Korea Development Institute The Korean Economy and Future Opportunities for New Zealand June, 2006 Jung Taik HYUN President Korea Development Institute

Contents 1. Transformation of the Korean Economy (1945-2005) 2. The Current Status of the Korean Economy 3. Challenges Ahead 4. Korea’s Efforts for Globalization 5. Korea and New Zealand – Economic Opportunities

1. Transformation of the Korean Economy (1945-2005)

Per Capita Income (US$) 1.1 Overview - Per Capita Income Per Capita Income (US$) 16,291 14,193 11,432 10,000 Six 5-Year-Economic- Development Plans 7,355 Financial Crisis 5,000 Liberation from Japanese Colonial Rule 1,000(1977) OECD Member 100(1964) 89 67 1945 1953 1961 1970 1980 1990 1995 1998 2004 2005

1.1 Overview - GDP Structure & Employment Structure Agriculture, fisheries, and mining 4% Agriculture, fisheries, and mining 45% Services 40% Manufacturing 28% 1963 2005 Services 68% Manufacturing 15% < Employment Structure > Agriculture, fisheries, and mining 6% Services 29% Agriculture, fisheries, and mining 63% Manufacturing 8% Manufacturing 19% 1963 2005 Services 75%

< Economic Conditions of the Early 1960s > 1.2 Economic Take-Off with Outward-looking Development Strategy (1/5) < Economic Conditions of the Early 1960s > Capital Shortage Abundant Labor High Level of Education Weak Technology Base ? Strong Economic will Underdeveloped Private Sector

1.2 Economic Take-Off with Outward-looking Development Strategy (2/5) < Working Mechanism of Outward-looking Development Strategy > Foreign Capital Inducement (Economic Aids External Debt) Economic Growth Reproduction Export Promotion Manufacturing Processing Private Enterprises Capital Good Imports Raw Material Imports Technology Development Financial  Tax Support Well-educated Labor force Foreign Technology Imports Government

< Growth in Imports and Exports > 1.2 Economic Take-Off with Outward-looking Development Strategy (3/5) < Growth in Imports and Exports > 20 40 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 (% of GDP) Imports Exports Trade balance

 Petro-Chemical Products Selecting National Champions(“Chaebol”) 1.2 Economic Take-Off with Outward-looking Development Strategy (4/5)  Iron and Steel  Electronics  Petro-Chemical Products  Automobile  Ship-building  Machinery Policy Change Toward HCI Development Mobilizing Financial Resources Selecting National Champions(“Chaebol”)

1.2 Economic Take-Off with Outward-looking Development Strategy (5/5) < Changes in Export Commodity Profile: From Light Industry to Heavy Industry > Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. Export Commodity Profile Wig Textile Automobile Semiconductor 79.8% HCI Product 50% Light Industry Product 14.1% Agricultural Product 6.1% 1980 1960 1970 1990 1999 2003

< Pitfalls of the Government-led Economic Development > 1.3 Changes in the Development Strategy (1980-97) < Pitfalls of the Government-led Economic Development > Financial repression due to prolonged government intervention Over-investment in HCIs High inflation and large fiscal deficits Inefficient resource allocation Macroeconomic instability Rising inequality Negative economic growth (-3.9%) and political crisis in 1980 Change in policy stance: “Liberalization and Stabilization”

1.4 Delayed Economic Reforms and the Financial Crisis (1/2) < The 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

1.4 Delayed Economic Reforms and the Financial Crisis (2/2) Cleaning up non-performing loans Rapid economic recovery - GDP growth: -6.7% (1998)  10.7% (1999) - Unemployment: 6.8% (1998)  3.7% (2005) Accelerating liberalization Improving corporate governance Improved external positions - Early graduation from the IMF program - Foreign reserves of more than USD 200bn in 2005 Expanding social safety net Stronger corporate and financial sector - Debt-equity ratio: 396% (1997)  182 (2002) - No. of banks: 33 (1997)  20 (2001)

2. The Current Status of the Korean Economy

2.1 The Current Status of the Korean Economy  KDI 경제전망 2.1 The Current Status of the Korean Economy I. 최근 경제동향 / 15 (y-o-y, %) 2005p 2006 Yearly 1/4p 2/4 3/4 4/4 GDP 4.0 6.1 5.8 5.1 4.4 5.3 Private Consumption 3.2 4.8 4.7 Facility Investment 6.9 9.9 10.4 7.0 8.4 Merchandise Exports 9.7 11.6 12.6 11.8 11.9 Note: P denotes Preliminary. Source: KDI

