A Brief Introduction to the Korean Economy

Dec. 03, 2003

Yung-Soo Shin

Republic of Korea

                                                                                  

Agenda

• Where’re we now?– Quantitative Data

• How’s the miracle made?– Economic Development Process– Did the miracle end?

• Financial Crisis in 1997

• Will the growth be continued?– Future growth engines

1. Where’re we now?

General information

• Location –Eastern Asia, southern half of the Korean Peninsula

Generation Information

• Independence : 1945– Economic exploitation under the Japanese colonial rule

from 1910 to 1945

• Creation of the Republic of Korea : 1948– Democratic government established in the U.S-sponsored

south• Communists in the Soviet-sponsored north

• Korean War : 1950-53– Over 40% of industrial facilities and 20% of housing

stocks destroyed

General information

• Area

– The total area of the peninsula: 222,154 sq km

• similar to the size of Britain

– The area of South Korea : 99,313 sq km(45% of the Peninsula)

• about the size of Hungary

General information

• Population(2002) : 47.6 million– Density : 479 people per sq km– Growth rate : 3%(1960s), 2%(1970s), 0.7%(2002) – North Korea : 22.3 million

• Urban Population(2002) : 83.0%

• Ethnic groups : homogeneous

• Languages : Korean– Invented by the King Sejong in 1443

General information

• Literacy(2002) : 98.0%

• Life expectancy(2002) : 73.9

• Gini coefficient(1996) : 0.2954

• Employment Structure(1960-2002)– Primary : 63.0% to 9.7%– Secondary : 8.7% to 19.1%– Tertiary : 28.3% to 71.2%

General information

• Economy scale(1962-2002)– GDP : US$2.3 billion to US$477 billion– GDP per capita : US$87 to US$10,013– The World 12th largest Economy– 29th OECD member since 1996

• GDP Composition by sector(2002)– agriculture: 4.0%– industry: 40.9%– services: 55.1%

• Exports of goods(% of GDP, 2001) : 35.6%

General information

• ICT Sector Exports in Total Merchandise Exports (2001) : 31.0%

• Expenditures for R&D(% of GDP)(2002) : 2.7%

• Number of internet users : 26.3 million– 55.1% of the Population

• Broadband service subscribers : 10.4 mill.– more than 70% of all households

General information

• Foreign trade(2002, US$ mill.)– Export : 162,471– Import : 152,126– Trade balance : 10,344

• Exports by types of goods(2002, US$ mill.)– Electronics : 63,574(39.1%)

• Semi-conductor : 16,631(10.2%), Communication Equip : 13,619(8.4%), Computer : 12,941(8.0%)

– Chemical & Petro : 21,592(13.3%)– Vehicle : 14,779(9.1%)– Vessel : 10,867(6.7%)– Machinery : 9,764(6.0%)– Steel & Metal : 9,312(5.7%) >>Heavy Ind.: 82.7%

Exports by types of goods(2002)

Primary(2.5%)

Steel & Metal(5.7%)

Light Indstry(14.9%)

Electronics(39.1%)

Machinary(6.0%)

Chemical &Petro(13.3%)

Vehicle(9.1%)

Vessel(6.7%)

Exports by country or region(2002)

OthersAfrica

OceaniaTaiwanMiddle East

La. AmericaHong K(6.2)

J apan(9.3)ASEAN(11.3

EU(13.4)China(14.6)

USA(20.2)

0 10000 20000 30000 40000

Exp

ort

s

General information

• Imports by types of goods(2002, US$ mill.)– Raw materials :76,063(50.0%)– Capital goods : 56,399(37.1%)– Consumer goods : 18,795(12.4%)

» Total imports : 152,126(100.0)

• Import Partners(2002, US$ mill.)– Japan 29,856(19.6%) – USA 23,009(15.1%) – Middle East 20,881(13.7%) – China 17,400(11.4%) – EU 21,803(11.2%) – ASEAN 16,757(11.0%), etc.

