Trade Promotion and Economic Development in Korea

DoHoon KIM Vice President, Korea Institute for Industrial Economics and Trade

May 29, 2006

1. Export-oriented Policies rather than Import Substitution……..… 2. Evaluating the “Export Promotion” Policy…………….……………3. In order to Promote SMEs’ Exports…………………………………..

1. From Nobody to a World Leader…………………………..……….…2. Export-oriented Industrialization……………………………..……....3. High Dependence on Human Capital…………………………………4. Government-led but Respecting Market Mechanism……………...

Overview of Korea’s Economic Development…………………..3

Contents

II

Export Promotion and Development of Light Industries in 1960s……7IIII

3456

71012

1. Launching “Heavy and Chemical Industries Development Plan” …2. In order to Mobilize Investment Funds…………………….……………3. Establishing Industrial Complexes for HCI Development and Trade Promotion ………………………………………………………4. Evaluating HCI Development Strategies………………………………..

Developing Heavy & Chemical Industries in 1970s………………..14ⅢⅢ14

18

1.1. Building Infrastructure to Promote TradeBuilding Infrastructure to Promote Trade ……………………………. …………………………….2.2. Actively Participating in Globalization…………………………Actively Participating in Globalization…………………………………. 3. Export Diversification……………..……………………………………….4. Overall Assessment………………………………………………………..

23

Towards a More Diversified Trading Country : 1990’s-present…21ⅣⅣ21

2427

16

20

1. Strengths of Korea’s Economic Development……………...………… 2. Structural Economic Weakness…………………………………….……

2931

Strengths and Weaknesses of Korea’s Economic ………….....…29ⅤⅤ

4

I. Overview of Korea’s Economic Development

1960 2005

GDP per capita (in US$) 82 16,291

Share of Manufacturing(in GDP(%))

14.4 32.0 (2004)

Major Industries

WigsEyelashes

ClothesPlywood

Shipbuilding(world no.1)Automobile(world no.5)

Semiconductor(world no.3)Steel(world no. 5)

o Korea was one of the least developed countries in terms of industrial development in early 60s → It has been transformed into one of leading industrial countries in the world during the last 40 years.

[ Korea in 1960 and in 2005 ]

1. From Nobody to a World Leader1. From Nobody to a World Leader

5

2. Export-oriented Industrialization2. Export-oriented Industrialization

[ Rapid increase of exports’ share in GDP(%) ]

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

3 9 14 24 28 32 26 24 34 36

o Korea's industrial development has been achieved through export- oriented strategies.

o During 1960s and 1970s, the period when Korea accomplished the development of major industries, export growth outpaced GDP growth.

6

3. High Dependence on Human Capital 3. High Dependence on Human Capital

o Korea, which had nothing to rely on when it started its economic development, has had to intensively take advantage of abundance of labor forces.

o Fortunately, right labor forces, unskilled and skilled, were there to support appropriate industries.

• 1960s: unskilled and cheap labor forces for labor intensive industries • 1970s: skilled labor forces (engineers) for heavy and chemical industries • 1980s: researchers and scientists for technology-oriented industries

7

4. Government-led but Respecting Market Mechanism 4. Government-led but Respecting Market Mechanism

o Korea's industrial development seems to be known as characterized by government-led development.

o It has been government-led one in the sense that government mobilized various measures to support industrial development.

o But, Korea has been pursuing its economic development fully respecting the conditions of comparative advantage that have been imposed by international economic environments.

o From the earlier stage when the government played an important role in supporting industries, Korea let the market conditions select specific industries that the government should support.

8

1. 1. Export-oriented Policies rather than Import SubstitutionExport-oriented Policies rather than Import Substitution

Ⅱ. Export Promotion and Development of Light Industries in 1960s

Why outward-looking (export-oriented) development?

no domestic market for manufacturing goods.poor endowment of natural resources.need for importing indispensable goods such as food, energy, and capital goods.

Two important steps

boosting savings is important but hard → to increase interest rates.unexpected growth in exports → to depreciate the national currency.

9

allowance for retaining foreign exchange earnings.

exempted from import controls and tariffs.

financial support for exporters at preferential rates.

tax concessions.

fiscal policy in favor of key industrial firms.

a sliding-peg system of exchange rate adjustment.

export targets set by the government.

awards from the president.

