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The Korean EconomicDevelopment
Experiences and Implications
Doowon LeeProfessor of Economics
Yonsei University, Seoul, Korea
Unfavorable Initial Conditions
vUnderdeveloped
vLow income
vPoor resources
vAgrarian society
Divided
Colonial legacy: 1948 mfg prod was only 14% of 1939 level
electricity
unbalanced development
Unfavorable Initial Conditions
South North All Korea
Share of the South
in all Korea(%)
Agriculture 965.1(60.2) 561.9(42.7) 1,527 63.2
Forestry 109.7(6.9) 103.3(7.9) 213 51.5
Fishery 141.2(8.8) 85.8(6.5) 227 62.2
Mining 62.0(3.9) 194.0(14.7) 256 24.2
Manufacturing 324.3(20.2) 371.7(28.2) 696 46.6
Total 1,602.30 1,316.70 2,919 54.9
Population (1,000s) 15,627 7,920 23,547 66
Per capita net commodity Product
(yen)102.5 166.3 124
Electricity 8
)Comparison of Net Commodity-Product Between South and North Korea, 1940 (million Yen
War Devastated Korea
Refugees of War
Vicious Cycle of Poverty
Low Wage & High Unemployment
Low Income
Low Saving
LowInvestment
LowProduction
Per Capita GNP/GDP (dollars)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1962 1965 1970 1975 1980 1985 1990 1995 2000 2004
Years
US $
India Philippines Thailand Turkey Mexico Korea
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
16,000.00
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Argentina
Korea
Philippines
GDP per capita Unit: US $
Table 1-1. Key Economic Indicators of Korea
1953 to 20011953 1962 1972 1982 1992 2005
GDP ($ bn) 1.3 2.3 10.6 74.4 314.7 786.8
Per capita ($) 67 87 319 1,847 7,183 16,291
U.S. per capita ($) 2,290 3,029 5,910 14,192 24,709 39,843
Export ($ bn) 0.040 0.055 1.6 21.9 76.6 284.4
Import ($ bn) 0.345 0.422 2.5 24.3 81.8 261.2
Agriculture / GDP (%)
47 40 27 14.5 7.4 3.3
Gross I Ratio (%) 14.7 11.8 21.3 29.0 37.3 30.2
Gross S Ratio (%) 13.1 11.0 17.1 25.4 36.4 33.0
Note: ‘*’ stands for ‘estimated values’.Source: Appendix 1. Also, refer to ‘http://kosis.nso.go.kr’.
6.38.77.59.6Korea
3.21.65.95.9Western Hemisphere
7.36.95.34.5Asia
5.44.25.55.6Developing Countries
1.04.04.811.7Japan
1.92.43.14.9EU*
2.62.92.83.8U.S.A.
2.33.13.24.7Industrial Countries
3.13.43.94.8World
91-200081-9071-8061-70
Notes: * In the 1960s and 70s, it is European industrial countries.
Comparison of Growth Rates in Selected Regions
v GDP ranking: 11th ($680 bn)
v Per Capita GNI: 30th ($14,162)
v HDI ranking: 28th (2002)
v Trade ranking: Export 12th ($253.8 bn),
Import 13th ($224.4 bn)
v Ranking of major productions: Ship Building1st, Electronics 4th, Steel 5th, Automobile 6th
The Current Status of Korea in the Global Economy (2004)
1950s: Import Substitution
v Before war: successful land reform
and education reform for universal
primary education
vWar and its recovery
v IS policy: overvalued e, quantitativeimport protection, monopolisticcompetition, 3-white industries
q Role of aid in investment, budget, & trade
q Export: less than 5% of GNP, primarygoods oriented
q Government expenditure focused on
defense and education and
reconstruction effort
1950s: Import Substitution
12.610.110.71213.19.87.312.9Imports as
a % of GNP
71.473.184.986.676.169.373.958.3Aid as a % of
Imports
343.5
303.8
378.2
442.1
386.1
341.4
243.3
345.4
Total Imports
245.4
222.2
321.3
382.9
293.7
236.7
179.9
201.2
Total Aid
1960
1959
1958
1957
1956
1955
1954
1953
(Million $)
Aid Received and its Importance, 1953~1960
0
500
1000
1500
2000
2500
53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Year
Mil
lion
$
Import
Export
Aid
External Transaction of Korea
1960s: Export Promotion
v Transition to EP: warning of declining aid and persistent import, IS in basic commodities completed
v Five Year Development Plan and Colonial Era Compensation Fund
q Policies of EP:
q e unified and depreciated
q export import linkage
q subsidies & policy loans (low r with gov’t control)
q tax incentives
q tariff reduction/exemption for imports ofintermediate input for export
qInstitutional Reform: EPB, NTA (66’)
1960s: Export Promotion
Source : World Bank, World Development Report, 1987 and 1999/2000.
