dr_woo_kbe korea dev process

8/3/2019 Dr_Woo_KBE Korea Dev Process

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Chapter 2 & 3Overview of the Koreas Development Process until 1997

The Challenges for Koreas Development Strategies

2006. 6. 8Cheonsik WOO, [email protected]


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Part I:Part I: Synoptic Review ofKoreas Economic DevelopmentPart II: Korea and KBE : Synoptic Review & AssessmentKorea and KBE : Synoptic Review & Assessment

(1997~2002)(1997~2002)

Part III: The Korean Economy Today: Challenges fromThe Korean Economy Today: Challenges fromLongLong--term, Structural Perspectiveterm, Structural Perspective

Part IV:Part IV: Prospect and Key Policy AgendasProspect and Key Policy Agendas


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Part I:

Synoptic Review ofKoreas Economic Development


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1. Transformation of the Korean Economy

A. Economic Growth

6 Five-Year EconomicDevelopment Plans

2003P19801962 1970 1995

5,000

10,000

6787

11,432

7,355

1953

Per Capita GNI

(US$)

19901945

12,646

100(1964)

1,000(1977)

1998

Big PushLiberation

(1945)

Korean War

(1950~53)

OECD

(1996)

F. Crisis

(1997)


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B. Changes in Industrial Structure

Employment Structure

Manufacturing

63.07.9

28.3

1960

Service

Sector

19.2

71.5

9.3

ServiceSector

Agriculture /Fisheries

Manufacturing

Agriculture /

Fisheries

200232.5

63.2

4.3

ServiceSector

Agriculture /

Fisheries

Manufacturing

36.8

15.9

47.3

Manufacturing

Agriculture /

FisheriesService Sector

GDP Structure


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ExportCommodity

Profile

1960 1970 1990 19991980

HCI Product

Agricultural

Product

LightIndustry

Product

50%

Wig Automobile SemiconductorTextile

2003

Semiconductor, Mobile

Phone, DTV, Display,

Automobile, Ship-building,

etc.

79.8%

14.1%

6.1%

C. Changes in Export Commodity Profile

- from Agriculture to Manufacturing /

- from Light Industry to Heavy and Chemical Industry


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3.5

Russia

Japan

USAustraliaDenmark

CanadaUK

NetherlandsKorea

SpainItalyPoland

Austria

Switzerland

FinlandFranceGermany

Turkey

China

IndiaBrazil

0

1000

2000

3000

4000

5000

6000

0 0.5 1 1.5 2 2.5 3

R&D expenditure as % of GDP

Researchers(permillion

population)

* Technological Capabilities: R&D


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2. Economic Take-off with Outward-looking

Development Strategy (1960-80)

A. Economic Conditions of the early 1960s

CapitalShortage

WeakTechnology Base

UnderdevelopedPrivate Sector

AbundantLabor

StrongEconomic will

High Level of

Education?

(-) (+)


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B. Working Mechanism of the Outward-looking

(Export-oriented) Development StrategyForeign

Reserves

Repr

oductio

n

S

Export

PromotionManufacturing

Processing

PrivateEnterprises

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)

S

* Started with the First 5-Year Development Plan (1962)

Market

Mechanism


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C. Change in Industrial Policies during the 1970s

Mobilizing Financial

Resources (Policy Loans)

Selecting NationalChampions (Chaebol)

Accelerating Competition

Iron and steel Electronics Petro-chemical products Automobile Ship-building Machinery

Light Industry to Heavy and Chemical Industry (HCI)(HCI drive set off in 1973)

from general export promotion to the picking-the-winners policy- respond to wage increase- respond to increased international competition in light industries

- nurture defense industries ( the Nixon Doctrine)


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3. Changes in Development Strategy(1980-2000)

A. Limits of the Government-led Development

Inefficient Resource Allocation

Macroeconomic Instability

Rising Inequality

Financial Suppressiondue 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%)


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B. Stabilization Policies in the Early 1980s

Budget Freeze/CutZero-Based Budgeting

Phasing-out of PolicyLoans and InterestRate Deregulation

InvestmentAdjustment in HCI

Inflationat around 3%

Inflationat around 3%

DisinflationDisinflation

Current AccountSurpluses

Current AccountSurpluses

Strong ExportsStrong Exports

GDP Growth of8% per annum

GDP Growth of8% per annum

HighEconomic Growth

High

Economic Growth


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* Technological Capability Building-up

1960-1970s : Building institutions

- KIST (1966); MOST(1967); KAIST(1973)

- Technology Development Promotion Act (1967)

1980s: National R&D Programs (NRDP, 1982)- Private firms began to act

1990s: Mission-oriented R&D by line ministries (Targeted, top-down)

- Private/public partnership in technology development

Govt : PrivateGovt : Private

R&D/GDP (%)R&D/GDP (%)

ResearchersResearchers

33

71 : 29

0.38

5,628

428

64 : 36

0.77

18,434

4,600

19 : 81

1.87

70,503

197019701970 198019801980 199019901990GERD (US$, Mil.)GERD (US$, Mil.) 16,000

25 : 75

2.64

198,171

200320032003

Changes in R&D Activities


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4. Delayed Economic Reform and

Financial Crisis of 1997

IncreasedVulnerability to

External Shocks

IMFRescue Package

Massive Capital Outflow Denied Rollover of

Short-term External Debt

Continued

Government Intervention /

WeakPrudential Regulation

Large NPLsin the Financial

Sector

South-east AsianCrisis

HighCorporate

Debt LeverageWidespread

Moral Hazard


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Firm Failures and Unemployment, 1996-99

05

101520

2530

10

10

10

11

10

10

10

11

10

10

10

11

10

10

10

11

20

20

(%)

05,001,0001,5002,0002,5003,0003,5004,000

Overnight inter-bank call rate Unemployment rate

No. of firm failures

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

5 S ift C i i R l ti d E i


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5. Swift Crisis Resolution and Economic

