Korea has been adversely affected by soaring oil and commodity prices, which led to a spike in inflation and slowed the pace of economic activity. Moreover, the global financial crisis accelerated the depreciation of the won and clouded the economic outlook. Output growth is likely to remain subdued until the world economy improves, which may not happen until well into 2009. Korea faces a number of challenges, both in the short and long run. This chapter looks at four key challenges: i) setting an appropriate macroeconomic policy to cope with the severe external shocks; ii) raising additional tax revenue as rapid population ageing puts upward pressure on public spending; iii) promoting the development of services, where productivity growth and levels lag significantly behind manufacturing; and iv) reforming the labour market and the education system to address the growth and equity problems related to labour market dualism and population ageing.