Major tools for export promotion policy

10

o Major industries that were developed during 1960s

• labor-intensive industries such as wigs, artificial eyelashes, clothing, and plywood • they were not pre-selected by the government • but selected by entrepreneurs themselves that were responsive to international market conditions

o Export promotion became the first priority in economic policy with various measures to achieve this end.

11

2. Evaluating the “Export Promotion” Policy 2. Evaluating the “Export Promotion” Policy

Exports ImportsKorea Global U.S. Japan Korea Global U.S. Japan

19621963196419651966196719681969

34.158.236.947.142.928.042.236.7

4.59.6

11.88.89.65.0

11.814.3

3.96.9

14.53.9

10.05.3

10.19.6

16.110.922.426.615.76.8

24.223.3

33.532.7-27.914.654.639.146.924.7

5.28.7

11.18.9

10.14.6

11.013.8

11.64.79.1

14.219.53.8

23.08.6

-3.019.517.82.9

16.622.511.415.7

Export growth rate

One of the fastest countries in the world during 1960s1960: $ 41 million → 1970: $ 1,048 million

(source: IMF, International Financial statistics, 1990 and April 1991)

[ export and import growth rates (%) ]

12

from a traditional agriculture-based economy to a manufacture-leading economy

Dramatic change of export structure

1961 1966 1971

Agricultural ProductsFishery ProductsMining Products

Manufacturing Products

28.619.224.527.7

9.610.422.567.5

4.34.62.2

88.9

Total 100.0 100.0 100.0

13

Financial support for SMEs in Korea

Two major financial assistance measures: The Korean government has preferred financial assistance to tax incentives in terms of promoting SMEs.

o Credit rationing scheme for SMEs: it obligates all commercial banks to lend more than a certain proportion of annual incremental loans to SMEs.

o Credit guarantee system to complement the shortage of collateral provided by SMEs.

• 30% → 45% for nation-wide banks• 55% → 80% for locally based banks

3. In order to Promote SMEs’ Exports 3. In order to Promote SMEs’ Exports

14

In order to provide marketing assistance for SMEs’ exports

In 1962, the government set up KOTRA, initially the Korea Trade Promotion Corporation , to assist business to explore foreign markets. Some 103 Korea Trade Centers (overseas branches) are operating in 74 countries as of now. KOTRA also runs 13 regional branch offices in Korea.

o KOTRA’s functions for promoting exports of SMEs• KOTRA introduces overseas buyers to the most appropriate business partners in Korea.• KOTRA dispatches groups of Korean exporters abroad to explore global markets.• KOTRA organizes international exhibitions in Korea as well as large-scale Korean product shows in strategic markets abroad.• KOTRA operates the Cyber Business Center at its Seoul headquarters where overseas buyers can hold online business meetings with domestic companies.• KOTRA provides domestic and foreign firms with trade-related information gathered by its local and overseas networks.

15

1. Launching 1. Launching “ “Heavy and Chemical Industries Development Plan”Heavy and Chemical Industries Development Plan”

Ⅲ. Developing Heavy & Chemical Industries in 1970s

o Targeted industries

• Labor intensive industries, which had fully developed during the first stage of industrialization, started to demand materials produced by heavy and chemical industries.• Apparel and textile for petrochemicals, electronic appliances for steel and nonferrous metals, all light industries for industrial machinery etc.

o Importance of "Sequencing" in the Process of Industrialization

• Steel, petrochemicals, shipbuilding, industrial machinery, nonferrous metals, and electrical industries.

16

• Industrial complexes were established to locate targeted industries.• Massive "policy loans" were mobilized to subsidize investments of targeted industries.• General trading companies were introduced to facilitate exports of targeted industries.

o A veritable industrial targeting policy launched: indirect support in the form of export promotion in 1960s → direct support for specific manufacturing sectors deliberately selected by the government in 1970s.