2.2 Risk Factors of the Korean Economy  세계경제 여건-리스크 요인 Possibility of further increase in petroleum price Low production capacity of petroleum producing countries Geo-political risks such as Iranian nuclear crisis - WTI ($/bbl): 61.17 (Dec. 2005) → 70.19 (June 14, 2006) … 14.7% - Dubai ($/bbl): 53.49 (Dec. 2005) → 66.77 (June 14, 2006) … 24.8% Further decrease in exchange rate (Korean Won/US$) Sustaining Current account imbalance of the US Expansion of the Korean economy - Won/Dollar: 1011.9 (Dec. 2005) → 954.1 (June 13, 2006) … 6.1%

3. Challenges Ahead

3.1 Potential Growth Rate and Productivity (1/2) Economic growth of Korea depended on resources such as capital and labor. Korea has shown one of the highest saving ratio. It is well endowed with highly educated and well trained labor. < School Enrollment Rate > 20 40 60 80 100 1970 1980 1990 2000 2005 Kindergarten Elementary Middle High College (%) the number of enrollments in a specified age range Note: Enrollment rate = --------------------------------------------------------------------- the whole population in the same age range

(before economic crisis) (after economic crisis)  잠재성장률 추세변화와 요인 3.1 Potential Growth Rate and Productivity (2/2) III. 한국의 잠재 경제성장률과 그 제고방안 / 19 Growth depending on factor accumulation ran its course, and productivity should lead further growth. Education and training system toward the knowledge-based economy Promoting public and private R&D activities Creating an investment-friendly environment Upgrading the institutional quality < Potential Growth and Contributions > (%) 6.9 6.1 1.8 1.8 Productivity 4.8 3.9 3.3 1.6 Capital 2.3 1.2 Labor 1.0 0.9 1991∼2000 1991∼1997 (before economic crisis) 2003∼2012 (after economic crisis) Source: KDI

3.2 Income Disparity < Gini-Coefficients (1992-2003) > Income disparity increased, reflecting structural changes in industries and labor markets. Income gap widened among wage earners (66% of workforce) & among the whole households including self-employed & unpaid workers (33% of workforce). However, the disparity shows the sign of decline since early 2000s. < Gini-Coefficients (1992-2003) > 0.37 0.359 0.35 Total income, Entire Workforce 0.342 0.33 Total Income, Urban Employee 0.31 0.290 0.29 Payroll, Urban Employees 0.27 0.25 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

3.3 Industrial Restructuring and Challenges from China (1/5) 중고기술제품 중저기술제품 Positive correlation between RCA (or profitability) and the share of value added by technological level. Employment share in low tech continues to decrease, while employment share remains unchanged in high tech despite its increase in the share of value added. < Korea : Share of Value Added by Technological Level > < Korea : Share of Employment by Technological Level > High tech Low tech Medium-high tech Medium-low tech Source: Korea National Statistical Office, Mining and Manufacturing Survey

3.3 Industrial Restructuring and Challenges from China (2/5) During 1993-2004, Korea gained a CA in high-tech products and improved medium-high tech, while CA declined in medium-low tech and Low tech products. China showed similar phases of restructuring and became challenges to the Korean economy. 0.5 1 1.5 2 2.5 1993 2004 US China Korea Japan Medium-low tech Medium high tech High tech Low tech

3.3 Industrial Restructuring and Challenges from China (3/5) 2 China’s export structure is rapidly converging with that of Korea. Particularly, China achieved a large increase in the export of IT products. < China > < Korea > 0% 20% 40% 60% 80% 100% 1993 2004 Medium-high tech High tech Low tech Medium-low tech Non-manufacturing 0% 20% 40% 60% 80% 100% 1993 2004 Medium-high tech High tech Low tech Medium-low tech Non-manufacturing Source: UNCOMTRADE

3.3 Industrial Restructuring and Challenges from China (4/5) 6 Korea maintained CA in some high-tech products such as radio, TV and communication products. Although China gained CA in some high-tech products, technology level involved in the production process of these products differs greatly in China. * Production of some products only needs simple labor-intensive process. While Korea’s CA in semiconductors and elec.valves decreased, it is still higher than other major developed economies. <Computers & Office products> <Radio, TV & Comm Equip> <Semiconductor & Electronic Valves> 0.5 1 1.5 2 2.5 3 1993 2004 0.5 1 1.5 2 2.5 3 3.5 1993 2004 4 Korea 3.5 Japan 3 Korea Japan 2.5 US Japan 2 US China 1.5 Korea 1 US China China 0.5 1993 2004

3.3 Industrial Restructuring and Challenges from China (5/5) Among major Medium-high tech products,Korea has achieved CA in auto products since 2001. Korea still has CDA in machines and equipment, however, CA index improved rapidly. < Major Medium-High tech Products > <Motor Vehicles & Trailers> <Machines & Equipment> 0.5 1 1.5 2 2.5 1993 2004 China Korea US Japan 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 1993 2004 Japan US Korea China

