Economic Study of South Korea

-Group 5Sreedhar G.

Mayank TripathiPoonam Khaitan

Shivam MehrotraShaurya Vikram Singh

ContentsHistory

Economy

Events under the First Republic

Events under the Second Republic

Events under the Military Rule

Events under the Third Republic

Events under the Fourth Republic

Events under the Fifth Republic

Events under the Sixth Republic

US- South Korea Ties

Graphs

Findings

[Contents contd.]

HistoryAlso called the Republic of Korea (ROK)Established on 15 August 1948Its history is marked by alternating periods of democratic and autocratic rule as follows:

First Republic(1948-1960)Second Republic(1960-1961)Military Rule(1961-1962)Third Republic(1963-1972)Fourth Republic(1972-1981)Fifth Republic(1981-1987)Sixth Republic(1987-Present)

EconomyToday it is a high-tech industrialized economy.Per capita GNP, only $100 in 1963, exceeded $9,800 in 2002.Chaebols

a South Korean form of business conglomerate. Samsung, Hyundai and LG

Earlier the centrally planned , government-directed investment model

Nowmarket-oriented

Economic OverviewGDP(PPP) $1,541trillion

Real GDP Growth Rate 3.4%(27-10- 2011)

GDP per capita $29,997

Unemployment rate 3.1%

Inflation rate (CPI): 4.2%(Nov. 2011)

Industry Electronics,Telecommunications,Automobile production,ChemicalsShipbuilding,Steel

Trade :ExportsImports

47 Billion USD43.1 Billion USD

Major export markets China (23.2%)U.S. (10.1%)Japan (5.8%)Hong Kong (5.3%)Singapore (3.6%)

Major importers China (16.8%)Japan (15.3%)U.S.(9.0%)Saudi Arabia (6.1%)Australia (4.6%).

United States' sixth-largest trading partner and is the 12th-largest economy in the world

Events under the First Republic

First Republic of South Korea was South Korea's first independent government, ruling the country from 1948 to 1960-the Rhee administration The government took in vast sums of American Aid in amounts sometimes near the total size of the national budget.

Major EventsThe Korean WarIntroduction of hwan

The Korean War(June 25, 1950 - July 27, 1953)

Broke out when the two Koreas barely managed to maintain socio-economic stability.

Damage Estimates: The war destroyed majority of the industries and industrial infrastructureBy August of 1951, 44% of factory buildings and 42% of production facilities lay in ruinsPower production plummeted down to a miserable level of 11 thousand kHz, about one-eighth of the earlier production level of 80 thousand kHzForeign trade deteriorated from US$208 million to US$2.9 millionAll these factors led to serious Inflation

Destruction Ratios:

Textile Industry 70%

Chemical Industry 70%

Agricultural Machinery Industry 40%

Rubber Industry 10%

Power Plants 80%

Overall Industry Destroyed 51%

Hyper Inflation: War expenses were equivalent to 50% of the national budgetTemporary increase in taxes could not meet the huge demand in war expensesHence, during the first three months of the war, the total money in circulation was increased by 72%South Korea also had to provide UN forces with loans in Korean currency according to the Taegue Agreement - an agreement of UN forces expenditure

Increase in Money in Circulation

June 24, 1950 - July 31, 1953 24 times

by December 31, 1953 42 times

Result- 79% of the money increased during the 3 year period of war

Distortion of Two Major Economic Reform PoliciesThe Farmland Reform Bill(1950)

Farmers who wanted to buy distributed farmland had to pay 150% of the average annual product,30% each in five years with farm products(not in money)The tax rate was applied progressively from a 15% to a 28% level1/3 of farm products had to be sold to the government at an official set price , according to the newly established Law of Grains Management(1950)Old landlords were forced by law to sell all the farmland that was in excess of 3 chongbo(1 chongbo=0.993 hectares) and received a voucher called Farmland Price SecuritiesHowever the real value of vouchers plummeted with soaring inflation rate

The Enemy Property Privatization Bill(1950)Sales of the confiscated enemy properties (production facilities or business firms) through auctionBut landowners were not interested because

the real value of vouchers plummeted the difficulty of operating business in times of war

