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|Keynote Speech by Vice Minister at PEMNA Technical Launch Workshop in Bangkok, Thailand (June 7, 2012)|
|2012-06-07||+82 2 2150 5374|
Korea’s PFM Reforms:
Challenges and Lessons for PEMNA
Keynote Speech by
Dong Yeon Kim
Vice Minister of Strategy and Finance
Republic of Korea
PEMNA Technical Launch Workshop
June 7, 2012
Good morning, ladies and gentlemen.
Ms. Annette Dixon, country director of South East Asian region at the World Bank, and distinguished guests,
It gives me a great honor to be here today with you.
I would like to extend my gratitude to the staff at the World Bank for organizing the launch of the Public Expenditure Management Network in Asia (PEMNA) and to the Thai government for hosting this first technical workshop. Korea has been involved in the launch of the PEMNA and is willing to continue its strong support.
Today, I would like to talk about challenges and lessons for the PEMNA building on Korea’s public financial management reforms. I hope that Korea’s experience provide some insights for the PEMNA as it strives to go through challenges and achieve its vision.
Korea’s Economic Growth and Crises
Let me briefly touch on Korea’s growth performance landscape. In an era of intense development from the 1960s to 1980s, Korea posted splendid annual growth figures of 9% on average. Its GNI per capita rose from 67 dollars in 1953 right after the Korean War to 22,489 dollars in 2011, which is a 300-fold increase.
Korea was among the 186 aid recipient countries back in the 1960s. It has successfully turned into a donor and became the 24th member nation of the OECD Development Assistance Committee (DAC) in 2009. This marked the first case of its kind since the establishment of the OECD in 1961 that a recipient was successfully transformed into a donor and joined the DAC.
Overcoming Global Financial Crises
Despite seemingly strong records, the path to growth was quite rocky for the Korean economy. Over the course of development, Korea has experienced ups and downs in economic cycles as well as a number of significant obstacles, which it managed to get through. In the past fifteen years, in the particular, it has experienced two devastating financial crises.
The first one was a financial crisis that started in the South East Asian region in 1997.
The Korean government took swift reform measures in all sectors to overcome the crisis. It reformed the corporate, public, financial, and labor sectors. Many companies went through workout programs, government size was frozen, and massive layoffs took place. Unprecedented public fund was injected to liquidate insolvency, which accounted for 33% of GDP at the time.
The government also submitted two supplementary budgets in 1998. With this line of strenuous efforts, Korea was able to repay IMF bailout loans in just four years. In retrospect, the crisis that forced Korea to undertake drastic reform measures was often called a “blessing in disguise.”
After years of efforts to overcome the crisis, Korea was again hit hard by the 2008 global financial crisis that swept the world. It showed clearly how credit crunch in the financial sector could spill over to the real economy. The collapse of Lehman Brothers in September 2008 has brought the Korean economy down the spiral. As investors started to pull their money out of the Korean market, stock prices plummeted by more than a half of their values and uncertainties grew in the foreign exchange market. In the fourth quarter of 2008, foreign exchange rates soared by more than 50% and Credit Default Swap (CDS) premium also skyrocketed from 100 basis points to 699 basis points. In the same quarter, the quarter-on-quarter GDP growth rate plunged to negative 4.6%, a record low since the first quarter of 1998.
In the face of the global crisis, Korea adopted an overarching policy mix based on three core principles: preemptive, decisive and sufficient responses. The Korean government mobilized every possible measure in the policy package, involving fiscal, monetary, and financial policies.
The government was swift in implementing monetary and financial policies. Korea lowered its benchmark interest rate from 5.25% to 2%, and provided liquidity in the market with repurchase agreements (RPs) and bank recapitalization. It also entered into currency swaps with the US, China and Japan, 30 billion US dollars with each counterpart.
However, I want to emphasize that what lied at the heart of the stimulus package was strong public finance. Korea submitted a revised budget for fiscal year 2009 for the first time since 1981. Revised budget allows the government to make revisions to the budget which was already submitted to the National Assembly during the budget cycle before its resolution. It also submitted two supplementary budget plans in 2008 and 2009 respectively. Supplementary budget changed the amount of budget already set for then-fiscal year. The government also imposed tax cuts in 2009, notably corporate tax rate reduction from 22% to 20%. This fiscal stimulus was forwarded to regional economic development, job creation, support for small and medium-size enterprises, and assistance for the low-income class.
