Republic of Korea WT/TPR/S/204/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Since its previous Trade Policy Review in 200 4, Korea's continued restructuring of its 
economy, including trade liberalization and asso ciated improvement in its international 
competitiveness1, has resulted in steady growth in real GDP, which averaged nearly 4.8% annually 
between 2004 and 2007 (Table I.1), largely due to  exports.  During the same period, inflation 
averaged nearly 2.8% and unemployment fell from 3. 7% to 3.2%.  As a result of strong growth, GDP 
per capita has risen from US$14,173.4 in 2004 to US$20,015.2 in 2007.  Moreover, Korea maintained its position in the high category of the UN human development index, ranking 26
th out of 177 
in 2006.2   
Table I.1 
Selected macroeconom ic indicators, 2003-07 
  2003 2004 2005 2006 2007a 
National accounts (Percentage change) 
Real GDP (at 2000 prices) 3.1 4.7 4.2 5.1 5.0 
   Consumption -0.3 0.4 3.9 4.8 4.7 
Private consumption -1.2 -0.3 3.6 4.5 4.5 
Government consumption 3.8 3.7 5.0 6.2 5.8 
   Gross fixed capital formation 4.0 2.1 2.4 3.6 4.0 
   Exports of goods and non-factor services 15.6 19.6 8.5 11.8 12.1 
   Imports of goods and non-factor services 10.1 13.9 7.3 11.3 11.9 
XGS/GDP (%) (at current market price) 37.9 44.0 42.3 43.0 45.6 
MGS/GDP (%) (at current market price) 35.6 39.7 39.9 42.1 44.8 
Unemployment rate (%) 3.6  3.7  3.7  3.5  3.2  
Productivity  
Labour productivity 6.2  9.2  8.0  12.3   ..  
Prices and interest rates (Per cent) 
Inflation (CPI, %age change) 3.4  3.6  2.8  2.2  2.5  
Loans and discounts rate 6.24  5.90  5.59  5.99  6.55  
Savings deposit rate 4.15  3.75  3.62  4.41  5.07  
Money credit (end period)b (Percentage change) 
Narrow money (M1) 5.4 7.6 3.3 11.7 -14.7 
Broad money (M2) 3.0 6.3 7.0 12.5 10.8 
Credit to private sector (households) 2.3 0.8 8.5 16.2 14.7 
Exchange rate      
Won/US$ (annual average) 1,191.9  1,144.7  1,024.3  955.5  929.2  
Real effective exchange rate (%age change) 1.7  1.8  12.1  7.5  1.5  
Table I.1 (cont'd) 
                                                      
1 According to the 2007 edition of the IMD's World Competitiveness Yearbook , Korea's ranking rose 
from 32nd in 2006 to 29th (out of 55) in 2007 (online data vi ewed at:  http://www.imd.ch/research/ 
publications/wcy/upload/PressRelease.pdf and http://w ww.inosanchez.com/files/i i/2007wcy_scoreboard.pdf 
[27 March 2008]).  Furthe rmore, according to the World Economic Forum Growth Competitiveness Index , 
Korea moved from 17th (out of 117 countries) in 2005 to 11th (out of 131) in 2007.  The Index comprises the 
technology index, the public institutions index, and the macroeconomic environment index.  For further 
information, see WEF online information.  Viewed a t:  http://www.weforum.org/e n/ and http://www.weforum. 
org/pdf/Gcr/GCR_05_06_Executive_Summary.pdf [27 March 2008]. 
2 UNDP (2008). WT/TPR/S/204/Rev.1 Trade Policy Review 
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  2003 2004 2005 2006 2007a 
 (Per cent of GDP, unless otherwise indicated) 
Consolidated fiscal balance 1.0  0.7  0.4  0.4  3.8  
Consolidated revenue 23.7  22.9  23.6  24.7  27.0  
   Tax revenue 15.8  15.1  15.7  16.3  17.9  
   Social security contributions 2.9  2.9  3.1  3.2   3.3 
   Non-tax and capital revenue 5.1  4.9  4.8  5.2   5.6  
Consolidated expenditure 22.7  22.3  23.2  24.3  23.3  
Government total debt (end-period) 18.4  22.6  24.9   ..   ..  
Saving and investment       
Gross national savings 31.9  34.5  32.0  30.5  29.9  
Gross domestic investment 30.0  30.4  30.1  29.8  29.7  
Savings-investment gap 1.9  4.1  1.9  0.7  0.2  
External sector      
Current account balance  2.0  4.1  1.9  0.6  0.6  
Net merchandise trade  3.6  5.5  4.1  3.1  3.0  
   Merchandise exports 32.4  37.8  36.5  37.4  39.1  
   Merchandise imports 28.8  32.3  32.4  34.2  36.0  
Services balance -1.2  -1.2  -1.7  -2.1  -2.1  
Capital account -0.2  -0.3  -0.3  -0.4  -0.2  
Financial account 2.5  1.4  0.9  2.4  0.9  
     Direct investment 0.0  0.7  0.3  -0.5  -1.4  
Balance of payments  4.3  5.7  2.5  2.5  1.6  
Terms of trade 88.5  85.3  79.0  73.2  70.2  
Merchandise exports (%age change) 20.7  30.6  12.1  14.8  14.2  
Merchandise imports (%age change) 18.0  25.6  16.4  18.6  15.0  
Service exports (%age change) 16.1  27.1  7.8  10.6  26.3  
Service imports (%age change) 10.4  23.6  17.7  17.1  21.4  
Foreign exchange reservesc (US$ billion, end-period) 154.5  198.2  210.0  238.4  261.8  
Total external debt (US$ billion, end- period) 157.4  172.3  187.9  260.1  380.7  
of which short term 50.8  56.3  65.9  113.6  150.0  
Debt service ratiod 13.1  10.7  7.9  7.4  7.6  
.. Not available. 
a Provisional. 
b M1 consists of currency in circulation,  demand deposits and saving deposits with tr ansferability.  M2 consists of M1 plus 
periodical time deposits and instalment savings and marketable  instruments, yield-based divi dend instruments, financial 
debentures and other (e.g. securities investme nt savings at investment trust companies). 
c Excluding gold, Special Drawing Rights, and Reserve Position in the IMF. 
d Debt service on medium and long-term debt in  per cent of exports of goods and services. 
Source:  Korea National Statistical Office, Monthly Statistics of Korea  2007-9 and 2008-2;  IMF (2007), IMF Country 
Report  No. 07/344, October;  and data provided by the authorities. 
2. Nonetheless, certain long-term and short-te rm concerns remain.  Despite apparent 
improvements in Korea's global competitiveness due to its strategy of deve loping high va lue-added 
and high technology products, and growing labour  productivity in manufacturing, primarily through 
technological advancement (probably the main source of growth in total factor productivity in the 
longer term), labour productivity in services is one third lower than in manufacturing.3  The depletion 
of Korea's low skilled manufacturing base, coupled  with comparatively low productivity in the 
services sector, could threaten Korea's potential long-t erm growth.  In addition, there appears to be a 
                                                      