Recovery

Cleaning up

Non-performing Loans

AcceleratingLiberalization

Improving

Corporate Governance

Expanding

Social Safety Net

- Early Graduation from

the IMF Program

- Foreign Reserves of more thanUSD 200bn in 2004

- Early Graduation fromthe IMF Program

- Foreign Reserves of more thanUSD 200bn in 2004

Improved

ExternalPositions

Improved

ExternalPositions

- GDP Growth:-6.7% (98) 10.7% (99)- Unemployment:

6.8% (98) 3.5% (04)

- GDP Growth:

-6.7% (98) 10.7% (99)- Unemployment:

6.8% (98) 3.5% (04)

RapidEconomicRecovery

RapidEconomicRecovery

- Debt-equity Ratio:

396% (97) 182 (02)- No. of Banks:

33 (97) 20 (01)

- Debt-equity Ratio:396% (97) 182 (02)

- No. of Banks:33 (97) 20 (01)

StrongerCorporate andFinancial Sector

Stronger

Corporate andFinancial Sector


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Corporate Sector Reform

- Chaebols: required to eliminate existing cross-debt guarantees

- Exit of 55 non-viable firms

- Corporate workout programs: IBRD to provide expertise

- Big deals: core competencies, reducing excessive capacity,creating efficient management structures

Market Liberalization- Eliminating foreign equity ownership ceilings

- Hostile M&As by foreigners

- Legal basis for FDI: FIPA (foreign investment promotion act)

- Phasing-out of remaining Import barriers(e.g. import-diversification program)


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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 andmobilizing 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 theeconomy

Giving a greater role to private initiatives

Reflecting a growing concern on equity issues

Medium-term Fiscal Plan introduced in the early 1980s tobridge the gap between EDPs and annual budgeting

Not published to the public

Not tightly linked to annual budgeting


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Part II:

Korea and KBE: Synoptic Review

1 S


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The Knowledge Strategy of Korea

- Officially documented by

(1) KBE Master-plan (Strategy Report: MOFE-KDI 1999)

(2) Three-Year Action Plan (NEAC 2000)

- endeavor to seek for & anchor

New Development Paradigm for the Age of Knowledge Economy* - though not widely recognized among the general public, but

Overall, many notable attainments but serious limitations as well- policy initiatives until 2002 ended up as an unfinished mission

- engendering/confronted with a set of new overarching challenges

Knowledge Revolution/Derive stopped being a policy buzzword- But basic spirit/tenet carried over to the present government

1. Summary


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1999 0098975 10 11

12

1 4

Knowledge Campaign by the Press (esp. Vision Korea by Maeil)

The WB joined(W B-OECD:

Koreas KBE Report)

Booze-Allen-Hamilton Report

McKinsey ReportMonitor Report

Macro

K

BE

IMFCrisis

NEAC

CrisisManagement(-6.7 % G)

Rebound & Recovery(10.9 % --> 9.3%)

12

ResearchProject

PublicHearing

Implementation

StrategyReport

3-YearsAction Plan

PresidentialMandate

Policy Forum

(KDI -MOFE)

01-02

Setback & Regaining(3.0% -> 6.2 %) ?

World Knowledge Forum

Road to KBE: Background and Proceeding ( ~ 2002)

Si h fi i l i i K l d l i ff &


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Since the financial crisis, Knowledge revolution set off &a strong move toward a knowledgetrong move toward a knowledge--driven economydriven economy

-- Synergetic Interplay of the New PrivateSynergetic Interplay of the New Private--Public Initiatives =>Public Initiatives =>helped unleash the hidden energy and Khelped unleash the hidden energy and K--potentials of the Korean societypotentials of the Korean society

Private-Sector

Initiatives

-Corporate, Media

- New and ongoing

New PolicyDrive/Support

Restructuring Efforts

& Knowledge Strategy

Huge Dynamic Energy and K-Potentials of theKorean Society/People

* IT-Readiness, Huge Learning Potential, Will to Perform

* Suppressed for long and just waiting to be unreleased

The 1997Crisis

2 S f 2000


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2. The Strategy Report of 2000

1. Reinforcing Market FundamentalsThorough Reforms of 4 Major Sectors

* Financial, Corporate, Labor, Public

2. Full Opening-up/Liberalization Attract foreign MNEs (Aggressive, Proactive)

Create New, Open Social/Cultural Environment

3. Upgrading Innovative CapacitiesEducation/Training, S&T/R&D, ICT, KBI

Fusion of internal & external resources

* Cope with the Impending Threat of New Digital Divide

3- Strategic Thrusts

(2000 Strategy Report) Koreas KBE Vision & Strategy


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Core

Micro-PolicyAreas

Transparency Flexibility

Credibility

Full Opening-up

(Attracting MNEs)

Pillars of

Development

Strategy

Enhancing Internal

Innovative Capacity

Open Culture

Globally Connected

Better Supply Chain

Vision

MNEs & Rising Strategic Importance of East Asia (esp. China) Chance for Far-fetching Structural Reforms due to the Crisis

High Absorptive Capacity (High Motivation & Learning Abilities)

Reliable Industrial and Tech. Base built on Indigenous Capabilities

Opportunities

Strength

Resources Gap (Absolute Gap in Knowledge, Technology, and Capital)

Institutional Gap (Gap in various Systemic Assets. eg. Basic Market Order)

Rapid Industrialization of China and Other NIEs

Erosion of Reform Momentum Danger of Social Disintegration

Weakness

A Leading KBE of the 21st Century

~ 2010: Harnessing Basis and Transforming into a KBE

~ 2002: Grounding-up of Basic Conditions needed for the Transition

Threats

Improving

Market Fundamentals

(Structural Reforms)

Education &HRD

Science &Technology

K-Industries SocialSafety Net

InformationInfra

3 Th Th Y KBE A i Pl


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Scope: Policy Actions for the Micro-Part of the Strategy Report* The other 2 parts left to macro-restructuring policy underway

Contents: 5 Sectors, 18 Target Tasks; 83 Specific Tasks- 5 Policy Areas: Information, Education&HRD,

S&T/Innovation, K-industries, Digital Divide

Goals1. Leapfrog to top 10 knowledge-information leaders in the globe2. Upgrade educational environments to OECD standard

