Korea’s recovery in 2002, which boosted output growth to 6 per cent despite a sluggish world economy, reflects both the success of the economic restructuring programme initiated in the wake of the 1997 crisis and the underlying dynamism of the economy. Reform efforts have strengthened the mechanisms for resource allocation through market forces and significantly altered the legal and institutional settings to improve governance. They have also created positive synergies with macroeconomic policies. In particular, the restoration of healthy bank balance sheets has strengthened the transmission of monetary easing to the economy, as slowing credit growth to the enterprises in the wake of corporate restructuring has been more than offset by buoyant lending to households, in part through credit cards. At the same time, tax reform measures to encourage credit-card use and thereby increase tax compliance have broadened the tax base and helped to keep the government budget in surplus. These developments laid the foundation for a rebound from the 2001 downturn led by private consumption and housing investment. However, the recovery has been accompanied by a sharp increase in household debt, rising inflationary pressures and a steep rise in real estate prices, prompting the government to take numerous measures to stabilise the housing market. Even though private consumption and housing investment are likely to moderate, output growth in the 5½ to 6 per cent range is projected for 2003 and 2004, assuming that there is a pick up in the world economy that results in a recovery in external demand. The challenge for Korea is to maintain its high growth potential by overcoming remaining structural weaknesses through further reforms, while keeping inflationary pressures under control and containing potential financial imbalances through appropriate macroeconomic policies.