Imports by country or region(2002)

Others

La. America

Taiwan

Oceania

Asean(11.0)

EU(11.2)

China(11.4)

M.East(13.7

USA(15.1)

J apan(19.6)

0 5000 10000 15000 20000 25000 30000

Imp

ort

s

2. How’s the miracle made?

Economic Development Process

• 1960s : Launch of Economic Development Plans & Industrialization

• 1970s : Promotion of Heavy and Chemical Industries

• 1980s : Strengthening of Economic Stabilization Efforts

• 1990s : Weakening of Economic Constitution– 1997 : Financial Crisis

Launch of Industrialization in the 1960s

• Five-Year Economic Development Plan launched in 1962

• Promotion of Labor-intensive export industries : Textiles, Plywood, Wig

– Extensive export promotion measures • Low-interest rate policy, tax exemptions and tariff rebates to export in

dustries

– Efficient mobilization and allocation of investment resources • Specialized banks, Foreign Capital Inducement Act

Key Economic Indicators in the ‘60s

1962 1969Annual

Change(%)

GNP per capita(US$) 87 210 12.5

Real GDP Growth Rate(%) 2.1 13.8 8.7

Current A/C Balance(Mill. US$) -55.5 -548.6 -

Exports(Million US$) 54.8 658.3 41.5

Imports(Million US$) 390.1 1,650.0 24.7

Gross Domestic Invest. Ratio(%) 11.8 27.9 -

Gross Saving Ratio(%) 11.0 21.4 -

Consumer Price inflation(%) - 11.6 11.4

Promotion of Heavy & Chemical Industries in the 1970s

• Gradual Weakening of Competitiveness of labor-intensive light industries– Protectionism and world-wide stagnation caused by

the first oil crisis– Rapid wage increase and fierce competition from other

developing countries

• Strategic objectives modified : Promoting heavy and chemical industries– Shipbuilding, steel, automobiles, machinery and

petrochemicals

Key Economic Indicators in the ‘70s

1970 1979Annual

Change(%)

GNP per capita(US$) 243 1,636 22.8

Real GDP Growth Rate(%) 8.8 7.1 8.8

Current A/C Balance(Mill. US$) -622.5 -4,151.1 -

Exports(Million US$) 882.2 14,704.5 36.4

Imports(Million US$) 1,804.2 19,100.0 27.7

Gross Domestic Invest. Ratio(%) 26.2 36.2 -

Gross Saving Ratio(%) 19.0 29.9 -

Consumer Price inflation(%) 16.9 18.5 15.3

Economic Stabilization Efforts in the 1980s

• Priority in economic policy shifted from growth to stability– To cope with the 2nd oil crisis, domestic political

turmoil, and huge current account deficit– Tight monetary and fiscal policies

• From 1986 GDP growth accelerated due to ‘3 lows’– Low oil prices, low int’l interest rates and low US

Dollars to JPY– Surplus in Current Account Balance

• 4.7 US$ bill.(’86), 10.0(’87), 14.5(’88), 5.3(’89)

Key Economic Indicators in the ’80s

1980 1989Annual

Change(%)

GNP per capita(US$) 1,598 5,185 12.2

Real GDP Growth Rate(%) -2.1 6.1 7.5

Current A/C Balance(Bill. US$) -5.3 5.4 -

Exports(Million US$) 17,505 62,377 15.2

Imports(Million US$) 22,292 61,465 11.9

Gross Domestic Invest. Ratio(%) 32.2 33.8 -

Gross Saving Ratio(%) 24.4 37.6 -

Consumer Price inflation(%) 28.7 5.7 8.4

Weakening of Economic Constitution in the 1990s

• High-cost, low-efficiency industrial structure deepened– High wages, high land prices & high interest rates– Over-regulation & government meddling in the

financial & corporate sectors

• Intense competition– Rapid catch-up growth of late-starter developing

countries– Launch of WTO, acceleration of market opening to

meet OECD entry criteria

Key Economic Indicators in the ’90s

1990 1996Annual

Change(%)

