The Korean Economy and Future Opportunities for New Zealand

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

2. 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

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

4. 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 1995 1970 1980 1990 1998 2004 2005 1961

5. 1.1 Overview - GDP Structure & Employment Structure Services 29% Manufacturing 8% Agriculture, fisheries, and mining 63% < GDP Structure > Agriculture, fisheries, and mining 4% Agriculture, fisheries, and mining 45% Services 40% Manufacturing 28% 2005 1963 Services 68% Manufacturing 15% < Employment Structure > Agriculture, fisheries, and mining 6% Manufacturing 19% 2005 1963 Services 75%

6. 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

7. 1.2 Economic Take-Off with Outward-looking Development Strategy (2/5) Economic Growth Reproduction Export Promotion Manufacturing Processing Private Enterprises Financial  Tax Support Technology Development Well-educated Labor force < Working Mechanism of Outward-looking Development Strategy > Foreign Capital Inducement (Economic Aids External Debt) Capital Good Imports Raw Material Imports Government Foreign Technology Imports

8. 1.2 Economic Take-Off with Outward-looking Development Strategy (3/5) (% of GDP) 40 20 0 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 < Growth in Imports and Exports > Imports Exports Trade balance

9. 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”)

10. 1.2 Economic Take-Off with Outward-looking Development Strategy (5/5) Wig Textile Automobile < Changes in Export Commodity Profile: From Light Industry to Heavy Industry > Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. Export Commodity Profile Semiconductor 79.8% HCI Product 50% Light Industry Product 14.1% Agricultural Product 6.1% 1980 1990 2003 1960 1970 1999

11. 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”

12. 1.4 Delayed Economic Reforms and the Financial Crisis (1/2) High corporate debt leverage Widespread moral hazard Increased vulnerability to external shocks Large NPLs in the financial sector Continued government intervention/ Weak prudential regulation • Massive capital outflow • Denied rollover of short-term external debt South-east Asian crisis IMF rescue package < The Crisis of 1997 >

13. 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)

14. 2. The Current Status of the Korean Economy

15.  KDI 경제전망 2.1 The Current Status of the Korean Economy I. 최근 경제동향 / 15 (y-o-y, %) Note: P denotes Preliminary. Source: KDI

16. 세계경제 여건-리스크 요인 2.2 Risk Factors of the Korean Economy I. 최근 경제동향 / 16 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%

17. 3. Challenges Ahead

18. 3.1 Potential Growth Rate and Productivity (1/2) (%) Kindergarten Elementary Middle High College 100 80 60 40 20 0 2005 1970 1980 1990 2000 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 > the number of enrollments in a specified age range Note: Enrollment rate = --------------------------------------------------------------------- the whole population in the same age range

19. 3.1 Potential Growth Rate and Productivity (2/2)  잠재성장률 추세변화와 요인 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

20. 3.2 Income Disparity 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

21. 3.3 Industrial Restructuring and Challenges from China (1/5) 1 High tech High tech Medium-high tech Medium-high tech Medium-low tech Medium-low tech Low tech Low tech 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 Employment by Technological Level > < Korea : Share of Value Added by Technological Level > Source: Korea National Statistical Office, Mining and Manufacturing Survey

22. 3.3 Industrial Restructuring and Challenges from China (2/5) Low tech Medium-low tech Medium high tech High tech 2.5 China 2 Japan Japan US Korea 1.5 Korea Korea US China Japan 1 China Korea US US 0.5 China Japan 0 1993 2004 1993 2004 1993 2004 1993 2004 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.

23. 3.3 Industrial Restructuring and Challenges from China (3/5) 2 100% 100% High tech High tech 80% 80% Medium-high tech 60% 60% Medium-high tech Medium-low tech 40% 40% Medium-low tech Low tech 20% 20% Low tech Non-manufacturing Non-manufacturing 0% 0% 1993 1993 2004 2004 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 > Source: UNCOMTRADE

24. 3.3 Industrial Restructuring and Challenges from China (4/5) 6 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 1993 1993 2004 2004 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. <Semiconductor & Electronic Valves> <Computers & Office products> <Radio, TV & Comm Equip> 4 Korea 3.5 Japan 3 Korea Japan 2.5 US Japan 2 US China 1.5 Korea 1 US China China 0.5 0 1993 2004

25. 3.3 Industrial Restructuring and Challenges from China (5/5) 1.8 2.5 Japan Japan 1.6 2 1.4 1.2 US 1.5 1 US 0.8 Korea 1 0.6 Korea 0.4 0.5 China 0.2 China 0 0 1993 2004 1993 2004 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>

26. 3.4 Aging Society (% of total population) 40 35 Japan 30 25 20 US EU 15 Australia and New Zealand 10 Korea 5 0 60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50 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+) >

27. 4. Korea’s Efforts for Globalization

28. 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

29. 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.

30. 5. Korea and New Zealand – Economic Opportunities

31. 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. < Bilateral Trade Volume > < World Trade Volume > $265 bil Year: 2005 Year: 2005 $248 bil $890 mil $595 mil $25 bil $22 bil export import export import K to NZ NZ to K Korea New Zealand Source: UN Trade Data, 2005

32. 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% Automobiles 15% Food, Products & Beverages 12% Basic Metals 13% Source: UN Trade Data, 2005

33. 5.1 K-NZ Bilateral Relationship in Merchandise Trade (3/3) Chemical Food, Products Products Basic Metals & Beverages 5% other 5% 39% 8% Paper Products, Printing, Publishing 6% Agriculture Forestry, Fishery 37% 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. < Major Imports of Korea > < Imports of Korea from NZ > 277 (million) Year: 2005 162 Year: 2005 44 38 25 5 Wood of coniferous species Fruit Bovine meat vegetable Other cheese Food preparations <Food, Products & Beverages> <Agriculture & Forestry, Fishery>

34. 5.2 Market Share of NZ in Korea Fruit, fresh,dried, nes Wood of coniferous species U.S 44 U.S 71.3 35.9 45.2 16.1 9.7 New Zealand 29 New Zealand 17.9 KoreaMarket KoreaMarket 1990 1990 2005 2005 Sheepskinsand lambskins Bovine meat, frozen 66.9 99.8 30.3 58 Australia 75 New Zealand England 18 5 New Zealand 0.0 KoreaMarket KoreaMarket 1990 1990 2005 2005 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.

35. 5.3 Korea-NZ BilateralRelationship 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. < Outbound Tourists and Expenditure > < Overseas Expenditure on Education & Training > 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 Expenditure per Capita Tourists Overseas Expenditure - Korea

36. THANK YOU !