Q1: How has Korea reacted to the economic difficulties so far?

A: The Korean government has worked on expansionary liquidity supply of USD55 billion, tax reduction of USD35 billion, and increased fiscal expenditure of USD16 billion.

The Korean government has taken preventive, decisive and sufficient policy measures to get out of the global economic turmoil. The measures mainly cover liquidity supply, FX market stabilization, and tax reduction and expansionary fiscal expenditure. To provide more liquidity in the market and lower interest rates, the Bank of Korea lowered a benchmark interest rate four times by 225bp from 5.25 percent to 3.00 percent. Also, the government has supplied the liquidity of KWR19,500 billion through RP purchases and credit limit raise for small- and medium- sized enterprises (SMEs).

Foreign liquidity supply of USD55 billion will have been provided with USD37.6 billion already provided by the end of Dec. ’08. Currency swap arrangements with the US, Japan, and China, amounting to USD30 billion each, have been completed along with the IMF Short-term Liquidity Facility of USD22 billion fixed. The government guarantee on banks’ borrowing in foreign currencies will total USD100 billion.

A total of USD35 billion tax reduction will have been implemented from ’08 to ’12 through an oil tax rebate and income/corporate tax reduction. Additional budgets of USD16 billion will have been allocated from ’08 to ’09, which are earmarked for overcoming economic difficulties including high energy prices.

Deregulations to boost corporate investment, various job maintenance efforts such as promoting employment of female, the young and old, and social safety net reinforcement are among other measures the Korean government has taken.

Q2: What are the key economic policies for 2009?

A: The key economic polices for 2009 can be summarized as preparation for the future and job creation. The Korean government will take offensive measures to revitalize the economy and to become one of the most advanced countries in the world. The government will also make ongoing efforts to create more jobs, maintain current jobs and encourage sharing jobs.

The global financial turmoil brings uncertainty, and the Korean government will try its best to turn the uncertainty into an opportunity to join the top-class country group. The 2009 economic policy direction released at the end of 2008 contains measures to prepare for the future as well as measures to cope with the economic difficulties.

To overcome the economic difficulties, sixty percent of the 2009 budget will be executed during the first half along with measures to stabilize financial and FX markets. The government is working on strengthening the social safety net as well as promoting a job-sharing program. The government is also stepping up its efforts to upgrade the economy to prepare for the future. Measures such as supplying liquidity to financial institutions, corporate restructuring and nurturing human resources are all under the policy for future preparation.

A: Korean-style New Deal has been laid out with its focus on expansionary SOC investment. To reinvigorate its economy, Korea will nurture future growth engines such as ‘green industries’, newly born converged industries and service industries. It also promotes the use of the Korean human resources in foreign countries, and plans to acquire more overseas resources by expanding overseas investment.

Q3: How is the outlook of the Korean economy for 2009?

A: The 2009 economic outlook is optimistic. If preventive, sufficient and

decisive measures are taken, the Korean economy will achieve what is planned to achieve.

The global economic weather surrounding Korea is not favorable as the global economic recession is not predicted to end soon. Major economies including the US, Japan and the Eurozone forecast negative growth rates for 2009. Developing countries are expected to suffer from a ripple effect from those major economies, whose financial institutions are collecting loans to developing countries. The Korean economy, too, is expected to suffer from low growth and employment.

However, the Korean government will do its utmost to achieve a growth rate of around three percent along with a current account surplus of more than USD10 billion and job increase of over a billion. Korea aims at making a complete economic recovery by 2010 and becoming one of the most advanced countries in the nearest future.

Q4: What measures have been taken to generate and maintain jobs?

A: The Korean government has taken measures to respond to further deterioration in the job market caused by a decline in the growth rate and corporate restructuring. It has focused on creating, sharing and maintaining jobs.

Although three percent growth is expected to add more than 100 thousand jobs1, the job market could possibly be affected by worsening external conditions and full scale corporate restructuring, generating less jobs than expected. KDI (Korea Development Institute) and the BOK (Bank of Korea) estimated the number of job increases at 30,000 and 40,000 respectively. The number of those not seeking jobs is projected to increase as the job market contracts.