GNP per capita(US$) 5,886 11,380 11.9

Real GDP Growth Rate(%) 9.0 6.8 7.6

Current A/C Balance(Billion US$) -2.0 -23.0 -

Exports(Million US$) 65,016 129,715 12.2

Imports(Million US$) 69,844 150,339 13.6

Gross Domestic invest. ratio(%) 37.6 38.1 -

Gross Saving Ratio(%) 37.5 33.8 -

Consumer Price inflation(%) 8.5 4.9 6.4

Financial Crisis in 1997

• Nov. 1997 Korea turned to IMF stand-by funds due to lack of FX Reserves

• Three fundamental weaknesses

– Moral hazard in Corporate Sector : “too big to fail” mentality

– Poor Financial system : government direction in allocating capital and poor credit analysis and internal risk control mechanisms

– Large level of short-term foreign debt : following the liberalization of short-term overseas borrowing in 1993

Policy Initiatives to Overcome the Crisis

• Thoroughgoing structural reform

• Corporate sector– Improving corporate governance to force the chaebols to focus on

profitability and shareholders value

• Financial sector– Rehabilitating the financial system by re-capitalizing viable financi

al institutions and addressing the NPL problem– Establishing a new supervisory framework for the financial sector

in order to avoid future crises

Policy Initiatives to Overcome the Crisis

• Public sector– Reducing government’s role through Privatization

of state-owned enterprises and by regulatory reform

• Labor sector – Increasing the flexibility of labor markets by

loosening controls on layoffs and the use of temporary workers while strengthening the social safety net

Fully repaid US$19.5 bill. IMF emergency funds on Aug. 2001

Key Economic Indicators since 1997

1997 1998 1999 2000 2001 2002

GNP per capita(US$) 10,315 6,744 8,595 9,770 8,900 10,013

Real GDP Growth Rate(%)

5.0 -6.7 10.9 9.3 3.0 6.3

Current A/C Bal.(Bil. US$) -8.2 40.4 24.5 12.2 8.6 6.1

Exports(Bill. US$) 136.2 132.3 143.7 172.3 150.4 162.5

Imports(Bill. US$) 144.6 93.3 119.8 160.5 141.1 152.1

Gross Dom. Inv.Ratio(%) 34.4 21.3 26.9 28.3 26.8 -

Gross Saving Ratio(%) 33.4 33.9 32.9 32.4 29.9 -

Consumer Price Infl.(%) 4.4 7.5 0.8 2.3 4.1 2.7

Unemployment Rate(%) 2.6 7.0 6.3 4.1 3.8 3.1

3. Will the growth be continued?

Background to Ten Engines of Growth

• Leading industries over the last 4 decades– 1960s : Light Industry(Textiles, Plywood, Wig)– 1970s : Heavy & Chemical Industry(Steel, Machinery,

Chemicals)– 1980s : Fabricating & Processing Industry(Electronics,

Shipbuilding, Automobile)– 1990s : IT Industry(Semi-conductor, Computer,

Communications Equipment)– 2000s : ?

• GDP Growth Rate Trend– 1962-1990: 8.9%, 1990-1996: 7.1%, 1996-2003: 5.2%– GDP per capita : stalled at US$10,000 level since 1995

Background to Ten Engines of Growth

• Nut-cracker situation– Between the Advanced and the Developing countries

• The Korean government has selected “ten major engines of growth”

– To achieve per capita income of UD$20,000, raising export USD121.3billion and creating 1.42million jobs by 2007

Ten Engines of Growth

Sector Main Items

Goal(by 2007)

Export(USD bil.)

Employment(1,000

Persons)

Digital TV/Broadcasting DTV/DMB/Broadcasting System 15.5 198

Display LDC/LED/PDP/Organic EL 18.6 130

Intelligent Robot Home Robot/Medical Robot 0.5 4

Next Generation VehiclesIntelligent & Environment-friendly Vehicles

25 240

Next Generation Semiconductor

Next Generation Memory/SoC 35 30

Next Generation Mobile System

4G/Telematics 22.8 724

Intelligent Home N/WHome Networking/Intelligent Information Home Electronics

28.5 310

Digital Contents Contents/Built-in S/W 2 234

Next Generation Battery Rechargeable Battery/Fuel Cell 5.4 46

BiotechnologyBiochip/Artificial Organ/New Drug

4.43 45

Thank youfor your attention!