Securing the Future for Korea-An Address to Seoul National University, By Christine Lagarde, Managing Director, International Monetary Fund
December 5, 2013By Christine Lagarde
Managing Director, International Monetary Fund
Seoul, December 5, 2013
As Prepared for Delivery
Good morning—annyeong haseyo! It is a great privilege to come to Seoul National University, to the world-renowned Seouldae. Let me thank President Oh, Dean Moon, and Associate Dean Lee for their warm welcome—as well as our moderator, Professor Bark. I would also like to acknowledge Jong-Won Yoon, Korea’s representative at the IMF—and a graduate of this great university.
This university is indeed the premier institution of higher learning in Korea. In a country that takes education and learning so seriously, you are the best of the best.
For many years now, you have been kindling the fires of knowledge and learning to enlighten your society and fuel your economy. This blazes forth from your Latin motto, Veritas Lux Mea—“the truth is my light”.
The story of modern Korea is deeply entwined with this university. This is your legacy—and it is still the goal that ennobles you, energizes you, and excites you.
To paraphrase Isaac Newton: you stand on the shoulders of giants—the preceding generations of Koreans who propelled this economy from a position of weakness to a position of force and strength in an astoundingly short period of time.
For Korea is a place where miracles can happen and dreams can come true. In 1960, Korea was among the poorest countries of the world. Today, it is one of the richest—the world’s thirteenth most prosperous economy, with an income per capita higher than the EU average.
Koreans have always been driven by an extraordinary will to succeed—not only as individuals, but as a single people linked together. They have always prized the principle of meritocracy—from the Gwa-guo examinations in the Chosun dynasty to the emphasis on social mobility through education in modern times.
Perhaps not surprisingly, Korea has shown the world that an impressive rate of growth can co-exist with an enviable degree of equity.
Ever since ancient times, Korea has also been a land of invention and innovation. Today, it continues to enchant and dazzle the world with its technological wonders. Even in popular culture, the famous Korean wave—the hallyu—reverberates widely.
What about the future? We can see two clear trends on the horizon for the global economy. First, Asia is rapidly becoming the economic center of gravity, and the 21st century will be an increasingly Asian century. Second, the world is becoming more linked and interconnected than ever before, which calls an invigorated multilateralism and ever closer economic cooperation.
These trends clearly play to Korea’s strengths. Korea is poised to play an increasing leadership role in the global economy of tomorrow.
So let me talk about how Korea can take the best of its past to create the best possible future.
Specifically, let me touch on two topics: (i) how Korea can stay at the leading edge of the global economy; (ii) how Korea can harness its deep commitment to multilateralism and global cooperation.
Staying at the leading edge of the global economy
Let me begin with how Korea can stay at the leading edge of the global economy.
Like a tree with deep roots, Korea starts from a position of strength—and as a famous Korean classic says, those deep roots save it from being “shaken by the wind”. Some of these roots are very old indeed.
In recent times, the Korean economy has faced many tests, and each time has come through more confident and resilient.
After the trauma of Asian crisis, Korea strengthened its economic roots—with low inflation, healthy public finances, and ample foreign reserves. It did not make the mistakes of many other advanced countries in the run up to the Great Recession.
Korea’s resilience shone brightly in the aftermath of the global financial crisis of 2008. Like everywhere else, it was hit hard, losing 1.2 million jobs. Yet it bounced back strongly in 2010.
Korea is even more resilient today than it was five years ago. It has used the time wisely, making sure banks had healthy capital buffers and lower external debt. It has deployed macroprudential policies proactively to tame financial risks.
Today, prudence and preparation are paying off. Growth is strengthening and should pick up further—to about 3¾ percent—in 2014. At a time when many economies are reeling from market turmoil, Korea has distinguished itself as a safe haven.
To move ahead, Korea needs to build on these exceptionally strong roots. It needs to keep nurturing and nourishing that tree, so that it can stay sturdy for generations to come.
This means making sure that its growth potential stays strong, especially with population aging—Korea’s population is projected to become one of the oldest in the OECD by 2050. Without action, Korea’s long-term growth could fall to 2 percent by 2025, down from around 5 percent at the start of the century.
At the same time, income inequality has risen, casting a shadow over the social cohesion that has accompanied the Korean economic miracle.
