2016 Index of Economic Freedom South Korea
Over the past five years, South Korea’s economy has charted steady, uninterrupted progress in economic freedom. Recent reforms have put greater emphasis on enhancing regulatory efficiency and ensuring a larger role for small and medium-size enterprises in the economy. South Korea’s dynamic private sector, bolstered by a well-educated, hard-working labor force, continues to capitalize on the country’s openness to global trade and investment.
- Economic Freedom Snapshot
- 2016 Economic Freedom Score: 71.7 (up 0.2 point)
- Economic Freedom Status: Mostly Free
- Global Ranking: 27th
- Regional Ranking: 7th in the Asia–Pacific Region
- Notable Successes: Open Markets and Monetary Stability
- Concerns: Corruption and Labor Freedom
* Overall Score Change Since 2012: +1.8
Despite the challenging international economic environment, the overall soundness of South Korea’s public finance has been well maintained. The independent judicial system upholds the rule of law effectively, but corruption continues to undermine confidence and trust in political institutions. Reforming the rigid labor market remains critical to ensuring long-term competitiveness.
Conservative President Park Geun-hye assumed office in February 2013 promising a new policy toward North Korea. Her “trustpolitik” strategy balances enhancing South Korea’s ability to deter North Korean attacks with a willingness to engage Pyongyang in conditional, reciprocal diplomacy. Pyongyang rejected Park’s “Dresden Declaration,” a vision for Korean reconciliation articulated during a 2014 visit to Germany, as an attempt at “unification through absorption.” In early 2015, there were hopes for improved relations, but Pyongyang subsequently rejected all attempts at dialogue. Park’s tenure has been plagued by a series of scandals involving senior administration officials. South Korea remains a world leader in electronics, telecommunications, automobile production, and shipbuilding.
Rule of Low
Bribery and influence peddling persist in politics, business, and everyday life despite government anti-corruption efforts. Large family-run conglomerates known as chaebols enjoy outsized influence and continue to dominate the economy. Nevertheless, the rule of law is effective, the judicial system is independent and efficient, and private property rights are protected.
The top personal income tax rate is 35 percent, and the top corporate tax rate is 22 percent. A 10 percent surtax on individual and corporate rates and a value-added tax bring the overall tax burden to 24.3 percent of GDP. Government spending amounts to 31.8 percent of total domestic output. The budget has generated a small surplus, and public debt equals about 35 percent of GDP.
The regulatory framework is relatively competitive. With no minimum capital required, starting a business is not overly burdensome. The labor market remains dynamic, but there are lingering regulatory rigidities, and powerful trade unions add to the cost of conducting business. Monetary stability has been well maintained, but government subsidies of numerous renewable energy projects as well as child care and medical care affect prices.
South Korea’s average tariff rate is 7.7 percent. Foreign investment levels in many sectors of the economy are capped. Several state-owned enterprises are active in the economy. The government may not expropriate property without providing compensation. The financial sector has become more competitive, although business start-ups still struggle to obtain financing. The banking sector remains largely stable.