3 OECD (2007g).  The authorities' estimate for labour  productivity in services is even lower, at only 
46% of that in manufacturing in 2005.  Also, TFP growth in services declined from 1.7% in the 1980s to 0.4% in the 1990s. Republic of Korea WT/TPR/S/204/Rev.1 
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long-term trend of increasing income inequality, with the Gini coefficient4 having risen from 0.28 to 
0.32 since 19975, mainly due to the widening wage gap between large and small firms and labour 
market dualism.6  Aging population and the associated fiscal burden, also constitute serious concerns.7 
3. International trade continues to play a pivot al role in Korea's economy, whose openness is 
such that total trade in goods and non-factor servi ces amounted to 90.2% of GDP in 2007.  Moreover, 
Korea remains a significant source of foreign direct investment (FDI), as Korean manufacturers move operations abroad to take advantage of lower costs.  By contrast, inward FDI in Korea remains low by 
OECD country standards and dec lined during the period under review
8;  relatively low and declining 
FDI in relation to GDP is thought to be due to, inter alia,  the increasing cost of doing business in 
Korea, excessive regulation, an d perhaps the appreciating won.  Compared with other Asian 
economies, Korea's integration into the global economy seems somewhat low9, although the 
authorities maintain that this is not the case and, in any event, they are taking steps to enhance its 
integration by, among other things, increasing ma rket access, expanding overseas operations, as well 
as participating in multilateral and regional trade agreements.   
(2) RECENT ECONOMIC DEVELOPMENTS  
4. During the period under review, Korea's real GDP growth peaked at 5.1% in 2006, but came 
down marginally to 5.0% in 2007 (Table I.1).  GDP  growth was fuelled by exports, particularly of 
manufactures, which grew at an annual average of n early 9%, in spite of weak private consumption, 
deteriorating terms of trad e, and falling investment.10  However, the share of manufacturing in GDP 
declined from 28.6% in 2004 to 27.9% in 2007, due to a rise in the share of imported intermediate 
inputs in the manufacturing process.  By contrast the share of services increased from 55.6% to 
57.6%, possibly partly due to liberali zation in the sector (Table I.2).  
5. Overall unemployment dropped from 3.7% in 20 04 to 3.2% in 2007 owing to increasing 
employment in the services sector.  This is mainly due to the rise in the number of temporary workers, 
from 17% of employees in 2001 to 29% in 2005, the second highest in the OECD area.  
                                                      