3. Harness S&T base to help reach G-7 standard

Implementation and Monitoring- 5 Task Forces involving 19 Ministries; 17 Research Institutes

* Each Task to be implemented by Relevant Ministry(ies)

* all to be tracked and coordinated by MOFE (6th Task Force)

- Report : the Private Committee ofNEAC --> President* NEAC (National Economic Advisory Council)

3. The Three-Year KBE Action Plan (Apr. 00~02)

The Three-Year KBE Action Plan: Contents


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Sector Target Tasks (18 Total)

Informitization

(20)

Complete a basic info infra, such as an optic cable network

Foster an education information network

Manage a national knowledge/ information system

Build a cyber government

Change mindsets with respect to IT

Build a sound and secure knowledge societyS&T/Innovation(15)

Reinforce a strategic approach in R&D investment

Facilitate industry-university- research centers cooperation

Build an efficient support system for research

Enhance an understanding of s&T and scientistsK-basedIndustries(16)

Build an industrial infrastructure for a KBE

Nurture a new knowledge-intensitve industry

Upgrade traditional industries through IT

Education andHRD/HRM(19)

Reform education system for creativity and competitiveness Revamp vocational training system

Build a sound system for a fair and efficient labor market

Digital Divide(13)

Expand access to information and IT training

Empower the vulnerable and enhance their life quality

The Three Year KBE Action Plan: Contents

4 Outcomes


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equity and debt ratio

0

200

400

600

94 95 96 97 98 99 00

0

200

400

600

Debt rat io(%) SME debt rat io(%)

Trends in FDI

0

1000

2000

3000

4000

5000

96 97 98 99 00 01

0

5

10

15

20

Cases Volume

Trends in R&D invest

0

50,000

100,000

150,000

94 95 96 97 98 99 00

SMEs Total

Market interest ratio(%)

0

5

10

15

94 95 96 97 98 99 00 01

Dramatic Changes resulted- both in Macro- and Micro-Dimensions

- All in the Desirable Directions

Treds in Venture

0

2,000

4,000

6,000

8,000

10,000

12,000

97 98 99 00 01

no.

0

0

0

1

1

1

1

Inbound FDI

Interest Rate

Venture Startups

R&D Investment

Firms Debt Ratio

4. Outcomes

IT R l ti N Gl b l IT P h


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Broadband Internet User (per 100 people)

13.9

3.20.80.3

0

2

4

6

8

10

12

14

16

Korea USA UK EU

Online Stock Trading (June 2000)

28%

1.8%

7.2%

40%

57%

0

10

20

30

40

50

60

Korea USA France Japan Sweden

366 7311,634

3,103

10,860

19,040

095 96 97 98 99 00

24,380

01

Internet Users in Korea

IT Industry Output and Share of GDP

75.5

88.1

115

148 152

0

20

40

60

80

100

120

140

160

1997 1998 1999 2000 2001

TrillionKor

eanwon

IT Revolution a New Global IT Powerhouse

>> Some changes to the point of excessiveness21


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Successful corporate and financial market reforms =>Korea firms debt-equity ratio has become evenlower than those of advanced countries.

Successful corporate and financial market reforms =>Korea firms debt-equity ratio has become evenlower than those of advanced countries.

>> Some changes to the point of excessiveness

Korea US Japan Germany

Intl Comparison of Debt-equity ratio (%)(the end of 2004)

* Figures for Japan and Germany are the end of 2002.

104

141162

241

Debt Equity Ratios for Firms :Large firms vs. SMEs

0

50

100

150

200

250

300

350

400

450

500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

SMEs

Large firms

4 Lessons of the Korean K Model : Bright Side


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Strong Supports from the Top Leadership- Crisis and new Millennium: need a new initiative/hope

* helped by private-sector champion group (Media)

In todays global world, all citizens must become the next

generations intellectuals, Kim Dae Jung (former president of Korea)

cited by Kochan of MIT in his recent book

Timely and Due Regard to Digital Divide

- rural area; disadvantageous group; under-attended/tapped groups

- addressed at national welfare policy level

Dual Monitoring System (Strong & Weak points)

- Micro-areas addressed by 3-Year Action Plan

- Macro-areas addressed by the Crisis-Management/Restructuring Plan

4. Lessons of the Korean K-Model : Bright Side


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Micro-Dimensions: Private + Public Initiatives well Matched

- existing/latent private-sector demands supported/bolstered the govt* ICT, Venture startup

Proper Policy Mix (for IT) : Supply-side + Demand-Side

- Supply Side : distribution of low-priced PC, building

Infra(high-speed internet), support for venture startups

(KOSDAQ) and e-business

- Demand Side : offering massive computer training,

mandating S/W purchase to all government institutions

Tapping onto and collaboration with external expertise

- Collaboration/alliances with WB-OECD (Foreign consulting firms)

* WB-OECD report: complementary to Strategy Report and 3-year Plan

4 Lessons of the Korean K-Model : Deficiency Side


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Deficiency in Implementation Strategy>> Limitations/Problems of the 3-Year KBE Plan

WB-OECD(2000) says:

KBE requires an integrated systemic approach because of interactionsamong policies & actors across traditionally disparate areas of policymaking

Undertaking key inter-linked reforms requires:

* buy-in from stakeholders and population at large

* coordination and setting of monitorable goals

* monitoring, evaluation & constant adjustment(Feedback mechanism)

* institutionalizing the process so that it spans changes in government

4. Lessons of the Korean K-Model : Deficiency Side

In Korea,


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,

Poor coordination among government agencies yet* though improving gradually (NS&TC, HRD Committee)

Insufficient public consultation and consensus building process- strong legacy oftop-down, centralized approach

- main policies vulnerable to political cycle* problematic esp. in major micro-reform issues such as education

Inadequate/Insufficient Monitoring of Implementation- Poor performance evaluation/monitoring mechanism/capacity

- NEAC-directed monitoring process did not work (self-complacency) .

