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ECN 5164 ECONOMIC PLANNING AND POLICY

ECN 5164 ECONOMIC PLANNING AND POLICY. PLANNING IN SOUTH KOREA PREPARED BY: ABDUL RAZAK BIN ABU BAKAR MOHD SAKERI BIN ABDUL KADIR AFIDAH AZWA BINTI ABDUL AZIZ SALMIRA BINTI MOHD SHUKRI. OUTLINE OF PRESENTATION TYPES OF ECONOMIC PLANNING THEORETICAL FRAMEWORK OF PLANNING

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ECN 5164 ECONOMIC PLANNING AND POLICY

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  1. ECN 5164ECONOMIC PLANNING AND POLICY PLANNING IN SOUTH KOREA PREPARED BY: ABDUL RAZAK BIN ABU BAKAR MOHD SAKERI BIN ABDUL KADIR AFIDAH AZWA BINTI ABDUL AZIZ SALMIRA BINTI MOHD SHUKRI

  2. OUTLINE OF PRESENTATION • TYPES OF ECONOMIC PLANNING • THEORETICAL FRAMEWORK OF PLANNING • BRIEF ECONOMIC HISTORY • PATHWAY TO ECONOMIC DEVELOPMENT – “ECONOMIC MIRACLE” - FIVE YEAR ECONOMIC PLAN ( EDP1 – EDP4) - ECONOMIC AGENTS • END OF “ECONOMIC MIRACLE” • DEVELOPMENT AFTER PARK’S ADMINISTRATION - EDP5 – EDP7 - FROM PLANNING TO A MARKET ECONOMY : 1979-1990 - KOREA’S GLOBALIZATION IN 1990s • DISCUSSION • CRITIQUES ON KOREA’S ECONOMIC PLANNING • CONCLUSION

  3. ECONOMIC PLANNING Types of Planning • Centralized Physical Planning • Socialist Competitive Planning • Democratic Competitive Planning • Indicative Planning • Forecast Planning

  4. THEORETICAL FRAMEWORK • DEVELOPMENTAL STATE - the developmental state theory is that the state authority should make development its top priority and so by strategically intervening in the market, the state can facilitate economic growth and industrial transformation. - One of the characteristic of developmental state is the state-business coalitions – i.e. the set up of chaebol in South Korea. The success of the Korean developmental state thus lay in its new production-oriented alliances with the dominant classes, which buttressed the state’s capacity to both control and transform, which led to sustained economic transformation - Bureaucrats were not only executors of the will of lawmakers but setters of national goals and standards, and the standards they set drew upon international experience - In particular, the South Korean Economic Planning Board set up an economic policy – the Five Year Economic Development Plans – during the industrialization period (1960s-1980s) provided administrative and financial aids to highly competitive export-oriented industries.

  5. STATE CAPACITY - the ability to mobilize social resources and allocate them to desired ends. - the success of the planning depends much on the ‘state capacity’ - determines by the balance of power between the state and capital - The success of the development project depends not only on the ability of the state to discipline capitalists, but also on an appropriate balance of forces between state and capital, where both feel that their own progress depends on the success of the other partner - largely rests on the character of the distributional alliance, which is, in turn, determined by the distribution of power between state and society -- i.e. the ‘political settlement’. • STATE AUTONOMY - the developmental state has been defined by its autonomy from societal forces and its capacity and capability to implement economic policies effectively. - Economies are neither self-constituting nor autonomous, but always ‘embedded’ within political processes and institutions; just as states ‘rest’ on economic bases, economies in turn ‘rest’ on certain political bases

  6. BRIEF ECONOMIC HISTORY • 1910 – 1945 : JAPANESE COLONIZATION – “AGRICULTURAL FIRST” • 1945 : PARTITION OF KOREA – NORTH & SOUTH • 1949 : GOVERNMENT OF SOUTH KOREA ESTABLISHED • 1950 – 1953 : KOREAN WAR • 1953 – 1957 : SOLID RECOVERY – FOREIGN AID • 1958 – 1960 : STABILIZATION PROGRAM – IMPORT SUBSTITUTION • 1960 - 1970 : DIMINISHING OF FOREIGN AID & RELY HEAVILY ON FOREIGN BORROWING • 1979 : SECOND OIL SHOCK & ASSASSINATION OF PRESIDENT PARK • 1980s – 1990s : WIDE-RANGING ECONOMIC REFORMS

  7. PATHWAY TO ECONOMIC DEVELOPMENT DURING PARK’S ADMINISTRATION – “ECONOMIC MIRACLE” • Introduction of Five – Year Economic Plan (EDP) • Establishment of a more independent economy by means of agricultural self-sufficiency and a heavy industrial base financed by primary commodity exports • Are said to be the key element of the successful progress of the Korean economic transformation from the world’s poorest agrarian society to one of the most fast-paced industrializing economy

  8. ECONOMIC DEVELOPMENT PLANNING 1 (1962-1966) • was to lay a foundation for industrialization, consisted of initial steps toward the building of a self-sufficient industrial structure finance by primary commodity export (Hart-Landsberg, 1987). • The government established the basis for mobilizing investment funds for developing energy industries. • The Plan initiated and accelerated a structural readjustment of industry from subsistence agriculture to modern manufacturing through: i) the development of energy industries (i.e. coal, electricity and oil refining); ii) the expansion of social overhead capital; iii) the expansion of export and development of import substitution industries; and iv) the inclination of agricultural productivity (by preparing ground work for self- sufficiency in fertilizer).

