Since the global financial crisis in 2008, Korea’s economic growth rate has been 2.9% p.a. on average, with government debt continuously increasing from the foreign currency crisis in 1997 to reach 34.8% of GDP in 2012. Moreover, concern over mid-/long-term fiscal health is growing due to the increasing welfare demand driven by the low birth rate and aging population and the bifurcation of income, the expected decrease in the working age population (aged 15~64) from 2016, and internal/external uncertainties including the possible unification of the Korean Peninsula. Accordingly, this report first analyzed the cases of Northern European countries including Sweden, Finland, and Norway that overcame financial and fiscal crises in the early 1990s and maintained universal welfare systems while demonstrating sound fiscal health and economic growth, and then developed implications for Korea.
Sweden, Finland, and Norway experienced financial and fiscal crises in the early 1990s. Real estate bubbles created by the financial liberalization of Northern European countries in the 1980s, Europe’s economic downturn after the unification of Germany in 1990, and foreign exchange speculators who emerged in the process of European monetary integration were the major culprits. They undermined the economic growth rates of Northern European countries and aggravated their fiscal balances because of massive injections of public funds, decreases in tax incomes, and increased welfare spending including unemployment benefits, etc.
In response, the Swedish, Finnish, and Norwegian governments introduced diverse policies. After the financial market was stabilized, Northern European countries introduced codes for fiscal stability, reduced welfare spending through reform of the pension and unemployment benefits, and privatized some state-owned companies that accounted for a large share of the companies. As a result, the fiscal balance and government debt situation improved as pension spending growth was slowed in spite of the aging population and welfare spending was reduced thanks to of the shrinking unemployment rate driven by economic recovery and reform of unemployment benefits.
At the same time, Northern European countries continued to expand investment in R&D and human capital, reinvigorated clusters, which are region-based R&D complexes, and reinforced support for SMEs and venture businesses and, as a result, successfully improved their economic growth rate and shifted their economies to a high-tech industry-based structure.
Such efforts laid the financial foundation for public finance expansion policies adopted to overcome sluggish domestic demand and exports, low economic growth rates, and high unemployment after the global financial crisis in 2008. In particular, Northern European countries are using the global financial crisis as an opportunity to establish mid-/long-term R&D investment plans and strengthen technological cooperation among Northern European countries.
The implications of the cases of Northern European countries for Korea are as follows. First, Korea needs to legislate new codes for fiscal stability, including debt rules, for mid-/long-term fiscal integrity. Second, it is necessary for Korea to consider fiscal sustainability and policy priorities when expanding the welfare system. Third, Korea also needs to focus on raising the competitiveness of state-owned companies and, to this end, make continuous efforts to improve the performance and efficiency of state-owned companies. Lastly, Korea is in need of a qualitative improvement in investment before proceeding with a quantitative expansion in R&D investment, which accounts for 4.0% of GDP as of 2011.
Sweden, Finland, and Norway experienced financial and fiscal crises in the early 1990s. Real estate bubbles created by the financial liberalization of Northern European countries in the 1980s, Europe’s economic downturn after the unification of Germany in 1990, and foreign exchange speculators who emerged in the process of European monetary integration were the major culprits. They undermined the economic growth rates of Northern European countries and aggravated their fiscal balances because of massive injections of public funds, decreases in tax incomes, and increased welfare spending including unemployment benefits, etc.
In response, the Swedish, Finnish, and Norwegian governments introduced diverse policies. After the financial market was stabilized, Northern European countries introduced codes for fiscal stability, reduced welfare spending through reform of the pension and unemployment benefits, and privatized some state-owned companies that accounted for a large share of the companies. As a result, the fiscal balance and government debt situation improved as pension spending growth was slowed in spite of the aging population and welfare spending was reduced thanks to of the shrinking unemployment rate driven by economic recovery and reform of unemployment benefits.
At the same time, Northern European countries continued to expand investment in R&D and human capital, reinvigorated clusters, which are region-based R&D complexes, and reinforced support for SMEs and venture businesses and, as a result, successfully improved their economic growth rate and shifted their economies to a high-tech industry-based structure.
Such efforts laid the financial foundation for public finance expansion policies adopted to overcome sluggish domestic demand and exports, low economic growth rates, and high unemployment after the global financial crisis in 2008. In particular, Northern European countries are using the global financial crisis as an opportunity to establish mid-/long-term R&D investment plans and strengthen technological cooperation among Northern European countries.
The implications of the cases of Northern European countries for Korea are as follows. First, Korea needs to legislate new codes for fiscal stability, including debt rules, for mid-/long-term fiscal integrity. Second, it is necessary for Korea to consider fiscal sustainability and policy priorities when expanding the welfare system. Third, Korea also needs to focus on raising the competitiveness of state-owned companies and, to this end, make continuous efforts to improve the performance and efficiency of state-owned companies. Lastly, Korea is in need of a qualitative improvement in investment before proceeding with a quantitative expansion in R&D investment, which accounts for 4.0% of GDP as of 2011.