1. Korea Development Institute The Korean Economy: History of Economic Development History of Economic Development The Korean Economy: History of Economic Development History of Economic Development June 2005

2. 2 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

3. 3 1. Transformation of the Korean Economy (1945-2003) A. Growth Trend Liberation from Japanese Colonial Rule 6 Five-Year-Economic- Development Plans Financial Crisis 2003 P 198019621970 1995 5,000 10,000 67 87 11,432 7,355 1953 Per Capita (US$) GNI 1990 1945 12,646 OECD Member 100(1964) 1,000(1977) 1998

4. 4 B. Changes in Industrial Structure Changes in Employment Structure Manufacturing 1960 Service Sector Agriculture / Fisheries Manufacturing Agriculture / Fisheries 2002 Service Sector Agriculture / Fisheries Manufacturing 36.8 15.9 47.3 Manufacturing Agriculture / Fisheries Service Sector Changes in GDP Structure

5. 5 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 Strong Economic will High Level of Education ?

6. 6 B. Working Mechanism of the Outward-looking Development Strategy Economic Growth Reproduction Export Promotion Manufacturing Processing Private Enterprises Government Technology Development Financial Tax Support Well-educated Labor force Foreign Technology Imports Capital Good Imports Raw Material Imports Foreign Capital Inducement (Economic Aids External Debt)

7. 7 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 AVGKORU.S.JPNUKGermany GDPshare 5.57.7 7.04.65.3 Public-financed 4.84.9 4.83.54.54.3 Private-financed 0.62.8 2.21.20.71.0 OECD, Education at a Glance 2003. Korean figures are for 2003.

8. 8 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

9. 9 D. Changing Industrial Structure: from Agriculture to Manufacturing / from Light Industry to Heavy and Chemical Industry 19601970 1990 1999 1980 HCI Product Agricultural Product Light Industry Product 50% Wig Automobile Semiconductor Textile 2003 Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. 84.8% 12.4% 2.8% (ICT, 27.6%) Changes in Export Commodity Profile

10. 10 3. Changes in Development Strategy (1980-2000) A. Pitfalls of the Government-led Economic Development Inefficient Resource Allocation Macroeconomic Instability Rising Inequality Financial Suppression due to Prolonged Government Intervention High Inflation and Large Fiscal Deficits Over-investment in HCI 1979 : Negative Export Growth for the first time since 1960 1980 : Negative Economic Growth (-3.9%)

11. 11 B. Stabilization Policies in the Early 1980s Budget Freeze/Cut Zero-Based Budgeting Phasing-out of Policy Loans and Interest Rate Deregulation Investment Adjustment in HCI Inflation at around 3% Inflation at around 3% Disinflation Current Account Surpluses Current Account Surpluses Strong Exports GDP Growth of 8% per annum GDP Growth of 8% per annum High Economic Growth High Economic Growth

12. 12 4. Delayed Economic Reform and Financial Crisis of 1997 Increased Vulnerability to External Shocks IMF Rescue Package Massive Capital Outflow Denied Rollover of Short-term External Debt Continued Government Intervention / Weak Prudential Regulation Large NPLs in the Financial Sector South-east Asian Crisis High Corporate Debt Leverage Widespread Moral Hazard

13. 13 Firm Failures and Unemployment, 1996-99 0 5 10 15 20 25 30 1996 01 1996 04 1996 07 1996 10 1997 01 1997 04 1997 07 1997 10 1998 01 1998 04 1998 07 1998 10 1999 01 1999 04 1999 07 1999 10 2000 01 2000 04 (%) 0 5,00 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Overnight inter-bank call rateUnemployment rate No. of firm failures Source: Choi(2001), Bank of Korea, and National Statistical Office.

14. 14 5. Swift Crisis Resolution and Economic Recovery Cleaning up Non-performing Loans Accelerating Liberalization Improving Corporate Governance Expanding Social Safety Net - Early Graduation from the IMF Program - Foreign Reserves of more than USD 200bn in 2004 - Early Graduation from the IMF Program - Foreign Reserves of more than USD 200bn in 2004 Improved External Positions Improved External Positions - GDP Growth: -6.7% (1998) 10.7% (1999) - Unemployment: 6.8% (1998) 3.5% (2004) - GDP Growth: -6.7% (1998) 10.7% (1999) - Unemployment: 6.8% (1998) 3.5% (2004) Rapid Economic Recovery Rapid Economic Recovery - Debt-equity Ratio: 396% (1997) 182 (2002) - No. of Banks: 33 (1997) 20 (2001) - Debt-equity Ratio: 396% (1997) 182 (2002) - No. of Banks: 33 (1997) 20 (2001) Stronger Corporate and Financial Sector Stronger Corporate and Financial Sector

15. 15 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

16. 16 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

17. 17 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

18. 18 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

19. 19 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

20. 20 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