4 The Gini coefficient measures income inequality, where an index of zero represents perfect equality, 
and 1 perfect inequality. 
5 The share of temporary workers rose from 17% of employees in 2001 to 29% in 2005 (IMF, 2006). 
6 The labour market in Korea consists of temporar y workers and permanent workers.  The latter tend to 
be much better paid and covered by worksite-based pension, and health and employment insurance;  temporary 
workers are not (OECD, 2007b). 
7 Under the existing parameters, the aging population could result in an increase in the health and 
long-term care by 8.5% of GDP by 2050 and deplete the assets of the pension system, requiring an annual 
budget outlay of approximately 7% of GDP (IMF, 2006). 
8 Korea ranks among the lowest in the OECD as regards the ratio of inward FDI to GDP and 110th in 
the world with respect to the cost and time involved in starting a new business (OECD, 2008). 
9 Korea ranked 29th (out of 123) in globalization, according to a report by the Swiss Institute for 
Business Cycle Research (KOF) of the Swiss Federal Ins titute of Technology in Zurich, Switzerland.  Despite 
receiving a relatively high score in social globaliza tion and political globalizatio n indexes, its economic 
globalization rank lagged far behind that of its Asian rivals ( The Nation online information "Korea ranks 29th in 
globalization", 13 February 2006.  Viewed at:  http://www.korea.net/news/news/NewsView.asp?serial_no= 
20060212005&part=102&SearchDay= [27 March 2008]). 
10 Total investment declined from 37.5% of GDP in 1996 to 28.8% in 2007, while spending on 
machinery and equipment fell from 15.2% to 10.7% of GDP over the same period (OECD, 2007g). WT/TPR/S/204/Rev.1 Trade Policy Review 
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Table I.2 
Basic economic and social indicators, 2003-07 
   2003 2004 2005 2006 2007 
Real GDP at market prices (won billion, 2000 prices ) 662,654.8 693,995. 5 723,126.8  760,25 1.2   98,057.0  
Real GDP at market price (US$ billion,  2000 prices) 586.1 613.8 639.6  672.4  705.9  
Current GDP at market price (won billion) 724,675.0 779,380.5 810,515.9  848,044.6  901,188.6  
Current GDP at market price (US$ billion) 608.0 680.9 791.3  887.5  969.9  
GDP per capita at current market price (won '000) 15,141.9 16,223.9 16,837.3  17,558.9  18,598.1  
GDP per capita at current market price (US$) 12,704.1 14,173.4 16,437.7  18,376.5  20,015.2  
GDP by economic activity at constant 2000 prices (Annual percentage change)  
Agriculture, forestry and fishing -5.3 9.2 0.7 -1.5 1.1 
Mining and quarrying 0.9 2.7 -1.7 1.7 1.6 
Manufacturing 5.5 11.1 7.1 8.5 6.5 
Electricity, gas and water 4.7 6.6 7.8 3.4 4.0 
Construction 8.6 1.8 -0.1 0.3 1.8 
Services 1.6 1.9 3.4 4.4 4.8 
 Wholesale and retail trade, restaurants and hotels -2.8 -0.2 2.0 3.5 3.5 
 Transport, storage and communication 4.8 7.0 4.8 4.6 5.4 
 Financial intermediation 0.5 -1.4 4.7 5.3 10.3 
 Real estate, renting and busin ess activities 2.2 1.9 3.4 4.6 3.9 
 Public administration and defence, compul sory social security 2.6 2.1 2.6 3.3 2.5 
 Education 3.7 2.2 1.2 2.6 1.6 
 Health and social work 5.1 5.0 5.6 7.2 8.1 
 Other 1.1 1.1 3.1 5.8 4.1 
Share of GDP, current prices (Per cent) 
Agriculture, forestry and fishing 3.8 3.8 3.4 3.3 3.0 
Mining and quarrying 0.3 0.3 0.4 0.3 0.4 
Manufacturing 26.4 28.6 28.4 28.0 27.9 
Electricity, gas and water 2.7 2.4 2.3 2.3 2.3 
Construction 9.6 9.3 9.2 9.0 8.9 
Services 57.2 55.6 56.3 57.1 57.6 
 Wholesale and retail trade, restaurants and hotels 9.9 9.4 9.4 9.4 9.3 
 Transport, storage and communication 7.5 7.3 7.3 7.1 7.2 
 Financial intermediation 8.9 8.2 8.4 8.5 8.9 
 Real estate, renting and busin ess activities 12.8 12.4 12.5 12.7 12.8 
 Public administration and defence, compul sory social security 6.0 6.1 6.3 6.5 6.4 
 Education 5.6 5.6 5.8 5.9 5.9 
 Health and social work 3.0 3.0 3.2 3.4 3.6 
 Other 3.5 3.4 3.5 3.6 3.6 
Share of sector in total employment      
Agriculture, hunting and fishery 8.8 8.1 7.9 7.7 7.4 
Mining and quarrying 0.1 0.1 0.1 0.1 0.1 
Manufacturing 19.0 19.0 18.5 18.0 17.6 
Electricity, gas and water 0.3 0.3 0.3 0.3  ..  
Construction 8.2 8.1 7.9 7.9 7.9 
Services 62.6 63.8 64.5 65.3  ..  
 Wholesale and retail trade 17.5 16.9 16.4 16.0  ..  
 Hotels and restaurants 8.9 9.1 9.0 8.9  ..  
 Transport, storage and communication 6.0 6.1 6.3 6.4  ..  
 Financial institution and insu rance 3.4 3.3 3.3 3.4  ..  
 Real estate, renting and leasing 1.9 2.0 2.2 2.2  ..  
 Business activities 5.9 6.5 6.7 7.2  ..  
 Public administration and defence, compulso ry social security 3.4 3.4 3.5 3.5  ..  
 Education 6.7 6.7 6.9 7.2  ..  
 Health and social work 2.4 2.6 2.8 3.0  ..  
 Other community, social and personal service activity 6.4 7.2 7.6 7.7  ..  
Othera 1.0 0.7 0.7 0.7  ..  
.. Not available. 
a Including private households with employed persons , and extra-territorial organizations and bodies. 
Source:  Korea National Statistical Office, Monthly Statistics of Korea  2007-9 and  2008-1;  and data provided by the authorities. Republic of Korea WT/TPR/S/204/Rev.1 
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6. A key reason for exports remaining competitive is  the growth (10%) in labour productivity in 
manufacturing, which is driven main ly by technological enhancements.11  On the other hand, 
productivity in the services sector is low compared wi th manufacturing, and has been stagnating.  The 
main problem lies in the retail sector, which is dominated by small family-owned stores, but 
productivity performance in other services has also pr oved disappointing due mainly to protection of 
the services sector as a whole. 
7. Inflation was modest during the review period.   The consumer price index was contained 
within the Bank of Korea's (BOK)  target range of 2.5%-3.5%.  Howe ver, inflation has been increasing 
since the beginning of 2008 and reached a nine-year high of 5.5% in June.  The increase in prices was 
due largely to rising fuel and food prices. 
(3) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policy 
(a) Monetary policy 
8. The BOK conducts monetary policy with the ai m of maintaining price stability, and thus 
pursues an inflation-targeting policy.  Under Article 3 of the Bank of Korea Act, "The monetary and 
credit policies of the Bank of Korea shall be form ulated neutrally and implemented autonomously and 
the independence of the Bank of Korea shall be r espected".  The present medium-term target is 3% ± 
0.5%, over 2007-09.12  The BOK in consultation with the Gove rnment changed the target indicator in 
January 2007 from core inflation to headline CPI,  which includes energy and non-grain agricultural 
prices (core inflation included other food pri ces), thus representing more closely living costs.13  The 
main BOK instrument to control the interest rate, an d thus the price level, is open market operations.14  
Other instruments used by the BOK to control credit and liquidity in the economy are aggregate credit 
ceiling and reserve requirements.15 
9. Following the credit card crisis16, the BOK adopted an expansionary monetary policy stance 
during 2003 and 2004 to facilitate economic recovery and address fina ncial market instability.  As 
economic recovery took hold in 2005 and banks re-engaged in household lending, the BOK pursued a 
contractionary monetary policy to counter the ass ociated inflationary pressure, raising the policy  
(uncollateralized overnight call rate) interest rate seven times to its current level of 5%.17  The BOK 
                                                      
11 Korea's share of world exports has remained stable at 3% (IMF, 2007b). 
12 Bank of Korea online information.  Viewed at:  http://www.bok.or.kr/index. jsp [20 January  2008]. 
13 Bank of Korea online information.  Viewed at:  http://www.bok.or.kr/index. jsp [20 January  2008]. 
14 The BOK changed its policy rate from "the call rate target" (uncollateralized overnight call rate) to 
"the Bank of Korea Base rate", which is the reference rate applied to transactions between BOK and financial 
institutions, such as repurchase agreements and the Bank’s  standing facilities.  However, the call rate maintains 
its role as "operational target". 
15 The Bank of Korea operates its aggregate credit ceiling by setting a ceiling on its refinancing credits 
to banks and allocating quotas under this to individual banks in accordance with prescribed criteria. Banks may 
then borrow funds from the Bank of Korea within their quotas (Bank of Korea online information.  Viewed at:  
http://www.bok.or.kr/content/o ld/attach/00000888/200301161356580.pdf [10 May 2008]). 
16 Between 1999 and 2003, consumer lending and credit was encouraged and grew significantly;  
furthermore the consumer credit market  was lightly regulated.  As debts rose, borrowers found it increasingly 
difficult to repay, resulting in widespread defaults and the near collapse of the cr edit card companies in 2003, 
which required a bailout package from the Government. 
17 The rate was raised by 0.25% in October 2005, and has subsequently been raised six times to 5%;  
however, the BOK has left the rate unchanged since August 2007 (IMF, 2007b);  and Bank of Korea online information.  Viewed at:  http://www.bok.or.kr/index.jsp [20 January 2008]. WT/TPR/S/204/Rev.1 Trade Policy Review 
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also raised reserve requirements in 2006 and lowere d the aggregate credit ceiling in 2007 in order to 
subdue liquidity growth resulting from the capital account surplus.  The authorities' reason for 
maintaining a tight monetary policy, other than to pre-empt any inflationary pressures, was to respond 
to rapid money and credit growth in the economy.18 
(b) Exchange rate policy 
10. Korea has maintained a floating exchange rate19, which is determined by supply and demand, 
although the authorities have intervened in the ma rket in modest amounts to smooth volatility and 
prevent the won from appreciating too rapidly.20  As a result of surpluses on both the capital and 
current accounts, the won appreciated significantly against the U.S. dollar, moving from W 1,144.7 
per US$ in 2004 to W 935.8/US$ in early 2008, an appreciation of over 18%.  However, since March, 
the won has depreciated against the U.S. dollar and was at US$1,046.8 on 30 June 2008.  The real 
effective exchange rate also depreciated during 20 08.  According to the IMF, the exchange rate 
seemed to be appropriately valued.21  
(ii) Fiscal policy 
11. During the period under review, Korea recorded a fiscal surplus each year;  albeit declining 
from 0.7% of GDP in 2004 to 0.4% in 2006, but rising significantly to 3.8% in 2007.  The fiscal stance has been broadly neutral.  Revenue as a share of GDP increased from approximately 23% in 2004 to 27% in 2007
22, and tax to GDP rose from 15.1% to 17.9% (for breakdown of taxes see 
Chapter III).  However, both ratios are relatively low in comparison to other OECD countries.  
Revenue during 2007 exceeded the budgeted amount by  W 14 trillion, due to temporary carry-over of 
tax collection, increases in real estate related taxes,  and a broadening of the tax base.  The increased 
revenue has been earmarked to repay government debt, which was approximately 33.2% of GDP in 
2007.  
12. Expenditure grew from 22.3% of GDP to 23.3% during the period (Table I.1).   The National 
Fiscal Management Plan aims to increase the fiscal surplus to 1.8% of GDP by 2010 by reducing 
expenditure growth to 6.4%.23  The Plan24, as well as the National Fiscal Act (2007), also limits the 
possibility of the Government issuing supplementary budgets.25  To enhance transparency, the 
Government plans to implement accrual budget accounting by introducing double bookkeeping in fiscal year 2009, which would supplement the cu rrent cash-based accounting system.  The level of 
                                                     
