The Korean Economy: Past, Present, Future Challenges and Lessons from its Experiences

1. The Korean Economy: Past, Present, Future Challenges and Lessons from its Experiences April 2013 Hyun-Hoon LEE (Kangwon National University)

2. Professor, Department of International Trade and Business, Kangwon National University, Korea - Current Dean, Asia-Pacific Cooperation Academy, Kangwon National University, Korea Senior Analyst, Asia-Pacific Economic Cooperation (APEC) Secretariat Senior Environmental Affairs Officer, United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) Visiting Professor, Keio University, University Melbourne, Bank of Korea, etc. Ph.D. in Economics, University of Oregon, U.S. Hyun-Hoon LEE

4. Contents 1. Transformation of the Korean Economy (1945-2011) 2. The Current Status of the Korean Economy 3. Challenges Ahead 4. Lessons from the Korean Experiences

5. 1. Transformation of the Korean Economy (1945-2011)

6. 1.1 Overview - summary [ Korea in 1962 and in 2011 ]

7. 1.1 Overview - Per Capita Income 20,045 Per Capita Income (US$) 16,413 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 2005 2007 1961

8. 1.1 Overview - GDP Structure & Employment Structure Services 29% Manufacturing 8% Agriculture, fisheries, and mining 63% < GDP Structure > Agriculture, fisheries, and mining 2.6% Agriculture, fisheries, and mining 45% Services 40% Manufacturing 28.0% 2009 1963 Services 69.4% Manufacturing 15% < Employment Structure > Agriculture, fisheries, and mining 5.3% Manufacturing 16.8% 2009 1963 Services 77.9%

9. 12th largest trading nation; 14th largest economy; No 1 shipbuilder; No 5 producer of automobiles; No 4 producer of electronics; No 1 producer of semiconductors; No 5 producer of textiles; And perhaps one of the most dynamic countries. Nassassinated in 1979 by the head of KCIA 1.1 Overview – Status in the World

10. 1.1 Overview – Status in the World 20 largest economies in the world in terms of GDP (2010)

11. 1.1 Overview – Status in the World

12. 1.1 Overview – Status in the World

13. led a bloodless military coup in 1961 launched the first Five-Year Economic Development Plan in 1962 became president after 1963 election imposed martial law in 1972 assassinated in 1979 by the head of KCIA 1.2 Park Chung Hee (President during 1963 – 1979)

14. Prosperity and independence by pursuit of a high-growth economic strategy Export-led industrialization strategy Market economy, but strong government intervention 1.2 Park’s strategies

15. 1.3 Economic Take-Off with Export-led Growth Strategy (1/8) < Economic Conditions of the Early 1960s > Capital Shortage Abundant Labor High Level of Education ? Weak Technology Base Strong Economic will Underdeveloped Private Sector

16. 1.3 Economic Take-Off with Export-led Growth Strategy (2/8) 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

17. 1.3 Economic Take-Off with Export-led Growth Strategy (3/8) Major tools for export promotion policy • export targets set by the government. • financial support for exporters at preferential rates. • tax concessions. • allowance for retaining foreign exchange earnings. • exempted from import controls and tariffs. • fiscal policy in favor of key industrial firms. • a sliding-peg system of exchange rate adjustment. • awards from the president.

18. 1.3 Economic Take-Off with Export-led Growth Strategy (4/8) (% 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

19. 1.3 Economic Take-Off with Export-led Growth Strategy (4/8) < Growth in Imports and Exports >

20. 1.2 Economic Take-Off with Export-led Growth Strategy (5/8)  Iron and Steel  Electronics  Petro-Chemical Products  Automobile  Ship-building  Machinery Policy Change Toward HCI Development • Mobilizing Financial Resources • Selecting National Champions(“Chaebol”)

21. 1.2 Economic Take-Off with Export-led Growth Strategy (6/8) < Changes in Export Commodity Profile: From Light Industry to Heavy Industry > Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. Export Commodity Profile 83.7% HCI Product 50% Agricultural Product 8.9% Light Industry Product 7.4.% 1980 1990 2007 1960 1970 2000

22. 1.2 Economic Take-Off with Export-led Growth Strategy (7/8) 【 Top 10 export items of Korea (%) 】 Source : KOTIS, MTI

23. 1.2 Economic Take-Off with Export-led Growth Strategy (8/8) 【 Top 10 export markets for Korea (%) 】 Source : KOTIS

24. 1.2 【 Top 5 export items from Algeria to Korea in 2010】 【 Top 5 export items from Korea to Algeria in 2010】 Source : UN Comtrade, HS2007

