South Korea will cut the tax burden for service industries and increase funding for start-ups as President Park Geun Hye aims to spur innovation and boost growth of Asia’s fourth-biggest economy.
The nation will roll back regulations in sectors from health to finance and education to spur competition, and aim to cut household debt that poses risks for the financial system, the government said in a statement today in Seoul. The government will also spend an extra 4 trillion won ($3.7 billion) by 2017 to help entrepreneurs.
Boosting the services industry could help Park lower the economy’s dependence on exports and lift growth potential to her target of 4 percent in the next three years. Park is trying to reduce the dominance of conglomerates such as Samsung Group to enable smaller companies to thrive.
“This is what the South Korean economy needs, a dose of bold structural reforms to lift trend growth,” said Wai Ho Leong, an economist at Barclays Bank Plc in Singapore. “I like the clear investment-boosting strategy.”
The three-year innovation plan is aimed at building a base for longer-term expansion after Park jump-started the economy with a 17.3 trillion-won extra budget in May. The finance ministry projects growth will pick up to 3.9 percent this year, after a 2.8 percent gain in 2013 and 2 percent increase in 2012, the lowest in three years.
The won rose 0.4 percent to 1,070.75 per dollar at 1:13 p.m. in Seoul, rebounding from the lowest level in more than two weeks as a rally in U.S. stocks boosted risk sentiment and increased demand for emerging- market assets. The Kospi index gained 0.7 percent.
Park’s bid to boost the economy’s growth potential comes after the Group of 20 nations on Feb. 24 agreed to aim to lift collective gross domestic product by more than 2 percent above the trajectory implied by current policies over the coming five years.
South Korea faces risks from a weaker yen that aids rival exporters in Japan to the U.S. Federal Reserve’s tapering that has strained emerging markets.
The country is also grappling with record household debt, which climbed to 1,021.3 trillion won at end of December. The latest plan to tackle that burden was foreshadowed by Finance Minister Hyun Oh Seok in an interview on Feb. 21.
South Korea’s service sector accounted for 58 percent of its GDP in 2011, less than 70.5 percent for Japan, 78.3 percent for the U.S., and 76 percent for the U.K., according to the finance ministry.
Park said the government will increase financial support for research and development in the service sector to levels in manufacturing. R&D spending in services is about one tenth the amount at manufacturers, according to finance ministry.
“If the three-year economic innovation plan is implemented successfully, young people will find more job opportunities in their preferred service sectors including education, medical, finance, tourism and content-building areas,” Park said.
Shaking up the service sector, which is dominated by small companies, could boost the economy’s potential. Small companies lag larger ones in productivity due to a lack of investment and R&D, the finance ministry said.
As of 2012, labor productivity at big companies was 2.88 times that of small- to medium sized companies, according to the finance ministry.
“The real difficulty that we have is that our economic structure is heavily concentrated in a small set of industries,” Changyong Rhee, who’s a South Korean and the chief economist at the Asian Development Bank, said in an interview in October.