The Korean Economic Development Experiences and …mofat.go.kr/mofat/htm/issue/policyplanning/6_africa.pdfThe Korean Economic Development Experiences and Implications ... India Philippines

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