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

The Korean Economy and Future Opportunities

for New Zealand

June, 2006

Jung Taik HYUN President

Korea Development Institute

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

2. The Current Status of the Korean Economy

ContentsContents

3. Challenges Ahead

5. Korea and New Zealand – Economic Opportunities

4. Korea’s Efforts for Globalization

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

4

1.1 Overview - Per Capita Income1.1 Overview - Per Capita Income

Liberationfrom JapaneseColonial Rule

Six 5-Year-Economic- Development Plans

FinancialCrisis

200419801961 1970 1995

5,000

10,000

67 89

11,432

7,355

1953

Per Capita Income (US$)

1990

1945

14,193

OECDMember

100(1964)1,000(1977)

1998 2005

16,291

5

Agriculture, fisheries, and mining

45%

Manufacturing15%

Services40%

Services29%

Agriculture, fisheries, and mining

63%

Manufacturing8%

< Employment Structure >

1963

1963

Agriculture, fisheries,and mining

6%Manufacturing

19%

Services75%

2005

Agriculture, fisheries,and mining

4%Manufacturing

28%

Services68%

2005

1.1 Overview - GDP Structure & Employment Structure1.1 Overview - GDP Structure & Employment Structure

< GDP Structure >

6

CapitalShortage

WeakTechnology Base

UnderdevelopedPrivate Sector

AbundantLabor

StrongEconomic will

High Level ofEducation

?

< Economic Conditions of the Early 1960s >

1.2 Economic Take-Off with Outward-looking Development Strategy (1/5)

7

Economic Growth

Reproduction

S

ExportPromotion

ManufacturingProcessing

PrivateEnterprises

Government

TechnologyDevelopment

Financial Tax Support

Well-educated Labor force

Foreign TechnologyImports

Capital Good Imports

Raw Material Imports

Foreign Capital Inducement (Economic Aids External Debt)

S

< Working Mechanism of Outward-looking Development Strategy >


8

< Growth in Imports and Exports >

0

20

40

53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04

(% of GDP)

Imports

Exports

Trade balance


9

Policy Change Toward

HCI Development

Iron and Steel

Electronics

Petro-Chemical

Products

Automobile

Ship-building

Machinery

Mobilizing Financial Resources

Selecting National Champions(“Chaebol”)


10

ExportCommodity

Profile

1960 1970 1990 1999

1980

HCI Product

Agricultural Product

Light Industry Product

50%

Wig Automobile SemiconductorTextile

2003

Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc.

79.8%

14.1%

6.1%

< Changes in Export Commodity Profile: From Light Industry to Heavy Industry >


11

< Pitfalls of the Government-led Economic Development >

Financial repressiondue to prolonged

government intervention

High inflation andlarge fiscal deficits

Over-investment in HCIs

Negative economic

growth (-3.9%) and

political crisis in 1980

• Inefficient resource allocation• Macroeconomic instability• Rising inequality

Change in policy stance:

“Liberalization and Stabilization”

1.3 Changes in the Development Strategy (1980-97)

12

Increased vulnerability

to external shocks

IMFrescue package

• Massive capital outflow• Denied rollover of short-

term external debt

Continued government intervention/

Weak prudential regulation

Large NPLs in the

financialsector

South-east Asiancrisis

Highcorporate

debt leverageWidesprea

dmoral hazard

< The Crisis of 1997 >

1.4 Delayed Economic Reforms and the Financial Crisis (1/2)

13

Cleaning up non-performing loans

Cleaning up non-performing loans

Acceleratingliberalization

Acceleratingliberalization

Improving corporate governance

Improving corporate governance

Expanding social safety net

Expanding social safety net

- Early graduation from the IMF program- Foreign reserves of more than USD 200bn in 2005

- Early graduation from the IMF program- Foreign reserves of more than USD 200bn in 2005

Improved external positions

Improved external positions

- GDP growth: -6.7% (1998) 10.7% (1999)- Unemployment: 6.8% (1998) 3.7% (2005)

- GDP growth: -6.7% (1998) 10.7% (1999)- Unemployment: 6.8% (1998) 3.7% (2005)

Rapid economic recovery

Rapid economic recovery

- Debt-equity ratio: 396% (1997) 182 (2002) - No. of banks: 33 (1997) 20 (2001)

- Debt-equity ratio: 396% (1997) 182 (2002) - No. of banks: 33 (1997) 20 (2001)

Stronger corporate and financial sector

Stronger corporate and financial sector

1.4 Delayed Economic Reforms and the Financial Crisis (2/2)

2. The Current Status of the Korean Economy

15

KDI 경제전망

Note: P denotes Preliminary.

