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Overview of Korea’s Rapid Industrial Development:
Miracle on the Han River
Tae-Shin KWON
President & CEO, Korea Economic Research Institute
Miracle on the Han River and BeyondOverview of Korea’s
Rapid Industrial Development
and the Future
President & CEO Tae-shin KwonKorea Economic Research Institute
Vanderbilt University, September 22nd, 2016
Contents
I. Overview of the Korean Economy
II. Key Drivers of Sustained Growth
III. Foreign Exchange (“FX”) Crisis of 1997
IV. Current Status of Korean Economy
V. Future Challenges
VI. Opportunities Ahead
2
I. Overview of the Korean Economy
3
Colonization: 1910-45
Disruption in economic activities due to the departure of Japanese
Territorial division: economic complementarity lost
Korean War: 1950-53
President Rhee: 1948-60
Lower priority on economic development
4
The Korean Economy Before its Take-off
In 1961, Korea had:
– Per capita income of US$82, approximately
the same level as Ghana and Sudan
– Scarce natural resources
– Infrastructure damaged from Korean War
– Low level of savings (8%) and high level of
poverty
– US aid accounted for 50% of its budget,
70% of imports, 80% of foreign exchanges
Korea also had a number of advantages
– Abundant labor with high level of literacy
– Relatively equal income distribution
A Brief Summary of Korean Development History:
Initial Conditions
5
0
5,000
10,000
15,000
20,000
25,000
30,000
1945 1955 1965 1975 1985 1995 2005 2015
105607
2,355
11,735
17,531
Joined
OECD
Asian
Financial
Crisis
Six 5-Year Economic
Development Plans
Liberation from
Japanese
Colonial Rule
Global
Financial
Crisis
Korea’s Rapid Economic Growth
27,340(2015)
Korea Over the Last Five Decades
7
1961 2015
Per Capita GNI (US$) 82 27,340 330 times
Commodity Exports (US$) 41 million 527 billion 13,000 times
Trade/GDP Share (%)3.3% 69.8% 66.5%p ↑
Trade $33million $96.3billion 6006 time
Life Expectancy 55 (1960) 82 27 years ↑
Enrollment Rate (%)
High School
University/College
29.3 (1970)
9.0 (1970)
93.5
70.8
3.2 times
7.9 times
Strong economic growth with outward-looking strategy (1960~1980)
– Government-led development
– Transition from import substitution to export-driven industrialization
– Heavy and Chemical Industries (“HCI”) drive in the 1970s
Changes in development strategy (1981~1997)
– Stabilization policy in the early 1980s
– Market-oriented reforms (phasing-out of policy loans, interest rate
deregulation, investment adjustment in HCI, etc.)
Financial crisis in 1997 and the swift recovery (1998~1999)
Paving the way for an advanced economy
Economic Policies During the Development Period
8
II. Key Drivers of Sustained Growth
9
Key Drivers of Sustained Growth
Human capital: High investment in education, high quality workers and
entrepreneurs
– Population with tertiary education(2014)
• 17%(55~64 year olds) vs 68%(25~34 year olds)
10
24 25 25 28 30 30 31 32
38 38 39 40 40 40 41 41 42 43 44 44 46 46 46 46 48 49 49 51 53 58 59
68
12 13 10
25
14 15 13
17 18 21 21
34 29
36
29
21
29
14
26 27
41
30 31
47
33 32 35
24
32
45
35
17
0
10
20
30
40
50
60
70
80
ITA
ME
X
TU
R
DE
U
SV
K
CZ
E
PR
T
HU
N
SV
N
AU
T
GR
C
FIN
NZ
L
ES
T
ISL
ES
P
DN
K
PO
L
BE
L
NL
D
US
A
SW
E
CH
E
ISR
AU
S
NO
R
GB
R
IRL
LU
X
CA
N
JPN
KO
R
25~34 year olds 55~64 year olds
< Population with tertiary education >(unit: %)
Key Drivers of Sustained Growth
Policy
– Sound macroeconomic policies
– Adoption of export-oriented, pro-
growth policies
– Responded rapidly and flexibly to
external shocks
– Some policies right, some wrong;
learning through trial and error
– Government intervention,
ingredient for growth?