The average yearly growth rates for 1985-1998 were calculated by the author.
-0.2-0.11.6Strongly Inward
-0.11.74.0Moderately
Inward
2.41.64.9Moderately
Outward
6.8%5.9%6.9%Strongly Outward
1985-19981973-19851963-1973
Average Yearly Growth RatesTrade
Orientation
1963-1998 Average Growth Rates
7.816.2Inflation(WPI)
4.557.114.8Unempl Rate
25.86.518.78.7Imp Growth
33.817.138.628Exp Growth
14.514.411.813Saving/GNP
25.219.921.622.7Inv/GNP
9.777.87.1GNP Growth
ActualPlannedActualPlanned
2nd FYP(1967-71)1st FYP(1962-66)
Five Year Development Plans (Plan vs. Outcome)
Contents of 5th row are reversed
Table 1: Paradigms of Economic Reforms in India Since1981
Pre-Reforms Period Post-Reforms Period
1. Quantitative licensing on trade and industry1. Abolition of industrial and trade licensing
2. State regulated monopoly of utilities &
trade
2. Removal of state monopolies; privatization &
divestment
3. Govt. control on finance & capital
markets
3. Liberalization of financial & capital markets
4. Restrictions on foreign investment and
technology
4. Liberal regime for FDI, portfolio investment,
foreign technology imports
5. Export promotion and export
diversification
5. Import substitution and export of primary
goods; no import bias.
6. High duties & taxes with multiple rates 6. Reduction and rationalization of taxes and
duty dispersions.
7. Sector-specific monetary, fiscal and
tariff policies
7. Sector-neutral monetary, fiscal and tariff
policies
8. End-use and sector-specific multiple
interest rates
8. Flexible interest rates without any end-use or
controlled interest rates sector specifications
9. Foreign exchange control, no
convertibility of rupee
9. Abolition of exchange control, full
convertibility on current account
Table 1 Contd..
Table 1 Contd..
10. Multiple and fixed exchange rates 10. Market determined exchange rates
11. Administered prices for minerals, public
utilities
11. Abolition of all administered prices essential on goods
except for few strategic sectors
12. Tax concessions on exports and savings 12. Rationalization of structure, and concessions being
phased out
13. Explicit subsidies on food, fertilizers, and
some strategic sectors
13. No significant change, budget subsidies on LPG
essential items and kerosene introduced
14. Hidden subsidies on power, urban transport 14. No significant change
15. General lack of consumer protection and
other rights
15. Acts governing consumer rights, Intellectual Property
Rights, independent other rights and regulatory authorities.
16. Central planning and high level of
discretionary processes
16. Decentralization, sound institutional framework,
reducing degree of bureaucracy and reforming civil services.
17. Outdated Companies Act 17. No change
18. No exit policy for land and labour 18. No change in labour policy, slow progress of reforms in
land markets
19. Outdated legal system 19. No change
Source : Mehta, Rajesh and Agarwal, Manmohan, “ India : The State of its Economy” , (mimeo.)
