6 may 2014 shim ui sup myongji university, korea delgersambuu munkhtsetseg institute of finance and...

6 May 2014 Shim Ui Sup Myongji University, Korea Delgersambuu Munkhtsetseg Institute of Finance and Economics Comparative Study of Economic Development of Korea and Mongolia for the Take Off of Mongolian Economy: focused on economic miracle and Dutch disease Mongolian Socio-economic Situation and Emerging Issues Commemoration International Conference for the 90th Anniversary of Institute of Finance and Economics, Ulaanbaatar Mongolia, 6-7 May, 2014

C O N T E N T S . Initial conditions for economic development . Development strategy . Economic miracle and its result . Factors of economic miracle . Cooperation frontier for mutual prosperity

I. Initial conditions for economic development Korean tragedy of a nation Demilitarised Zone (DMZ). South Korea describes the war as a tragedy of a nation, but they are Brothers. Koreans dream reunification with the belief of "dream comes true". The fog of war is still exist, their desire to see a unified Korea is unmistakable. Korea's development accomplished in hard way Economic conditions of the early 1960s War-torn & divided with $89 in1961(101st out of 125 countries) Vicious Cycle of low savings and low growth Economic take-off with outward-looking development strategy(1960~80)

Korean society in pre-developmental stage I. Initial conditions for economic development

Why Korea? Transition very rare Simultaneous economic and political development Economists (EPB) Technocrats (military service) Shared growth (Labor and capital) Catch up Japan(colonial experience) Security(cold war front line with USA ) I. Initial conditions for economic development

Turning Initiating the transition, the Start of Growth in the 1960s Heavy and Chemical Industry Promotion in the 1970s Rationalization and Liberalization in the 1980s Democratization (1987) Globalization in the 1990s Financial crisis (1997) and post-crisis reform Global Economic Crisis 2008 New Challenges and Opportunities (rise or fall) I. Initial conditions for economic development

Korea as a natural state 1950s: Rhee regime not very different from most natural states throughout developing world. - Clientelism and personal exchange - Rents based on connections Economic policy as an instrument of politics and coalitions - Foreign exchange - Import licenses - Grain Heavy dependence on American aid Yet unstable I. Initial conditions for economic development

Initiating Koreas transition, 1961-1979 Park and military takeover, 1961 Establishes the developmental state Transformation of policy from personal to impersonal basis - Move toward economic independence based on export-led growth - Macroeconomic stability - Shared growth Systematic and simultaneous transformation of polity and economy (doorstep) New system of coordinated incentives I. Initial conditions for economic development

SWOT of Mongolian Economy for Korea Strength/OpportunityWeakness/Threat -abundant natural resources (cupper 2nd, fl uorspar 3rd, coal 4th, molybdenum 11th etc) - high dependence on natural resources - neighboring giant market(China, Russia)- land-locked(no sea line) - good manpower, political interest- high inflation and wage -abundant demand for SOC and construction Project - weak transportation infrastructure and l ower urbanization - 100 tsn Korean understanding Mongolian- Small population size(less than 3mln) -equidistance diplomacy for Korea(S-N Korean a nd Mongolia, triangular cooperation) -neighboring conflict (border dispute with China and Russia) source: , p.21

1. Koreas economic strategy as a developing country unbalanced growth dual society, export oriented, Chaebol & SME, urban & rural, SOC investment, labor and business outward or inward economic development plan Korea's outward mind dispatched worker, Vietnam war, construction worker, sailor etc proper investment in infrastructure development can lead to long-term growth. II. Development strategy

2. Basic philosophy of the 5-year plan: five principles! Korean economic development should be achieved through industrialization Economic development should be achieved under government control and leadership. Although firms should be owned and managed privately, the government could implement private decisions in the case of major investments (a variant of authoritarian capitalism) To finance investments, foreign capital inflows should be induced Growth should have a higher priority than redressing imbalances in income distribution and unevenness in industrial development across geographical regions

3. Strategic vision of the government for economic development Poverty was regarded as the seed bed of social conflict & instability Korean government faced challenging tasks of meeting BHN and maintaining national security

4. Outward-looking Development Strategy Policy shift from "Import Substitution" to "Export Promotion" in the early 1960s Export-promotion policy focused on labor-intensive industries in view of abundant and well educated labor force Strong export promotion led to rapid export growth of 40% per year between 1964-80 In particular, focus on labor-intensive exports in the 1960s led to large employment opportunities Unemployment rate continued to decline steadily as employment opportunities outgrew the labor force