• may differ at different
stages of development
Institution
11
2.9
58.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
< export / GNI >(unit: %)
Strong Top Leadership During the Development Period
Strong leadership commitment to economic development
Monthly meetings presided by the President: Economic Conditions Review
Meetings, Meetings for Export Performance Monitoring
Strong support from think tanks such as KIST and KDI
Partnership with big businesses (Korea, Inc.)
– Strong incentives provided while closely monitoring big businesses
– Largely free from corruption and interest group pressures
12
Government: coordination, monitoring, resource allocation
Large business groups: implicit development partners
Conditions for success
– Effective monitoring: top leadership with vision and commitment; strong
and relatively clean bureaucracy
– Strong incentives: subsidized credit, etc.
– Sensible performance criteria: export performance, etc.
13
Efficiency of Korea, Inc. in the Early Stage
Promotion of Exports and Industrialization: Export-Oriented
Economic Takeoff in the 1960s
Export incentives
– Industry neutral: based on export performance
– Exchange rate realignment
– Credit & tax incentives, export-import link system, etc.
Institutions for export promotion
– Export-targeting; monthly meetings for monitoring
– KOTRA
– General trading companies
– Free export zone
14
Foreign Direct Investment
FDI playing only a minor role
– Fear of foreign domination
– Gradual liberalization since the
1980s
Was it a good policy?
– Missed chance of technology
transfers and skills training
– Too much dependence on
borrowing caused a crisis
– Borrowing cheaper than FDI?
– Better for deepening local
technological capabilities in the
long run?
15
US$20,910
0
5000
10000
15000
20000
25000
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
< FDI >(unit: million USD)
Heavy and Chemical Industry (“HCI”) Drive in the 1970s
Steel/shipbuilding/machinery/electronics/chemicals
Export/industrial structure upgraded
Macroeconomic policy distortions
– Interest rate control; significant preferential credit -> financial development
delayed; inflationary pressure
– Currency appreciation (due to increased repayment burden on foreign debt)
Inefficiency: excessive/duplicative investment; lack of technology & skills; import
protection, etc.
Concentration of economic power
16
1960 1970 1990 20001980
HCI Products
Agricultural
Products
Light Industry
Products
50%
Wig Automobile SemiconductorTextile
Semiconductor,
Mobile Phone, DTV,
Display,
Automobile,
Shipbuilding, etc.
80%
14%
6%
17
Changing Export Structure:
From Agriculture to Light Industry, and to HCI
Challenges of 2nd-Stage Import Substitution
Constraints on capital, technology & skills
Small domestic market -> not merely import substitution, but to grow as export
industries
Harder to identify the industries to be promoted
Concentration of economic power; monopolistic profits & corruption <- import
protection
Macroeconomic instability
18
Price Stabilization in the Early 1980s
Difficult to rely entirely on demand management (tight fiscal & monetary policies)
in recession
Incomes policy may be effective under some circumstances
– Credibility/consistency of the government policies
– Public economic education
– Tools: unofficial wage guideline through low salary increase for civil servants
19
Business Groups: Their Roles and Issues
Development partners of the government: capturing policy-induced profit
opportunities
National champions in the global market: undertaking long-term, risky R&D
investment
Seeking family and/or controlling shareholders’ interests first?
– Cross-shareholding, poor corporate governance
– Extensive diversification and internal transactions
– High dependence on debt; overinvestment
– Poor profitability (for smaller groups)
20
III. Foreign Exchange (“FX”) Crisis of 1997
21
Weak financial and corporate sectors due to continued government-bank-
chaebol tie-up:
– Moral hazard; poor governance; accumulated non-performing loans
Poorly managed (external) financial liberalization: prudential regulation;
financial safeguards, etc.
