1. Institute for Korean Studies Indiana University 7 September 2016 8 Key Challenges Facing Policymakers: Lessons from Japan and Korea Randall S. Jones Head, Japan/Korea Desk, OECD

2. 2 Organization for Economic Cooperation and Development

3. 3 The OECD publishes biannual economic surveys of member countries and key emerging economies www.oecd.org/eco/surveys/economic-survey-japan.htm www.oecd.org/eco/surveys/economic-survey-korea.htm

4. “For Korea, membership in the OECD has provided an opportunity to exchange ideas with the most advanced countries and to learn best practices. The OECD has played a crucial role in developing and advancing Korea during the past two decades. Moreover, the OECD is Korea’s most trusted policy advisor. Korea has seriously taken the OECD’s recommendations into account and reflected them in its economic policies.” Government of Korea, preface to the 2016 OECD Economic Survey of Korea 4 Korean government’s view of the benefits of membership in the OECD

5. 1.Rapid population ageing 2.Weak productivity and economic growth since the global financial crisis 3.Rising inequality and relative poverty 4.High levels of government debt 5 Four key challenges facing policymakers

6. Japan’s population will remain the oldest in the OECD while population ageing in Korea will be the fastest Population aged 65 and over as a share of the working-age population (15 to 64) 6 Source: OECD Demography and Population Database.

7. The labour forces in Japan and Korea are both projected to decline significantly 7 1.For the working-age population (15-64), assuming that the labour force participation rate for men remains constant from 2011 to 2030. 2.The participation rates for men and women are assumed to remain at their current levels for each age group. 3.Female participation rates are assumed to reach current male rates in each age group by 2050. Source: OECD calculations based on national population projections. 2. Female participation rates are assumed to reach current male rates in each age group by 2050. Source: OECD (2014).

8. Employment rates in Korea are low for women and youth 8 Source: OECD Employment Outlook Database.

9. The take-up of maternity and parental leave in Korea is low 9 Source: Yoon (2014). As a percentage of the number of births each year

10. Working hours are long in Korea for both men and women 10 Source: OECD Family Database.

11. The gender wage gap is large in both Korea and Japan 11 1. The difference between median earnings of men and women relative to median earnings of men. Source: OECD Earnings Distribution Database. In 2013 or latest year available for full-time employees 1

12. Women in Korea are concentrated in non-regular jobs 12 1. Includes temporary employees and atypical workers (dispatched, daily on-call, in-house, independent contractors, etc.). Source: Statistics Korea, Economically Active Population Survey, August 2015. Employees by employment status as a percentage of total employment in 2015

13. The share of women in management is low in Korea and Japan 13 Source: OECD Family Database.

14. 1.Increase the take-up of maternity and parental leave. 2.Improve work-life balance by reducing working time. 3.Decrease the gender wage gap. 4.Reduce the share of women in non-regular employment. 5.Increase the share of women in management. Policies to raise the employment of women

15. 15 As a share of the 15-29 age group¹ The rate of NEETs in Korea is high for tertiary graduates 1. “Neither in employment nor in education or training. Source OECD (2015), Education at a Glance 2015.

16. Youth employment rates are positively correlated with those of older workers 16 Source: OECD Labour Force Statistics Database. Per cent in 2014

17. 1.Rapid population ageing 2.Weak productivity and economic growth since the global financial crisis 3.Rising inequality and relative poverty 4.High levels of government debt 17 Four key challenges facing policymakers

18. … productivity isn't everything, but in the long run it is almost everything. Paul Krugman,1994 18

19. 19 Explaining differences in income (in 2014) 1. Using 2014 PPP exchange rates. Source: OECD (2016), Going for Growth 2016.

20. 20 Productivity growth slowed across the OECD even before the crisis Labour productivity growth since 1990 GDP per hour worked (China and India refer to GDP per worker) Source: OECD calculations.