* No effective feedback from anywhere

* Mechanical compilation of line ministries reports

Limitations of the first round of Koreas K-model became highly visible

around 2003, and with the coming of the new Roh government=> searching for a new, more comprehensive strategy that

encompasses not only economic but social & political dimensions.

5. New Vision & Strategy Work (2004)


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>> Socio-economic Environment of the Roh Administration in 2003 The Roh administration was inaugurated under a mandate for change

However, the new administration faced internal and external challenges

The Roh administration was inaugurated under a mandate for change

However, the new administration faced internal and external challenges

Create new political culture governed by rules and justice

Regain growth momentum and economic vitality

Alleviate regional disparity

Resolve tension on the Korean Peninsula

Create new political culture governed by rules and justice

Regain growth momentum and economic vitality

Alleviate regional disparity

Resolve tension on the Korean Peninsula

Mandate for ChangeMandate for ChangeMandate for Change

Increased world economic and political

uncertainties caused by the Iraqi war

Potential downgrade of sovereign credit ratingdue to the North Korean nuclear impasse

Slowdown of exports to Asia due tothe outbreak of SARS

Increased world economic and political

uncertainties caused by the Iraqi war Potential downgrade of sovereign credit rating

due to the North Korean nuclear impasse

Slowdown of exports to Asia due tothe outbreak of SARS

External ChallengesExternal ChallengesExternal Challenges

Economic slowdown due to a sharp decrease

in domestic demand

Continued financial market uncertaintiesdue to the SK Global incident and creditdelinquencies

Labor disputes and other social conflicts

Economic slowdown due to a sharp decrease

in domestic demand Continued financial market uncertainties

due to the SK Global incident and creditdelinquencies

Labor disputes and other social conflicts

Internal ChallengesInternal ChallengesInternal Challenges


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>> Challenges to the Korean Economy

Rapid

globalization

RapidRapid

globalizationglobalization

Emergence of

China

Emergence ofEmergence of

ChinaChina

Tensions on the

Korean Peninsula

Tensions on theTensions on the

Korean PeninsulaKorean Peninsula

Rapid

globalization

RapidRapid

globalizationglobalization

Emergence of

China

Emergence ofergence of

ChinaChina

Em

Tensions on the

Korean Peninsula

Tensions on theTensions on the

Korean PeninsulaKorean Peninsula

Slowdown ingrowth

momentum

Slowdown inSlowdown ingrowthgrowth

momentummomentum

Increased

social tension

IncreasedIncreased

social tensionsocial tension

Fast growth of China in both traditional and hi-tech sectors

Chinas increasing share of foreign investment into East Asia

Fast growth of China in both traditional and hi-tech sectors

Chinas increasing share of foreign investment into East Asia

Increased systemic risk due to political uncertainty in the Korean peninsula

Intensified geo-political complexity in Northeast Asia

Increased systemic risk due to political uncertainty in the Korean peninsula

Intensified geo-political complexity in Northeast Asia

Financial and corporate sectors under-prepared to meet global standards

Increased pressure to liberalize agricultural and service sectors (DDA, FTA)

Financial and corporate sectors under-prepared to meet global standards

Increased pressure to liberalize agricultural and service sectors (DDA, FTA)

Reduction in labor and capital inputs Inadequate technological and institutional capabilities Reduction in labor and capital inputs Inadequate technological and institutional capabilities

Intensified conflicts across regions, genders, generations and income groups

Insufficient social safety net for the unemployed,

and worsening income distribution

Intensified conflicts across regions, genders, generations and income groups

Insufficient social safety net for the unemployed,

and worsening income distribution

Diagnosis: Problems are structural in nature and due to continuing challenges Diagnosis: Problems are structural in nature and due to continuing challenges

>> Basic Scheme of the New VisionDynamic Korea: a Nation on the Move


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Dynamic KoreaDynamic KoreaDynamic Korea

Regain economic vitality and

improve the welfare of the needy

Political, Administrative and Social ReformPolitical, Administrative and Social Reform

Innovation Integration

Northeast AsianEconomic Hub

UpgradingTechnology &Manpower

Market Reform

EnhancingSocial Well-being

Vision

Two pillars forachieving vision

SevenStrategicInitiatives

Balanced

TerritorialDevelopment

Stable LaborRelations

Short-term

Action

- Dynamic Korea: a Nation on the Move -


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Part III:

The Korea Economy: ChallengesFrom Long-term, Structural Perspective

1. Summary


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Sagging and unstable economyLosing growth momentum

Losing industrial competitiveness

Job instability (Jobless Growth)Increasing disparity (new divide)

Sagging and unstable economy

Losing growth momentum

Losing industrial competitiveness

Job instability (Jobless Growth)Increasing disparity (new divide)

Internal Strains

Globalization

S&T revolution (IT, NT, BT etc)

Surging-up of China ( + DDA, FTA)

Globalization

S&T revolution (IT, NT, BT etc)

Surging-up of China ( + DDA, FTA)

External Pressure

Fundamental changes under way

- Industrial structure and leading players- Market and policy environments- Firm behavior/strategy and exterior interaction

- Polarization across/ within industries and firms

Fundamental changes under way

- Industrial structure and leading players- Market and policy environments

- Firm behavior/strategy and exterior interaction

- Polarization across/ within industries and firms

Korea continues to undergo deep & fast structural changes Mired into severe confusion / disputes about the Present and the FutureKorea continues to undergo deep & fast structural changes Mired into severe confusion / disputes about the Present and the Future

2 Sh t t d t ti l th

2. Growth : Low, unstable trajectory


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Growth performance:- more precarious since the 1997 crisis- third business cycles under way now

Growth performance:- more precarious since the 1997 crisis- third business cycles under way now

3.1

(%)

1981

1990 1991

2000

1.7

7.8

1.2

6.3

0.6

5.2/4.6

2003

2012

HumanCapital

TFP

Labor

Capital

3.6 3.2

2.00.80.9

0.6

1.7

1.0

2.0/1,5

Long-term potential growth rate:- forecast to fall esp. due to falling

labor input (aging problem)

Long-term potential growth rate:- forecast to fall esp. due to falling

labor input (aging problem)

