T D HE d K es O of R r E o A wth and D NECO ECONOMY NO YM ... · THE KOREAN ECONOMY Six...

THE KOREAN ECONOMYSix Decades of Growth and Development

The Committee for the Sixty-Year History of the Korean EconomyTHE KOREAN ECONOMYSix Decades of Growth and Development

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60

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Editors

Il SaKong and Youngsun Koh

THE K

OREAN EC

ONOMY

Six Dec

ades o

f Growth

and Develo

pmen

t

The Comm

ittee for the Sixty-Year History of the Korean Econom

yEditors


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60YEARS

THE KOREAN ECONOMYSixDecadesofGrowthandDevelopment

The Korean EconomySix Decades of Growth and Development

Edited by


The Committee for the Sixty-Year History of the Korean Economy

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ⓒ 2010Korea Development InstituteP.O.Box 113 Hoegiro 49 Dongdaemun-guSeoul, 130-868Koreawww.kdi.re.kr

ISBN 978-89-8063-457-6

The Korean EconomySix Decades of Growth and Development


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Foreword

A Note on Romanization

Abbreviations

Contributors

Chapter 1

Introduction 001

Il SaKong

Chapter 2

The Growth of Korean Economyand the Role of Government 007

Youngsun Koh

1. Introduction 0092. Liberation and state-building (1948-1959) 0103. Export promotion and government-led

industrialization (1960-1979) 0164. Stabilization and liberalization (1980-1997) 0395. From the economic crisis to the present (1997-2009) 0616. Challenges 0737. Conclusion 074

Chapter 3

Korea’s Industrial Development 083

DoHoon Kim and Youngsun Koh

1. Introduction 0852. Structural changes in the Korean economy 0863. Historical development of Korean industry 1024. Conclusion 118

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Contents

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Chapter 4

International Economic Policy 123

Junkyu Lee, Jungho Yoo, Nakgyoon Choi,

Jeong Gon Kim, June Dong Kim, Hea-Jung Hyun,

Sangkyom Kim, Jinkyo Suh, Deok Ryong Yoon,

Hongshik Lee and Yoocheul Song

1. Introduction 1252. The early evolution of international economic policy

from the 1950s to 1970s 1253. Expansion of economic liberalization and globalization

from 1980 to the present 1374. Liberalization of foreign direct investment 1455. Economic cooperation 1506. Agricultural import liberalization 1547. Liberalization in the service sector 1618. Financial opening 1679. Conclusion 173

Chapter 5

Territorial Development Policy 177

Jung Jay Joh, Young-Pyo Kim and Youngsun Koh

1. Introduction 1792. Agrarian land reform and post-war reconstruction

from 1948 to the 1950s 1833. Development of industrial parks and population

migration to Seoul in the 1960s 1844. Development corridors and the Saemaul Movement

from 1970 to 1987 1865. The pursuit of a better quality of life and globalization

from 1988 to the 1990s 1956. Promoting regional balance and green growth in the 2000s 2027. An assessment of Korea’s territorial policy 2098. Conclusion 223

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Contents

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Chapter 6

Social Policy 227

Youngsun Koh, Seung Kwon Kim,

Chang Whan Kim, Young Lee, Joo Seop Kim,

Sang Young Lee and Young-Ock Kim

1. Introduction 2292. Demographic changes 2303. Education system 2344. Developments in the labor market 2475. Social welfare system 2686. Health care services 2867. Women’s economic and social participation 2998. Conclusion 306

Appendices

Annex tables 313

Committee members 331

Advisory group 331

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List of tables

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Table 2-1. Price inflation 015Table 2-2. Export credit by banks 018Table 2-3. Capacity utilization in manufacturing 025Table 2-4. Tariff rates (1957-1984) 026Table 2-5. Main components of the August 3rd Measure 032Table 2-6. Central bank lending to deposit money banks 035Table 2-7. Contributions to the reserve base growth 036Table 2-8. International comparison of consumer price

inflation 036Table 2-9. Major macroeconomic indicators (1975-1990) 041Table 2-10. Investment coordination and industrial rational-

ization in automobile manufacturing 046Table 2-11. Reform of BOK lending programs (March 14,

1994) 048Table 2-12. Main indicators of the National Health

Insurance (1977-2008) 058Table 2-13. Housing supply ratio (1960-2008) 058Table 2-14. Expansion of transport facilities 059Table 2-15. Major macroeconomic indicators (1991-2000) 061Table 2-16. Average return on assets of the largest 30

chaebol 062Table 2-17. Changes in the number of financial institutions069

Table 3-1. Annual output growth by sector 086Table 3-2. Share in gross value-added by sector 087Table 3-3. Share of the top 10 export items in total exports089Table 3-4. Distribution of employment by sector 090Table 3-5. Sources of growth in major regions (1961-2004) 093Table 3-6. Imports by commodity group 095Table 3-7. Fish exports in the second half of the 1940s 103Table 3-8. Savings and investment 105Table 3-9. Self-sufficiency ratio of grains (1956-2005) 106Table 3-10. Energy consumption by source 108Table 3-11. Growth contribution by ICT industries 113

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Table 4-1. Foreign aid (1953-1960) 126Table 4-2. The extent of won overvaluation (1955-

1970) 128Table 4-3. Korea’s imports and exports (1955-1970)

130Table 4-4. Openness ranking of major countries 141Table 4-5. Korea’s current status of the FTAs 144Table 4-6. The utilization rate of preferential tariffs 144Table 4-7. Trends of inward foreign direct investment

by the 10 largest investing countries 147Table 4-8. Contribution by foreign-invested com-

panies in manufacturing production 147Table 4-9. Contribution by foreign-invested

companies in services production 148Table 4-10. Korea’s outward direct investment by

region 149Table 4-11. Korea’s outward direct investment by

sector 150Table 4-12. Korea’s trade surplus (1982-1987) 155Table 4-13. Agricultural import liberalization rate 156Table 4-14. Changes in major indicators of agriculture

in Korea 157Table 4-15. Service sector in Korea (1960-2008) 162Table 4-16. The change in travel expenses (1988-

1992) 163Table 4-17. Level of liberalization in the Mode 3 after

the Uruguay Round 164Table 4-18. The acceptance and reservation rate of

Korea 165Table 4-19. Type of FDI in Korea 166Table 4-20. FDI by industry (1990-2008) 168

Table 5-1. Annual growth rate of population by region182

Table 5-2. Designation of industrial parks (1974-1984)187

Table 5-3. Changes in mining and manufacturingemployment by region 188

Table 5-4. Reclamation projects (1946-2007) 194Table 5-5. Housing stock and housing supply ratio

(1980-2006) 198

Table 5-6. Incheon International Airport’s ranking inthe ACI evaluation (2009) 207

Table 5-7. Population in the capital region 210Table 5-8. Urbanization trends 210Table 5-9. Annualized growth rate of the price index

for apartment sales 217Table 5-10. GRDP by region 219Table 5-11. Population of Seoul and the capital region

in 1981 and 1991 219Table 5-12. Population growth in regional growth

centers 220Table 5-13. Index for economic and living conditions

222

Table 6-1. Private tutoring in Korea (2007) 245Table 6-2. Employment rates after graduation and

study-job matches of tertiary education 245Table 6-3. Workers by status 251Table 6-4. Employment by sector 256Table 6-5. Employment by occupational group 257Table 6-6. Flexibility and security in the Korean labor

market 264Table 6-7. OECD employment protection index (2008)

266Table 6-8. Development of the social security system

270Table 6-9. Participants in the National Health

Insurance Program 275Table 6-10. Spending for the care and education of

pre-school age children 280Table 6-11. Average personal income tax and social

security contribution rates on gross laborincome (2008) 284

Table 6-12. Main indicators of the National HealthInsurance (1977-2008) 285

Table 6-13. Number of hospitals and clinics byownership (December 2008) 289

Table 6-14. Agreements of the KORUS FTA in thehealth care sector (December 2008) 297

Table 6-15. Women’s role in Korea’s economic andsocial development 299

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List of tables

Table 6-16. Advancement rate into tertiary education 302Table 6-17. Employment rates of persons with tertiary

education (2008) 305

Annex Table 1. Major macroeconomic indicators (1953-2009) 313

Annex Table 2. Nominal exchange rate of won to the U.S.dollar (1945-1970) 315

Annex Table 3. Share in gross value-added 317Annex Table 4. Share in total employment 319Annex Table 5. Major trade indicators 321Annex Table 6. Demographic trend 323Annex Table 7. Educational participation and resources

325Annex Table 8. Labor market indicators 326Annex Table 9. Participants in work-related social

insurance programs 328Annex Table 10. Health care indicators 330

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List of figures

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Figure 2-1. Movement of real exchange rates (1945-2009) 018

Figure 2-2. Exports and imports (1953-2009) 020Figure 2-3. Marginal effective tax rates on corporate

income 022Figure 2-4. Trend in R&D expenditure 023Figure 2-5. Trend in import liberalization (1955-1999)

026Figure 2-6. Outstanding stock of external assets and

liabilities (1962-2009) 028Figure 2-7. Debt-to-equity ratio and interest coverage

ratio in the manufacturing sector 029Figure 2-8. Inflows of grants, loans, and FDI 030Figure 2-9. Trends in real interest rates (1954-2009)

034Figure 2-10. Consolidated central government fiscal

balance (1970-2009) 042Figure 2-11. Central government debt (1953-2008) 042Figure 2-12. Sterilization of central bank lending (1950-

2009) 043Figure 2-13. Sterilization of net foreign assets (1966-

2009) 044Figure 2-14. Share of the largest 100 companies in

mining and manufacturing 056Figure 2-15. General and central government spending

(1953-2009) 057Figure 2-16. General government spending by function

(1970-2008) 057Figure 2-17. Enrollment rates and the number of

enrolled students (1965-2009) 060Figure 2-18. Output growth: Comparison of 1997-1999

and 2008-2010 071

Figure 3-1. Share in gross value-added by sector 087Figure 3-2. Share in total employment by sector 088

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List of figures

Figure 3-3. Share in manufacturing value-added bysubsector 088

Figure 3-4. Share in exports by sector 089Figure 3-5. Periods of industrialization 091Figure 3-6. Trends of Hoffman ratio across countries

091Figure 3-7. Investment and savings rates 092Figure 3-8. R&D expenditure 094Figure 3-9. Royalties and license fees 095Figure 3-10. Urbanization trend 096Figure 3-11. Labor productivity of the service sector

(1963-2008) 099Figure 3-12. Average wages by firm size in

manufacturing (1980-2008) 100Figure 3-13. Labor compensation per employee (2006)

100Figure 3-14. Employment share in the service sector

101

Figure 4-1. Export composition 131Figure 4-2. Earnings per dollar of exports 132Figure 4-3. Import liberalization 135Figure 4-4. Korea’s tariff rates (1978-2007) 138Figure 4-5. Export growth and real effective exchange

rates 142Figure 4-6. Korean outward direct investment (1981-

2008) 148

Figure 5-1. Map of the Republic of Korea 182Figure 5-2. Changes in farm household income (1971-

1982) 192Figure 5-3. Changes in population distribution (1960-

2005) 211Figure 5-4. Infrastructure development (1960-2008) 213

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Figure 6-1. Population growth and fertility rate(1961-2008) 230

Figure 6-2. Population pyramid in 1955 and 2005231

Figure 6-3. Share of the elderly (65 years and over)in total population (1950-2050) 231

Figure 6-4. Share of foreigners in registeredresidents in Korea 234

Figure 6-5. Number of students 235Figure 6-6. Enrollment rate 235Figure 6-7. Population that has attained tertiary

education (2008) 236Figure 6-8. Investment in educational resources 237Figure 6-9. Advancement rate 237Figure 6-10. Number of high school graduates and

university entrance quota 240Figure 6-11. Fraction of students attending private

institutions (1965-2009) 243Figure 6-12. Inactive youth in the 15-29 age group

with tertiary education (2004) 246Figure 6-13. Unemployment rate 248Figure 6-14. Growth of unit labor costs 249Figure 6-15. Growth of wages and output per work

249Figure 6-16. Number of labor disputes 250Figure 6-17. Labor union participation rate 251Figure 6-18. Share of salaried workers and

regular employees 252Figure 6-19. Employment rate 252Figure 6-20. Wage by worker’s educational

attainment 253Figure 6-21. Share of temporary employees and

day laborers 254Figure 6-22. Female labor market participation

rate by cohort 255Figure 6-23. Employment rates in OECD countries

(2008) 256Figure 6-24. International comparison of the

employment pattern 258Figure 6-25. Workers by status 259Figure 6-26. Share of the non-salaried workers 259

Figure 6-27. Share of part-time workers in totalemployment 260

Figure 6-28. Incidence of part-time employment(2008) 261

Figure 6-29. Trends in the minimum wage level262

Figure 6-30. The level of minimum wage in OECDcountries (2008) 262

Figure 6-31. Hours worked in Korea 263Figure 6-32. Hours worked in the OECD area

(2008) 264Figure 6-33. Labor union participation rate in

OECD countries (2008) 265Figure 6-34. Growth and distribution of income in

1965-1989 269Figure 6-35. Gini coefficient (1982-2008) 270Figure 6-36. General government welfare

spending 271Figure 6-37. Social expenditure in Korea and other

countries (2005) 272Figure 6-38. Recipients of unemployment benefits

278Figure 6-39. Relative poverty rate 281Figure 6-40. Impact of taxes and transfers in

reducing poverty among the entirepopulation 282

Figure 6-41. Participants in work-related socialinsurance programs 283

Figure 6-42. Trends in tax burden 284Figure 6-43. Health outcomes 287Figure 6-44. Health expenditure in Korea 287Figure 6-45. Out-of-pocket and public health

expenditures 288Figure 6-46. Health expenditures in OECD

countries (2008) 288Figure 6-47. Increases in health care resources

290Figure 6-48. Labor force participation rate 301

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Foreword

Korea’s economic success has often been called a‘miracle.’There has been an

ongoing debate about the factors behind its success, which has attracted the interest

of not only academicians but also policy practitioners. Korea’s experience holds

relevance for other developing countries that want to catch up with advanced

economies in a short period of time as Korea did. A careful study of Korea’s

economic history is also essential to chart its future path in the face of new

challenges.

Two years ago, a project to compile the sixty-year history of the Korean

economy was started to contribute to the discussion. For this purpose, issues were

grouped into five areas－(1) general economic policies (macroeconomic, financial

market, fiscal, taxation and competition policies), (2) industrial growth, (3) external

economic relations, (4) territorial development, and (5) social policies. In the last

two years, many research institutions and researchers have worked on this project

to highlight Korea’s progress in the five areas, examine main issues, and draw

lessons. The result was published in five volumes in Korean. This English volume

is a condensed and revised version of the original Korean text.

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In romanizing Korean, we have used the guideline set forth by the Korean

government in 2000. In romanizing the names of Koreans, we have used their

preferred romanization. When the information was not available, we have

followed the above-mentioned guidelines and put a hyphen between the two

personal names, the second of which has not been capitalized. In ordering the

elements of persons’ names, we have adopted a Western sequence?personal

name first and family name last. Exceptions are the names of Presidents of the

Republic of Korea, for whom the use of the family name first seems to be

established by custom and preference. Korean words in the plural are not

followed by the letter“s.”

Many people contributed to the publication of this book. Special thanks go to

Mr. Man-Soo Kang (Senior Economic Adviser to the President and Chairman of the

Presidential Council on National Competitiveness) who initiated the project two

years ago as Minister of Strategy and Finance. The advisory group consisting of

eminent scholars－Professors Chang Yung Jung (Yonsei University), Kwang Suk

Kim (Kyung Hee University), Heeyhon Song (Asia Development Institute), Jung Jay

Joh (former Minister of Maritime Affairs and Ficheries), Hacheong Yeon (Myongji

University), and Chong-Hyun Nam (Institute for Global Economics)－provided

many valuable suggestions to the authors throughout the two-year period to

improve the book. The Ministry of Strategy and Finance (MOSF) financed and

assisted the project under the leadership of Minister Jeung-Hyun Yoon. Messrs

Cheol-Kyu Park (MOSF) and Sang-Mok Choi (Financial Services Commission) have

played a particularly important role in this regard. President Oh-Seok Hyun of

Korea Development Institute organized the work and his staff worked very hard for

a successful completion of the project. The participants of the international

conference held in Seoul on August 30, 2010, including Professor Anne Krueger

(Johns Hopkins University), made valuable comments on the original draft. Mr.

John Burton served as the English-language editor of the book. The devoted efforts

by these people are deeply appreciated.

Il SaKong

Chairman of the Committee for the Sixty-Year History of the Korean Economy

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In romanizing Korean, we have used the guideline set forth by the Korean

government in 2000. In romanizing the names of Koreans, we have used their

preferred romanization. When the information was not available, we have

followed the above-mentioned guidelines and put a hyphen between the two

personal names, the second of which has not been capitalized. In ordering the

elements of persons’names, we have adopted a Western sequence－personal

name first and family name last. Exceptions are the names of Presidents of the

Republic of Korea, for whom the use of the family name first seems to be

established by custom and preference. Korean words in the plural are not

followed by the letter“s.”

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Abbreviations

ALMP active labor market policy

APEC Asia-Pacific Economic Cooperation

ASEAN Association of Southeast Asian Nations

ASEM Asia-Europe Meeting

BOK Bank of Korea

BOP balance of payment

CD certificate of deposit

CP commercial paper

CRIK Civil Relief in Korea

DAC Development Assistance Committee

DDA Doha Development Agenda

DMB deposit money bank

ECA Economic Cooperation Administration

EFTA European Free Trade Association

EIS Employment Insurance System

EPB Economic Planning Board

EU European Union

FDI foreign direct investment

FSC Financial Supervisory Commission

FTA free trade agreement

FTC Fair Trade Commission

GATT General Agreement on Tariffs and Trade

GCC Gulf Cooperation Council

HCI heavy and chemical industry

ICA International Cooperation Administration

ICT information and communication technology

KDB Korea Development Bank

KDI Korea Development Institute

KITA Korea International Trade Association

KOTRA Korea Trade Promotion Agency

L/C letter of credit

M&A merger and acquisition

MBC merchant banking corporation

MDA Manufacturing Development Act

MFN most favored nation

MMA minimum market access

MOF Ministry of Finance

MPC military payments certificate

MRFTA Monopoly Regulation and Fair Trade Act

MSB Monetary Stabilization Bond

NAFTA North American Free Trade Agreement

NAMA non-agricultural market access

NBFI non-bank financial institution

NBLSP National Basic Livelihood Security Program

NFA net foreign asset

NHI National Health Insurance

NIF National Investment Fund

NPS National Pension Scheme

OBS Office of Bank Supervision

ODA Official Development Assistance

ODI overseas direct investment

R&D research and development

RTA regional trade agreement

SACU Southern African Customs Union

SITC Standard International Trade Classification

SME small- and medium-sized enterprise

SOE state-owned enterprise

TFP total factor productivity

TRERA Tax Reduction and Exemption Regulation

Act

TRQ tariff-rate quota

UNC United Nations Command

UNCTAD United Nations Conference on Trade

and Development

UNKRA United Nations Korean Reconstruction

Agency

UR Uruguay Round

URAA Uruguay Round Agreement on Agriculture

WTO World Trade Organization

ZBB zero-based budgeting

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Contributors

Nakgyoon Choi

Senior Research Fellow, Korea Institute for International Economic Policy

Hea-Jung Hyun

Research Fellow, Korea Institute for International Economic Policy

Jung Jay Joh

Former Minister of Maritime Affairs and Fisheries and President of Korea Maritime Institute

Chang Whan Kim

Senior Research Fellow, Korean Educational Development Institute

DoHoon Kim

Senior Research Fellow, Korea Institute for Industrial Economics and Trade

Jeong Gon Kim

Senior Researcher, Korea Institute for International Economic Policy

Joo Seop Kim

Senior Research Fellow, Korea Labor Institute

June Dong Kim


Sangkyom Kim


Seung Kwon Kim

Senior Research Fellow, Korea Institute for Health and Social Affairs

Young-Ock Kim

Senior Research Fellow, Korean Women’s Development Institute

Young-Pyo Kim

Senior Research Fellow, Korea Research Institute for Human Settlements

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Youngsun Koh

Senior Research Fellow, Korea Development Institute

Hongshik Lee

Professor of Economics, Korea University

Junkyu Lee

Research Fellow, Korea Institute for International Economic Policy

Sang Young Lee

Research Fellow, Korea Institute for Health and Social Affairs

Young Lee

Professor of Economics, Hanyang University

Il SaKong

Chairman of the Presidential Committee for the G20 Seoul Summit

Yoocheul Song

Professor of International Business, Dongduk Women’s University

Jin Kyo Suh

Director, Department of Planning and Research Coordination, Korea Institute for International Economic Policy

Jungho Yoo

Professor, Korea Development Institute School of Public Policy and Management

Deok Ryong Yoon


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Chapter 1

IntroductionIl SaKong

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In the last six decades, Korea has achieved unparalleled economic growth. Korea was

one of the poorest countries in the world in 1948 when the government was first

established. Now it has grown into a global economic player with a solid industrial base.

In the meantime, democracy and pluralism have taken firm root in Korean society. It is no

exaggeration to say that Korea is one of only a handful of countries that have combined

economic success with democratic transition in the post-World War II era.

The transformation of the Korean economy can be summarized in two words－

industrialization and globalization. The share of the industrial sector (manufacturing,

construction and public utilities) in total value-added more than doubled from 17 percent

in the 1950s to 38 percent in the 1980s, and has fluctuated around this level ever since. The

service sector has also increased its share from 41 percent in the 1950s to 60 percent in the

2000s. By contrast, the primary sector has experienced a precipitous fall in its share from

42 percent to 3 percent in the same period. Along with rapid industrialization, integration

into the global economy accelerated, as indicated by total trading volume, which rose from

about 10 percent of GDP in the 1950s to 80-90 percent in recent years. Cross-border capital

flows also increased rapidly in this period.

The industrialization of the Korean economy has been greatly affected by the

globalization trend. International trade offered a vast global market for Korean producers.

It also enabled them to import intermediate goods and advanced technologies needed for

the production of export goods. At the beginning, the international division of labor

prompted the growth of labor-intensive industries in which Korea had a comparative

advantage. These industries absorbed surplus labor from rural areas and contributed to an

increase in per capita income and savings rates. Later, as capital accumulation progressed,

the comparative advantage shifted from labor-intensive to capital-intensive industries, and

the latter began to dominate industrial production and exports. Per capita income

continued to grow rapidly as productivity improved.

In the process of industrialization and globalization, the policy stance of the government

underwent a few significant changes. In the aftermath of the Korean War, the government

focused on meeting the immediate consumption needs of the population. It was only in

the 1960s that a systematic effort to jump-start the economy was initiated. The government

actively promoted exports with pecuniary and other incentives given to exporters. Initially,

these incentives were non-discriminatory in the sense that all exporters with a good export

performance were entitled to them regardless of their business sector. In the 1970s,

however, as the government came to concentrate its efforts on promoting heavy and

chemical industries (HCIs), government intervention in the market became more selective

and discriminatory. The government also strengthened its control of the financial market to

003In

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direct resource allocation in favor of the HCIs.

The government-led growth strategy, as exemplified by the HCI drive, produced many

problems, including a serious misallocation of resources, chronic inflation, and greater

income inequality. In the early 1980s, the government made a radical departure from the

past by emphasizing price stability over economic growth. It also encouraged private

initiatives and began to liberalize the market. More attention was given to social policies,

with a corresponding increase in public spending on health, welfare and education.

Throughout its economic history, Korea has had its fair share of failures as well as

successes. Financial repression since the 1960s held back the financial sector from

developing into a fully competitive service industry. A number of large business

conglomerates, namely the chaebol, increased their influence on the back of government

support, and the concentration of economic power emerged as an important economic

and social issue. In addition, Korea failed to establish sound worker-management relations

until disruptive labor movements appeared in the mid-1980s.

Most importantly, the repeated interventions by the government to salvage troubled

firms from bankruptcy strengthened the so-called“too-big-to-fail” principle. Combined

with very low interest rates maintained since the 1960s, the risk partnership between the

government and private sector encouraged excessive borrowing by the latter. The average

corporate debt-to-equity ratio hovered between 300 and 400 percent between the 1970s

and 1990s. The non-performing loans of banks grew in size, and the financial sector

became increasingly vulnerable to external shocks.

The financial crisis of 1997, while inflicting extreme hardship on many Koreans, worked

as a catalyst in solving many of these problems. Many chaebol went bankrupt and the

public-private risk partnership disappeared. Government-led restructuring strengthened the

financial health of the banking sector significantly. External liberalization, especially the

opening of capital markets, accelerated Korea’s integration into the global economy. While

pursuing liberalization, the government also modernized and strengthened prudential

regulation and competition policy. A modern economic system finally came into

operation.

On the other hand, concerns have been raised in the 2000s on the growth potential of

the Korean economy. Economic growth began to slow in the 1990s with the decelerating

growth of the working-age population. Income distribution also started to deteriorate in

the early 1990s, with the expansion of the knowledge-based economy and globalization

leaving low-skilled workers at a disadvantage. At the same time, productivity gaps

between manufacturing and services, between the HCIs and light industries, and between

large and small companies are widening, and access to quality jobs is becoming more

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difficult.

Summarized in this way, the economic history of Korea poses many interesting and

important questions. For example, what are the main characteristics that distinguished

Korea from other developing countries that failed to establish an industrial base? What are

the commonalities and disparities between Korea and other East Asian countries that

achieved similar economic success? Were financial repression, the HCI drive, and

oppressive labor market policies inevitable choices for Korea? What would have a more

liberal, market-friendly policy achieved? These questions hold relevance not only for Korea

but other countries, and continue to generate discussions in academic and policy circles.

To contribute to this debate, the following chapters describe the growth of the Korean

economy from various perspectives. Chapter 2 chronicles the various market interventions

made by the Korean government, including export promotion, the HCI drive, financial

repression, the bail-out of private companies, and price controls. Some of the

interventions, notably export promotion and investment in infrastructure and education,

successfully addressed market failures and contributed to economic growth. But many

others did more harm than good to the long-term growth and stability of the Korean

economy. The author concludes that the government can and should play an important

role in a country’s economic growth, but try to avoid the errors made by the Korean

government.

Chapter 3 documents Korea’s industrialization process, and offers an explanation on its

structural changes in the growth accounting framework. The rapid capital accumulation

based on Korea’s high savings rate accounts for a large part of output growth as has been

noted in the existing literature. No less important, however, has been the rapid increase in

total factor productivity (TFP). Among other factors, international trade has made a

particularly important contribution to TFP growth by stimulating innovation and

technological progress and by encouraging the reallocation of resources from less to more

productive sectors. The authors point out that a critical task for the Korean government is

to maintain dynamism in the private sector, rather than designating certain industries as

“strategic” and providing them with subsidies in the name of industrial policy.

Chapter 4 explains the development of external economic policies in various areas－

trade, foreign direct investment, economic cooperation, agriculture, services and financial

markets. According to the authors, three rounds of devaluation in 1960 and 1961 prompted

a sudden jump in exports in the early 1960s and led to a policy switch in the mid-1960s

from import-substitution industrialization to export promotion. Various export-promotion

measures neutralized the depressing effects of the protectionist policy on exports and

cleared roadblocks to allow the growth of Korean exports in the global market. In this

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respect, a major contribution by the Korean government to export growth in the 1960s and

thereafter lay in eliminating market distortions created by overvaluation and protectionism.

Building on past success, future efforts should be directed at pursuing external

liberalization consistently in all areas and strengthening market mechanisms.

Chapter 5 reviews Korea’s territorial development over the last sixty years. In Korea,

territorial policy has been assigned three main responsibilities: (1) supplying physical

infrastructure for economic growth, (2) stabilizing real estate prices, and (3) promoting

balanced regional growth. The first of these has achieved tremendous success thanks to

heavy government investment, while the other two goals have fallen short. Various

measures to reduce speculative real estate demand often increased price instability in the

market. More successful in curbing property prices were the measures to increase the

housing supply, such as the construction program adopted at the turn of the 1990s. The

Korean government has also made recurrent efforts to promote balanced regional growth,

but the population has continued to be concentrated in the capital region. A more market-

friendly approach to regional development is called for that focuses on building“soft”

infrastructure in regional communities while allowing the dynamic reallocation of resources

across the country.

Chapter 6 examines Korea’s social development with a focus on education, the labor

market, welfare and health care policies. Up to the early 1990s, Korea could maintain

relatively equitable income distribution due to several factors, including the explosive pace

of economic growth and the rapid creation of jobs; the promotion of mass education by

the government; and a labor market that functioned smoothly in most areas. But Korea

currently faces many new challenges. It needs to upgrade the quality of education by

decentralizing the education system and giving more power to parents and students. The

sharp contrast in the labor market between core and periphery workers should be

mitigated by relaxing legal employment protection provisions on the one hand and

strengthening social welfare and active labor market programs on the other. Welfare

policies achieved great progress, especially after the 1997 financial crisis, but further efforts

are required to improve their effectiveness, minimize their adverse impact on work

incentives, enhance long-term financial sustainability, and give a greater role to the private

sector in the provision of services.

To summarize, Korea has achieved not only tremendous economic growth but also

broad-based social development in the last sixty years. Government policies have been

broadly in line with market principles, in particular in regard to exchange rate and trade

policies. Many challenges remain, but as long as Korea maintains its economic and social

dynamism, the future will favor Korea.

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60YEARS


Chapter 2

The Growth ofKorean Economy

and the Role ofGovernment

Youngsun Koh


1. Introduction

Korea has achieved rapid economic growth and social development in the last five

decades. Per capita income grew from 1,342 dollars1 in 1960 to 19,227 dollars in 2008. In

the same period, life expectancy rose from 52.4 years to 79.6 years and infant mortality

declined from 70 deaths per 1,000 births2 to 3.4 deaths. The political structure also

switched from an authoritarian one to a fully functioning democracy.

In the 20th century, such sustained growth over decades can be found in only a handful

of developing economies, including Korea and other East Asian countries. Their socio-

economic achievements have often been described as a‘miracle.’ Various interpretations

have been offered for the role that governments played in leading or supporting these

achievements (Aoki, Kim and Okuno-Fujiwara, 1997).

According to the market-friendly view, the rapid growth was made possible by the

government maintaining macroeconomic stability and heavy investments in human capital.

On the other hand, the selective promotion of particular industries by government was

either ineffective or counter-productive to overall growth since it hampered an efficient

allocation of resources. This view, as represented by the World Bank (1993), Noland and

Pack (2003), Jungho Yoo (2004) and others, emphasizes the primary role of government in

helping the market mechanism to function properly.

At the opposite end of the spectrum is the development-state view, which claims that

prevalent market failures in the early years necessitated government intervention to correct

them. East Asian countries purposefully distorted relative prices (“getting the prices

wrong,” Amsden, 1989) and boosted investment in particular sectors, attaining rapid

industrialization that would have been otherwise impossible.

In the case of Korea, the truth may lie somewhere in between these two extreme views.

Government intervention appears to have been more extensive than the World Bank

(1993) admits. The promotion of exports in the 1960s and heavy and chemical industries

(HCIs) in the 1970s was based on severe financial repression. The period up to the 1980s

was characterized by high import barriers, restrictions on capital flows, widespread price

controls, and repressive labor practices. On the other hand, a relatively stable

macroeconomic environment, well-established private property rights, and large public

spending on education (particularly primary education) and infrastructure investment were

market-friendly aspects of government policy often ignored by proponents of the

1 In 2008 constant won converted into dollars using the exchange rate in 2008.2 This figure is for 1960-1965.

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development-state view.

Some authors have noted that Asian countries did not take the same road to growth

(Perkins, 1994). Hong Kong and Singapore adopted laissez-faire attitudes from the

beginning, whereas Japan, Korea and Taiwan took more dirigiste approaches in varying

degrees. Late industrializers like Malaysia, Indonesia and Thailand, with their abundant

natural resources, relied heavily on foreign direct investment. China and India were

distinctive in their eagerness not only to invite foreign direct investment but also to go

abroad to acquire foreign firms. It would therefore be inappropriate to treat all Asian

countries in the same manner.

At any rate, few would argue that government intervention should continue in managing

the Korean economy. Past interventions produced various problems, including an

underdeveloped financial sector, excessive corporate reliance on debt financing, the

accumulation of non-performing loans by banks, the concentration of economic power in

the hands of a few large business conglomerates (the chaebol), chronic inflation, and weak

democracy. Recognizing these problems, the government began efforts in the 1980s to

liberalize the market and redefine its role. These efforts were not always successful,

however, and full-scale liberalization was postponed until after the economic crisis of 1997.

This chapter discusses the history of the Korean economy during the last six decades.

The central questions are whether various government interventions promoted or retarded

economic growth, and what kind of policy lessons we can now draw for Korea and other

developing countries. Of course, we should expect no definitive answers to such grand

questions, but only meaningful insights that may guide further research.

2. Liberation and state-building (1948-1959)

The liberation from Japanese colonial rule in 1945 left Korea in economic chaos. The

complementary economic structure between the northern and southern parts of the

peninsula was lost. Most of the Japanese businessmen, managers and technicians returned

to Japan, leaving many firms bereft of management or technical expertise. The closely-knit

ties with the Japanese economy, a vast market for Korean goods, were broken. A

stupendous growth in money supply around the time of the liberation period generated

hyperinflation. Amid these difficulties, the newly independent Korean government was

installed in 1948, and it immediately embarked on rebuilding the nation. Any serious effort,

however, was delayed by the Korean War (1950-1953).

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2.1 Establishing a market economy based on private property ownershipThe American military government which was in charge of South Korea between 1945

and 1948 tried to introduce a modern market economy system.3 It outlawed the so-called

“workers’self-management” of factories abandoned by Japanese owners and barred

workers from interfering with managerial responsibilities (Yong-deok Jeon, 1997a). The

military government also began to sell confiscated Japanese-owned property despite calls

for nationalization from both right- and left-wing political groups. The realized sales of

companies and farmland during the three-year U.S. military rule were not large in size, but

this was an important first step toward establishing a market economy based on private

property ownership.

Divesture continued under the newly established Korean government, and sales reached

a peak in 1951-1953. As a result, most of the Japanese-owned properties were converted

into private ownership by 1958. They accounted for a large portion of the total national

economy; for example, among the companies with 300 or more employees, the share of

privatized ones was roughly 40 percent in the 1950s. This achievement is notable given the

predisposition toward socialism even among right-wing politicians at the time.4

2.2 Agricultural land reformLand surveys and registration conducted by the colonial government in the 1910s

established the first modern system of property rights in Korea and reduced land

transaction costs significantly. But it was not accompanied by measures to protect small

farmers, and led to a wide disparity in agricultural land holdings (Seok-gon Cho, 2001).

The Korean government responded to the increasing demand for agricultural land reform

by enacting the Farmland Reform Act of 1949 and revising it in 1950. The reform was

based on the principle of“compensated forfeiture and non-free distribution,” whereby the

government bought farmland from landlords at forced prices and sold it to farmers at

below-market rates.

The reform had many elements that ran counter to private property rights. The

compensation to landlords was less than the market price, leading to big losses for the

landlords (Yong-deok Jeon, 1997b).5 The Farmland Reform Act also banned farmland

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3 The North was occupied by Soviet Union until a separate government was established in 1948.4 In fact, the first Constitution of 1948 mandated companies of major importance to be nationalized or controlled by the government.Following this mandate, the government designated 50 companies as state-owned enterprises in 1951. The Constitution, however,was revised in 1954 as agreed by the Korean and American governments, and divestures gained speed to encompass allindustries except a few strategic ones.


ownership by non-farmers, stipulated the maximum amount of landholdings per farmer,

and prohibited tenant farming. Nevertheless, from the perspective of private property

rights, “compensated forfeiture and non-free distribution” was a better option than

“uncompensated forfeiture and free distribution” as espoused by left-wing groups and

“compensated forfeiture and free distribution” by centrist groups. The most pressing task

at the time was state-building, based on the support of farmers who constituted by far the

largest part of the Korean population, even if this meant some infringements on the private

property rights of landlords.

Agricultural land reform contributed not only to state-building, but also to redistributing

wealth and reducing income inequalities. Everyone was now placed on a more or less

equal footing, and individual effort and ability rather than family wealth became the most

important determinant for individual success. Many believe that the Koreans’characteristic

diligence and their emphasis on education were motivated by this perception of equal

opportunity. On the negative side, however, restrictions on farmland holdings hampered

the growth of large-scale farming and contributed to the low productivity growth of the

agricultural sector in later years.

2.3 Economic reconstruction plans and foreign aidRhee Syngman, the first president of the young republic, strived to rebuild the economy

with a series of reconstruction plans.6 These plans aimed to expand the economic

infrastructure, build key industries (cement, steel, etc.) and increase the productive

capacity of manufacturing (Sang-oh Choi, 2005, pp.358-359).

Rhee’s desire to construct a self-sufficient Korean economy with these plans was in

direct conflict with the American government’s intention to rebuild an East Asian economic

bloc with an industrialized Japan at its center. America urged Korea to liberalize its market,

stabilize the value of the Korean currency, and expand cooperation with Japan. To Rhee,

however, this implied nothing but the revival of the Greater East Asian Co-Prosperity

Sphere and the re-colonialization of the Korean economy. Rhee made full use of Korea’s

geopolitical value to frustrate America’s effort while promoting import-substitution

industries through reconstruction plans.7

5 The forced prices were well below market prices. In addition, the delay in payments due to the war, combined with high inflation,significantly eroded the real value of “land compensation securities”that had been given to landlords in exchange for their lands.

6 The Five-Year Industrial Reconstruction Plan (1949), Reconstruction Plan (1951), Comprehensive Reconstruction Plan (1954),Five-Year Economic Reconstruction Plan (1956), and Three-Year Economic Development Plan (1960). These kinds of development planscould be found not only in socialist economies, but also in capitalist ones such as France after the Second World War (Yergin andStanislaw, 1998).

7 The Taiwanese government was much more cooperative than Korea was with the Americans (Jung-en Woo, 1991, p.52).

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The Korean government also differed with the Americans on what kind of foreign aid it

would receive. There were two types, one being project assistance and the other non-

project assistance. The former was to be used for reconstruction, while the latter was to be

distributed to private enterprises for civilian use. Korea received a large amount of foreign

aid from the United Nations and the U.S. in the 1950s and 1960s.8 The Korean government

preferred project assistance, while the American government preferred non-project

assistance. In the end, the American preference prevailed; under ICA (International

Cooperation Administration) aid, for example, project assistance made up 27 percent of the

total and non-project assistance 73 percent.

