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

    The Challenges for Koreas Development Strategies

    2006. 6. 8Cheonsik WOO, KDIcswoo@kdi.re.kr

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    2

    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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    4

    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

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