Growth Rate (1981-2004) Potential Growth Rate (1981-2012)

2. Short-term and potential growth

6.2

7.3

10.8

8.16.8

10.6

11.1

10.6

6.7

9.29.4

5.96.1

8.5 9.27.0

4.7

-6.9

9.5 8.5

3.8

7.0

3.1

4.6

-8

-4

0

4

8

12

1981 1985 1989 1993 1997 2001

GowhRe%)

2004

4.05.0

3 J bl G th

2. Employment and Jobs


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The elasticity changes erratically, butappears to fall below the long-term trend lately

Source of Problems

Business downturn

- Rapid contraction of the service industry

Reduced labor demand in the manufacturing sector

- Rapid decline of labor intensive industries.

occupied mostly by SMEs

Inflexible labor market

- labor unions in public sector and large firms

- Restrictive lay-offs and hiring practices

1975 1980 1985 1990 1995 20000.10.20.30.40.50.60.7 (2 Year Moving Average)

Trend Line

Source: KDI* Employment Elasticity =

Employment growth Rate / Economic Growth Rate

On top of precarious and low growth,a concern is rising over the sign of Jobless Growth

On top of precarious and low growth,a concern is rising over the sign of Jobless Growth

Employment Elasticity (1970-2002) Current Situation and Issues

3. Jobless Growth

2

26


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New challenges arise in both quantity & quality of jobsNew challenges arise in both quantity & quality of jobs

Employment rate remains low compared to advanced nations* (96) 63.7 (02) 63.3 (03) 63.0 (04) 63.6 %

Employment gains occurred mostly in the non-regular jobs

U-shaped job-creation curve:* Mid-level income jobs , while low- & high-level income jobs

Employment rate remains low compared to advanced nations* (96) 63.7 (02) 63.3 (03) 63.0 (04) 63.6 %

Employment gains occurred mostly in the non-regular jobs

U-shaped job-creation curve:* Mid-level income jobs , while low- & high-level income jobs

Employment Changes by Income-

Deciles Jobs Group (93~04)

Employment Changes by IncomeEmployment Changes by Income--

Deciles Jobs Group (Deciles Jobs Group (93~93~04)04)(%)

Total Employment &

Non-regular Workers

Total Employment &Total Employment &

NonNon--regular Workersregular Workers

(thousand persons, %)

2001 2002 2003 2004

Employ-ment

21,572

3,636

22,169

(2.8)

22,139

(-0.1)

22.557

(1.9)

Non-Regular

3,839

(5.6)

4,606

(20.0)

5,394

(17.1)

276

635

204

108

508

137

579558

-73-20

-200

-100

0

100

200

300

400

500

600

700

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

* The figures in ( ) are the rate of increase (%)Lower higher

4 Income Disparity

3. Economic and Social Disparity


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Also, mounting concern over greater income disparity Also, mounting concern over greater income disparity

Gini-Coefficients (1992~2003)

0.25

0.27

0.29

0.31

0.33

0.35

0.37

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Payroll,

Urban Employees

Total Income, Urban

Employee

Total income,

Entire Workforce

* Income gap among wage earners (2/3 of total workforce) +

* among the whole workforce including self-employers and unpaid workers (1/3)=> New Working Poor groups: SMEs labor, self-employers, and temps

4. Income Disparity

0.342

0.359

0.290

< Rising Income Disparity >

1 Structure

II. Polarization: the New Overarching Challenge

Polarization in Korea


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Drastic changes in economic environment,=> Rapid progress of Polarization (Divide)Drastic changes in economic environment,=> Rapid progress of Polarization (Divide)

Put up steadily during 1990s + amplified during the recent recession

Self-sustaining mechanism in effect

Put up steadily during 1990s + amplified during the recent recession

Self-sustaining mechanism in effect

Industries

Firms

Employment

Income

Innovative

Capacity EducationHRD InvestmentIT-readiness

Wage gap increase

Working-Poor enlarged

(SMEs, Temp, Self-employers)

Manpower

R&D Capabilites

Manufactures vs Services

IT vs Non-IT

LE vs SMEs

Circular Structure of Polarization

1. Structure

>> Cutting Dimensions of Polarization


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45

Manufacturing

Services

0

3

6

9

12

15

2001 2002 2003

1/4

2/4 3/4 4/4 2004

1/4

Light Mfr

HCI

-10

-5

0

5

10

15

20

2001 2002 2003 2/4 3/4 4/4 2004

1/4 1/4

SMEs (< 300)

LE (> 300)

-2

0

2

4

6

8

10

90 92 94 96 98 2000 2002

Growth Gap: Sectors Growth Gap: Industries Earnings by firm size (KOSPI)

-200

0

200

400

600

800

1 2 3 4 5 6 7 8 9 10

(1,000)

Permanent

Contractual

0

5

10

15

20

25

2000 2001 2002 2003

(0.1M KRW)

Wage GapNew Jobs (93~2002)

Low-Paying High-Paying

0.24

0.25

0.26

0.27

0.28

0.29

0.30

92 95 98 2001 2004

1/4

Gini (Wages)

>> Cutting Dimensions of Polarization

5 Industrial Restructuring and Declining Competitiveness (1/2)

4. Industrial Restructuring and Competitiveness


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5. Industrial Restructuring and Declining Competitiveness (1/2)

PolarizationPolarizationPolarization

a few Korean MNEs in electronics and automobile sectors soaring

laying down a foundation for a dynamic, and innovation based growth But, most SMEs and general products losing competitiveness

Services absorbing more labor, but performance sagged relative to mfr. etc

a few Korean MNEs in electronics and automobile sectors soaring

laying down a foundation for a dynamic, and innovation based growth But, most SMEs and general products losing competitiveness