17

• Credit allocation by the government through the banking system was the most powerful means of supporting selected industries. • Banks, practically owned by the government, were directed to allocate loans to targeted industries on a preferential basis.• During the latter half of the 1970s, the share of policy loans in domestic credit rose steadily from 40 percent to over 50 percent.

o Policy loans in Korea

RatesYear

General bankloan rate

Curb rateAverage borrowingcost(manufacturing)

Consumer price inflation

19701970197519751980198019851990

24.024.015.515.523.423.411.511.5

49.849.841.341.344.944.924.018.7

14.714.711.311.318.718.713.4NA

15.415.425.425.428.728.72.58.6

[ Regulated and Market Interest rates(%) ]

(source: Bank of Korea)

2. In order to Mobilize Investment Funds 2. In order to Mobilize Investment Funds

■ ■ Policy loans and government’s role for investments ■Policy loans and government’s role for investments ■

18

o Establishment of the HCI Promotion Committee.

How to mobilize funds for policy loans

o Establishment of National Investment Fund.• mobilized public employee pension funds and a large portion of commercial bank funds

• in charge of providing the necessary support for government- sponsored investment projects• defined the criteria of qualification for low-cost credit

19

o land provided by Ministry of Construction and Transportation(MOCT) or local government

What have been provided in Industrial Complexes?

o access roads, industrial water supply, electricity, communication system, pollution control, land scraping and other facilities(e.g. schools, housing, recreation, medical centers) provided by MOCT and/or public utility corporations such as Korea Land Development Corporation, Water Resource Development Corporation, and Agriculture Promotion Corporation

o financial support by central or local governments

3. Establishing Industrial Complexes for HCI Development and Trade Promotion3. Establishing Industrial Complexes for HCI Development and Trade Promotion

20

o making industrial complexes attractive for (foreign/domestic) companies

How to make industrial complexes efficient & effective

o providing many incentives• financial assistance for investment• tax incentives during a determined period

• easy to recruit workforces(skilled or unskilled)• easy to ship products(markets, highways, railroads, ports)• well-connected to public utilities(electricity, water supply, communication)• providing proper living facilities for managers(schools, housing & medical centers)

21

1971 1976 1981

Primary ProductsLight Industries

Heavy & Chemicals

13.972.114.2

12.257.929.8

10.445.644.0

Total 100.0 100.0 100.0

A new jump in export structure

fast growth in heavy and chemical products

4. Evaluating HCI Development Strategies 4. Evaluating HCI Development Strategies

22

Ⅳ. Towards a More Diversified Trading Country : 1990’s - Present

1. Building Infrastructure to promote Trade

more dependent on trade

1970 1975 1980 1985 1990 1995 2000 2002 2005

KoreaU.S.

JapanChina

32.18.2

18.7-

57.813.122.7

-

64.017.325.312.5

65.713.522.523.2

53.415.717.230.1

50.318.314.740.1

65.020.818.143.9

57.518.119.050.2

69.320.724.463.5

Source : IMF

[ Dependence on trade by countries](Trade Volume/GDP,%)

but no more direct assistance for promoting trade

23

electronic commerce

taking advantage of world class broadband network

trade fairs

promoting exhibition industries supporting participation in world top level fairs such as COMDEX &, Cebit

training trade professionals

universities & Korea International Traders’ Association

Supporting R&D activities

24

more engaged in globalization

overseas economic cooperation activities

trade negotiations such as DDA & FTA FTAs in effect : Korea-chile, Korea-Singapore, Korea-EFTA FTAs in negotiation : Korea-ASEAN, Korea-India, Korea-USA,

Korea-Canada FTAs in preparation : Korea-MERCOSUR, Korea-EU

2. Actively Participating in Globalization

25

3. Export Diversification

in terms of trading partners

from developed countries towards developing countries trade concentration with major trading parters is decreasing

