU Presidency and the Commission, it will be presented to the European Parliament. Final singing of the FTA will occur in the second half of 2010.

According to the report submitted by the Finance Ministry to the National Assembly of Korea, the nation will see an annual increase of approximately 9.2% in its tax collection and a 5% rise in GDP, annually between the years of 2011 and 2013. Government figures place the expected income at approximately KRW187 trillion for 2011, KRW 204 trillion in 2012 and KRW223 trillion in 2013. Plans for the increase were outlined in the submitted report, which stated “We plan to go aggressive in securing our tax sources, such as cutting tax exemption or tax reduction cases and strengthening transparency in tax collection”.

Concerns have been raised about rising difference between tax collection growth and GDP growth, and the subsequent increased burden on tax payers. Forecasts issued for 2009 saw a growth gap of only 0.6%, compared to the 4.2% predicted for the 2011 to 2013 period.

The Korean Government currently expects a 3.9% rise in tax collection for 2010, a figure of KRW6.5 trillion. The currently expected rise consists of a 9.0% rise in personal tax collection, increases value-added tax by 5.0% and a fall of 2.0% for corporate taxes.

According to statements made by the Korean Ministry of Strategy and Finance, on the 23rd of September, the country will see an extra KRW3.1 trillion tax receipts in 2010. The total tax take is projected to reach KRW171.1, approximately equivalent to US$143.1 billion.

The details of the increased tax receipt are expanded in the Korean government’s draft budget plan, which will be submitted to the National Assembly on October 1st. Income tax is expected to rise by 9.0% to KRW37.0 trillion. Value Added Tax (VAT) has a projected 5.0% rise to KRW48.7 trillion. Bucking this trend, corporate taxes are expected to experience a fall of 2.0% to KRW35.4 trillion, on account of weakened economic conditions and governmental tax corporate tax cuts. Increased employment and a buoyant property market are attributed to the tax intake recovery.

Korea is currently in the midst of an all round economic recovery, announcing a reduced government budget deficit. Sans any unplanned spending, government officials are hopeful in reaching their budget deficit target of KRW22 trillion. The increased tax take and reduced government spending are considered to be the key factors behind the improved budget position.