Services absorbing more labor, but performance sagged relative to mfr. etc

Change in

Industrial

organization

Change inChange in

IndustrialIndustrial

organizationorganization

dominance of the domestic conglomerates tripod structure* domestic conglomerates (Chaebols) + foreign MNEs +

new technology-based SMEs (NTBFs)

subcontract relation btw large companies and SMEs changing

dominance of the domestic conglomerates tripod structure* domestic conglomerates (Chaebols) + foreign MNEs +

new technology-based SMEs (NTBFs)

subcontract relation btw large companies and SMEs changing

Upgrading

of FirmsActivities

Upgrading

of FirmsActivities

focus shifting from production to R&D, sales, the other higher VA activities

business streamlining, spin-offs and labor shedding by big companies emerging innovation networks (still undeveloped)

increased cooperation among firms, university and research institutes

focus shifting from production to R&D, sales, the other higher VA activities

business streamlining, spin-offs and labor shedding by big companies emerging innovation networks (still undeveloped)

increased cooperation among firms, university and research institutes

< Deep and wide structural changes under way >

8

< Loosing Industrial Competitiveness : China Shock or Effect? >


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Chinas export structure is rapidly converging withthat of Korea.Chinas export structure is rapidly converging withthat of Korea.

Source: UNCOMTRADE

0%

20%

40%

60%

80%

100%

1993 2004

Medium-high tech

High tech

Low tech

Medium-low tech

Non-manufacturing0%

20%

40%

60%

80%

100%

1993 2004

Medium-high tech

High tech

Low tech

Medium-low tech

Non-manufacturing

Particularly, China achieved a large increase in the export of IT products Particularly, China achieved a large increase in the export of IT products


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DomesticProductionShare

[Textile] [Light Manufactures]

2.1 5.5

11.8

4.0

6.8

15.4

ImportfromChina

1 9 9 0 1 9 9 6 2 0 0 2

1.4

7.9

4.2

1.72.7

4.8

1 9 9 0 1 9 9 6 2 0 0 2

1.9

4.7

China

3.32.5 Kor

[Manufacturing]

1 9 9 0 2 0 0 0 2 0 0 3

6.9

10.5

China

5.8 8.2 Kor

[Textiles]

1 9 9 0 2 0 0 0 2 0 0 3

7.3

3.3

15.9

6.0

DomesticProductionShare

ImportfromChina

China vs Korea in Global Export Market Crowding-out by Imports from China

Food TextilesClothing WoodProduct Metals Minerals Computer TelecomEquipment HomeAppliancesMachinery precisionmachine

48.6

19.4

6.4

22.9

3.56.5

0.0 0.0 0.0

1.0

0.0

5.6

35.8

31.1

12.5 13.2

25.0

37.5

20.8

11.8 13.311.1

1991~1997

2000~2003

auto

Proportion of the Vulnerable Korean Firms (%)Light

Manufacturing ICT

Products

Primitive estimate by KIET (2004)

Overall Competitiveness Position of the Korean SMEsSMEs in Korea >


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As a result, widening gap as against big leading firms As a result, widening gap as against big leading firms

* Productivity differential increased- Especially in technology-intensive industries such as IT equipment and parts

* Productivity differential increased

- Especially in technology-intensive industries such as IT equipment and parts

Notable positive changes, but most SMEs remain inapt and vulnerable Notable positive changes, but most SMEs remain inapt and vulnerable

* Passive or Reactive in overall business orientation and capabilities

- unable to proactively respond to rapid structural changes under way

- accustomed to surval under government protection/support

* especially weak in technological (R&D) capabilities

- SMEs with technological innovation capabilities: 18.1%

(higher than in the past way, but still below advanced countries (30~40%)

* also weak in other upstream and downstream activities

- design, marketing (esp. international), brand-exploitation etc.

- requisite professional business services market under-developed

* Passive or Reactive in overall business orientation and capabilities

- unable to proactively respond to rapid structural changes under way

- accustomed to surval under government protection/support

* especially weak in technological (R&D) capabilities

- SMEs with technological innovation capabilities: 18.1%

(higher than in the past way, but still below advanced countries (30~40%)

* also weak in other upstream and downstream activities

- design, marketing (esp. international), brand-exploitation etc.

- requisite professional business services market under-developed

Ove a Co pet t ve ess os t o o t e o ea S s

>> Productivity Gaps (1)


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Productivity Gap against Large Firms

Increased across industries and among firms since the crisis Increased across industries and among firms since the crisis

* labor productivity: SMEs gap against large firms enlarged steadily

* TFP: SMEs once outperformed large firms -> reversed during 90~97 -> gap widening

- TFP growth during 1998~1991: SMEs 8.87 vs LEs = 15.21

* labor productivity: SMEs gap against large firms enlarged steadily

* TFP: SMEs once outperformed large firms -> reversed during 90~97 -> gap widening- TFP growth during 1998~1991: SMEs 8.87 vs LEs = 15.21

y p ( )

0

20

40

60

80

100

120

140

160

180

200

1984 1990 1995 2002

1-9 10-19 20-99 100-299 >300

0

2

4

6

8

10

12

14

16

18

20

1985-1989 1989-1997 1998-2002

(%)

1-9 10-19 20-99 100-299 > 300

Labor Productivity Total Factor Productivity

Size groups are in number of employees

>> Productivity Gaps (2)


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Changes in Productivity by Industries

0

5

10

15

20

25

30

1985-89 1989-97 1998-01

T&C

Chemicals

Semi-conductor

E Parts

IT equipment

Auto

(%)

0

50

100

150

200

250

300

350

400

450

1984 1990 1995 2001

T&C

Machinery

E&Emillion Won per capita

Chemicals

Auto

Machinery

Increased gap between SMEs and large firms is driven by quantum leap ofKoreas vanguard firms in Electronics

Increased gap between SMEs and large firms is driven by quantum leap ofKoreas vanguard firms in Electronics

* Productivity of EE, esp. IT equipment, electronic parts, quantum leaped since mid 90s

(led by Koreas vanguard companies such as Samsung, LG, Hyundai etc.)

* In 2001, Productivity of EE is ten times higher than T&C

* Productivity of EE, esp. IT equipment, electronic parts, quantum leaped since mid 90s

(led by Koreas vanguard companies such as Samsung, LG, Hyundai etc.)