In any event, various reconstruction plans prepared by Rhee’s administration failed to

spark economic growth in Korea. They remained just that－plans.

2.4 Exchange rate and trade policiesThroughout the 1950s, the Korean government maintained a complicated multiple

exchange rate system (Frank, Kim and Westphal, 1975). In addition to the official rate,

there were separate rates applied to the counterpart fund9 and to military payments

certificates (MPCs).10 The overvaluation of the Korean won under these rates either

reduced the government’s burden (as in the case of the counterpart fund rate) or increased

its revenues (as in the case of the MPC rate). The government reluctantly adjusted

exchange rates from time to time when it could no longer withstand pressure from

America.

An overvalued exchange rate discouraged imports. Imports were further discouraged by

quantitative restrictions that the Korean government employed to promote import-

substitution industrialization. Trade Programs, which were published semi-annually by the

Ministry of Commerce and Industry, listed three types of goods: (1) freely-imported items,

(2) restricted items whose import required prior approval from relevant ministries, and (3)

banned items (Sang-cheol Lee, 2001, p.459). Banned items referred to those that were

produced domestically in sufficient quantity to meet all domestic demand. Restricted items

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8 The amount of aid as a proportion to GDP corresponded to a low of 11 percent in 1954 and a high of 23 percent in 1957 (Sang-ohChoi, 2005, p.362).

9 The foreign aid often took the form of the right to import from America or other countries a certain amount of goods in dollarterms. A private importer or a government agency that was allocated these rights had to deposit Korean currencies in thecounterpart fund held by the Bank of Korea. The low won/dollar value of the counterpart fund rate meant a smaller burden forthe importer or the government agency (Younghoon Rhee, 2007, pp.302-303).

10 During the war, American and other military forces needed a means of payment for local goods and services they purchased. Tofacilitate this, the Korean government turned over to the United Nations Command a large amount of won in advance with theunderstanding that the terms of repayment in dollars would be negotiated later. In the negotiations, the Korean government triedto keep the won/dollar exchange rate at low levels to maximize its dollar receipts (Krueger, 1977).


were those whose domestic production could not meet all demand.

The tariff system was also geared to protecting domestic industry. From 1945 to 1949, a

single tariff rate of 10 percent was levied on all items except for foreign aid goods. In 1950,

the government enacted the Tariff Act that imposed different rates depending on whether

the item was produced domestically or not, and whether the item was a finished good or

not. Tariff rates were generally high, ranging between 27.4 and 66.5 percent in the latter

half of the 1950s.

Export promotion was also pursued, but the focus was not on actively promoting

exports but on mitigating the impediments to exports. An example is the Foreign

Exchange Deposit System, which allowed exporters to deposit foreign currencies earned

from exports at the Bank of Korea (BOK) and to use them to pay for imports or sell the

foreign currencies to other importers at market rates. However, direct subsidies for exports

were minimal.

2.5 Financial market policiesAccording to Jung-en Woo (1991, p.60), Korea in the 1950s exhibited a textbook

example of financial repression. The official lending rate by banks was capped at 20

percent when the curb market rate was well above that.11 In addition, the credit priority

regulation and the credit ceiling regulation enabled the government to control bank

lending directly (Pyung-joo Kim, 1995, p.188).

In January 1954, the Korea Development Bank (KDB) was launched as a solely

government-owned bank. Its mission was to provide long-term credits to key industries. It

financed over 70 percent of total equipment loans and over 10 percent of total working

capital loans made by financial institutions (Joon-kyung Kim, 1993). It raised funds by

borrowing from the government fiscal loan program (50 percent of the funds in the 1950s)

and issuing bonds (37 percent).

The real interest rate remained negative most of the time due to low official rates and

high inflation, discouraging savings and increasing demand for credit. Credit demand

always surpassed savings despite the regulations mentioned above, and commercial banks

had to rely on the central bank rediscount facility to fill the gap. Before 1957, about half of

bank lending was financed by the central bank in this way (Jung-en Woo, 1991, p.62).

The excessive reliance on the central bank rediscount facility inevitably generated high

inflation. Money supply was increased further by central bank lending to the government

11 The curb market rate was 48-120 percent according to Sang-cheol Lee (2001, p.463) and 150-240 percent according to Jung-enWoo (1991, p.61).

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to finance essential public services, such as defense and the police. Annual inflation

fluctuated between 20 and 400 percent between 1946 and 1957 (Table 2-1). The root cause

of high inflation lay in the lack of operational independence of the central bank. Arthur

Bloomfield, an economist at the New York Fed, recommended the establishment of an

independent central bank resembling the Federal Reserve Bank. Following his advice, the

Bank of Korea Act and the Banking Act were enacted in May 1950. The Bank of Korea Act,

however, failed to bestow full independence on the central bank.

Table 2-1.Price inflation (Unit: %)

Source: Bank of Korea (2005a).

The implementation of the Banking Act was postponed until August 1954 due to the

delay in the privatization and recapitalization of banks. From 1954, the government

attempted five times to sell its shares in banks, but failed. It could finalize the sales in

February 1957 only after relaxing the eligibility conditions for bids. In the end, each major

chaebol came to own a bank, which accelerated the concentration of economic power

(Pyung-joo Kim, 1995, p.190). The military government re-nationalized the banks in 1961

shortly after seizing power.

2.6 Performance of economic policies in the 1950sThroughout the 1950s, the Korean government maintained an overvalued exchange

rate, restricted imports, regulated interest rates and bank lending, and undermined central

bank independence. These market interventions created economic rents, which amounted

to 16-19 percent of GNP according to Nak-nyeon Kim (1999). Of these, the rents resulting

from exchange controls amounted to 11-15 percent of GNP and those resulting from

financial repression 3-8 percent of GNP.

The question is how much of these rents were utilized in productive activities. Sang-oh

Choi (2005) observes that rents were distributed mostly to those who put them to

productive use, and stimulated economic reconstruction at the time. He cites the case of

the cotton spinning industry, which lost 66 percent of its facilities during the war, but

recovered soon after and even encountered over-capacity in the latter half of 1956.

Younghoon Rhee (2007) also claims that the government maintained a certain degree of

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1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959

Producer price 385.4 73.9 62.9 36.7 - - - 25.3 28.2 81.1 31.6 16.2 -6.2 2.6

Consumer price 280.4 78.9 58.4 24.9 167.5 390.5 86.6 52.5 37.1 68.3 23.0 23.1 -3.5 3.2


consistency and ethical standards in distributing dollars obtained from foreign aid and

military payment advances to civilians. In fact, real output grew by 3.8 percent annually in

1953-1960. This is about half the rate witnessed in the 1960s and afterwards, but it can

hardly be called“stagnation.”

Contrary to these views, some authors believe that the government policies at the time

encouraged zero-sum rent-seeking activities rather than positive-sum productive ones,

leading to the underperformance of the Korean economy far below its growth potential.

Jones and SaKong (1980, pp.270-274) describe the rapid growth of the chaebol after the

liberation, and declare that the major sources of accumulation were (1) non-competitive

allocation of import quotas and import licenses, (2) the bargain price acquisition of former

Japanese properties, (3) the selective allocation of aid funds and materials, (4) privileged

access to cheap bank loans, and (5) the non-competitive award of government and U.S.

military contracts for reconstruction activities. To be successful as an entrepreneur, one had

to build close ties with politicians and return their favors with cash (Jung-en Woo, 1991,

pp.65-69).

However plausible each of these contrasting views is, it is not possible to make any

quantitative judgment on this issue. We will conclude this section by looking at policy

changes taken in 1957. In the mid-1950s, the view gained wide support within America

that the best way to win the war against communism lay in promoting the economic

growth of its allies. The American government subsequently separated military and

economic aid, and began to reduce the former while increasing the latter. In addition, it

reduced unrequited transfers and introduced the Development Loan Fund in its place.

American aid to Korea peaked in 1957 and declined rapidly thereafter. At the same time,

the American government pressed the Koreans to adopt the Financial Stabilization Program

(1957-1960) to eliminate large budget deficits and curb rapid monetary expansion. Unlike

previous efforts, stabilization under the Program relied on a systematic framework

comprising annual targets for M1 growth and quarterly and monthly implementation plans.

This provided the first opportunity for Korean officials to learn the techniques of

controlling money supply (Pyung-joo Kim, 1995, p.187).　

3. Export promotion and government-led industrialization(1960-1979)

Park Chung-hee, who came into power in 1961 through a military coup, adopted a

government-led growth strategy to build an industrial base for Korea. The strategy rested

on promoting exports and heavy and chemical industries (HCIs). For this purpose,

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financial repression was continued and imports were restricted. Below we will explore

various aspects of the growth strategy in the 1960s and 1970s.

3.1 Export promotionAs the new president, Park proclaimed that economic development would be the central

agenda of his administration (Soon Cho, 1991, pp.175-177). He and his aides understood

the importance of economic success in legitimizing their forceful seizure of power. Their

ideological orientation was far from a free market economic model and they made many

mistakes.12 Still, they managed to adopt active export promotion and this later turned out

to be the most important reason for their success.

Initially, export promotion was pursued in response to the rapid depletion of foreign

exchange reserves (Sang-cheol Lee, 2005, p.394). The reserves began to decline in March

1962 due to the large repayment of short-term commercial loans raised in 1961 and 1962 to

finance the first Five-Year Economic Development Plan (1962-1966).13 Faced with the

specter of a foreign exchange crisis, the government introduced various measures. In

January 1963, the export-import link system was introduced to give exporters the right to

import foreign goods equal to the full amount of exports.

In the meantime, exports began to grow rapidly following the two rounds of

devaluation in February and October of 1960.14 Starting with a 66 percent growth in 1960,

exports increased by 43 percent a year up to 1964. Bolstered by the success, the

government started more serious efforts to promote exports in 1964-1965. First, a new

exchange rate regime was announced in May 1964. Multiple fixed rates were consolidated

into a single variable rate, and the won was devalued by almost half from 130 to 255 won

per dollar. The real exchange rate has maintained a competitive and stable level since

then. Figure 2-1 shows the won/dollar real exchange rate and the won’s real effective

exchange rate over the past decades, and compares them to the dollar’s performance.

At the same time, the government phased out various ad hoc export subsidies and the

export-import link system, and established a comprehensive and consistent export

incentive mechanism (Kwang Suk Kim, 1994, p.322; Choong Yong Ahn and Joo-Hoon

Kim 1995, p.324). Key measures were (1) export credits that were automatically extended

12 They abandoned the Financial Stabilization Program and adopted expansionary fiscal and monetary policies in the first two yearsof the first Five-Year Economic Development Plan (1962-1966). They carried out a currency reform in May 1962 to mobilize idledomestic capital held by households, but it failed to disgorge the funds. The new administration also attempted unrealistic andwasteful investments in the domestic production of cars and color TV sets, but abandoned the projects shortly thereafter.

13 The reserve fell by half (from 205 to 107 million dollars) in nine months between December 1961 and September 1962.14 The Korean government reluctantly accepted these devaluations in accordance with the agreement with the U.S. government.

See Chapter 4 for further discussion on export promotion policies in the 1960s.

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to exporters who turned in letters of credit and (2) tariff exemptions on imports of

intermediate inputs.15 Of particular importance were the export credits, whose share in

total bank credit rose from 4.5 percent in 1961-1965 to 7.6 percent in 1966-1972 and then

to 13.3 percent in 1973-1981 (Table 2-2). The interest rate on export credits was kept at

low levels, and the gap with the general interest rate reached 17 percentage points during

the high-interest rate period of 1966-1972.

Figure 2-1. Movement of real exchange rates (1945-2009)

Note: A rise in exchange rate indicates a decline in the value of domestic currency.

Source: OECD (http://stats.oecd.org); Bank of Korea (2005a).

Table 2-2. Export credit by banks (Unit: %)

Source: Joon-kyung Kim (1993), Table 4-3; Bank of Korea (http://ecos.bok.or.kr).

These incentives were augmented by administrative measures. First, a target was set for

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1961-1965 1966-1972 1973-1981 1982-1986 1987-1991 1992-2001 2002-2008

Share of export credit in total bank credit 4.5 7.6 13.3 10.2 3.1 2.0 1.5

Interest rate on export credit (A)

General interest rate (B)

(B-A)

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18.2

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17.1

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17.3

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10.0

10-11.5

0-1.5

10-11

10-13

0-2.0

15 Other measures for export promotion included (3) indirect tax exemptions on intermediate inputs and exports, (4) direct taxexemptions on exporters (abolished in 1973), (5) wastage allowance for imports of raw materials, (6) registration as an importerconditional on export performance, (7) tariff and indirect tax exemptions granted to domestic suppliers of exporters, and (8)accelerated depreciation of fixed assets in major export industries.


019

each year’s total exports by adding up the export forecasts of individual firms. This practice

was often called“export targeting.” Second, Monthly Export Promotion Meetings were

held, where government officials and business representatives gathered to monitor export

performance, compared it to export targets, identified problems, and sought solutions. The

president himself chaired the meetings. Third, the Korea Traders Association and the Korea

Trade Promotion Agency (KOTRA) were launched. KOTRA took charge of building overseas

networks, helped the marketing activities of domestic firms, and collected market information.

Exports as a proportion of GDP rose from 5 percent in 1963 to 28 percent in 1973

(Figure 2-2). International trade is known to produce multiple benefits.16 The question is

whether various schemes introduced in the mid-1960s were really helpful in promoting

exports. Kwang Suk Kim (1994, p.326) notes that they did not raise financial gains for

exporters much. Even before the exchange rate reform, exporters could convert their

foreign currency earnings into domestic currencies at market rates through the foreign

exchange deposit system. Devaluation of the won therefore did not suddenly increase

exporters’profits. The total amount of various subsidies to individual exporters was also

similar in the 1950s and 1960s. Jones and SaKong (1980, p.96) propose other reasons for

the rapid growth of exports. According to them, “the most important cause for the change

was probably the reduction of alternative higher-yielding sources of entrepreneurial

income. If you can make 100 percent in a few months with little risk, through privileged

access to foreign exchange, there is little point in devoting effort to the difficult and

complicated task of exploring export markets and putting together internationally

competitive productive combinations. The exchange rate reform closed out the zero-sum

sources of rent, reduced opportunity costs, and drove rent-seekers into productive positive-

sum activity.” They also note that other factors such as the decline in exchange rate

variability and the commitment to growth by a politically stable government must have

played an important role in creating a favorable business climate.

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16 First, international trade enhances the division of labor as countries specialize in their areas of comparative advantage.Second,integrated markets enable producers and consumers to reap the full benefits of economies of scale. Third, stronger competitivepressure prompts producers to reduce inefficiencies and invest in productivity-enhancing capital goods and innovation (OECD,2007, pp.6-7). In addition, exporters from developing countries can gain knowledge of product development,manufacturing,marketing, and other modern practices in advanced countries (Je-min Lee, 2001, pp.493-495). The knowledge gained issubsequently disseminated to other parts of the economy, leaving positive externalities.


Figure 2-2. Exports and imports (1953-2009)

Source: Bank of Korea (http://ecos.bok.or.kr).

3.2 Government-led industrialization“Industrialization” was the central theme of the Five-Year Economic Plans that started in

1962. The initial version of the first Plan (1962-1966) assigned 34 percent of gross

investment to mining and manufacturing (Eun-bok Lee, 1986, pp.777-778). The revised

version (1964) declared the Korean government’s ambition to modernize the industrial

sector and enhance its international competitiveness by rapidly expanding key industries

(cement, fertilizer, industrial machinery, oil refinery and others), fostering related industries,

and promoting new export and import-substitution industries.

The second Plan (1967-1971) placed emphasis on HCIs, including steel, machinery and

petrochemical industries. In case of steel industry, the Steel Industry Promotion Act was

enacted in 1969 to support the construction of a large-scale integrated iron and steel mill

and other kinds of mills by granting tax exemptions to them (Ki-jun Lee, 1986, p.786). In

other industries, similar laws－the Machinery Industry Promotion Act (1967), the

Shipbuilding Industry Promotion Act (1967), the Textile Industry Modernization Act (1967),

the Electronics Industry Promotion Act (1969), the Petrochemical Industry Promotion Act

(1970), the Nonferrous Metal Producing Business Act (1971)－were introduced to provide

financial and tax incentives to these industries (Kwang Suk Kim and Joon-kyung Kim,

1995, p.49). Of particular importance to the government was the construction of a

petrochemical complex and an integrated iron and steel mill. Both projects had to rely

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021

almost entirely on foreign technology and capital, and they encountered many difficulties

at the beginning. Construction began in 1969 and 1970, respectively, after several years of

struggle.

The government also made considerable efforts to alleviate shortages in economic

infrastructure. Electric power development projects were carried out from 1962 and the

supply of electric power came to exceed demand in the mid-1960s. Road construction also

succeeded in easing transport difficulties with the completion of major expressways. The

Seoul-Incheon, Seoul-Busan and Honam Expressways were opened in 1968, 1970 and

1973, respectively.

A full-scale drive toward HCIs began in 1973. On January 1st, Park Chung-hee stated in

his New Year’s press conference that“the government is announcing the HCI project to

promote HCIs. To achieve a 10 billion dollar target of annual exports by the early 1980s,

the share of HCIs in total exports should be raised to well over 50 percent. From now on,

the government will accelerate the promotion of HCIs such as steel, shipbuilding and

petrochemical industries, and thereby increase their exports (Yeong-koo Park, 2005,

p.406).” The HCI Drive Committee was organized shortly after, and the Committee

presented the HCI Drive Plan in June. Targets were set to achieve per capita income of

1,000 dollars and annual exports of 10 billion dollars. Through industrial deepening and

export mix upgrading, the share of HCIs in total industrial production was to be raised

from 35 to 51 percent between 1972 and 1981, and their share in total exports from 27 to

65 percent. For this purpose, six strategic industries－steel, nonferrous metal, machinery,

shipbuilding, electronics, and chemical engineering－were selected. The Plan was revised

slightly in the fourth Five-Year Economic Plan (1977-1981) prepared after the first oil

shock, but in most part, it was pursued with great consistency until the Comprehensive

Economic Stabilization Program was introduced in April 1979.

Various reasons have been suggested for the adoption of the HCI drive (Choong Yong

Ahn and Joo-Hoon Kim, 1995, p.329). First, the government felt the urgent need to

strengthen its self-defense capacity by building a defense industry. Concerns about national

security grew as North Korea’s military provocations increased in frequency toward the

end of the 1960s. Furthermore, the American government announced in 1968 that its

ground troops would be gradually pulled out of Korea in 1971-1975. Second, it was

considered necessary to upgrade the industrial structure and find new export industries to

maintain a safe lead over newly industrializing countries. Policymakers thought that HCIs

would provide new sources of growth.

Government support to HCIs took various forms; (1) providing long-term credits and tax

incentives to selected industries; (2) establishing and expanding vocational schools and

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training centers to supply skilled manpower; and (3) creating government-funded research

institutions to carry out R&D activities as a public good (Kwang Suk Kim, 1994, pp.347-

348; Choong Yong Ahn and Joo-Hoon Kim, 1995, p.330).

Perhaps the most important of these were the credit programs. By controlling the

financial sector, the government could supply vast amount of directed credits with low

interest rates and share investment risk with private enterprises. The National Investment

Fund (NIF), established in 1974, played an important role in this regard. Banks, insurance

companies and public funds were required to lend a certain portion of their funds to NIF.17

The NIF lent these funds in turn to financial institutions at low interest rates (5 percentage

points below the rates on general long-term bank credits on average before 1982) for very

long periods (8-10 years in some cases). In 1974-1991, 80 percent of the lending was

assigned to specialized banks (including development banks), 17 percent to commercial

banks, and 3 percent to regional banks. In 1974-1981, 62 percent of NIF lending was

assigned to KDB, and the NIF accounted for 57 percent of total equipment loans by

financial institutions. This share reached 70 percent in the late 1970s, when big industrial

complexes were being built around the country.18

Figure 2-3. Marginal effective tax rates on corporate income

Source: Tae-won Kwack (1985). Recited from Jungho Yoo (1991).

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17 To lend to NIF, banks set aside 10-30 percent of the increase in deposits, insurance companies 40-50 percent of total premiumcollection, and public funds (such as pension funds for teachers and civil servants) 90 percent of their idle cash. In 1974-1979,these sources accounted for 74, 14 and 12 percent, respectively, of NIF funding (Joon-kyung Kim, 1993, pp.162-163).

18 In 1982, interest subsidies on policy loans were abolished. At the same time, the share of KDB in NIF re-lending began to declinewhile those of the Export and Import Bank and other specialized banks began to rise.


023

On top of directed credits, various tax incentives were offered to HCIs. Tae-won Kwack

(1985) estimated the marginal effective tax rates of HCIs to be 30-35 percentage points

lower than those of light industries during the height of the HCI drive (Figure 2-3).

Also notable were public-sector R&D activities. The total of public and private R&D

spending remained below 0.5 percent of GDP throughout the 1970s, far below the current

level of around 3 percent (Figure 2-4). The public sector played a leading role in those

years, accounting for 50-70 percent of total R&D spending. The government launched

many research institutions whose mission was to import advanced foreign technologies,

modify them to suit local needs, and disseminate the results.

Figure 2-4. Trend in R&D expenditure

Source: National Statistical Office (http://www.kosis.kr).

Yeong-koo Park (2005) summarizes the characteristics of the HCI drive in the following

way. First, it had a clear export orientation, going beyond import-substitution

industrialization. Its primary goal, as stated by President Park in his New Year’s press

conference, was to increase total annual exports to 10 billion dollars. Such export

orientation exposed domestic firms to international competition, forcing them to constantly

improve productivity.

Second, the government led the drive but left actual implementation to the private

sector. In most cases, the government confined its role to providing financial and tax

incentives to large private enterprises such as Samsung and Hyundai, and refrained from

direct participation in industrial production. This distinguished Korea’s strategy from those

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of other developing countries at the time.19

Third, the HCI drive took demand conditions and government budget constraints into

full consideration. Priority was given to finished goods production, and then went

upstream to intermediate inputs and raw materials. Even in the case of the defense

industry, 80 percent of the capacity was allocated to the production of civilian goods in

order to maximize capacity utilization. The HCI Drive Plan specified funding requirements

for each project, and care was taken not to exceed the budget ceiling.

The HCI drive, however, was not always planned and implemented with care. Yung

Bong Kim (2003) observes that“given the haste with which the HCI Drive Plan was

prepared, it is extremely unlikely that economic benefits of individual investment projects

were carefully evaluated.” In implementing the Plan, “the detailed targets and modes of

individual projects were often determined through bargains between politicians,

bureaucrats and businessmen, with bureaucrats selecting the firms to benefit from the

projects.” If this observation was true, there must have occurred no small degree of

inefficiencies in implementing the Plan.

Different authors have expressed different views on the success or failure of the HCI

drive. On one side are those who believe that it was mostly a failure. Indeed, the HCI drive

produced excess capacity. In 1975-1980, capacity utilization in machinery, electrical

instruments and transportation equipment was around 50 percent, well below the average

capacity utilization of over 70 percent in total manufacturing (Table 2-3). This indicates the

existence of inefficiencies in resource allocation. Jungho Yoo (1991) shows that HCIs

exhibited a very low capital efficiency compared to light industries, and claims that the HCI

drive retarded overall output growth. Jong-Wha Lee (1996) finds no correlation between

industrial policies, such as tax incentives and subsidized credit, and total factor productivity

growth in the promoted sectors. He further shows that trade protection reduced growth

rates of labor productivity and total factor productivity.

The HCI drive has also been criticized for its negative impact on other aspects of the

national economy. Large amounts of policy lending led to the unhealthy accumulation of

debts by enterprises. Acting as vehicles for the HCI drive, the chaebol further increased

their economic power. Excessive monetary expansion produced chronic inflation. Most

importantly, financial repression obstructed the development of a competitive financial

sector and increased the inefficiency in financial intermediation.

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19 Since 1973, the Taiwanese government also stressed the promotion of three HCIs－steel, petrochemical and shipbuildingindustries. Unlike in Korea, however, state-owned enterprises played the main role in implementation.


025

Table 2-3. Capacity utilization in manufacturing (Unit: %)

Source: Young-Sun Lee (1986).

On the other hand, some authors argue the HCI drive should be evaluated from the

perspective of a dynamic comparative advantage.20 According to them, Korea could make

full use of the“three lows”21 in the mid-1980s because of the industrial base built during

the HCI drive, which provided an opportunity to deepen industrial structures and upgrade

the export mix.

It is difficult to assess the impact of HCI drive on Korea’s growth path because of our

limited ability to construct counterfactuals. International comparisons, however, provide

some clues. Radelet, Sachs and Lee (1997), after reviewing the different paths taken by East

and Southeast Asian countries (Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia,

China and Indonesia), concluded that“while the promotion of heavy industry may have

been beneficial in some identifiable cases, it surely was not the common denominator that

accounts for the rapid growth across East and Southeast Asia. Instead, the common

denominator was manufactured exports, supported by a regime best characterized as free

trade for exporters. The varied experiences of the countries of East and Southeast Asia

indicate that both an open market and a more interventionist approach that offsets other

distortions can be made to work, as long as manufacturers face the acid test of operating

on world markets, both for imported inputs and exports. East Asia’s successful industrial

policy strategy was to support labor-intensive manufactured exports, not capital-intensive

heavy industries (emphases by the original authors).”

From this perspective, Korea’s favorable growth performance was due to its export

orientation taken since the 1960s rather than the HCI drive itself. Of course, without

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20 See Pack and Saggi (2006) for the discussion on dynamic comparative advantage and their criticism of this concept.21 The “three lows”refer to low oil prices, low international interest rates, and the low value of the dollar (with which the won

moved closely) against the Japanese yen.

1975 1977 1979 1980

Total manufacturing

Steel

Nonferrous metal

Machinery

Electrical instruments

Transportation equipment

Textile

Wood and wood products

Paper and printing

70.1

67.1

67.1

52.2

62.6

42.0

70.8

74.7

84.7

81.5

80.2

85.0

66.9

71.8

37.6

58.9

94.3

96.5

81.9

81.1

69.6

60.1

69.4

35.3

82.8

84.3

93.2

71.8

74.8

62.0

42.3

58.6

44.0

79.1

52.6

57.2


definite proof for or against the effectiveness of the HCI drive, the debate will continue.

3.3 Import liberalizationThe government promoted exports but maintained restrictions on imports to contain

current account deficits and protect domestic industries. Tariff rates began to decline slowly

in the early 1970s, but their levels remained very high until the early 1980s (Table 2-4).

Table 2-4. Tariff rates (1957-1984) (Unit: %)

Note: 1) Simple average of statutory tariff rates.

Note: 2) Weighted average of statutory tariff rates with 1975 production as weights.

Note: 3) General tariff plus special tariff and foreign exchange tax.

Note: 4) = 1 / (1 + total tariff).

Note: 5) Shaded areas indicate the periods when the tariff rates rose.

Source: Kwang Suk Kim (1998), Tables 1 and 5.

Figure 2-5. Trend in import liberalization (1955-1999)

Note: ‘Tariff liberalization’refers to the inverse of total tariff as defined in Table 2-4. ‘Liberalization of quantitative

restrictions’refers to the number of freely-imported items divided by the number of total items.‘Total

import liberalization’is the average of these two ratios. Quantitative restrictions include those imposed not

only by the Ministry of Commerce and Industry but also by other ministries.

Source: Kwang Suk Kim (1988), Table 5; Kwang Suk Kim (2001), Table Ⅳ-1.

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1957 1962 1968 1973 1977 1979 1984

Simple average tariff1) 30.2 39.9 39.1 31.5 29.7 24.8 21.9

General tariff2) 35.4 49.5 56.7 48.1 41.3 34.4 26.7

Total tariff3) 35.4 49.6 58.9 48.2 41.3 34.4 26.7

Inverse of total tariff4) 73.9 66.8 62.9 67.5 70.8 74.4 78.9


On the other hand, quantitative restrictions were reduced significantly. The previous

positive list system whereby the Ministry of Commerce and Industry designated freely

imported, restricted and banned items was turned into a negative list system in July 1967.

In the new system, only restricted and banned items were identified, and all other items

could be imported without restriction. In Figure 2-5,‘liberalization of quantitative

restrictions’is defined as the number of freely-imported items divided by the number of

total items. This ratio jumped from 9.3 percent in 1966 to 52.4 percent in 1967.

Between 1968 and 1977, however, quantitative restrictions were strengthened, and total

import liberalization remained at around 55 percent. Compared to Japan and Taiwan,

which had already raised the liberalization ratio above 90 percent in the mid-1960s and

mid-1970s, respectively, liberalization proceeded very slowly in Korea (Young-Sun Lee,

1986, p.812). Quantitative restrictions were aimed mainly at protecting the domestic HCI

and agricultural sectors (Jungho Yoo, 1991, p.70). It was almost impossible to import the

items in these protected sectors.

Import liberalization made a fresh start in 1978 with the announcement of three separate

liberalization schedules. It was put off again due to the second oil shock that occurred in

1979, but continued after 1980. It gained full momentum in 1984 as the external balance

was restored.

3.4 Large increase in foreign borrowingCapital account opening was also pursued. In so far as its goal was to encourage foreign

capital inflow to fill the gap in domestic savings, however, liberalization remained selective

and partial. In January 1960, the Foreign Capital Inflow Inducement Act was enacted but

did not succeed in attracting much inflow. In July 1962, the new administration introduced

the Foreign Borrowing Repayment Guarantee Act to provide guarantees not only to public

but also private borrowing. These two laws were merged into the Foreign Capital Inflow

Act in August 1966 (Pyung-joo Kim 1995, p.199). At the same time, the government agreed

with Japan to normalize their diplomatic relationship in return for reparation payments of 500

million dollars22 and commercial loans of 300 million dollars (Jung-en Woo, 1991, pp.85-87).

All these efforts led to the heady growth of foreign borrowing. Access to state

guarantees was considered a privilege, and all private enterprises wanted to get a share

regardless of the viability of their business plans. The large gap between domestic and

22 Reparation was for the Japanese colonial occupation, and the payments comprised 300 million dollars in grants and 200 milliondollars in government loans.

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foreign interest rates due to the interest rate reform in 1965 also encouraged foreign

borrowing. Figure 2-6 shows that the outstanding stock of external liabilities, rising from 4

percent of GDP in 1962, hovered at around 40 percent in the 1970s, and rose further to 50-60

percent in the early 1980s. This ratio went down to close to 20 percent only after the current

account experienced large surpluses in the latter half of the 1980s due to the“three lows.”23

Figure 2-6. Outstanding stock of external assets and liabilities (1962-2009)

Source: 1) Debt liability for 1962 is from Joon-kyung Kim (1993), Table 4-14, and those for 1963-1969 are from

Jung-en Woo (1991), Table 4-8. Foreign direct investment for 1962-1969 was obtained by accumulating

annual foreign direct investment from Figure 2-8. Total external liability in this period is the sum of debt

liability and FDI.

Source: 2) Figures for 1970-2004 are from Lane and Milesi-Ferretti (2006). Figures for 2005 and after are from

International Investment Position, Bank of Korea (http://ecos.bok.or.kr).

Addiction to debt financing took root in this period. The debt-to-equity ratio in the

manufacturing sector rose from 100 percent in the mid-1960s to 300-400 percent in the

1970s (Figure 2-7). Interest payments turned more onerous, as reflected in the interest

coverage ratio of 100-200 percent in the 1970s through 1990s. This implies that operating

profits could barely cover interest expenses in those years.

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23 The outstanding stock of debt liabilities corresponded to about 25 percent of M2 stock (and similarly of the bank lending stock) in1962, rose to about 150 percent in the 1970s, and then went back to 20-30 percent after the three-low period.


029

Figure 2-7. Debt-to-equity ratio and interest coverage ratio in the manufacturing sector

Note: Interest coverage ratio = operational profit / interest expense.


Toward the end of the 1960s, many enterprises were no longer able to repay foreign

loans. Banks, which were in charge of providing guarantees on foreign borrowing, also

met difficulties (Jin-hyeon Kim, 1986, p.600; Eun-bok Lee, 1986, p.783). In response, the

government began to strengthen qualitative and quantitative restrictions on borrowing and

paid greater attention to attracting foreign direct investment (FDI). It launched a program

to attract FDI, designated the Masan Free Export Zone in 1970, and enacted a special law

prohibiting labor unions in foreign companies (Ki-jun Lee, 1986, pp.792-793; In-hwan

Noh, 1986, p.567). FDI inflows, however, remained meager (Figure 2-8). It was not only

because Korea was not a very attractive place for multinational corporations, but also

because there were still many restrictions on FDI inflows. Restrictions were also placed on

capital outflows as reflected in the low level of external assets in Figure 2-6. Full-fledged

market opening for both inflows and outflows came only after the economic crisis of 1997.

Since the late 1960s, widespread insolvency in the corporate sector had been a recurrent

problem. It left banks with piles of non-performing loans and threatened the stability of the

whole financial system. The government intervened frequently to stabilize the market, but

never tried to redress the root cause of the problem (i.e., excessive debt financing). In fact,

government interventions, by propping up ailing firms with public money and other

emergency measures, heightened the expectation that the government would always offer

a helping hand in times of difficulty, which encouraged further borrowing. This will be

discussed below in detail.

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Figure 2-8. Inflows of grants, loans, and FDI

Sources: 1) Among grants, financial aid from U.S and international organizations are from Bank of Korea, EconomicStatistics Yearbook, 1984, p.245, and reparation payments from Japan are from Economic Planning Board,

Whitepaper on Reparation Payments, 1976, p.29.

Sources: 2) Commercial and public loans (1962-1965) are from Ministry of Finance, Thirty-Year History of Fiscal andFinancial Policies, 1978, p.97.

Sources: 3) Commercial and public loans (1966-2007), foreign direct investment and GDP are from Bank of Korea

(http://ecos.bok.or.kr).

3.5 Financial repressionThe government increased intervention in domestic financial markets to support the

government-led growth strategy, reversing the course from the 1950s (Pyung-joo Kim,

1995, p.199; Seok-mo Koo, 1986, p.127). First, commercial banks were renationalized. The

government promptly enacted the Act to Dispose of Illegally Accumulated Wealth in July

1961 and confiscated bank shares in October. The government was now in full command

of commercial as well as specialized banks.

The government also strengthened its grip on the central bank by revising the Bank of

Korea Act in May 1962. The Financial and Monetary Board was renamed as the Financial

and Monetary Operation Board to emphasize the operational, in contrast to policy-making,

role of the Board. The Minister for Finance was given the right to request the Board to

reconsider its decisions. When the Board stuck to an initial decision by a super-majority

(over two-thirds of the votes), the final decision was to be made by the cabinet. Thus the

ultimate responsibility for monetary policy came to rest clearly with the government. The

BOK was also subject to inspections by the Ministry of Finance and to audits by the Board

of Audit and Inspection, and the decision on the BOK’s annual budget was transferred

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031

from the Board to the government.

The Banking Act was revised twice, in May 1962 and January 1969, to reinforce

government control of banks. The control was often exercised through notices and

instructions from the Ministry of Finance without any clear legal basis, and affected all areas

of management. At the same time, the BOK also exercised control on commercial banks

through its rediscount facility on which banks depended heavily.

The government also established various specialized banks. The Industrial Bank of

Korea (1961), the National Agricultural Cooperative Federation (1962), the National

Federation of Fisheries Cooperatives (1962), Kookmin Bank (1963), Korea Exchange Bank

(1967), Korea Development Financing Cooperation (1967), Korea Trust Bank (1968),

Housing and Commercial Bank (1969), and the Export-Import Bank of Korea (1976) were

established in addition to KDB (1954).

This array of apparatus enabled the government to intervene in the market quite

extensively. The only incident where the government retreated from market intervention

was the decision to raise interest rates in 1965 following the recommendation by American

advisers－Hugh Patrick, Edward Shaw and John Gurley (Jung-en Woo, 1991, p.103). On

September 30, 1965, the rate on time deposits was doubled from 15 to 30 percent, and the

lending rate was increased from 15 to 26 percent. Such a steep rise in interest rates

shocked the business community that had grown accustomed to very low rates.

The interest rate reform had two purposes. The first was to encourage savings in banks

and other financial institutions. The higher rate was expected to attract financial resources

from the curb market, which offered an interest rate of over 50 percent, to the regulated

market. The second was to enhance the efficiency of resource allocation. The higher rate

would raise the opportunity costs of capital and prevent wasteful investment.

Indeed, time deposits at banks increased by half by December, and doubled each year

afterwards. Time deposits as a proportion to GDP rose from 2 percent to 21 percent

between 1964 and 1969, and total deposits from 6 percent to 29 percent. The reform,

however, entailed unintended consequences. Banks incurred losses because the lending

rate was below the deposit rate, and the BOK had to subsidize them by paying interest on

reserve requirements. More serious were the increase in foreign borrowing induced by the

large gap between domestic and foreign interest rates and a resulting increase in corporate

insolvency.

These problems led the government to revoke the interest rate reform and cut interest

rates (Seung-yun Lee, 1986, pp.196-197). The rate cut was carried out in six stages

between April 1968 and August 1972. The government also organized the Taskforce to

Restructure Insolvent Firms within the presidential office in 1969 and began closing down

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or merging insolvent firms (Pyung-joo Kim, 1995, p.200; Jin-hyeon Kim, 1986, p.600; Jung-

en Woo, 1991, pp.109-110).

Entering the 1970s, output growth slowed due to the recession in major trading partner

countries and the stabilization program adopted after IMF recommendations. At the same

time, repayment of foreign loans began in full, and imposed serious burdens on indebted

firms. The large devaluation of 1971, part of the stabilization program, added to the

burden. Many firms turned to the curb market to tide over the difficulties (Chung-yum

Kim, 2006, pp.313-314).

The business community demanded government action to alleviate their financial

burden. In 1972, the government responded with a fifth and sixth interest rate cut (in

January and August, respectively) and the August 3rd Measure.24 The Measure aimed at

relieving enterprises from the burden of curb market loans and providing special financial

Table 2-5. Main components of the August 3rd Measure

Source: Pyung-joo Kim (1995), pp.202-203.

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Component Explanation

Curb marketloanrestructuring

Curb market loans as of August 2nd of 1972 should be reported and converted into long-term loans with athree-year grace period and a five-year repayment period at a monthly interest rate of 1.35 percent (anannual rate of 16.2 percent).

Special creditprogram forbusinesses

Special bonds would be issued by financial institutions and bought by the BOK in the amount of 20 billionwon and at an annual yield of 5.5 percent. The proceeds would be used for the conversion of 30 percentof short-term credits to businesses into long-term loans with a three-year grace period and a five-yearrepayment period at an annual interest rate of 8 percent.

