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, Ship-building, Semiconductor 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