* In 2001, Productivity of EE is ten times higher than T&C

Labor Productivity Total Factor Productivity

[Parts, Materials, and Machinery Industries]


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Export share & Income-generating effectIncome generating effect of exports(GDP/export)

Week competitiveness taxing Korea more and morePolarization btw Exports-Domestic Demand (recession)

Week competitiveness taxing Korea more and morePolarization btw Exports-Domestic Demand (recession)

* Import-dependency keeps rising (equipment machine:94 (98) 137 (03))* Spillover of exports falling since mid 90s (esp. in IT sector)

- employment creating effect : 25.8 (95) 15.7 (00)

* Import-dependency keeps rising (equipment machine:94 (98) 137 (03))* Spillover of exports falling since mid 90s (esp. in IT sector)

- employment creating effect : 25.8 (95) 15.7 (00)

Export Share (%)

IGE

Auto

Machinery

Semi-Conductor

Chemicals

IT

Equipment

0.3

0.4

0.5

0.6

0.7

0.8

0 5 10 15

1990

1995

2000

0.55

0.60

0.65

0.70

0.75

1980 1983 1985 1988 1990 1993 1995 1998 2000 2003

0.70

0.63

0.58*

* Figure for 03 is estimate

Income-generating effect of advanced nations: Japan 0.89 (00), US 0.91(90)

28

< Under-developed Services Sector>


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Job quality & income disparity largely reflect Koreasundeveloped service sector

Job quality & income disparity largely reflect Koreas

undeveloped service sector

Employment Real GDP

Korea

Japan

US

Germany

20

30

40

50

60

70

80

90

80 86 92 98 01

(%)

Korea

Japan

US

Germany

40

50

60

70

80

80 86 92 98 01

(%)

Source: OECD, STAN D/B

Share of the Service Sector

Service sector has expanded steadily in employment while Real GDPhas remained stagnant at 50~52% Low-productivity in Korean servicesector

Service sector has expanded steadily in employment while Real GDPhas remained stagnant at 50~52% Low-productivity in Korean servicesector

29

< Under-developed Services Sector>


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Productivity & Employment Changes in Korean Service Sector (92. 97, 02)Productivity & Employment Changes in Korean Service Sector (92. 97, 02)

Labor Productivity (10 thousands KRW)

Empom(TenTpersons))

WholesaleRetail

Hotels

Restaurants

TransportStorage

Telecom.

FinanceInsurance

Real EstateBusiness

Edu R&D

Medical Health

Others

0

50

100

150

200

250

300

350

400

450

1000 2000 3000 4000 5000 6000

92

97 2002

Most of employment gain in service sector since 1990 occurred in

low-productivity traditional service sector

Most of employment gain in service sector since 1990 occurred in

low-productivity traditional service sector

Employment in high-productivity sectors has been stagnant/shrunken

* traditional services : wholesale/retail/restaurants/hotels

Employment in high-productivity sectors has been stagnant/shrunken

* traditional services : wholesale/retail/restaurants/hotels

>> Emerging Trend in Korean Service Sector


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Productivity Changes in Service since 1990Productivity Changes in Service since 1990Productivity Changes in Service since 1990

(1992=100)

Service Total

Transport,

Telecom

Finance

Insurance

Real Estate &

Business Services

40

60

80

100

120

140

160

180

200

1992 1994 1996 1998 2000 2002

Level relative to yr. 1992

Jobs Creation by Work Type & IndustryJobs Creation by Work Type & IndustryJobs Creation by Work Type & Industry

Mfg, Construction, Service

-30

-20

-10

0

10

20

30

40

50

60

70

Mfr

(Temp)

Services

(Temp)

Const

(Temp)

Mfg

(Perm)

Services

(Perm)

Const

(perm)

Employment(tenT)

0

0.5

1.0

1.5

2.0

2.5

Wage(

10M

KRW)

Employment ChangesWage

Toward late 1990s, a new trend appears to set in.Toward late 1990s, a new trend appears to set in.

The modern business-related sectors started to pick up in productivity,compared to traditional sectors

After 2000, the service sector created most high-paying permanent jobs

The modern business-related sectors started to pick up in productivity,compared to traditional sectors

After 2000, the service sector created most high-paying permanent jobs

K b d FDI h b dil i i h

22< Underperforming FDI & the Threat of Hollowing-out>


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Korean out-bound FDI has been steadily increasing, whereas

in-bound FDI has been sluggish after peaking in 1999.

Korean out-bound FDI has been steadily increasing, whereas

in-bound FDI has been sluggish after peaking in 1999. As for manufacturing, the amount of out-bound FDI has

exceeded in-bound FDI during 2001-03.

- The pick-up of in-bound FDI in 2004 was mainly due to technical factors

such as introduction of shortened tax-exemption period (from 10 to 7 yrs)beginning January 2005.

As for manufacturing, the amount of out-bound FDI hasexceeded in-bound FDI during 2001-03.

- The pick-up of in-bound FDI in 2004 was mainly due to technical factors

such as introduction of shortened tax-exemption period (from 10 to 7 yrs)beginning January 2005.

(Trillion won)

0.0

4.0

8.0

12.0

16.0

20.0

1991 1993 1995 1997 1999 2001 2003

In-boundFDI

Out-boundFDI

(Trillion won)< All industries > < Manufacturing >

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1997 1998 1999 2000 2001 2002 2003 2004

In-bound FDI

Out-bound FDI


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Part IV:

Prospect and Key Policy Agendas

1. Vision 2030 : A New Korea for the New Future


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Project: National Vision and Long-Term Fiscal Strategy (MPB-KDI)

* Launched July 2005 (now underway)

Design a vision plan with long-term well-calibrated financing strategy

- ensure implementablity of the plan, spanning political cycle

- prepare for the distant, but anticipatable future (2030)

esp. tackling Aging, Social Cohesion, the Korea Peninsula Issues

1 year budgeting 5-years rolling plan long-term planning

Spending within revenue strategic/pro-active fiscal policy

6 Policy Areas: Growth momentum, HRD, Social welfare,

Globalization, Social Capital, Governance

* Social capital & National Governance added as two keystones

Specialists on S&TE, Sociology, political science, public

administration etc joining T/F

Vision : Prosperous and Decent Korea :whether to co-prosper or to co-perish?