21. 21 The convergence in Korea’s productivity level has stalled Gap compared to the top half of OECD countries 1 1. Percentage gap with respect to the weighted average using population weights of the highest 17 OECD countries in terms GDP per hour worked. Source: OECD, National Accounts and Productivity Databases.

22. Output growth in Korea has slowed toward the OECD average 22 Source: OECD Analytical Database. GDP growth at an annual average rate in per cent

23. Policies to raise productivity 1.Relax government regulations 2.Facilitate the entry and exit of firms 3.Upgrade human capital 4.Improve the innovation system 5.Enhance openness to international competition 6.Address problems in the SME sector 7.Promote venture capital investment

24. Priority #1: Reduce the stringency of government regulation 24 The indicator ranges from zero (most relaxed) to three (most stringent) Source: OECD Product Market Regulation Database; Koske et al. (2015).

25. Priority #1: Productivity in Korea is much lower in services, where regulation is more stringent 25 Manufacturing = 100; in 2014 based on 2010 prices Source: OECD National Accounts Database; OECD STI Database.

26. Priority #2: Reduce barriers to entrepreneurship, which are high in Korea 26 Source: OECD Product Market Regulation Database; Koske et al. (2015).

27. Priority #2: Small firms in Japan are old, suggesting barriers to entry 27 Source: Criscuolo et al. (2014).

28. Priority #2: Poor image of entrepreneurship in Japan and Korea discourages firm creation 28 Source: OECD (2013), Entrepreneurship at a Glance 2013. Share of respondents with a broadly favourable image of entrepreneurs

29. Source: OECD Education at a Glance Database. 29 Priority #3: Upgrade human capital particularly of older workers Share of the population with a university degree in 2013

30. Priority #3: Upgrade the skills of older workers in Korea 30 Source: OECD (2013), The Survey of Adult Skills: Reader’s Companion. Share of the population with a good ability to use computers and solve problems

31. Priority #4: Improve the innovation system by increasing R&D links between different sources of research 31 1. Includes private non ‑ profit institutes. Source: OECD R&D Statistics Database. Allocation of R&D spending by sector performing it Source of funding Share of total R&D spending GovernmentUniversities Business enterprises Total Government 1 18.154.440.25.4100.0 Universities5.90.699.30.1100.0 Business enterprises 75.50.60.598.9100.0 Foreign sources0.59.61.688.8100.0 R&D funding in Japan in 2013

32. 32 Priority #4: Improve the innovation system by increasing Japan’s links to global networks Ranking of national science and innovation systems in 2014 Source: OECD Science, Technology and Industry Outlook.

33. 33 Priority #5: Enhance international openness by reducing barriers to trade and investment Source: OECD Product Market Regulation Database; Koske et al. (2015). The indicator ranges from zero (most relaxed) to three (most stringent), 2013

34. Priority #5: Enhance international openness by increasing inflows of FDI 34 Inward and outward stocks of direct investment as a per cent of GDP in 2013¹ 1. Belgium (189,200), Ireland (231,173), Luxembourg (301,234), The Netherlands (134,83.7) and Switzerland (194,115). Source: OECD, Economic Globalisation Indicators 2014.

35. 35 Priority #6: Address problems in the SME sector by reducing the number of zombie firms Number of SMEs in Korea with negative operating profits for at least three consecutive years Source: Shin (2015), “Analysis and Implications of Marginal Companies”, KOSBI SME Focus, Vol.15-14, Korea Small Business Institute, Seoul.