Cuts in interestRates

The maximum lending and deposit rates of financial institutions and the maximum BOK lending ratewould be reduced. Lending rates of specialized banks and fiscal loans would be adjusted. The BOK wouldcompensate for losses incurred by financial institutions by paying interest on reserve requirements andproviding special credit subsidies.

Increasedsupply ofcredit guarantees

The government would provide grants to the SME Credit Guarantee Fund and the Agricultural andFisheries Credit Guarantee Fund to facilitate credit supply to businesses with insufficient collaterals. Eachfinancial institution would install a credit guarantee fund.

Industrialrationalizationandinvestmentpromotion

The Committee for Industrial Rationalization would be organized within the Prime Minister’s Office anddesignate industries to be rationalized. KDB would supply long-term rationalization loans to businesses atlow interest rates. Taxes would be reduced for designated industries by raising special depreciation ratesof fixed investment and increasing corporate and personal income tax investment credits.

Abolishing thetax sharing

Central government grants to local governments and educational authorities would be reduced byabolishing the statutory tax sharing system and instead allocating funds through the central government’sannual budget process.

24 Its full name was the President’s Emergency Decree on Economic Stability and Growth.


033

support. All curb market lenders and borrowers were required to report all their loans held

as of August 2nd to tax offices or banks between August 3rd and 9th. Borrowers were

exempted from repaying unreported loans. Reported loans were converted into long-term

loans with a three-year grace period and a five-year repayment period. The interest rate

was set at 1.35 percent per month (16.2 percent per year), which was far below the curb

market rate of 3.5 percent per month (42.0 percent per year). The reported aggregate

amount of loans was equivalent to roughly 90 percent of M1. Table 2-5 summarizes the

main components of the August 3rd Measure.

The effect of the August 3rd Measure, if any, was short-lived. After a brief contraction,

the curb market grew again and generated another crisis in the money market in the 1980s.

In fact, the existence of the curb market is inevitable under interest rate controls and

directed credits. The size of curb market depends on (1) the level of regulated interest

rates, (2) the size of funding demand, and (3) the efficiency of financial intermediation.

First, the lower the regulated interest rate is, the larger is the curb market. Those who

hope to reap a higher rate of return will supply their savings to the curb market. Official

interest rates remained at very low levels from the 1950s to the early 1990s (Figure 2-9).

The real rate on export credits averaged -10 percent in the 1960s and 1970s, and the real

NIF lending rate was negative in 1974-1981. The general lending rate was also very low.

Second, the larger the credit demand is, the larger is the curb market. The high debt-to-

equity ratio of 300-400 percent after the 1970s indicates that credit demand was very large.

One reason can be found in the frequent interventions by the government to restructure

private businesses. The first instance was the restructuring done by the Taskforce to

Restructure Insolvent Firms that began its work in May 1969 on 30 firms with foreign debts

and 56 firms managed by banks. The Taskforce finalized a restructuring plan in August

1969. The plan aimed (1) to save all banks that had provided loans or guarantees to

insolvent firms, (2) to clean up the balance sheets of firms burdened with foreign debt, and

(3) to force owners of insolvent firms to sell their personal property (Chung-yum Kim,

2006, p.308). Similar interventions were tried again and again in the 1970s and 1980s,25 and

strengthened the expectation that the government would always come to the rescue when

times got tough for businesses. This expectation was dispelled only after the economic

crisis of 1997 as the sudden fall of the debt-to-equity ratio indicates (Figure 2-7).

Third, the more inefficient the financial intermediation is, the larger is the curb market. If

credits are directed by the government mostly toward unprofitable investments, then those

investments excluded from directed credits, but sufficiently profitable, would seek funding

in the curb market.

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Figure 2-9. Trends in real interest rates (1954-2009)

Note: 1) Real rates were obtained with GDP deflator (GNP deflator in 1954-1970).

Note: 2) General lending rate refers to the discount rate on commercial bills by deposit money banks before

1990, general lending rates in 1990-1995, and the weighted average of corporate lending rates on new

loans after 1995.

Source: 1) Curb market rate is from Nak-nyeon Kim (1999), p.134 and Duk-Hoon Lee et. al (1998), p.32.

Source: 2) General lending rate is from Bank of Korea (2005a), p.79 and Bank of Korea, Monthly Bulletin, various

issues.

3) National Investment Fund lending rate is from Il SaKong (1993), p.244.

4) Export credit rate is from Nak-nyeon Kim (1999), p.134 and Il SaKong (1993), p.244.

Estimates on the size of directed credits in the 1970s range from 40 percent to 60 percent

of domestic credits (Pyung-joo Kim and Yung-chul Park, 1984, p.354; Un-chan Chung,

1986, p.210; Il SaKong, 1993, p.35; Joon-kyung Kim, 1993, p.316; OECD, 1996, p.45).

Inefficiency would have been unavoidable when the size of the directed credits was that

large.

The August 3rd Measure was a failed attempt by the government to put under its control

not only foreign borrowing and the organized financial markets, but also the unorganized

ones. A better way to eradicate the curb market would have been (1) assuring positive real

returns in organized markets by liberalizing interest rates and stabilizing price inflation, (2)

denouncing implicit guarantees to private businesses, and (3) discontinuing directed

credits.26 These were tantamount to giving up financial repression.

25 Examples are the August 3rd Measure of 1972, the HCI investment coordination in 1979 and 1980, and the industrialrationalization in the mid-1980s. The latter two incidences will be explained below.

26 As can be inferred from the convergence of general lending rates and curb market rates in Figure 2-9, the curb marketdisappeared gradually in the 1990s precisely for these reasons (especially (1) and (3)).

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035

3.6 Macroeconomic stabilityThe primary role of the monetary authorities during the government-led growth period

lay in supplying“growth money,” and price stabilization received a far lower priority.

Banks never had enough money to satisfy the voracious demand for credit from

businesses, and had to rely on central bank lending (Pyung-joo Kim, 1995, p.219; Joon-

kyung Kim, 1993, p.138). In 1968, the government abolished the ceiling on the central

bank rediscount facility and entitled banks to an automatic rediscount of a fixed proportion

of their directed credits. Consequently, the share of central bank lending in total deposit

money bank (DMB) credits reached 10-20 percent in 1965-1993, and its share in total

directed credits 30-40 percent (Table 2-6). The share was especially high in the case of

export credits; banks relied for 89 percent of their export credits on central bank lending in

1973-1981.

Table 2-6. Central bank lending to deposit money banks (Unit: %)

Source: Figures for 1965-1972 are from Joon-kyung Kim, 1993, p.138 and the rest are from Bank of Korea (http://ecos.bok.or.kr).

Central bank lending was the major source of reserve base growth (Table 2-7). In 1973-

1981, the reserve base grew by 25.1 percent annually, of which 20.2 percent came from

lending to DMBs. Such a rapid growth in the reserve base inevitably led to high inflation.

Consumer price inflation soared to 10-20 percent in the 1960s and 1970s, far higher than in

Japan, Taiwan or Singapore (Table 2-8).

In the 1960s and 1970s, the government tried to contract the money supply from time to

time to contain inflation. Except for a few years (1963-1964, 1970-1971), however, money

supply continued to grow rapidly and the budget deficit remained large due to the

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1965-1972 1973-1981 1982-1986 1987-1993 1994-2001 2002-2008

Lending under global ceiling

Rediscounts

Export credits (A)

Commercial bills (B)

Agricultural and fisheries lending

General lending

Other lending

0.0

72.2

63.2

9.0

18.5

6.6

2.7

0.0

72.0

59.7

12.3

3.9

20.7

3.4

0.0

45.6

28.6

16.9

2.2

51.1

1.1

0.0

37.1

7.4

29.7

3.1

54.4

5.4

74.5

0.0

0.0

0.0

1.4

18.2

5.8

100.0

0.0

0.0

0.0

0.0

0.0

0.0

Total central bank lending (C) 100.0 100.0 100.0 100.0 100.0 100.0

A/DMB export creditsB/DMB commercial bill discounts

75.422.5

89.151.3

65.647.7

44.244.6

0.00.0

C/DMB creditsC/DMB directed credits

11.3-

20.232.5

23.740.1

16.729.3

5.4-

1.4-


Table 2-7. Contributions to the reserve base growth1)(Unit: %)

Note: 1) = current year’s growth rate × the ratio of previous year’s stock to reserve base.

Note: 2) = BOK’s purchase of government bonds and lending to government - government deposit at BOK.

Note: 3) Sterilization through Monetary Stabilization Bonds and Monetary Stabilization Account.

Source: Figures for 1950-1969 are from Bank of Korea, Economic Statistics Yearbook, various issues and the rest are from Bank of

Korea (http://ecos. bok.or.kr).

Table 2-8. International comparison of consumer price inflation (Unit: %)

Note: 1) 1981-1990.

Source: OECD (http://stats.oecd.org); National Statistics, Republic of China, Taiwan (http://eng.stat.gov.tw); Census and Statistics

Department, Hong Kong SAR (http://www.censtatd.gov.hk); Statistics Singapore (http://www.singstat.gov.sg).

“growth-first” policy at the time (Tae-seong Jeong, 1986, p.969). Instead of

macroeconomic tools, the government relied heavily on price controls. Price controls had

been imposed intermittently in the 1940s and 1950s without much success. In November

1961, a legal basis for price controls was prepared with the introduction of the Act on

Temporary Measures for Price Controls. Price controls in accordance with the Act

continued until 1971 (Jae Hyung Lee, 2005, p.439; Seong-sang Park, 1986, p.939;

Economic Planning Board, 1982, pp.52-53).

The government considerably strengthened price controls in the 1970s. In March 1973,

amid escalating inflation fueled by devaluation and sky-rocketing international commodity

prices, it put in place the Price Stabilization Act to replace the previous Act on Temporary

Measures. The new Act extended the coverage of regulation from the price of goods to the

price of services, including rent, fees and user charges. Inflation came down temporarily,

but intensified again in 1974 due to rising oil prices.

The government continued price controls but had to allow occasional upward

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1960-1970 1970-1980 1980-1990 1990-2000 2000-2009

Korea

United States

Japan

Taiwan

Hong Kong

Singapore

13.8

2.8

5.6

3.4

-

1.1

16.3

7.8

9.0

10.4

-

6.4

6.3

4.7

2.0

3.1

7.8 1)

2.2

5.1

2.8

0.8

2.6

5.3

1.7

3.2

2.5

-0.2

0.9

0.2

1.5

1951-1964 1965-1972 1973-1981 1982-1986 1987-1993 1994-2001 2002-2009

Net lending to government2)

Lending to DMBs

Increase in net foreign assets

Sterilization3)

Others

29.7

12.7

-

0.0

6.6

1.1

9.5

1.5

-3.8

31.0

6.0

20.2

5.8

-8.6

1.6

-1.8

32.0

4.5

-38.8

17.2

-7.0

6.7

22.1

-30.7

34.0

-1.6

-3.1

62.0

-29.8

-21.8

2.9

0.4

45.0

-21.1

-17.5

Growth of reserve base 49.0 39.3 25.1 13.0 25.0 5.7 9.7


adjustments in prices. It also revised the Price Stabilization Act into the Act on Price

Stabilization and Fair Trade in 1975. The new Act brought in wide-ranging regulations,

including those on monopolistic and oligopolistic pricing. In addition, competition policy

(i.e., regulations on anti-competitive behavior and unfair trading) was included in the Act

in the belief that a fundamental cure for inflation lay in installing a competitive market

structure. But the Act served mainly to implement price controls and did not play a

significant role in promoting competition (Jae Hyung Lee, 2005, pp.439-440). The Act

enabled the government to intervene directly in the entire process of production,

distribution and consumption, to set“standard prices,” and to influence the pricing in

monopolistic and oligopolistic markets.

Not supported by monetary and fiscal adjustments, however, price controls failed to

stabilize inflation. They delayed but could not prevent eventual price increases, generating

public distrust of government policies and boosting inflationary expectations. Producers

diverted their sales to overseas markets to avoid the price controls, which amplified

domestic inflationary pressure and enlarged the black market. In return, the government

had to intervene further in the market by imposing production quotas and export caps on

enterprises (Tae-seong Jeong, 1986, p.970).

The government began to reduce price controls in the 1980s. The Monopoly Regulation

and Fair Trade Act was introduced in 1980 as the first fully-fledged competition law.

Competition policy was transferred to the new Act from the Act on Price Stabilization and

Fair Trade. Some price regulations remained, but were finally abolished in February 1994.27

3.7 Labor market policiesDuring the colonial period, the labor movement also represented a political movement

against the Japanese occupation (Sookon Kim and Ju-Ho Lee, 1995). Many workers

considered their employers, mostly from Japan, not as partners for mutual prosperity, but

as adversaries to defeat. This characteristic carried over into the 1960s-1980s when the

adversaries were no longer Japanese employers but domestic authoritarian rulers.

After the liberation, many labor unions were organized with a strong political bias (right

or left) and fought each other. The government enacted basic labor laws during the

Korean War that focused on protecting workers and were quite progressive in nature.

Their purpose was to win favor with the workers in the midst of the struggle with

27 This means that general price controls were discontinued. There still exist price controls on certain items (such as mobile phonecharges) based on sector-specific laws.

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communism. But given the lack of government’s administrative capacity and the scarcity of

profitable businesses at the time, labor laws did not have much real meaning. The gap

between laws and reality became commonplace after that.

Labor unions, highly politicized and engrossed in infighting, continued to form and

disband along political lines. The Federation of Korean Trade Unions (FKTU) was formed

in November 1960, but made little difference. In 1961, the military government suspended

labor laws, dissolved the FKTU, and converted company-level unions into fifteen industry-

level unions. In 1962, it also placed restrictions on civil servants’three basic labor rights

(i.e., rights to organize, bargain collectively, and strike).

The government further weakened labor unions by prohibiting multiple unions within a

firm, reinforcing the ban on political involvement by labor unions, and allowing employers

to escape from punishment for unfair labor practices if they corrected them afterwards. In

return, the government expanded statutory benefits and protection for workers, including

weekly and annual paid leave, severance payments, and limited work hours.

The 1970s witnessed the increasing oppression of the labor movement. In December

1972, the government declared a state of emergency and promulgated the Act on Special

Measures on National Security. Collective bargaining as well as strikes was now subject to

mediation by the authorities. Moreover, the revised Constitution of 1973 (the Yushin

Constitution) stipulated that the workers’three basic rights could be limited or denied by

law. The labor movement turned more violent and more politically charged, especially

after an incident in November 1970 in which a worker in a sweatshop set himself on fire in

protest at government policies.

The suppression of the labor movement continued in the 1980s. The Chun Doo-hwan

administration, installed in 1981, amended the Constitution with additional restrictions on

collective action. The Labor Union Act was revised to restrict the workers’right to organize

by prohibiting union shops and industry-level unions, and requiring a minimum number of

votes from workers to form a labor union in a firm. The intervention of third parties was

also outlawed. Furthermore, the Labor Dispute Adjudication Act was revised to prohibit

workers from demonstrating outside their workplaces. This prohibition actually inflicted

larger losses on firms as striking workers occupied workplaces instead and disrupted

production lines.

On June 29, 1987, Roh Tae-woo, the presidential candidate of the ruling party, made a

public pledge to expand civil rights and revive democracy if he won the election. This

resulted in an outbreak of labor disputes. There were about 3,500 labor disputes in July

and August alone and 3,749 in total during the year, a huge jump from 289 in 1986. The

issue was about wage increases in most cases, but the real issue was often about

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organizing a new labor union if there had been none or dismantling the existing company-

controlled union. In November, laws were revised and restrictions on the workers’right to

organize were partly eased. Labor disputes subsided in following years (1,878 in 1988,

1,616 in 1989, and 322 in 1990).

To summarize, the oppressive labor market policies in the 1960s through 1980s

contributed to high economic growth and rapid job creation, but at the same time

produced political instability and hampered social integration. The legacy of violent labor

movement still remains.

4. Stabilization and liberalization (from the 1980s to the Crisis of 1997)

At the turn of the 1980s, the government attempted a drastic change in policy directions.

A“growth-first” strategy was replaced by“consolidating growth on the basis of stability.”

“Private sector-led” rather than“government-led” growth was emphasized. In particular,

price stabilization was pursued with contractionary policies, banks were privatized, and

competition policy was strengthened. These attempts, however, were only half successful

in redefining the respective roles of government and the private sector.

4.1 Macroeconomic stabilizationThe giddy output growth of 9 percent in the 1970s was accompanied by

macroeconomic imbalances (Kwang Suk Kim and Joon-kyung Kim, 1995, p.66). Excess

demand created by the HCI drive, the Middle East construction boom and fiscal deficits,

combined with the first and second oil shocks, produced a rapid escalation in inflation. A

delay in devaluation28 amid high inflation led to the overvaluation of won and the loss of

price competitiveness of Korean exports. Exports shrank in 1979 for the first time since the

early 1960s. Output growth turned negative in 1980 due to a crop failure and political

instability following the assassination of President Park.

The need for change was initially brought up within Park’s administration. Since early

1978, the staff of the Economic Planning Board (EPB), together with economists at the

Korea Development Institute (KDI), studied the problems affecting the Korean economy

and made strenuous efforts to persuade the president to adopt a stabilization program

(Heung-ki Kim, 1999, p.276). The result was the Comprehensive Economic Stabilization

28 The nominal exchange rate was kept at 484 won/dollar for 5 years between December 1974 and December 1979.

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Program announced in April 1979.

The Program touched on the most sacred parts of the administration’s policy agenda,

and proposed reducing export subsidies, moderating HCI investments, and scaling back

the rural housing improvement program. It also proposed liberalizing prices and interest

rates, which was unthinkable at the time.

It encountered fierce opposition from other ministries and the president himself ordered

the continuation of export subsidies. Nonetheless, stabilization came to take center stage in

economic policy, and the successor administration of Chun Doo-hwan adopted“stability”

and“private sector-led growth” as its slogan. These changes were reflected in the fifth

Five-Year Plan (1982-1986).29

Stabilization was pursued with monetary and fiscal contractions. The annual M2 growth

declined from 35 percent in 1975-1982 to 20 percent in 1983-1985 (Table 2-9). But the

decline was mostly a passive response to the slowdown in inflation; the real growth rate

actually rose slightly from 13 to 14 percent. What contributed more to price stabilization

was moderation in rice price increases and active fiscal consolidation.

In 1981, the rice price paid by the government to farmers was set at 14 percent above

the previous year’s price, far below the level demanded by the opposition party (45.6

percent) or the Ministry of Agriculture and Fisheries (at least 24 percent). The incident

demonstrated the government’s commitment to stabilization (Heung-ki Kim, 1999, p.289;

Economic Planning Board, 1994, p.109).

In 1982, the government introduced zero-based budgeting (ZBB)30 and cut the budget

that was already being implemented. In addition, the 1983 budget was prepared with great

restraint; the central government’s consolidated spending decreased by 2.7 percent in real

terms in 1983 (Table 2-9). Fiscal consolidation continued through 1986 and successfully

curbed spending growth. The fiscal balance improved markedly; a deficit of -4.3 percent

of GDP in 1981 turned into a surplus of 0.2 percent in 1987.

Fiscal consolidation, together with the stabilization of oil prices, helped consumer price

inflation to drop from over 20 percent in 1981 to under 5 percent in 1983. Inflation has

remained below 10 percent ever since.

29 Jung-en Woo (1991, p.191) observes that these changes were led by economists at KDI and technocrats at EPB trained in theUnited States. Previously, most policymakers had been educated in the Japanese system and built their career in banks duringthe colonial period.

30 In ZBB, every spending item is examined thoroughly from top to bottom. In incremental budgeting, on the other hand, onlyincreases in funding are examined in detail, taking the previous year’s funding as given. From this perspective, ZBB is nothing morethan good budgeting practice, but proclaiming the adoption of ZBB for price stabilization must have had an“announcement”effectthat facilitated the cooperation of ministries and politicians.

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Table 2-9. Major macroeconomic indicators (1975-1990) (Unit: %)

Note: Real growth rates were obtained with GDP deflator.


Fiscal consolidation also set public finances on a sustainable path. From the mid-1980s

onward, the fiscal balance maintained a roughly stable position (Figure 2-10). Central

government debt continued to decline and reached a very low level before the crisis (8

percent of GDP in 1996), which enabled the Korean government to address the 1997

financial crisis aggressively (Figure 2-11).

Fiscal consolidation, however, entailed costs in terms of lost output and increased

unemployment. The unemployment rate jumped from 3.8 percent in 1979 to 5.2 percent

in 1980, and then stayed at 4.0-4.5 percent before falling to 3.1 percent in 1987 and 2.5

percent in 1988 (Table 2-9). Fiscal consolidation appears to have prolonged the recession

that began in 1980.

As mentioned above, monetary policy did not make a meaningful contribution to price

stabilization. This was because of the continued existence of directed credits. The outstanding

The

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M2 (end of year)

Consolidated central government

Unemploy-ment rate

Consumerprice

inflation

Fiscalbalance

Expenditure and net lending Revenue

Nominalgrowth

Realgrowth

% of GDPNominalgrowth

Realgrowth

% of GDPNominalgrowth

Realgrowth

% of GDP

1975

1976

1977

1978

1979

1980

1981

25.2

35.1

40.1

35.4

29.7

44.5

36.1

0.6

11.5

22.0

10.8

9.5

16.2

16.0

-4.4

-2.8

-2.6

-2.5

-1.4

-3.0

-4.3

52.2

34.8

25.8

36.6

24.2

36.1

34.3

22.3

11.2

9.6

11.8

4.8

9.5

14.4

20.6

20.2

19.8

20.0

19.4

21.6

23.0

51.4

48.4

26.8

37.7

31.6

26.2

27.0

21.7

22.4

10.4

12.6

11.0

1.5

8.2

16.2

17.4

17.2

17.6

18.0

18.6

18.8

4.1

3.9

3.8

3.2

3.8

5.2

4.5

25.2

15.3

10.1

14.5

18.3

28.7

21.4

1982

1983

1984

1985

1986

37.0

22.9

19.0

18.1

29.5

29.1

17.2

13.9

13.3

24.3

-3.9

-1.4

-1.2

-0.8

-0.1

8.3

2.0

11.3

9.0

4.6

2.0

-2.7

6.5

4.6

0.4

21.7

18.8

18.2

17.8

15.9

9.0

15.1

12.5

11.2

9.3

2.6

9.7

7.7

6.7

4.9

17.8

17.4

17.0

16.9

15.8

4.4

4.1

3.8

4.0

3.8

7.2

3.4

2.3

2.5

2.8

1987

1988

1989

1990

30.3

29.8

25.8

25.3

24.3

21.7

19.0

13.5

0.2

1.2

-0.0

-0.8

17.0

15.2

22.1

29.9

11.6

8.0

15.5

17.6

15.8

15.3

16.5

17.8

19.1

22.3

13.4

23.9

13.6

14.7

7.2

12.3

16.0

16.4

16.5

17.0

3.1

2.5

2.6

2.4

3.0

7.2

5.7

8.5


Figure 2-10. Consolidated central government fiscal balance (1970-2009)

Note: Operational balance is obtained by excluding from the fiscal balance financial-sector restructuring costs

and surpluses in social security funds.

Source: Ministry of Finance and Strategy.

Figure 2-11. Central government debt (1953-2008)

Note: Central government debt is the sum of procurement on credit, foreign and domestic borrowing, and

government bonds, and excludes guarantees.

Source: Ministry of Finance and Strategy.

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stock of central bank lending to DMBs exceeded 100 percent of the reserve base in 1981

and 200 percent in 1985, forcing the BOK to sell Monetary Stabilization Bonds (MSBs) to

sterilize the increased reserves (Figure 2-12). This indicates that gearing monetary policy

toward stabilization faced a fundamental difficulty as long as directed credits were

continued.

Figure 2-12. Sterilization of central bank lending (1950-2009)

Note: 1) Net lending to government = lending to government + holding of government bonds - government

deposit at the central bank.

Note: 2) Monetary Stabilization Bonds include deposits at Monetary Stabilization Accounts.

Source: Figures for 1950-1969 are from Bank of Korea, Economic Statistics Yearbook, various issues. Those since

1970 are from Bank of Korea (http://ecos.bok.or.kr).

Another source of difficulty for the BOK was the increase in net foreign assets (NFAs).

The latter increased to 87 percent of the reserve base at the end of 1988 (Figure 2-13). A

large part of the current account surplus during the“three-low period” (1986-1988) was

used to pay back foreign debts, and the rest showed up as increased NFAs on the BOK’s

balance sheet. The government delayed exchange rate adjustment in order to sustain

exports and encourage business investment, and started to revalue the won as late as 1988.

Japan and Taiwan, on the other hand, began their revaluation in September 1985 after the

Plaza Accord was signed. The delay in revaluation is believed to have hampered efforts by

businesses to enhance their competitiveness, retarded the restructuring of domestic

industries, increased the stock of MSBs, and encouraged real estate speculation (Heung-ki

Kim, 1999, p.344; Economic Planning Board, 1994, p.25).

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Figure 2-13. Sterilization of net foreign assets (1966-2009)

Note: Monetary Stabilization Bonds include deposits at Monetary Stabilization Accounts.


As Figures 2-12 and 2-13 indicate, MSBs played a very important role in controlling

money supply. In addition to MSBs, the BOK employed reserve requirement ratios and

regulations on bank lending, but was not very successful in restraining money supply

growth within annual targets. Out of 18 years between 1979 and 1996, targets were

exceeded in 12 years. The large amount of interest payments on MSBs added to the money

supply and caused the BOK big losses. The BOK wanted to minimize losses by forcing

banks to buy MSBs at an interest rate below the market rate, their gap reaching 3

percentage points at one point (OECD, 1994, p.113). This arrangement was discontinued

in February 1997 with the introduction of a fully competitive auction system.

4.2 HCI investment coordination and industrial rationalizationToward the end of the 1970s, increasing overcapacity and worsening profitably in HCIs

posed serious challenges to policymakers. The government initiated three rounds of

“investment coordination” in 1979 and 1980 and completed them by 1983. The first round,

started in May 1979 following the Comprehensive Economic Stabilization Program, was

delayed during the change in governments and then resumed in August 1980 by the new

administration. The government declared the investment coordination of nine companies

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in three industries (power generation, automobile and construction machinery). In

October, the second round of restructuring was imposed on three more industries (heavy

electrical instruments, electronic switchboard and copper smelting). The restructuring

continued in the 1980s with some modifications (Choong Yong Ahn and Joo-Hoon Kim,

1995, p.333; Economic Planning Board, 1994, pp.151-152). The government provided

rescue packages, including loans from state-controlled banks, to troubled companies being

restructured.

Despite government-led restructuring, HCIs continued to have difficulties up to the mid-

1980s. The restructuring also accelerated the concentration of economic power and

strengthened the monopolistic market structure. Most importantly, it failed to eliminate

excess capacity, and“industrial rationalization” became necessary in the mid-1980s.

In 1985, to carry out rationalization in a systematic way, the government revised the Tax

Reduction and Exemption Regulation Act (TRERA), abolished the promotion laws for

individual industries, and introduced the Manufacturing Development Act (MDA). TRERA

provided various tax benefits (such as the exemption from capital gains taxes) to

companies subject to rationalization, and MDA enabled the government to regulate market

entry and investment in rationalized industries.

Rationalization based on TRERA was carried out in many industries. Before 1985, it

covered not only HCIs such as fertilizer, heavy machinery, power generator manufacturing

and LPG importing, but also the shipping industry, which faced serious difficulties in the

early 1980s. After 1985, the rationalization of power generator manufacturing and shipping

industries continued, while overseas construction, coal mining and shipbuilding industries

were added to the list. At the same time, the government restructured 78 troubled

companies in 1986 and 1988 in five rounds (Joon-kyung Kim, 1991, p.46).

Rationalization based on MDA began in seven industries (automobile, construction

machinery, diesel engine, electrical instrument, alloyed metal, textiles and dyeing) in July

1986. Fertilizer (December 1987) and footwear (February 1992) were added later. In these

industries, new market entry was restricted during the rationalization period and financial

support was given to existing companies. Most of the rationalization was completed by

1988-1990.

Investment coordination and industrial rationalization depended on strong anti-

competitive measures such as creating monopolies and banning new market entries. Table

2-10 illustrates the case of automobile manufacturing. The government also provided

financial support and tax benefits. For the insolvent firms restructured in 1986-1988, all

liabilities in excess of assets were to be eliminated. Debts of 986.3 billion won were written

off, the repayment of another 1,640.6 billion won was postponed, and interest payments

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on 4,194.7 billion won were either postponed or reduced. New long-term lending of 460.8

billion won was also provided at a low interest rate. Furthermore, companies received total

tax benefits of 241.4 billion won. To compensate for the losses incurred by commercial

banks, the BOK granted to six banks special loans of 1,722.1 billion won (299.9 billion

won in 1985, 684.4 billion won in 1986 and 773.8 billion won in 1987) at an interest rate of

three percent (Joon-kyung Kim, 1991, p.47). This amount was equivalent to 53.5 percent

of the net increase in the reserve base between 1984 and 1987.

Table 2-10. Investment coordination and industrial rationalization in automobile manufacturing

Source: Economic Planning Board, 1994, Table 2.3.2 and 2.3.6.

One may argue that the government had to initiate restructuring because it was

responsible for the failure of companies that participated in the HCI drive. This explanation

is incomplete, however, because the government also tried to rescue companies in such

industries as shipping, overseas construction and textiles that were not part of the HCI

drive. A more important reason for government intervention must have been the fear that a

corporate and banking sector breakdown31 would generate an economic crisis. The

intervention succeeded in averting a crisis in the short term by propping up failed

companies, but hampered long-term stability by dodging painful restructuring and

increasing moral hazard in the corporate and banking sector. The risk partnership between

the state and the private sector was strengthened in the 1980s. Private sector-led growth as

emphasized by the government did not materialize. If the government had let insolvent

firms fail in the 1980s, the growth of corporate debts and non-performing loans held by

banks after that would have been much smaller and the impact of the 1997 crisis much

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31 Yeong-hyo Park (1985) claims that as of October 1985, non-performing loans (NPLs) held by banks amounted to 4 trillion won, or14.5 percent of their total lending. Similarly, Choong Yong Ahn (1986) reports an NPL estimate of over 5 trillion won in November1985.

Date Events Note

August 20, 1980Production of passenger cars was to be unified as Hyundai Motor took over

Daewoo Motor. Kia would become the monopoly producer of 1-5 ton trucks.Coordination

February 28, 1981

Duopoly production of passenger cars by Hyundai and Daewoo Motors was

allowed. For other types of cars, Kia Industry and Dong-a Motor would be

merged.

Coordination

July 1986 - June 1989New market entries were banned and the existing market structure comprising

of four producers was maintained.Rationalization


047

milder. It should also be noted that the chaebol increased their size in the process of

restructuring and rationalization.

4.3 Financial liberalizationFinancial liberalization proceeded very slowly in the 1980s and early 1990s. In the early

1980s, the real interest rate turned positive as inflation stabilized, providing a favorable

environment for interest rate reform. The large amount of corporate debt, however,

precluded active liberalization because even a slight rise in interest rates would increase

interest payments substantially. A partial liberalization was tried in 1984 and 1986 without

noticeable impact. A more ambitious plan was announced in December 1988, but revoked

in early 1989 when the interest rate jumped due to price instability.

The next round of interest rate reform was embodied in the Four-Stage Interest Rate

Liberalization Plan announced in August 1991. The Plan proposed liberalization to move

from long-term to short-term interest rates, from securities market rates to bank interest

rates, and from large-sum to small-sum instruments. The actual liberalization, however,

was not guided by this principle. Full implementation was also delayed for years;

liberalization began officially in the latter half of 1991 but was completed only in 1996-1997

(Yoon Je Cho, 2003, pp.85-86; OECD, 1996, p.48).

Directed credits also continued. In 1982, the government consolidated the less important

credit programs into a general credit program and reduced interest subsidies significantly.

But at the same time, it expanded credit programs for small- and medium-sized enterprises

(SMEs). The minimum share of SMEs in banks’lending portfolio was raised in 1980, and

this regulation was extended to non-bank financial institutions (NBFIs) in 1985. The BOK

began to provide a rediscount facility in 1983 to various types of SME loans by DMBs, and

strengthened support in the mid-1980s and thereafter. As a result, the total amount of

directed credits decreased very slowly (Joon-kyung Kim, 1993, pp.131-134).

The BOK’s involvement in directed credits was not limited to SME support. As explained

above, the BOK supplied 1,722.1 billion won of cash to banks during the industrial

rationalization in 1985-1987. It also released 250.0 billion won to agricultural, fisheries and

livestock cooperatives in 1987 as part of a debt-relief program for farmers and fishermen.

In 1992, three investment trust companies received 2,900.0 billion won from the BOK.

These companies had been ordered by the government to buy stocks to support the

collapsing market. The attempt failed and they incurred enormous losses, which the

government tried to make up for through BOK lending (Pyung-joo Kim, 1995).

Criticism of BOK lending grew. In response, the government set out to streamline BOK

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lending programs and reduce their size in 1994 (Table 2-11). Of particular importance were

the abolition of automatic rediscounting and the consolidation of various programs into a

unified lending program with a global ceiling on its total amount of lending. The ceiling

was to be determined ex ante. This arrangement allowed greater room for maneuver for

the BOK (Bank of Korea, 2005b, p.97).

Table 2-11. Reform of BOK lending programs (March 14, 1994)

Source: Bank of Korea (2005b).

There was a wave of privatization of commercial banks in the early 1980s. In addition to

the one that had been already privatized in 1973, four others were privatized between 1981

and 1983.32 Government intervention continued, however, in the operation of the

privatized banks, such as management appointments, asset management and

organizational changes. Government influence on the nomination of bank presidents was

abolished officially in 1993, but political influence remained (OECD, 1996, p.43; Yoon Je

Cho, 2003, p.94).

The 1980s and early 1990s also witnessed the entry (and sometimes exit) of many banks

and NBFIs. Forerunners of NBFIs included finance companies33 and merchant banking

corporations (MBCs)34 that had been in place since the 1970s. A host of other NBFIs such

as mutual savings banks, life insurance companies, investment trust companies, securities

32 Korea Commercial Bank (1973), Hanil Bank (1981), Korea First Bank and Seoul Trust Bank (1982), and Choheung Bank (1983).33 Finance companies were first introduced in the money market after the August 3rd Measure of 1972. They were involved mainly

in discounting and trading commercial papers. Twelve new finance companies were added in the aftermath of two large-scalemoney market frauds in 1982-1983, and their number totaled 32 in 1990. But the worsening business environment in ensuingyears forced their conversion into other types of NBFIs. Five of them were converted into securities companies and three intobanks in 1991, and the rest into MBCs in 1994 (nine) and 1996 (fifteen).

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Lending program Reform measures

- Commercial bill rediscount- Export credits- Materials and components production fund- Local SME funds

Consolidated into a unified general lendingprogram with a global ceiling on its totalamount of lending

- Temporary illiquidity lending No changes

- Agriculture, fisheries and livestock funds Gradually transformed into budget programs

- Export equipment financing- SME technology development fund, SME pollution abatement facilities

fund, SME customer financing- Defense industry financing- Liquidity control fund- Funds with no new lending

Discontinued

- Investment trust companies normalization fund Extension examined every six months


049

companies, investment advisory companies, venture capital companies and lease

companies also sprang up. NBFIs were subjected to lighter regulations than banks because

they had been created in the first place to siphon off funds from unorganized financial

markets into organized ones. Their lending and deposit rates were higher than bank rates,

restrictions on asset portfolio were fewer, market entry was easier, and directed credit was

not an obligation. In particular, many chaebol acquired control over NBFIs and lobbied,

often successfully, for further deregulation. These enabled NBFIs to grow rapidly in the

1980s (Yoon Je Cho, 2003, p.94).

Banks lost their market share to NBFIs continuously until the mid-1980s. Recognizing

the disadvantages faced by banks, the government allowed them to undertake trust

business through special accounts (“trust accounts”) classed with non-bank intermediaries.

Trust accounts grew rapidly in volume afterwards, and their share in total domestic

liabilities of DMBs rose from 5 percent in 1984 to over 40 percent in 1993 (OECD, 1994,

pp.102-103).

In 1993, the government liberalized the interest rate on commercial papers (CPs) and

permitted bank trust accounts to be invested in CPs. In addition, the ceiling on the share of

securities in the asset portfolios of trust accounts was also raised from 40 to 60 percent.

These changes led to a very rapid expansion of the CP market. The share of CPs in total

corporate financing rose from 2.5 percent in 1990-1992 to 13.1 percent in 1993-1996, and

peaked at 17.5 percent in 1997. Companies preferred CPs to bank credits because banks

normally required detailed project plans before making loans to large projects whereas the

underwriters of CPs did not require such plans as long as companies received an eligible

rating from credit rating agencies (Yoon Je Cho, 2003, p.96).

The constant creation, conversion, merger and diversification of banks and NBFIs was a

desirable phenomenon from the perspective of financial liberalization. The instability of the

financial system, however, increased with liberalization as prudential regulation was not

strengthened simultaneously. The problems with prudential regulation at the time can be

summarized as follows.

First, the amount of loans that were not subject to prudential regulation grew as the CP

market and the bank trust accounts expanded. For instance, bank loans from the general

account were subject to a regulation that limited the amount of loans to a single borrower,

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34 An MBC is a mixture of the British merchant bank and the American investment bank with an added function of medium- tolong-term equipment lending. MBCs were created after the first oil shock to help domestic companies tap into foreign capitalmarkets, but their remit covered domestic markets in commercial papers, securities and corporate bonds as well. There existedsix MBCs until the early 1990s. With the subsequent conversion of 24 finance companies into MBCs, their number increased to 30by 1997. After the economic crisis, however, 29 MBCs were either closed or merged, while one new MBC was established, leavingtwo MBCs in the market.


whereas the same loans from the trust account was not subject to a similar regulation

(Yoon Je Cho, 2003, p.87).

Second, regulatory standards remained outdated. Before the 1997 crisis, the prudential

regulation of banks was based on the Management Improvement Measure, something

similar to the prompt corrective action adopted after the crisis. The Measure, however, had

many weaknesses; the criteria to identify problem banks were complicated; the conditions

to take corrective actions were neither objective nor transparent; it was left to the

authorities’discretion whether to take action or not; and the authorities could not close

down troubled banks (Won-hyeong Choi, 1996). As for NBFIs, supervision was practically

non-existent due to the absence of a regulatory framework (such as a capital adequacy ratio)

and insufficient regulatory efforts by the MOF. Some MBCs were even found after the crisis to

have engaged in fraudulent operations (Inseok Shin and Joon-Ho Hahm, 1998, p.28).