5. Working mechanism of outward-looking development strategy

6. Koreas comprehensive and concrete industrial development strategy since 1960s

7. Incentives for firms Economic policy making in service of economic growth - Cooperation of business and government. Exports - Loans, credit, licenses, refund import taxes - Profit opportunities - Tournaments - Impersonality General trade company, Absence of SBC, , - Several restructurings

8. Incentives for Bureaucrats Meritocratic/impersonal vs natural states/personal But not independent of politics Rewards for performance Minister shuffling Monthly meetings Relative absence of bureaucratic corruption? Most natural states, such as India, Mexico EPB polices budgets Pensions Deliberative councils

10. Citizen Incentives Repressive regime Absence of political rights (e.g. association) No democracy Yet a range of impersonal benefits Education Infrastructure (e.g., rural roads to markets) Security. Shared growth Open access to jobs in an expanding economy and the bureaucracy. Rising wages (8%/year from 1970-1988) Contrast with natural state

11. Government / coalition incentives To make this system work, government (and coalition leaders) had to have incentives to support system of impersonal exchange. What prevented reneging, especially in crises (e.g., early modern Europe, Latin America, Africa)? The security dilemma: threat of communism. Perceptions in 1950s and 60s On-going threat from North Korea and China. Credible commitment: [Differentiates from other natural states] Reneging would destroy system creating independence and security Maintain incentives for firms, meritocractic bureaucracy, and citizens.

12 Changing industrial structure: from agriculture to manufacturing / from light industry to heavy and chemical industry Changes in Export Commodity Profile

III. Economic miracle and its result Koreas Economy 1. Economic miracle A period of rapid economic growth that exceeds expectations. Economic miracles 2. Positive effects South Korea; transformed from an aid recipient into a donor country within the span of a single generation. National growth rates, East Asia, 1960~2002

(1) Growth trend III. Economic miracle and its result

(2) Economic performance in Korea III. Economic miracle and its result

(3) Macroeconomic and structural patterns of Korea 1963-86 III. Economic miracle and its result Measure1963-731974-801981-86 Annual inflation rate a Annual real GNP growth rate Manufacturing product Share in GNP Agriculture b Manufacturing c Other Share in employment Agriculture b Manufacturing c Other Exports as share of GNP Taxes as share of GNP Investment as share of GNP Foreign saving as share of GNP 16.6 9.7 19.7 35.2 15.7 49.1 54.5 12.6 32.8 14.5 11.8 22.0 8.3 21.9 7.2 14.1 20.9 28.0 51.1 41.2 21.5 37.2 30.6 16.8 30.4 7.2 6.0 8.7 10.0 15.6 33.1 51.3 28.6 23.5 47.9 38.6 19.2 30.2 4.3 Source: Bank of Korea, Economic Statistics Yearbook, various issues. a. GDP deflator. b. Includes forestry and fishing. c. Includes mining.

(4) Gross domestic product by industrial origin (factor cost, 1970 prices) III. Economic miracle and its result Share of GDP(%)Annual average growth rate(%) 1953- 55 1960- 62 1973- 75 1953/55 to 1960/62 1960/62 to 1973/75 1953/55 to 1973/75 Primary Total Manufacturing Total Services Total Gross domestic product.513.081.405 1.000.452.127.405 1.000.258.346.396 1.000 2.5 10.8 3.9 17.9 9.0 9.1 3.6 15.3 7.1 7.3 Sources: BOK, National Income in Korea. 1975, pp. 144-145; and BOK, Final Estimate of Gross National Product for 1975, Sept. 1976, p.15.

(5) Export and import trend in Korea III. Economic miracle and its result

(6) Reducing poverty Absolute poverty declined steeply from 48% in 1961 to less than 10% entering 1980s. III. Economic miracle and its result

3. Swift crisis resolution and economic recovery III. Economic miracle and its result

1) Pitfalls of the Government-led Economic Development III. Economic miracle and its result 4. Negative effects

2) Economic Reform and Financial Crisis of 1997 III. Economic miracle and its result Isn it a miracle?