By the end of March 1953, less than 7% (20,955 cases) of the enemy properties (29,906 cases) were sold

Thus the reform failed to make up fiscal deficits with sales revenue of enemy properties

The Long-term Consequences of the US AidDuring the war the government took in vast sums of American aid , in amounts sometimes near the total size of the national budgetinitial aid items were food, medicine and other necessary consumer goodsthese caused the fall of domestic farm product prices decreasing the income of farmersSome Korean agricultural products such as wheat and cotton eventually disappeared completely due to the sharp decline of their prices.

US destroyed the agricultural industry through aid made the Korean economy dependent on the US economy perpetuated its dependency by controlling the Korean economy through aid, loans and direct foreign investments

But the US aid was also very effective in stabilizing the Korean economyThe postwar average annual inflation rate was reduced to 20% from 120% of the preceding period

Mishaps of the Korean Government Economic PoliciesKorean government was responsible for fostering consumer goods industry and later on paving the way for the rise of big-business oriented Chaebol structureOperational production facilities were favored with much lower interest rates for their loans , mostly 10% or lower compared to the general bank loan rate of 18.25%Loans were allocated in favor of big firms This contributed to the establishment of special government-business nexus and corruptionCartels such as the Korea Textile Association were formed , which could monopolize raw material aidHowever they could establish neither optimum level of production scale, nor competitiveness in international marketsthe unemployment rate was estimated to be 45%

After the war

South Korean policymakers set upon stimulating economic growth by promoting indigenous industrial firms

selected firms in targeted industries were given privileges to buy foreign currencies and to borrow funds from banks at low rateserected tariff barriers and imposed a prohibition on manufacturing imports

Import-Substitution Industrialization (ISI) set in

these Directly Unproductive Profit-seeking activities (DUP) caused efficiency to falter and living standards to stagnate

Hwan

To counter the inflation the first South Korean currency the won the hwan was introduced in 1953 This was done at the rate of 1 hwan = 100 won The hwan was nominally subdivided into 100 jeon However the lowest denomination issued was 1 hwanThe hwan also suffered from inflation and a series of devaluations occurred

Pegs for the South Korean hwan

Date introduced Value of U.S. dollar in hwan

February 15, 1953 60

15 December 1953 180

August 15, 1955 500

February 23, 1960 650

January 1, 1961 1000

February 2, 1961 1250

Events under the Second RepublicThe student revolution caused parliamentary election in 1960.The Democratic Party - the opposition, gained powerUnion membership and activity grew rapidly

Teachers' Union, Journalists' Union, and the Federation of Korean Trade Union were formed

The government formulated a five-year economic development plan, although it was unable to act on it prior to being overthrownThe Hwan lost half of its value against the dollar between fall 1960 and spring 1961

Events under Military Rule

The military coup d'état led by Major General Park Chung-he on May 16, 1961, put an effective end to the Second RepublicThe Supreme Council was the first South Korean government to introduce economic planningThe first South Korean five-year plan was inaugurated in 1962Shift to a strategy of stimulating growth through export promotionqualification for the special treatment was quantifiable and objective thus the room for DUP became significantly smaller

per capita output doubled in the following decadeSouth Korea became an industrialized countrythe share of agriculture in GDP fell from 45 percent to 25 percent the share of manufacturing rose from 9 percent to 27 percent

Events under the Third & Fourth Republic

The Third Republic was initiated by announcing the Five Year Economic development PlanThe core was an export-oriented industrialization policy"Development First, Unification Later”The economy grew rapidly with vast improvement in industrial structure(heavy chemical industries)Capital was needed for such development-foreign aid from Japan and the United Statesimproved the standard for livingthe government controlled pricesthe rural economy steadily lost ground