Poor management of the external sector
– Small FX reserves; high short-term debt
– Currency appreciation due to capital inflows
22
FX Crisis of 1997: Causes
Post-Crisis Reform
Financial reform
– Restructuring non-viable financial institutions
– Strengthening prudential regulation/supervision
Corporate restructuring
– Legal frameworks & practical methods of workout
– Reform of corporate governance
Strengthening social safety nets while redressing labor market rigidity
23
Comparison: Pre- and Post-Crisis Period
Pre-crisis period of 1990-1997:
Chronic overcapacity problems
– 8-year long trade deficits
– FDI inflows were insignificant
– Vulnerable external position
– Explosive corporate debt growth
– Weak financial sector
Post-crisis period since 1998:
Structural improvements
– Continued current a/c surplus
– FDI inflows increased ten times
– Much improved external position
– Significant de-leveraging trend
– Sound and efficient financial
sector
24
IV. Current Status of Korean Economy
25
26
Korea achieved a solid growth post-crisis.
Core inflation remains stable.
Real Sector: Korea’s economic fundamentals remain robust
GDP
Growth
% YOY
1997 1998 1999 2000 2011 2012 2013 20142015
(f)
US 4.4 4.3 4.1 3.8 1.6 2.2 1.5 2.4 2.4
Japan 1.8 -1.1 0.7 2.8 -0.5 1.7 1.4 0.0 0.5
Hong Kong 5.1 -5.0 3.4 10.2 4.8 1.7 3.1 2.6 2.4
Singapore 8.5 -0.9 6.4 9.4 6.2 3.7 4.7 3.3 2.0
South Korea 5.0 -6.7 10.9 9.3 3.7 2.3 2.9 3.3 2.6
Taiwan 6.7 4.6 5.4 5.9 3.8 2.1 2.2 3.9 0.7
India 5.0 6.9 6.0 4.0 6.6 5.6 6.6 7.2 7.3
China 8.8 7.8 7.1 8.0 9.5 7.7 7.7 7.3 6.9
EU 2.5 2.9 2.8 3.4 1.8 -0.4 0.3 1.4 2.0
G7 3.2 2.7 3.0 3.5 1.6 1.4 1.2 1.7 1.8
Latin Americ
a5.3 2.0 -0.1 4.0 4.9 3.2 3.0 1.3 -0.1
OECD 3.6 2.7 3.1 3.9 1.9 1.3 1.3 1.9 2.2
World 4.2 2.8 3.5 4.4 4.2 3.5 3.3 3.4 3.1 0
1
2
3
4
5
6
7
8
1997 2000 2003 2006 2009 2012 2015
(%)
Headline CPI Core CPI
External Sector: Strong Balance Supports Korea’s Stability
The current account surpluses continued since 1998 and hit record high at 105.9 billion US$ in 2015.
This enabled Korea’s FX reserves to rise from 4 billion US$ in 1997 to 368 billion US$ in 2015, the 7th
largest in the world.
27
(US$ billion)
-9.8
-23.8
-10.3
40.1
21.6
10.42.74.7
11.9
29.7
12.73.6
11.83.2
33.628.9
18.7
50.8
81.184.4
105.9
-40
-20
0
20
40
60
80
100
120
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Current Account Surplus
52
74
96 103
121
155
199 210
239
262
201
270
292 306
327
346
364 368
0.8
1.9
2.2
2.1
3.0
3.2
3.93.7
3.6
2.3
1.3
1.8
1.9
2.2
2.6
3.13.1
3.4
0.0
1.0
2.0
3.0
4.0
5.0
0
50
100
150
200
250
300
350
400
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
FX Reserves (US$bn)(Left) FXR/ST Ext Debt(Right)
Debt-equity ratios dramatically declined and corporate profitability has significantly improved.