 
18 IMF (2007b). 
19 Korea maintains exchange rate restriction for se curity purposes in accordance with UN security 
council resolutions and these have been notified to the IMF. 
20 From the start of 2006 to third-quarter 2007 , estimated interventions averaged approximately 
US$1 billion per month, which was approximately 0.75% of the onshore foreign exchange market 
(IMF, 2007b). 
21 IMF (2007b) and IMF (2008b). 
22 Revenue receipts include social security contributions, which amounted to 3.3% of GDP in 2007 
(Table I.1). 
23 OECD (2007g). 
24 The Plan provides a medium-term perspective on fiscal management and detailed sectoral investment 
plans.  Additionally the Plan has to be revised and updated annually to serve as a guideline to the annual budget process. 
25 Between 2001 and 2006, the Government issued a supplementary budget every year, averaging 
W 5 trillion annually (OECD, 2007g).  Under the National Fiscal Act, a supplementary budget can only be issued under conditions of national emergency, natural disaster, economic downturn, and legal requirements for 
expenditure.  In addition under the Act, when the Government submits a Bill that contains increased expenditure 
or tax reduction measures, an estimate on expenditures and revenues for the next five years as well as detailed 
financing plans should be attached.  Republic of Korea WT/TPR/S/204/Rev.1 
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expenditure in 2007 was expected to remain the same as in 2006, but the focus has changed from 
infrastructure and public administration to the social safety net, education, and research and 
development.   
13. The Government has significant contingent liabilities, such as off-budget spending on account 
of build-transfer-lease projects and government guarantees for SME loans.26 
(4) MAIN STRUCTURAL POLICY DEVELOPMENTS  
(i) Tax reform 
14. The objectives of Korea's tax reform are to:  enhance economic activity and increase growth 
potential;  increase fiscal revenue by broadening the ta x base so as to be able to address the issues of 
aging population and income inequality;  stabilize asset  markets;  and improve transparency.  Personal 
income tax is only 3% of GDP, compared with an  OECD average of 10%;  this is on account of 
extensive deductions, tax credits, a llowances, and weak enforcement.27  Only 43% of household 
income is taxed, compared with over 75% in othe r OECD countries;  furthermore, only about half of 
eligible people pay tax.28  The authorities are trying to broaden the tax base by improving enforcement 
against understatement of income, increasing pe nalties for tax fraud, and requiring high income 
self-employed to use business accounts for all business transactions.  Additionally, reducing 
allowances and credits such as deductions and tax credits for salary and wage earners, and wide 
ranging tax preferences for enterprises, improving the taxation of fringe benefits and collection, would 
result in a revenue increase of approximately 5% of GDP, which would enable the Government to 
meet social needs without raising tax rates.29  With regard to corporate income tax, incentives 
provided to R&D, SMEs, and agriculture also lim it the authorities' ability to increase tax revenue. 
(ii) Financial and capital markets reform 
15. During the period under review, restructuring an d reform continued in  the financial sector, 
resulting in its improved health (Chapter IV).  Howe ver, banks remain vulnerable due to the variable 
interest rate based consumer and SME loans30, growth in mutual savings banks loans (subject to less 
stringent prudential regulations than commercial banks), reliance on wholesale funding, and increased 
un-hedged foreign exchange lending by domestic banks.31 
16. The Government has been implementing its fi nancial hub policy, for which a roadmap was 
drawn up in 2003, as an effective apparatus to advance the financial market.  The legal and 
institutional framework has been set up, and co ncrete policy measures are being implemented, 
including the establishment of the Korea Investment Corporation in 2005 and the ongoing 
deregulation of capital markets.32  Additionally, in December 2007, the Government introduced the 
Act on the Financial Centre Development, aimed at  strengthening the legal foundation in order to 
carry out the financial hub policy.   The Government has taken steps to liberalize the capital account 
                                                      