Despite social and political unrest,the economy continued to flourish under the export-based industrialization policythe 3rd and 4th five-year plans focused on expanding the heavy and chemical industries(HCIs) - steel production & oil refiningmost of the profit went back to repaying the loans and interestlarge conglomerate Chaebols were continuously receiving preferential treatment and soon came to dominate the domestic marketLow interest loans to chaebols -- selected for the task of developing different sectors of HCISuccessfully expanding the capital-intensive industries more rapidly than the rest of the economy

Events under the Fifth & Sixth Republic

Started in 1981 with election of Chun Doo-hwanTight monetary laws and low interest rates contributed to price stabilityNotable growth in the electronics, semi-conductor, and automobile industries.The country opened up to foreign investmentsGDP rose as Korean exports increased.However, the economic growth widened the gap between the rich and the poor, the urban and rural regions

The Sixth Republic began in 1987 and remains the current republic of South In the 1990s,liberalization of capital account followed causing rapid accumulation of short-term external debts

Major EventsFinancial Crisis of 1997Re-introduction of won

Economic Crisis of 1997

November 1997, Korea was hit by a currency-cum-banking crisis Official assistance from the IMFKorea has implemented many institutional and policy reformsToday, it has gone far toward strengthening its financial sector Country not likely to become a victim of another financial crisis.

CausesIn 1990, Korea’s current account balance started to deteriorate because

rising inflationappreciation of the Korean wonthe recession of the world economy

Current account recorded a deficit of $8.7 billionBanks and Business Firms finance long-term investments with short-term foreign borrowingsCausing maturity mismatches

Remedies

As it was a liquidity crisis, a rapid infusion of hard currency reserves was criticalThe IMF together with other international financial institutions offered $58.4 billion to bail out KoreaOut of this, $23.4 billion was reserved as a second line of defense that would be made available to Korea by G-7 countries

Major Reforms

Implemented to achieve the following objectives:

(1) to reduce the likelihood of a similar crisis in the future by cleaning up the balance sheets of financial institutions

(2) to evolve a financial system that can best help the nation resume growth with stability

Reforms Till Date

The contents and significance of the reforms that have been actually undertaken to date can best be reviewed under six headings:I. Reforms designed to strengthen the legal and regulatory

infrastructure, II. Reforms implemented to rehabilitate the financial sector,III. Reforms aiming at strengthening prudential regulation,IV. Reforms to reduce moral hazard,V. Reforms to promote capital account liberalization and VI. Reforms to strengthen the corporate governance of financial

institutions

Won

• Another attempt to control inflation • In 1962, the second South Korean won was• reintroduced • Rate of 1 won = 10 hwan• This finally caused inflation to slow down

The slowing global economy and falling exports slowed growth to 3.3% in 2001Consumer overspending and rising household debt, along with external factors, slowed growth to near 3% again in 2003Economic performance in 2004 improved to 4.6% due to an increase in exportsRemained at or above 4% in 2005, 2006, and 2007.With the onset of the global financial and economic crisis in the third quarter of 2008, annual GDP growth slowed to 2.3% in 2008 and just 0.2% in 2009.

Current ScenarioEconomic

US- South Korea Ties

As Korea's economy has developed, trade and investment ties have become an increasingly important aspect of the U.S.-R.O.K. relationshipAmerican firms have long been major investors in KoreaKorea's leading firms have begun to make significant investments in the United StatesThe IMF reforms also improved the trade relationsSigned a comprehensive FTA that would eliminate virtually all barriers to trade and investment between the two countries, in 2007

Tariffs on 95% of trade were to be eliminated within 3 years of implementation, All the remaining tariffs to be removed within 10 years of implementationThe FTA will generate billions of dollars in increased trade and investment between the United States and the Republic of KoreaBoost economic growth and job creation in both countries.

Graphs

Phillip Curve for South Korea

Won and USD Exchange Rate

Findings

South Korea's economic growth potential has fallen because of a rapidly aging population and structural problems that are becoming increasingly apparent.Foremost among these structural concerns are the rigidity of South Korea's labor regulations, the country's underdeveloped financial markets, and a general lack of regulatory transparency. Korean policy makers are increasingly worried about diversion of corporate investment to China and other lower wage countries, and by Korea's falling foreign direct investment (FDI).