To maintain the current level of employment, expanded job sharing programs by reducing working hours and job-training programs for the young and vulnerable will be implemented. The government will raise its assistance given to companies maintaining employment rather than laying off by taking some portion of training expenses and closure allowance: The government will take three quarters of the expenses for SMEs and two thirds for large companies, an increase from two thirds and one half, respectively. The conditions of the assistance will be relaxed as the assistance will be given when production decline is expected due to ordering companies’ production halts.

To support companies suffering from labor cost increases caused by working hour reduction, KRW2.4 million per worker will be provided quarterly instead of KRW1.8 million. The support program will cover up to thirty percent of all employees, a twenty percent increase from 2008. The government will also introduce a paid training leave program, and support seventy percent of trainees’ pay and substitutes’ pay.

48,000 young adults will find jobs as interns in SMEs and public firms along with 125,000 people from a vulnerable class employed as social workers. 13,000 young adults will be trained in hi-tech industries and 19,000 to be raised as global leaders, preparing them for the future.

Q5: Are there welfare policies to assist the low-income class?

A: Necessities and education will be guaranteed to the low-income class, while basic support will be given through employment policies.

The most effective welfare policy is to create more jobs for the vulnerable class. KRW24,700 billion will be invested in SOC projects such as the development of the four rivers and ‘wide economic zones’. More social jobs will be made available, with the number of positions expected to increase to 125,000 in 2009 - up from 110,000 in 2008 - through expanded social services of childcare, handicapped self-support and nursing.

As the lower-income class is afflicted with the difficulties from the economic crisis, more support of necessities and basic education will be provided.

Living costs for the working class will be reduced. Those with earned monthly income below KRW1.73 million will receive a tax exemption, while those below KRW3 million will have their taxes reduced by 42.4% per annum. Support for education and medical fees will also be increased. Up to KRW2 million of education fees will be tax-exempted, and so will the medical fees up to KRW7 million. Through the EITC (Earned Income Tax Credit), families with a child/children, yearly incomes of up to KRW17 million, and total assets of less than KRW100 million will receive up to 1.2 million won, for which the total government tax expenditure amounts to KRW470 billion.

Emergency support for families in difficulties due to the loss of employment will be increased; so will the number of people receiving basic livelihood support. KRW1.32 million will be given to families with total assets less than KRW135 million if their business closes for up to 6 months, a total of KRW51.5 billion for 42,000 families, up from KRW37.8 billion for 31,000 families. Also, less strict regulations will apply for basic livelihood support in terms of total assets and the number of family members supported (the total amount of assets eligible for the support increased from KRW69 million to KRW85 million, and the total asset limits of families with support obligations increased from KRW95 million to

KRW126 million). 60,000 more people will receive these benefits, an increase to 1.59 million people (KRW7,200 billion), up from 1.53 million people (KRW6,900 billion) in 2008.

Childcare and education support for the low-income class and meal support for poorly-fed children will be provided. Free childcare support will be expanded to people with income below 50% of the national average. This will result in an increase to 630,000 people and KRW810.7 billion in 2009, up from 410,000 people and KRW496.9 billion in 2008. Free secondary school education for the lower class will also be expanded with beneficiaries of 386,000 students, up from 250,000. Those receiving basic livelihood support will be granted increased college registration fee support (KRW222.3 billion for 52,000 people in 2009, up from KRW70 billion for 18,000 people in 2008). Poorly-fed children will also receive increased support from the treasury, with KRW42.1 billion committed to providing meals to 454,000 children in 2009, up from 294,000 in 2008.

Support for housing will be increased through permanent rent and residential mortgage loans. 5,000 houses will be made available in 2009 with 30% lower rental rates compared to the market rates. Residential mortgage loans will be offered with maturities of 30 to 35 years and grace periods of 5 to 10 years.

The lower-income class will receive more scholarships and education fee support. Those living in poverty will receive scholarships of KRW222.3 billion in 2009, equivalent to KRW4.3 million per person, up from KRW70 billion in 2008. Also, more working scholarships of KRW109.5 billion, KRW3 million per person, up from KRW8 billion in 2008, will be made available to university students.

Budgets set aside for the lower class will be executed early with 70% being allocated for the first half. A more efficient welfare system will be instituted in order to execute the budget effectively.

Q6: May the fiscal policies undermine fiscal soundness?

A: Fiscal policies such as tax reduction and fiscal expenditure expansion must play an important role to overcome the economic difficulties. Our finances are healthier than most OECD nations. Medium-long term efforts will be made to keep Korea’s finances healthy through tax revenue and efficient spending.