26 The Government guarantees 18% of SME loans, which amounts to 5.3% of GDP (IMF, 2007b).  
According to the authorities, government guarant eed debt amounted to 3.7% of GDP in 2007. 
27 IMF (2007b).  Another plausible reason for the low personal income tax to GDP ratio could be the 
significant difference between the corporate income tax rate (25%) and the highest personal income tax rate 
(35%), which provides considerable scope for personal tax avoidance. 
28 OECD (2007g). 
29 OECD (2007g). 
30 IMF (2006). 
31 Such loans increased by US$8.5 billion during the first six months of 2006 (IMF, 2006). 
32 IMF (2006). WT/TPR/S/204/Rev.1 Trade Policy Review 
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through the Overseas Investment Revitalization Pl an, launched in 2005, which promotes corporate 
expansion overseas, easing of restrictions on fo reign exchange transactions, as well as announcing the 
complete liberalization of the capital account by 2009, two years ahead of schedule.33  The Financial 
Investment Services and Capital Ma rket Act, set to become effec tive in 2009, brings together all 
capital-market-related laws under a single Act, th ereby streamlining some 300 regulations to 190 
(Chapter IV).  Other initiatives include a planned shift from rules-based to risk-based supervision 
under Basel II, and the financial supervisors' inte ntion to strengthen the monitoring of SME lending 
and decrease the quota of preferential loans made to SMEs by banks.34  
(iii) Privatization 
17. State intervention in the economy persists in  key service sectors such as financial, 
telecommunications, and transportation services.  Th ere is also state inte rvention in the gas and 
electricity sectors (Chapters III and IV).  The privat ization process, a contentious issue, has been put 
virtually on hold;  the new Government seems committed to resuming divestment activities to streamline the public sector and improve its overall  competitiveness, but no concrete plans have yet 
been formulated.  
(iv) Labour 
18. In conjunction with management and labour union s, the Government passed new legislation 
on reforming labour relations in 2006.  Under the ne w law;  the compulsory arbitration system was 
abolished, the minimum service system was introdu ced, and the reporting requirement for third-party 
assistance was repealed.  With rega rd to the labour standards;  the penal provision punishing unfair 
dismissal was deleted;  non-compliance charges began to be imposed in case of failure to comply with 
a remedial order to enhance the effectiveness of a remedy for breach of rights;  the requirement to specify working conditions in writing was expanded;   and the period of advance notice in case of 
dismissal for managerial reasons was shor tened from 60 to 50 days.  The new provisions  are expected 
to, inter alia,  enhance the balance (and harmony) between labour market flexibility and protection of 
vulnerable
 workers .35  With a view to expanding the social safety net, the coverage of  unemployment 
benefits was widened, and implem entation of the Earned Income Tax Credit was planned for 2008.  
(v) Corporate governance 
19. Recent policy initiatives with respect to cor porate governance included measures to protect 
investor rights.  Examples include the introduction of class action law suits and electronic voting systems for shareholders.  Audit laws were also  amended (in December 2003), requiring firms to 
change auditors every six years.  Firms ha ve also voluntarily improved the accountability of 
controlling shareholders through e nhanced disclosure of information with regard to fundraising and 
restructuring.  Information on sharing of costs be tween affiliates must also be disclosed.  Moreover, 
under the Government's Three Year Market Reform Roadmap (completed in 2006), shareholders have 
been further limited as from 2006 from expanding their control through financial affiliates.  
Disclosure requirements with respect to owners hip and control have also been enhanced.
36  O t h e r  
                                                      
33 Under the Overseas Investment Revitalization Plan , in 2005 the overseas direct investment ceiling 
was adjusted upwards and regulations on indirect overse as real estate investment were eased.  In 2006, the 
ceiling was abolished on overseas direct investment by individuals for individual purposes. 
34 IMF (2007b). 
35 Non-regular workers (a category that includes te mporary workers) earned almost 40% less than 
regular workers in 2005, with differences in productivity explaining only part of the disparity.  Furthermore, 
two thirds are not covered by worksite-based pension, health or employment insurance (OECD, 2007g). 
36 KFTC (2004). Republic of Korea WT/TPR/S/204/Rev.1 
 Page 9 
 
 
initiatives by the authorities include the limitation on cross-shareholding, which cannot exceed 15% 
of the gross number of stocks issued by a groups' affiliates.37  In order to encourage chaebols  to 
convert to holding companies (or to establish one), the Korea Fair Trade Commission (KFTC) has eased requirements for establishing holding compani es.  Additionally, Korea has taken steps to 
implement the OECD's convention on foreign bribery.   In this regard, there were six convictions 
during the period under review.
38  Korea's ranking among several countries on measurements of 
opacity and corruption perception remains relatively satisfactory.39    
(vi) Pension reform  
20. As a result of Korea's rapidly aging population40, the assets of the national pension fund are 
expected to peak in 2043, and then start declining.  In order to sustain the pension fund, Korea carried 
out national pension reforms in 2007.   The reforms aim to reduce the benefit replacement rate from 
60% to 40% by 2028, while keeping the contribution ra te at its current level of 9%.  The assets of the 
national pension fund were nearly W 220 trillion in 2007 and were mostly invested in financial assets;  
almost 70% are in domestic bonds, while the rest are invested in domestic stocks, foreign bonds, 
foreign stocks, and alternative investments such as real estate and venture investment.41   
21. Furthermore, in 2005, a Retirement Pension System was introduced, in addition to the 
national pension system.  Under the new system, firms with five or more employees are allowed to 
replace the existing lump-sum retirement allowances with a company pension system based on an 
agreement between labour and management.42 
(5) BALANCE OF PAYMENTS  
22. Korea's current account surplus declined from 4.1% of GDP in 2004 to 0.6% in 2007.  The 
current account surplus reflects the extent to which gross national saving exceeds gross domestic 
investment.  During the review period, both gross na tional savings and gross dom estic investment as a 
share of GDP fell.  However, the decline in the former was more pronounced.  This may be due to the 
recovery of domestic consumption after the restru cturing following the credit card crisis enabling 
banks to re-engage in household le nding.  In addition, the rise in government spending as a share of 
GDP could also result in domestic consumption rising.  
                                                      
37 The ceiling was reduced gradually from 25% in 2006 and 20% in 2007. 
38 OECD (2007e). 
39 Korea ranked 26th (among 48 countries) in the 2004 Opac ity Index, which measures the degree to 
which countries lack clear, accurate, easily discer nible, and widely accepted practices governing the 
relationships among governments, businesses, and investors (Kurtzman Group, 2004).  This translates into a risk 
premium of 3.5%.  Opacity may to some degree reflect, among other things, language factors.  Further, according to Transparency In ternational's 2007 Corruption Perceptions Index, which measures perceptions of 
corruption among public officials and politicians, Korea's rank improved to 43 (out of 179) in 2007 from 
47 (out of 145) in 2004 (Transparency International's Corruption Perceptions Index.  Viewed at: http://www.transparency.org/ policy_research/surveys_indi ces/cpi [10 March 2008]). 
40 With a fertility rate of one, coupled with rising life expectancy, Korea's population is aging quickly; 
consequently, the old age dependency ratio (people aged 65 or more compared with the working age population) 
is expected to rise from 13% in 2005 to 65% in 2050.  This dramatic demographic change would result in fiscal 
pressure on account of pensions, heath, and long-term car e expenses.  It is estimated that public age-related 
expenditures could rise by as much as 13% of GDP (IMF, 2008a). 
41 Under the Regulation on National Pension Fund Mana gement;  the ceiling on investment in domestic 
bonds is 10% to 100% of the equity capital of the i ssuer, depending on the credit rating of the issuer.  For 
foreign bonds, the fund can be invested in 20% to 100%  of the equity capital of the issuer, depending on the 
credit rating of the issuer.  With regard to direct management of domestic stocks, the fund can be invested in up 
to 10% of common stocks and preferred stocks issued by the same firms. 
42 OECD (2007g). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 10 
 