3) Side effects of economic growth Happiness index According to UN's the world happiness report 2013, Korea's happiness index rated number 41 in the world. Received low score in social unification like fairness, social solidarity. Suicide rate It's the Korea that records suicide rate number one position among the OECD members. Our nation's suicide rate is 33.3 people per 100 thousand people. Mental problems, physical problems and economic issues are main causes of suicide Estimated population Our nation's birthrate is 1.3 children per woman. It ranked 225th in the world which is very low level. (In Korea, it spends 262 million and 44 thousand Won to raise one kid.) Also, entering an aging society makes rapid progress. In 2026, it's going to enter super high aged society. As a result, potential of growth is getting lower because of decreasing the number of economically active people. III. Economic miracle and its result

Social inequality Korea has been cited as one of successful countries with relatively low income inequality and rapid growth It seems that all people are wealthy as the economy develops, but the most wealth is biased to the super rich. But the concentration of wealth in several levels of society. The income gap has further widened. Bipolarization; present Occupy Wall Street 1 : 99 past golden rule/Pareto Distribution 78:22 8 : 2 The degree of dependence upon foreign trade Korea's degree of dependence upon foreign trade is very high. If the degree of dependence upon foreign trade is extremely high, it's impacted easily to the international economy. Korea's degree of dependence upon foreign trade is 94.5%, ranked 36th in the world. when the world economy crisis occurs, contagion effect blows Korea easily. III. Economic miracle and its result

.. income differential Korea is the country which exacerbated income bipolarization. Working poor, house poor, land poor, Consequentialism, Mammonism, Lookism, Workholics Concentrationism, Balibalism, I-can-do-ism * It appears several side effects by rapid economic development. * The number of plastic surgery ranked number one in the world.

(1) Total effects(2) Direct effects (3) B.P. (4) Income (5) Employment (6) B.P. (7) Income (8) Employment 1975 77 29.963.610.7825.872.140.20 1978 82 53.526.633.0845.873.920.94 1983 8628.622.901.8023.091.690.76 III. Economic miracle and its result 5. Koreas DD of overseas construction in the Middle East Effects of overseas construction on national economy Boom period (1978 82), Before boom(1975 77) post boom(1983 86) 1) Positive effects : Balance of payments, national income, employment

2) Negative effects de-industrialization effect Price and wage effect III. Economic miracle and its result de-industrialization effect Price/InflationWage (1)manufacture(2)trade (3) relative price (4) manufacture (5)constructio n (6) relative wage 1975 7724.69-2.53-7.258.3410.088.02 1978 8210.621.784.1041.8610.081.52 1983 8612.37-2.63-4.239.034.63*1.04 :(1) . 3 ; (2) / , 1980=100; (3) / , 1980=100; (2),(3),(4),(5) ; (6) / ; * 1983 85 : , , , 2007. 8.20: 158.

Mongolia economy, Bogdkgairkhan economic miracle 1. Growth of Mongolia: mid-term projection 2011 Mongolia can do, building on reform steps it has already taken, to avoid a resource trap. It argues that (i)cash transfers to the general population should be linked directly to the performance of (ii)the underlying mining assets to create a domestic constituency for good governance in the mining sector; (ii) social spending should be de-linked from resource revenues, better targeted and fully incorporated into the budget; (iii) macroeconomic volatility could be reduced by operationalising the fiscal stabilisation fund, issuing GDP-indexed debt instruments, and through financial sector reforms; and (iv) major infrastructure and industrial development projects should seek private sector co- investments to ensure that public money is well spent. III. Economic miracle and its result 2011*2012*2013*2014* GROWTH OF REAL GDP /PERCENT, YOY/ AGRICULTURE INDUSTRY SERVICE 19.4 7.8 11.3 8.9 19.9 5.0 36.6 9.3 14.8 3.6 21.6 13.5 15.4 3.7 23.0 12.7. Estimations as of October 2011. For next decade: annual average growth rate to be approximately 14% pa

2. Features of Dutch disease. Large real appreciation in the currency,. an increase in spending,. an increase in the price of non-traded goods, relative to traded goods, such as services and real estate. a resulting shift of labor and other resources out of non-export sector. a decrease in the non-mining export industry III. Economic miracle and its result

Part III quoted largely from Ch. Khashchuluun, The Challenge of Dutch Disease, Structural Change, and Economic Diversification National Development and innovation committee Government Agency of Mongolia, 2011.10.21

III. Economic miracle and its result

Policies and actions for economic diversification Good practices of mining revenue management and successful economic diversification Success countries - Chile, Finland, Australia, Canada and others Actions for economic diversification - Creating resources revenue funds, - Financing education, - Innovation, R&D, - Industry, Agriculture.

