Transcript 1. The Korean Economy: History of Economic Development

The Korean Economy:
History of Economic Development
June 2005
Korea Development Institute
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
2
1. Transformation of the Korean Economy
(1945-2003)
A. Growth Trend
Per Capita
(US$)
GNI
12,646
11,432
10,000
6 Five-Year-EconomicDevelopment Plans
7,355
5,000
Liberation
from Japanese
Colonial Rule
67
1945
1953
Financial
Crisis
1,000(1977)
OECD
Member
87 100(1964)
1962
1970
1980
1990
1995 1998 2003P
3
B. Changes in Industrial Structure
Changes in Employment Structure
Service
Sector
28.3
Changes in GDP Structure
Service Sector
Agriculture /
Fisheries
1960
Agriculture /
Fisheries
36.8
47.3
63.0
7.9
15.9
Manufacturing
Manufacturing
Agriculture /
Fisheries
9.3
19.2
71.5
Service
Sector
Manufacturing
Agriculture /
Fisheries
4.3
2002
63.2
32.5
Manufacturing
Service
Sector
4
2. Economic Take-off with Outward-looking
Development Strategy (1960-80)
A. Economic Conditions of the early 1960s
Capital
Shortage
Weak
Technology Base
Underdeveloped
Private Sector
Abundant
Labor
?
High Level of
Education
Strong
Economic will
5
B. Working Mechanism of the Outward-looking
Development Strategy
Economic Growth
Foreign Capital Inducement
(Economic Aids  External Debt)
S
S
Manufacturing
Processing
Capital Good Imports
Export
Promotion
Private
Enterprises
Raw Material Imports
Financial  Tax Support
Foreign Technology
Imports
Technology
Development
Government
Well-educated Labor force
6
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.
7
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
8
D. Changing Industrial Structure:
from Agriculture to Manufacturing /
from Light Industry to Heavy and Chemical Industry
Changes in Export Commodity Profile
Textile
Wig
Automobile
Semiconductor, Mobile Phone,
DTV, Display, Automobile,
Semiconductor Ship-building, etc.
84.8% HCI Product
(ICT, 27.6%)
50%
12.4%
Light
Industry
Product
2.8% Agricultural
Product
1960
1970
1980
1990
1999
2003
9
3. Changes in Development Strategy
(1980-2000)
A. Pitfalls of the Government-led Economic
Development
Financial Suppression
due to Prolonged
Government Intervention
Over-investment in
HCI
High Inflation and
Large Fiscal Deficits
• Inefficient Resource Allocation
• Macroeconomic Instability
• Rising Inequality
 1979 : Negative Export Growth for the first time since 1960
 1980 : Negative Economic Growth (-3.9%)
10
B. Stabilization Policies in the Early 1980s
Budget Freeze/Cut
Zero-Based Budgeting
Disinflation
Inflation
at around 3%
Phasing-out of Policy
Loans and Interest
Rate Deregulation
Strong Exports
Current Account
Surpluses
Investment
Adjustment in HCI
High
GDP Growth of
Economic Growth 8% per annum
11
4. Delayed Economic Reform and
Financial Crisis of 1997
High
Corporate
Debt Leverage
Widespread
Moral Hazard
Large NPLs
in the Financial
Sector
Continued
Government Intervention /
Weak
Prudential Regulation
South-east Asian
Crisis
Increased
Vulnerability to
External Shocks
• Massive Capital Outflow
• Denied Rollover of
Short-term External Debt
IMF
Rescue Package
12
Firm Failures and Unemployment, 1996-99
30
4,000
3,500
25
3,000
20
2,500
15
2,000
1,500
10
1,000
5
5,00
Overnight inter-bank call rate
No. of firm failures
2000 04
2000 01
1999 10
1999 07
1999 04
1999 01
1998 10
1998 07
1998 04
1998 01
1997 10
1997 07
1997 04
1997 01
1996 10
1996 07
1996 04
0
1996 01
0
Unemployment rate
Source: Choi(2001), Bank of Korea, and National Statistical Office.
13
5. Swift Crisis Resolution and Economic
Recovery
Cleaning up
Non-performing Loans
Accelerating
Liberalization
Improving
Corporate Governance
Expanding
Social Safety Net
Improved
External
Positions
- Early Graduation from
the IMF Program
- Foreign Reserves of more than
USD 200bn in 2004
Rapid
Economic
Recovery
- GDP Growth: -6.7% (1998)
 10.7% (1999)
- Unemployment: 6.8% (1998)
 3.5% (2004)
- Debt-equity Ratio: 396% (1997)
Stronger
 182 (2002)
Corporate and
- No. of Banks: 33 (1997)
Financial Sector  20 (2001)
14
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
15
• 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 to bridge the gap between EDPs and annual
budgeting
∗ Not published to the public
∗ Not tightly linked to annual budgeting
16
• 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
17
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
18
• 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,
and monetary policy to MPB, FSC, and BoK,
respectively.
– Still in charge of coordinating economic policies
19
• 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
20