 
23. After peaking in 2006, the capital and financia l account surplus has declined significantly 
(Table I.3);  however, the capital account has been qu ite volatile, with large swings in net direct and 
portfolio investment.  The reason for the latter is the repatriation of foreign investments in Korean 
stocks and a sharp rise in overseas stock investment by Korean residents.  On the other hand, other 
investments, particularly trade credits and loan s, have grown significantly, due to a surge in 
short-term borrowing by banks to hedge against fore ign exchange fluctuations.  These have more than 
offset the investment outflows.43  With both the capital and financial and current accounts in surplus, 
foreign exchange reserves rose from US$199.1 b illion in 2004, to US$262.2 billion in 2007 
(US$258.2 billion at end-May 2008), which represents more than 170%  of short-term  debt and over 
ten months of import coverage. 
Table I.3 
Balance of payments, 2003-07 
(US$ million) 
    2003 2004 2005 2006 2007a 
Current account 11,949.5 28,173.5 14,980.9 5,385.2 5,954.3 
Goods and services balance 14, 527.8 29,522.7 19,024.9 8,944.4 8,834.5 
    Trade balance 21,952.0 37,568.8 32,683.1 27,905.1 29,409.4 
       Exports 197,289.2 257,710.1 288,970.7 331,842.0 378,982.0 
       Imports 175,337.2 220,141.3 256,287.6 303,936.9 349,572.6 
    Services balance -7,424.2 -8,046.1 -13,658.2 -18,960.7 -20,574.9 
       Receipts 32,956.5 41,881.5 45,129.4 49,890.8 63,033.8 
    Transportation 17,179.8 22,529.4 23,876.9 25,807.0 33,766.7 
    Travel 5,358.2 6,069.0 5,805.6 5,787.8 5,796.6 
    Communication 341.2 445.6 443.0 642.2 573.5 
    Insurance 34.0 138.7 168.7 273.7 318.6 
    Royalties 1,311.2 1,861.1 1,908.4 2,045.6 1,920.1 
    Other business 6,687.3 8,125.1 9,422.3 10,532.1 14,124.0 
    Government 1,203.2 1,377.0 1,418.2 1,509.3 1,497.4 
    Other 841.6 1,335.6 2,086.3 3,293.1 5,036.9 
       Payments 40,380.7 49,927.6 58,787.6 68,851.5 83,608.7 
    Transportation 13,613.0 17,654.8 20,144.0 23,132.8 29,873.9 
    Travel 10,102.8 12,350.2 15,405.9 18,850.5 20,889.9 
    Communication 692.9 635.7 773.1 1,011.7 929.7 
    Insurance 390.3 461.2 732.7 854.0 1,116.1 
    Royalties 3,570.0 4,445.9 4,560.8 4,650.4 5,075.1 
    Other business 11,049.4 13,162.5 15,537.5 17,704.7 22,508.3 
    Government 452.5 554.3 732.6 828.4 1,085.8 
    Other 509.8 663.0 901.0 1,819.0 2,129.9 
Income balance 326.3 1,082.8 -1,562.5 533.7 768.5 
       Credit 7,175.8 9,410.3 10,431.8 14,547.4 19,326.9 
    Compensation of employees 732.1 713.1 745.3 685.0 660.8 
    Investment income 6,443.7 8,697.2 9,686.5 13,862.4 18,666.1 
       Debit 6,849.5 8,327.5 11,994.3 14,013.7 18,558.4 
    Compensation of employees 97.3 125.9 119.4 141.2 185.4 
    Investment income 6,752.2 8,201.6 11,874.9 13,872.5 18,373.0 
Current transfers  -2,904.6 -2,432.0 -2,481.5 -4,092.9 -3,648.7 
       Credit 7,859.3 9,150.5 10,004.0 9,587.5 10,934.4 
       Debit 10,763.9 11,582.5 12,485.5 13,680.4 14,583.1 
Capital and fina ncial account 13,909.4 7,598.8 4,756.5 17,972.0 6,232.3 
Capital account -1,398.4 -1,752.8 -2,340.4 -3,126.1 -2,389.6 
Financial account 15,307.8 9,351.6 7,096.9 21,098.1 8,621.9 
   Direct investment 100.0 4,588.3 2,010.4 -4,540.4 -13,696.7 
      Korea's direct investment abroad -3,425.5 -4,657.9 -4,298.1 -8,126.8 -15,275.5 
      Foreign direct investment in Korea 3,525.5 9,246.2 6,308.5 3,586.4 1,578.8 
   Portfolio investment 17,906.5 8,619.3 -1,728.2 -22,745.6 -19,093.3 
Table I.3 (cont'd) 
                                                      
43 In 2006, Banks borrowed US$40.6 billion in short-term loans (OECD, 2007g). Republic of Korea WT/TPR/S/204/Rev.1 
 Page 11 
 