36. Priority #6: Address problems in the SME sector by reducing government guarantees Source: OECD (2016), Financing SMEs and Entrepreneurs 2016: An OECD Scoreboard. 36 Government guarantees for loans to SMEs in 2014 as a percentage of GDP

37. 37 Priority #6: Address problems in the SME sector to encourage firms to grow Post-entry growth: the average size of young and old firms Source: C. Criscuolo, P. N. Gal and C. Menon (2014),

38. Priority #7: Make greater use of venture capital investment 38 Source: OECD, Entrepreneurship at a Glance 2014. In 2013 or latest year available

39. Priority #7: Focus venture capital investment on start-ups 39 Source: Korea Venture Capital Association. Venture capital investment per firm by age in Korea

40. 1.Rapid population ageing 2.Weak productivity and economic growth since the global financial crisis 3.Rising inequality and relative poverty 4.High levels of government debt 40 Four key challenges facing policymakers

41. Korea has experienced rising income inequality and relative poverty 41 Source: Statistics Korea.

42. Japan and Korea have high rates of relative poverty 42 Source: OECD Income Distribution and Poverty Database. Share of the population with an income below half of the national median

43. 43 The impact of the social safety nets on income inequality and relative poverty are weak in Japan and Korea 1. The Gini coefficient can range from 0 (perfect equality) to 1 (perfect inequality). 2. The relative poverty rate is the percentage of households whose income is less than half of the median income. Source: OECD Income Distribution and Poverty Database.

44. Wage inequality is high in Korea Share of full-time workers earning less than two-thirds of median earnings 1 44 1. Including bonuses. In 2013. Source: OECD Demography and Population Database.

45. Around one third of employees in Korea and Japan are “non-regular” workers Year Wage workers Non-regular workers Of which 1 Contingent (temporary) workers Part-time workers Atypical workers Fixed-term workers Open-ended contract workers 2 DispatchedOthers Thousand % %%% 200314 1494 60632.62 40352.213.320.22.134.3 200514 9685 48336.62 72849.816.219.02.232.6 200715 8825 70335.92 53144.417.821.13.135.7 200916 4795 75434.92 81548.912.124.82.936.8 201117 5105 99534.22 66844.513.028.43.337.2 201418 7766 07732.42 74945.212.633.43.231.6 45 Employed persons by status in Korea 1. The sum of the categories of non-regular workers exceeds 100% due to double-counting. 2. Workers whose employment contract term is not fixed but whose employment can continue through repeated renewals of the contract or is not expected to continue due to involuntary reasons. Source: Statistics Korea, Economically Active Population Survey.

46. Non-regular workers earn less than two-thirds as much as regular workers Year Regular workers Non- regular workers Of which 1 Contingent (temporary) workers Part-time workers Atypical workers Fixed-term workers Open-ended contract workers 2 DispatchedOthers 2003100.071.670.769.185.168.0n.a. 2005100.070.574.566.076.776.1n.a. 2007100.070.976.375.466.670.8n.a. 2009100.061.565.558.256.269.7n.a. 2011100.065.369.070.559.366.5n.a. 2014100.064.367.867.554.060.8n.a. 46 Hourly wages of non-regular workers relative to regular workers in Korea (regular workers = 100) 1. The sum of the categories of non-regular workers exceeds 100% due to double-counting. 2. Workers whose employment contract term is not fixed but whose employment can continue through repeated renewals of the contract or is not expected to continue due to involuntary reasons. Source: Statistics Korea, Economically Active Population Survey.

47. Non-regular workers have lower income 47 1.In households headed by regular and non-regular workers. Households with two or more persons. Source: Korea Labour Institute, Korean Labour and Income Panel Survey (KLIPS); OECD calculations. Annual earned income in Korea (before tax) ¹

48. The poverty rate is higher among non- regular workers 48 1.Household head under age 60. Households with two or more persons. Source: Korea Labour Institute, Korean Labour and Income Panel Survey (KLIPS); OECD calculations. Relative poverty rate in Korea based on the employment status of household head ¹

49. Education spending is lower in non-regular households 49 1. Households with two or more persons. Up to age 18. Private education cost includes private tutoring institutions (hagwons), private tutors, and early childhood education and care. Source: KLI, Korean Labour and Income Panel Survey (KLIPS); OECD calculations. Monthly expenditure in Korea based on the employment status of household head ¹

50. Poverty rates are high for persons over 50 in Korea Relative poverty rate in per cent 1 50 1. Defined as a the share of the population with an income below half of the national median. Source: OECD Income Distribution Poverty Database.