  9. ECONOMIC DEVELOPMENT PLANNING 2 (1967-1971) • stressed on the expansion of mostly labour intensive export industries. On the foundation of industrialization achieved during the First Plan, the government pushed forward during the Second Plan, with mobilization of investment funds as a prime mover. The goals of the plan were to i) propel industrialization full speed by improving the industrial structure through construction of heavy industries such as steel, machinery and chemical industries; ii) the exports (textiles and plywood) and promote import-substitutions industries; iii) to expand the foundations of agricultural production through farmland consolidation and expansion of irrigation facilities; iv) increase the farm household income by maintaining a high rice price policy and carrying out special projects for the increase of farm and fishery incomes in order to equalize living standards with the industrial sector; and v) promote the advancement of scientific technology.

  10. ECONOMIC DEVELOPMENT PLANNING 3 (1972-1976) • focused on internal and external structural adjustment, aimed at achieving rapid • progress in building an export-oriented structure. • The objectives of the EDP3 were to • i) promote development of heavy and chemical industries (i.e. iron and steel, • transport machinery, household electronics, shipbuilding, and petrochemicals). • The developers of heavy and chemical industries sought to supply new industries • with raw materials and capital goods and to reduce or even eliminate dependence • on foreign capital; • ii) encouraged activities that contribute to the increase in self-supply of food, • increase of incomes of farmers and fishermen and improvement of living • conditions. The Saemaul Undong (New Village Movement) was introduced to help • modernizing rural areas and reduced income variances between urban and rural • residents. expand the exports and improve the trade structure; • iii) ensure that under the coordinated development of national land initiative, new • (and critical) industries were to be constructed in the southern part of the • peninsula, thus encouraging economic development and industrialization outside • the Seoul area and providing new employment opportunities for residents of the • less developed areas; and • iv) stress on the evolution and teaching of science and technology.

  11. ECONOMIC DEVELOPMENT PLANNING 4 (1977-1981) EDP4 stressed on the following goals: i) To foster the development of the strategic industries designed to compete effectively in the world’s industrial export markets, involving technology- intensive and skilled labor-intensive industries such as machinery, electronics, and shipbuilding; and ii) To emphasize on large heavy and chemical industries, such as iron and steel, petrochemicals, and nonferrous metal. The government introduced financial assistance program that benefits the machinery industries most, where investments were doubled in electric power generation, integrated machinery, diesel engines, and heavy construction equipment. However, the global recession, rising fuel costs and growing inflation during the 1970s, affected South Korea’s industrial structure and the economy suffered from acute inflation because of an overemphasis on investment in heavy industry at a time when many potential customers were not in a position to buy heavy industrial goods.

  12. ECONOMIC AGENTS 1. THE GOVERNMENT - implementation of a strong development policy - General Park Chung Hee set a vision to transform South Korea from a backward agricultural nation into a modern industrial nation that would provide a decent way of life for its citizens while at the same time defending itself from outside aggression - decided that the Central Government must play the key role in economic development because no other South Korean institution had the capacity or resources to direct such drastic change in a short time - creation of Economic Development Plan (EDP) – nerve centre of government’s plan to promote economic development. - extended control over business by nationalize the banking system - increase the level of export, stressing greater international competitiveness and higher productivity - other economic policies include strengthening key industries, increasing employment and developing more effective management systems to drive the development of export-driven economy.

  13. STATE-OWNED ENTERPRISES (SOEs) - establishment of public corporations to develop and manage highly strategic industries to the fastest and most efficient way to foster growth in a variety of key areas. - During the 1960s, SOEs were concentrated in such areas as electrification, banking, communications, and manufacturing. - Korea Electric Power Corporation (KEPCO) - Pohang Iron and Steel Company (POSCO)

  14. CHAEBOL - The family-owned enterprises treated as government-corporate alliance - Modelled from keiretsu (successor of zaibatsu) system in Japan, chaebol however differ from Japanese zaibatsu that were controlled by professionals and organized around a bank for their source of capital. In contrary the chaebol were family dominated and were prevented from buying controlling shares of banks - Concerntration of chaebols: 1950s & 1960s – wigs & textile 1970s & 1980s – heavy, defense & chemical industries 1990s - electronics & high technology industries - The chaebol were able to grow because of foreign loans and special favours factors - Under the guise of “guided capitalism,” the government selected companies to undertake projects and channelled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks - However, the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates

  15. AFTER PARK’S ADMINISTRATION – “END OF MIRACLE” • After Park’s assassination and the second oil shock in 1979, the Chun Regime stopped the projects devoted to the heavy and chemicals industries and shifted credit to light industries. The country was facing another balance-of-payments crisis. The economy went into recession. • This is happended due to, in many cases serious over-investment in the heavy and chemical sector at the expense of light manufacturing. These new industries were often technologically dependent upon foreign capital. • while massive state spending spurred economic growth and profits for the large conglomerates, foreign corporations, and state officials, the economy became increasingly lopsided and dependent. • Growth pulled in imports of technology and capital goods, while the overbuilt and often inefficient new industries were unable to generate sufficient compensating exports.