Third, various authorities were involved in prudential regulation, creating overlaps and

gaps in supervision. The Office of Bank Supervision (OBS) within the BOK was in charge

of the banking sector, and the Ministry of Finance (MOF) most of the NBFI sectors. Within

the banking sector, general accounts were supervised by the OBS, whereas trust accounts

by the MOF. The BOK was concerned mostly with the banks’compliance with a list of

credit allocation guidelines set by the government and less with the assessment of their risk

exposure and the prevention of excess risk-taking. The MOF did not have the manpower and

expertise to carry out proper supervision of financial institutions (Yoon Je Cho, 2003, p.95).

Fourth, the authorities did not pay sufficient attention to the strengthening of the

financial market infrastructure necessary for the sound operation of a market-based

financial system. Accounting and disclosure standards remained unchanged, and the credit

rating capacity was not enhanced (Yoon Je Cho, 2003, p.96).

To summarize, financial market became increasingly liberalized in the 1980s and early

1990s, especially as many chaebol, as owners of NBFIs, demanded deregulation. The

liberalization, however, lacked a clear orientation and was not accompanied by a

concurrent strengthening of prudential regulation. A fundamental reform was delayed

because politicians and bureaucrats were not ready to bear the short-term costs. Enforcing

prudential regulation would have required the restructuring of many businesses and

financial institutions.35 This would have helped clarify the respective responsibilities of the

state, businesses and financial institutions and dismantle the risk partnerships among them,

but no effort was made in this direction. Phillip Wonhyuk Lim (2001, p.15) portrays the

35 As noted above, the interest rate reform was delayed for the same reason.

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situation as“de-control without de-protection,” with the state giving up directing the

economy while still willing to insure risks. A well-planned action by the government to

“de-protect” the corporate and financial sector would have made the crisis of 1997

significantly less painful, if not preventing it.

4.4 Market openingThe import liberalization announced in 1978 was stalled in 1979-1980 due to the second

oil shock, but resumed afterwards and gathered speed in 1984 as the external imbalance

disappeared. The current account turned to a surplus in 1986 for the first time and the

surplus increased in size in the following years. In 1989, the government began to reduce

quantitative restrictions amid intensifying trade conflict with America. In January 1990,

Korea moved into the status of a GATT Article XI nation because of the surpluses, and

could no longer impose trade restrictions for balance-of-payment purposes as it had done

before. All in all, the average statutory tariff declined from 34.4 to 9.8 percent between

1981 and 1995, while the import liberalization from quantitative restrictions rose from 60.7

to 92.0 percent (Kwang Suk Kim, 2001, p.82).

The primary goal of import liberalization did not lie in improving consumer welfare, but

in enhancing the competitiveness of domestic industries by exposing them to international

competition (Choong Yong Ahn and Joo-Hoon Kim, 1995, p.342). The balance of

payments was also an important consideration, one example of which was the stalled

liberalization in 1979-1980. Another example was the import diversification system (1977-

1999), brought in to reduce trade deficits with Japan by banning imports of certain items

(924 in 1981). Nonetheless, by the mid-1990s, Korea achieved a level of liberalization

comparable to those in the OECD area (OECD, 1994, p.64). Protection of agriculture,

however, did not diminish in importance.

Capital market opening lagged significantly behind trade liberalization. A major concern

was the control over domestic money supply and the real exchange rate movement.

Restrictions were strengthened on capital outflows in the late 1970s and early 1980s when

the current account showed large deficits (OECD, 1996, pp.51-55). The government took

an opposite position in the latter half of the 1980s when the current account moved into

considerable surplus, relaxing restrictions on outward FDI while tightening the

enforcement of regulations concerning the use of import credit and commercial bank

loans. The public sector stopped borrowing from abroad and started to repay foreign

debts. Then in 1990-1993, the government began liberalizing long-term capital inflows as

the current account returned to deficits. In January 1992, the stock market was opened to

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foreigners, who could now invest in listed firms up to a certain limit.

Despite sporadic episodes of liberalization, the domestic capital market had been largely

closed to foreigners up to the early 1990s. There were restrictions on 89 percent of the

items in the OECD code for capital account liberalization in 1992, far above the OECD

average of 17 percent (OECD, 1994, p.118). A more serious effort began with the Three-

Stage Financial Liberalization and Market-Opening Plan announced in June 1993. It was

part of a strategy to join the OECD and accelerate the globalization of the Korean

economy. The Plan was followed by the Foreign Exchange System Reform Plan

(December 1994) and the Revised Foreign Exchange System Reform Plan (December

1995). Still, capital market opening before the 1997 crisis was passive in nature, and

liberalization plans followed a positive-list approach (OECD, 1996, p.62; Moon-Soo Kang,

Buhmsoo Choi and Dongmin Nah, 1996, p.54).

Choongsoo Kim and Inseok Shin (2003) define the capital market liberalization before

the crisis as bank-centered. The government liberalized trade-related financing of firms and

the short-term foreign currency borrowing of banks, but delayed the liberalization of other

types of capital flows. It allowed banks greater freedom to engage in overseas activities on

the assumption that the traditional modus operandi was enough to monitor and control

system stability. Indeed, banks had been used extensively in regulating money supply

(with the BOK directly controlling bank credits and selling MSBs to banks to absorb excess

liquidity) and propping up troubled companies (as in the case of industrial rationalization

in the mid-1980s). The government’s reasoning was founded on the apparent success of

such policies in stabilizing the economy.

In the mid-1990s, the government substantially reduced regulations on overseas activities

by banks and NBFIs. It believed that liberalization would not hamper domestic

macroeconomic stability and might help improve the international competitiveness of

domestic financial institutions (Choongsoo Kim and Inseok Shin, 2003, p.24). In 1994-

1996, as many as 24 finance companies were converted into MBCs and embarked on

foreign excursions, and domestic banks opened a total of 28 overseas branches. Their

borrowing surged as the investment-led boom generated a strong demand for low-cost

capital. They relied on short-term rather than long-term borrowing to meet these demands

because of the strict regulation on long-term borrowing. Short-term borrowing by banks

was boosted further by a deregulation move that lowered the minimum share of long-term

liability in their debt portfolio from 60 to 40 percent (Yoon Je Cho, 2003, pp.89-90).36

36 The purpose of the deregulation was to make it easier for banks to compete with MBCs for foreign-currency lending.

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The mismatch between foreign currency assets and liabilities was posing a grave threat

not only to individual financial institutions but also to the whole economy, but the

government did not strengthen the necessary supervision. As in the case of domestic

financial liberalization, capital market opening was not accompanied by a commensurate

augmentation of prudential regulation. The OBS drew up a guideline on foreign currency

liquidity ratios for banks as late as June 1997. The MOF did not establish a guideline of any

sort for NBFIs before the economic crisis (Inseok Shin and Joon-Ho Hahm, 1998, pp.27-

28). The government believed that discretionary intervention through banks would be

sufficient to secure macroeconomic stability. The economic crisis of 1997 proved belatedly

that this belief was seriously wrong.

4.5 Competition policy and chaebolpolicyAs explained above, wide-ranging intervention by the government in the market

continued until the early 1990s. In many cases, the entry and exit of businesses was

decided not by market forces but by the government. In the meantime, the Korean

economy grew steadily in size and depth. In manufacturing, for example, the real value of

shipments increased 5.5 times in two decades between 1975 and 1995 and the number of

firms 4.2 times. Market competition increased accordingly.

An important contribution to enhanced market competition was made by the Monopoly

Regulation and Fair Trade Act (MRFTA), which was legislated in 1980 and became effective

in 1981. MRFTA banned or restricted the abuse of market-dominant positions, anti-

competitive M&As, undue collaborative activities, unfair business practices, restraints on

competition by trade associations, resale price maintenances, and anti-competitive

international contracts. MRFTA underwent several revisions afterwards and came to

incorporate regulations on the chaebol, going beyond the traditional role of a competition

law.37 The organization in charge of competition policy also underwent changes. The Fair

Trade Commission (FTC) was instituted in 1981 within the EPB, and was then separated

from the EPB and became an independent agency in 1994. The Chairman of the

Commission was accorded a minister-level position in the government in 1996.

Despite many achievements, MRFTA faced basic constraints in carrying out its mission of

competition promotion. Competition policy was foreign to many policymakers and did not

command wide support from the public. The strong tradition of state dominance over the

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37 Initially, MRFTA stipulated the necessity of preventing excessive concentration of economic power without defining specific policymeasures. Then the regulation on cross-shareholding was introduced in the first revision in 1986 and that on cross-debtguarantee in the third revision in 1992. The ceiling on cross-shareholding was lowered in the fourth revision in 1994.


market led many to question whether free and fair competition would help promote

industrial development. The government continued to intervene extensively in the market

in the 1980s and 1990s by setting up entry barriers, initiating industrial rationalization,

keeping a large number of state-owned enterprises (SOEs) under its control, and regulating

prices. Anti-competitive government regulations were common not only in manufacturing

but also in the service sector and the SOE sector. Very slow progress in deregulation and

privatization severely limited the role of competition policy (Seong Min Yoo, 1997a).

Deregulation began to emerge as an important priority in the late 1980s. In 1988, the

new administration designated ten industries－alcoholic beverages, refineries and others－

as targets for deregulation and sought to promote competition in these industries. Another

eight industries－shipping, bus passenger transport and others－were added in the

following year. The FTC drew up deregulation plans in consultation with the private sector

and relevant ministries. In 1990, the Administrative Deregulation Committee was organized

within the Prime Minister’s Office to spearhead the government-wide deregulation efforts

as part of the Comprehensive Economic Vitalization Program. These efforts were inherited

and expanded by the Kim Young-sam administration that came into office in 1993.

The main goal of regulatory reform, however, changed quickly as the economy dipped

into a downturn in 1989 after heady growth in 1986-1988. Rather than a step toward a

competitive market structure, deregulation was now proposed as a way to free businesses

from red tape and thereby stimulate their investment. One example was the

Comprehensive Economic Vitalization Program of 1990 mentioned above.

This change in tenor created considerable confusion and distorted the reform process

(Seong Min Yoo, 1997b). Concerning economic, social and administrative regulations, the

deregulation effort was often focused only on administrative regulations, although

economic regulations tended to pose a greater threat to competition. Regulatory reform

shoud encompass not only deregulation (abolishing unnecessary and harmful regulations),

but also better regulation (improving the cost-effectiveness of necessary regulations). But

the latter was dropped from the equation in Korea. Regulatory reform is market-friendly,

but not necessarily business-friendly, because it makes life more difficult for incumbent

firms by exposing them to greater competition. But talk about“business-friendly

deregulation” had the potential to lead policymakers to anti-competitive deregulation.

Privatization, another prerequisite for an effective competition policy, was not pursued

with consistency either. Privatization in Korea dates back to the 1950s when Japanese

properties were sold to the public. Later, SOEs in aviation, surface transportation, mining

and manufacturing were privatized in 1968 and banks and refineries were privatized in the

early 1980s. In 1987, an ambitious plan was announced to privatize large-scale SOEs such

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as Korea Telecom Corporation, Korea Electrical Power Corporation and Pohang Steel and

Iron Corporation. The privatization, however, ended up only a partial success. Many

worried that a large supply of new share issues would overburden the stock market and

that economic power would be further concentrated in the chaebol if the latter were to buy

the SOEs. Managers and workers of SOEs also fiercely opposed privatization. In 1993, the

Kim Young-sam administration announced yet another ground-breaking plan to sell all

government shares in 58 SOEs out of 133 existing ones, but the implementation

encountered the same objections and fell far short of the original plan.

While competition policy was struggling to take root, regulations on the chaebol

multiplied. Attempts to halt economic concentration in the chaebol began in 1974 with the

introduction of a credit control system, which was not vigorously enforced and soon

neglected. In 1980, another set of regulations was announced, but again the

implementation was discontinued after a year. It was in 1987 that the chaebol policy got a

fresh start. The cross-shareholding regulation was put in place in the revised MRFTA, and

the so-called basket control of credit38 was strengthened. Thereafter, these regulations

constituted two of the most important chaebol regulations, but the government also

employed other regulations on cross-debt guarantees, intra-group transactions, business

diversification, and ownership structure. Such a vast array of regulations, however, failed to

stop the concentration of economic power. The share of the largest 100 companies in

mining and manufacturing remained at 40-45 percent in terms of shipments and around 20

percent in terms of employment in 1980-1990 with no noticeable signs of decline (Figure 2-14).

This is not surprising given the opportunities facing the chaebol at the time. The

government provided an implicit state guarantee to the chaebol’s expansion based on the

“too-big-to-fail” principle. In fact, the larger a chaebol was, the more it was likely to be

saved by the government from bankruptcy. Low interest rates also encouraged borrowing

by the chaebol to finance their expansion. The domestic market was too small for the

chaebol to realize economies of scale through specialization, and diversification into

various business lines was a natural choice for them. Insufficient foreign competition due

to import restrictions assured the success of such diversification. Various chaebol

regulations addressed the symptoms rather than the root causes of the chaebol problem,

and were bound to fail (Sung Soon Lee and Seong Min Yoo, 1995, p.414)

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38 The basket control was applied to the largest 50 chaebol, and intended to monitor and regulate the total flow of credits from eachbank into each chaebol and its subsidiaries.


Figure 2-14. Share of the largest 100 companies in mining and manufacturing

Source: Jae Hyung Lee (2007), Table 4-4.

In the meantime, the chaebol increased their influence in the political as well as

economic arena. After Korea achieved a peaceful transition from autocracy to democracy

in 1988, the chaebol gradually broke away from state control. They became more vocal

and did not hesitate to criticize the government when necessary.

Given these changes, the government had two alternative choices (Seong Min Yoo,

1997a, p.34). The first was to stop providing implicit state guarantees and accelerate the

transition to a free market economy in which competition and the threat of bankruptcy

would discipline the chaebol, and the second was to introduce various ad hoc regulations

on their behavior. The government chose the second option and failed to tame the

chaebol.

The basic solution rested in dismantling the government-business risk partnershp,

reinforcing competition policy, liberalizing interest rates, and opening domestic markets to

foreign producers. Most of these reforms were launched in earnest only after the 1997

crisis.

4.6 Rapid growth of government spendingOnce the fiscal balance was restored to a stable position in 1987, the government began

to increase spending rapidly in response to the growing demand for public services. As a

result, the general government39 spending rose from 18 percent of GDP in 1987 to 30

percent in 2009 (Figure 2-15). The central government spending showed a similar growth.

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Figure 2-15. General and central government spending (1953-2009)

Note: SNA refers to the System of National Accounts and GFS the Government Finance Statistics. The former is

published by the central bank and the latter by the Finance Ministry in Korea.

Source: Bank of Korea (http://ecos.bok.or.kr) and Ministry of Finance and Strategy (http://www.mosf.go.kr).

Figure 2-16. General government spending by function (1970-2008)

Note: 1) Economic affairs includes, among others, spending on infrastructure investment and subsidies to SMEs

and farmers.

Note: 2) Welfare includes spending on social protection, health, and housing and community services.


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39 General government refers to the sum of central and local governments.


When we classify the government spending by function, its growth was particularly

strong in welfare (Figure 2-16). An important factor was the National Health Insurance

(NHI), which was first introduced in 1977 to firms with 500 or more employees. It

subsequently was expanded in stages and came to cover the entire population in 1989,

with a corresponding increase in expenditure (Table 2-12).40

The government also sought to expand the housing supply. The housing supply ratio

jumped from 72.4 to 96.2 percent within ten years between 1990 and 2000 (Table 2-13).

Table 2-12. Main indicators of the National Health Insurance (1977-2008)(Unit: 1,000 persons, %, billion won)


Table 2-13. Housing supply ratio (1960-2008) (Unit: %)

Note: 1) Housing supply ratio = number of houses ÷ number of households. Here, households exclude single-person households

and non-family households.

2) New series adjust for multi-family houses and include single-person households.


In addition to welfare spending, the spending on economic affairs grew rapidly in the

early 1990s with the launch of many construction projects－roads, subways, dams and

water supplies.41 Traditionally, economic affairs and education have accounted for about

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1960 1970 1980 1990 2000 2002 2007 2008

Housing supply ratio(New series)

82.5 78.1 71.2 72.4 96.2 100.6 108.1(99.6)

109.9(100.7)

40 Other social insurance programs－Industrial Accident Compensation Insurance (1964), National Pension (1988), andEmployment Insurance (1995)－were introduced and expanded in a similar fashion, but their impact on total spending has beenrather limited.

1977 1980 1985 1990 1995 2000 2005 2008

Participants

(% of the total population)

3,200

(8.8)

9,226

(24.2)

17,995

(44.1)

40,180

(93.7)

44,016

(97.6)

45,896

(97.6)

47,392

(98.5)

48,160

(99.1)

Revenue (A)

Insurance contributions

Government subsidies (B)

15

14

0

113

96

1

639

598

2

2,432

1,884

364

5,614

3,601

755

9,828

7,229

1,553

21,091

16,928

3,695

29,787

24,973

4,026

Expenditure (C)

(% of GDP)

5

(0.0)

91

(0.2)

648

(0.7)

2,164

(1.1)

5,076

(1.2)

10,744

(1.8)

19,980

(2.3)

28,273

(2.8)

Balance (A-C) 10 22 -9 268 538 -917 1,111 1,514

Balance (A-B-C) 10 21 -11 -96 -217 -2,469 -2,584 -2,512


059

40 percent of total government spending, with the former taking a slightly larger share than

the latter. The spending on economic affairs contributed to the fast expansion of economic

infrastructure (Table 2-14), while the spending on education supported the rise in

enrollment rates (Figure 2-17). The enrollment rates of primary and secondary education

are currently close to 100 percent, and private as well as public schools have depended

heavily on the central government funding.42

Table 2-14. Expansion of transport facilities

Source: Ministry of Land, Transport and Maritime Affairs (http://www.mltm. go.kr).

The

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Roads Expressways RailroadsSeaports

(Cargo handlingcapacities)

Airports(Flights)

(㎞)(1980

=1.00)(㎞)

(1980

=1.00)(㎞)

(1980

=1.00)

(Million

tons)

(1980

=1.00)

(1,000

flights)

(1980

=1.00)

1962

1970

1980

1990

2000

2008

27,169

40,244

46,951

56,715

88,775

104,236

0.58

0.86

1.00

1.21

1.89

2.22

-

-

1,225

1,551

2,131

3,447

-

-

1.00

1.27

1.74

2.81

3,032

3,193

3,135

3,091

3,123

3,381

0.97

1.02

1.00

0.99

1.00

1.08

-

-

82.3

224.3

430.4

758.6

-

-

1.00

2.73

5.23

9.22

140

600

1,006

1,331

2,025

2,222

0.14

0.60

1.00

1.32

2.01

2.21

41 Examples include the West Coast Expressway, Seoul-Busan High-speed Railroad, and Incheon International Airport. Even thoughsuch infrastructure investment takes the lion’s share of the spending on economic affairs, it should be noted that the latter alsoincludes subsidies to producers and other possibly unproductive spending. See Chaper 5 for further discussion on infrastructureinvestment.

42 Colleges and universities, on the other hand, depend mostly on tuitions for their funding. See Chapter 6 for further discussion oneducation policies.


Figure 2-17. Enrollment rates and the number of enrolled students (1965-2009)

(a) Elementary schools (b) Middle schools

(c) High schools (d) Colleges and universities

Note: 1)“Public schools” are the schools controlled by provincial educational boards or provincial governments.

Note: 2) Enrollment rate = number of enrolled school-age students ÷ school-age population. The school-age

refers to 6-11 years for elementary schools, 12-14 years for middle schools, 15-17 years for high

schools, and 18-21 years for colleges and universities.

Note: 3) The last year in the charts is 2009.

Source: Korean Educational Development Institute (http://cesi.kedi.re.kr).

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5. From the economic crisis to the present (1997-2009)

5.1 The crisis and its causesThe economic crisis began in November 1997 as international creditors rushed to

withdraw their loans to domestic banks. The BOK provided emergency lending to banks,

but could not meet the escalating demand for foreign currency. The foreign exchange

reserve was quickly depleted and an explosive devaluation followed.

Before the outbreak of the crisis, it was difficult to spot abnormalities in major

macroeconomic indicators (Table 2-15). Output growth, money supply, interest rate,

inflation, exchange rate and fiscal balance were all at their trend levels. The only signs of

instability came from the external sector. The current account deficit surged to 4.0 percent

of GDP in 1996 due to the terms-of-trade shock generated by plummeting semiconductor

prices. Total external liabilities increased by 27 percent per year between 1992 and 1996 to

reach 163.3 billion dollars. Of particular importance was the increase in short-term external

liabilities that corresponded to 280 percent of the foreign exchange reserve in 1996. Most

of the increase could be explained by foreign currency borrowing by financial institutions.

Table 2-15. Major macroeconomic indicators (1991-2000)

Note: Output growth and money supply growth are in real terms. These and real bond yield were obtained using GDP deflator.

Source: Bank of Korea (http://ecos.bok.or); OECD (http://stats.oecd.org); National Statistical Office (http://kosis.kr); Ministry of

Strategy and Finance.

Given the poor risk management, financial institutions became increasingly vulnerable

to external shocks. The insufficiency of data makes it difficult to gauge the depth of the

problem, but Hahm and Mishkin (2000) estimate that non-performing loans in 1996 made

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Outputgrowth

Moneysupply (Lf)

growth

Real yieldon

corporatebond

Consumerprice

inflation

Realeffectiveexchange

rate

Operationalfiscal

balance

Currentaccountbalance

Default rateof

comercialbills

Unemploy-ment rate

Unit % % % % 2005=100 % of GDP % of GDP % %

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

9.7

5.8

6.3

8.8

8.9

7.2

5.8

-5.7

10.7

8.8

12.1

13.0

11.8

15.8

10.8

11.2

9.7

7.2

9.2

6.1

7.9

7.7

5.8

4.9

5.9

6.6

9.2

9.7

10.0

8.3

9.3

6.2

4.8

6.3

4.5

4.9

4.4

7.5

0.8

2.3

98.0

104.2

107.3

106.1

104.9

101.2

107.9

142.1

124.6

115.6

-2.2

-1.1

-0.6

-0.4

-0.5

-0.9

-2.5

-5.0

-3.7

-1.0

-2.7

-1.2

0.2

-0.9

-1.6

-4.0

-1.6

11.3

5.3

2.3

0.06

0.12

0.13

0.17

0.20

0.17

0.52

0.52

0.43

0.39

2.4

2.5

2.9

2.5

2.1

2.0

2.6

7.0

6.3

4.1


up 22 percent of the total financial credit to the corporate sector. This reflected the low

profitability of businesses (Table 2-16). The largest 30 chaebol recorded an average return

on assets (ROA) of 0.2 and -2.1 percent in 1996 and 1997, respectively. In early 1997, some

chaebol went bankrupt and the general shortage in liquidity began to afflict businesses.

Table 2-16. Average return on assets of the largest 30 chaebol(Unit: %)

Source: Fair Trade Commission, recited from Youngsun Koh et al. (2007).

Instability increased in international financial markets as well. Thailand and other

Southeast Asian countries came near to a foreign exchange crisis in August 1997. Asian

stock markets crashed in October, and worries spread to Japan’s financial markets.

International credit rating agencies began to downgrade Korea, which was finally engulfed

in the financial crisis at the end of November.

Many explanations have been suggested for the financial crisis. They can be categorized

broadly into two schools, with one finding the root cause in the economic fundamentals of

the country in crisis and the other emphasizing the self-fulfilling nature of the crisis.

According to the first, weak economic fundamentals－inconsistency between exchange

rate policy and other policies (monetary and fiscal policy in particular), financial weakness

of the corporate and banking sector, implicit state guarantees to businesses and financial

institutions, and unsustainable current account deficits－are at the heart of any foreign

exchange crisis. In the case of East Asian countries, the unhealthy relationship between

government and the private sector (so-called“crony capitalism”) produced widespread

weaknesses in the economy. International investors, sensing these weaknesses, began to

pull capital out of the country and the crisis erupted.

In contrast, the second school maintains that international financial markets demonstrate

a high degree of intrinsic instability. When every creditor expects other creditors to

withdraw from a country, there will occur a“run” on the country, driving down the

currency and generating bankruptcies. A collective action of this sort can ruin a country

even if its fundamentals are sound. According to Radelet and Sachs (1998), the sharp

rebound of the East Asian countries after the crisis indicates that their problem lay not in

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The Chaebol by asset size 1993 1994 1995 1996 1997

Largest 5

Next largest 5

Next largest 20

1.86

0.87

-0.40

3.54

1.17

-0.06

4.86

1.10

-0.08

1.41

-0.49

0.08

0.43

-2.15

-3.00

Largest 30 1.11 2.19 3.15 0.23 -2.13


063

insolvency arising from weak fundamentals, but illiquidity produced by international

creditors’uncoordinated withdrawal. Korea, for example, could come out of the turmoil

only after foreign creditor banks collectively agreed to the rollover of short-term debts.

There is not enough clear-cut evidence to support either of these two opposing views,

which implies that both may contain some degree of truth. Accordingly, the policy

response of the Korean government was centered on (1) restructuring corporate and

financial sectors to redress fundamental weaknesses and (2) seeking international help to

tide over the illiquidity. The following subsection dwells on policy responses after the

crisis.

5.2 Policy responses to the crisis

5.2.1 Monetary and fiscal policesThe sudden depreciation of the Korean won wreaked havoc on businesses and banks

and the Korean economy entered an unprecedented crisis. Initially, the government

tightened monetary and fiscal policies to contract domestic demand, improve the current

account balance, and stabilize the exchange rate. The corporate bond yield soared from 12

percent before the crisis to over 30 percent at the end of 1997. As a result, the exchange

rate began to stabilize in the second quarter of 1998 and the current account turned into a

large surplus in 1998 (Table 2-15).

The austerity policies, however, deepened the recession and generated public criticism

of the IMF, which demanded the tightening as a condition for liquidity support. It is not

easy to determine what would have happened with more accommodative policies;

nonetheless, the tightening seems to have been indispensable to stabilizing the foreign

exchange market. Faced with a massive withdrawal by foreign creditors, domestic financial

institutions flocked to the foreign exchange market to buy foreign currencies with

borrowed money. The Korean won would have been substantially weakened if their

borrowing had not been curbed by high interest rates (Joon-kyung Kim and Dongchul

Cho, 2003, p.379).

As the liquidity crisis subsided, the government switched into an expansionary mode.

The interest rate was lowered and the fiscal deficit was increased. Helped by strong export

demand from advanced countries, output growth recovered rapidly, moving from -5.7

percent in 1997 to 10.7 percent in 1998. The government also embarked on a thorough reform

of the corporate, financial and public sectors, and the labor market. The loose monetary and

fiscal policy facilitated microeconomic reforms by reducing macroeconomic risks.

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5.2.2 Corporate sector reformThe corporate sector reform had two objectives. The first was to restructure insolvent

firms that could not repay their debts, and the second was to strengthen market discipline

to prevent future crises.

First, the restructuring effort relied on two strategies. One was the swapping of business

lines (so-called“big deals”) between the chaebol that was arranged and enforced by the

government. The other was out-of-court debt settlements, known as“workout” programs,

whereby a firm and its creditors negotiated rescheduling or restructuring with more

flexibility than in formal proceedings. These were emergency measures to speed up the

restructuring. They differed from the industrial rationalization of the 1980s in that the size

of bad loans was far larger. The restructuring process was also made as open and

transparent as possible by inviting foreign as well as domestic investors to buy insolvent

firms.

Second, the structural reform of the corporate sector was based on“the five plus three

principles.” In January 1998, president-elect Kim Dae-jung and the owners of the four

largest chaebol agreed on (1) enhancing the transparency of corporate management, (2)

eliminating cross-debt guarantees, (3) improving the capital structure considerably, (4)

focusing on core lines of business and strengthening cooperation with SMEs, and (5)

increasing the accountability of controlling shareholders and managers. In accordance with

these five principles, consolidated financial statements became mandatory for the chaebol,

international accounting standards were introduced, listed companies were required to

appoint outside directors, a uniform debt-equity ratio ceiling of 200 percent was set for all

firms (to be met by the end of 1999), and the Commerce Act was revised to recognize as

de facto directors those who carried out a director’s role without such title (e.g., controlling

shareholders). In August 1999, three more principles were added; (1) improving the

governance structure of the NBFIs, (2) restraining intra-group circular shareholdings within

the chaebol and blocking unfair inside trading, and (3) prohibiting unlawful inheritance

and gifts. The main objective was to stop the chaebol from exploiting NBFIs under their

control to escape restructuring, and to discourage chaebol owners from handing over their

controlling interest illegally to their descendants and relatives.

Among the five plus three principles, two－namely, enhancing corporate transparency

and increasing the accountability of controlling shareholders and managers－were essential

in strengthening market discipline. Others－eliminating cross debt guarantees, improving

the capital structure, etc.－were temporary measures employed during the period when

the market principle was not working properly. The lack of market discipline was

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065

manifested when Daewoo issued an enormous amount of corporate bonds (17 trillion

won) between the end of 1997 and September 1998 on the assumption that the

government would not let the five largest chaebol falter.

On top of“the five plus three” principles, additional efforts were made to dispel moral

hazard, improve corporate governance, and intensify competitive pressures. To dispel

moral hazard, a partial deposit insurance system and forward-looking criteria for non-

performing loans were introduced, and insolvent firms were allowed to go bankrupt (as in

the case of Daewoo in 1999), inflicting losses on shareholders, financial institutions and

other concerned parties. To improve corporate governance, conditions on the exercise of

shareholders’rights were relaxed, the role of institutional investors was expanded, and

M&As were deregulated, leading to the stronger position of shareholders vis-a-vis the

management. Lastly, to intensify competitive pressure, regulations on FDI were eliminated

almost completely, the import diversification system was discontinued, and the bankruptcy

law was revised.

5.2.3 Financial sector reformAs in the corporate sector, financial sector reform had two objectives; on the one hand,

normalizing the financial system as fast as possible through restructuring, and on the other,

rebuilding a financial safety net to prevent future crises.

First, to normalize the financial system, the government planned a speedy state-led

restructuring of financial institutions. Those institutions capable of creating systemic risks

(e.g., large banks) were reorganized with capital injections. To minimize moral hazard and

to maintain market discipline, the incumbent management was removed, existing shares

were retired, and employees were laid off. On the other hand, those posing little systemic

risk (e.g., small banks and merchant banking corporations) were wound down.

Second, to rebuild the financial safety net, a consolidated regulatory agency with

oversight on the banking, securities and insurance industries was created. In addition,

prompt corrective action was introduced. The criteria for non-performing loans became

much more stringent, and Korea Asset Management Corporation was established in 1999 to

purchase and dispose of the impaired assets of financial institutions.

In May 1998, financial sector restructuring funds of 64 trillion won were raised in a first

round of bond issues. The second round in December 2000 added 40 trillion won to the

pool of funds available for the purchase of impaired assets, recapitalization, and repayment

of deposits of viable financial institutions. In addition to bond issues, the government

resorted to other funding sources such as international lenders, state property holdings and

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public funds to raise a total of 168.3 trillion won, which was equivalent to 35 percent of

GDP in 1998.

5.2.4 Labor market reformIn restructuring corporations and financial institutions, the large-scale layoff of redundant

workers was inevitable. However, militant labor unions had traditionally been a fixture in

these organizations and great difficulty was expected in implementing the necessary

reform. To build public consensus on the reforms, the government set up the Tripartite

Commission in January 1998, which consisted of representatives from government,

employer groups and the two national labor federations.

The key issue was legalizing layoffs for managerial reasons. The Tripartite Commission

arrived at an agreement and relevant laws were revised in February 1998. Employers could

now lay off workers in case of“urgent managerial need,” including M&As. Restrictions on

the use of temporary dispatched workers were also reduced. Workers, on the other hand,

made gains on such issues as legalizing civil servants’workplace associations (a weaker

form of labor unions) and teachers’unions, and allowing the political participation of labor

unions, which the unions had demanded consistently since the early 1990s.

The reform, however, did not contribute much to enhancing labor market flexibility

because layoffs and the use of dispatched workers were already quite common in most

workplaces. But the reform had political significance in ending nationwide disputes that

erupted at the turn of 1997 concerning layoffs and other industrial relations issues.

Furthermore, most of the basic rights of workers were restored with the reform. Excessive

restrictions on collective dismissal were now mostly dismantled.43

5.2.5 Public sector reformThe public sector also undertook far-reaching reforms to set an example for private

sector restructuring. Central government ministries were reorganized, and a new body in

charge of prudential regulation was created. A large-scale privatization program was

prepared, mandating immediate privatization for five SOEs,44 a phased-in privatization for

six,45 and internal restructuring or managerial improvement for fifteen. At the same time,

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and need to be addressed in the future.44 Pohang Steel and Iron Corporation, Korea Heavy Industries and Construction Company Limited, Korea General Chemistry

Corporation, Korea Technology Banking Corporation and National Textbook Corporation.45 Korea Telecom Corporation, Korea Tobacco and Ginseng Corporation, Korea Electrical Power Corporation, Korea Gas

Corporation, Daehan Oil Pipeline Corporation and Korea District Heating.


067

employment in central and local governments and their agencies was reduced drastically.

Efforts were also made to redefine the role of government and improve its capability.

The Regulatory Reform Committee was installed in the Prime Minister’s Office to lead the

government-wide initiative to reduce total regulations by half. Confusion about the proper

goals of regulatory reform persisted, but an OECD indicator points to a substantial

reduction in product market regulations between 1998 and 2003 (Conway, Janod and

Nicoletti, 2005). In addition, some managerial positions were opened up to outsiders, a

performance-based pay system was introduced, and e-government was actively promoted.

Service quality improvement was also emphasized.

5.2.6 Welfare policiesBefore the crisis, Korea had already equipped itself with a basic welfare system,

consisting of a public assistance program－Livelihood Protection Program (1961)－and four

social insurance programs－Industrial Accident Compensation Insurance (1964), National

Health Insurance (1977), National Pension Scheme (1988), and the Employment Insurance

System (1995).46 Most of these programs, however, were limited in their coverage. For

example, the unemployment benefits of the Employment Insurance System (EIS) covered

only those firms with at least 30 workers, and not all of these establishments actually paid

insurance premiums.

Unemployment skyrocketed from 2.6 percent in 1997 to 7.0 percent in 1998, and many

people fell below the poverty line. In response, the government increased wage subsidies

to firms that retained redundant workers and expanded vocational training for the

unemployed within the framework of EIS. In March 1998, a public works program was

introduced to create jobs directly with tax money. This program played a major role during

the crisis in providing emergency support to the poor. Unemployed college graduates

could also benefit from government-paid internships at private companies.

At the same time, the government made important changes to the EIS and the public

assistance program. First, the coverage of EIS was extended rapidly in 1998 to firms with at

least ten workers (January), to those with at least five workers (March), and eventually to

those with one or more workers (October).47

Second, a new public assistance program, the National Basic Livelihood Security

Program (NBLSP), replaced the existing one in 2000. The NBLSP stipulated the

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46 Employment Insurance provides funding for various active labor market policies in addition to unemployment benefits.47 Still, only 10 percent of the unemployed could receive unemployment benefits in 1998 because the eligibility depended on a

minimum period of contribution to the EIS.


responsibility of government to guarantee minimum living standards for the whole

population by providing benefits to households below the poverty line. It has been,

however, criticized for discouraging participants to seek employment.48

5.3 Outcomes of policy responses

5.3.1 Rehabilitating the financial health of the corporate and financialsectors

Through the restructuring process, corporations and financial institutions improved their

financial health significantly. In the corporate sector, latent non-performing assets were

estimated at 18.6 trillion won, or 3.4 percent of GDP, at the end of 2001. This ratio was

much lower than the level observed before the crisis (over 20 percent), and government

intervention was deemed no longer necessary. Debt-to-equity ratios and other financial

indicators also improved dramatically. Of particular importance was the disappearance of

implicit state guarantees to businesses. Witnessing the demise of Daewoo and other

chaebol, businesses hurried to dispose of unprofitable business lines and reduce debts,

and became more prudent in their investment decisions. The root of the chaebol problem

vanished.

Also notable were the sweeping changes in the financial sector. All weak financial

institutions, except large banks, were closed down or merged (Table 2-17). Twenty-nine

out of thirty merchant banking corporations, which were directly responsible for the

outbreak of the crisis, disappeared. As for other NBFIs, including insurance companies,

mutual savings banks, credit unions and lease companies, over half of them discontinued

their business. The number of banks also decreased by half, and the financial health of the

remaining banks improved markedly; their average capital adequacy ratio rose from 7.0

percent in 1997 to 10.8 percent in 1999, and recorded 12.4 percent in 2005.

The public sector reform was completed mainly as planned. All of the five SOEs slated

for immediate privatization were privatized, as were three of the six SOEs scheduled for

phased-in privatization. Consequently, the total number of SOEs and their subsidiaries

decreased by 64 percent from 98 to 35, and their employment by 62 percent. Across the

entire public sector, including central and local governments and their agencies,

employment was reduced by 20 percent between 1997 and 2001. Privatization also

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48 The implicit tax rate facing NBLSP beneficiaries is 100 percent because their benefits decline by the same amount as theirearnings increase. All types of benefits (health, housing, education, etc.) are given to those under the poverty line, but none at allto those above it. These features impart to the beneficiaries a strong incentive not to escape from poverty.


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generated revenues of 24.3 trillion won.

Table 2-17. Changes in the number of financial institutions

Source: Youngsun Koh et al. (2007), Table 4-8.

5.3.2 Establishing an advanced market economyThe Korean economy emerged from the crisis in an entirely different shape. First, it

became much more open to international capital flows. Most of the restrictions on inward

FDI were lifted at the end of 1997. FDI surged in and the accumulated amount of FDI

inflows reached 100 billion dollars in October 2004, of which 82 percent had occurred

since the crisis. Foreign exchange trading was liberalized in two stages between April 1999

and January 2001, which helped the daily trading volume to jump from 4 billion dollars (1

percent of GDP) in 1998 to 30 billion dollars (3 percent of GDP) in 2006.49 The

government also abolished the ceiling on foreign shareholdings in listed companies in May

1998. The foreigners’share of total market capitalization rose sharply and exceeded 40

percent in 2004, up from less than 15 percent in 1996.50

Second, the transparency of corporate management was substantially enhanced.