The government is planning tax reductions and fiscal expenditure expansion in response to the economic difficulties.

Total tax reductions of KRW35,300 billion will have been given (long-term: KRW25,500 billion, short-term: KRW9,800 billion).

Fiscal expenditures will amount to KRW16,000 billion (2008~2009) including the 2009 adjusted budget plan: Revised supplementary budgets for high oil prices (KRW4,600 billion in 2008) and adjusted budgets to overcome the economic difficulties (KRW11,000 billion in 2009).

To overcome the ongoing economic difficulties, aggressive fiscal policies are required, including tax reductions and fiscal expenditure expansion. In time of worsening exports and domestic demand, aggressive fiscal policies are required to support the economy. Advanced nations such as the US and Japan are also responding aggressively to the global economic crisis through tax reductions and expenditure expansions.

Korea’s financial state is healthier than that of most OECD nations. National debts may increase temporarily amid responding to the economic difficulties, but they are more manageable than those of advanced nations. Debts likely to fall to deficit amount to 42% of the total national debts.

The operation of national finances will be flexible according to the economic conditions, however medium-to-long term fiscal health will also be sought through efficient expenditures. It is expected that there will be more tax revenue when the economy starts to recover, helping relieve the fiscal burden. This was seen during the 1997 Asian financial crisis, when the fiscal account improved (against GDP, %: (1997) -1.4 → (1998) -3.9 → (2002) 3.3) as the crisis was overcome early with aggressive fiscal measures.

Q7: What are the reasons for greatly expanding SOC investments?

A: As with other nations around the world, Korea greatly increased SOC

investments to stimulate domestic demand and create more jobs. The provincial economies will receive more support through projects such as those for developing wide economic zones, called 30 leading projects, and for improving provincial small to medium-sized infrastructure, the purpose of which is to strengthen the provincial economies not to be affected by changes in business conditions. In the long run, these projects will contribute to reducing logistics costs, by which the economic capability of Korea will increase and the Korean people will enjoy more comfortable lives.

Nations around the world have introduced stimulus policies to fight against the world financial crisis. China and the US have expanded fiscal expenditures by investing in SOC projects. China will have invested CNY4,000 billion (KRW800 trillion) in creating infrastructure until 2010, while the US will invest USD25 billion (KRW37,500 billion) in SOC projects to create one million new jobs. According to Joseph Stiglitz, tax rebates for the middle-class are not enough to stimulate the economy, and SOC expansion policy is required.

The construction industry is known to be more effective in job creation. It also leads to increased production in related industries. A KRW1,000 billion SOC investment in the construction industry will bring production worth KRW2,000 billion in related industries, as well as create 18,000 new jobs. Also, workfare will be improved by employing the lower-class and having their income raised.

The provincial economies will be revitalized through the 30 leading projects and improvement projects for provincial small to medium-sized infrastructure. Support for the 30 leading projects to develop wide economic zones will be increased to KRW3,653.2 billion in 2009, up from KRW1,693.4 billion in 2008. The infrastructure improvement projects will involve projects to improve elevator facilities in train stations, fix roads in frequent accident areas, maintain drainage systems, renovate old houses and expand gas distribution systems.

Provincial SMEs will be encouraged to participate in such projects, which will also help create jobs in those regions.

Currently, KRW170 trillion is spent every year due to insufficient and unsafe traffic infrastructure (22% of GDP, KRW23,000 billion spent on traffic delays, KRW92,000 billion due to too much logistics fees, KRW40,000 billion on household transportation fees, and KRW15,000 billion on traffic accident damages). Comparing the Korean SOC stock with that of the OECD average, Korea’s road infrastructure only takes up 67% of the OECD average, and railroad infrastructure 40% of it. According to IMD’s National Competitiveness Rankings (2008), Korea ranks 23rd out of 60 nations in road density and 24th in railroad density.

There had been delays in SOC investments over the last 5 years (2004~2008), which also caused delays in construction. SOC investment increase during the period was 2.5 percent, a lot lower compared to total fiscal growth of 7.0%. Early completion of SOC projects will greatly improve the lives of the Korean people. In 2008, 41 projects were completed including the Janghang Line, but in 2009, 101 projects are planned to be completed including Seoul Subway Line 9.

* Please refer to the attached PDF for details.