Korea in Focus

newly industrialized countries. Today, however, the Korean economy faces the new challenges of internationalization and globalization in an increasingly complex global economic environment.

Past Performance and Policies

Since Korea launched its First Five-Year Economic Development Plan in 1962, the country’s real GNP has expanded by an average of more than 8 percent per year. As a result, Korea’s GNP has grown from US$2.3 billion in 1962 to US$328.7 billion in 1993; per capita GNP has increased from a meager US$82 in 1962 to US$7,466 in 1993 at current price levels.

The industrial structure of the Korean economy has also been completely transformed. The agricultural sector’s share of GNP declined from 37.0 percent in 1962 to 7.1 percent in 1993. The manufacturing sector’s share has increased from 14.4 percent to 27.1 percent in the same period. The service sector accounted for only 24.1 percent of GNP in 1962 but grew to 40.0 percent in 1993.

Korea’s merchandise trade volume increased from US$500 million in 1962 to US$166 billion in 1993. The nation continuously posted trade deficits until 1985 when its foreign debt reached US$46.8 billion, the fourth largest in the world. From 1986 to 1989, Korea recorded current account surpluses and its debt declined.

Trends of Major Economic Indicators

Unit ‘62 ‘70 ‘80 ‘85 ‘90 ‘92 ‘93

GNP US$ bil. 2.3 8.1 60.5 91.1 251.8 305.7 328.7

Per Capita GNP US$ 8.2 242 2,194 2,242 5,883 7,007 7,466

GNP Growth Rate % 2.2 7.6 7.0 7.0 9.6 5.0 5.6

Domestic Savings % 3.3 17.9 29.1 29.8 35.9 34.9 34.9

Ratio

Trade Volume US$ bil. 0.5 2.8 39.8 61.4 134.9 158.4 166.0

Producer Price % 9.4 9.2 38.9 0.9 4.2 2.2 1.5

Consumer Price % 8.3 15.9 28.8 2.4 8.6 6.2 4.8

Inflation in Korea was one of the major economic problems in the 70s and early 80s, during which consumer prices rose at annual rates of 10-20 percent. Since 1982, Korea has managed to keep inflation down to a single digit. The ratio of domestic savings to GNP grew from 3.3 percent in 1962 to 34.9 percent in 1993.

Recent Challenges

Beginning in 1989, the Korean economy began experiencing slower growth, high inflation and a deterioration in the balance of payments. The GNP growth rate fell to 6.7 percent in 1989 from the 12 percent level of previous years. A slump in the growth of the manufacturing sector, from 18.8 percent in 1987 and 13.4 percent in 1988 to 13.7 percent in 1989, contributed largely to this decline in GNP growth rate. The export growth rate on a customs clearance basis, which was 36.2 percent in 1987 and 28.4 percent in 1988, fell to just 2.8 percent in 1989. Reflecting this fall in the export growth rate, the current account surplus lowered to around US$5.1 billion, a significant drop from the 1988 surplus of US$14.2 billion.

In 1991, the economic growth rate showed signs of recovery. The GNP grew during the year 9.1 percent. However, most of this growth was attributed to an increase in domestic demand, particularly domestic consumption. Exports increased 10.3 percent compared to 1990, while the growth rate of imports increased 17.7 percent. The trade balance deteriorate rapidly to a US$7.0 billion deficit in 1991 from the US$4.6 billion surplus in 1989. In addition, price stability, which had served to boost Korea’s competitiveness, weakened. Consumer prices, which had risen on an annual average of 2-3 percent between 1984 and 1987, rose 9.3 percent in 1991.

Recent Economic Trends

‘91 ‘92 ‘93 ‘94. 1 ~ 6

GNP

GNP Growth Rate in % 9.1 5.0 5.6 8.5

Manufacturing Sector Growth Rate in % 9.1 5.1 5.0 10.0

Private Consumption Growth Rate in % 9.5 6.6 5.7 7.2

Investment Growth Rate in % 12.6 0.8 3.6 10.3

Equipment Growth Rate in % 12.1 1.1 0.2 17.7

Prices

Producer Price % 4.7 2.2 1.5 2.2

Consumer Price % 9.3 6.2 4.8 6.2

Balance of Payments 7.0 2.2 1.9 1.6

Export US$ bil. 69.6 75.1 81.0 43.1

Imports US$ bil. 76.6 77.3 79.1 44.7

Current Account

Balance US$ bil. 8.7 4.5 0.4 2.7

In 1992, the Korean economy rapidly cooled off, with the GNP growth rate dipping to 5.0 percent, influenced chiefly by blunted investment in capital goods. The consumer price index rose just 6.2 percent, and the deficit in the balance of payments also dropped to US$4.5 billion.