Accounting standards were revised, the chaebol were required to prepare consolidated

financial statements, and external auditors and corporate accounting officers were subject

to stiffer penalties. In particular, the punishment of Daewoo’s management and its

accounting firms sent a strong signal that corporate crimes would no longer be tolerated.51

In corporate governance, outside directors became a permanent part of the governance

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49 The volume of FDI flows and foreign exchange trading, however, is still small compared to those in other advanced economies.50 In comparison, the foreigners’share was 10.3 percent in America, 17.7 percent in Japan, 38.8 percent in France, and 23.1 percent

in Taiwan.

At the end of1997(A)

Closed orMerged

(B) (B/A)

Created

(C)

At the end ofMay 2007(A-B+C)

Banks 33 16 0.48 1 18

Non-bank financial institutions

Merchant banking corporations

Securities companies

Insurance companies

Investment trust companies

Mutual savings banks

Credit unions

Lease companies

2,070

30

36

50

32

231

1,666

25

897

29

15

22

13

138

666

14

0.43

0.97

0.42

0.44

0.41

0.60

0.40

0.56

113

1

19

21

30

16

15

11

1,286

2

40

49

49

109

1,015

22

Total 2,103 913 0.43 114 1,304


structure and the rights of shareholders were significantly strengthened.52

Third, the working of the financial market improved substantially. Most importantly,

interest rates were fully liberalized and could now play their proper role as a price

mechanism. Previously, liberalization was delayed because it would increase interest rate

volatility given the BOK’s control of the money supply. In the wake of the crisis, BOK

shifted to a policy of inflation targeting, discontinued its control of the money supply, and

began to influence the interest rate directly through open market operations. In the

meantime, the treasury bond market increased in size and provided a stable benchmark

interest rate. The stock market also grew steadily from 2003, helped by strengthened

shareholder rights, the full opening of the market to foreigners, the increased role of

institutional investors, and low interest rates.

5.3.3 Growth performance of the Korean economy since the crisisHow did these structural reforms translate into the overall economic growth? The annual

growth rate declined from 7.9 percent in 1990-1995 to 4.5 percent in 2000-2005. The

decline was accompanied by a noticeable fall in investment rates. Chin Hee Hahn and

Sukha Shin (2007) broke down the aggregate growth into the growth of capital, labor and

total factor productivity (TFP). Their results show that the slowdown in the growth of

capital and labor explains most of the decline in the aggregate growth. In contrast, the TFP

growth rose from 0.8 percent in 1990-1995 to 2.0 percent in 2000-2005, slightly above the

1.5 percent recorded in 1960-1990. They interpret this result as favorable to the hypothesis

that the structural reforms contributed to the improved efficiency of the Korean economy.

5.4 The 2008 global financial crisis and the Korean economy

5.4.1 The outbreak of the crisis and its impact on domestic economyThe global financial crisis that started with the fall in housing prices in the United States

in 2007 became truly global in scale as Lehman Brothers filed for bankruptcy in September

2008. In Korea, output shrank by 4.5 percent in the fourth quarter of 2008 (17 percent in

annual terms). Even before the global financial crisis, there had been small and large

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51 In 1999, regulators suspended two of Daewoo’s accounting firms from receiving new business and terminated the licenses of twoaccountants, sending shockwaves throughout the industry. In 2006, the Korean Supreme Court fined former Daewoo Groupexecutives a total of 23 trillion won and sentenced some of them to prison for their involvement in accounting fraud and othercorporate crimes. The fines were the largest ever levied in Korea.

52 But the role of outside directors remains limited, and shareholders do not yet actively exercise their rights.


071

shocks in the 2000s, such as the collapse of the KOSDAQ market in 2000 after the burst of

IT bubble and the credit card crisis in 2003. But these shocks arose from domestic

sources53 and did not result from a global economic downturn.

The American economy, the epicenter of the crisis, has had structural problems for

years. Blanchard (2009) points to four such problems54; (1) the assets that were created

and traded appeared much less risky than they truly were; (2) securitization led to complex

and hard-to-value assets being placed on the balance sheets of financial institutions; (3)

securitization and globalization led to increasing connectedness both within and across

countries; and (4) leverage increased. These problems produced asset price bubbles and

increased the vulnerability of financial system.

The global crisis threw Korean financial markets into disarray. The sudden capital

outflow caused a severe credit crunch in the domestic financial market. The stock market

plunged by 40.7 percent in the course of 2008 and declined further by 5.5 percent in the

first two months of 2009. Domestic banks faced serious difficulties in rolling over foreign

debt. The won weakened by 40 percent against the dollar between October 2008 and

February 2009.

Figure 2-18. Output growth: Comparison of 1997-1999 and 2008-2010

Note: Output growth is over the previous quarter in seasonally adjusted data.


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53 The KOSDAQ market collapse in 2000 was attributed to the low interest rate maintained since late 1998 to stimulate recovery.The credit card crisis in 2003 was also attributed to the low interest rate maintained after the IT bubble burst and the September11 attacks. Another cause of the credit card crisis was the moral hazard of credit card companies that took advantage ofderegulation to rapidly expand their operations, and the lack of appropriate responses by the regulatory authorities.

54 The following discussion draws from Joon-kyung Kim (2009).


The industrial sector was also battered by the precipitous fall in exports and investment.

In the last quarter of 2008, exports contracted by 41 percent, investment by 45 percent, and

output by 17 percent in annual terms. Still, the pain was milder than during the 1997 crisis;

output returned to positive growth in the first quarter of 2009 (Figure 2-18).

5.4.2 Policy responses to the crisisThe rapid recovery from the crisis was due to, among other reasons, the reduced

vulnerability of the financial and corporate sectors as a result of the restructuring following

the 1997 crisis; the reduction of home equity loans before the 2008 crisis due to various

regulations; and prompt policy responses to the crisis. The policy responses can be

summarized as follows.

First, the government and BOK provided 55 billion dollars in foreign currency (21 billion

dollars in export credits and 34 billion dollars in emergency liquidity) to the banking sector

between October 2008 and February 2009. It also announced that state guarantees would

be provided for new foreign borrowing by domestic banks and their overseas branches

until June 2009. In October 2008, the BOK and the Federal Reserve signed a currency swap

accord worth 30 billion dollars. In December, similar swap accords were arranged with

Japan and China, each worth 30 billion dollars. These measures, together with the current

account surplus, helped to ease the shortage in foreign liquidity; the rollover rate of banks’

foreign borrowing dropped to around 50 percent in October but recovered to 106 percent

in March 2009.

Second, the BOK slashed its policy rate from 5.25 to 2 percent between September 2008

and February 2009. It also rapidly expanded domestic liquidity by 23 trillion won through

purchases of RPs (repurchase agreements) and treasury bonds and early repayment of

MSBs.

Third, fiscal policy took an expansionary turn. On top of the tax cuts announced before

the crisis, the government introduced a supplementary budget in September 2008 to

increase spending. Total spending growth in 2008 was 14 percent, well above the 5-10

percent observed in previous years. Spending was further increased in 2009 by 14 percent.

As a result, the operational fiscal balance recorded a deficit of 4 percent of GDP in 2009.

Fourth, the government announced a plan to expand credit guarantees for SMEs through

various public funds. All expiring guarantees during 2009 would be automatically

extended, the hurdle for borrowers would be lowered to get new guarantees, and the

guarantee ratio would be raised from 85 to 100 percent of the loan amount for some types

of borrowers (e.g., exporting companies).

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Fifth, the burden of home equity loans was lessened for borrowers. They could get

guarantees equivalent to the decline in their housing prices up to 100 million won. The

maximum grace period and repayment period of home equity loans were extended to 5-10

years and 30-35 years, respectively. Those who wanted to move from variable to fixed

interest payments were exempted from associated fees.

Sixth, recapitalization schemes were prepared to strengthen the financial health of

financial institutions and to facilitate the corporate sector restructuring. In the first round,

the Bank Recapitalization Fund, worth 20 trillion won, was set up with capital injections of

10, 2, and 8 trillion won from the BOK, KDB and institutional investors, respectively. In the

second round, the Financial Stabilization Fund was set up within the Korea Finance

Corporation, a state-owned financial institution specializing in policy loans, to support the

recapitalization of banks and NBFIs. In addition, a Restructuring Fund worth 40 trillion

won was set up within the Korea Asset Management Corporation to buy and dispose of

impaired asset owned by financial institutions and restructured enterprises.

6. Challenges

The Korean economy is currently faced with many challenges to its long-term growth

and development.

First, growth is slowing due to the declined in employment growth and the savings rate.

According to the IMF (2006), the potential growth rate will fall from 4.5 percent in recent

years to 2 percent in 2050, and Korea will never be able to catch up with the U.S. in terms

of per capita GDP. Raising the employment rate, which remains low in international

comparison (Figure 6-19 in Chapter 6), looks essential to boost growth. In addition, it is

very important to limit the negative effects of declining savings rate, for example by

reforming the pention and health insurance systems and running fiscal surpluses.

Second, the productivity gap is widening between manufacturing and service industries

(Figure 3-11 in Chapter 3). The gap between HCIs and light industries in the manufacturing

sector is also increasing as can be inferred from the growing share of HCIs in total

manufacturing value-added (Figure 3-3). Because HCIs are dominated by large

corporations, the gap between large corporations and SMEs is widening as well (Figure 3-

12). These gaps are delaying overall productivity improvement and the creation of high-

quality jobs. Without decisive policy actions, the gap will continue to grow in the future.

Third, income disparity is widening. The Gini coefficient rose from 0.26 to 0.32 between

1992 and 2008 (Figure 6-35 in Chapter 6). Increasing inequality is a byproduct of

globalization and the knowledge-based economy that puts low-skilled workers at a

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disadvantage, and is therefore a worldwide phenomenon. In the case of Korea, stagnant

employment growth, the increasing share of the elderly in the population, inequality in

educational opportunities, and the insufficient coverage of the social safety net are adding

to the problem. Growing inequality is not only undesirable in itself but also harmful to

stable economic growth and social development. But reversing the trend will be very

difficult because it reflects in most part the structural change in the economy.

Fourth, the global financial crisis demonstrated that Korea’s exposure to external shocks

has increased considerably. It also showed that a crisis can break out in advanced as well

as developing economies with little prior warning. It is thus becoming more difficult to

safeguard the stability of the domestic financial market.

Fifth, the financial health of the government is deteriorating. Central government debt

increased from less than 10 percent of GDP in 1996 to 30 percent in 2006. After stabilizing

in 2007 and 2008, it resumed increasing in 2009 due to the global financial crisis. Over the

longer term, the aging population will accelerate the growth in pension and healthcare

spending and pose a far greater threat. Reunification with North will also entail enormous

fiscal costs.

These changes require a new growth strategy. With the slower growth of labor and

capital, total factor productivity (TFP) gains greater importance as an engine of growth.

Input-driven, especially investment-driven, growth is no longer feasible. All efforts should

be directed at accelerating the overall TFP growth, and for this purpose, it is imperative to

improve the productivity of the service sector and SMEs drastically. This will also help

expand employment opportunities and reduce income inequality. In addition, greater

attention should be paid to securing financial stability and improving the financial health of

the government.

7. Conclusion

In the 1960s and 1970s, Korea concentrated its efforts on fostering economic growth.

The government employed financial repression to support exporting companies and HCIs.

Perhaps more importantly, the strong political leadership guided the private sector away

from zero-sum rent-seeking activities toward positive-sum productive activities (Jones and

SaKong, 1980). In particular, the exchange rate reform and export promotion exposed

domestic producers to international competition and encouraged them to concentrate their

effort on productivity-enhancing investments. Other“right” policies at the time included

well-established private property rights, a relatively stable macroeconomic environment,

and emphasis on education (particularly primary and secondary education) and

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infrastructure investment. Helped by these policies, Korea achieved unprecedented

success in economic growth and social development in a relatively short period of time.

The government-led growth strategy, however, produced many problems, including

excess capacity in HCIs, the concentration of economic power in the chaebol, chronic

inflation, and distortions in industrial relations. A risk partnership system between the state

and private sector developed, and the financial fragility of the corporate and banking sector

increased. Entering the 1980s, the risk partnership system was not dismantled but

strengthened and eventually played a part in triggering the financial crisis in 1997.

In the wake of the crisis, the Korean government strived to restructure the corporate and

financial sector and to install an advanced market system with institutional reforms. While

pursuing liberalization, the government strengthened corporate governance, prudential

regulation and the social safety net. The improved economic fundamentals enabled Korea

to overcome the global financial crisis in 2008 and 2009 without great difficulty.

Still, there are many challenges facing the Korean economy: Growth is slowing due to

the decline in employment growth and the savings rate. Productivity gaps are widening

between manufacturing and service industries, between HCIs and light industries, and

between large corporations and SMEs. Income disparity is widening due to the

globalization of the Korean economy, the increasing productivity gaps between sectors,

population aging, and other factors.

Solutions to these problems should be found in strengthening the role of government in

stabilizing the macro-economy, establishing market discipline, and expanding the social

safety net.

First, it is necessary to minimize macroeconomic risks by maintaining low inflation,

improving financial stability, and ensuring fiscal sustainability. Inflation targets should be

lowered, possibly to around 2 percent adopted in other advanced countries. Financial

stability can be improved with, among other measures, restrictions on home equity loans,

stringent foreign currency liquidity requirements, closer cooperation between regulatory

agencies, and active participation in international discussions on the new regulatory

framework (Dongchul Cho et al., 2009). Lastly, the medium-term fiscal framework needs

to be reinforced to impose stronger intertemporal budget constraints on government.

Second, at a microeconomic level, the principle of market-led growth should be firmly

established. Despite the reforms since the financial crisis, some parts of the economy are

still subject to heavy direct intervention by the government. Examples include restrictions

on market entry and business operations in professional services; fiscal, tax and financial

support given to SMEs; and government investment to promote particular industries (as

high-tech medical complexes being built in two Korean cities). These interventions reflect

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the continued belief in the omnipotence of government and distrust in the market

economy, a legacy from the government-led growth period. They are likely to hinder TFP

growth by distorting resource allocation, suppressing innovation, and encouraging rent-seeking.

Government interventions should now be limited to those areas where market failure is

clearly present. For examples, support for SMEs should be focused on start-up companies

that suffer from information asymmetry. At the same time, greater efforts should be made

to strengthen market competition. Market-led growth is not equivalent to laissez faire; on

the contrary, government needs to actively promote competition between producers,

speed up market opening, regulate monopolies, and protect consumers. It should be kept

in mind that competition is the main driver toward innovation and TFP growth.

Third, attention should be paid to social cohesion. The social protection system should

be expanded to include those who are most in need of state help. In particular, active

labor market policies such as vocational training and job placement services should

provide effective support to low-skilled workers and other vulnerable groups. In addition,

educational assistance to low-income families should be increased. The overall quality of

educational services, which is widely viewed as inadequate, should also be enhanced.

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Lim, Phillip Wonhyuk, “The Evolution of Korea’s Development Paradigm: Old Legacies andEmerging Trends in the Post-Crisis Era,”ADB Institute Working Paper, No. 21, July 2001.

Ministry of Finance, Thirty-year History of Fiscal and Financial Policies, 1978 (in Korean).Noh, In-hwan, “Rapid Changes in Domestic and External Economic Environment and the

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Evolution of International Economic Cooperation (Overview),”in Forty-year History of theKorean Economic Policy, The Federation of Korean Industries, 1986, pp. 560-576 (in Korean).

Noland, Marcus and Howard Pack, Industrial Policy in an Era of Globalization: Lessons from Asia,Institute for International Economics, 2003.

OECD, OECD Economic Surveys: Korea, 1994.______ , OECD Economic Surveys: Korea, 1996.______ , “Making the Most of Globalisation,”ECO/CPE(2007)5, 2007.Pack, Howard and Kamal Saggi, “Is There a Case for Industrial Policy? A Critical Survey,”World

Bank Research Observer, Vol. 21, No. 2, 2006, pp.267-297.Park, Seong-sang, “Moderate Stability of the Aid-dependent Economy (1954-60),”in Forty-year

History of the Korean Economic Policy, The Federation of Korean Industries, 1986, pp.935-944(in Korean).

Park, Yeong-hyo, “Special Rescue Loans of the Bank of Korea: A Desperate or a Clever Measure?”Shin-dong-a, August 1985, pp. 246-253 (in Korean).

Park, Yeong-koo, “Structural Changes and the Drive to Heavy and Chemical Industry,”in Dae-geun Lee (ed.), New Korean Economic History: From the Late Joseon Period to the High-growth Period of the 20th Century, Na-nam, 2005, pp.403-428 (in Korean).

Perkins, Dwight H., “There Are at Least Three Models of East Asian Development,”WorldDevelopment, Vol. 22. No. 4, 1994, pp.655-661.

Radelet, Steven and Jeffrey D. Sachs, “The East Asian Financial Crisis: Diagnosis, Remedies,Prospects,”Brookings Papers on Economic Activity, Vol. 1998, No. 1, 1998, pp.1-90.

Radelet, Steven, Jeffrey Sachs and Jong-Wha Lee, “Economic Growth in Asia,”DevelopmentDiscussion Paper 609, HIID, 1997.

Rhee, Younghoon, A Story of the Republic of Korea: Re-understanding the Post-Liberation Period,Ki-pa-rang, 2007 (in Korean).

SaKong, Il, Korea in the World Economy, Institute for International Economics, 1993.Shin, Inseok and Joon-Ho Hahm, “The Korean Crisis－Causes and Resolution,”KDI Working

Paper, No. 9805, Korea Development Institute, 1998.Woo, Jung-en, Race to the Swift: State and Finance in Korean Industrialization, Columbia

University Press, 1991.World Bank, The East Asian Miracle: Economic Growth and Public Policy, Oxford University Press,

1993.Yergin,Daniel and Joseph Stanislaw, The Commanding Heights, Simon & Schuster, 1998.Yoo, Jungho, “The Effect of Heavy and Chemical Industry Policy of the 1970s on the Capital

Efficiency and Export Competitiveness of Korean Manufacturing Industries,”KoreaDevelopment Review, Vol. 13, No. 1, 1991, pp.65-113 (in Korean).

______ , Freeing the Economy of Government Control: the Road to the Market Economy, Chaek-se-sang, 2004 (in Korean).

Yoo, Seong Min, “Evolution of Government-Business Interface in Korea: Progress to Date andReform Agenda Ahead,”KDI Working Paper, No. 9711, Korea Development Institute, 1997a.

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______ , “Regulatory Reform: Reflections on the Last Ten Years and the Tasks for the Coming TenYears,”paper presented at a press meeting organized by the Korea Fair Trade Commission,May 16, 1997b (in Korean).

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THEKOREANECONOMYSixDecadesofGrowthandDevelopment

Chapter 3

Korea’s IndustrialDevelopment

DoHoon Kim and Youngsun Koh


085

1. Introduction

The tremendous growth of the Korean economy in the last 60 years has been

accompanied by deep changes in its industrial structure. Initially, the Korean economy was

dominated by agriculture and other primary industries. As the industrialization gained full

momentum in the 1960s, labor-intensive manufacturing came to lead output growth by

utilizing Korea’s comparative advantage in its abundant supply of a relatively well-educated

and diligent labor force. But as wage levels rose and competition from low-wage

economies intensified in the 1970s, capital-intensive, high-productivity manufacturing

assumed importance over labor-intensive, low-productivity manufacturing.

Entering the 1980s, private enterprises stepped up investment in research and

development (R&D) to improve productivity further. These efforts gradually bore fruit and

the productivity gap with advanced countries narrowed significantly in the 1990s. In a few

industries such as information and communication technology (ICT), Korea became a global

leader. The trend continued into the 2000s, with many Korean firms in important industries

(electronics, steel, automobile, shipbuilding and others) emerging as global players.

Progress toward higher value-added activities was made possible not only by the rapid

accumulation of capital based on increased domestic savings, but also by the heavy

investment in technology at each level of development and the flexible reallocation of

resources from less to more productive sectors. Foreign trade played a pivotal role in this

respect by encouraging innovation and accelerating resource reallocation. It also enabled

Korea to learn from advanced countries and take advantage of the rapidly expanding

global market. Entrepreneurs responded to changing circumstances by committing

themselves to entering new markets and pioneering new products. The government

provided the institutional and physical infrastructure essential for their activities.

Many tasks lie ahead for Korea to sustain its growth and adapt its industrial structure to

changing conditions. Efforts are needed to develop new growth engines in such areas as

the advanced technology sector, parts and materials sector, and knowledge-based service

industries. It is also important to enhance the competitiveness of small- and medium-sized

enterprises (SMEs) and domestic-oriented industries, and to reconcile industrial

development with environmental protection.

Most of these tasks are the responsibility of the private sector, on whose dynamism the

Korean economy will continue to depend. Now that Korea has significantly narrowed the

technological gap with advanced countries and has become an industry leader in some

cases, the uncertainty surrounding investment outcomes is much bigger and the

government is nearly incapable of picking winners. Its role now lies in finding and

Korea’s

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eliminating obstacles to entrepreneurship, encouraging innovation through regulatory

reform and trade liberalization, correcting market failures (positive externalities in

particular) if they exist, and supplying high-quality manpower, all in close consultation

with market participants. All government interventions should be based on sound

economic analyses, have clear criteria for success and failure, and target specific activities

(R&D, for example) but not specific sectors (pharmaceuticals, for example).

This chapter reviews the development path of the Korean economy, offers explanations

on the underlying factors, and proposes future policy directions. The discussion will focus

on the manufacturing sector, while mention will be made of the primary, construction and

service sectors when necessary.

2. Structural changes in the Korean economy

2.1 Rapid changes in industrial structureAfter a long period of stagnation, the Korean economy began to grow rapidly in the

1960s. The growth spurt was led by manufacturing, whose output grew annually by 17

percent in the 1960s and 16 percent in the 1970s (Table 3-1). The share of manufacturing

in gross value-added rose from 12 percent in 1953-1960 to 23 percent in 1971-1980 (Figure

3-1, Table 3-2). Its share in total employment also rose rapidly (Figure 3-2). In the

meantime, the share of services increased continuously in terms of both value-added and

employment, whereas that of agriculture declined. Within manufacturing, heavy and

chemical industries (HCIs) have increased their share at the expense of light industries

(Figure 3-3, Table 3-2).

Table 3-1. Annual output growth by sector (Unit: %)


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Agriculture, forestry and fishing 2.3 4.4 1.6 3.5 1.9 1.8

Mining and manufacturing 12.1 15.7 14.1 11.4 8.2 5.3

Mining 4.7 -0.2 -1.3 -0.3

Manufacturing 12.7 16.8 15.8 12.2 8.4 5.4

Light industries 12.7 7.0 1.1 -0.6

Heavy and chemical industries 17.2 14.4 9.8 6.6

Public utilities and construction 9.3 19.2 10.3 10.3 2.7 3.3

Public utilities 15.8 17.6 10.3 5.8

Construction 10.1 9.7 1.4 2.6

Services 3.8 8.6 6.8 8.4 6.1 3.6

Gross Domestic Product 3.8 8.4 9.0 9.7 6.5 3.9


087

Figure 3-1. Share in gross value-added by sector

Note: Services include public utilities and construction.


Table 3-2. Share in gross value-added by sector (Unit: %)

Note: Period averages.


Similar changes have occurred in the export structure (Figure 3-4). In 1970, the primary

industries (mostly mining and fisheries) accounted for 17 percent of total exports, light

industries 70 percent and HCIs 13 percent. In 2008, their shares were 2 percent, 6 percent

and 92 percent, respectively. The top 10 export items also changed dramatically (Table 3-3).

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1953-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001-2009

Agriculture, forestry and fishing 41.9 35.5 24.6 12.4 6.0 3.4

Mining and manufacturing 13.4 19.1 24.0 28.4 26.9 27.3

Mining 1.4 1.8 1.3 1.1 0.5 0.2

Manufacturing 12.0 17.3 22.7 27.3 26.5 27.1

Light industries 9.5 11.5 11.3 9.8 6.5 4.5

Heavy and chemical industries 2.5 5.8 11.4 17.5 20.0 22.6

Public utilities construction 3.7 5.2 6.8 10.0 11.9 9.6

Public utilities 1.4 2.7 2.1 2.2

Construction 5.5 7.3 9.7 7.4

Services 41.1 40.2 44.5 49.2 55.2 59.6

Gross value-added 100.0 100.0 100.0 100.0 100.0 100.0


Figure 3-2. Share in total employment by sector


Figure 3-3. Share in manufacturing value-added by subsector


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Figure 3-4. Share in exports by sector

Source: Institute for International Trade (http://www.kita.net).

Table 3-3. Share of the top 10 export items in total exports (Unit: %)

Source: Institute for International Trade (http://www.kita.net).

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Rank 1961 1970 1980

123456789

10

Iron oreTungstenRaw yarnCoalCuttlefishLive fishGraphitePlywoodRiceSwine bristle

13.02.66.75.85.64.54.23.33.33.0

TextilePlywoodWigsIron oreElectronic goodsConfectioneryFootwearTobaccosIron productsMetal products

40.811.010.85.93.52.32.11.61.51.5

GarmentsSteel plate-rolled productsFootwearShipsAudio equipmentMan-made filament fabricsRubber productsWoods and wood itemsVideo equipmentSemiconductors

16.05.45.23.63.43.22.92.82.62.5

Sum 62.0 81.1 47.6

Rank 1990 2000 2008

123456789

10

GarmentsSemiconductorsFootwearVideo equipmentShipsComputersAudio equipmentSteel plate-rolled productsMan-made filament fabricsAutomobiles

11.77.06.65.64.43.93.83.83.63.0

SemiconductorsComputersAutomobilesPetroleum productsShipsMobile phone equipmentSynthetic resinSteel plate-rolled productsGarmentsVideo equipment

15.18.57.75.34.94.62.92.82.72.1

Ships and ship componentsPetroleum productsMobile phone equipmentAutomobilesSemiconductorsFlat display screensSteel plate-rolled productsSynthetic resinAutomobile partsComputers

10.28.98.58.37.84.43.83.53.32.5

Sum 53.4 56.6 61.3


Similar patterns of structural change have been observed in other countries as well.

According to Table 3-4, Korea’s industrial structure in the early 1960s was comparable to

that of U.K. in 1700, the U.S. before 1880, and Japan in the early decades of the 20th

century. These countries saw manufacturing and service industries replacing the agricultural

sector in importance in the following decades. What sets Korea apart from these advanced

countries is the speed with which it achieved its structural changes. Korea’s industrial structure

in 1990 came close to that of U.K. in 1890, the U.S. in 1950, and Japan in 1970.1

Table 3-4. Distribution of employment by sector(Unit: %)

Note: Agriculture includes forestry and fishing; industry includes mining, manufacturing, public utilities and construction; servicesinclude other remaining sectors.

Source: Jong-il Kim (2002).

For an international comparison, Jungho Yoo (1997) defines“industrialization” as the

process during which the employment share of agriculture fell from above 50 percent to

below 20 percent. Figure 3-5 illustrates that industrialization took much longer for early

starters than for late starters.090THEKOREAN

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1 The data for Japan in 1970 can be found in Table 10 of Jong-il Kim (2002).

Country Year Agriculture Industry Services

U.K.170018201890

60.040.016.0

15.030.044.0

25.030.040.0

U.S.

18801900192019401950

51.943.030.925.517.7

25.930.038.737.443.0

22.227.030.437.139.3

Japan

18801900192019401948

80.968.554.444.356.0

6.513.520.526.921.3

12.618.025.128.822.7

Korea

19631970198019901996199719981999

63.150.434.017.911.711.312.411.6

11.217.228.735.032.130.927.527.1

25.632.337.347.156.257.860.161.3

Taiwan

195219601970198019901997

56.150.735.719.612.98.5

16.921.534.442.941.338.1

27.027.929.937.545.953.5


091

Figure 3-5. Periods of industrialization

Note: The numbers in parentheses indicate the length of the industrialization period in years.

Source: Jungho Yoo (1997).

The transition from light industries to HCI-related ones within manufacturing is another

common feature across economies. Figure 3-6 shows that the ratio of value-added of light

industries to that of HCIs (Hoffman ratio) has been declining in advanced countries as well

as in Korea. Again, the difference lies in the speed of decline. Korea indeed achieved

“compressed” growth in the last few decades in much the same way as Taiwan and other

East Asian countries did.

Figure 3-6. Trends of Hoffman ratio across countries

Note: Hoffman ratio is the ratio of value-added of light industries to that of heavy and chemical industries.

Source: Jong-il Kim (2002).

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2.2 Capital accumulation and productivity growth

2.2.1 Components of output growthThe rapid economic growth and structural transformation was the result in the first place

of the rapid accumulation of productive capital. From the mid-1970s to the present, the

investment rate has stayed at 30-40 percent, reaching a peak in 1991 at 40 percent (Figure

3-7). Domestic investment has been mostly financed by domestic savings except between

the mid-1960s and mid-1980s when Korea ran a large current account deficit.

Figure 3-7. Investment and savings rates


In fact, Krugman (1994) contended that most of East Asia’s economic growth stemmed

from factor accumulation rather than efficiency improvement and would soon face

deceleration as the diminishing returns set in. He bases his argument on a series of growth

accounting analyses by Young (1992, 1993, 1995), which point out the small contributions

of total factor productivity (TFP) to the growth of East Asian economies. A recent study by

Chin Hee Hahn and Sukha Shin (2010) gives a similar result (Table 3-5). Between 1961 and

2004, per worker GDP grew by 4.7 percent annually, out of which 1.8 percent came from

the TFP growth and 2.9 percent from per worker capital accumulation. The figures for

industrial countries were 2.1 and 1.1 percent, respectively. Therefore the TFP growth explains

38 percent of the per worker GDP growth in Korea and 52 percent in industrial countries.

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Table 3-5. Sources of growth in major regions (1961-2004) (Unit: %)

Note: The numbers in paratheses indicate the numbers of countries.

Source: Chin Hee Hahn and Sukha Shin (2010).

Jong-il Kim (2002) proposes an interesting hypothesis on the reason for the smaller role

played by TFP in East Asia. According to him, technological progress is often heavily

biased in a physical capital-using direction in the early stage of modern economic growth.

Once the first phase of industrialization comes to a close, however, the technological

progress becomes less capital-using and the bias shifts in an intangible capital-using

direction, yielding a higher estimate of the TFP growth. In this respect, it is very important

for Korea and other East Asian countries to invest in intangible capital such as education

and R&D to make a successful transition from a low-TFP to a high-TFP economy.

Still, according to the above table, Korea’s absolute level of TFP growth in the past has

been quite remarkable, higher than that of industrial countries and surpassed only by

China’s. Where did such efficiency improvement come from? Three of its main sources are

technological progress, resource reallocation and international trade. Each of these sources

is discussed in some detail in the rest of this subsection.

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GDP growthPer worker GDP

growth

Contribution from

K/L TFP

World (83) 4.0 2.4 1.2 1.3

Industrial countries (22) 3.3 2.1 1.1 1.1

China 7.2 5.4 2.1 3.4

Korea1961-19701971-19801981-19901991-20002001-2004

7.17.77.38.65.84.5

4.74.74.66.14.12.9

2.93.03.82.82.71.3

1.81.60.83.41.51.5

East Asia (5) 5.7 2.8 1.8 1.0

Latin America (22) 3.7 1.0 0.6 0.4

South Asia (4) 4.9 3.0 1.1 1.8

Sub-Saharan Africa (19) 3.4 1.0 0.6 0.3

Middle East and North Africa (9) 4.4 2.0 1.2 0.9


2.2.2 Technological progressTechnological progress is made possible by domestic R&D activities, imports of capital

goods that embody advanced technologies, acquisition of foreign technologies, or

knowledge transfer through foreign direct investments (FDIs, inward or outward). In

addition, exporters from developing countries can gain knowledge of product

development, manufacturing, marketing, and other modern practices in advanced

countries. The knowledge gained by exporting is subsequently disseminated to other parts

of the economy, leaving positive externalities. International trade also strengthens the

incentive of firms to innovate by increasing the market size and enhancing the competitive

pressure.

All of these factors, except perhaps FDIs, must have played an important role in Korea.

Domestic R&D activities surged in the 1980s as the private R&D spending increased rapidly

in response to the intensifying competition at home and abroad (Figure 3-8). The current

level of total R&D spending (3.4 percent of GDP in 2008) is among the highest in the

world. Since the 1960s, imports have been dominated by raw materials and capital goods.

In 2000, for example, imports of capital goods for domestic use corresponded to 57

percent of facilities investment (Table 3-6). The payment of royalties and license fees, one

measure of technology acquisition, has been increasing over time, reaching 0.8 percent of

GDP in 2009 (Figure 3-9).

Figure 3-8. R&D expenditure


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Table 3-6. Imports by commodity group (Unit: billion dollars, %)

Note: 1) Include goods not classified elsewhere.

Source: Korea International Trade Association (http://www.kita.org); Bank of Korea (http://ecos.bok.or.kr).

Figure 3-9. Royalties and license fees


2.2.3 Resource reallocationA second important source of efficiency improvement is the reallocation of resources

from less productive toward more productive sectors. A notable example is the migration

of labor and capital from agriculture to manufacturing, from light industries to HCIs, and

from rural to urban areas. The economy-wide productivity improves when such migration

Korea’s

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1970 1980 1990 2000 2009

Total imports1)

(% of total imports)2.0

(100.0)22.3

(100.0)69.5

(100.0)160.5

(100.0)323.1

(100.0)

Materials(% of total imports)

1.0(52.9)

14.5(65.0)

38.2(54.9)

81.6(50.8)

186.1(57.6)

Capital goods(% of total imports)

Capital goods for domestic use(% of total imports)(% of GDP)(% of gross fixed capital formation)(% of facilities investment)

0.5(23.1)

5.1(23.0)

25.6(36.8)

64.6(40.2)37.2

(23.2)(7.0)

(23.2)(56.7)

104.0(32.2)59.1

(18.3)(7.1)

(24.2)(77.8)

Consumption goods(% of total imports)

0.5(24.0)

2.7(12.1)

5.7(8.2)

14.0(8.7)

32.7(10.1)


proceeds without much difficulty. On the other hand, productivity improvement is

constrained when such migration is hindered by an inflexible labor market, geographic

immobility of factor inputs, government protection of declining industries and unprofitable

businesses, inefficient financial intermediation, or inadequate supply of infrastructure to

support the growth of cities.

In Korea, the rapid structural changes recorded in the past decades (Figures 3-1, 3-2, 3-

3) indicate that resources have been reallocated quite flexibly across sectors. According to

Jong-il Kim (1998), the TFP growth in 1970-1986 was 1.45 percent per year, of which 0.74

percent was attributable to technological progress and 0.71 percent to resource reallocation,

implying that the latter was as important as the former in productivity improvement.

In the labor market, Kim and Topel (1995) report that labor mobility was high not only

between rural and urban areas but also within manufacturing during the period of rapid

economic growth (the 1970s and the early 1980s). In the 1990s, the flexibility in

employment and sectoral mobility somewhat declined as the supply of young workers

from rural areas fell off (Ju Ho Lee and Dae-Il Kim, 1997).

Geographic mobility has been also high as can be inferred from the rapid urbanization

trend (Figure 3-10). The Korean government has made consistent efforts to expand urban

infrastructure to accommodate the increasing population. As a percentage of GDP, the

current level of government capital stock across the country compares favorably with those

in major economies (Joonook Choi, DeokHyun Ryu and Hyungsoo Park, 2005).2

Figure 3-10. Urbanization trend


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097

At the same time, however, the Korean government impeded the market-based resource

reallocation with directed credits, the promotion of HCIs, repeated bailouts of insolvent

firms, and the protection of SMEs. Perhaps more importantly, the long period of financial

repression stunted the development of an efficient system of financial intermediation and

weakened the competitiveness of the financial sector. It is still being debated whether

these interventions accelerated or hampered the economic growth and structural changes.

In understanding the nature of resource reallocation, one question remains. Other than

government influences (intentional or unintentional), what drives the reallocation? An

immediate answer would be the high profitability in high-productivity sectors that lures

capital and labor into these sectors. But when the market size is limited, the extent of

reallocation will also be limited.3 International trade in this regard enables a country to

overcome the limited size of its domestic market, and stimulates a further reallocation of

resources toward its areas of comparative advantage. Korea would not have been able to

expand its manufacturing sector to the present degree without the opportunities offered by

international trade.

The meaning of comparative advantage needs some elaboration. Traditionally, factor

endowments were believed to determine the comparative advantage of a country. But they

cannot explain the recent increase in intra-industry trade, and economies of scale is now

receiving greater attention as a determinant of comparative advantage (Gill and Kharas,

2007, p.13). Products with small differences still fall under the same broad industrial

classification, yet may be made in different countries and traded for each other. With

increasing returns to scale, trade allows the exploitation of technological advantages by

increasing the market size, and encourages specialization in production. Specialization in

turn promotes innovation and reinforces the comparative advantage. The Korean

economic growth in the past decades is well described by such a dynamic development of

comparative advantages.

2.2.4 International tradeThe preceding discussions point out the critical role played by international transactions

in facilitating technological progress and resource reallocation. They create knowledge

spillovers (through imported capital goods, acquisition of foreign technologies, and FDI),

promote learning by exporting, and strengthen the incentive to innovate. They also allow

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2 Infrastructure investment is discussed in Chapter 5 of this book.3 It should also be noted that productivity growth can reduce rather than increase employment as in the case of retail services.Again the critical question is the market size.


4 See the discussion in Chapter 4.

domestic producers to access the global market and exploit their comparative advantages.

Many studies provide empirical support to the role of international trade in promoting

Korea’s economic growth.4

Some authors believe that the key to East Asia’s economic success was the regime that

has been best described as free trade for exporters (Radelet, Sachs and Lee, 1997). The role

of industrial policy in picking winners and salvaging losers was secondary to that of export

promotion. The vastly enlarged international trade of the post-war period provided an

opportunity for East Asian countries to rapidly improve their productivity and achieve fast

growth (Jungho Yoo, 1997).

2.3 ChallengesThe structural transformation of the Korean economy is an on-going process. The

government should continue to promote productivity growth by facilitating technological

progress and resource reallocation. There are, however, many potential impediments to

continued productivity growth.

First, many agree that Korea has graduated from the stage of“extensive” growth when

the main challenge was to import and deploy foreign technologies－to do known things in

known ways (Eichengreen and Chung, 2004, p.3). The opportunities for growth through

catch-up have largely been exhausted, and future growth will depend critically on how

Korea can expand its technological frontier through home-grown innovations.

