Korea

1
Koreas Economic Development Experiences

• Taeho Bark
• The Graduate School of International Studies
  (GSIS)
• Seoul National University
• March 30, 2005

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Contents

• Korea in the Late 1950s
• The Korean Economy 40 Years Later
• Overview of Koreas Economic Development
• Evaluation of Koreas Economic Development
• Factors Contributing to the Success
• Lessons from the Korean Experiences
• Is the Korean Model Replicable?

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1. Korea in the Late 1950s

• Largely rural peasant economy, wholly lacking
  natural resources
• Has the highest density of people on arable land
  in the world
• Exports were 3 of GDP (88 of which were primary
  products)
• Crucially dependent on foreign aid-transfers
  (More than 10 of GDP)
• The third poorest country in Asia with no hope
  for growth

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2. The Korean Economy 40 Years Later

• Real GDP per capita grew 10-fold
• - Almost 3 times that of Brazil and almost 3.5
  times
• that of Mexico in 2000
• Exports grew on average by more than 30 a year
  over three decades and more
• - Exports grew to 37 of GDP in 2000
  
• - 253 bil (Manufacturing 97) in
  2004
• Dramatic improvements in the quality of life
• - Infant mortality dropped, life expectancy
  rose, real
• wage rose, unemployment fell
• The 13th largest economy in the world
• - FX reserves (4th), shipbuilding (2nd), steel
  (6th),
• automobile (6th), DRAM
  semiconductors (1st)

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3. Overview of Koreas Economic Development

• lt Export-led growth 1962-1972gt
• Policies
• - Currency devaluation
• - Interest rate reform for high savings
• - Nationalization of commercial banks
• - Establishment of specialized banks
• - Limited import liberalization
• Export incentives Industry Neutral
• - Tax deduction, wastage allowances
• - Export credit subsidies
• - Based on export performance

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3. Overview of Koreas Economic Development

• lt H C industrial promotion 1973-1979gt
• Policies
• Designate the industries (steel, machinery,
  petro-chemical, shipbuilding, electronics)
• Long-term subsidized loans National Investment
  Fund (Credit rationing)
• - Tax holidays and investment tax credits
• - Accelerated depreciation
• - Reduced export incentives
• - Expansionary monetary policy
• Government guarantee of foreign loans

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3. Overview of Koreas Economic Development

• lt Stabilization, liberalization and renewed
• growth 1980-1996gt
• Policies
• - Anti-inflationary policy measures
• - The HCI drive was toned down
• - Abolished preferential lending rates
• - Privatized the commercial banks
• - Deregulation
• - Market opening (goods and services, FDI,
  financial markets)
• - Financial support for small and medium firms

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4. Evaluation of Koreas Economic Development

• lt Successful Aspects gt
• Rapid Growth
• - GDP, Capital formation (Investment)
• Strong export performance
• Upgrading the economic structure
• - Larger share of manufacturing industry
• Establishing competitive heavy industrial sector
• Establishing infrastructure for industrial
  development

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4. Evaluation of Koreas Economic Development

• lt Negative Side Effects gt
• Price distortions
• Distortions in financial sectors
• - Non-performing loans
• Excess capacity in some HC sectors
• - Overlapping investment
• Increased economic power of Chaebols and
  resource- wasting competition out of dynastic
  pride
• - Sales of the top five business groups 50
  of GDP (1991)
• - SMEs were crowded out handicap for
  competitiveness

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4. Evaluation of Koreas Economic Development

• lt Negative Side Effects (Contd)gt
• Excessively high debt/equity ratios for Chaebols
• - Moral hazard from government loan
  guarantees
• Lack of foreign competition in the domestic
  market
• - Producer protection policy restrictive
  trade and FDI
• policy
• Nationalistic sentiments in the general public
• Less focus on social welfare and environment
  protection programs

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5. Factors Contributing to the Success

• Strong Political leadership and institutional
  building
• - Early reform, well-prepared
  planning, administrative
• support (export target, monthly export
  meeting presided
• by the President, HCI Committee)
• Consistent growth-oriented economic policy
• - Outward-looking and
  industry-oriented development
• strategy
• - Stable macroeconomic policy
• Interventionist policy based on technical and
  economic criteria
• Risk-sharing among government, financial
  institution and business enterprises

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5. Factors Contributing to the Success

• Emphasis on education and human capital
• - Establishment of RD centers, recruiting
  Korean scientists
• and engineers from abroad
• Dynamic entrepreneurship
• Well-trained labor force
• Successful borrowing from abroad
• Relatively clean government officials
• Eagerness to catch-up
• Liberal world trading environment

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6. Lessons from the Korean Experiences

• No secrete recipe, an outward orientation with
  strong incentives for exports and a commitment to
  growth through trade are the key
• Address fundamental problems
• - Remove bottlenecks and Tackle problems of
  poor
• infrastructure
• - Stick with reforms
• - Sound macroeconomic policies
• - Economic liberalization and importance of
  foreign trade
• recognized

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6. Lessons from the Korean Experiences

• Remove any bias against exports
• - Realistic exchange rate incentives for
  exporters
• - Inputs for exports at world prices
• - Incentives are uniformly applied across
  all exporters
• Leaderships
• - Strong commitment from President
• - Large conglomerates
• Political stability
• - Consistent policy implementation
• - Long-term goals can be set

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6. Lessons from the Korean Experiences

• Policies need be closely monitored and modified
  if necessary
• - Monthly export performance meeting chaired
  by
• President
• - HC Committee
• Investment in human capital and RD
• The competition in the domestic market
• - Liberalization of trade and FDI must be
  continued

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7. Is the Korean Model Replicable?

• Is export promotion policy possible?
• - WTO prohibits trade distorting subsidies
  export
• subsidies, import substitution subsidies
• - Allowed subsidies RD, environment,
  regional
• development
• Is specific sector targeting industrial policy
  possible? (especially for HC sectors)
• - Too much risks financing, excess capacity
  in the
• world, foresight and ability of government,
  able
• entrepreneurs