Korea Development Institute

The Korean Economy:The Korean Economy: History of Economic History of Economic

DevelopmentDevelopment

The Korean Economy:The Korean Economy: History of Economic History of Economic

DevelopmentDevelopment

June 2005

2

Table of Contents

1. Transformation of the Korean Economy

2. Economic Take-off with Outward-looking Development Strategy

3. Changes in Development Strategy

4. Delayed Economic Reform and Financial Crisis of 1997

5. Swift Crisis Resolution and Economic Recovery

6. Five-year Economic Development Plans

7. Organizational Structure of the Planning Function

3

1. Transformation of the Korean Economy

(1945-2003) A. Growth Trend

Liberationfrom JapaneseColonial Rule

6 Five-Year-Economic- Development Plans

FinancialCrisis

2003P19801962 1970 1995

5,000

10,000

67 87

11,432

7,355

1953

Per Capita (US$)GNI

1990

1945

12,646

OECDMember100(1964)

1,000(1977)

1998

4

B. Changes in Industrial Structure

Changes in Employment Structure

Manufacturing

63.07.9

28.31960

Service Sector

19.2

71.5

9.3

Service Sector

Agriculture / Fisheries

Manufacturing

Agriculture / Fisheries

200232.5

63.2

4.3

Service Sector

Agriculture /Fisheries

Manufacturing

36.8

15.9

47.3

Manufacturing

Agriculture /Fisheries Service Sector

Changes in GDP Structure

5

2. Economic Take-off with Outward-looking Development Strategy (1960-80)

A. Economic Conditions of the early 1960s

CapitalShortage

WeakTechnology Base

UnderdevelopedPrivate Sector

AbundantLabor

StrongEconomic will

High Level ofEducation

?

6

B. Working Mechanism of the Outward-looking

Development StrategyEconomic Growth

Reproducti

on

S

ExportPromotion

ManufacturingProcessing

PrivateEnterprises

Government

TechnologyDevelopment

Financial Tax Support

Well-educated Labor force

Foreign TechnologyImports

Capital Good Imports

Raw Material Imports

Foreign Capital Inducement (Economic Aids External Debt)

S

7

Education & HRD in Korea : Attainments

• Quantitative profile: impressive, well above the OECD average

– Education up to the college level almost universalized

∗College Advancement > 80 %

∗Net Enrollment for the aged 18~21 = 41%, (No. 5 in the World)

• Superb academic performance: global leader (TIMSS, PISA)

Size and Composition of Educational Investment (2000)(Unit: %)

OECD AVG KOR U.S. JPN UK Germany

GDP share 5.5 7.7 7.0 4.6 5.3 5.3

Public-financed 4.8 4.9 4.8 3.5 4.5 4.3

Private-financed 0.6 2.8 2.2 1.2 0.7 1.0

OECD, Education at a Glance 2003. Korean figures are for 2003.

8

C. Change in Industrial Policies during the 1970s: from Light Industry to Heavy and Chemical Industry

• Mobilizing Financial Resources

• Selecting National Champions (“Chaebol”)

• Accelerating Competition

Iron and steel

Electronics

Petro-chemical products

Automobile

Ship-building

Machinery

9

D. Changing Industrial Structure: from Agriculture to Manufacturing / from Light Industry to Heavy and Chemical Industry

1960 1970 1990 1999 1980

HCI Product

Agricultural Product

Light Industry Product

50%

Wig Automobile SemiconductorTextile

2003

Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc.

84.8%

12.4%

2.8%

(ICT, 27.6%)

Changes in Export Commodity Profile

10

3. Changes in Development Strategy (1980-2000)

A. Pitfalls of the Government-led Economic Development

• Inefficient Resource Allocation• Macroeconomic Instability• Rising Inequality

Financial Suppressiondue to Prolonged

Government Intervention

High Inflation and Large Fiscal Deficits

Over-investment in HCI

1979 : Negative Export Growth for the first time since 1960

1980 : Negative Economic Growth (-3.9%)

