Korea’s Economic Development Experiences Taeho Bark The Graduate School of International Studies (GSIS) Seoul National University March 30, 2005

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

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

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)

3. Overview of Korea’s Economic Development < Export-led growth: 1962-1972> 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

3. Overview of Korea’s Economic Development < H & C industrial promotion: 1973-1979> 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

3. Overview of Korea’s Economic Development < Stabilization, liberalization and renewed growth: 1980-1996> 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

4. Evaluation of Korea’s Economic Development < Successful Aspects > 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

4. Evaluation of Korea’s Economic Development < Negative Side Effects > Price distortions Distortions in financial sectors - Non-performing loans Excess capacity in some H&C 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

4. Evaluation of Korea’s Economic Development < Negative Side Effects (Cont’d)> 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

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

5. Factors Contributing to the Success Emphasis on education and human capital - Establishment of R&D 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

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

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

6. Lessons from the Korean Experiences Policies need be closely monitored and modified if necessary - Monthly export performance meeting chaired by President - H&C Committee Investment in human capital and R&D The competition in the domestic market - Liberalization of trade and FDI must be continued

7. Is the Korean Model Replicable? Is export promotion policy possible? - WTO prohibits trade distorting subsidies: export subsidies, import substitution subsidies - Allowed subsidies: R&D, environment, regional development Is specific sector targeting industrial policy possible? (especially for H&C sectors) - Too much risks: financing, excess capacity in the world, foresight and ability of government, able entrepreneurs