25. 1.3 Pitfalls of the Government-led Development (1980-97) 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”

26. 1.3 Pitfalls of the Government-led Development (1980-97) 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 >

27. 1.4 The Financial Crisis and Economic Reform Cleaning up non-performing loans Rapid economic recovery - GDP growth: -6.7% (1998)  10.7% (1999) - Unemployment: 6.8% (1998)  3.2% (Sept 2007) Accelerating liberalization Improving corporate governance Improved external positions - Early graduation from the IMF program - Foreign reserves of more than USD 258bn in May 2008 Expanding social safety net Stronger corporate and financial sector - Debt-equity ratio: 396% (1997)  182% (2002) - No. of banks: 33 (1997)  20 (2001)

28. 2. The Current Status of the Korean Economy

29. 2.1a Real GDP Growth Rate – year on year Percent Source: Bank of Korea

30. 2.2 Business Condition Index: Prospects, All Industries Percent Source: Bank of Korea

31. 2.3 Unemployment Rate Source: National Statistical Office

32. 2.4 Stock Market – Korea Composite Stock Price Index

33. 2.5 Consumer Prices (year-on-year, % change) Source: Bank of Korea

34. 2.6 Won/US Dollar Exchange Rate Source: Bank of Korea

35. 2.7 Current Account Balance

36. 2.8 International Reserves

37. 3. Challenges Ahead

38. 3.1 Potential Growth Rate and Productivity (1/2) Economic growth of Korea depended on accumulation of 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.

39. 3.1 Potential Growth Rate and Productivity (2/2)  잠재성장률 추세변화와 요인 III. 한국의 잠재 경제성장률과 그 제고방안 / 39 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 Rate and Contributing Factors > (%) 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

40. 3.2 Income Disparity (1/3) Income disparity has recently increased, reflecting structural changes in industries and labor markets. • The Government has pursued “shared growth”, “fare society”, and “symbiosis society”. • But there has been growing discontent among people.

41. 3.2 Income Disparity (2/3) Different regimes have pursued different welfare policies. 41

42. 3.2 Income Disparity (3/3) • Three major problems in employment: (1) high degree of dualism between regular workers and non-regular workers; (2) high unemployment rate of the youth; and (3) low employment rate of women. 42

43. 3.3 Challenges from China (1/2) 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 the period of 1990s and 2000s, 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 pattern and became challenges to Korea in the World market.

44. 3.3 Challenges from China (2/2) China is now number on trading partner for Korea, thus is providing the largest market for Korea. Yet, Korea is becoming overly dependant on China. 【 Top 10 export markets for Korea (%) 】

45. 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+) >

46. 3.5 Challenges of Regionalism Major economies of the world have pursued regionalism, while multilateralism under the WTO has been staggering. • Through FTA, 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 globalised economy, promoting FTA with a variety of economies. < Korea’s Promotion of FTA > FTA completed Negotiation in progress FTA under consideration Chile, Singapore, EFTA, ASEAN, USA, EU, India, Peru, Turkey, Columbia Canada, Indonesia, China, CJK , Vietnam, RCEP Japan, Mexico, GCC, Australia, New Zealand, MERCOSUR, Malaysia, etc.

47. 3.5 Worsening Environment (1/2) Korea’s Environment has worsened at a very rapid rate during its course of rapid industrialisation. • Korea’s environmental sustainability (Environmental Sustainability Index) ranked 122 out of 146 countries in 2005. • Korea’s ecological footprint has exceeded its environmental carrying capacity. • Korea’s Ecological Footprint and Biocapacity per person

48. 3.5 Worsening Environment (2/2) A special attention needs to be given to environmental sustainability during the course of economic growth. • Korea has adopted a new paradigm of economic growth, namely the paradigm of “Green Growth” or environmentally sustainable economic growth. • Two Principles of Green Growth • Creation of synergy between growth and environmental sustainability • Many policy makers and businesses tend to believe that investment in the environment is a sunken cost, but the environment and the economy can be integrated to create synergy. (2) Improving eco-efficiency • To enhance the environmental sustainability, countries need to reduce not only “relative” environmental impact per unit of production, but also the “absolute” size of environmental impact per person.

49. 4. Lessons from the Korean Experiences

50. 4.1 Strong political leadership and stability President’s strong leadership and political stability are a precondition. • President’s strong commitment to economic growth led Korean people’s willingness to “work hard, save more, and sacrifice.” • Long-term goals were set and policies were consistently implemented.