Source: KDI

2005p 2006

Yearly 1/4p 2/4 3/4 4/4 Yearly

GDP 4.0 6.1 5.8 5.1 4.4 5.3

Private Consumption

3.2 4.8 4.8 4.7 4.4 4.8

Facility Investment

5.1 6.9 9.9 10.4 7.0 8.4

Merchandise Exports

9.7 11.6 12.6 12.6 11.8 11.9

(y-o-y, %)

I. 최근 경제동향 / 15

2.1 The Current Status of the Korean Economy

16

세계경제 여건 - 리스크 요인I. 최근 경제동향 / 16

Possibility of further increase in petroleum price 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%

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$)Further decrease in exchange rate (Korean Won/US$)

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%

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%

2.2 Risk Factors of the Korean Economy

3. Challenges Ahead

18

3.1 Potential Growth Rate and Productivity (1/2)

Economic growth of Korea depended on resources such as capital and labor.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.

Korea has shown one of the highest saving ratio.

It is well endowed with highly educated and well trained labor.

0

20

40

60

80

100

1970 1980 1990 2000 2005

Kindergarten Elementary Middle High College

(%)< School Enrollment Rate >

the number of enrollments in a specified age range Note: Enrollment rate = --------------------------------------------------------------------- the whole population in the same age range

19

(%)

1991 2000∼ 1991 1997∼

(before economic crisis)

1.01.0

6.1

1.21.2

6.9

0.90.9

4.8

2003 2012∼

(after economic crisis)

Productivity

Labor

Capital 3.33.3 3.93.9

2.32.3

1.81.8 1.81.8

1.61.6

잠재성장률 추세변화와 요인III. 한국의 잠재 경제성장률과 그 제고방안 / 19

< Potential Growth and Contributions >

Source: KDI

3.1 Potential Growth Rate and Productivity (2/2)

Growth depending on factor accumulation ran its course, and productivity should lead further growth.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

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

20

0.25

0.27

0.29

0.31

0.33

0.35

0.37

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Payroll,Urban Employees

Total Income, Urban Employee

Total income, Entire Workforce 0.342

0.359

0.290

3.2 Income Disparity Income Disparity

Income disparity increased, reflecting structural changes in industries and labor markets. 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.

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) >

21

Positive correlation between RCA (or profitability) and the share of value added by technological level. Positive correlation between RCA (or profitability) and the share of value added by technological level.

11

< Korea : Share of Employment by Technological Level >

중고기술제품

중저기술제품

3.3 Industrial Restructuring and Challenges from China (1/5)

0%

20%

40%

60%

80%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

High tech

Low tech

Medium-high tech

Medium-low tech

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

High tech

Low tech

Medium-high tech

Medium-low tech

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.

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.

Source: Korea National Statistical Office, Mining and Manufacturing Survey

< Korea : Share of Value Added by Technological Level >

22


0

0.5

1

1.5

2

2.5

1993 20041993 2004 1993 2004 1993 2004

US

China

Korea

Japan

China

China

China

Korea

Korea

Korea US

US

US

Japan

Japan

Japan

Medium-low tech Medium high tech High techLow tech

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.

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.

China showed similar phases of restructuring and became challenges to the Korean

economy.

23

China’s export structure is rapidly converging with that of Korea. China’s export structure is rapidly converging with that of Korea.

< Korea >

Source: UNCOMTRADE

0%

20%

40%

60%

80%

100%

1993 2004

Medium-high tech

High tech

Low tech

Medium-low tech

Non-manufacturing

22

Particularly, China achieved a large increase in the export of IT products. Particularly, China achieved a large increase in the export of IT products.

< China >

0%

20%

40%

60%

80%

100%

1993 2004

Medium-high tech

High tech

Low tech

Medium-low tech

Non-manufacturing


24

Korea maintained CA in some high-tech products such as radio, TV and communication products. Korea maintained CA in some high-tech products such as radio, TV and communication products.

66

0

0.5

1

1.5

2

2.5

3

1993 2004

0

0.5

1

1.5

2

2.5

3

3.5

1993 2004

Japan

US

Korea

China


China

Korea

US

Japan

Japan

US

Korea

China

0

0.5

1

1.5

2

2.5

3

3.5

4

1993 2004

<Computers & Office products> <Semiconductor & Electronic Valves>

<Radio, TV & Comm Equip>

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.

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.

250

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1993 2004

Japan

US

Korea

China


Among major Medium-high tech products,Korea has achieved CA in auto products since 2001.Among major Medium-high tech products,Korea has achieved CA in auto products since 2001.

