Korea’s Experience on Linking Planning and Budgeting

May 23, 2005

Byung-Seo YooMinistry of Planning and BudgetRepublic of Korea

During the Development Era and Recent Reform

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Ⅰ. Korea’s Economic Miracle

Ⅱ. Linking Planning and Budgeting

Ⅲ. Public Expenditure in Development Era

Ⅳ. Future Challenges

Table of Contents

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Ⅰ. Korea’s Economic Miracle

GDP/capita Average Nominal Growth Rate

1960-2004 : 20%

• 1960’s : 26% • 1970’s : 31%

• 1980’s : 17%

• 1990’s : 13%

• US$79(1960) US$14,162(2004)

0

2000

4000

6000

8000

10000

12000

14000

16000

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

financialcrisis

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Korea’s Economy Scale(1960-2004)

• GDP : US$ 2 billion to US$ 680 billion • GDP per capita : US$79 to US$14,162• The World 11th largest Economy• 29th OECD member since 1996

Top 5 Exports (industrial Structure)

• 1960’s : Iron, Tungsten, Silk, Anthracite, Cuttlefish• 1970’s : Textiles, Plywood, Wigs, Iron, Electronics• 1980’-90’s : Electronics, Iron & Steel, Footwear, Ships, Textiles • 2000’s : Semiconductor, Motor Cars, Computers, Ships, Petroleum Products

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• 1960s : Launch of Economic Development Plans

& Industrialization

• 1970s : Promotion of Heavy and Chemical Industries

• 1980s : Strengthening of Economic Stabilization Efforts

• 1990s-Now : Transition into Knowledge Based Economy

(1997 : Financial Crisis)

Economic Development Process

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Ⅱ. Linking Planning and Budgeting for this Miracle

• Economic Planning Board (EPB), 1961-1994:

- planning and budgeting functions reside under one roof

• Strong political support and leadership

- monthly President’s visit to EPB

- minister of EPB holds position of Deputy Prime Minister

(influence over line ministries for coordination)

Linking System

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• Fiscal policies were implicitly linked to economic plans.

- Plans had a medium-term (5 years) perspective.

- Five-Year Economic Development Plan launched in 1962. (until 1996)

• In retrospect, MTEF exercise without calling it MTEF (Medium-Term Expenditure Framework)

Planning and Budgeting

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• Given limited resources, concentration was essential.

• Budgeting concentrated on economic affairs

according to med-term economic development plans.

- Supplied infrastructure for economic development

- Initiated structural changes by investing R&D

- developed human resources

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Ⅲ. Public Expenditure in Development Era

0

5

10

15

20

25

30

35

70 75 80 85 90 95 00 05

Social Welfare Economic services Defence Education

Economic AffairEconomic Affair

Social Welfare & Quality of LifeSocial Welfare & Quality of Life

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Composition of expenditure (by function) 2004

0%

20%

40%

60%

80%

100%

Korea OECD average

Economic affairs

Social protection

Health

Education

Public order andsafetyGeneral publicservicesDefence

• Expenditure in economic development and education is very high compared with other countries.

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• SOC stock has increased by 4-15 times compared to the past.

1962(A) 1980(B) 2003(C) Ratio

- Road (km) 27,169 46,951 97,252 3.6(C/A)

- Airport (flight #) 140 1,006 2,149 15.4(C/A)

- harbor (million ton) - 82 487 5.9(C/B)

- subway (km) - 41 412 10.0(C/B)

SOC investment

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• R&D : 2.9% of GDP, 4.8% of central government budget

< R&D investment ratio to GDP (IMD,2003, %) >

Korea USA Japan France UK

2.92 2.80 2.98 2.20 1.85

• Education has been a stepping stone for Korea’s miracle

< Education Expenditure ratio to the Integrated Public Finance (%) >

USA(01) UK(99) Japan(recent) Korea(03)

1.9 3.7 6.0 15.1

Aggressive Investment in R&D and Education

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Changes in policy environment

• Spending pressure will accelerate

- health and welfare costs due to an aging population.

- costs due to maturing social safety net.

- uncertain cost of cooperation with North Korea.

• Diversified demand and political pressure.

Complicated policy demands.

Ⅳ. Future challenges

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Korea’s recent reforms (since 2004)

• Clearly implement medium-term plans.

• Improve budget formulation procedure with a top-down

approach.

• Strengthen performance management.

• Improve transparency by simplifying budget structure.

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Thank you

“A budget is much more than

a collection of numbers.

A budget is a reflection of

a nation’s priorities, its needs, and its promise.”