International practice: Desired outcomes (developed resource-producing countries as an example ) Transparency, advanced institution development, High level of human development, Strong linkages between the resource sector and the rest of the economy, Property rights are well defined, the rule of law prevails, and the judiciary system is independent, Policies are usually underpinned by a broad social consensus, long-term perspectives, and prudent economic management III. Economic miracle and its result

Strengths and Weakness of Mongolia Strengths Proper age structure of the population; Abundant mineral resources; Rich historical heritage and traditional; Unique natural ecosystems and vast lands; Unique nomadic lifestyle, Weakness Small population, limited labor forces, particularly shortage of highly qualified engineers, technical workers, Low level of scientific and technological development, Limited and unreliable energy supply, poor development of infrastructure, Land locked location, Limited financial resources, Lower index of business environment and institution Policies and actions for economic diversification

III. Economic miracle and its result Macroeconomic stability. Managing the revenue: Stabilization fund. Controlling inflation and improving productivity. Fight property boom through expansion of housing (particularly affordable housing). Reduction of government budget deficit, balanced budget policy. Political stability Human development. Training of young professionals: engineers, skilled labor. Reform of education (pre-school, school, vocational training, higher education). Improving national healthcare system, services and supply of services

III. Economic miracle and its result Policies for diversification. Heavy and chemical industry:. industry for basic metal and non-ferrous metals,. Industry for coal, chemical and oil Competitive light industry:. Industry for meat, sea buckthorn, wheat. Industry for wool, cashmere, and leather products, Tourism, crop, small and medium sized enterprises etc. Infrastructure to support those industries

III. Economic miracle and its result Actions. To develop infrastructure to reduce transportation/energy costs. To improve business environment to reduce business costs. To develop financial market /to reduce investment/transaction cost. To create funds for entrepreneurs. To facilitate trade and transit transportation. To support coordination of university and industry, R&D,. To promote education, health

Macroeconomic conditions for sustainable growth: better management of resources. Monetary policy to continue combat inflation. Gradual decrease in government budget deficit and move to balanced budget in future starting from now. Financial stabilization fund from 2010, now equal to 3% of GDP. Human Development fund restructuring: dealing seriously with pension funds and national health insurance, gradually move to SWF structure. End of direct cash distribution program from mid 2012. Legal measure to stop more money promises beginning from next Parliament elections of 2012. Development bank set up to sponsor improvement in competitiveness and diversification. Expected increase of public investment into infrastructure. Much stringent ecological control III. Economic miracle and its result

Growth key: Political stability. creation of unique political system, flexible to withstand growth conflicts. Parliamentary system adopted in 1992, first in Central Asia.. Social consensus on main development issues through decentralized balance of power III. Economic miracle and its result

Koreas Economy 1. Macroeconomic Performance Korea and LDCs, Selected Periods, 1967-85 Percent per year IV. Factors of economic miracle MeasureAfricaAsiaEurope a Middle East Latin America Korea Inflation 1967-76 1977-85 Real GDP growth 1967-76 1977-85 8.5 17.2 5.0 1.9 9.4 7.9 5.2 6.5 9.0 25.1 6.0 3.1 8.7 14.1 9.3 0.7 24.5 77.6 5.9 2.6 7.2 11.1 10.3 6.4 Sources: International Monetary Fund, World Economic Outlook, various issues, and EPB, Major Statistics of Korean Economy, various issues. Averages of country growth rates are weighted by the average U.S. dollar value of GDPs over the preceding three years. a. Developing countries in Europe, that is, Southern Europe including Portugal, Spain, Greece, and Yugoslavia.

2. Baumol's catching-up hypothesis IV. Factors of economic miracle 1960 per capita income (000 of 1970 "int'l" dollars ) Per capita real GDP growth rate, 1960-81 (%)

3. Sources of Economic Growth in Korea, 1963-82 Percent per year IV. Factors of economic miracle Measure1963-721972-82 Real GDP Total factor input Labor Capital Output per unit of input 8.2 4.2 3.1 1.1 4.0 8.0 5.6 3.5 2.1 2.4 Sources: Korea Development Institute, Quarterly Economic Review (Seoul: KDI, 1986), p. 33; and K. S. Kim and J. K. Park, Sources of Economic Growth in Korea: 1963-1982 (Seoul: KDI, 1985), pp. 61-62.