51. The first-tier pension benefit in Korea is low while elderly poverty is high 51 1.The first-tier pension benefit as a percentage of the average wage. The first-tier pension is a non-contributory, safety-net pension for the elderly. In Korea, this refers to the Basic Pension. 2. Share of the elderly in relative poverty – an income below 50% of the national median. Source: OECD Pensions at a Glance (2015). First-tier pension benefits¹ and the elderly poverty rate² in 2014 or latest year available

52. The coverage of the first-tier pension benefit in Korea is high 52 1.The first-tier pension benefit is a non-contributory, safety-net pension for the elderly. In Korea, this refers to the Basic Pension. Source: OECD Pensions at a Glance (2015). Coverage of the first-tier pension¹ in 2012 or latest year available

53. 1.Rapid population ageing 2.Weak productivity and economic growth since the global financial crisis 3.Rising inequality and relative poverty 4.High levels of government debt 53 Four key challenges facing policymakers

54. Korea has a consistent government budget surplus in contrast to major OECD economies 54 Source: OECD Analytical Database.

55. 55 Japan’s level of gross government debt relative to GDP is the highest in the OECD Source: OECD Economic Outlook Database. As a per cent of GDP in 2014 or latest year available

56. 56 Public social spending in Korea is low Source: OECD Social Expenditure Database. As a per cent of GDP in 2014

57. But government social spending in Japan has doubled as a share of GDP 57 Source: OECD Economic Outlook Database.

58. The gap between government expenditure and revenue is large in Japan Note: Central government general account as per cent of GDP. Source: Ministry of Finance; OECD calculations. 58

59. 59 Japan and Korea have relatively low tax revenue as a share of GDP Source: OECD Analytical Database. As a per cent of GDP in 2014

60. Japan and Korea have scope to further raise its consumption tax (VAT) 60 Standard tax rate in 2014 ¹ 1. In January 2014, except for Japan, which reflects the consumption tax hike to 8% in April 2014. Source: OECD, Consumption Tax Trends 2014.

61. Japan needs all three arrows of Abenomics to achieve fiscal sustainability 1.Bold monetary policy to exit deflation 2.Flexible fiscal policy 3.A growth strategy to boost real output growth to 2% over the next decade 61

62. Reducing government debt requires fiscal consolidation while boosting real growth and inflation 62 1. In the no fiscal consolidation scenario, nominal growth is around 2¾ per cent (1% real growth, 1¾ per cent inflation). Fiscal consolidation of 7% of GDP over the decade 2017-26 is assumed in the other two scenarios. Output growth rates over 2015- 40, resulting in varying levels of interest rates: Slow growth: nominal growth of 1½ per cent (1% real growth, ½ per cent inflation). High growth: is nominal growth of 4% (2% real growth and 2% inflation). Source: OECD Economic Outlook Database; OECD calculations. Gross government debt as percentage of GDP¹

63. Comparison of North and South Korea in 2014 (A)(B) Ratio (B/A) North KoreaSouth Korea Population (millions)24.750.42.0 Gross National Income (trillion won)34.21 496.643.7 Gross National Income per capita (million won) 1.429.721.4 Total trade ($ billion)7.61 098.2144.3 Exports3.2572.7181.2 Imports4.5525.5118.1 Of which: inter ‑ Korean exports 1 1.21.10.9 1. North Korean exports to the South in column Panel A, and South Korean exports to the North in column B. Source: Statistics Korea; Bank of Korea. 63 The income gap between North and South Korea is enormous

64. 64 詳細は … 추가 정보 … More information… www.oecd.org/eco/surveys/economic-survey-japan.htm www.oecd.org/eco/surveys/economic-survey-korea.htm