Table 1: Paradigms of Economic Reforms in India Since1981
0
500
1000
1500
2000
2500
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
Year
Mil
lion$
Import
Export
Aid
External Transaction of Korea
1970s: HCI Development
v Backgrounds of HCI
v Security issues: nixon doctrine
v Economic issues: PEP completed with risingwage level
Per Capita GDP ofSouth and North Korea
Per Capita GDP of South and North Korea
0
200
400
600
800
1000
1200
1400
1600
1800
1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
Years
$
South Korea North Korea
1970s: HCI Development
v Policies of HCI
v 1st Oil Shock and its overcome: secured supply
& middle-east construction boom
v Rural reform: New Village Movement
v protection, NIF, Loans, tax incentivesincluding tax holidays
v Side effects of HCI: conglomerates, negative with curb market, income distribution, foreigndebt
HCI: Shipbuilding (Daewoo Okpo)
75.5Average
75.71870246937341979
801719214831251978
75.41040138020261977
74.262283812791976
77.548162110981975
61.443470710541973-74
% of facility
investment in HCI
(B/A)
HCI (B)Mfg (A)
All industries
Facility Investment in the Manufacturing Sector (billion won)
Structural change in manufacturing (% share)
100100100100100100100100Total
56.547.633918.253.951.444.536HCI
43.552.466.181.846.148.655.564Light
industry
19831980197519701983198019751970
ExportValue added
Capacity utilization in HCI (%)
53.162.661.757.161Fabricated
metals and machinery
71.38188.181.178.6Basic metals
80.395.4110.498.191.9Chemical
19801979197819771976Industry
20.419.5Inf (WPI)
4.143.94U Rate
10.31212.613.7Imp Growth
10.51632.722.7Exp Growth
20.523.923.119.5S/GNP
30.32626.124.9Inv/GNP
5.89.210.18.6GNP
Growth
ActualPlannedActualPlanned
4th FYP(1977-81)3rd FYP(1972-76)
Five Year Development Plans (Plan vs. Outcome)
한국 소비자 물가 상승률(1967~2003)- 자료 출처 : 한국은행 경제통계 시스템
21.33
2.68
3.554.10
2.240.82
7.53
4.39
4.98
4.44
6.19
4.80
6.30
9.30
8.57
5.70
7.14
3.032.75
2.45
2.30
3.42
7.20
28.69
18.24
14.48
10.17
15.26
25.31
24.29
3.21
11.73
13.45
16.08
12.4111.02
10.43
0.00
5.00
10.00
15.00
20.00
25.00
30.00
1967 1972 1977 1982 1987 1992 1997 2002Year
%
한국 소비자 물가 상승률
1980s: Liberalization and Structural Reform
n 1980-82 Crisis management: 3 highs and foreign debt
n Stabilization Policies: tight MP and FP -> inflation subdued and positive r
n Liberalization: import liberalization ratio and tariff rate
n Structural Reform: rationalization
n Three-Low Boom and Current account surplus: oil price, int’l interest rate, strong yen (low $)
n Democratization and labor movement
4.2Inflation (WPI)
2.43.73.83.8Unemployment Rate
20.98Imp Growth
16.28Exp Growth
35.333.532.521.7Saving/GNP
37.131.329.529.5Inv/GNP
97.38.67.5GNP Growth
ActualPlannedActualPlanned
6th FYP(1987-91)5th FYP(1982-86)
Five Year Development Plans
(Plan vs. Outcome)
1990s: Slowed Economy and Crisisn End of high growth era
n High cost (wage, logistic, interest) and low efficiency
n Excessive growth without structural adjustment
n Hasty join of OECD and capital market liberalization
n Growing current account deficit and over-valued exchange rate
1995 Manufacturing Industry
2.40.74.5Unit L cost growth (87-95 average)
1.21.21.74Wage/per capita GNP
5.823.77.4Wage/hour ($ Mfg.)