Technological progress, if any, will be slower than before and the uncertainty higher.

As the government becomes incapable of charting the course of technological progress,

it becomes more important to create a market-based innovation system in which various

technologies are developed and tested by a diverse group of entrepreneurs and their

success or failure is rewarded or punished by the market. The traditional government-led

investment strategy can prevent Korea from converging with the world technology frontier

(Acemoglu, Aghion and Zilibotti, 2006). Government interventions shoud be confined to

clear cases of market failure.

Second, educational opportunities rapidly expanded in the past (Figure 6-6 in Chapter

6), and there is now less room for growth in terms of the quantity of school education. The

enrollment rate in 2009 was 98 percent in elementary school, 96 percent in middle school,

93 percent in high school, and 70 percent in tertiary education. This implies that the

growth rate of human capital will slow in the future and with it, the productivity growth.098THEKOREAN

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099

An important issue at this stage is to improve the quality of education at all levels of

schooling in line with the quantity expansion. This is essential to facilitate the intangible

capital-using technological progress and promote productivity growth (Jong-il Kim, 2002).

Efforts should be focused on increasing consumer choices and strengthening the

accountability of service providers. Chapter 6 of this book addresses the issue.

Third, some sectors－namely, the service sector and SMEs－of the Korean economy are

suffering from a perennial productivity deficit. The productivity gap between the

manufacturing and service sectors is widening (Figure 3-11). The gap between HCIs and

light industries within manufacturing is also increasing as can be inferred from the growing

share of HCIs in total manufacturing value-added (Figure 3-3). Because HCIs are populated

by large corporations whereas light industries and services by SMEs, the gap between large

corporations and SMEs is widening as well (Figure 3-12).

Figure 3-11. Labor productivity of the service sector (1963-2008)


The low productivity of services is concentrated in two subsectors－(1) wholesale and

retail trade, and (2) restaurants and hotels. In 2006, labor compensation per employee in

these subsectors amounted to 26 percent of that in manufacturing.

In G7 countries, the comparable figure was 55 percent (Figure 3-13). In 2007, these

subsectors accounted for 37 percent of the employment in services (Figure 3-14). This is

smaller than 55 percent recorded in 1982, but still sizable. Requiring a minimal amount of

skills, they often provide the last resort for workers on the margins of the labor market

Korea’s

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together with some types of personal services. There do not appear to be many ways for

the government to help these workers except in the framework of ALMPs (job training,

employment service, etc.) or welfare programs (earned income tax credits, reduced social

security contributions, etc.).

Figure 3-12. Average wages by firm size in manufacturing (1980-2008)


Figure 3-13. Labor compensation per employee (2006)

Source: OECD Structural Analysis (STAN) Database (http://stats.oecd.org).

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Figure 3-14. Employment share in the service sector

Source: OECD Structural Analysis (STAN) Database (http://stats.oecd.org).

On the other hand, government policies for other types of services do have room for

improvement. For example, many professional services (health care, legal, accounting, real

estate appraisal, etc.) are tightly regulated by the government in part to correct market

failures resulting from information asymmetry and negative externalities (Youngsun Koh et

al., 2009; Heesuk Yun and Youngsun Koh, 2009). But in reality, many of the regulations

actually do more harm than good to consumer welfare by limiting competition between

service providers and protecting their interests. At the same time, the government is not

sufficiently monitoring the quality of services provided by professionals. Reforming the

regulation of professional services－abolishing harmful regulations and strengthening the

monitoring of service quality－will contribute to increased consumer welfare and promote the

competitiveness of service providers. Similar efforts are required in other service sectors as well.

As for SMEs, the government should streamline its complicated system of SME

assistance, refocus the policy on complementing rather than replacing the market

mechanism, and restructure the implementation system. In particular, those credit

programs that compete directly with private financial institutions should be discontinued

(Young-sam Cho, 2009), and more authorities should be delegated to local governments

(Jong-il Kim, 2007).

To summarize, there exists an urgent need to establish a market-based innovation

system, upgrade the quality of educational services, reform the regulatory framework of

many service industries, and reorganize the SME assistance. Improving the productivity of

Korea’s

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the Korean economy will face great difficulty in the future without these efforts. Against

this backdrop, the following sections describe in detail Korea’s industrial development

since the 1950s.

3. Historical development of Korean industry

3.1 Dominance of the primary sector in the 1940s and 1950sThe Korean economy was dominated by the primary industries of agriculture, forestry

and fisheries until the early 1960s, when Korea embarked on full-scale industrialization.

Just prior to the 1960s, the primary sector accounted for nearly 40 percent of gross

domestic product, while manufacturing accounted for only around 10 percent, and

accounted for about a quarter of total exports.

The dominance of the primary sector was not unusual given the underdeveloped nature

of the Korean economy at the time. Moreover, Japanese colonial policy had created a

complementary economic structure between the northern and southern parts of the

Korean peninsula to support its military expansion into China in the 1930s. While most

manufacturing factories built by the Japanese in Korea were located in the north, close to

similar facilities in the Japanese puppet state of Manchukuo, the south was designated as

the prime source of food supplies. In addition, the manufacturing facilities that the south

did possess were largely destroyed during the Korean War (1950-1953).

The most important policy change during this period was the land reform that started in

1950. The redistribution of land ownership to small farmers accelerated productivity

growth in agriculture by boosting their work incentive. The newly-created farming class

had more money to spend on educating their children, which created a highly-skilled

population that was necessary to support industrialization. Landlords who sold their farms

often used the money to reinvest it in industrial enterprises, which provided an important

source of capital for the initial stage of manufacturing development.

The fishing industry played as important a role as agriculture in the primary sector

during this period, although it made up a smaller percentage of the economy. It was an

important foreign currency earner, accounting for the single largest source of foreign

revenue after foreign aid during the late 1940s (Table 3-7). Fish exports, for example, made

up 93 percent of Korea’s total exports in 1949. Unlike agriculture, where tenant farming

was prohibited and a ceiling was placed on the amount of landholding per farmer as a

result of the land reform, the fishing industry became increasingly commercialized, while

providing an important source of protein for a population that was suffering nutritional

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103

deficiencies.

Table 3-7. Fish exports in the second half of the 1940s (Unit: million tons, %)

Source: Bank of Korea; Korea International Trade Association.

The construction sector also played an important role in the 1940s and 1950s in

rehabilitating the physical infrastructure that had been neglected or destroyed in the late

1940s or during the Korean War. Infrastructure reconstruction contributed to economic

growth and laid the base for the development of other industries.

The development of the manufacturing sector was slow during this period, and

depended heavily on foreign aid. The few industries that produced consumer goods,

including sugar, flour and cotton (the so-called“three white industries”), grew because

foreign aid helped provide the raw materials and supported domestic demand. The rapid

rise of the consumer goods industry, however, created an imbalance in the development of

the industrial structure. It also increased a dependence on the import of raw materials and

production machinery, which resulted in a deterioration in the balance of payments.

Nonetheless, the sector’s growth laid the ground for subsequent industrialization in the

1960s and after.

Foreign aid was used by the Korean government to buy fertilizer to increase food

production; develop energy industries, such as electricity and coal; and build the

infrastructure and facilities needed for the country’s post-war restoration. This led,

however, to the establishment of a large number of state-run enterprises under the direct

control of government. While these public enterprises greatly contributed to advancing

Korea’s industrial structure in the early stages, they later became an economic burden due

to reckless management and growing debts.

3.2 Rapid Industrialization in the 1960s and 1970s

3.2.1 Growth of the manufacturing sector

In the 1960s, the manufacturing sector started to play a leading role in Korea’s economic

growth. It grew by 17 percent per year between 1960 and 1970, the highest decade-long

Korea’s

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Fish exports Share in total exports

1946

1947

1948

1949

594

2,279

5,984

10,921

69.5

57.4

60.3

93.3


growth rate since 1953 (Table 3-1). It continued to grow rapidly in the 1970s, and its share

in gross value added doubled from 12 percent in 1953-1960 to 23 percent in 1971-1980

(Table 3-2). Its share in total exports rose from one quarter in the early 1960s to nearly 90

percent in the early 1970s (Figure 3-4), with an accompanying change in major export

items (Table 3-3).

Manufacturing growth in this period was dominated by the labor-intensive light

industries such as clothing and footwear. These industries absorbed the surplus labor force

discharged from rural areas by creating jobs rapidly. As these industries began their

production activities in industrial complexes near urban areas, they also contributed to the

growth of large cities and the urbanization of the Korean population. The Guro industrial

complex in Seoul is one example.

There were several underlying factors for the phenomenal development of the

manufacturing sector in Korea. First was the early generation of entrepreneurs who

became aware of the opportunities offered by international markets and made profits from

importing various goods that were in short supply in domestic markets. These small traders

came to be the first group of industrial entrepreneurs who launched businesses in labor-

intensive industries.

The entrepreneurship of the early traders was combined with the unlimited supply of

labor from the agricultural sector to generate the explosive growth of light industries. At

that time, the wage level in Korea was one of the lowest in the world, while Korean

workers were relatively well-educated and diligent. Labor-intensive industries could

acquire cost competitiveness quickly and increase their share in the international market.

Unlike labor, capital, another important factor of production was not abundant at that

time. The domestic savings ratio was 15 and 23 percent in 1961-1970 and 1971-1980,

respectively, while the investment ratio was 19 and 29 percent (Table 3-8). The gap

between savings and investment had to be financed by borrowing from abroad, which

amounted to 3 and 6 percent of Gross National Disposal Income.

In addition to borrowing, current transfers from abroad made significant contributions to

alleviating the shortage in domestic savings. Without them, domestic savings would have

been much lower (see the last row of Table 3-8).

An important development in this regard was the reparation payment of 500 million

dollars and commercial loans of 300 million dollars from Japan that followed the

normalization of diplomatic relationship between Korea and Japan in 1965. The payments

were used in building Pohang Iron and Steel Company (now known as POSCO) and

making investments in various sectors of the Korean economy.

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Table 3-8. Savings and investment (Unit: % of GNDI)


The Vietnam War became another source of foreign currency earnings to support

industrialization since Korea received U.S. economic aid for its military participation in the

war (1965-1973), while Korean companies benefited from supplying services, including the

building of military facilities, and products, such as uniforms, to the U.S. armed forces

serving in Vietnam.

Lastly, the role of government was no less important in accelerating the growth of

manufacturing. During the first and second Five-Year Economic Development Plans

undertaken in the 1960s, the Korean government invested heavily in physical infrastructure

－power plants, express highways and seaports among others－to lay the foundation for

export-driven industrialization. The government established many state-owned enterprises

(SOEs) in key industries such as fertilizer, cement, oil refinering, and steel and iron, which

were indispensable for industrial development. In addition, the government mobilized

other policy measures, involving foreign exchange, taxation, finance and customs

regulations, to promote export-oriented industries. Besides these conventional measures,

the Korean government employed rather unusual methods, such as the president chairing

the Monthly Export Promotion Meeting, which was meant to solve problems and remove

bottlenecks affecting exports.

3.2.2 Growth of other sectorsIn the 1960s and 1970s, the construction sector also grew rapidly. It played a main role

in building physical infrastructure and industrial plants. The experience gained from

building large-scale facilities greatly enhanced Korea’s competitiveness in the construction

Korea’s

IndustrialD

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1953~1960 1961~1970 1971~1980 1981~1990 1991~2000 2001~2009

Gross savings (A)Private savings

HouseholdsCorporations

Government savings

11.1 8.6

2.5

15.5 9.9

5.6

23.3 19.0 11.5 9.8 4.3

33.0 26.8 14.1 12.7 6.2

35.8 27.1 15.2 11.9 8.7

31.3 21.4 5.5

15.9 10.0

Gross investment (B) 11.5 18.8 29.2 32.1 34.6 29.4

Net lending from the rest of theworld (A-B)

-0.4 -3.4 -5.8 0.9 1.2 1.9

Current transfers from the rest ofthe world (C)

7.1 5.4 1.0 1.1 0.3 -0.3

(A - C) 4.0 10.1 22.3 31.9 35.5 31.6


industry and enabled it to win many overseas construction projects staring from the 1970s.

Overseas construction orders rose from 170 million dollars in 1973 to 13 billion dollars in

1981, contributing greatly to Korea’s foreign currency revenues.

On the other hand, the primary sector, especially the agricultural sector, stagnated with

annual output growth of 3 percent in the 1960s and 1970s. The slow growth of agricultural

output is natural given the continued migration of workers from agriculture to

manufacturing and from rural to urban areas. But the perceived imbalance in jobs and

other opportunities between rural and urban areas created social tensions and political

pressure increased for policy interventions to revitalize the agricultural sector and rural areas.

A more important question is whether agricultural productivity improved as hidden

unemployment in rural areas decreased. In this respect, an important contribution was

made by the development of a new local rice variant, known as Tong-il (unification) rice,

in the early 1970s, which produced a far larger amount of grain per stalk than the

traditional variant. In addition, machinery and new farming methods were introduced to

improve agricultural productivity. Traditional farming communities were subject to the

Saemaul (new village) Movement, which the government organized to modernize rural

areas in all aspects from food production to living conditions. The goal of the program was

to achieve self-sufficiency in grain production, supported by the Green Revolution in crops.

All these changes led to a large improvement in agricultural productivity, accelerated the

migration of workers from rural to urban areas, helped Korea achieve self-sufficiency in

food production at least in the case of rice (Table 3-9), and contributed to increasing rice

supplies at a lower price to industrial workers.

Table 3-9. Self-sufficiency ratio of grains (1956-2005) (Unit: %)

Source: Ministry of Agriculture and Forestry, Main Statistics of Agriculture and Forestry, various issues.

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Rice Barley Wheat Corn Bean Potato Others Total

1956

1960

1965

1970

1975

1980

1985

1990

1995

2000

100.0

100.8

100.9

93.1

94.6

95.1

103.3

108.3

91.4

102.9

87.3

110.4

106.0

106.3

92.0

57.0

63.7

97.4

67.0

46.9

35.9

33.9

27.0

15.4

5.7

4.8

0.4

0.1

0.3

0.1

100.0

18.9

36.1

18.9

8.3

5.9

4.1

1.8

1.1

0.9

100.0

79.3

100.0

96.1

85.8

35.1

22.5

20.1

9.9

6.4

100.0

100.0

100.0

100.0

100.0

100.0

100.0

95.6

98.4

99.3

100.0

100.0

100.0

96.9

100.0

89.9

11.6

13.9

3.8

5.2

92.1

94.5

93.9

80.5

74.1

56.0

48.4

43.1

29.1

29.7


107

As for fishing, a significant part (10 percent) of reparation payments was invested in this

sector and supported its growth. The fishing sector got a further boost with the Korean-

Japanese Fishing Agreement (1965), which gave protection to Korean fishing grounds and

provided an opportunity for the revival of the fishing industry. In time, deep-sea

commercial fishing emerged as a new business and became an important foreign currency

earner. It also contributed to the improvement in the nutritional standards of Koreans by

providing new sources of protein. The large fishing fleets venturing to the far corners of

the world were an early source of Korean national pride, although their activities were

curbed after 1977 when Korea lost access to important fishing grounds with the declaration

of exclusive fishing zones by the U.S., the Soviet Union and other countries.

3.2.3 Promoting heavy and chemical industriesDespite their remarkable success, Korea’s labor-intensive industries showed their limits

as well. The labor-intensive industries were in general specialized in finished goods such

as clothes, footwear and electronic appliances, and their success led to a huge increase in

imports of raw materials, parts and components, and equipment to produce those finished

goods. The need increased for moving upstream to higher value-added products and

deepening Korea’s industrial structure.

In the 1970s, the Korean government embarked on an ambitious industrial policy to

promote HCIs.5 The government selected the industries that should be promoted and gave

them financial support. It chose the location and built infrastructure for the industrial

complexes to provide the HCI sector with the optimal geographical conditions. It provided

policy loans at below-market interest rates to the HCI companies since they required a

tremendous amount of capital to establish facilities and operate them. The government

also promoted the creation of general trading companies to expand exports for these

industries.

What distinguished the development of the HCI sector in the 1970s from that of the

labor-intensive industries in the 1960s was the need for greater energy supplies and the

provision of a more skilled labor force and more advanced technology.

The first priority was securing the energy supplies. The government decided to make

industrialization reliant on the cheap and plentiful supplies of petroleum, switching away

from Korea’s previous focus on coal as the main source of energy. When the first oil crisis

erupted in 1973, however, the government renewed its emphasis on coal. The debate on

Korea’s

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5 See the discussion in Section 3 of Chapter 2.


the choice between the policies of“coal-first-oil-next” and“oil-first-coal-next” underscored

that energy had become a contentious issue for the government. In the end, Korea was

able to absorb the blow since earnings from overseas construction orders, mainly in the

Middle East, offset the impact of rising oil prices. But in the second oil shock in 1979,

Korea was adversely affected since the country’s energy needs were much greater by then

due to the extensive development of the power-hungry HCI industries. As a result, the

government recognized the need to find new energy sources besides oil to support future

industrial development. Nuclear energy was seen as one important alternative to oil and a

nuclear energy program was successfully launched at this time (Table 3-10).

Table 3-10. Energy consumption by source (Unit: %)

Note: 1) Other energy sources include charcoal.


The next task was the acquisition of technology. The launch of industrialization required

that the relevant technologies should be introduced and developed at an appropriate pace

with the country’s economic progress. In the beginning, the technology required was

usually obtained with turn-key production plants supplied by foreign companies. By the

1970s, however, Korea needed more advanced technology, with the result that the focus

shifted toward increased training for a technically-skilled workforce and the expansion of

domestic R&D capacity. Many important state research institutes were established at this

time and represented the most significant results of this policy.

In implementing the HCI program, the Korean government depended heavily on the

creativity and dynamism of the private sector. Businessman responded to the new

challenges and opportunities. Their participation made this period legendary in the annals

of Korean business. There is the story of Tae-joon Park, the head of state-owned POSCO,

who created Korea’s steel industry from scratch despite lacking technology, capital and raw

materials at the beginning. Or the case of Ju-yung Chung, the founder of the Hyundai

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1968 1973 1978 1983 1988 1993 1998 2003 2008

Total consumption 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

CoalPetroleumLNGHydraulicNuclearRenewable and others1)

34.234.8-1.5-

29.5

30.253.8-1.3-

14.7

26.063.3

-1.21.58.0

33.455.9

-1.44.54.8

33.447.03.61.2

13.31.5

20.461.94.51.2

11.50.6

21.754.68.30.9

13.50.9

23.847.611.20.8

15.11.5

27.441.614.80.5

13.52.2

Per capita consumption(TOE)

0.51 0.73 1.03 1.24 1.79 2.87 3.58 4.49 4.95


109

group, who started Korea’s modern shipbuilding industry by first persuading a group of

Greek ship owners to place orders for vessels despite the absence of shipbuilding facilities,

and then used the Greek orders to persuade London bankers to provide the capital needed

for the construction of the shipyards.

Opinions are divided regarding the success or failure of the HCI drive. On the positive

side, many people believe that it contributed decisively to forming the foundation of the

majority of key industries that currently support the Korean economy. According to them,

Korea would never have been able to upgrade its industrial structure without the HCI

drive.

But the HCI program also had unexpected negative side effects. The fact that low-

interest policy loans were devoted to HCIs and related sectors meant that light industries

were largely deprived of state financial support and placed at a disadvantage. This helped

cause the unbalanced growth between HCIs and light industries.

Another significant result of the HCI program was that it contributed to the formation of

the large business conglomerates, or the chaebol, that still dominate the industrial

landscape. Many of the future chaebol got their start in the light-industrial phase in the

1960s and then expanded into HCIs with government support in the 1970s. This led to the

concentration of economic power among the chaebol groups, which remains an issue

today.

Another criticism of the HCI program was that it encouraged investments by the chaebol

in the designated industries with little thought given to their long-term profitability. The

government’s financial support to the HCI sector resulted in excessive and overlapping

investments as the chaebol competed for government assistance. It also created the

conditions for future corporate insolvencies and had a knock-on effect in terms of

hampering the normal development of the banking sector, which had helped finance the

HCI investments by the big business groups.

3.3 Industrial rationalization in the 1980sToward the end of the 1970s, attention was increasingly drawn to the over-capacity and

low profitability of HCIs.6 In response, the government set out an investment coordination

plan as part of the Comprehensive Economic Stabilization Program (May 1979) and

implemented the plan in two rounds in 1980. The first round (August 20, 1980) was

targeted at power generator, automobile and construction machinery, whereas the second

Korea’s

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6 See the discussion in Section 4 of Chapter 2.


round (October 7, 1980) at heavy electric machinery, electronic switchboard, diesel

engines and copper smelting. In these industries, the investment coordination plan aimed

to merge enterprises if there were too many of them; to reduce excessive capacity and

cancel new investments; and to guarantee monopolies if excessive competition was a

worry.

In addition to the investment coordination, a series of industrial restructuring programs

were carried out in the 1980s to help distressed sectors overcome their difficulties. The

shipping industry underwent several rounds of restructuring (December 1983, May 1984,

July 1985 and December 1985), in which many shipping companies were merged with the

aid of tax benefits and financial support from the government. The restructuring of the

overseas construction industry began in 1984 and gained speed in 1986.

The industrial restructuring of these and other industries had its legal basis in the Tax

Reduction and Exemption Regulation Act (TRERA) and the Manufacturing Development

Act (MDA). These laws enabled the government to designate certain industries for

rationalization, provide various tax benefits (such as exemption from capital gains taxes)

and financial support, and regulate market entry and investment. The rationalization period

was specified in advance for each industry. Nine industries were rationalized after 1985－

automobile (1986-1989), construction machinery (1986-1988), diesel engine for ships

(1986-1989), heavy electric machinery (1986-1989), alloyed metal (1986-1989), textile

(1986-1997),7 dyeing (1987-1988), fertilizer (1987-1990) and footwear (1992-1995).

The industrial rationalization program was meant to improve the competitiveness of the

industries. But its success was limited because the government did not adopt reasonable

standards in assessing what business categories and companies should be chosen for

rationalization. In addition, the government failed to monitor the results of corporate asset

disposals.

The industrial rationalization program produced negative side effects as well. It

accelerated the concentration of economic power in the hands of the chaebol, which were

the only business enterprises with the financial resources to take over troubled companies.

In some cases, it blocked the entry of new competitors and left key industries under the

dominance of a few companies. This led to a monopolistic or oligopolistic market structure

in many industries. More importantly, it represented another example of questionable

government intervention in the economy following the HCI drive of the 1970s, which

hindered the development of market mechanisms.110THEKOREAN

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7 The rationalization of the textile industry began in July 1986 and was extended three times in July 1989, July 1992 and July 1995,and was completed in December 1997.


111

Recognizing these problems, the government changed its industrial policy in the late

1980s. Instead of directly intervening in the market, it decided to rely more on indirect and

functional methods such as R&D support. It also began to liberalize the financial sector.

But the reliance on the private sector in taking the initiative also had its share of

drawbacks. The government failed to keep close tabs on excessive investments by the

large industrial groups in the early 1990s as they sought to expand their business empires.

This eventually led to the 1997 financial crisis. The fundamental problem lay in the

inappropriate sequence of liberalizing the economy before strengthening market discipline

by abolishing the risk partnership between the state and the private sector as discussed in

Chapter 2.

3.4 Responding to new challenges in the 1990s

3.4.1 New challengesOne can easily recognize two big trends that greatly influenced Korea’s industrial

development from the 1990s: technology development and market opening.

While developed countries wanted to prevent the transfer of advanced technology to

newly industrialized nations, including Korea among others, Korea, in turn, had to worry

about economic competition posed by a second wave of industrializing countries, such as

China and those in Southeast Asia. Accordingly, Korea decided the best way to deal with

these challenges was to develop new industries based on new technologies, while

boosting the productivity of existing industries through the improvement of technology.

At the same time, the conclusion of the Uruguay Round of global trade negotiations and

the subsequent launch of the World Trade Organization in 1995 created further

international competitive pressure not only on the manufacturing sector but also on the

primary industries and the service sector. This represented an unprecedented challenge to

the Korean economy.

3.4.2 Technology developmentThere had already been recognition of the importance of technology during the earlier

phases of Korea’s industrial development. But as developed countries began to withhold

advanced technology from Korea, the Korean government and industry decided to step up

its own technology development.

Since the mid-1990s, Korea has relied more on technologies that it developed on its own

rather than using technology adopted from elsewhere. This achievement has been

Korea’s

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substantially due to the help of the state-financed research institutes that were set up in the

1960s and 1970s to foster development in key industrial sectors. They took the lead in

developing home-grown technology, with the launch of full-scale efforts in the 1980s.

They have also been the source of well-trained researchers who have gone on to

companies and universities to continue R&D programs as well as conducting joint research

projects with the state institutes. In the 1980s, private enterprises also began R&D activities

with government support and participated in many national R&D projects promoted by the

government. Since the 1990s, Korean enterprises have been able to expand their own R&D

efforts and created a number of private-sector research institutes.

The expansion of corporate R&D activities enhanced their ability to develop core

technologies needed to gain self-reliance in such new sectors as semiconductors and

telecommunications as well as existing key industries. Although the R&D efforts of

universities were minimal in comparison until the beginning of the 1990s, various national

R&D projects after that were started to stimulate basic research activities at the universities

and led to the establishment and support of various university research centers.

Technology development in the 1990s focused on the information and communication

technology (ICT) sector, which rapidly expanded and encouraged more private-sector

initiatives in this area. The rise of ICT-related industries in the 1990s represented an

important turning point in Korea’s industrial development. It showed that Korea was able

to compete in a rapidly changing international environment and that economic

development was no longer dependent on a state-directed industrial policy. The success of

the ICT sector also helped create a new development vision for Korean HCIs just as they

were emerging from the period of industrial rationalization and were searching for ways to

achieve future-oriented growth. Moreover, this period was notable for the fact that Korea

was weaning itself from adopting technology from advanced countries and instead was

beginning to develop its own.

In this way, the new advanced technology industries introduced structural changes in

Korean industry by being able to cope with new challenges in various areas. Until then,

Korean industries had not been able to respond adequately to these challenges due to an

inefficient industrial structure as well as the lack of technological expertise and other assets

compared to advanced countries. Korea’s bid for technological leadership focused on

developing the new materials and bio-industry sectors in addition to ICT. But the ICT

industry was better able to make gains than the other sectors due to government support.

Korea made rapid progress in the ICT sector, including the creation of an information-

based society that was among the most advanced in the world. For example, the personal

computer was developed by IBM in 1978, but its mass distribution in the U.S. only began

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in 1981. It was only two years later when Samsung Electronics was distributing its own

personal computers in Korea, starting in 1983.

Table 3-11. Growth contribution by ICT industries (Unit: %)

In the telecommunications sector, Korea had been far behind advanced countries in

establishing fixed-line phone networks, but it caught up with the rest of the world quickly

when it came to mobile phones. Korea was not far behind the U.S. in introducing the

internet and in some respects soon overtook the U.S. in terms of establishing a more

extensive broadband internet network.

Korea also proved to be on the cutting edge in developing or adopting other

information and communication technologies. Samsung Electronics was the first in the

world to develop 256 megabit DRAMs. In other remarkable initiatives, Korea developed

the TDX telephone switching technology and CDMA wireless system. These research

breakthroughs were partly due to government efforts to create an efficient national

telecommunications infrastructure. With the establishment of the Ministry of Information

and Communication (MIC) in 1994, the government sought to create a“national

information super-highway” based on high-speed broadband internet access. These goals

were supported by the MIC’s Informatization Promotion Fund, which aided the rapid

growth of the ICT sector.

These developments took place against the background of two noticeable investment

trends. One was that R&D investments, mainly spurred by technology development,

increased to 2.4 percent of GDP in 1997 from 1.7 percent in 1990. The second was that

private-sector R&D spending now accounted for 70-80 percent of total R&D investments in

Korea, a sharp reversal of the government’s previous dominant role in the area. The

number of private research institutes soared to 7,100 in 2000 from less than 1,000 in 1990,

signifying that technology development was now mainly being driven by the private

sector. As a result, Korea has emerged at the forefront of the global semiconductor

industry, while the number of patents applied by Korea’s private sector has increased at an

explosive rate.

Korea’s

IndustrialD

evelopmen

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1998 1999 2000 2001 2002 2003 2004

GDP Growth -6.9 9.5 8.5 3.8 7.0 3.1 4.6

ICT Growth 23.0 35.3 33.8 10.5 17.6 14.2 20.4

Contribution(percentage points)

1.1 2.2 2.3 1.0 1.8 1.6 2.5


Development of ICT industries

The take-off of Korea’s ICT sector can be largely credited to the companies that

improved the competitiveness of various advanced ICT products, including

semiconductors, liquid crystal displays and mobile phones among others. Owing to

quick and aggressive investments in R&D and production, they could reach their

present dominant global position. They are now posed to lead the evolution of the

global ICT industry in the future. They were the global leader in the LCD market with a

46.5 percent share in 2008. Korea held the second largest market share of mobile

phones in the first quarter of 2009 and it ranked third in the global semiconductor

market, including being the world’s leading producer of memory chips in 2008.

Korean companies anticipated the growth of the PC industry, the acceleration of

digitalization and the growth of wireless communication services, which led them to

focus intensively on the development of semiconductors, LCDs and mobile phones.

For example, the Korea Electronics Technology Research Institute received a 2.9

million dollar grant from the World Bank in 1979 to develop semiconductors. This

stood Korea in good stead when Apple released the first personal computers in 1978,

which was followed by the IBM personal computers using the MS-DOS operating

system in 1981. In December 1983, Samsung succeeded in developing and producing

64-megabit DRAM chips. Since then, Samsung has become a global leader through

aggressive R&D and investments, such as being the first company to develop the 256-

megbit DRAM in 1994.

Another major reason for Korea’s growing power in the ICT sector was the effort by

the government to actively promote the building of ICT infrastructure, which

facilitated widespread ICT usage. The ICT industry was also fostered by the

government’s competition, informatization and industrial development policies. This

shows that cooperation between business and government was beneficial in

commercializing new products and services, while revealing their ability to cope with

rapid changes in the ICT environment in a prompt manner.

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3.4.3 Market openingThe launch of the WTO system, Korea’s entry into the OECD and the 1997 Asian

financial crisis led to the wider opening of the Korean market, which posed new

challenges for Korean businesses. The market opening provided new opportunities for

Korean manufacturers that had already been exposed to international competition but it

caused difficulties for the primary sector industries, such as agriculture and fishing, which

were forced to restructure (DoHoon Kim et al., 2005).

Globalization trends in the world economy had earlier encouraged Korean

manufacturers to focus on export markets rather than depend on a domestic market with

limited demand. Now Korean manufacturers are taking the next step in“industrial

globalization” by establishing production facilities overseas. This has contributed to the

increased competitiveness of Korean industry in their respective sectors. Korea now ranks

among the top five countries when it comes to automobiles, shipbuilding, electronics and

steel. In turn, this resulted in management improvements of Korean companies that made

them first-class organizations. Korea’s success in embracing the globalization process is

borne out by the fact that the number of Korean companies reaching global status

continues to increase.

The rapid globalization of Korean business, however, has also produced adverse side

effects. The relationship between domestic-oriented businesses and those focused on

exports weakened, leading to a“bipolarization of industries.” The result was that even if

exports were booming, some companies relying on domestic demand did not benefit.

It also contributed to the“jobless growth” that first appeared in advanced countries in

the 1980s, but then emerged in Korea in the 1990s. The number of jobs in Korea that

exporting industries previously created dwindled as more production facilities went

overseas.

The market opening had its most severe impact on the agriculture and fishery sectors.

Pessimistic predictions about the future of these sectors in the wake of increased foreign

competition accelerated the reallocation of resources to industrial sectors. The import of

cheap agricultural and fishery products also caused changes in demand patterns, while

reducing domestic self-sufficiency in food production. The foreign competition forced a fall

in the price of domestic agricultural and fishery products, adding to the sectors’disruption.

Farmers and fishermen often responded to new market-opening measures by holding

street protests, with no real gains to themselves and the country.

The Asian financial crisis in the late 1990s increased pressure on the Korean industry to

restructure. Some industries, such as ICT, emerged stronger from the crisis and were better

Korea’s

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able to compete internationally. But the of agriculture and fishing industries, along with the

labor-intensive light industries in textiles and footwear, faced a harsh and difficult future.

3.5 In search of new growth engines in the 2000sThe biggest challenge for Korean industry in the 2000s is how to deal with restructuring

between industries that are able to handle the changes resulting from market opening and

technological advancement and those industries that have trouble dealing with these

challenges. In addition, there is the need to effectively select and develop future growth

engines.

In light of the country’s resources and industrial structure, it is generally agreed that the

Korean government and business should focus on advanced technology industries, parts

and materials sector, and knowledge-based service industries as the sources of future

growth. These new growth industries are not only expected to play the leading role in

forging the future of the Korean economy, but also influence the development of existing

industries. In addition, the“green growth” economic strategy for the next 60 years as

outlined by the Lee Myung-bak administration is expected to influence the future growth of

some industries.

From the early 2000s, Korea started to foster the development of new advanced

industries under such programs as“next-generation growth engine businesses,”“basic

development plan for bio-technology,”“comprehensive development project for nano-

related technology,”and“development plan for convergence technology.” These efforts

will require large financial investments and long lead times since Korea now lacks the core

technologies in these areas.

The 21st century will be the era of“system competition,” where individual industries

will work closely with their parts and materials suppliers and related sectors to enhance

their competitiveness. But the parts and materials industry is one of the weakest points of

Korea’s industrial structure. To promote this industry, Korea initially focused on import

substitution and localization in this area, and then encouraged building up global

distribution bases under the Special Act for Assisting Specialized Firms in Parts and

Materials (2001). The Act also set up an institutional framework by which the Korean

government can concentrate policy efforts on developing parts and materials.

Of course, the manufacturing sector alone cannot lead the Korean economy in the

future. The country already entered the period of de-industrialization in the 1990s. With

the“tertiarization” of the economy gaining pace, it is necessary to cultivate service

industries as new growth engines. The government has prepared comprehensive measures

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since the mid-2000s to improve the competitiveness of service industries. It has focused on

developing knowledge-based service industries, which include most categories of high

value-added services.

In addition, the green growth industries that have been highlighted by the Lee Myung-

bak administration represent another future growth engine and are expected to perform

well due to concerns about global climate change. The efforts will be focused on investing

in green technology and developing new renewable energy sources, upgrading production

facilities to meet higher environmental standards, and reducing harmful emissions by

promoting the more efficient use of energy.

However, the focus on developing new growth engines should not distract from the task

of also nurturing the future development of existing industries.

First, in the case of primary industries, the challenge is difficult since the agriculture and

fishing sectors are burdened with an aging workforce. Competitive pressures are likely to

increase on these sectors with the signing of more free trade agreements that will entail

further market-opening measures. It will be necessary to identify agricultural segments that

can remain competitive as well as find future growth engines among the primary sector

industries.

Manufacturing has played the leading role in the development of the Korean economy

and is likely to continue to do so. However, it is affected by the“bi-polarization

phenomenon,”characterized by the gap between exporting and domestic-oriented

industries, and between large corporations and SMEs. Manufacturing faces other structural

issues, such as a heavy dependence on parts and materials from Japan and the increased

competition from China and other newly industrializing countries.

In the energy sector, the need to improve energy efficiency and secure new energy

sources represents the biggest challenge. The push for international agreements on climate

change has made green growth a high priority for the government. This underscores the

importance of energy efficiency, nuclear energy development, and renewable energy as

major issues in Korea’s industrial development. This is also putting pressure on the

restructuring of energy industries, including that of the electricity power sector.

The slowdown in the growth of industries in the ICT sector has been matched by

acceleration in the convergence of ICT businesses with those of other industries. Future

economic productivity will depend more on technology convergence, including that

between broadcasting and telecommunications, rather than the growth of the ICT sector

alone.

As for science and technology, Korea has reached the level where it can be at the

forefront of global efforts in making scientific and technological breakthroughs. But for this

Korea’s

IndustrialD

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to happen, it must create leading-edge research groups and create an institutional

framework that encourages the development and retention of top talents. There is also the

need to reform the current university system, while encouraging leading foreign

universities to cooperate with domestic educational institutions. This must be

complemented by fostering the development of technology-focused SMEs, the creation of

a high-tech parts and components sector, and the formation of regional technology

innovation centers. There is also the need to promote efficient cooperation among

industries, universities and research institutes in terms of developing advanced technology.

Finally, and perhaps most importantly, there is a need to create the proper conditions for

entrepreneurs. It is entrepreneurs that should take charge in the future in solving many of

the problems when it comes to industrial and technological developments.

Entrepreneurship is also important in fostering the growth of SMEs and start-up firms.

4. Conclusion

In the last 60 years, Korea was able to achieve a phenomenal economic growth through

a rapid industrialization process. Primary industries that dominated the Korean economy

up to the 1950s gave way first to labor-intensive industries in the 1960s and then to capital-

intensive industries in the 1970s, and now knowledge-based industries are leading the

economy. These structural changes followed the pattern of development in advanced

countries, but at a much faster rate.

The progress was made possible not only by the massive mobilization of labor and

capital but also by the heavy investment in technology at each level of development and

the flexible reallocation of resources from less to more productive sectors. Foreign trade

played a pivotal role in this aspect by encouraging innovation and accelerating resource

reallocation. It also enabled Korea to learn from advanced countries and take advantage of

the vastly expanded global market. Entrepreneurs responded to changing circumstances

by committing themselves to pioneering new markets and new products. The government

provided institutional and physical infrastructure essential for their activities.

One distinguishing feature of Korea’s industrialization process is that it has depended

critically on the dynamism of the private sector. The government intervened in the market

heavily but relied mostly on private enterprises for the actual implementation of the

projects, taking full advantage of their creativity and minimizing deadweight costs

associated with bureaucratic control. This was true even at the height of the HCI drive.

Since the 1980s, as the government intervention receded, the private sector has been

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playing an even greater role in innovation and market expansion.

Many tasks lie ahead for Korea to sustain its growth and adapt its industrial structure to

changing environments. Efforts are needed to develop new growth engines in such areas

as the advanced technology sector, parts and materials, and knowledge-based service

industries. It is also important to enhance the competitiveness of SMEs and domestic-

oriented industries and to reconcile industrial development with environmental protection.

Most of these tasks are the responsibility of the private sector, on whose dynamism the

Korean economy will continue to depend. This does not mean, however, that the

government has no part in this venture. The government can indeed facilitate or debilitate

the industrial development. What is needed is not picking winners and saving losers in the

old-fashioned way, but getting the processes right as Rodrik (2004) emphasizes. He argues

that industrial policy should be a discovery process where firms and the government learn

about underlying costs and opportunities and engage in strategic coordination.