  16. DEVELOPMENT AFTER PARK’S ADMINISTRATION • Implementation of a wide range of structural adjustment and various measures of liberalization and internalization in the financial sector as well as in the real sectors: i) the ownership of all commercial banks was returned to the private sector by 1983, and a number of regulations on the internal management and operations of banks were either abolished or greatly reduced; and ii) 2 new nationwide commercial banks and a number of new non-bank financial institutions were set up to provide a more competitive environment in the financial markets. • In 1989, 3 more commercial banks were established and the Korea Exchange Bank was permitted to change its status from a specialized bank to a nationwide commercial bank, making the banking business even more competitive.

  17. ECONOMIC DEVELOPMENT PLANNING 5 (1982-1986) • sought to shift the emphasis away from heavy and chemical industries, to technology-intensive industries, such as precision machinery, electronics (televisions, videocassette recorders, and semiconductor-related products), and information. • More attention was to be devoted to building high-technology products in greater demand on the world market.

  18. ECONOMIC DEVELOPMENT PLANNING 6 (1987-1991) • to a large extent continued to emphasize the goals of the previous plan. • The government intended to accelerate import liberalization and to remove various types of restrictions and non-tariff barriers on imports. These moves were designed to mitigate adverse effects, such as monetary expansion and delays in industrial structural adjustment, which can arise because of a large surplus of funds. • The Plan pledged to continue phasing out direct assistance to specific industries and instead to expand manpower training and research and development in all industries, especially the small and medium-sized firms that had not received much government attention previously. • aimed to accelerate the development of science and technology by raising the ratio of research and development investment from 2.4% of the GNP to over 3% by 1991.

  19. ECONOMIC DEVELOPMENT PLANNING 7 (1992-1996) • was to develop high-technology fields, such as microelectronics, new materials, fine chemicals, bioengineering, optics, and aerospace. • Government and industry would work together to build high-technology facilities in seven provincial cities to better balance the geographic distribution of industry throughout South Korea.

  20. From Planning to a Market Economy: 1979-1990s • The major portion of economic growth occurred in the private rather than public sector. • Efforts were made in the late 1970s to encourage tech­nological innovation through research and development instead of preferential loan packages. • In order to strengthen market mechanisms that would enable the private sector to play a more dominant role in the economy, the Korean government sought to shrink the public sector. • In shifting the pattern of state intervention, the government continued to use financial instruments but relinquished direct control in favor of indirect control of the economy. • This step called for the liberalization of financial institutions, including increased autonomy for banking institutions, internationalization of the capital market, and promotion of direct foreign investment • the Comprehensive Measures for Economic Stabilization (CMES) that was launched in 1979 had successful in terms of economic stabilization, sustained economic growth, recovery of international competitiveness in industrial products, and improvement in the balance of payments. • in the 1980s, Korea became one of the four dragons where prices were stabilized and its industrial sector became extremely competitive but it won’t long last.

  21. Korea's Globalization in the 1990s • Problems - Wage increases average 18% annually - High financial cost - Excessive administrative regulations on business activities - Low social overhead capital investment - Sudden increased in disposable income among Koreans - Deterioration of Balance of payments - High inflation rate – 10% - Deficit Current Account • Efforts - Reformation of financial sector - Dismantled of EPB, replaced by Ministry of Finance and Economy - Economic and Social Blueprint up to the year 2020 was planned • The Korean economy made a remarkable comeback in the first half of 1990s.

  22. DISCUSSION Why Has Such a Centralization Occurred in South Korea? • Traditionally, Korea had been ruled by a strong central government through central government officials. ii) Korea needs the economic efficiency and administrative rationality. iii) Korea has a lack of resources, both human and capital, in its local areas. iv) Korean government has stressed national security and economic growth as ultimate national goals. v) Centralization may occur as new modes of production develop with the support of state intervention. vi) Interest of the Core Power Elite

  23. CRITIQUES ON KOREA’S ECONOMIC PLANNING • Labour condition - the removal of workers rights, which was manifested through attempts to “repress labour conditions to keep wages low and thereby attract investment.” • Welfare system - The welfare state function has been virtually absent, and the state has assumed no responsibilities outside the domains of production and capital accumulation. • Democracy - It is an authoritarian in nature and this is inconsistent with the vision of a pluralistic form of democracy, in which a multitude of small-scale interest groups enjoy broadly equal and unrestricted access to the state. • Simultaneous human and economic development - issue of whether it is actually possible to simultaneously achieve both human and economic development.

  24. CONCLUSION several issues pertaining to Korea economic development are of particular interest. It can be summarized that the Korean economic planning features some characteristics as follows: • Crisis cause reform approach • Capitalism type of economic systems • Democracy and growth • Establishment and roles of chaebols • Establishment of state-owned enterprises • Capital accumulation • The role of President Park Chung Hee

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