TaiwanJapanKorea
Unit labor cost growth = nominal wage growth – L productivity growth
Land price for industrial complex($/square meter, 1995)
5-10174.848.4195.647.7226.8
U.S. Hong Kong
MalaysiaJapanThailandKorea
Ratio of logistic cost out of total sales: Korea 17%, Japan 7%, U.S. 8.8%
High interest burden (96):Korea 5.8%, U.S. 2.6%, Taiwan 2.5%, Japan 1.3%
South Korea*(1997)
South Korea*(1999)
South Korea*(2001 June)
U.S.A**(2000)
Japan**(2000)
Germany*** (1999)
U.K** *(1999)
6.0 8.3 5.7 1.21 5.44 1.3 2.17
Sources: Korea Financial Supervisory Service (www.fss.or.kr);The Banker (July 2000, July 2001), recited From www.seri.org (2001.6) and
www.bok.or.krNote; * Average of all the commercial banks’ NPL.
Korea has changed its criteria of NPL in 1999 according to international standard..** Average of ten biggest commercial banks’ NPL.*** Average of five biggest commercial banks’ NPL.
Table 3. International Comparison of NPL (unit: %)
Table 4. International Comparison of Debt-Equity Ratios of Mfg Industry
South Korea(1997)
South Korea(2004)
Germany(1996)
Japan(1999)
Taiwan(1995)
US(1999)
3.96 1.04 0.98 1.74 0.86 1.64
Sources: Krueger and Yoo (2001).Bank of Korea, Bank of Korea Information (June, 2001, p.66).
2000s: Crisis Recovery and Remaining Agenda
n Corporate and financial sector restructured
n Export led recovery
n Government owned financial institutions
n Ballooning government debt: public fund and budget deficit
n Credit bubble and household debt
n Worsened income distribution and poverty problem
Exports Have Been the Main Driver for Growth...
10
15
20
25
30
35
40
45
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
10
15
20
25
30
35
40
45Merchandise Exports
(Percent change, y/y, two-month average)
Also Domestic Demand Has Failed to Pick-up with GDP…
-4
-2
0
2
4
6
8
10
12
14
19991 20001 20011 20021 20031 20041 20051 20061
0
2
4
6
8
10
12
14
국내소비지출 GDP
자료출처 : ecos.bok.or.kr
…Resulting in Unbalanced Growth.
40
60
80
100
120
140
160
180
200
1997 1/4 1998 1/4 1999 1/4 2000 1/4 2001 1/4 2002 1/4 2003 1/4 2004 1/4 2005 1/4 2006 1/4
40
60
80
100
120
140
160
180
200
산업생산지수 수출
자료출처 : kosis.nso.go.kr
…As Households Reduced Debt, Especially Card Loans…
자료출처 : ecos.bok.or.kr
0
10
20
30
40
50
60
70
1996 1997 1 998 1999 2000 200 1 2002 2003 2004
0
2
4
6
8
1 0
1 2H o u s eh o ld d e b t(P e rcen t o f G D P )
T o ta l(le ft sca le )
C red it ca rd 1
(righ t sca le )
1 / D a ta on cred it from N B FIs is used as a p ro xy fo r c red it ca rd deb t.
Q 4 .2004
Features of Korean Model (1)
n Neoclassical Explanation:
Y(t) = A(t) * F[L(t), K(t)]
n Asian Values: High I & S, Education
n Macroeconomic Stability: Inflation, Budget Balance
n Small open economy following the law of Comparative Advantage in Favorable Int’l Environment: L-Intensive First, K-Intensive, Knowledge-Intensive
n Growth with Equity
0
5
10
15
20
25
30
35
40
45
1970 1975 1980 1985 1990 1995 2000
%
Saving Raito Investment Ratio
Source:통계청
Korea’s Saving and Investment Ratio
Table 2-2. ICOR of Selected Countries
1970-81 1978-1987 1988-1992
6.6 5.6 9.6
7.4 5.1 7.5
3.3 4 4.4
2.6 5.5 5.2
6 5.7 4.7
13.3 n.a. 9.1
Source:Recited from Table 3-4 of Gillis, Perkins, Roemer and Snodgrass (1996).
Countries
U.S.A.