Now that Korea has significantly narrowed the technological gap with advanced

countries and in some cases is leading the industry, the uncertainty surrounding investment

outcomes is much larger and the government is nearly incapable of picking winners. Its

role now lies in finding and eliminating obstacles to entrepreneurship, correcting market

failures (positive externalities in particular), and supplying high-quality manpower, all in

close consultation with market participants. All government interventions should be based

on sound economic analyses, have clear criteria for success and failure, and target activities

but not sectors.

Indeed, these are exactly what the Korean government did in the 1960s with its export

promotion program. It eliminated rent-seeking opportunities and encouraged positive-sum

activities by entrepreneurs with the exchange rate reform (Jones and SaKong, 1980). It

provided export subsidies, which can be considered as a compensation for the knowledge

spillover (positive externalities) exporters generated for other domestic producers by

finding new markets or products. The subsidies were given in proportion to the export

performance, which acted as a clear and objective criterion for success. They were also

given to all export activities regardless of the sectors or industries. The government held a

monthly cabinet-level meeting with representatives from the private sector to discuss and

solve export-related problems. The government also focused on education and training to

support export industries.

When industrial policy is taken simply as handing out subsidies to the targeted sector

without due regard to their potentially adverse impact on entrepreneurial spirits, it often

degenerates into grounds for rent-seeking and results in expensive failure. The problem

Korea’s

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turns even more serious when the government lacks clear ideas about the nature of the

market failure to be addressed, objective criteria for success and failure, or a tightly

structured coordination mechanism between the government and the private sector. In

fact, industrial policy is gaining popularity after the recent global financial crisis, but not all

countries are keenly aware of its dangers as well as potentials (The Economist, August 7,

2010).

In this respect, the Korean government should resist the temptation to designate certain

industries as“strategic” and provide them with subsidies in the name of industrial policy.

Rather, future efforts must be directed at encouraging innovation through regulatory reform

and external liberalization, correcting market failures where they exist, strengthening the

analytic capability within the government, securing a well-functioning communication

channel with the private sector, and upgrading the education system.

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References

Acemoglu, Daron, Philippe Aghion and Fabrizio Zilibotti, “Distance to Frontier, Selection, andEconomic Growth,”Journal of European Economic Association, Vol. 4, No. 1, 2006, pp.37-74.

Cho, Young-sam, “Directions of Fiscal Policy for SME Credit Programs,”paper presented at theConference for National Fiscal Management Plan 2010-2014, Korea Development Institute,June 24, 2009 (in Korean).

Choi, Joonook, Deockhyun Ryu and Hyungsoo Park, The Sectoral Allocation of GovernmentFunctional Expenditure, Korea Institute of Public Finance, 2005 (in Korean).

The Economist, “Picking Winners, Saving Losers,”August 7, 2010, pp.46-48.Eichengreen, Barry and Duck-Koo Chung, “Introduction,”in Duck-Koo Chung and BarryEichengreen (eds.), The Korean Economy Beyond the Crisis, Edward Elgar, 2004.

Gill, Indermit and Homi Kharas, An East Asian Renaissance: Ideas for Economic Growth, WorldBank, 2007.

Hahn, Chin Hee and Sukha Shin, “Understanding the Post-crisis Growth of the Korean Economy:Growth Accounting and Cross-country Regressions,”in Takatoshi Ito and Chin Hee Hahn (eds.),The Rise of Asia and Structural Changes in Korea and Asia, Edward Elgar, 2010, pp.97-141.

Jones, Leroy P. and Il SaKong, Government, Business, and Entrepreneurship in EconomicDevelopment: The Korean Case, Harvard University Press, 1980.

Kim, Dae-Il and Robet H. Topel, “Labor Markets and Economic Growth: Lessons from Korea’sIndustrialization, 1997-1990,”in Richard B. Freeman and Lawrence F. Katz (eds.), Differencesand Changes in Wage Structure, The University of Chicago Press, 1995, pp.227-264.

Kim, DoHoon et al., Market Opening and Industrial Restructuring, Korea Institute for IndustrialEconomics and Trade, 2005 (in Korean).

Kim, Jong-il, “The Sources of Growth of Korean Industries and their Productive Efficiency,”KyongJe Hak Yon Gu, Vol. 4, No. 3, March 1998, pp.3-24 (in Korean).

______ , “Total Factor Productivity Growth in East Asia: Implications for the Future,”AsianEconomic Papers, Vol. 1, No. 2, 2002, pp.50-74.

______ , “Redefining the Role of SME Policies,”in Youngsun Koh (ed.), Redefining the Role ofGovernment for Economic Advancement, Research Monograph 2007-03, Korea DevelopmentInstitute, 2007, pp.97-157 (in Korean).

Koh, Youngsun, Wankyo Chung, Duol Kim, Siwook Lee and Kyoung-Soo Yoon, Improving theRegulatory Framework of Professional Services in Korean, Research Monograph 2009-02,Korea Development Institute, 2009 (in Korean).

Krugman, Paul, “The Myth of Asia’s Miracle,”Foreign Affairs, Vol. 73, No. 6, 1994, pp.62-78.Lee, Ju Ho and Dae-Il Kim, “Labor Market Developments and Reforms in Korea,”KDI WorkingPaper, No. 9703, March 1997.

Radelet, Steven, Jeffrey Sachs and Jong-Wha Lee, “Economic Growth in Asia,”DevelopmentDiscussion Paper 609, HIID, 1997.

Rodrik, Dani, “Industrial Policy for the Twenty-first Century,”CEPR Discussion Paper, No. 4767,

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Center for Economic Policy Research, 2004.Yoo, Jungho, “The Impact of the Size of the Global Market on the Speed of Industrialization,”KDIDevelopment Review, Vol. 19, No. 2, 1997, pp.73-157 (in Korean).

Young, Alwin, “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong andSingapore,”in Olivier J. Blanchard and Stanley Fisher (eds.), NBER Macroeconomics Annual1992, 1992, pp.13-54.

______ , “Lesson from the East Asian NICs: A Contrarian View,”NBER Working Paper, No. 4482,1993.

______ , “The Tyranny of Numbers: Confronting the Statistical Realities of East Asian GrowthExperience,”Quarterly Journal of Economics, Vol. 110, No. 3, 1995, pp.641-680.

Yun, Heesuk and Youngsun Koh, Improving the Regulatory Environment of the HealthcareHealthcare Industry, Research Monograph 2009-01, Korea Development Institute, 2009 (inKorean).

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60YEARS


Chapter 4

InternationalEconomic Policy

Junkyu Lee, Jungho Yoo,Nakgyoon Choi, Jeong Gon Kim, June Dong Kim,

Hea-Jung Hyun, Sangkyom Kim, Jinkyo Suh, Deok Ryong Yoon,

Hongshik Lee and Yoocheul Song

eng2_Chap4_수수_수수:eng2_Chap4_수수_수수 10. 12. 22 수수 5:25 Page 1

125

1. Introduction

Over the past six decades, Korea experienced rapid growth and industrialization. During

this period, international trade played a critically important role and the government

heavily intervened in the market, especially in the 1960s and 1970s. For this reason, Korea’s

growth is often characterized as“export-led” and“government-led.” Given that the

prevailing wisdom on economic development had been a preference for import-

substitution industrialization and trade protection, Korea’s experience raises interesting

questions. How important was the export promotion policy in Korea’s economic

development? What was the relationship between the exchange rate and trade growth?

What were Korea’s policies on bilateral and multilateral trade relations and foreign

investment? How did Korea manage the opening of its agricultural, services and financial

markets? What are the challenges ahead for Korea in international economic policy? These

are some of the questions this chapter tries to answer.

This chapter consists of nine sections, including the introduction and conclusion. Section

2 discusses the exchange rate and trade policies in the 1960s and 1970s, when the rapid

expansion of Korea’s exports suddenly began. During these decades, Korea, one of the

poorest countries in the world, transformed itself from an agrarian and stagnant economy

into an industrialized and dynamic one with a rapidly rising per capita income. Section 3

considers the evolution of trade policies starting in the 1980s, which deepened the

integration of Korea in the global economy. The remaining sections discuss specific policy

issues. The fourth section examines policies affecting both inward and outward foreign

direct investment. The fifth examines Korea’s bilateral and regional economic cooperation,

development assistance, and related policies. The sixth section deals with the controversial

issue of Korea’s agricultural trade liberalization, and the seventh discusses liberalization in

the services sector. The eighth section examines financial liberalization in the foreign

exchange and capital markets.

2. The early evolution of international economic policy fromthe 1950s to 1970s

2.1 OverviewAfter the liberation from Japan in 1945, Korea experienced major economic chaos as

Japanese businessmen, managers and technicians returned home. In 1950, the Korean War

broke out, destroying roughly 42-44 percent of production facilities in South Korea (Kim

InternationalEconomicPolicy


and Roemer, 1979). Aid from the UN and the U.S. was crucial in the reconstruction of the

South Korean economy. During 1945-1950, a total of 585 million dollars in aid was

provided by the U.S. (Government and Relief in Occupied Areas, or GARIOA, and the

Economic Cooperation Administration, or ECA) and the UN (Civil Relief in Korea, or CRIK,

and the United Nations Korean Reconstruction Agency, or UNKRA).1 Aid from the U.S.

and UN kept Korea supplied with daily necessities, construction materials and fertilizer.

In the second half of the 1950s, Korea’s exports averaged 20 million dollars per year and

imports 370 million dollars. The trade deficits were financed by foreign aid, mostly from

the U.S. as shown in Table 4-1, and the economy suffered from a severe shortage of foreign

exchange. It was against this backdrop that Korea’s foreign exchange rate and trade policy

evolved. In the 1950s, Korea’s trade policy was highly protectionist. Beginning in the mid-

1960s, the Korean government focused on export promotion and this has been a top

priority in economic policy since then. At the same time, Korea began to liberalize its import

regime, although it suffered some setbacks in the 1970s. From the early 1980s, the governmen’s

promotion of import liberalization began in earnest and tariffs were reduced unilaterally.

Table 4-1. Foreign aid (1953-1960) (Unit: million dollars, %)

Note: CRIK = United Nations Civil Relief in Korea, UNKRA = United Nations Korea Reconstruction Agency.

Source: Krueger (1979).

This section discusses the foreign exchange and trade policies in the 1950s, how rapid

export expansion began in the early 1960s, and how trade policy evolved in the 1960s and

1970s. It also attempts to assess the effects of these policies and interpret what happened

in Korea during these two decades, to determine if indeed the experience may be

characterized as“export-led” and“government-led.”

126THEKOREANECONOMY

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1 Hyung Yoon Byun (1996), p.73.

1953 1954 1955 1956 1957 1958 1959 1960

U.S.CRIKUNKRATotal foreign aid

12.8158.829.6

201.2

108.450.221.3

179.9

205.88.7

22.2236.7

271.00.3

22.4293.7

368.8-

14.1382.9

313.6-7.7

321.3

219.7-2.5

222.2

245.2-0.2

245.4

Imports 345.2 243.3 341.4 386.1 442.1 378.2 303.8 343.5

Aid/import ratio 58.3 73.9 69.3 76.1 86.6 84.9 73.1 71.4

Import/GNP ratio (current price) 12.9 7.3 9.8 13.1 12.0 10.7 10.1 12.6

Import/GNP ratio (constant price) n.a. 8.8 11.2 13.0 14.3 11.7 9.3 10.4

Current account deficit/GNP n.a. 6.2 8.7 11.7 10.5 8.7 7.5 9.3


127

2.2 Foreign exchange rate and trade policies in the 1950sThe importance of the foreign exchange rate to an economy, and in particular, to its

foreign trade cannot be overstated. If the domestic currency is overvalued, all domestic

goods and services would be over-priced in the global market; similarly, if the domestic

currency is undervalued, all the goods and services would be under-priced. This

subsection first discusses the changes in Korea’s foreign exchange rate policy, focusing on

the period from the Korean War to the early 1960s.

“An official rate was set at 0.015 won to one US dollar in October 1945, equivalent to the

yen exchange rate in Japan.”2 This was the start of the won-dollar exchange rate. The rate,

however, did not play an important role until after the end of Korean War as foreign trade

amounted to barter trade until then. In the meantime, an event took place that profoundly

affected the exchange rate policy. In July 1950, shortly after the outbreak of the war, a

financial agreement was made between the Korean and U.S. governments in relation to

the UN forces dispatched to the Korean peninsula. Under the agreement, the Korean

government would advance won to the United Nations Command (UNC) for its

expenditures in Korea, which would be paid back in dollars.3

The agreement meant that the higher the value of the won was to the dollar, the greater

amount of dollars the Korean government would receive for the won it had advanced.

This seemed to dominate all other considerations in the exchange rate policy, which is not

surprising since dollar redemption for won advances was the most important source of

foreign exchange supply.4 Prior to the agreement, the monetary authority appears to have

been concerned about currency overvaluation, but afterwards the exchange rate policy

was aimed at keeping won valuation as high as possible. In the short period from August

1948 when the Korean government was established, to July 1950 when the agreement was

made, there were four devaluations and a bidding system was introduced. For the next ten

years until February 1960, there were only four devaluations. Inevitably this policy led to a

tug-of-war between the Korean and U.S. governments over the exchange rate, as it was in

the U.S. interest to have the won fall in value.

Thus in the 1950s, the official exchange rate always kept the domestic currency

overvalued. The extent of overvaluation is shown in Table 4-2 that compares the official

InternationalEconomicPolicy2 The exchange rate is expressed in current denomination, taking into consideration two currency reforms: the 100-to-1 revaluation

in 1953 and another one of 10-to-1 in 1961 (Frank, Kim and Westphal, 1975, p.28).3 It was Agreement between the Government of U.S.A. and the Republic of Korea Government Regarding Expenditures by Forcesunder Command of the Commanding General, Armed Forces of Member States of the United Nations. See Frank, Kim andWestphal (1975), p.28.

4 Foreign exchange from this source amounted to 62 million dollars in 1952 and 122 million dollars in 1953, or about 62 and 70percent of total foreign exchange receipts respectively in those years (Frank, Kim and Westphal, 1975, p.28).


rate with the market rate. The market rate came into being as exporters deposited their

earnings at the Bank of Korea in dollar-denominated accounts under the Foreign Exchange

Deposit System, which was in effect until 1961, and traded the certificates of deposits in the

market.

Table 4-2. The extent of won overvaluation (1955-1970) (Unit: won/dollar)

Note: 1) All exchange rates are estimates contained in Frank, Kim and Westphal (1975) except for the market rates for 1955, 1960,

1961, 1964 and 1965. For these years, the market rates are estimated by taking into account the number of days the rate was

in effect.

Note: 2) ‘NT’ stands for‘no transaction’ and‘n.a.’ for‘not available.’

Source: Annex table 2.

Besides the official rate and the market rate, there were numerous other exchange rates

depending on different allocation schemes for dollars that the Korean government

obtained through the sale of won to the UNC and exports of tungsten that the government

directly handled. The allocation schemes included“special foreign exchange loans,”

“bidding,” “lottery” and“modified bidding system” among others.

The import policy began when an import and export licensing system was introduced in

1946, under which the government simply announced the items that could and could not

be imported, with no quantitative controls in place. It was replaced by the Import Quota

System in 1949, which specified not only the items that could be imported but also the

quantity. In 1955, the Trade Program (Import Program) was instituted, a positive-list system

that listed“approved import items,” which were divided into“automatically approved

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Exchange RatesExport/Official Market/Official

Official Export Market

(1) (2) (3) (2)/(1) (3)/(1)

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

30.0

50.0

50.0

50.0

50.0

62.5

127.5

130.0

130.0

214.3

265.4

271.5

270.7

274.6

285.3

304.5

78.1

102.9

108.9

114.0

134.7

146.4

142.1

NT

169.8

254.0

NT

NT

NT

NT

NT

NT

77.6

96.6

103.3

118.1

125.5

143.7

148.3

134.0

174.5

285.6

316.0

302.7

301.8

304.1

323.6

342.8

2.60

2.06

2.18

2.28

2.69

2.34

1.11

n.a.

1.31

1.19

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

2.56

1.93

2.07

2.36

2.51

2.29

1.16

1.03

1.34

1.33

1.23

1.11

1.11

1.11

1.13

1.13


129

items” and“restricted items.” If there was sufficient domestic production of some items to

meet domestic demand, then the import of these goods was prohibited. If the domestic

production of some products could not fully meet domestic demand, then the import of

these goods was either automatically approved or restricted. The Ministry of Commerce

and Industry had the discretion to allow imports of the prohibited or restricted items. As is

evident, the trade policy was protectionist and was in line with the import-substitution

strategy that was in vogue at the time.

Tariffs rose in the 1950s. In 1946, the tariff rate was set at a uniform rate of 10 percent on

all goods except those financed by foreign assistance. In 1950, a new law on customs

duties raised the average tariff rate to 40 percent to increase tariff revenue and protect

domestic industries. The new tariff rates were lower on food, raw materials and essential

goods with little domestic production, higher on unfinished goods competing with

domestically produced goods and highest on finished goods competing with domestically

produced ones. In 1952, the government introduced tariff exemptions on imports of capital

equipment required for certain major industries, including electric power, shipbuilding,

metal working, machinery, chemicals, oil refining, textiles, mining and fishing. In 1957,

individual tariff rates were changed somewhat and the average tariff rate rose by about 4.1

percent. But the tariff structure remained basically unaltered.

In terms of export policy, there were initially export controls to prevent the export of

essential domestic products. A few export promotion measures were taken during the

1950s, mostly of the nature of softening the negative effects of the strong currency on

exports. One of the earliest promotion measures was the Trade Credit System (later known

as the Export Credit System) introduced in 1950, under which exporters enjoyed priority in

the allocation of domestic credits. Another early measure was the Preferential Export

System, adopted in 1951, under which the exporters of so-called non-essential products

enjoyed the right to use a certain percent of foreign exchange earnings for importing

popular items, which otherwise could not be imported. From 1950 to 1954, exporters

enjoyed preferential access to foreign exchange loans in a scheme that allocated

government-held foreign exchange reserves (KFX) to domestic users. In 1955, direct

subsidies were provided to the exporters, but the program was discontinued the following

year as the government failed to obtain funding for it in the budget. Tariff exemptions

were introduced in 1959 on imports of raw materials and intermediate goods for export

products, and it was changed into a tariff rebate in 1974. Finally, the trader registration

system under the Trade Transaction Act of 1957 encouraged exports requiring that a trader

should export a certain minimum amount of goods to be registered as an importer.



2.3 The beginning of rapid export expansion in the early 1960sExports began to expand rapidly in the early 1960s, with exports growing by 40 percent

per year on average in current dollars and reaching 835 million dollars in 1970, more than

40 times as large as in the 1950s. As a result, the export/GNP ratio rose from less than 1

percent in 1959 to more than 10 percent in 1970. The rapid expansion of exports

continued over the next decades. This subsection attempts to date the beginning of this

trend and discuss the reasons.

Table 4-3. Korea’s imports and exports (1955-1970) (Unit: million dollars)

Source: Bank of Korea, Economic Statistics Yearbook, various issues.

The rapid expansion of exports was so sudden that it is possible to date the beginning

with the help of Table 4-3 and Figure 4-1, which breaks down total exports into three

groups; two subgroups of manufactures and non-manufactures. The first of the two

manufacturing subgroups comprises goods belonging to SITC (Standard International

Trade Classification) 6 and 8. SITC 6, “manufactured goods chiefly classified by material,”

includes textile products, leather products, rubber products, etc. and SITC 8,

“miscellaneous manufactured articles,” includes clothing, footwear, travel goods, etc. This

subgroup consists mostly of labor-intensive“light” manufactures. The other subgroup is

the sum of SITC 5 and SITC 7, the former being“chemicals” and the latter“machinery and

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Total imports

Exports

Total exportsManufactures

Non-manufacturesTotal manufactures SITC 6+8 SITC 5+7

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

341.4

386.1

442.2

378.2

303.8

343.5

316.1

421.8

560.3

404.4

463.4

716.4

996.2

1,462.9

1,823.6

1,984.0

18.0

24.6

22.2

16.5

19.8

32.8

40.9

54.8

86.8

119.1

175.1

250.3

320.2

455.4

622.5

835.2

1.6

2.5

4.1

2.6

2.4

4.5

6.2

10.6

39.5

58.3

106.8

153.6

215.2

338.2

479.1

646.3

1.3

2.3

4.0

2.5

2.2

4.0

4.8

8.2

34.5

55.5

100.9

143.4

198.6

310.6

416.1

573.4

0.3

0.2

0.1

0.0

0.1

0.5

1.5

2.4

5.0

2.8

5.9

10.3

16.6

27.6

63.0

72.9

16.3

22.1

18.1

13.9

17.4

28.3

34.6

44.2

47.3

60.7

68.3

96.7

105.1

117.2

143.4

188.9


131

transport equipment.” This second manufacturing subgroup consists mostly of more

capital-intensive and more technologically sophisticated manufactures than the first

subgroup. Non-manufactures include the products from the agricultural, fishing and

mining industries.

Figure 4-1. Export composition

Source: Jungho Yoo (2008).

As shown in the figure, in the 1950s almost all Korea’s exports were non-manufactures.

Afterwards, this share declined to around 20 percent by 1970 as the share of manufactures

rapidly increased. In particular, the share of labor-intensive, light manufactures (SITC 6+8)

rose from around 10 percent in the early 1960s to 70 percent of the total in the late 1960s.

This characterized the early expansion of Korea’s exports. For this reason, it seems

appropriate to pick year 1962, when the share of light manufactures in total exports began

to increase and continued to increase thereafter, as the start date for Korea’s rapid export

expansion.

What were the reasons for the sudden, rapid increase in exports of light manufactures?

Since there were new export promotion measures introduced in the early 1960s, one

should ask if they were the reason. An income tax reduction of 30 percent was introduced

in 1961 for exporters, which was raised to 50 percent the next year. Direct subsidies were

provided from 1961 to 1963. In 1962, “export targets” were established, which turned out

to be much lower than what was actually achieved. In addition, the Korea Trade

Promotion Agency (KOTRA) was founded in 1962 to assist exporters by gathering



information on new foreign markets. However, these measures, though numerous, do not

appear to have been the main reason for the sudden and rapid export expansion as they

did not add much to exporters’earnings.

This can be seen in Figure 4-2, which shows earnings per dollar of exports in real terms

from 1958 to 1970, with 1965 as the base year. It breaks the exporters’earnings into three

components: official exchange rate; the premium on export dollars, that is, the difference

between the official and market exchange rate; and export subsidies. According to this

figure, export subsidies accounted for a negligible portion of exporters’earnings in real

terms in the early 1960s. Furthermore, the figure shows that the earnings per dollar of

exports were declining in the early 1960s when rapid export expansion began. Therefore,

the availability of export incentives cannot explain the sudden and rapid export expansion.

Figure 4-2. Earnings per dollar of exports

Source: Frank, Kim and Westphal (1975), Table 5-8.

On the other hand, the most noticeable change in Figure 4-2 is that the premium on the

export dollar in the preceding years drastically shrank in 1961 and disappeared in 1962.

This was the direct result of three devaluations that took place in a span of one year

between February 1960 and February 1961. The devaluations changed the official

exchange rate from 50 won to the dollar to 130 won to the dollar, nearly eliminating the

won’s overvaluation. This can also be seen in the comparison of official and market

exchange rates in Table 4-2 and Annex table 2. Once most of the won’s overvaluation was

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eliminated and the official exchange rate began to send correct price signals, the export of

light manufactures took off and increased at a pace no one thought possible.5

2.4 Trade and exchange rate policies since the mid-1960sThe successful rise in exports greatly affected export policies.6 In June 1964, the Korean

government adopted the Comprehensive Export Promotion Program, which attempted to

place export promotion in a comprehensive and consistent framework, since previous

promotion measures were piecemeal and improvised in nature. The program extended

policy support to export production as well as exports themselves. It may be regarded as

much as an industrial policy as a trade policy since it attempted to pick and promote

export industries. Credit incentives were greatly expanded by increasing the number of

types and volume of loans for exports that offered preferential interest rates.7 Even under

the financial reform in 1965 that nearly doubled the bank deposit rate for savers,

preferential interest rates for exporters were further reduced.

In 1965, generous“wastage allowances” were introduced, which allowed the exporters

to import inputs for their production over and above established needs. Since this was

applied to intermediate goods and raw materials, import of which was limited or subject to

high duties, the unused portion could be sold in the domestic market for profit. Also in

1965, a system of local letters of credit (L/Cs) was introduced, which exporters could issue

to domestic producers of export goods and intermediate inputs on the basis of the export

L/Cs they received. The domestic producers with local L/Cs enjoyed the same benefits that

exporters did with respect to preferential loans, import licenses, tax favors and so on. Also

in 1965, President Park Chung-hee began to preside over the Monthly Export Promotion

Meeting attended by various economic ministers, the Bank of Korea governor, the heads of

KOTRA, the Korea International Trade Association (KITA) and the Korea Chamber of

Commerce, the chief executives of banks and financial institutions, the chairmen of leading

export firms, and trade experts. These changes in policy represented an all-out effort by

the government for export promotion.


5 See Jungho Yoo (2008) for further discussion.6 In 1963, the government instituted a full-scale export-import link system under which all imports were linked to exports, whileremoving nearly all goods from the list of automatically approved import items. It was a response to an import surge and the rapiddecline in foreign exchange reserves due to expansionary fiscal and monetary policies in the previous two years. The effect isreflected in the premium in 1963 and 1964 in Figure 4-2.

7 See Frank, Kim and Westphal (1975), p.49. The preferential loan arrangements included loans for the suppliers of U.S. offshoreprocurement (mainly for Vietnam), credits for the importers of raw materials and equipment for export industries, export usance(credits for exporters who ship without L/Cs but receive payment after shipment), export industry promotion loans, MediumIndustry Bank equipment loans for the conversion of factories to export production, Medium Industry Bank equipment loans forspecialized export industries.


In addition to the export promotion measures already mentioned, various policies and

institutions were created for exporters. The export insurance system was introduced in

1969 to compensate exporters, producers and foreign investors for possible losses from

credit risks (i.e., the bankruptcy of importers) and political risks (such as wars and foreign

currency trade restrictions). In addition to the founding of KOTRA in 1962, KITA, which

was established in 1946 to represent the interests of traders, has played a critical role in

pioneering overseas markets, promoting cooperation with partner trade organizations in

the private sector, conducting surveys and providing related information. Responding to

the need for medium- to long-term credit for exports and imports the Export-Import Bank

of Korea was established in 1976, and it has been providing export loans and trade

finance, and facilitating economic cooperation with foreign countries.

The exchange rate policy also came to be linked to export promotion. In May 1964, the

government undertook a major devaluation of the won from 130 to 256.5 to the dollar and

dropped measures intended to offset the adverse effects of an overvalued currency, such

as direct subsidies and the full-scale export-import link. In March 1965, the government

implemented the unitary floating exchange rate system, which had been announced at the

time of devaluation. Under the new system, the Bank of Korea announced the exchange

rate every day on the basis of exchange certificate prices quoted in the free exchange

market. From this point on, the unitary exchange rate system was maintained and

managed by the government. From 1968, a gradual devaluation of won was allowed until

1971 when another abrupt devaluation took place.

Import policy was gradually liberalized from the mid-1960s, as the balance of payments

improved. The number of items eligible for importation increased substantially thereafter,

while the number of prohibited items declined. Korea joined the General Agreement on

Tariffs and Trade (GATT) in 1967, and the negative-list Trade Program was adopted in

1967. The import liberalization ratio, the proportion of automatically approved items in

total import items, rose from 12 to 60 percent. Korea also began to scale down export

promotion measures in the early 1970s. For example, the reduction of income tax on

export earnings was abolished in 1972, and the tariff exemption on imports of raw material

for export production was changed to a tariff rebate system in 1975. Import policy may be

graphically summarized as in Figure 4-3, which shows the average tariff rates and

“quantitative restriction” liberalization index, the latter being the ratio of the number of

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Figure 4-3. Import liberalization

Source: Kwang Suk Kim (1991).

2.5. An interpretation of the impact of government policiesWhat remains to be done in this section is to interpret the experience of Korea’s export

success. The conventional view is that the policy switch from import substitution to export

promotion led to Korea’s export success. This view leaves the impression that this success

was due to government intervention in terms of export promotion. But it is too simple an

explanation. The reality was more complicated.

First of all, as was discussed earlier, three devaluations triggered the rapid export

expansion and the devaluations were rather accidental in nature. In February 1960, the

Korean government reluctantly accepted the first of the three devaluations, because it had

agreed with the U.S. government to change the exchange rate in accordance with the price

index. In October 1960, the Korean government accepted the second devaluation

suggested by the U.S. government, when the two governments resumed aid and economic

cooperation that had been temporarily suspended at the time of Student Revolution, which

ousted the Rhee government in April 1960. The last of the three devaluations, which was

the Korean government’s own decision, would have been very difficult without the

previous two. Viewed in this light, it is difficult to say that the three devaluations that

triggered the rapid export expansion were the result of a government decision to promote

exports. Clearly, the first two devaluations were not.

Secondly, the policy switch from import substitution to export promotion happened



after rapid export expansion had already begun. The first Five-Year Economic

Development Plan, which was adopted by the new military government in 1961, still

placed a high priority on import substitution and considered exports as a mere remedy for

the foreign exchange shortage. However, a sharp turnaround in the policy took place and

can be observed in the new version of the first Five-Year Plan, which was revised in 1964

after the rapid export expansion had begun. The revised plan now explicitly stated that

promotion of exports and export industries was the policy goal. This was followed by the

government’s all-out efforts for export promotion, as discussed above. Thus, the beginning

of rapid export expansion led to the switch in policy in the mid-1960s from import

substitution to export promotion, not the other way round.

Nevertheless, the decision to make the policy switch deserves applause since it enabled

export expansion to continue thereafter. To see why, it needs to be recalled that

protectionism has the effect of depressing exports, first, by making domestic sales

profitable relative to exports and therefore attracting resources to domestic production, and

secondly, by depressing the demand for foreign exchange and thereby leading to currency

appreciation. As Figure 4-3 shows, the import policy was highly protectionist during the

1960s and 1970s. When it decided on export promotion in the mid-1960s, the government

did not drop the protectionist policy of the 1950s, which had been adopted for import-

substitution industrialization. So, in the 1960s and 1970s the government was in fact

simultaneously pursuing two policies that worked at cross-purposes. From the producers’

point of view, export promotion made exports more attractive than domestic sales, and

trade protection made domestic sales more attractive than exports. Thus a question arises:

which one of the two policies had a stronger effect and what was the net result?

This question was quantitatively investigated by Westphal and Kim (1982), and the

authors came to the conclusion that the effects of the two policies on Korean producers

nearly offset each other in the late 1960s. In other words, the incentives that the producers

faced were virtually neutral between exports and domestic sales. The accuracy of the

quantitative estimates of the policy effect may be debated, but there is no question that

export promotion must have been neutralizing the export-depressing effects of

protectionism to a considerable extent, if not completely. Therefore, it would be simply

wrong to explain the rapid export expansion as the consequence of the export promotion

policy since it ignores the fact that a negative influence was being exerted on exports by

the protectionist policy. In addition, attention needs be paid to unintended consequences.

Export promotion and trade protectionism jointly had the effect of raising the prices of

traded goods vis-a-vis non-traded services, making the manufacturing sector more

attractive to productive resources than the service sector. Indeed, export expansion was

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137

facilitated by increased investments made in the manufacturing sector than in other sectors

as it attracted capital from the rest of the economy.

The experience with export expansion in the 1960s and 1970s indicates that Korea had a

comparative advantage in labor-intensive light manufactures, as the country was resource-

poor and labor-abundant. But this export potential had been suppressed by two

impediments to trade, namely, an overvalued currency and a protectionist import regime.

As soon as the first impediment was removed by the three devaluations, exports of labor-

intensive light manufactures began to expand explosively in the early 1960s. In the

following years, the government’s all-out efforts for export promotion neutralized the second

impediment of the protectionist import regime by offsetting the negative effects on exports.

3. Expansion of economic liberalization and globalizationfrom 1980 to the present

3.1 Economic liberalization from the 1980s to 1997After the government stopped pursuing the HCI(Heavy and Chemical Industry) drive in

1979, it was necessary for the Korean economy to move towards a market-driven and

more open economy. The government began import liberalization in earnest in the early

1980s, after it had suffered a temporary setback under the HCI policy. The government

reduced intervention in the economy and emphasized greater reliance on the market. It

also decided on market opening measures to stimulate a competitive business

environment. The rapid increase in export volume also encouraged the government to

undertake import liberalization. In addition, stable energy prices, low international interest

rates and a favorable exchange rate, especially with that of Japan, in the mid-1980s became

catalysts for trade liberalization.

Korea introduced the Advance Notice of Tariff Reduction in 1984, to help trading

companies prepare for it, and reduced tariff rates gradually over a period of 11 years. The

Advance Notice of Tariff Reduction was successfully implemented, which made clear the

government’s intention to open the domestic market.

The event that had the most significant impact on Korea’s trade and economic policy

was the Uruguay Round (UR) negotiations (1986-1994). Due to the UR agreement, Korea

reduced its tariff rates by 54 percent, and increased the share of tariff-free goods to 26

percent of total items, a big jump from 4 percent in the pre-UR period. As a result, the

average tariff rate in 1989 was 12.7 percent, and fell to 7.9 percent in 1995, almost the

same level as the recent simple average tariff rate.



Figure 4-4. Korea’s tariff rates (1978-2007)

Source: APEC (http://www.apectariff.org).

Besides tariff reductions, the Korean government enacted the External Trade Act in 1987,

which enhanced trade liberalization and considerably reduced direct support for exports.

Moreover, the government encouraged foreign investment, which had been highly

restricted, preparing plans to attract foreign direct investment (FDI) in 1980 and opening

the capital market in 1988 (with the lifting of some restrictions).

During this period, major trading partners strongly urged Korea to open its market as

Korea’s trade surplus was increasing due to favorable economic conditions, such as stable

energy prices, low international interest rates and low value of won in the mid-1980s.

Trade conflicts with the U.S. became a major concern for Korea as its bilateral trade surplus

with the U.S. increased rapidly (from 1.9 billion dollars in 1983 to 9.5 billion dollars in

1987). After the Plaza Accord, the Japanese yen sharply rose in value, which was beneficial

to Korean exports and helped increase its trade surplus with the U.S. The U.S. pressed

Korea on market opening, based upon Section 301 of the Trade Act of 1974, and bilateral

tensions reached a peak when the U.S. enacted the Omnibus Trade and Competitiveness

Act of 1988. Between 1979 and 1988, the U.S. conducted eight Section 301 investigations

involving Korea in various areas, including insurance, shoes, steel rope, intellectual

property rights, cigarettes, beef and wine; but all disputes were resolved by consultations

and no retaliatory measures were taken. However, Section 301’s retaliation threats were

influential in Korea’s market opening.

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From the 1990s, Korea started opening markets in services and FDI. Competitiveness

based on low wages was no longer a valid option since the 1990s. Wages have risen

rapidly since the mid-1980s due to the democratization of Korean society and the end of

labor surpluses, while Japanese firms increased outsourcing to Southeast Asian countries in

order to take advantage of lower wages there. These circumstances forced Korea to

develop technology-intensive industries. In addition, Korea was pressed to open its

markets due to worldwide economic integration resulting from the UR, the World Trade

Organization (WTO) and globalization trends.

In 1993, the Korean government announced the New Economy Five-Year Plan, which

included (1) the internationalization and liberalization of the economy, (2) active

participation in the new international trade order such as the UR, (3) the qualitative

improvement of export products, and (4) the facilitation of technology transfer through

FDI. The government simultaneously announced an economic policy that would be driven

by the private sector and it promoted industrial restructuring through market opening,

deregulation and competition. During the early 1990s, Korea carried out the following

market liberalization policies: the opening of distribution markets, a plan to liberalize

financial markets (1992), improvement of overseas direct investment (ODI) regulations

(1992), the real-name financial transaction system (1993), and the Won Currency

Internationalization Plan (1993). The FDI liberalization policy included abolition of several

FDI-related obligations and increased the number of business categories to be liberalized

(1994).

3.2 Globalization of the Korean economy from 1998 to the presentThe Asian financial crisis of 1997 caused a great economic turmoil in Korea. Some of the

factors cited for the crisis included Korea’s failure to take appropriate measures to counter

reckless management of banks and moral hazard problems resulting from close ties

between politicians and businesses, and a belief that large business groups were“too big

to fail.” Korea had failed to establish a fair and transparent economic system in the process

of pursuing dramatic economic growth (Chang Young Chung and Tae Kyu Park, 1995).

High economic growth depended on an excess amount of foreign loans, which reached

180 billion dollars, most of which were short-term debts. In 1997, Korea’s manufacturing

sector had a debt-to-equity ratio of 400 percent, which was twice that of the U.S. or Japan,

and five times higher than that in Taiwan (Kyu Sung Lee, 2006).

The IMF bailout agreement accelerated the liberalization of the Korean economy. Korea

agreed to eliminate trade-related subsidies, restrictive import licensing, and the import



diversification program, in addition to streamlining and improving the transparency of

import certification procedures. Moreover, Korea agreed not to postpone liberalization

plans for reasons of its international balance of payments.

From the late 1990s, Korea began pursuing a FTA (Free Trade Agreement) policy,

turning away from a trade policy that focused only on the WTO’s multilateral trade

liberalization. In an environment where FTAs were rapidly spreading all over the world, it

was vital that Korea improve its economic efficiency. In addition, Korea needed to pursue

an FTA policy in response to the regionalization trend in other regions, such as the EU and

NAFTA (North American Free Trade Agreement), which posed the threat of trade

discrimination in Europe and the U.S. The FTA policy also was seen as necessary to secure

export markets and promote the efficiency of Korea’s economic system. With the launch of

the FTA policy, Korea has concluded FTAs with Chile, Singapore, EFTA (European Free

Trade Association), ASEAN, the U.S., India and the EU. The Korea-U.S. FTA signed in

April 2007 was notable since it is the largest one in terms of trade volume among the FTAs

concluded between countries around the Pacific Rim.

