IMF raises its growth forecast for 2017 again

The International Monetary Fund raised once again Korea’s economic growth outlook for 2017 to 3.2 percent, only a month after it adjusted the forecast from 2.8 percent to 3 percent, citing stronger momentum than expected in the third quarter.

However, the IMF said for the Korean economy to sustain stronger long-term growth, the government needs to increase spending particularly on social policies and structural reforms while allowing a more flexible labor market including active participation of women in the workplace.

“The momentum is very strong, especially in the third quarter. We thought that the investment growth remained stronger than what we expected, export still performed well and even when you adjust all the changes in work days, still in the fourth quarter we expect this momentum to continue, so 3.2 percent [growth] is quite feasible,” said Necmettin Tarhan Feyzioglu, IMF’s Korea Mission Chief, who has been leading a delegation assessing the Korean economy in the past two weeks in Seoul.

The IMF economist said while the delegation has projected next year’s growth at 3 percent, that doesn’t mean the Korean economy will be slowing down. In fact he expects policies implemented by the Moon Jae-in administration to boost jobs and encourage consumption could result in higher growth.

The IMF delegation noted the need for the government to increase fiscal spending and reform the labor market if it hopes for long-term sustainable growth.

“Fiscal policies should be significantly more expansionary,” Feyzioglu said. “Three main reasons: one, supporting growth; two, supporting the vulnerable; and three, supporting structural reform.”

The IMF delegates said the government could make additional spending by 0.5 percent of the GDP.

“This adjustment should be achieved through higher expenditure on social policies and structural reforms targeted at specific groups, spending on childcare and active labor market policies,” Feyzioglu said.

“Spending increases on childcare would encourage more women to participate in the economy and counter the shrinking of active participants in the economy due to demographic changes.”

“This would reduce an important challenge,” Feyzioglu said.

He said Korea has ample fiscal space for larger spending in the short to medium run without risks to debt sustainability.

Feyzioglu stressed the need for more aggressive reform of the labor market.

“The current [economic growth] momentum provides a good opportunity for ambitious structural reforms,” he said, promoting the notion of “flexicurity.”

Flexicurity has three pillars, he said; more flexibility in the hiring and firing of salaried workers, a strong and inclusive safety net for the unemployed and labor policies that will allow people to switch jobs easily.

Feyzioglu also said that supporting innovation and deregulation are critical elements in fully realizing such flexicurity by making sure the Korean economy is working at full capacity.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]