Japan
Korea
Indonesia
India
Argentina
General Account Expenditure(1948 to 1950)(Unit: Million won, %)
1948 1949 1950a Changeb
Amount Share Amount Share Amount Share 1949 1950
General Public
Service2.84 9.1 5.79 6.4 11.33 10.7 103.9 95.8
Justice, Police 4.45 14.2 12.20 13.4 10.97 10.4 36.5 -10.1
Defense 8.09 25.8 23.95 26.3 25.10 23.8 196.1 4.3
Education,
Culture2.74 8.8 7.33 8.1 10.17 9.6 167.5 38.8
Social Service 1.52 4.9 2.60 2.7-
(8.08)
-
(7.6)71.1 -
Industrial
Economy4.31 13.7 13.14 14.4 7.13 6.8 204.9 -45.7
Public Work 1.76 5.6 4.31 4.7 2.67 2.5 144.9 38.11
Contribution,
Investment- - 0.64 0.7 - - - -
Local Finance 1.88 6.0 4.41 4.8 4.28 4.1 134.6 -3.0
National Bond - - 1.01 1.2 - - - -
Others - - 2.22 2.4 31.47 29.8 - -
Transfers to
Other Account3.72 11.9 13.52 14.8
3.24
(106.53)
3.1
(100.0)263.4 -76.1
Total 31.30 100.0 91.11 100.0 105.59 100.0 191.1 15.9
Central Government Expenditure in the General Public Sector (1950 to 1953)a
(Unit: Million won, %)
1950 1951 1952 1953
Amount Share Amount Share Amount Share Amount Share
Defense 132.4 54.5 329.9 53.4 946.3 44.0 3,260.5 53.7
Security 16.2 6.7 63.4 10.3 124.7 5.8 510.4 8.4
Military &
Police Support14.2 5.8 4.7 0.8 33.7 1.6 125.8 2.1
Sub Total 162.8 67.0 398.0 64.5 104.7 51.4 3,896.7 64.2
General Public
Service27.5 11.4 75.7 12.3 337.0 15.7 342.5 5.6
Education,Social
Serviceb15.0 6.2 30.5 4.9 77.5 3.6 208.3 3.4
Industrial
Economyc18.5 7.5 55.0 9.9 48.5 2.2 1,255.4 20.7
Local Finance 6.2 2.6 39.6 6.4 137.0 6.4 236.7 3.9
Others 13.8 5.8 19.1 3.1 446.1 20.6 128.8 2.1
(National Bond) 2.3 1.0 9.9 1.6 357.2 16.4 28.7 0.5
Total 243.0 100.0 617.9 100.0 2,150.8 100.0 6,068. 3 100.0
Chart 4: Poor countries that integrated with global economy are growing fastest
Source: World Bank, 2001.
Source: Dawson, Thomas C., “Globalization, the Transition Economy, and the IMF,” IMF
Why more globalized countries grow faster?
n Liberalized capital market: more investment through FDI and borrowing
n Liberalized trade:
- static gains from trade
- dynamic gains from trade:
more competition
economies of scale
technological progress
Source: Dollar, David, “Globalization, Poverty, and Inequality since 1980,” World Bank
0
200
400
600
800
1000
1200
1400
1600
1800
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96
Years
Rea
l W
age
Index
(1960=100)
Figure 2-1. Growth of Real Wage Index
in Manufacturing Sector, 1960 to 1996
Source: Bank of Korea, Monthly Bulletin (Jan. 1998).
Features of Korean Model(2)
n Government-initiated: development oriented authoritative
government (long-term plan, free from interest group and vested
interests)
(determined leadership + competent technocrat + right institutions:
EPB, KDI, NTA, FTA)
n Political stability: Consistent Market-Oriented Policies
n Private sector as the main actor: Role of Conglomerates and
Entrepreneurship
n Industrial Policies: market-friendly (minimized price distortion), timely
restructuring
Future Challenges
n Gradual decline of the potential growth rate:
diminishing investment ratio, rapidly ageing
society
n Globalization and challenges from China
n North Korea Factor: geopolitical risk and
unification cost
Contrast between the South and the North
North Korean boys in the street market