South Korea’s economic freedom score is 71.5 on 2015
South Korea’s economic freedom score is 71.5, making its economy the 29th freest in the 2015 Index. Its score is 0.3 point higher than last year, with improvements in property rights, labor freedom, and monetary freedom exceeding declines in the management of government spending and business freedom. South Korea is ranked 7th out of 42 countries in the Asia–Pacific region, and its overall score is above the world and regional averages.
Over the past five years, South Korea’s economic freedom has improved by 1.7 points, further advancing the country into the “mostly free” category. The export-oriented, dynamic economy scores above the world average in seven of the 10 economic freedoms. Openness to global trade and investment has been institutionalized through free trade agreements, and the regulatory environment has become more efficient and competitive.
Nonetheless, South Korea’s overall economic freedom is limited by corruption and a low level of labor freedom. Despite a sound legal framework, corruption continues to erode equity and trust in government; despite reform efforts, the rigid labor market undermines competitiveness and results in a high level of underemployment.
Conservative President Park Geun-hye assumed office in February 2013 vowing 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. North Korea has demanded that it first be granted unconditional aid and developmental subsidies from Seoul. Pyongyang rejected Park’s “Dresden Declaration,” a vision for Korean reconciliation articulated during a visit to Germany, as an attempt at “unification through absorption.” At home, Park has yet to deliver on pledges of a mixture of business-friendly economic policies to jump-start the economy and increased government “social welfarism” to redress economic disparities. Scandals involving senior administration officials have reduced her popularity and political capital. The country remains a world leader in electronics, telecommunications, automobile production, and shipbuilding.
Rule of Law
Despite the political system’s overall health, bribery, influence peddling, and extortion continue in politics, business, and everyday life. Since 2013, there have been several investigations into allegations of corruption among high-ranking officials. A well-functioning modern legal framework ensures strong protection of private property rights. The rule of law is effective, and the judicial system is independent and efficient.
The top individual income tax rate is 35 percent, and the top corporate tax rate is 22 percent (with a 10 percent surtax on individual and corporate rates). Other taxes include a value-added tax. The overall tax burden is equivalent to 26.8 percent of domestic income. Government spending equals 32.7 percent of total domestic output, and public debt amounts to approximately 37 percent of GDP.
The competitive regulatory framework facilitates business formation and innovation. With no minimum capital required, incorporating a business takes three procedures and four days on average. The labor market is dynamic, but costs of hiring and dismissing a worker remain burdensome. Monetary stability has been well maintained, but the government subsidizes numerous renewable energy projects, child care, and medical care.
The average tariff rate is 8.7 percent. South Korea continues to pursue its “World’s Best Customs” strategy. Foreign investment in some sectors is regulated or capped. The financial system has become more sophisticated and competitive, offering a wide range of options, but business start-ups and small and medium-sized companies struggle to obtain timely financing. The banking sector remains largely stable.