< Share of the old (65+) > 3.4 Aging Society The speed of population aging is far higher in Korea than other major developed countries. Reforming the public pension and health insurance program Extending employment opportunities for female, elderly and disadvantaged groups < Share of the old (65+) > 5 10 15 20 25 30 35 40 60 65 70 75 80 85 90 95 00 05 45 50 (% of total population) EU Korea Japan US Australia and New Zealand

4. Korea’s Efforts for Globalization

< Korea’s Promotion of FTA > 4.1 Korea’s Efforts for Globalization (1/2) Korea pursues to be a global leader, through FTA and the plan to be a Northeast Asian Economic Hub. Korea aims to enhance regional cooperation and to be a center of R&D, logistics and financial services in Asia. It also endeavors to transform into an open and globalized economy, promoting FTA with a variety of economies. < Korea’s Promotion of FTA > FTA completed Negotiation in progress or to be started FTA under consideration Chile, Singapore, EFTA, ASEAN USA, Canada, Japan, Mexico China, EAFTA, India, MERCOSUR, EU

4.1 Korea’s Efforts for Globalization (2/2) Korea takes initiatives to improve political stability and economic welfare in the region and in the world. Korea completed FTA talks with Chile, Singapore, EFTA and ASEAN. It started FTA talks with the USA. It opens new era of peace and prosperity in the region through regional cooperation and freer trade. Korea-US FTA will contribute to upgrading Korea for further prosperity. The increased trade, FDI and welfare due to FTA will consolidate its momentum for sustained economic growth. More active participation into global production network will improve efficiency and competitiveness of its industries. Upgrading social system and institutions to meet global standard will provide new opportunities for future development.

5. Korea and New Zealand – Economic Opportunities

< World Trade Volume > < Bilateral Trade Volume > 5.1 K-NZ Bilateral Relationship in Merchandise Trade (1/3) Korea was the 7th largest trade partner of New Zealand in 2005. One of the most striking findings from the two nation’s trade relationship is the complementarity. Comparing the trade relationship between the two countries ten years ago, the importance of Korea to NZ increased. < World Trade Volume > < Bilateral Trade Volume > $265 bil $248 bil Year: 2005 Year: 2005 $890 mil $595 mil $22 bil $25 bil export import export import K to NZ NZ to K Korea New Zealand Source: UN Trade Data, 2005

< Exports of Korea to NZ > 5.1 K-NZ Bilateral Relationship in Merchandise Trade (2/3) Korea has build up comparative advantage in high tech manufacturing product. While Korea exported semiconductors, IT equipment and electronic parts, the nation possessed disadvantage in natural resource. < Exports of Korea to NZ > Year: 2005 other 15% General Machinery 10% IT Equipment 18% Chemical Products 17% Food, Products & Beverages 12% Automobiles 15% Basic Metals 13% Source: UN Trade Data, 2005

5.1 K-NZ Bilateral Relationship in Merchandise Trade (3/3) Major imports of Korea from NZ included wood and bovine meats. Korea’s total imports to NZ was explained by food, beverage and Agriculture, Forestry & Fishery. Primary ferrous metal products and paper products also explained about 6% of exports to Korea respectively. < Imports of Korea from NZ > < Major Imports of Korea > Year: 2005 277 (million) 162 other 8% Printing, Paper Products, Publishing 6% Chemical Products 5% Basic Metals Agriculture Forestry, Fishery 37% Food, Products & Beverages 39% Year: 2005 44 38 25 5 Wood of coniferous species Fruit vegetable Bovine meat Other cheese Food preparations <Food, Products & Beverages> <Agriculture & Forestry, Fishery>

Wood of coniferous species Sheepskins and lambskins 5.2 Market Share of NZ in Korea The share of NZ in Korea market soared up in 2005. In Wood , Fruit, Sheepskins and Bovine, the share of NZ in the Korea market took more comparative advantages than other competitors. Wood of coniferous species 1990 2005 New Zealand 45.2 U.S 17.9 71.3 16.1 Korea Market Fruit, fresh,dried, nes 1990 2005 New Zealand 35.9 U.S 29 44 9.7 Korea Market Sheepskins and lambskins 1990 2005 New Zealand 99.8 England 75 18 0.0 Korea Market Bovine meat, frozen 1990 2005 New Zealand 30.3 Australia 5 58 66.9 Korea Market

5.3 Korea-NZ Bilateral Relationship in Service Sector There should be large opportunities of the expansion of relationship between Korea and NZ in a variety of service sectors. In 2004, it was estimated that overseas expenditure for education reasons reached as much as $5.1 billion. In 2005, 10 million Koreans visited foreign countries and spent $1,239 for their trips. < Overseas Expenditure on Education & Training > < Outbound Tourists and Expenditure > 10,077,619 Year: 2004 Unit: $mil Year: 2004, 2005 Unit: person, $ 8,825,585 2005 2004 $1,239 $3,378 studying abroad $1,169 2005 2004 $1,770 Training abroad Overseas Expenditure - Korea Tourists Expenditure per Capita

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