2009 Index of Economic Freedom

Quick Facts

Population:

• 48.4 million

GDP (PPP):

• $1.1 trillion
• 5.1% growth
• 4.8% 5-year compound annual growth
• $22988 per capita

Unemployment:

• 3.3%

Inflation (CPI):

• 2.5%

FDI Inflow:

• $5.0 billion

South Korea’s economic freedom score is 68.1, making its economy the 40th freest in the 2009 Index. Its overall score has decreased by 0.5 point, reflecting worsened scores in labor freedom and government size that offset slight improvements in business freedom and trade freedom. South Korea is ranked 8th out of 41 countries in the Asia–Pacific region.

The South Korean economy, one of Asia's most successful, has long benefited from relative openness to global trade and investment. Although lingering non-tariff barriers hurt overall trade freedom, South Korea has adopted a more active international trade policy, pursuing a number of trade agreements including an FTA with the United States. The economy scores above the world average in business freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, and freedom from corruption. The overall regulatory environment has gradually become more efficient and transparent. Government spending is moderate but has increased in recent years. Monetary stability is relatively well maintained. The rule of law is strong, and property rights are protected in a transparent manner.

South Korea's fiscal freedom and labor freedom are relatively weak. The labor market remains rigid despite recent efforts by the government to enhance market flexibility. Improving efficiency of the tax system and making tax rates more competitive are part of the current government's reform agenda.

Background Back to the top

South Korea is one of Asia's most vibrant democracies and the world's 13th largest economy. In the years since South Korea's transition to democracy in 1988, the economy has been dominated to a significant extent by large conglomerates, or chaebols. The country has sophisticated electronics, telecommunications, automobiles, and shipbuilding industries. President Lee Myung-bak, who took office in 2008 with a large electoral majority, has vowed to liberalize the economy further through freer trade, deregulation, and the privatization of major industries.

Business Freedom 90.4 Back to the top

The overall freedom to conduct a business is well protected under South Korea's regulatory environment. Starting a business takes an average of 17 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Closing a business is easy.

Trade Freedom 70.2 Back to the top

South Korea’s weighted average tariff rate was 7.4 percent in 2006. Prohibitive tariffs, import restrictions, quantitative restrictions, services market access barriers, some import taxes, use of “adjustment” tariffs and taxes to increase import costs, burdensome and non-transparent standards and regulations, weak enforcement of intellectual property rights, and subsidies add to the cost of trade. Fifteen points were deducted from South Korea’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom 70.4 Back to the top

South Korea has a high income tax rate but a moderate corporate tax rate. The top income tax rate is 38.5 percent (35 percent plus a 10 percent resident surcharge), and the top corporate tax rate is 27.5 percent (25 percent plus a 10 percent resident surcharge). Other taxes include a value-added tax (VAT), a capital acquisitions tax on certain items, and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 26.8 percent.

Government Size 72.5 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 30.3 percent of GDP. Government expenditure, primarily in infrastructure, rose sharply before the 2007 election. Public debt is holding at about 30 percent of GDP. Privatization is progressing steadily but is resisted by strong labor unions in utilities and other sectors.

Monetary Freedom80.0 Back to the top

Inflation is low, averaging 2.5 percent between 2005 and 2007. The government can control prices on several products by emergency decree; can cap prices on key raw materials; and regulates or controls prices in certain sectors, including agriculture, telecommunications, other utilities, pharmaceuticals and medical services, and some energy products. Ten points were deducted from South Korea's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

The investment climate is increasingly open, but media, electric power, newspapers, fishing, power generation, airline transport, certain agricultural sectors, and a few other sectors remain restricted. The government offers such incentives as cash grants and zero–corporate tax zones, has a one-stop shop for foreign investments, and assigns an official to facilitate each project, but regulatory administration is still non-transparent and can appear to be arbitrary. Residents and non-residents may hold foreign exchange accounts. Payments, transactions, transfers, or repatriation of profits are subject to reporting requirements or restrictions on amounts permitted for specified periods.

Financial Freedom60.0 Back to the top

South Korea's modern financial sector has become more open and competitive, providing positive momentum for reforms in other sectors. Reforms have focused largely on improving transparency and efficiency, and ending state-directed lending. Since the 1997 Asian financial crisis, the government has succeeded in recapitalizing banks and non-bank financial institutions. Weak institutions have been closed or merged, and non-performing loans have decreased considerably. Foreign banks own majority stakes in major commercial banks, though foreign ownership remains restricted. The government has been selling its shares in private banks but retains some ownership positions. There is room for improvement in overall supervision of the financial sector. The insurance sector is well developed, and foreign insurers are prominent. Capital markets are sophisticated and well developed.

Property Rights70.0 Back to the top

Private property is secure, and expropriation is highly unlikely, but the justice system can be inefficient and slow. Contracts are often considered a matter of consensus. The protection of intellectual property rights needs to be improved, as piracy of copyrighted material is significant.

Freedom From Corruption51.0 Back to the top

Corruption is perceived as present. South Korea ranks 43rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is encouraged by non-transparent rulemaking and law formulation; exclusionary social, political, and business structures; and insufficient institutional checks and balances.

Labor Freedom46.4 Back to the top

South Korea's burdensome labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is costly. The high cost of laying off a worker creates a disincentive for hiring and expansion. Regulations related to the number of work hours are not flexible.