In particular, the acceleration in wages and sharp increase in real estate prices risk boosting inflationary pressure, suggesting that a gradual reversal of monetary easing would seem to be needed to keep inflation in its medium-term target range over the next two years.

The recovery was led by an upturn in private consumption, which reached 60% of GDP in 2002 for the first time in 20 years. The rebound was boosted by major structural changes in the financial sector, notably an increase in consumer credit from banks.

A second factor was the expanded use of credit cards following the introduction of tax advantages in 2000 to encourage their use. The number of cards issued doubled between 1999 and 2001, and purchases using them quadrupled over the same period.

But one consequence of expanding household debt was a 27% increase between 2000 and 2002 in the number of individuals defaulting on loans, boosting the total to 2.63 million or 8% of the working age population.

A special chapter in the survey, on reforming the public expenditure system, notes that Korea has low public debt, at around 22% of GDP, well below the OECD average of 74%, and one of the lowest ratios of government spending to GDP, partly the result of the immaturity of the social welfare system and a relatively low level of public services.

But the system is under pressure to increase spending as a result of population ageing, an expanding social safety net and to prepare for the cost of co-operation with the North. This will require measures to deal with structural shortcomings in the budget and expenditure management system, such as strengthening the macroeconomic forecasting process underlying the budget, making the budget process more transparent and strengthening accountability, the Survey says.

In any case, the survey sees economic growth continuing strong in 2003 and 2004 at 5.8% and 5.7%.

©OECD Observer No 236, March 2003