The Korean Economy:

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

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1. Transformation of the Korean Economy
(1945-2003)
A. Growth Trend
Per Capita
(US$)
GNI 12,646
11,432 (=75,000 CNY)
10,000

6 Five-Year-Economic-
Development Plans 7,355
5,000 Financial
Crisis
Liberation
from Japanese 1,000(1977) OECD
Colonial Rule
67 87 100(1964) Member

1945 1953 1962 1970 1980 1990 1995 1998 2003P

3
 B. Changes in Industrial Structure
Changes in Employment Structure Changes in GDP Structure

Service Agriculture /
Sector Service Sector
Fisheries
28.3 Agriculture /
36.8
Fisheries 1960 47.3
63.0
7.9
Manufacturing 15.9
Manufacturing

Agriculture / Agriculture /
Fisheries Fisheries
9.3 4.3
19.2 2002 32.5
Manufacturing 63.2 Manufacturing
71.5
Service Service
Sector Sector
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2. Economic Take-off with Outward-looking
Development Strategy (1960-80)
A. Economic Conditions of the early 1960s

Capital
Shortage
Abundant
Labor

Weak
Technology Base ? High Level of
Education

Underdeveloped
Private Sector Strong
Economic will

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 B. Working Mechanism of the Outward-looking
Development Strategy
Foreign Capital Inducement Economic Growth
(Economic Aids  External Debt)

S S
Export
Promotion
Manufacturing
Capital Good Imports Processing

Private
Enterprises
Raw Material Imports

Foreign Technology Financial  Tax Support

Government
Imports

Technology Well-educated Labor force

Development
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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.
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 C. Change in Industrial Policies during the 1970s:
from Light Industry to Heavy and Chemical
Industry

• Mobilizing Financial
Resources  Iron and steel
 Electronics
• Selecting National
 Petro-chemical products
Champions  Automobile
(“Chaebol”)  Ship-building
 Machinery
• Accelerating Competition

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 D. Changing Industrial Structure:
from Agriculture to Manufacturing /
from Light Industry to Heavy and Chemical Industry

Changes in Export Commodity Profile

Semiconductor, Mobile Phone,
DTV, Display, Automobile,
Wig Textile Automobile Semiconductor Ship-building, etc.
84.8% HCI Product

(ICT, 27.6%)

50%

Light
Industry
12.4%
Product

2.8% Agricultural
Product
1960 1970 1980 1990 1999 2003

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3. Changes in Development Strategy
(1980-2000)
A. Pitfalls of the Government-led Economic
Development
Financial Suppression
Over-investment in High Inflation and
due to Prolonged
HCI Large Fiscal Deficits
Government Intervention

• Inefficient Resource Allocation

• Macroeconomic Instability
• Rising Inequality

 1979 : Negative Export Growth for the first time since 1960
 1980 : Negative Economic Growth (-3.9%)
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B. Stabilization Policies in the Early 1980s

Budget Freeze/Cut Inflation

Disinflation
Zero-Based Budgeting at around 3%

Phasing-out of Policy Current Account

Loans and Interest Strong Exports
Surpluses
Rate Deregulation

Investment High GDP Growth of

Adjustment in HCI Economic Growth 8% per annum

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 4. Delayed Economic Reform and
Financial Crisis of 1997
High
Corporate
Debt Leverage
Increased
Widespread
Vulnerability to
Moral Hazard
External Shocks
Large NPLs
in the Financial
Sector

Continued
South-east Asian
• Massive Capital Outflow
Government Intervention / • Denied Rollover of
Crisis
Weak Short-term External Debt
Prudential Regulation

IMF
Rescue Package
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 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

0 0
1996 01

1997 04
1996 04

1996 07

1996 10

1997 01

1997 07

1997 10

1998 01

1998 04

1998 07

1998 10

1999 01

1999 04

1999 07

1999 10

2000 01

2000 04
Overnight inter-bank call rate Unemployment rate
No. of firm failures

Source: Choi(2001), Bank of Korea, and National Statistical Office.

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5. Swift Crisis Resolution and Economic
Recovery

Improved - Early Graduation from

Cleaning up the IMF Program
Non-performing Loans External
- Foreign Reserves of more than
Positions USD 200bn in 2004

Accelerating
Liberalization - GDP Growth: -6.7% (1998)
Rapid
 10.7% (1999)
Economic
- Unemployment: 6.8% (1998)
Improving Recovery  3.5% (2004)
Corporate Governance

Stronger - Debt-equity Ratio: 396% (1997)

Expanding  182 (2002)
Corporate and
Social Safety Net - No. of Banks: 33 (1997)
Financial Sector  20 (2001)

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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

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• 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
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• 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

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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

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• 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

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• 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

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