korea development institute the korean economy: history of economic development history of economic...
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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