OECD Warns of Bubble in Korea’s Green Sector

The Organization for Economic Cooperation and Development warned Tuesday that the Korean government’s fostering of the green industry could create a bubble similar to that of the venture business in the late 1990s.

The organization also recommended that the country gradually raise its key interest rate, stop economic stimulus measures, and take additional steps to reduce risk stemming from foreign currency borrowings by banks.

The Strategy and Finance Ministry said Tuesday that the OECD recently issued a report on the Korean economy for this year with these recommendations.

The report said tax breaks to companies who get green certificates and financial instruments investing in green technology could create a bubble like previous attempts to nurture the venture industry. Direct government support for the green industry runs the risk of the wrong technologies taking root, it added.

With Korea showing clear signs of entering a solid recovery path, the key interest rate should be normalized, the OECD said.

Randall S. Jones, a senior OECD economist in charge of Korea, said the Korean economy continues to recover despite the fiscal crisis in southern Europe and the Cheonan sinking, adding the key interest rate should return to normal gradually. On economic stimulus policies, he recommended that national debt be reduced to under 40 percent of GDP.

Jones also said supervision of foreign bank branches should be expanded in line with international standards to closely monitor the risk of foreign currency borrowings by financial institutions. He also urged additional measures to control deposit insurance premiums based on the amount of foreign currency loans.

turtle@donga.com