Understandably, this creates great anxiety. We can see this among young people like yourselves, hoping to find a job and a decent livelihood in a rapidly-changing economy—and where as many as half of recent graduates cannot find full-time employment.
We can see this among old people facing a fragile future, three times more likely to be poor than the population as a whole.
We can even see it in popular culture—through the irony-laced lyrics of Psy’s global phenomenon, Gangnam Style.
So Korea needs to continue what it does so well—combining stronger growth with greater equity. There are two main ways to achieve this—making labor markets more inclusive, and making service markets more productive. I will talk about each in turn.
Making labor markets more inclusive
Let me begin with making labor markets more inclusive.
A key problem is duality. Regular workers have high levels of job protection and decent wages and benefits. Non-regular—or temporary or part-time—workers have low wages, little employment security, inadequate training, and weak social insurance coverage. They make up about a third of the labor force.
One way to reduce duality is to boost social insurance coverage and training for non-regular workers, to bring them inside the fold.
A related problem is the low employment rates of young people and women.
For young people, the employment rate in Korea is only 24 percent, versus an OECD average of 40 percent. This outcome reflects high enrollment in tertiary education, but also jobseekers not having the skills needed by employers. One answer is to invest more in active labor market policies and vocational education.
Women’s labor force participation in Korea is about 60 percent—23 percentage points below Korean men and among the lowest in the OECD. Gender inequities do not end here. The gender earnings gap in Korea is the highest in the OECD. Only 9 percent of managers in Korea were women, against an OECD average of 29 percent.
Boosting female labor force participation opens the door to huge gains. A recent IMF study shows that this is true all across the world. In Korea, policies to help women better balance their busy lives can reduce the gender gap by one third. Examples of these kinds of policies include investing more in childcare and offering more flexible working conditions.
Korea has so much potential here. It has some of the most confident, educated, and innovative women in the world. I met some of them last night.
Korean women are already leading in diverse and creative ways. But they are waiting for the opportunity to contribute and to lead even more. I know the Korean government is committed to moving ahead, under the leadership of its outstanding woman president.
To borrow from one of your biggest K-pop groups, may the next generation be a Girls’ Generation!
Making service markets more productive
Let me turn to the second major impediment to long term growth, low productivity in the services sector.
Korea has one of the world’s most dynamic manufacturing sectors. However, productivity in services is only around half that in manufacturing, a much wider gap than in the OECD. Now is the time for Korea to bring its famed dynamism in manufacturing to the services sector.
This can be addressed with the right combination of policies: bring more competition to areas like utilities; boosting investment; and re-aligning small and medium-sized enterprises along commercial lines, liberated from dependence on government guarantees.
I know that the government has an ambitious agenda in this area, and I know that Korea always succeeds in its ambitions. I am confident that Korea will soon be a cutting-edge innovator in even more areas.
Overall gains from reforms
By implementing the right package of reforms, Korea could see great gains—long-term growth of 3½-4 percent over the next decade.
I should note that many of these reforms come with a price tag. The good news is that Korea can afford it, with the prudent budgeting and low taxes that have long been your hallmark. Social spending is also low—the second lowest in the OECD. Just to give one example: public spending on childcare and pre-primary school is five times higher in Sweden than in Korea, in percent of GDP.
The right sequence of reforms is also important—it would be best to have a stronger social safety net in place before embarking on the deeper and more difficult reforms.
This package of reforms will not be easy, but I know Korea has a proven track record for pulling together and taking tough decisions. It will be worth it, allowing Korea to keep its rightful position at the leading edge of the 21st century global economy.
Multilateralism and global responsibility
Let me now turn to my second topic: how Korea can continue to harness its commitment to multilateralism and global responsibility for the common good of all—and its relationship with the IMF in this context.
Once again, your legacy is your destiny. Openness to the wider world has always been the Korean way. Korea has always been a firm believer in the power of multilateralism and global cooperation.
I know that Korea takes its global responsibility very seriously. It understands that a strong Korea needs a strong and harmonious global economy. Three years ago, for example, Korea played host to a highly successful G20 leaders’ summit here in Seoul.
