KOREAN ECONOMIC DYNAMISM

Transcription

1 KOREAN ECONOMIC DYNAMISM

2 Also by Dilip K. Das and published by Palgrave Macmillan INTERNATIONAL TRADE POLICY: A Developing-Country Perspective MIGRATION OF FINANCIAL RESOURCES TO DEVELOPING COUNTRIES

3 KOREAN ECONOMIC DYNAMISM Dilip K. Das Visiting Professor Ecole Superieure des Sciences Economiques et Commerciales, Paris M MACMILLAN

4 Dilip K. Das 1992 Softcover reprint of the hardcover 1 st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WClE 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1992 Published by MACMILLAN ACADEMIC AND PROFESSIONAL LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Library Cataloguing in Publication Data Das, Dilip K Korean economic dynamism. 1. South Korea. Economic growth, history I. Title ISBN DOI / ISBN (ebook)

5 For Vasanti, who shared everything great and not-so-great along our twenty-jive-year long journey

6 'In the transformation and growth of all things, every bud and every feature has its proper form. Gradual maturing comes only through the constant flow of transformation and change.' - Chaung Tzu

7 Contents List 01 Tables List 01 Figures Prelace List 01 Abbreviations IX X Xl xiv 1 THE SYNERGY OF KOREAN EFFORTS 1 The Economic Transition 1 Why Korea? 8 The J apanese Role Model 11 The Korean Weltanschauung 14 The Heritage 16 Summing Up 19 2 THE PHASES OF GROWTH AND THEIR CHARACTERISTIC FEATURES 21 The Slack 21 The Turnaround 25 Of Savings and Investment 32 Of Prices and Inflation 36 The Agricultural Sector 40 The Manufacturing Sector 46 Aftermath of the Plaza Accord 54 The Sixth Plan ( ) and its Revision 55 3 OUTW ARD-ORIENTED INDUSTRIALISA TION STRATEGY 59 Scrutinising the Export Growth 59 The Incentive Structure 69 Outward-Orientation and the Macro-Variables 73 Policy Neutrality and Beyond 77 The Prerequisites for Outward-Orientation 80 Conclusion 81 VB

8 viii Contents 4 THE CONDUCT OF THE MACROECONOMIC POLICY 83 Introduetion 83 The Monetary Seetor 83 The Fiseal Seetor 93 The Finaneial Seetor and Pattern of Intermediation 107 Honing the Human Resourees 127 The State of Teehnology THE INVISIBLE HAND VERSUS THE VISIBLE HAND 141 Statism and the Market Forees 141 The Visible Hand in Korea 145 Major Points of Intervention 152 The Unique Features 154 The Changing Role of Government 156 Conclusion EXTERNAL FINANCES AND DEBT MANAGEMENT 159 The Finaneial and Real-Resouree Aspeets 159 Early Dependenee on External Assistance 160 Changing Pattern of Capital Flows 162 The Three Surges 166 Management of External Liabilities 173 And Korea Emerges As A Creditor Nation 175 Structural Adjustments 177 Readjusting to Success 181 Summing Up A PARADIGM FOR THE DEVELOPING ECONOMIES 185 Is Korea Sui Generis? 185 Paths To Follow 187 Notes 197 Bibliography 213 Index 228

9 List of Tables 1.1 Major Macroeconomic Indicators, Comparative Levels of Real Per Capita Income Structure and Growth Rate of Production Import Dependency Gross National and Foreign Savings and Investment, (at Current Prices) Gross National and Foreign Savings and Investment, (at Current Prices) Inflation Rates Grain Production Indexes, Rates of Agricultural Protection Production Indices in the Manufacturing Industries, Targets and Achievements The Composition of Merchandise Exports Products with High RCA Index Values Destination of Exports The Ratio of MI, M2 and Quasi Money to GNP, Interest Rates, Government Finance: Expenditure, Revenue, Surplus or Deficit, Major Indicators of Fiscal Performance, Trends in Income Distribution Proceeds from Corporate Securities Offerings, Employment Elasticity by Sector, Grants-In-Aid, External Debt Profile, Current Account Deficits and Debt Related Ratios, Real Effective Exchange Rate of the Won, lx

10 List of Figures 3.1 Chen's Eclectic Model Expenditure, Revenue, SurpluslDeficit (as per cent of GNP) Budget SurpluslDeficit (as per cent of GNP) Korea's Tax Structure, 1989 Budgeted Korea's Tax Structure, 1987 Actual Evolution of the Financial Structure Financial Institutions in Korea External Debt Profile Debt Related Ratios 169 x