in terms of exporting products

More High Tech Products

More IT Products

26

【 Top 10 export countries (%) 】Rank

1970 1980 1990 2000 2005

Country % Country % Country % Country % Country %

123456789

10

U.S.JapanHongKongGermanyCanadaNetherlandsU.K.VietnamSingaporeSweden

47.328.1

3.33.32.31.61.61.51.30.9

U.S.JapanSaudiArabiaGermanyHong KongIranU.K.IndonesiaNetherlandsCanada

26.317.4

5.45.04.73.53.32.12.02.0

U.S.JapanHongKongGermanySingaporeU.K.CanadaTaiwanFranceIndonesia

29.819.4

5.84.42.82.72.71.91.71.7

U.S.JapanChinaHongKongTaiwanSingaporeU.K.GermanyMalaysiaIndonesia

21.811.910.7

6.24.73.33.13.02.02.0

China U.S.JapanHongKongTaiwanGermany SingaporeU.K.IndonesiaMalaysia

21.814.5

8.45.53.83.62.61.91.71.6

Total 91.4 71.6 72.9 68.8 65.5

Source : KOTIS

27

【 Top 10 export items (%) 】

Source : KOTIS

Rank1970 1980 1990 2000 2005

Item Share Item Share Item Share Item Share Item Share

1 Textiles 40.8 Garments 16.0 Garments 11.7 Semiconductor 15.1 Semiconductor 10.5

2 Plywood 11.0 Steel Plate-rolled Products 5.4 Semiconductor 7.0 Computer 8.5 Automobile 10.4

3 Wigs 10.8 Footwear 5.2 Footwear 6.6 Automobile 7.7 Wireless telcom 9.7

4 Iron ores 5.9 Vessel 3.6 Video Apparatus 5.6 Petrochemical

products 5.3 Vessel 6.2

5 Electronic goods 3.5 Audio

Apparatus 3.4 Vessel 4.4 Vessel 4.9 Petrochemical products 5.4

6 Confectionery 2.3 Man made filament fabrics 3.2 Computer 3.9 Wireless telco

m 4.6 Computer 5.0

7 Footwears 2.1 Rubber Products 2.9 Audio

Apparatus 3.8 Synthetic Resin 2.9 Synthetic

Resin 3.6

8 Tobaccos 1.6 Woods & Wood items 2.8 Steel Plate-

rolled Products 3.8 Steel Plate-rolled Products 2.8 Steel Plate-

rolled Products 3.6

9 Iron products 1.5 Video Apparatus 2.6 Man made

filament fabrics 3.6 Garments 2.7 Parts of Automobile 3.0

10 Metal products 1.5 Semiconductor 2.5 Automobile 3.0 Video Apparatus 2.1 Video

Apparatus 2.6

Total 81.1 47.6 53.4 56.6 60.0

28

4. Overall Assessment

again export-led growth

high contribution to economic growth

【 Economic growth by export (1990 price base) 】Year Economic growth

by export (A, %) GDP growth rate

(B, % )Economic growth by

export (A/B, %)

19701975198019851990199520002003

3.03.91.51.20.93.82.43.4

8.86.6-2.76.59.58.98.53.1

34.159.1

-18.59.542.728.2

111.2

29

export volume

1980: $ 17.5 billion → 1990: $ 65.0 billion → 2000: $ 172.3 billion

→ 2005: $ 284.4 billion

in search of a more balanced trade

further market opening needed

【 Trade balance ($1 billion) 】Year 1962-85 1986-89 1990-97 1998-2003

Trade balance Δ39 19 Δ67 109

Balance/volume -8.6% 4.9% -4.0% 6.0%

30

Ⅴ. Strengths and Weaknesses of Korea’s Economic Development: Lessons for Developing Countries

1. Strengths of Korea’s Economic Development 1. Strengths of Korea’s Economic Development

Respecting market system

industries with comparative advantage have been promoted letting the market conditions select specific industries that the government should support

Relatively stable political system

enabling rapid decision making and policy implementation allowing elite bureaucrats to react appropriately to environments

31

Accumulation of human capital

high priority placed on education

relatively abundant labor forces for each period: cheap and educated workers for labor-intensive industries in 1960s and 1970s → skilled workers for heavy and technology-oriented industries in 1980s and 1990s

High savings and capital investment

10% of GDP in 1960s → 30% throughout other periods

32

2. Structural Economic Weaknesses 2. Structural Economic Weaknesses

Concentration of economic power

chaebol's economic power → constraining fair competition

moral hazard problems

Weak financial sector

financial sector reform lagged behind other areas

government intervention → moral hazard problems

low productivity, profitability and flexibility

33

Rigid and immature industrial relations

union activity suppressed until mid 1980s

labor law reforms to strengthen basic labor rights in 1987

→ labor market flexibility declined

Collusive relations between government and business

undermining efficiency, fairness and public respect for the bureaucracy