4. Main factors for economic development of Korea IV. Factors of economic miracle

5. 10 Tips for Economic Development based on Korean Experiences IV. Factors of economic miracle

6. Case : Construction Boom Factors of Middle East success Lower wage: The wage level in Korea is only about 25 percent of that in Japan and about 10 percent of those in Western countries like Sweden. Higher productivity: Korean companies gained a competitive edge by employing an all Korean labor force, in contrast to western companies that imported managers and cadres of skilled workers and hired the rest locally. Government support: To encourage Korean contractors, the Korean government provides them with low-cost loans, loan guarantees, and five-year tax exemptions on earnings from exports of construction materials and equipments. Lessons from Korea's Experience Equal opportunity (dissolution of traditional hierarchical social status system ) Competition, performance-based government support Broad access to education and raising technical know-how Growth with job-creation, initially led by labor intensive export promotion Promoting spirit of self-help: Saemael movement IV. Factors of economic miracle

Mongolia's economy Growth factors Natural resources boom Mining as a primary pillar of economic growth - 30% of GDP, 80% of exports - Multi-billion projects starting in 2009 - Just 2 projects (OT, TT) include investment of 10 billion dollars, large than size of GDP - Many more private investment projects - Largest world companies coming to cooperate: Rio Tinto, Goldman Sachs, Deutsche Bank, Peabody, Xstrata, Vale, Temasek, CIC, etc IV. Factors of economic miracle

1. Mongol-Solongos Partnership... Dreams come true! Mongol empire stretched from... to.., Area covering 33,000,000 sq km(12,741,000 sq mi), (22% of Earth's land), Population 100 million people V. Cooperation frontier for mutual prosperity

2. Mongolias Agenda 21 (Mongolian Government Report for UNDP, 2012) Grand Blue Print for Mongolia Development Mongolias Agenda 21 does not only represent the nations will for freedom and a wealthy life in the coming century, it also commits to the goal for the Government and people to work together for a better life environmental disadvantages for economic development in Mongolia five factors such as climate, desert, scare population, nomadic life and colonial experiences were discussed in this paper V. Cooperation frontier for mutual prosperity

3. Why Korea? Traditional Sadon country Cultural DNA Neutral for the Solongos reunification 3rd neighbor policy Mongolia's 'Third Neighbor' Foreign Policy Russia and China, third neighbor countries play a crucial role in Mongolia development gate way to ocean and Eurasia, Beyond Manpower, marriage relatives, anti-China in Africa, GCC V. Cooperation frontier for mutual prosperity

4. What Korea? Resource cooperation Technology cooperation Sharing economic development experiences Market cooperation for bilateral cooperation Mongolian infra for Korea's land bridge/inner Asia and East European market Korean infra cooperation for Mongolia Ocean V. Cooperation frontier for mutual prosperity

5. How Korea? Strategic FTA Silk road/Eurasia railway/TMGR, Tuman River development, reunification Capability building, KSP(Knowledge Sharing Program ) Tourism FTA Korea's ODA and EDCF Accumulation of knowledge and capabilities Effective transformation relies on specific capabilities ranging from skills and policies to effectively deploy domestic and external resources, policies, and programmes to transform natural resources, as well as strategies to harness the opportunitities in a globalized knowledge economy. V. Cooperation frontier for mutual prosperity

6. Beginning of Korea's FTA talk

7. Economic grand bloc with FTA V. Cooperation frontier for mutual prosperity

8. Foreign trade of Mongolia Unit: mln. USD

9. The share of the Korea in Mongolia's foreign trade V. Cooperation frontier for mutual prosperity

10. Mongolia and Korea FTA Strategic, vertical and long-run As for Mongolia, it is significant to establish the FTA with South Korea. In particular, South Korea is geographically the close and is one of the countries that consume the largest amount of natural resources such as copper and coal in the world market among the developed countries. Our competence in export can be improved and the transport cost can be reduced through a strategy to attract Korean investments and latest technology to Mongolia. If we assume that there will not appear major change in the structure of the Mongolian export, in other words, there would be slight benefits from mineral products and the raw materials. So, it is important to negotiate on an agreement to reduce the customs tariff of a product with value added that is feasible to be exported to Korea. One of the main difficulties from expanding the trade with Korea is definitely the transport costs, and it is crucial to collaborate with Korea on solving this problem. Especially, we have to work on the support of Korea and its trade partners in regard to the proposal of group of landlocked countries to include application of national treatment in a transit transport in the WTO. V. Cooperation frontier for mutual prosperity

6 may 2014 shim ui sup myongji university, korea delgersambuu munkhtsetseg institute of finance and...

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