I know that Korea’s position in the world economy is destined to grow. It is a role model for developing countries eager to follow in its footsteps. It has a lot to share and a big role to play.
I expect this particular Korean wave—this economic hallyu—to surge across the global landscape.
We can already see it happening. Korea will host the important Green Climate Fund, a new mechanism to help developing countries deal with the greatest economic challenge of the 21st century—climate change.
Korea—and indeed all of Asia—also plays a growing role at the IMF, which is another conduit for international cooperation.
Think of the IMF as a kind of mutual aid society, whereby all countries contribute to common resources to help individual members in need. I know this resonates deeply in Korean culture—the idea of the kye, a social organization based on mutual cooperation.
As the famous Korean proverb puts it, “even a sheet of paper is held more easily by two people”.
The principle behind the IMF is simple: by putting global economic stability ahead of more parochial concerns, the rising tide of prosperity would raise all boats across all oceans—and in doing so, lay the groundwork for peace between nations.
This is just as important today as it was seventy years ago when the IMF was founded. In some ways, it is even more important, given that the global economy is connected in ways that would have seemed unimaginable back then. A more tightly-knit world calls for more tightly-knit cooperation.
So while the IMF must stay true to its founding principles, it must also adapt to the new realities of the modern global economy. How are we doing that?
For a start, we are focusing far more on the complex web of interconnections and spillovers that run through the global economy—across countries, across sectors, across markets.
We are also putting more emphasis on the jobs and growth agenda, which is what people around the world ultimately care about.
Our lending is also tailored to the modern global economy. The recent financial crisis was a truly global crisis requiring a truly global response. This response was only possible thanks to the generosity of our member countries—including Korea.
Because of them, we were able to provide more than $300 billion to help ease the hardship of adjustment across the membership, and make 150 new commitments—including zero-interest loans to our poorest member countries.
Our support today is more flexible, allowing longer periods of fiscal adjustment, for example. It is focused on core areas of macroeconomic stability and economic growth. It is attuned to social conditions—seeking to provide and protect social safety nets and share the burden of adjustment equitably.
We also put developing capacity at the forefront of our agenda. This is the assistance and advice that we provide to developing countries, to help them strengthen their economic management and build stronger institutions.
Again, I thank Korea for its generous support in this regard. Just this morning, Korea agreed to contribute $15 million over the next five years to bolster IMF capacity development. This is an investment in the future and an investment in global solidarity—it will give developing countries the secure foundations to be able to follow in Korea’s footsteps.
While adapting to the world of today, we must also prepare for the world of tomorrow. We can already see some of the trends emerging. For instance, greater financial integration brings great benefits but it also raises the risk of crisis. Economic growth and stability might also be under threat from what I call the “new frontier of risk”—advancing climate change, major demographic shifts, and widening inequality.
To face these challenges, we need enhanced cooperation and partnership—indeed, a “new frontier of partnership”. For this to happen, the IMF must have the trust of its membership, which means it must truly mirror its membership.
This is why our 2010 reforms—which will a give a greater voice to dynamic countries like Korea—are so important. Korea has been a strong voice behind these vital reforms, and I hope they can be completed soon.
I am proud to say that our partnership with Korea is strong. Just as one example, I have appointed Changyong Rhee—a Korean national who was both a student and a professor at this great university—as the new director of the IMF’s Asia-Pacific Department.
I hope that our partnership can grow even stronger over time. Remember, true partnership is a two-way relationship—we want to listen to you, to learn from you, to serve you, and to move forward with you. May our partnership blossom into true friendship.
Let me conclude. You, the students of this university, will shortly be playing your own role in the remarkable story of Korea, making your own noble contribution to the betterment of your fellow Koreans and your fellow global citizens—not just for today, but for the long haul.
This is a great responsibility. As Korean independence leader Baekbeom Kim Gu once said, “Do not walk meanderingly in the snow. The path you take today will become someone else’s path tomorrow”.
To walk this path, you must keep one eye fixed firmly on the future—on what is needed for Korea to stay at the cutting edge of success. But you must keep the other eye on the global community, for a long journey is always easier in the company of others.
Think of the IMF as an instrument of service that makes it easier for the community of nations to embark on this common journey together, toward the common good.
Together, we can win the future.
Thank you very much—kamsa hamnida!