 
    2003 2004 2005 2006 2007a 
      Assets -3,590.2 -7,395.5 -10,675.1 -22,353.0 -42,414.0 
    Equity securities -1,992.7 -3,621.6 -3,685.6 -15,261.7 -52,435.9 
    Debt securities -1,597.5 -3,773.9 -6,989.5 -7,091.3 10,021.9 
      Liabilities 21,496.7 16,014.8 8,946.9 -392.6 23,320.7 
    Equity securities 14,418. 5 9,468.8 3,282.1 -8 ,390.9 - 28,725.9 
    Debt securities 7,078. 2 6,546.0 5,664.8 7,998.3 52,046.6 
   Other investment -2,698.7 -3,856.0 6,814.7 48,384.1 41,411.9 
      Assets -5,132.4 -8,138.4 -2,658.1 -7,945.4 -18,423.9 
    Trade credits 22.5 -986.5 453.6 -1,591.4 -2,022.3 
    Loans -4,492.7 -2,386.1 245.8 -1,275.0 -10,325.2 
    Currency and deposits -1,325.5 -130.2 -1,247.0 -1,354.3 -4,730.0 
    Other assets 663.3 -4,635.6 -2,110.5 -3,724.7 -1,346.4 
      Liabilities 2,433.7 4,282.4 9,472.8 56,329.5 59,835.8 
    Trade credits 6,301.0 8,088.0 7,780.4 13,090.5 13,546.7 
    Loans -5,031.9 -935.0 1,022.2 44,179.5 41,553.8 
    Currency and deposits 839.8 -2,650.4 -716.5 -2,415.8 5,496.1 
    Other liabilities 324.8 -220.2 1,386.7 1,475.3 -760.8 
Net errors and omission -9.5 2,938.2 68.4 -1,244.3 2,941.6 
Reserve assets -25,849.4 -38,710.5 -19,805.8 -22,112.9 -15,128.2 
a Preliminary figures. 
Source:  The Bank of Korea, Monthly Statistical Bulletin  2007.10 and 2008.1. 
(6) DEVELOPMENTS IN TRADE  
24. The ratio of Korea's total trade (exports and imports) in goods and non-factor services to GDP 
increased from 83.7% in 2004 to 90.2% in 2007 (Table  I.1), reflecting the increased trade openness of 
the economy.  Korea was the world's sixth la rgest exporter (counting the EC as one) and 
seventh largest importer of goods in 2006.44   
(i) Composition of trade 
25. Since 2003, the share of manufactures in exports has declined, due mainly to the drop in the 
share of office machines and telecommunications equi pment (Chart I.1, Table AI.1) and possibly the 
increasing competitiveness of Chinese products.45  On the other hand, the share of primary products 
has risen, due mainly to refined oil exports, which benefited from higher international prices.  Imports 
of primary products, particularly oil, have also risen (Table AI.2). 
(ii) Direction of trade 
26. The main destinations for Korea's exports in 2007 were China (22.1%), the EC-25 (14.8%), 
the United States (12.4%), and Japan (7.1%).  During the period under review, the shares of the United States and Japan declined, while the shares of China and the EC-25 have risen (Chart I.2, 
Table AI.3).  Korea's major suppliers in 2007 were China (17.7%), Japan (15.8%), the United States 
(10.5%), and the EC-25 (10.3%).  The share of imports from the Middle East rose from 14.8% in 2003 to 18.4% in 2007, presumably due to higher international oil prices (Table AI.4). 
 
                                                     
 
44 WTO (2007) . 
45 IMF (2007b). WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 12 
 
 
Chart I.1
Product composition of merchandise trade, 2003 and 2007
2003 2007
(a)    Exports (f.o.b.)
Other 
consumer goods
4.3
Manufactures
91.7
Total:   US$193.8 billion Total:  US$371.5 billion  
(b)    Imports (c.i.f.)
Office
 machines & 
telecom. equip.
17.9
Chemicals
9.2Transport equip. 
3.0
Manufactures
62.9Other electrical 
machines  
5.6
Non-electrical 
machinery
8.5Other mining
5.6Textiles & clothing
3.2Other
0.5
Other electrical machines  
4.9Office machines & telecommunication 
equipment
24.7
Other 
semi-manuf.   
3.8Transport equipment  
3.8
Chemicals
9.1Manufactures
57.8
Non-electrical
machinery
9.0
Total:   US$178.8 billion Total:   US$356.8 billion Per cent
Manufactures
88.9Mining
9.1
Other 
consumer 
goods  
6.3Other
1.8Other electrical 
machines
4.7Transport 
equipment
18.3Other
0.2
Other semi-
manufactures
4.0Iron & steel
5.1
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer goods 
7.4
Mining
35.6Other 
consumer goods 
8.1
Textiles & clothing
3.3
Other semi-
manufactures
4.7
Other semi-
manufactures
3.9Iron & steel
4.0Mining
5.0
Agriculture
6.2
Iron & steel
4.1Mining
27.2
Iron & steel
6.0Chemicals 
8.7
Chemicals
10.1Other 
1.1
Other mining
8.5Fuels
27.0Textiles & clothing
7.4Agriculture
2.2
Non-electrical 
machinery
6.5Non-electrical
machinery
7.7
Agriculture
8.1 Textiles & clothing
2.4
Office machines &
telecommunication
equipment
12.4Fuels
21.6Agriculture
1.7
Transport
equipment
21.3
Other electrical machines
4.8
Office machines & telecommunication 
equipment
32.9
 Republic of Korea WT/TPR/S/204/Rev.1 
 Page 13 
 
 
Chart I.2
Direction of merchandise trade, 2003 and 2007
2003 2007
(a)    Exports (f.o.b.)
Other Asia  
12.6
Asia
53.5
Total:  US$193.8 billion Total:  US$371.5 billion
(b)    Imports (c.i.f.)
Other Asia  
10.3
EC25
11.1EC25
10.3
China
17.7Chinese Taipei
2.8Other
5.1United States
10.5
Total:  US$178.8 billion Total:  US$356.8 billionPer cent
Asia
52.5Other Asia  
11.6
Middle
 East
4.5Other
1.7
Other Middle East  
6.5United States
17.7
Other Asia  
9.2United States
12.4
Source :  UNSD, Comtrade database.Japan
15.8EC25
14.8
Middle
 East
3.9
Asia
51.7Asia
52.3
Japan
20.3Kuwait  1.8EC25
13.9Hong Kong, 
China   
7.6Other
1.9
Other America
7.8
Australia
3.7Singapore
2.4
Hong Kong, China  
5.0
Chinese Taipei 
3.3Chinese Taipei
3.6Singapore
3.2
Australia  3.3  
Indonesia  2.6Other America
5.8
China  
22.1Africa
3.0
Other America
3.5Other America
4.0
China
12.3Indonesia  2.9China
18.1
Kuwait  2.5Chinese Taipei
3.5
Middle East
14.8Middle East
18.4
United Arab Emirates  3.2Saudi Arabia  5.2U.A.E.  3.5
Other Middle East
4.6Saudi Arabia
5.9United States
13.9Other
4.3Japan
8.9Japan
7.1
America
14.5America
17.5America
20.2
Africa  2.1America
23.6
CISa
3.0 CISa  1.3
a              Commonwealth of Independent States (CIS) countries are listed in Tables AI.3 and AI.4.
 WT/TPR/S/204/Rev.1 Trade Policy Review 
Page 14 
 