Corporate Sector: Sharp De-leveraging, Improved Profitability
Note: Corporate ordinary income/sales trend is only available until 2006 28
336
235221
196
144.66131.31
113.99110.86105.3114.94
129.8
159150 153 148 141 135
0
50
100
150
200
250
300
350
400
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Debt Equity Ratio (%)
126114
128136137
107115
64 71
141146
263.51
351.23
483.4460.3
413.86
380.96
331
241
311
280260
284285
-2
-1
0
1
2
3
4
5
6
7
8
0
100
200
300
400
500
600
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Interest Coverage (%)(Left) Ordinary Income/Sales (%)(Right)
Financial Sector: Restored Soundness
BIS ratios increased to the international standard and NPL ratios substantially lowered
Source: FISIS
BIS Ratio (%) NPL Ratio (%)
29Source: FISIS
7.0
11.8 12.1 12.3
14.614.0
14.3 14.514.0 13.9
13.1
0
2
4
6
8
10
12
14
16
19
97
19
99
20
04
20
07
20
10
20
11
20
12
20
13
20
14
20
15
20
16
.6
2.7
12.9
1.9
0.7
1.91.4 1.3
1.8 1.6 1.8 1.8
0
2
4
6
8
10
12
14
19
97
19
99
20
04
20
07
20
10
20
11
20
12
20
13
20
14
20
15
20
16
.6
Fiscal Sector: Low Indebtedness
30
Government debt increased substantially in the process of the crisis resolution, but stands at a low level at
an international standard
0
10
20
30
40
0
100
200
300
400
500
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Government Debt (US$m)(Left)
Government Debt / GDP
(%)(Right)
34.7%
247.0%
82.0%
119.0%113.0%
123.0%
0%
50%
100%
150%
200%
250%
300%
Kor('13) Jap Ger Fra UK US
Go
vern
men
t D
ebt
/ G
DP
20
14
(%
)
V. Future Challenges
31
Future Challenges
Our potential growth is slowing down very fast, and expected to continue to fall
unless we do something.
32
2.6(2015)1.48(2050)
-10
-5
0
5
10
15
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
20
20
20
23
20
26
20
29
20
32
20
35
20
38
20
41
20
44
20
47
20
50
actual growth rate potential growth rate
Source: OECD
Future Challenges
Low Birth Rate and Aging Society (Silver Tsunami)
33Source: Korea Statistics Bureau
18
24
73
40
115
8
12
21
37
40
Korea
Japan
US
Germany
France
Years taken Aging to Aged Years taken Aged to Super-Aged
2000 2018 2026
1970 1994 2006
1942 2015 2036
1932 1972 2009
1865 1980 2020
Aging (7%+)
Aged (14%+)
Post-Aged (20%+)
Future Challenges
Low Birth Rate and Aging Society (Silver Tsunami)
34Source: Korea Statistics Bureau
1970 17.5
1980 16.4
1990 13.5
2000 9.9
2010 6.7
2020 4.6
2030 2.7
2050 1.4
Number of Active Persons Supporting One Old Person
0
10
20
30
40
50
60
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
15~29 years old
Population Composition
15~65 years old
Over 65 years old
13.8%(2060)
48.8%(2060)
37.4%(2060)
Future Challenges
Household Debt Burden
- Aggregate Household Debt in 2015 = ₩1203 trillion = $973 billion
- Household Debt / GDP Ratio (2015) = 77%
• 85% (Spain), 61% (Greece)
35
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
0
200
400
600
800
1000
1200
1400
2004
120
04 2
2004
320
04 4
2005
120
05 2
2005
320
05 4
2006
120
06 2
2006
320
06 4
2007
120
07 2
2007
320
07 4
2008
120
08 2
2008
320
08 4
2009
120
09 2
2009
320
09 4
2010
120
10 2
2010
320
10 4
2011
120
11 2
2011
320
11 4
2012
120
12 2
2012
320
12 4
2013
120
13 2
2013
320
13 4
2014
120
14 2
2014
320
14 4
2015
120
15 2
2015
320
15 4
2016
120
16 2
amount(tril. KRW, left axis) growth rate(YoY, %)
Future Challenges
Increasing household debt causes domestic demand to shrink
– Household debt / GDP : 44.3%(1996) 80.8%(2014)
– Average Propensity to Consume in 2015 3Q was record low
36
3.6
97.8
44.3
145.8
43.0
100.5 80.8
224.3
0
50
100
150
200
250
gov't corporate household all
1994 2014 73.673.9 73.7
72.9
72.1 72.2
73.7
75.274.8
72.4
71.4 71.6
70.4 70.6
69.4
66
67
68
69
70
71
72
73
74
75
76
Debt / GDP (%) APC of the Households (%)
Future Challenges
Dual Labor Market, Inflexible Labor Union, and Absence of Social Dialogue
– Youth unemployment: UR 12.5% (2.6 times of aggregate UR)
– PT work, Discouraged young workers, Youth Labor Under-utilization 23.4%
– Group (D) (1.4 million workers) controls the whole labor market of 26 million
workers They refuse labor market reform to maintain their vested interests.
