For Korea, The year 2010 was full of remarkable achievements and the country can look ahead to another year that promises continued growth in the economy, emerging industries and trade and investment opportunities.

Having weathered the Global Financial Crisis, 2010 could be described as the year the Korean economy truly emerged from the woods. After barely budging in 2009, gross domestic product (GDP) growth was tipped to hit over six per cent in 2010, according to preliminary estimates from the Ministry of Strategy and Finance. Some 70,000 jobs were lost in 2009, but 2010 saw 310,000 new ones created. Inflation has held relatively steady at under three per cent, foreign reserves and the country’s current account balance remain robust, and foreign direct investment is on the rise. While recovery for some advanced markets seems anything but assured, in Korea, the only real question is how strong it will be.

The year was a success for the country in other respects too, with the hosting of the G20 Seoul Summit giving Korea a new global prominence, and the conclusion of wide-ranging free trade pacts with some of its largest trading partners.

If the theme of 2010 was gaining momentum, 2011 is likely to be all about sustaining it. Despite the country’s sunny outlook, there are some possible storm clouds ahead – debt problems in Europe, further tightening measures in China or a lapse back into recession in the United States could all take a toll on Korea’s largely export-oriented economy. Agencies like the central bank and finance ministry are cautioning that economic growth will slow, likely to the five per cent range.

Of course, even that would be a number that many other markets would envy, and it’s encouraging that the current administration doesn’t appear to be taking the country’s impressive recent performance for granted. The policy strategies unveiled so far for the year focus heavily on sustainability and prudence, as well as flexibility in dealing with a complex and shifting macroeconomic environment.

“The policy strategies unveiled so far for the year focus heavily on sustainability and prudence, as well as flexibility in dealing with a complex and shifting macroeconomic environment”

2011 Policy Priorities: Sustaining the recovery and reducing government debt

While the country’s finances are already in good shape, the 2011 budget sets out to strengthen them further by refining the management of funds such as the National Pension Fund and introducing a “sunset policy” that will see all government subsidies subject to intense evaluations, and scrapped if they’re not up to scratch. The moves should shave almost a percentage point from the Government debt to GDP ratio, bringing it down to the 35 per cent range three years ahead of schedule, and put the country on track to a balanced budget by 2013-2014.

The government is also emphasising job creation, with the Ministry of Strategy and Finance stating in a recent briefing on its policy plans that it would introduce tax breaks for foreign companies returning to Korea and firms in manpower-intensive industries such as security and cleaning to encourage hiring. Inflation will be kept in check by measures to improve the supply of agricultural goods and boosting the crop self-sufficiency rate. New limits will also be set on bank lending and efforts made to control household debt to ensure the health of the financial system.

Developing new growth industries and boosting trade

The Ministry of Knowledge Economy has unveiled plans to support 17 new growth industries in 2011, including smart grid technologies and electric vehicles. This year there’s a target set that will push Korea’s total annual trade volume to a level that will see it become the ninth largest in the world. The planned implementation of two landmark free trade agreements, with the United States and the European Union, should help the country advance towards that goal. Further possible FTAs are being examined in Central America and South-East Asia. President Lee Myung-bak has also called for the reshaping of trade policies to target newly emerging markets such as China, India and Brazil, which are playing an increasingly central role in trade globally.

Small and medium-sized enterprises (SMEs) will also be groomed as a growth engine and to account for a larger share of the nation’s exports, with nearly 24 per cent of the planned extended lending to SMEs year marked for firms in the environmental and other new growth industries. According to the national budget, SMEs will also receive assistance with research and development investments, startup costs, forays into overseas markets and securing human resources.

Encouraging foreign direct investment

Foreign direct investment was on an upward trend as 2010 drew to a close, climbing nearly seven per cent from the prior year as of November. Authorities are implementing several measures to build on this foundation. The Ministry of Knowledge Economy is refining foreign investment promotion legislation to extend the maximum period for which foreign companies can lease state land, and easing the cost burden on some foreign firms by cutting land lease commission rates and making support available for new research facilities. Several tweaks to the tax system are also in the works, including new tax credits for creating jobs outside the Seoul metropolitan area.

Conversely, as the stock and bond markets heat up on an influx of foreign capital – Goldman Sachs recently predicted Korea’s main index, the KOSPI, could rocket to the 2700 point level in 2011 – the Government is mulling ways to curb hot money inflows and foster financial system stability. Measures under consideration include the reimposition of a withholding tax on foreign bond holdings.

Shoring up security

Recent provocations by North Korea have again pushed the issue of security into the spotlight, but Korea’s financial markets have continued to flourish and investor confidence seems unrattled. A recent survey of foreign investors by the Korea Trade-Investment Promotion Agency found the vast majority felt geopolitical tensions would have little or no impact on their business or investment plans, and analysts have also played down the possibility of long-term effects on the country’s exchanges or corporate sector. The country’s high sovereign ratings have also remained intact.

The government has pledged to monitor markets closely and take action if necessary if they exhibit signs of instability on geopolitical jitters, and is also boosting investments in defense. It’s also exhibited a forward-looking, proactive approach to the North Korea issue, with the plan to introduce in 2011 a unification tax, which will be used to cover the costs that are expected to ensue when the two countries reunite. 

From Invest Korea Journal | http://www.ikjournal.or.kr

Invest Korea | www.investkorea.org