This set of expansionary fiscal policy from 2008 to 2010 amounted to 60 billion US dollars (66.7 trillion won), which was equivalent to 6.5% of the GDP. It was the highest among the OECD members, whose average was 4.1%.
In addition, the Korean government executed 62.9% of its budget in the first half of 2009, which was a historic high. This was referred to as an “early execution,” taken to boost economy by accelerating spending in the first half of the year.
This series of efforts eventually got the economy back on the recovery track with a positive growth mark in 2009, in what some media outlets dubbed as “textbook recovery.” As a result, we were able to register a year-on-year GDP growth rate of 0.3% in 2009 from negative 4.6% in the last quarter of 2008, and attained a remarkable growth rate of 6.3% in 2010.
The Drivers of Recovery
Now, I would like to share with you what drove Korea’s economy out of the crises with a focus on public finance.
The first driver was Korea’s persistence in soundly managing fiscal aggregates and maintaining fiscal consolidation. There is no doubt that it served as the foundation for effective fiscal policies, which played a major role in overcoming the financial crisis. Korea has continued to work hard to achieve fiscal balance and reduce national debt since 1997. In 2008, the government’s debt-to-GDP ratio was 30.1%, less than half the OECD average of 79.7%. Its fiscal balance was negative 1.1% of GDP, a healthier ratio compared to the average OECD level of negative 3.4%. Thanks to these vigorous efforts, it was able to retain sufficient fiscal soundness and overcome the crisis in a short period of time. After recovering from the crisis, the government is taking every effort to restore fiscal balance. In line with these efforts, it set an ambitious goal of achieving fiscal balance in 2013.
The second driver was a series of fiscal reforms. These reform measures helped Korea make timely and effective decisions with a comprehensive view, which led to improved public financial management. These measures, which started in the early 2000s, were medium-term expenditure framework (MTEF), top-down budgeting, performance-based budgeting, and integrated financial management information system.
MTEF has enabled us to expand the time horizon of fiscal management from annual budgeting to a five-year basis, based on macroeconomic forecasts and fiscal aggregate variables. This meant strengthened interconnection of mid-term policies and annual budgeting.
With top-down budgeting, it was possible to manage fiscal aggregates and prioritize investment by sectors. In essence, top-down budgeting has brought a paradigm shift in the way of budgetary decision making. During the course of consensus building, the Special Cabinet Meeting sets targets for fiscal aggregates, such as the national debt level, revenue and expenditure. In the process, the government sets ceiling and allocates resources for each sector such as welfare, education, national defense, and so on. As line ministries efficiently allocate budget under the ceiling, top-down approach is eventually integrated with bottom-up budgetary decision making.
Performance-based budgeting enhanced efficiency in expenditure by setting performance goals and indicators when budget is formulated and reflecting the results of performance evaluation in the next year’s budget. In order to link performance to budgeting, the units of evaluation and budget formulation had to be aligned with program budgeting structure. Through this process, the government was able to control the outputs and outcomes of government activities rather than controlling inputs or line items.
Enhancement of budgetary basics, including program budgeting and integrated financial management information system (IFMIS), was also an important pillar of the fiscal reforms. The Digital Budget and Accounting System, also known as the “dBrain,” connects financial systems of all government agencies and public entities, thus providing comprehensive aggregate fiscal information. The dBrain also enhances transparency and accountability by processing all transactions electronically in real time.
Korea’s Experience and PEMNA
In the course of adopting fiscal reforms, co-working with the World Bank and learning experience from other countries proved to be very helpful to Korea. In the early 2000s, the Korean government conducted joint research projects with the World Bank on four major reform areas to lay the groundwork for policy designing. The countries from which experience the Korean government gained lessons were Sweden, the UK, Australia and Singapore.
In this context, it is never too much to emphasize the importance of sharing experience and lessons learned. Korea’s reform case is regarded as successful. And its reforms played a pivotal role in helping the country overcome financial crises. Now, Korea is eager to share its experience and know-how with others that seek to improve their public financial management. Make no mistake, I am convinced that the PEMNA is a meaningful platform to share ideas and foster information exchange with counterparts in the region.
In turn, Korea is willing to help the platform grow its network. Korea eagerly looks forward to opening the door for broader experience sharing and financial system improvements in the East Asia and Pacific (EAP) region through its active support of the PEMNA.