At that time, the Korean economy faced many challenges on both the internal and external fronts. Part of the economic slowdown may be explained by the cyclical adjustment of the economy after three consecutive years of rapid growth. However, the stagnation was more likely the result of a structural deterioration in competitiveness, due to a combination of the lingering legacies of the past government-led economic management system, which had now become inefficient, and the disappearance of the advantages derived from the once ample availability of low-cost labor: Thus the country was forced to search for a new driving force sufficient for sustained economic growth.

Major Tasks and Policy Directions

To revitalize the economy, the Kim Young Sam Administration, which was inaugurated in February 1993 as the first civilian democratic government in over three decades, is endeavoring to construct a new developmental paradigm called “the New Economy”. This signals a clean departure from the past, when the government directed and controlled the concentrated investment of capital, labor and other resources in selected “strategic” industrial sectors to achieve rapid economic growth. Instead, the New Economy will promote the autonomy and creativity of all economic actors in order to maximize efficiency, while ensuring the equitable distribution of income. In that way, it seeks to enable the nation to leap into the ranks of the developed nations within the next five years.

As an initial step, the new Administration implemented a short-term 100-Day Plan for the New Economy in March 1993, designed to promptly create conditions conductive to revitalizing the economy. This was followed by the development of a new five-year economic development plan. Formally announced in July 1993, the Five-Year Plan for the New Economy was conceived primarily to lay the basis for joining the ranks of advanced countries and thus to effectively prepare for the eventual unification of the Korean Peninsula.

The Government will continue its efforts to ensure the effective implementation of the five-year plan through the spontaneous participation of the people by reforming economic institutions including the improvement or simplification of existing financial and tax systems and administrative measures. Furthermore, the Government will continue to endeavor to fully realized the nation’s economic growth potential, strengthen its international competitiveness, and improve the economic conditions of the public.

If the plan is implemented as intended, the Korean economy is projected to change as follows:

First with increased efficiency and greater realization of growth potential, the gross national product should rise at an average annual rate of about 6.9 percent, raising per capita GNP to US$14,076 in 1998.

Second, greater price stability should prevail as balance is maintained between the more steadily rising demand and the more briskly expanding supply, while wage increases are linked to rises in productivity. The stabilization of the value of the won currency should help stabilize the prices of imported goods and services. The net effect should be to hold down the rise in consumer prices to an annual average of 3.7 percent, the increase in producer prices to an annual average of 1.6 percent and the rise in the GNP deflator to an annual average of 4.6 percent.

Targets of the 5-Year Plan for the New Economy

‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘93-’98

GNP growth, % 8.4 4.7 6.0 7.1 7.2 7.1 7.0 7.0 6.9

Per capita GNP, US$ 6,518 6,749 7,306 8,196 9,339 10,716 12,305 14,076 14,0762)

Rise in producer prices, % 4.7 2.2 1.8 1.8 1.7 1.6 1.5 1.4 1.6

Rise in consumer prices, % 9.3 6.2 4.9 4.3 3.7 3.6 3.2 2.9 3.7

Rise in GNP deflator, % 11.2 6.3 5.3 5.3 4.8 4.5 4.1 3.8 4.6

Balance on curren account, 8.7 4.6 1.4 0 0.9 2.1 3.7 5.3 5.32)

US$ billion

Exports 1) ,US$ billion 69.6 75.1 82.3 82.3 99.3 110.1 122.6 136.3 136.32)

Rate of increase, % (10.2) (7.9) (9.5) (9.5) (10.2) (10.9) (11.3) (11.2) (10.4)

Imports, US$ billion 76.6 77.3 81.3 81.3 95.8 105.3 116.1 128.1 128.12)

Rate of increase, % (17.5) (1.0) (5.1) (5.1) (9.3) (9.9) (10.2) (10.3) (8.8)

Note: 1) On a balance-of-payments basis

2) In terms of 1998 current market prices

The Real name Financial Transaction System

On August 12, 1993, the President took a decisive step toward revitalizing the economy and eliminating corruption by announcing the inplementation of the long-anticipated real-name financial transaction system. In the past, it had been possible to open accounts and conduct business transactions under false names, directly and indirectly fostering institutionalized-corruption and illegal financial dealings. Deeming this reform as the most important in the creation