 
(7) TRENDS AND PATTERNS IN FOREIGN DIRECT INVESTMENT  
27. Inward FDI (on a notification basis) decrea sed slightly, from US$12.8 billion in 2004 to 
US$11.2 billion in 2006;  its share to GDP also declined from 1.2% to 0.4%.   During the period under 
review, the EC-25 became the largest investor, follo wed by Japan and the United States (Table I.4).  
The services sector, particularly finance and insu rance, attracted the most investment, while 
investment in restaurants and lodgings also increa sed considerably during the review period;  in 
contrast, investment in wholesale and retail service s declined markedly.  Within manufacturing, the 
electronics sectors has been the largest recipien t of foreign investment;  however, inflows in 
manufacturing have been quite volatile. 
Table I.4 
Inflows of foreign direct investment, 2003-06 
(US$ million and per cent) 
  2003 2004 2005 2006 
Total inflowsa (US$ million) 6,470.5  12,795.6 11,565.5  11,242.4  
 (Per cent of total) 
Inflows of origin     
EC 47.5 23.5 41.3 44.2 
Japan 8.4 17.7 16.3 18.8 
United States 19.2 36.9 23.3 15.2 
Singapore 3.6 3.0 3.4 5.0 
Hong Kong, China 0.8 0.7 7.1 1.5 
Cayman Islands 6.3 1.5 1.2 0.8 
Canada 1.1 1.8 1.7 0.7 
Malaysia 4.8 1.3 1.8 0.6 
Virgin Islands 2.6 0.2 0.2 0.4 
China 0.8 9.1 0.6 0.4 
Chinese Taipei 0.2 0.1 0.1 0.2 
Bermuda 0.1 0.3 0.3 0.1 
Other  4.5 4.0 2.7 12.3 
Inflows by sector     
Primary industries 0.1 0.0 0.0 0.0 
    Agriculture, fishery and forestry .. .. .. .. 
    Mining and quarrying 0.1 .. .. .. 
Manufacturing 26.3 48.6 26.6 37.8 
Electricity, gas, water, and construction 9.8 3.4 1.6 3.3 
    Electricity, gas and water 1.4 3.2 0.8 0.2 
    Construction 8.4 0.2 0.8 3.1 
Services 63.9 48.0 71.8 58.9 
     Wholesale and retail 14.6 8.8 7.0 4.4 
     Hotels and restaurants 3.3 0.4 2.7 9.9 
     Transport, storage and communication 9.6 3.2 8.7 5.5 
     Financial and insurance 25.5 25.2 33.9 26.9 
     Real estate and renting 5.2 2.1 8.3 2.9 
     Business activities 4.3 3.7 8.3 6.4 
     Culture and entertainment 0.4 3.7 2.7 2.7 
     Other services 1.0 0.9 0.3 0.2 
.. Not available. 
a Based on notifications. 
Source: Data provided by the authorities of the Republic of Korea.  Republic of Korea WT/TPR/S/204/Rev.1 
 Page 15 
 
 
28. Outward FDI rose considerably, from US$6 billion in 2004 to US$9.9 billion in 2006.  More 
than half was invested in other Asian c ountries, particularly China (Table I.5),  due mainly to large 
Korean firms shifting their manufacturing operations to take advantage of the comparatively lower 
wages in China and other Asian countries.  Other ma jor recipients of Korean investment include the 
United States, Hong Kong, China, and Viet Nam.  N early 50% of the investment is in manufacturing 
especially in radio and TV equipment and motor ve hicles.  With regard to services, Koreans have 
mainly invested in trade and repairs and real estate (Table I.5). 
Table I.5 
Outflows of foreign direct investment, 2003-06 
(US$ million and per cent) 
  2003 2004 2005 2006 
Total outflows (US$ million) 3,514.3 5,964.7 5,302.7 9,942.4 
 (Per cent of total) 
Outflows by destination      
China 37.1 38.4 46.0 30.9 
United States 28.7 22.4 21.4 16.1 
EC 4.5 11.2 -0.8 9.4 
Hong Kong, China 2.5 3.3 5.0 7.3 
Viet Nam .. 2.9 4.8 5.7 
Canada 0.4 0.8 0.6 3.9 
Bermuda .. 0.0 1.4 3.3 
Singapore 6.7 2.8 2.0 3.0 
Kazakhstan .. 0.4 0.5 2.2 
Japan 1.4 4.8 1.9 1.9 
Nigeria .. 0.0 0.0 1.2 
Indonesia 2.2 0.9 1.3 1.2 
Australia 1.4 0.9 2.0 1.2 
Cambodia . 0.2 0.6 1.1 
Brazil 0.2 0.3 2.7 1.1 
Other 14.9 10.6 10.8 10.4 
Outflows by sectors     
Agriculture and fishing 0.7 0.6 0.5 0.4 
Mining and quarrying 7.7 5.1 8.4 14.2 
Manufacturing 50.8 56.8 53.4 47.8 
Electricity, gas and water 0.0 0.0 1.1 -0.3 
Construction 1.2 1.3 2.1 5.8 
Services 39.6 36.2 34.5 32.1 
     Trade and repairs 25.7 19.3 17.0 11.1 
     Hotels and restaurants 2.1 1.8 3.6 2.0 
     Transport, storage and communication 2.2 1.7 2.9 3.8 
     Financial and insurance 0.1 0.1 0.0 0.0 
     Real estate, renting a nd business activities 6.8 9.8 7.8 12.3 
     Other services 2.7 3.4 3.0 2.8 
.. Not available. 
Source:  Data provided by the authorities of the Republic of Korea. 
 
 WT/TPR/S/204/Rev.1 Trade Policy Review 
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(8) OUTLOOK  
29. After the financial (1997) and credit card (2003)  crises, economic recovery in Korea remains 
strong and fundamentals are sound.  In the short term , the Government needs to continue to support 
consumption, which is vulnerable to a downturn in asset  markets;  proceed with structural reforms;  
and improve the investment climate, especially fo r foreign direct investment.  The Korea Vision 2030 
plan, seeks to make Korea a first-rate economy by 2020.  The plan also seeks to improve Korea's 
national competitiveness and quality of life rankings , while reducing poverty and inequality.  Low 
productivity in the services sector is a serious impedime nt to Korea's growth;  this is addressed by the 
plan through increased spending on research and devel opment, which is targeted to grow from 2.9% 
of GDP in 2004 to 5.3% of GDP by 2030.46  Recently, the new Government had targeted 7% real 
annual GDP growth, per capita income of US$40,00 0, and making Korea the seventh largest economy 
in the world by 2013.47  However, under the present economic circumstances, meeting these goals 
seems unlikely.  The BOK has reduced its  GDP growth forecast to 4.6% for 2008.48  T o  a c h i e v e  
sustainable growth, productivity in the services se ctor would need to be improved significantly 
through opening up the sector to domestic and fore ign competition.  Additional threats to Korea's 
long-term growth come from a declining and inflexible  labour force.  On the other hand, the threat to 
exports due to an appreciating exchange rate would be mitigated by substantial growth in productivity 
in the manufacturing sector. 
                                                      
46 Vision 2030.  Viewed at:  http://world.kbs.c o.kr/english/news/news_zoom_detail.htm?No=2014 
[30 March 2008]. 
 47 Financial Times,  24 March 2008, "S Korea leader's '747' pledge on economy hits turbulence".  
Viewed at:  http://www.ft.com/cms/s/0/243be74e-f 942-11dc-bcf3-000077b07658.html [9 April 2008]. 
48 Financial Times,  1 July 2008, "S Korea sl ashes growth forecast".  Vi ewed at:  http://www.ft.com 
[1 July 2008].