11

B. Stabilization Policies in the Early 1980s

Budget Freeze/CutZero-Based Budgeting

Budget Freeze/CutZero-Based Budgeting

Phasing-out of Policy Loans and Interest Rate Deregulation

Phasing-out of Policy Loans and Interest Rate Deregulation

Investment Adjustment in HCI

Investment Adjustment in HCI

Inflation at around 3%

Inflation at around 3%Disinflation Disinflation

Current Account Surpluses

Current Account SurplusesStrong ExportsStrong Exports

GDP Growth of 8% per annumGDP Growth of 8% per annum

High Economic Growth

High Economic Growth

12

4. Delayed Economic Reform and Financial Crisis of 1997

Increased Vulnerability to External Shocks

IMFRescue Package

• Massive Capital Outflow• Denied Rollover of Short-term External Debt

Continued Government Intervention /

Weak Prudential Regulation

Large NPLs in the Financial

Sector

South-east AsianCrisis

HighCorporate

Debt Leverage

WidespreadMoral Hazard

13

Firm Failures and Unemployment, 1996-99

0

5

10

15

20

25

30

1996 0

1

1996 0

4

1996 0

7

1996 1

0

1997 0

1

1997 0

4

1997 0

7

1997 1

0

1998 0

1

1998 0

4

1998 0

7

1998 1

0

1999 0

1

1999 0

4

1999 0

7

1999 1

0

2000 0

1

2000 0

4

(%)

0

5,00

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Overnight inter-bank call rate Unemployment rate

No. of firm failures

Source: Choi(2001), Bank of Korea, and National Statistical Office.

14

5. Swift Crisis Resolution and Economic Recovery

Cleaning up Non-performing Loans

Cleaning up Non-performing Loans

AcceleratingLiberalization

AcceleratingLiberalization

Improving Corporate Governance

Improving Corporate Governance

Expanding Social Safety Net

Expanding Social Safety Net

- Early Graduation from the IMF Program- Foreign Reserves of more than USD 200bn in 2004

- Early Graduation from the IMF Program- Foreign Reserves of more than USD 200bn in 2004

Improved External Positions

Improved External Positions

- GDP Growth: -6.7% (1998) 10.7% (1999)- Unemployment: 6.8% (1998) 3.5% (2004)

- GDP Growth: -6.7% (1998) 10.7% (1999)- Unemployment: 6.8% (1998) 3.5% (2004)

Rapid Economic Recovery

Rapid Economic Recovery

- Debt-equity Ratio: 396% (1997) 182 (2002) - No. of Banks: 33 (1997) 20 (2001)

- Debt-equity Ratio: 396% (1997) 182 (2002) - No. of Banks: 33 (1997) 20 (2001)

Stronger Corporate and Financial Sector

Stronger Corporate and Financial Sector

15

6. Five-year Economic Development Plans

• State-led Planning (1962-76); 1st, 2nd, and 3rd Five-year Economic Development Plans– Suitable for an under-developed, small-sized

economy with a relatively simple structure– Focused on setting up sectoral investment plans and

mobilizing and allocating domestic and external resources to support the implementation of the plans

– Supplemented by annual Economic Management Plans

16

• Indicative Planning (1977-91); 4th, 5th, and 6th Five-year Economic Development Plans– To cope with the growing size and sophistication of the

economy– Giving a greater role to private initiatives– Reflecting a growing concern on equity issues– Medium-term Fiscal Plan introduced in the early 1980s t

o bridge the gap between EDPs and annual budgeting∗Not published to the public∗Not tightly linked to annual budgeting

17

• Strategic Planning (1992-96); 7th Five-year Economic and Social Development Plan– Addressing strategic issues to be tackled through a

concerted effort by the government and the private sector

– Replaced by the Five-year Plan for New Economy in 1993∗Setting out various reform agenda -- fiscal, financial, and

regulatory reforms, accelerated external liberalization, improved social equity

∗“Planning” effectively abandoned

18

7. Organizational Structure of the Planning

Function• Economic Planning Board (1961-94)

– “Super ministry” in charge of both planning and budgeting

– Preparing Five-year EDPs and annual EMPs– Coordinating economic polices

∗Head of EPB holding the post of Deputy Prime Minister and chairing Economic Ministerial Meetings

– Allocating domestic and external resources for economic development

19

• Ministry of Finance (1948-94)– Financial market, monetary policy, tax policy, treasury

• Ministry of Finance and Economy (1995-)– EPB and MOF merged to produce MOFE– “Planning” effectively abandoned – In 1998, transferred budgeting, prudential regulation, a

nd monetary policy to MPB, FSC, and BoK, respectively.

– Still in charge of coordinating economic policies

20

• Ministry of Planning and Budget (1998-)– Responsible for central government budgeting– Increasing its role in long-term planning and policy

coordination with the introduction of MTEF