>> New Agendas and Mandates

1 Reform to Secure Extra financial Resources


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1. Reform to Secure Extra-financial Resources

Overhauling of taxation system : Property tax, service sector

New Budget allocation Rule among Big Budgets Sectors- Education vs S&T vs ICT vs SME vs social welfare

2. Decentralization/Regionalization

- Korea too big to make a single unit of big policy experiments

- Implementation/Experiments at Sub-national level desirable

* Needed for Edu&HRD, R&D/Innovation, Social Welfare etc.

* Induce constructive competition among Regions

3. New Leadership & Conflict Resolution Mechanism/Capacity- New Government Leadership

* Market vs Government

- Social Capital (Was the Red Devils Syndrome Dream?)

25

2. Policy Focus 1 & 233


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Establish an advanced national system for technological innovation

- Increase R&D investment, Integrate technological, human resources, and

industrial development policies

- Establish a new system for industry-academia collaboration

Education reform

- Increase diversity and specialization through decentralization & deregulation

Establish an advanced national system for technological innovation

- Increase R&D investment, Integrate technological, human resources, and

industrial development policies

- Establish a new system for industry-academia collaboration

Education reform

- Increase diversity and specialization through decentralization & deregulation

Upgrading Technology & ManpowerUpgrading Technology & Manpower

Ensure minimum living standard for all, and encourage soundeconomic activities

- Stabilize real estate market: Implement comprehensive measures, Rationalize

tax code, etc.

- Expand the social safety net: Extend the coverage of welfare, Reinforce

welfare delivery system, etc.

- Promote social equality: Enhance female participation and representation, etc.

Ensure minimum living standard for all, and encourage soundeconomic activities

- Stabilize real estate market: Implement comprehensive measures, Rationalize

tax code, etc.

- Expand the social safety net: Extend the coverage of welfare, Reinforce

welfare delivery system, etc.

- Promote social equality: Enhance female participation and representation, etc.

Enhancing Social Well-Being NetEnhancing Social Well-Being Net

Huge hindrances & mounting skepticism for problem solving

The Case ofEducation: Suggestion for Possible Solution:


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1) Increase Budget (Strategic Fiscal Plan)

- esp. on higher education & pre-school sector

- to help the needy students/family

2) Small Institutional Reform

- Tighten Performance Monitoring* budget as an investment not expenditure

- Information Disclosure

- Deregulation (esp. concerning the

usage of school properties/ facilities)

3) Big Institutional Reform

- Educational Administration

- Governance of Universities

- Equalization Policy

- Tax System

The Magic Triangle to RevitalizeKoreas Education & HRD

gg

- Big Deal to Ride out of the Policy Deadlock Situation- New alliances & compromises among various key players

25

3. Policy Focus 3 : FDI & FTA33


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Strategic inducement of In-bound foreign direct investmentStrategic inducement of In-bound foreign direct investment

Lift remaining restrictions, Improve investment incentives

Strengthen internal capabilities for a logistical, financial and R&D hub in

the region

Lift remaining restrictions, Improve investment incentives

Strengthen internal capabilities for a logistical, financial and R&D hub in

the region

Korea has far under-performed in its potentialas a destination for FDI.

Korea has far under-performed in its potentialas a destination for FDI.

During 2000-02, Korea was ranked 18th out of 140 countries

in potential for attracting FDI, but Koreas actual total in-bound FDI ranked 107th (UNCTAD,2004)

During 2000-02, Korea was ranked 18th out of 140 countries

in potential for attracting FDI, but Koreas actual total in-bound FDI ranked 107th (UNCTAD,2004)

25

[Ref.] Factors behind Decrease in In[Ref.] Factors behind Decrease in In--bound FDIbound FDI (1/2)(1/2)25


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0%

20%

40%

60%

80%

100%

Korea

Hong

Kong

Singap

ore China

Language &

livingconditionsCostcompetitivenessFavorablepolicies

High-skilledlabor force

Industrial &technolo ical

Rigid labormarket

High laborcost

Inconsistent& opaquepolicies

Others

Regulations

32.0%

15.5%15.5%

10.7%

26.3%

< Competitive factors in attracting FDI by country > < Discouraging factors in doing business inKorea >

According to KDIs survey of foreign investors, Korea offerscompetitiveness in market size, industrial and technologicalbase, and high-skilled labor force.

According to KDIs survey of foreign investors, Korea offerscompetitiveness in market size, industrial and technologicalbase, and high-skilled labor force.

However, rigid labor market and regulations act as barriers. However, rigid labor market and regulations act as barriers.

>> Policy Focus 3 : FTA>> Policy Focus 3 : FTA

FTA A i d B d

FTA A i d B d


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Chile, Singapore, EFTA

Canada, ASEAN, USA, Japan, Mexico

China, EAFTA, India, MERCOSUR, EU

FTA completedNegotiation inprogress or to bestartedFTA underconsideration

Koreas Promotion of FTA

FTA : Asia and BeyondFTA : Asia and Beyond

Korea seeks to be a global partner through FTA and initiative to be

a Northeast Asian Economic Hub.

- Korea aims to enhance regional cooperation and become a R&D, logistical and

financial services hub in Asia.

Korea seeks to be a global partner through FTA and initiative to be

a Northeast Asian Economic Hub.

- Korea aims to enhance regional cooperation and become a R&D, logistical and

financial services hub in Asia.

To Conclude:


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65

o Co c ude:

The 1st round of Knowledge Revolution over with Korea- essentially vital early awakening stage

- successful awakening of substantial some, invoking of newenergy and momentum, and phasing in new policy initiatives,

The 2

nd

round of Knowledge Revolution yet to come- from awakening of some to the awakening of all, &

- from phasing-in to more difficult task of rooting down

and routine change management

- will take more robust government leadership matched by

broader private support and participation (engagement of all)

dr_woo_kbe korea dev process

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