37
Composition of Employed
Workers
Regular(A)
67.9%Unionized(B)
25.4%
Large Firms(C)
12.1%
(D)
7.4%
(E)
26.4%
Future Challenges
Possibility of secular stagnation (Japanese style)
– Aging society, Housing market slump shrinking domestic demand
38
5.1
6.7
2.2
0.3 0.0-0.8
1.0
-0.4
0.1
0.0 0.0 0.0
-2.0
0.0
2.0
4.0
6.0
8.0
'81~'85 '86~'90 '91~'95 '96~'00 '01~'05 '06~'10
net export
domestic demand
3.93.4
2.0
0.9
0.8
1.2
0.0
1.0
2.0
3.0
4.0
5.0
'01~'05 '06~'10 '11~'14
net export
domestic demand
<Korea> <Japan>
Future Challenges
Superabundant Demand for Welfare
39Source: JK Hyun(2012)
% of Main Expenditures in Consolidated Finance
0
5
10
15
20
25
30
35
197
0
197
3
197
6
197
9
198
2
198
5
198
8
199
1
199
4
199
7
200
0
200
3
200
6
200
9
201
2
201
5
복지 경제 교육 국방
31%
16%
14%
10%
welfare economy education defense
Future Challenges
Weakened National Competitiveness
40
WEF National Competitiveness (rank)
11th13th
14th
22nd24th
19th
25th26th 26th
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014 2015
VI. Opportunities Ahead
41
Opportunities Ahead
Thus, we need to strengthen growth potentials by
– Fostering business-friendly environment to successfully
• transform HCI to high value-added manufacturing (ICT)
• discover new engine of growth in IT, BT, NT
• and develop high value added service industries
– Enhancing labor market flexibility and social mobility
42
Opportunities Ahead
We need more than simple manufacturing
– Smart Factory, IoT
– IT, BT, NT
43
Opportunities Ahead
Service industry will be a source of another Economic Big Bang for Korea.
Osaka
KyotoKobe
Fukuoka
Busan
IncheonSeoul
Korea
Dalian
China
Taipei
Shanghai
Nanjing
Hangzhou
Zhengzhou Nagoya
Tokyo
17.9 mil.
1.48 tril. $
13,281 𝑘𝑚2
26.7 mil.
341 bil. $
14,399 𝑘𝑚2
25.2 mil.
314 bil. $
7,037 𝑘𝑚2
8.7 mil.
-
11,026 𝑘𝑚2
Qingdao
Japan
Population: 20.2 mil.
GDP: 314 bil. $
Area: 7,037 𝑘𝑚2 13.6 mil.
185 bil. $
11,760 𝑘𝑚2
Beijing
Tianjin
41 cities with population of more than 1 million within 2-hour flight distance from
Incheon Int’l Airport, Korea
Opportunities Ahead
De-regulation of service industry will be a new source of job and value-
added creation
– Deregulation will create about 350 thousand jobs in medical, education, law and
contents service sectors in 8 years.
Value-added (billion USD) Job creation (person)
Education 3.6 93,000
Medical 4.4 104,000
Law 2.7 43,000
Contents 4.5 108,000
total 15.2 349,000
< Effect of Service Industry Deregulation >
Source: “Service Industry Deregulation and Job Creation” KERI(2013)
Thank You
46
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