Vision and Challenges for PEMNA
Economic and social exchanges are growing in scale and depth among the PEMNA member countries although they are diverse in their backgrounds. The population of potential members of the PEMNA totals 2.1 billion, which is 32% of the global population. The region’s GDP accounts for 25% of the global GDP, and the trade volume, 30%. According to ADB estimates, if the whole Asian region continues to follow its recent growth trends, by 2050, its GDP is expected to reach 52 percent of the global GDP. The building evidence points out that the region has been emerging from the periphery of the world to its center and will play a more pivotal role in the future.
However, the PEMNA may face some challenges in the course of development.
The first challenge is the diversity among member countries. Development gaps persist among the members. It is also true that cultural and language barriers remain across countries, and different political systems may hamper clear mutual understanding.
The second is EAP countries’ vulnerability to the international economic conditions. The region lacks a common platform to discuss possible responses to external shocks. As proved in the 1997 and 2008 financial crises, they were vulnerable to such shocks.
In this context, it is important to promote knowledge sharing in the region. The PEMNA is a significant network that connects practitioners and experts in public financial management. In particular, the recent eurozone debt crisis highlights the ever growing importance of international discussions and consensus. This is why the PEMNA’s role is crucial. As I mentioned, the PEMNA will function as a platform for peer learning and regional debates on public finance.
Korea’s Role in PEMNA
Once again, I’d like to reiterate Korea’s willingness to support the PEMNA.
Korea has been involved in a wide spectrum of international development cooperation activities, including initiatives for Official Development Assistance (ODA) and knowledge sharing.
Korea is providing growing amount of assistance to the international community, notably the ODA. Since joining the OECD Development Assistance Committee (DAC) in 2009, Korea has been working to enhance aid effectiveness and increase the level of total ODA amount. It plans to more than double its ODA contribution to 0.25% of GNI by 2015 from the level in 2009.
The Knowledge Sharing Program (KSP) is another effort executed by Korea to facilitate knowledge sharing in the form of policy advisory services. Since 2004, Korea has been conducting policy consulting programs with developing countries. This year, it is operating bilateral programs with 33 countries. In addition, it plans to implement around 14 joint consulting programs with multilateral development organizations for developing countries.
Korea is keenly exploring ways to extend a helping hand to where demands are. It is committed to boosting knowledge sharing and strengthening cooperation in international development. I believe that the PEMNA can be a suitable channel to make contribution to the region. In this respect, I would like to make three proposals on behalf of the Korean government.
First, Korea is willing to host the PEMNA Secretariat. The Korea Institute of Public Finance (KIPF), a government think-tank and training institute associated with the Ministry of Strategy and Finance, will be a reliable option. Since its founding in 1992, KIPF has played a critical role in developing tax and budget policies and improving public financial systems. The KIPF will provide administrative support and lay the network’s framework after coordinated discussion with PEMNA member countries and the World Bank.
Second, we’d like to host the PEMNA High-Level Conference in November this year in Seoul. The successful hosting of the launch workshop in Bangkok will lay the first stone of PEMNA’s growing role and broader consensus for its support, which will be reinforced by the Seoul Conference. With these efforts, Korea will support the PEMNA’s role as the cornerstone of public financial network in the EAP region.
And finally, the Korean government will sponsor and carry out joint research projects to mark the launch of the PEMNA. It will further discuss with the World Bank to provide additional assistance.
I’d like to sum up my remarks by giving you a quote by President Lee Myung-bak. He often mentioned that knowledge sharing with others should be provided with two hands instead of one. This has two meanings. First, in our culture, presenting something with both hands is a token of respect. We will show our full respect for our counterparts. Second, any knowledge or expertise we provide is to be shared in a bilateral, not unilateral manner. Not only will we provide others with what they need, but we will also learn from the other side, thus forming a mutually beneficial relationship.
It is clear that the EAP region is one of the most dynamic regions in the world. It is all the more important to bring about mutual cooperation to benefit from these dynamics. To make them surely happen, Korea is eagerly and humbly ready to work together with member countries, not by sympathy, but by empathy.
We need to secure the PEMNA’s position as the forum for debates on public finance in the EAP region. I believe that today’s launch workshop will serve as an opportunity to share ideas on the way forward for the PEMNA and pave the way for its enrichment.
I hope to see a more mature PEMNA and deepened discussions in the next conference later this year in Seoul. Thank you very much for your patience in listening to my long speech.
Please refer to the PDF file.