11 Preface There was no element of serendipity in the Republic of Korea's (hereinafter Korea) ebullient and unparalleled economic growth of the last three decades. It was based on sound economic reasons. The majority of the developing countries have performed poorly, so me have even stagnated. A revealing comparison is that in terms of per capita income, during the early 1950s Korea was poorer than both Egypt and India. At that time Egypt and Korea had almost equal populations. Korea's agricultural sector overwhelmingly dominated the GDP; it was a country of pe asant farmers with aper capita income of $450 in In 1987 its per capita income reached $2900, the comparable figures at that time for Egypt and India were $610 and $270 respectively. Korea has become a powerhouse economy of the Pacific rim and an important actor in the world economy. The Korea of 1960 is hardly comparable with the Korea of The former was gene rally believed to be beyond economic development, while the latter, with its per capita income of over $4000, is weil on its way to joining the high-achieving group of industrialised countries. The most significant strand in Korea's growth strategy was its export-led industrialisation which allowed it to exploit its static comparative advantage. It also played a meaningful role in dynamically changing Korea's comparative advantage through accelerating the broadening and deepening of Korea's industrial base. Export expansion facilitated the initiation of new industries at a relatively earlier stage. They could have otherwise been established but not without a substantial loss of scale economies. It also facilitated the enlargement of technological capability by transfer and indigenous R&D efforts. Thus this strategy helped Korea as much in catalysing industrialisation as in capitalising on its industrial competence at each point along the way. The industrial incentive policies, particularly those affecting export promotion, played a major role in the economic transformation. The record of incentives and policy changes in Korea shows a continual, if sometimes slow, movement towards an xi

12 xii Preface increasingly open economy. The restructured macroeconomic policy package was devised and put into place in the first quinquennium of the 1960s, which marked the real turning point in economic growth. One of the important policy changes for the opening up of the economy was the adoption of a uniform exchange rate at a level dose to free-market exchange. Consequently the balance of payments situation improved after The economic liberalisation philosophy took a firm hold after 1964 and the process of import control relaxation was put into operation. An extraordinary feature of Korean economic growth was that the government played an active interventionist role within the framework of a market economy. The intervention was such that the neodassical economic forces were not stifled and resource allocation was still done by the market, although the government influenced the markets. The statist approach was prevented from becoming dirigistic. The interdependence of the government and the private sector was remarkably productive. The government did not suffer from the 'soft state' syndrome and was highly committed to economic growth. A good deal of Korean growth can be justifiably attributed to a pragmatic and sagacious macroeconomic policy framework, and to following neodassical economic lines. How did Korea grow so much faster than most other developing countries? One finds no magie key. Several factors working in a synchronised manner brought it about. My analysis is limited to the macroeconomic factors that were responsible for the dynamic economic growth of Korea, whose experience is particularly rich for those LDCs that are in search of lessons on the effectiveness and propriety of economic policy. It is not that all was weil with the growth scenario. Blemishes did exist, for instance, financial repression, the HCI-drive, a tariff structure that was far from uniform and so on. This book focuses on both the positive and negative aspects ofthe Korean economy. To be sure, the former far outnumber the latter. A caveat emptor is necessary here: this work in no way pretends to be the complete story of Korean economic growth. That would take a repetition of the scholarly Mason-Kim series (published by the Couneil of East Asian Studies, Harvard University, in 1980). It took a great deal of time, energy and resources and several years of sedulous efforts by large teams of researchers working with some of the sharpest American and Korean ac ade mies to prepare the Mason-Kim series. An individual working without any financial assistance cannot possibly be expected to undertake such a gargantuan endeavour. Yet

13 Preface xiii my book is fairly comprehensive in its coverage and does not disregard many worthwhile facets of the Korean economy. It deals essentially with a successful industrialisation process, and how it was devised and implemented. I have attempted to keep my arguments as sharp and focused as possible so that findings can be clearly interpreted. While working on a project of this kind one incurs debts of gratitude from various quarters. I should foremost mention the names of Y.I. Park, the Chief Librarian in the Research Department of the Bank of Korea, and Jae-Chun Kim an economist in the same department. I am grateful to them for providing invaluable statistical support. I thank my wife for carefully editing the text, without this the language would have been incomprehensible. Sarita Singh jointed the project with her enormous nervous energy, provided first rate research assistance and gradually made herself the manager of the manuscript. T.R. Girijavallabhan bore ab the word-processing load with his customary alacrity and efficiency. Paris DILIPK. DAS

14 List of Abbreviations and Acronyms ANIEs DMBs EPB FDI FTZ GATI RCIs JETRO KDB KEB KETRI KIIET KOTRA LDC MCI MFA MFN MoF NCBs OEC ONTA pco QRs R&D SMI SOC UNKRA Asian Newly Industrialising Economies Deposit Money Banks Economic Planning Board Foreign Direct Investment Free Trade Zone General Agreement on Tariffs and Trade Reavy and Chemical Industries Japanese External Trade Organisation Korea Development Bank Korea Exchange bank Korea Electrotechnology and Telecommunications Research Institute Korea Institute for Industrial Econornics and Technology Korean Organisation for Trade Advancement Less Developed Country Ministry of Commerce and Industry Multifibre Arrangement Most-Favoured Nation Ministry of Finance Nation-wide City Banks Office of Economic Co-ordination Office of National Tax Administration Planning and Control Office Quantitative Restrictions Research and Development Small and Medium Industries Social Overhead Capital United Nations Korean Reconstruction Agency XIV