< Major Medium-High tech Products ><Motor Vehicles & Trailers> <Machines & Equipment>

0

0.5

1

1.5

2

2.5

1993 2004

China

Korea

US

Japan

Korea still has CDA in machines and equipment, however, CA index improved rapidly.

Korea still has CDA in machines and equipment, however, CA index improved rapidly.

26

3.4 Aging Society

< Share of the old (65+) >

0

5

10

15

20

25

30

35

40

60 65 70 75 80 85 90 95 00 05 10 15 20 25 30 35 40 45 50

(% of total population)

EU

Korea

Japan

US

Australia andNew Zealand

The speed of population aging is far higher in Korea than other major developed countries. 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

Reforming the public pension and health insurance program Extending employment opportunities for female, elderly and disadvantaged groups

4. Korea’s Efforts for Globalization

28

4.1 4.1 Korea’s Efforts for Globalization (1/2) (1/2)

Korea pursues to be a global leader, through FTA and the plan to be a Northeast Asian Economic Hub. 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 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.

Chile, Singapore, EFTA, ASEAN

USA, Canada, Japan, Mexico

China, EAFTA, India, MERCOSUR, EU

FTA completed

Negotiation in progress or to be started

FTA under consideration

< Korea’s Promotion of FTA >

29

4.1 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 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 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. 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.

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.

5. Korea and New Zealand – Economic Opportunities

31

5.1 5.1 K-NZ Bilateral Relationship in Merchandise Trade K-NZ Bilateral Relationship in Merchandise Trade (1/3) (1/3)

Korea was the 7th largest trade partner of New Zealand in 2005. 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.

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.

$265 bil

$248 bil

export import

Korea New Zealand

$22 bil

$25 bil

export import

$595 mil

$890 mil

K to NZ NZ to K

< World Trade Volume > < Bilateral Trade Volume >

Year: 2005 Year: 2005

Source: UN Trade Data, 2005

32

5.1 5.1 K-NZ Bilateral Relationship in Merchandise Trade K-NZ Bilateral Relationship in Merchandise Trade (2/3)(2/3)

< Exports of Korea to NZ >

Chemical Products

17%

Automobiles15%

IT Equipment18%

Basic Metals13%

Food, Products & Beverages

12%

other15%

General Machinery

10%

Korea has build up comparative advantage in high tech manufacturing product. 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.

While Korea exported semiconductors, IT equipment and electronic parts, the

nation possessed disadvantage in natural resource.

Source: UN Trade Data, 2005

Year: 2005

33

5.1 5.1 K-NZ Bilateral Relationship in Merchandise Trade K-NZ Bilateral Relationship in Merchandise Trade (3/3)(3/3)

< Imports of Korea from NZ >

other8%

Printing,

PaperProducts,

Publishing

6%

ChemicalProducts

5%Basic Metals

5%

AgricultureForestry,Fishery

37%

Food, Products& Beverages

39%

(million)277162

38

<Agriculture & Forestry,Fishery>

<Food, Products & Beverages>

Wood of coniferous

species

Fruit Bovine meat

Other cheese

vegetable

44

525

Food preparations

< Major Imports of Korea >

Major imports of Korea from NZ included wood and bovine meats. 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.

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.

Year: 2005

Year: 2005

34

5.2 Market Share of NZ in Korea5.2 Market Share of NZ in Korea

Wood of coniferous speciesWood of coniferous species

1990 2005

New Zealand

45.2

U.S

17.9

71.3

16.1

KoreaMarket

Fruit, fresh,dried, nesFruit, fresh,dried, nes

1990 2005

New Zealand

35.9U.S

29

44

9.7

KoreaMarket

Sheepskins and lambskinsSheepskins and lambskins

1990 2005

New Zealand

99.8

England

75

18 0.0

KoreaMarket

Bovine meat, frozenBovine meat, frozen

1990 2005

New Zealand

30.3

Australia

5

58

66.9

KoreaMarket

The share of NZ in Korea market soared up in 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.

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 5.3 Korea-NZ Bilateral Relationship in Service SectorRelationship in Service Sector

There should be large opportunities of the expansion of relationship between Korea and NZ in a variety of service sectors.

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.

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.

Overseas Expenditure - Korea

$1,770Trainingabroad

$1,770Trainingabroad

$3,378studying abroad

$3,378studying abroad

Year: 2004Unit: $mil

10,077,619

$1,239

8,825,585

$1,169

Tourists Expenditure per Capita

< Overseas Expenditure on Education & Training > < Outbound Tourists and Expenditure >

2004

2005

20042005

Year: 2004, 2005

Unit: person, $

THANK YOU !

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

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