Korea now ranks very high in terms of trade openness, although its FDI openness still

ranks very low. The openness of the Korean economy measured as the sum of exports

and imports as a percentage of GDP increased from 79 percent (exports 45 percent and

imports 34 percent) in 1998 to 92 percent (exports 45 percent and imports 47 percent) in

2008. However, FDI as a percentage of GDP was only 3 percent in 1990, and remained

low relative to other countries (Table 4-4). As of 2007, Korea ranked 52nd in terms of FDI

stock as a percentage of GDP among 55 countries, lower than most developed countries

and major developing countries. Even after receiving more policy attention, the amount of

FDI is still very small. The future agenda of trade policy should therefore be closely related

to how Korea can make its domestic market investment-friendly. This will require an

improvement of domestic institutions and the elimination of border barriers.

The liberalization process met with domestic opposition by groups that were adversely

affected by the measures. Institutional assistance and an expansion of the social safety net

became important in minimizing the opposition to the liberalization policy. The trade

adjustment assistance system was introduced immediately after the conclusion of the

Korea-U.S. FTA.

The global economy recently suffered one of the worst recessions since the Great

Depression of the 1930s triggered by the bankruptcy of Lehman Brothers in September

2008. Korea, the G20 chair country for 2010, has demonstrated its commitment to combat

protectionism. Korea played a significant role in eliciting the political initiative of global

leaders to prevent protectionism during the first and the second summits of the G20.

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Table 4-4. Openness ranking of major countries1)

Note: 1) FDI/GDP and ODI/GDP are for 2006 and other statistics are for 2007.

Note: 2) Ranking among 55 countries.

Note: 3) Ranking among 125 countries.

Source: IMD (http://www.worldcompetitiveness.com); WEF (2007).

Over the past several decades, Korea has taken actions to lower tariffs and to remove

non-tariff barriers. While it has observed international trade rules and made much progress

in market liberalization, more work needs to be done, in particular, in the liberalization of

the agricultural and service industries. It should also improve the investment environment.

By attracting more foreign investment, Korea can promote structural reforms that will help

the country in its transformation from a manufacturing-based economy to a knowledge-

based one. In addition, Korea needs to improve the trade adjustment assistance system

and make the social welfare infrastructure more relevant to an open market economy.

Korea was one of the greatest beneficiaries of the open and rule-based multilateral

trading system. Korea, now one of the world’s leading trading nations, should play a

leading role in the conclusion of the Doha Development Agenda (DDA) negotiations in

order to maintain the momentum for continued global liberalization. Moreover, Korea

should contribute to promoting APEC (Asia-Pacific Economic Cooperation) as an effective

regional organization.

The exchange rate was an important part of Korea’s export promotion policy. Before

the 1980s, Korea had a fixed exchange rate system with its currency pegged to the U.S.

dollar. This system, however, created a huge impact on the economy every time the rate

was adjusted. Thus the government adopted a multiple currency basket peg system. As

Korea started building a current account surplus, however, major trading partners,

especially the U.S., became vocal in opposition to the system, designating Korea as an

exchange rate manipulator.


Country Trade/GDP2) FDI/GDP2) ODI/GDP2) Level of trade barriers (tariffsand non-tariff barriers) 3)

Ownership allowed toforeigners 3)

Netherlands

Ireland

Singapore

England

Germany

U.S.

Japan

China

Malaysia

Thailand

9

14

1

43

26

54

53

33

5

15

7

8

2

19

37

46

54

42

27

26

4

9

5

8

17

23

33

43

22

45

32

6

3

26

13

36

53

83

45

90

24

1

3

5

7

43

77

87

49

104

Korea 25 52 38 56 95


In March 1990, the exchange rate system was switched to a market average rate system

with a narrow band of intraday fluctuation. With the trading band, the system was not able

to reflect fully foreign currency supply and demand conditions and caused the won to

remain overvalued against the dollar despite current account deficits. This led to a rise in

foreign debt and a fall in foreign exchange reserves.

The 1997 financial crisis caused a sharp depreciation of won. In an attempt to defend

the currency, the government widened its won trading band and finally abolished the band

to allow the won to float freely. Since 1997, the elasticity of exports with respect to the

exchange rate has declined, as the pass-through effects of the exchange rate were reduced,

meaning exporting firms tend to adjust won export prices rather than dollar prices in

response to exchange rate fluctuations.

As seen in the Figure 4-5, there is another notable feature in Korea’s exports related to

the exchange rate. Since 1997, while real effective exchange rates have continued to

appreciate, Korea’s exports by value or quantity have maintained high growth of about 20

percent.

Figure 4-5. Export growth and real effective exchange rates

Source: Bank of Korea (http://ecos.bok.or.kr)

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3.3 GATT/WTO and FTA policies

3.3.1 GATT/WTO policyThe GATT, signed in 1947, aimed to expand free trade by lowering trade barriers and

abolishing differential treatment based on the principle of multilateralism. Through eight

negotiating rounds, the GATT was committed to expanding fair and free trade. Korea

became the 71st member state to the agreement in 1967, when the 6th Kennedy Round

took place. Korea conceded tariffs on 60 items at the Kennedy Round and increased the

number to 657 items at the 7th Tokyo Round, which represented 10 percent of all tariff

goods.

The 8th Uruguay Round was critical in that it contained a wide range of agendas

including service trade, intellectual property rights, agricultural and textile goods, and a

number of other issues to clarify anti-dumping and safeguard measures. As a result of the

UR, the WTO was established and the trade-related dispute settlement process was

tightened by the organization.

Unlike previous rounds, Korea played an active role during the UR process, increasing

its tariff binding from 24 percent to 90 percent and reducing its tariffs by 54 percent. In

services trade, the country conceded 78 items out of 155. The stricter rules governing the

dispute settlement process were beneficial to Korea as it faced problems due to resurging

global protectionism. At the same time, the country was forced to abolish export subsidies

according to the UR agreement.

The DDA, the first multilateral negotiations under the WTO, was held in Doha, Qatar

starting in 2001 in accordance with the promises given under the UR. The DDA covers

nine main issues, including agricultural products, non-agricultural market access (NAMA)

and trade in services, but is currently at a standstill. Korea has generally maintained a

supportive stance toward the DDA. For NAMA and services trade, Korea is demanding

wider market access. But Korea, a developing country in terms of agricultural imports,

insists that the agricultural market must be opened gradually.

3.3.2 Free Trade Agreement policyWith regional trade agreements (RTAs) expanding in the 1990s and 2000s, Korea also

joined the trend. It was inevitable for the country, highly dependent on trade, to push for

FTAs because no FTA puts any country in an unfavorable situation compared to other

competing countries. Releasing the FTA Road Map in 2003, Korea has pursued

simultaneous FTAs with major economies to conclude high-quality and comprehensive



FTAs. As of January 2010, the country has signed seven FTAs, with five having gone into

effect, and more than 10 FTA negotiations are underway. In particular, the economic

impact(Lee and Lee, 2005) of the Korea-US FTA (concluded in 2007) and Korea-EU FTA

(signed in 2010) on the Korean economy is expected to be comprehensive and substantial

because Korea’s commitments agreed in these FTAs are more far-reaching than any other

FTAs Korea concluded before. As a result of such FTAs, Korea is expected to strengthen

and advance its economic system and to see quantitative and qualitative improvement in

growth potential through increased access to foreign markets.

Table 4-5. Korea’s current status of the FTAs

Source: Ministry and Foreign Affairs and Trade(2010)

With a number of FTAs coming into force, Korea has seen increasing exports but

witnessed little surge in imports despite initial domestic concerns. As seen in the Table 4-6,

the utilization rate of the preferential tariffs shows how well the signatories have utilized

the FTAs’lower tariff advantages. There are still problems waiting to be solved in relation

to the FTAs, including how to deal with domestic economic restructuring as more FTAs are

concluded and how to distribute the benefits of the FTAs.

Table 4-6. The utilization rate of preferential tariffs (Unit: %)

Note: The figures for the Korea-ASEAN FTA include data only from Indonesia, Malaysia, the Philippines, Laos and Vietnam.Source: HanSung Kim, Mee Jin Cho, Jae-Wan Cheong and Min-sung Kim (2008).

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Concluded

(7 FTAs singed;

5 FTAs effectuated)

Chile (effectuated in April 2004); Singapore (effectuated in March 2006); EFTA (effectuated in

September 2006); ASEAN (goods trade: effectuated Jun 2007, service trade: effectuated in May

2009, investment: effectuated in September 2009); U.S. (concluded in Apr 2007); India

(effectuated in Jan 2010); EU (effectuated in July 2011); Peru (concluded in September 2010);

Under negotiationCanada (begun in July 2005); Mexico (begun in February 2006); GCC (begun in July 2008);

Australia (begun in June 2009); Colombia (begun in December 2009)

Under examination

Japan (begun in December 2003, interrupted in November 2004); China (under joint study);

Korea-China-Japan (agreed to launch a joint study); Mercosur (under joint study); Turkey (joint

study finished); Russia (under joint study); Israel (under joint study); SACU (agreed to begin a

joint study between private sectors)

Korea-Chile Korea-Singapore Korea-EFTA Korea-ASEAN

First year 77.7 28.2 43.2 27.0

Second year 93.8 31.4 41.9 -

Third year 93.6 - - -

Fourth year 93.3 - - -

Average 90.5 29.8 42.5 27.0


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3.4 The impact of trade on growth and employmentSince the 1960s, Korea has implemented various forms of trade policies. Besides static

effects, the policies contributed to growth dynamically in various ways. For instance,

Wontack Hong (1979) reported that the percentage of jobs created by exports of industrial

products increased from 6 percent in 1963 to 30 percent in 1975. A recent study by Chong-

Hyun Nam (2008) shows that net job creation by trade rose from 1.9 percent of total

employment in 1975 to 6.7 percent in 1985. Hongshik Lee (2008) suggested that the

reduction in tariffs helped create jobs during the period 1980-2004.8

Exports and market opening contributed much to strengthening the effectiveness and

competitiveness of the Korean economy, and improving total factor productivity. Lawrence

and Weinstein (1999) suggested that market opening was instrumental in increasing

productivity in the cases of Korea and Japan.

4. Liberalization of foreign direct investment

4.1 Inward foreign direct investment

4.1.1 Evolution of policyForeign direct investment in Korea was allowed in 1962. However, the Korean

government depended on foreign loans rather than FDI in its development strategies, with

FDI being restricted until the early 1980s. The Korean government worried that foreign

firms might dominate domestic industry, while funding through foreign loans was easier to

control than capital inflows.

During the early 1980s, when foreign debt became a serious problem among developing

countries, the Korean government changed its policy by reducing its dependency on

foreign loans and encouraging FDI, with systems to achieve this goal being put in place. In

July 1984, the Korean government changed its FDI policy from a positive list system to

negative list one in order to expand the number of business categories that would be

liberalized for FDI. It lifted the horizontal restriction in foreign equity ceiling of 50 percent.

In 1992, it introduced a notification system in principle. In 1996, with Korea joining the

OECD, the government took further liberalization steps on FDI. It started to open up the

service sector, including financial, telecommunications and distribution services. In

February 1997, the government eased rules on mergers and acquisitions (M&As) of


8 However, a recent study (Bank of Korea, 2008) shows that the virtuous cycle of exports and employment has become weaker.


domestic companies by foreign firms, allowing friendly M&As, where the board of

directors of targeted firms approved the deal.

In 1998, with the Korean economy trying to recover from the Asian financial crisis, the

government promoted FDI by enacting the Foreign Investment Promotion Act. The

government allowed hostile M&As as well and liberalized the acquisition of real estate by

foreigners. Investment incentives involving tax exemptions were extended to ten years and

their coverage was expanded to include high technology industries, industrial support

services and businesses located in foreign investment zones. In April 1998, the Korea

Investment Service Center (KISC) was established under the KOTRA to provide one-stop

services to potential foreign investors. The KISC was renamed Invest Korea in 2003 after

expanding the organization and staff. In 1999, an Ombudsman system was introduced in

order to address any complaints by foreign investors.

In 2003, three free economic zones (FEZs) were designated in Incheon, Busan/Jinhae

and Gwangyang Bay. In these FEZs, various statutes were deregulated to meet

international standards and support was provided to improve business management and

living conditions. In April 2008, three more FEZs were designated in Hwanghae,

Saemangeum-Kunsan and Daegu-Gyeungbuk.

4.1.2 Trends of inward foreign direct investment FDI into Korea was minimal until the mid-1990s, but it has increased dramatically after

Korea joined the OECD and went through economic restructuring following the financial

crisis. Many domestic companies were sold to foreign investors as part of the restructuring

process, with FDI soaring to 15 billion dollars in both 1999 and 2000 on a notification

basis. Following the restructuring period, FDI has subsided to about 10 billion dollars

annually since 2001.

However, the FDI record is seen as disappointing by global standards. According to

UNCTAD, Korea is classified in the list of countries where FDI performance falls below its

potential. The FDI environment is evaluated as being less competitive than other countries.

According to IMD, Korea ranks 53rd and 54th among 55 countries in terms of deregulation

and labor market flexibility, respectively. The transparency of its policy also ranks poorly,

at 35th.

The U.S. is the largest foreign investor in Korea, followed by Japan and the Netherlands,

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Table 4-7. Trends of inward foreign direct investment by the 10 largest investing countries(Unit: million dollars, %)

Source: Ministry of Knowledge and Economy.

4.1.3 Economic effects of inward foreign direct investmentFDI had a crucial role in building up foreign exchange reserves in the aftermath of the

financial crisis. FDI increased foreign exchange reserves by 17 percent in 1998 and 42

percent in 1999, making a significant contribution to the resolution of the crisis.

FDI also increased production. From 1999 to 2006, the percentage of output by foreign-

invested companies out of total output rose from 8 percent to 13 percent in manufacturing

(Table 4-8) and from 4 percent to 10 percent in services (Table 4-9).

Table 4-8. Contribution by foreign-invested companies in manufacturing production(Unit: billion won, %)



1970 1980 1990 2000 2005 2006 2007 2008 1962-2008

Total76

(100.0)143

(100.0)803

(100.0)15,265

(100.0)11,566

(100.0)11,242

(100.0)10,514

(100.0)11,705

(100.0)149,013 (100.0)

U.S.45

(59.5)71

(49.3)318

(39.6)2,921

(19.1) 2,690

(23.3) 1,705

(15.2) 2,341

(22.3) 1,328

(11.3) 40,327 (27.1)

Japan21

(28.1)43

(29.7)236

(29.3)2,452

(16.1) 1,881

(16.3) 2,111

(18.8) 990

(9.4) 1,423

(12.2) 21,952 (14.7)

Netherlands1

(1.2)2

(1.3)36

(4.5)1,775

(11.6) 1,150 (9.9)

800 (7.1)

1,979 (18.8)

1,224 (10.5)

16,979 (11.4)

Germany1

(1.6)9

(6.0)62

(7.8)1,627

(10.7) 705

(6.1) 484

(4.3) 439

(4.2) 685

(5.9) 8,404 (5.6)

U.K.0

(0.1)2

(1.6)45

(5.6)86

(0.6) 2,308

(20.0) 698

(6.2) 338

(3.2) 1,231

(10.5) 8,052 (5.4)

Malaysia--

--

--

1,408 (9.2)

211 (1.8)

66 (0.6)

75 (0.7)

53 (0.5)

6,961 (4.7)

France--

--

22 (2.8)

616 (4.0)

85 (0.7)

1,173 (10.4)

439 (4.2)

538 (4.6)

5,697 (3.8)

Singapore--

--

14 (1.7)

297 (1.9)

389 (3.4)

557 (5.0)

516 (4.9)

916 (7.8)

5,479 (3.7)

Canada--

--

8 (1.0)

520 (3.4)

193 (1.7)

83 (0.7)

51 (0.5)

90 (0.8)

3,631 (2.4)

CaymanIslands

--

--

10 (1.2)

898 (5.9)

144 (1.2)

95 (0.8)

560 (5.3)

329 (2.8)

3,394 (2.3)

1999 2000 2001 2002 2003 2004 2005 2006

Total 464,790 533,373 536,165 606,461 654,268 761,576 827,721 884,306

Foreign-invested companies 37,648 62,938 64,876 69,743 80,475 95,197 106,776 118,497

Ratios 8.1 11.8 12.1 11.5 12.3 12.5 12.9 13.4


Table 4-9. Contribution by foreign-invested companies in services production(Unit: billion won, %)


4.2 Outward direct investmentUntil 1981, Korea’s outward investments amounted only to a total of 57 million dollars

because the government restricted capital outflows. From 1986, however, the government

began to change its policy, switching to the liberalization of capital outflows. Following

further liberalization measures in this area since 1994, overseas direct investment has

grown rapidly. The upward trend was briefly halted in 1998 due to the Asian financial

crisis.

The number of foreign subsidiaries established by Korean firms increased as the

economy began to recover in 2000. The size of investments has increased dramatically

since 2005, reaching 22 billion dollars in 2008. Korean multinational enterprises have been

the main drivers of overseas investments, including cross-border M&As. Figure 4-6 shows

the trend of Korean outward investment from 1981 to 2008.

Figure 4-6. Korean outward direct investment (1981-2008)

Source: Korea Export-Import Bank.

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1999 2000 2001 2002 2003 2004 2005 2006

Total 339,585 378,709 379,675 450,613 407,738 426,239 512,237 547,758

Foreign-invested companies 13,923 20,829 31,513 36,049 43,628 49,443 54,809 54,228

Ratios 4.1 5.5 8.3 8.0 10.7 11.6 10.7 9.9


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Most of the overseas investments by Korean multinationals have been in Asia, with

nearly half going to China (47 percent). The investment share for China, however, is

declining due to rising investments in Hong Kong and Vietnam since 2005. Table 4-10

shows that Asia has attracted 56 billion dollars, which represents 48 percent of total

investments from Korea between 1968 and 2008, compared with 23 percent for North

America and 15 percent for Europe. Since 2005, however, investments in Asia have been

declining at the expense of growing investments in North America and Latin America.

Table 4-10. Korea’s outward direct investment by region(Unit: million dollars, %)


The share of outward investment by Korean multinationals in agriculture, forestry and

fishing industries has fallen continuously and stood at a mere 0.4 percent of total overseas

investments in 2008, whereas investment in the mining sector increased from 0.2 percent

in 1981 to 16 percent in 2008, reflecting the increased interest in securing foreign sources of

raw materials. Overseas investments were biggest in the manufacturing sector until 2006,

followed by services. But this situation has been reversed since 2007 when the overseas

investment share for services exceeded 50 percent. Table 4-11 shows the distribution of

overseas investments of Korean multinationals by sector.


1981 1990 2000 2005 2006 2007 2008 1968-2008

Total57

(100.0)1,069

(100.0)5,282

(100.0)6,954

(100.0)11,579

(100.0)21,508

(100.0)21,808

(100.0)116,324(100.0)

Asia5

(9.6)366

(34.3)1,646

(31.2)4,139

(59.5)6,283

(54.3)11,039(51.3)

10,809(49.6)

55,969(48.1)

Middle East3

(6.0)40

(3.8)31

(0.6)43

(0.6)170

(1.5)158

(0.7)179

(0.8)1,441(1.2)

North America33

(58.7)455

(42.5)1,463

(27.7)1,293

(18.6)2,195

(19.0)3,599

(16.7)5,097

(23.4)27,012(23.2)

Latin America1

(1.7)67

(6.2)1,506

(28.5)542

(7.8)1,213

(10.5)1,464(6.8)

1,617(7.4)

9,424(8.1)

Europe2

(2.6)82

(7.7)292

(5.5)654

(9.4)1,213

(10.5)4,372

(20.3)2,988

(13.7)18,023(15.5)

Africa1

(1.6)27

(2.5)156

(3.0)129

(1.9)214

(1.8)239

(1.1)292

(1.3)1,688(1.5)

Oceania11

(19.7)32

(3.0)90

(1.7)154

(2.2)193

(1.7)539

(2.5)730

(3.3)2,766(2.4)


Table 4-11. Korea’s outward direct investment by sector(Unit: million dollars, %)


The economic impact of overseas investments by Korea has been analyzed in a number

of studies. Hongshik Lee (2010) found that the activities of foreign affiliates can boost

exports. Sung-Hoon Lim and Hwy-Chang Moon (2001) found that when Korean

multinationals in industries suffering low productivity invest in developing countries, the

outward investment can positively affect intra-firm trade. As for the relationship between

capital outflow and domestic investment, Hyunjeong Kim (2008) showed that there is no

evidence of a“crowding-out effect” on domestic capital formation by overseas

investments. Investments abroad can actually be complementary to domestic investment

and this effect becomes more significant for investments in high-tech industries in

developing countries. As for employment, Debaere et al. (2010) found that the impact of

overseas investment can differ depending on destination; increasing employment at

headquarters operations in Korea can decrease investment in developing countries, while

there was no significant effect on investment in developed countries. Overall, there seems

to be no evidence of a“hollowing-out effect” by overseas investment on the domestic

economy and the effect can vary depending on model specifications.

5. Economic cooperation

5.1 Bilateral economic relationsKorea’s economic reconstruction in the 1950s benefitted much from the U.S. aid, which

accounted for up to 10 percent of GDP. However, when Korea achieved a trade surplus

with the U.S. in the 1980s, intense trade conflicts ensued between the two countries.

Although the share of trade with the U.S. has fallen in recent years due to the rise of the

Chinese economy and Korea’s diversification strategy towards overseas markets, the U.S.

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1981 1990 2004 2005 2006 2007 2008

Agriculture, forestry and fishing11

(18.6)42

(3.866)34

(0.5) 30

(0.4) 44

(0.4) 101

(0.5) 84

(0.4)

Mining0

(0.2)152

(14.2)317

(5.0) 506

(7.3) 1,436

(12.5) 2,051(9.6)

3,491(16.1)

Manufacturing5

(8.02)476

(44.5)3,480

(54.4) 3,657

(52.7) 5,422

(47.2) 8,063

(37.7) 6,767

(31.2)

Services42

(73.2)400

(37.4)2,561

(40.1) 2,746

(39.6) 4,579

(39.9) 11,195(52.3)

11,368(52.4)


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remains one of Korea’s three biggest trading partners. Korea and the U.S. also have

entered into a new stage of economic cooperation with the conclusion of an FTA, which

represents a more advanced stage of economic cooperation. It is significant that both

governments agree on such issues as promoting environment-friendly growth and

technology and supporting economic development aid for the world’s poorest countries.

In contrast with the U.S., cooperation between Korea and Japan did not begin until 1965

when diplomatic ties between the two countries were normalized. The development grant

from Japan made a huge contribution to financing infrastructure investment projects and

fostering industrial development in Korea. This set the stage for increased trade and

investment between Korea and Japan. As Korea’s exports became more capital-intensive

and technology-intensive, Korean firms’competition with Japanese counterparts intensified

in world markets. At the same time, it also boosted Korea-Japan trade in industrial goods,

such as machinery and components. The relative importance of Japan in Korea’s trade has

declined, as trade and investment expanded with a growing number of nations.

Nonetheless, Japan still remains one of Korea’s major partners in trade and investment,

with great potential for further cooperation.

Bilateral economic cooperation with China has accelerated since the establishment of

diplomatic relations in 1992. China is of paramount importance in terms of trade and

investment flows. Korea-China economic relations have mirrored the dynamic

development of China. But the model of using Chinese low-wage labor as part of a wider

East Asian production network has reached a critical junction. Companies engaged in

simple manufacturing processing are being forced to relocate or shut down. Large

investments tend to be made in“high value-added” industries in China, from

manufacturing to services in finance, logistics and real estate. This structural change in

China requires the need for prompt and consistent actions in response.

The European Union (EU) has become the largest investor in Korea, and also it has

become the second largest market for Korea’s exports, after China. The importance of the

EU as a market and a source of FDI can hardly be overstated for Korea, especially now

when Korea needs to develop the service sector and upgrade its industrial structure. With

the Korea-EU FTA signed in 2010, it is vital to strengthen cooperation in science and

technology to bolster Korea’s industrial bases and participate in the joint development of

new technologies for the environment and energy sectors.

5.2 Regional cooperationThe history of Korea’s regional economic cooperation is short in contrast to that of its



bilateral cooperation. A regional cooperation policy came into being with the market

opening measures of the early 1980s and was stimulated by the prolonged UR negotiations

and rapid growth of regionalism in the Asia Pacific region. In the late 1980s, liberalization

in trade, investment and the foreign exchange market started to make a positive impact in

terms of promoting the globalization of Korean economy and its structural improvement. It

created the conditions and an environment for Korea to play a leading role in the arena of

international cooperation. The planned formation of the EU and launch of the UR in the

late 1980s encouraged Korea’s participation in regional cooperation.

In 1989, Korea took a leading role in establishing APEC to help develop economic

cooperation in the Asian and Pacific region, where most of Korea’s exports and investment

are concentrated. Since the Asian financial crisis in 1997, Korea has taken active part in

broader regional cooperation efforts through ASEAN (Association of Southeast Asian

Nations), ASEAN+3 (China, Japan, Korea), and ASEM (Asia-Europe Meeting) in order to

attain sustainable growth in association with regional economic development.

APEC took precedence for Korea as the main organizational body to promote regional

economic cooperation until the early 2000s. Korea has been a leader in advancing APEC’s

Trade and Investment Liberalization and Facilitation (TILF) and Economic and Technical

Cooperation (Ecotech) agendas, with the following policy objectives: (1) contributing to

the facilitation of global free trade under the WTO system; (2) deepening regional

integration to secure trade and investment markets and expand business opportunities; (3)

strengthening strategic relationships with member economies; and (4) sharing knowledge,

experience and resources with developing economies.

As regards East Asian cooperation, the Korean government has stepped up efforts to

create the ASEAN+3 cooperative frameworks. There are a number of impediments to

genuine economic integration. In particular, the historical conflict between China and

Japan hinders economic integration. Clarifying the division of roles with the EAS (East Asia

Summit) and other Asian cooperation forums, and solidifying the role of ASEAN+3 are

regarded as the key to all future activities. The future of the less structured ASEM, which

must overcome differences in economic, social and historical background between Asia

and Europe, rests on the efforts of its member economies. These efforts involve

strengthening economic ties through liberalization and openness, collaboration on securing

financial stability, the promotion of inter-regional trade and investment, the continuous

investment in infrastructure, extensive cooperation in science and technology, an increase

in political and security cooperation, joint action on environmental issues, and the

stimulation of educational, cultural and social interaction.

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5.3 Development cooperationIn the early 1990s, Korea received requests to fulfill its international responsibility to

global development due to its increasing economic importance and rising international

status. Korea’s establishment of the Economic Development Cooperation Fund (EDCF) in

1987 marked a new phase in economic cooperation. Since then, Korea has increased

official development aid (ODA) to contribute to the development and well-being of

developing economies. As a consequence, Korean ODA reached 700 million dollars in

2007, up from 180 million dollars in 1998, and its ODA/GNI ratio rose from 0.05 percent in

2006 to 0.08 percent in 2007 and 0.09 percent in 2008. However, this figure is short of the

UN’s recommendation of 0.7 percent and the average of the OECD Development

Assistance Committee (DAC) members of 0.3 percent.

Korea became the 24th member of the OECD DAC in November 2009, an

unprecedented case of leapfrogging from recipient to donor in the 13 years since it joined

the OECD. Joining the DAC has great significance in terms of enhancing Korea’s

international status and bolstering the vision of‘Global Korea’prior to holding the G20

summit in Seoul in November 2010. In this regard, Korea has set a goal of raising the ratio

of ODA/GNI to 0.15 percent by 2012 and 0.25 percent by 2015. This would require annual

spending on ODA to be around 3 billion dollars, requiring fundamental changes in

national policy priorities and consensus. Furthermore, another important task is to

strengthen the principles and priorities of ODA to turn quantitative growth into qualitative

development, and improve the integration of ODA policy objectives of the individual

government agencies.

Korea, as a member of the DAC, is wholeheartedly committed to improving the quality

and quantitative expansion of aid, with a focus on the consistency of development

cooperation. Having certain comparative advantages, it is essential for Korea to tailor the

contents of its development experience to the needs of recipient economies and support

the Korean model of development cooperation. It is suggested that ODA projects should

be governed by the proposed enactment of an“ODA Act,” which would create guidelines

and a performance-based assessment system to ensure objectivity and transparency in

ODA programs. Although Korea’s ODA policy gives much weight to the involvement of

citizen volunteers and has earned broad public support and participation, it is still at an

early stage of development. Based upon the extensive participation of the private sector, it

is necessary to exchange views and best practices of ODA, allocate adequate budgets, and

promote activities to fight poverty and support development cooperation. It is in need of a

more intense and focused effort to seek solutions to such issues as health care, the



environment and women’s rights, and nurturing efforts to improve the aid efficiency and

the outcome of millennium development goals.

6. Agricultural import liberalization

6.1 OverviewUntil the early 1960s when the first Economic Development Plan began, Korea was a

typical agrarian country. As the manufacturing sector grew at an explosive rate and a large

number of farm laborers migrated to urban areas, the importance of agriculture

diminished. In the early 1960s, agriculture generated about 40 percent of Korea’s GDP and

the labor force employed in the agricultural sector accounted for 60 percent of Korea’s total

working population. In 2009, the agricultural share of GDP was less than 3 percent and

agricultural workers accounted for less than 7 percent of employment.

In terms of Korea’s agricultural trade policy, imports of major agricultural products were

restricted to protect domestic farmers until the mid-1990s. However, despite such a policy,

agricultural imports steadily increased from the early 1980s due to the shortage of domestic

food supplies. In particular, the increased demand for meats, fruits, vegetable oils and

processed food were mainly satisfied by imports. The expansion of the domestic livestock

industry also resulted in large feed grain imports.

Full-scale import liberalization in agriculture began in the late 1980s when the Korean

government began to shift its development strategies towards liberalization in investment

as well as external trade. Globalization and serious trade frictions with major trading

partners also forced Korea to undertake policies for the opening of agricultural markets.

This section reviews the history of Korea’s agricultural import liberalization over the last

six decades, focusing on opening measures after the mid-1980s. The following sections

will discuss agricultural import liberalization, Korea’s graduation from GATT Article

XVIII:B, the implementation of the Uruguay Round Agreement on Agriculture (URAA), the

rice negotiations in 2004 and the delay of rice tariffication, and the impact of the FTAs with

major trading partners, including Chile, EFTA, ASEAN and the U.S.

6.2 Korea-US trade conflict and graduation from GATT article XVIII: B

6.2.1 Trade friction with the U.S. in the mid-1980sAs the world economy recovered from the first oil shock in 1973, Korea’s exports grew

rapidly, recording its first trade surplus of 300 million dollars with the U.S. in 1982. Korea’s

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trade surplus with the U.S. reached 9.6 billion dollars in 1987.

Table 4-12. Korea’s trade surplus (1982-1987)(Unit: billion dollars)

Source: Ministry of Agriculture and Forestry, Agricultural Major Statistics, various issues.

In contrast, the U.S. was burdened by financial and trade deficits. During the 1980s and

1990s, the U.S. trade deficits spawned worries about unfair foreign trade barriers, lost jobs,

and America’s ability to compete in the global market. As a result, the Section 301

provisions of 1974 and the 1988 Omnibus Trade and Competitiveness Act were passed by

the U.S. Congress.

As part of its efforts to avoid a possible U.S. designation of Korea as a“priority” foreign

country suspected of engaging in unfair trade practices, the Korean government

announced in 1988 a three-year market opening schedule (1989-1991) to liberalize imports

of 243 agricultural, forestry and fishery products.

6.2.2 Graduation from GATT XVIII: BKorea, which for many years had balance-of-payment (BOP) deficits and sought to

minimize imports to save foreign exchanges, relied on the GATT’s Article 18 that allowed

countries to impose quantitative import restrictions if they had BOP deficits. As a result, the

Korean government used a system of import licensing for many agricultural commodities

and almost never issued import licenses, effectively banning imports.

Under the GATT, countries using Article 18 to justify trade barriers were subject to

periodic reviews of their BOP situation. In 1987, a GATT committee reviewed Korea and

urged that Korea relinquish its restrictions because Korea was running BOP surpluses by

then. Based on this finding, the U.S. successfully challenged Korea’s quantitative import

restrictions on beef in a GATT dispute in 1989.

A subsequent review of Korea’s BOP status in 1989 also confirmed that Korea didn’t

need the quantitative restrictions to conserve foreign currency, having recorded current

account surpluses. In the face of these findings, Korea agreed in 1989 to eliminate its

quantitative restrictions by 1997 and announced a series of measures to liberalize many

tariff items.9

The UR coincided with the phasing out of the BOP trade barriers. In 1995, Korea’s


1982 1983 1984 1985 1986 1987

Non-U.S. -2.4 -1.8 -1.4 -0.8 3.1 6.3

U.S. 0.3 2.0 3.6 4.3 7.3 9.6


commitment to the UR agreement subsumed the BOP concessions and, in some cases,

amended them.

6.3 Implementation of the URAA

6.3.1 Commitments by KoreaThe Uruguay Round Agreement on Agriculture (URAA) can be regarded as the most

effective multilateral trade pact in history in that it converted quantitative restrictions to a

system based on tariffs, which would then be reduced in phases. It also harmonized

domestic subsidies with international rules on their use for the first time.

Korea agreed to the elimination of non-tariff barriers and the market liberalization of all

agricultural commodities with the exception of rice. Tariffs and newly established tariff-

equivalents were to be reduced by 27 percent on average over 10 years. Under its market

access commitments, Korea began to phase out non-tariff import restrictions on agricultural

products in January 1995. Tariff rate quotas were established for a number of former

import-restricted agricultural products, including many horticultural products. The

remaining phase of the BOP liberalization, somewhat modified by the URAA, was

completed on schedule by January 1, 2001.

As for beef, the import quota was maintained until 2000 and was completely liberalized

in 2001 with a tariff rate of 41.2 percent. Before then, Korea’s beef import regime followed

the rules negotiated under the auspices of the GATT in agreements reached with the

United States and other trading partners in 1989 and 1993 before the URAA. As a result,

Korea’s agricultural import liberalization rate increased sharply to 99 percent in 2008 from

80 percent in 1990.

Table 4-13. Agricultural import liberalization rate (unit: %)

Note: Agriculture includes livestock products.

Source: Ministry of Agriculture and Forestry.

156THEKOREANECONOMY

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9 Korea drew up a three-year market liberalization program of 137 products.

1985 1990 1995 2000 2005 2008

Total 72.6 80.4 95.6 98.6 99.1 99.1

Agriculture 16.1 83.4 94.5 98.3 98.9 98.9

Forestry 94.9 95.0 100.0 100.0 100.0 100.0


157

6.3.2 Overall changes in agriculture after the Uruguay RoundThe value of agricultural production was still rising in 1995 and 1996, but the growth rate

slowed after 1994. The“farm gate” price index for rice and grains increased rapidly in 1995

and 1996. During the same period, the“farm gate” price index for fruits began falling,

while that for vegetables and livestock products rose marginally. Agricultural imports

increased markedly in 1995, but the growth rate slowed in 1996. Agricultural exports

showed a similar trend. Accordingly, the increase in net imports can be one reason for the

slowing growth of agricultural prices in 1996.

Total acreage declined steadily, although the rate of decrease leveled off after 1995. Rice

acreage decreased only marginally in 1996. The acreage of barley, fruits and vegetables

increased. In conclusion, the rise in the value of agricultural production was caused by an

increase in prices of those products rather than by an increase in the size of agricultural

output. The price of agricultural products continued to increase due to strong consumer

demand and rising incomes, even with the growth of agricultural imports. Therefore, the

adverse effects of market opening through the implementation of URAA can be said to be

minimal.

Table 4-14. Changes in major indicators of agriculture in Korea

Source: Ministry of Agriculture and Forestry, Statistical Yearbook of Agriculture and Forestry, various issues.

6.4 Rice negotiations in 2004Import barriers have long played a central role in Korea’s rice policy. As a result of the


1993 1994 1995 1996

Value of agricultural production (billion won)(Growth, %)

21,827 24,935(14.2)

27,512(10.3)

29,607(7.6)

Average farm scale (ha) 1.34 1.35 1.35 1.37

Farm gate price index (1993=100)

Rice

Other grains

Vegetables

Fruits

Livestock

100.0

100.0

100.0

100.0

100.0

100.0

108.2

102.7

113.5

111.3

140.9

102.9

118.0

112.2

165.1

125.2

150.7

113.1

123.9

130.3

177.7

130.1

129.8

113.0

Agricultural imports (million dollars) 7,269 7,988 9,677 10,940

Agricultural exports (million dollars) 1,262 1,462 1,746 1,829

Total acreage (1,000 ha)

Rice

Barley

Vegetables

Fruits

1,845

1,136

117

378

154

1,776

1,103

85

373

161

1,749

1,056

90

403

172

1,713

1,050

95

389

173


UR agricultural negotiations, Korea received special treatment for rice, permitting the

suspension of the introduction of a tariff system for ten years from 1995 to 2004. Instead,

Korea was required to start in 1995 to import an amount of rice that was equivalent to 1

percent of average annual rice consumption between 1988 and 1990, with the amount of

imports to be raised to 4 percent by 2004.10 Korea was allowed to impose a tariff of 5

percent on the rice imports, with the rice trade remaining strictly under government control

during the 10-year grace period.

According to the URAA, the replacement of the Minimum Market Access (MMA) was to

be negotiated with Korea’s trading partners before December 31, 2004. Negotiations

continued through much of 2004 and culminated in an agreement just before the deadline

that set the rules for Korean rice imports for the period 2005-2014.

Under the agreement, the MMA import quota will almost double in size by 2014, but

there is no provision for imports above the quota. The tariff on rice imported under the

quota will remain at 5 percent. The Korean government is committed to releasing a portion

of the imported rice into local markets with a permitted mark-up in price.

The minimum import quota for the period 2005-2014 was divided into two stages. In the

first stage, an import quota of 205,228 tons was set in 2004, with supplies coming from four

countries, including China with 116,159 tons; the United States 50,076 tons; Thailand

29,963 tons; and Australia 9,030 tons. The second stage involved a gradual increase in the

quota each year between 2005 and 2014, with countries enjoying most-favored-nation

(MFN) status with Korea being allowed to sell rice within the quota. The initial MFN quota

was set at 20,347 tons and the quota was increased by 20,347 tons each year thereafter.

The total rice import will reach 408,700 tons by 2014, with the MFN quota being 203,472

tons.

Korea reserves the right to terminate the quota and replace it with a tariff-rate quota

(TRQ) system at the beginning of any year during the ten-year period. If a TRQ system is

adopted, the quota size remains at the level stipulated for that year when the switch to the

TRQ system is made, with no further increase thereafter. The TRQ allows for imports

exceeding the quota and the tariff for these excess imports will be calculated according to

the URAA guidelines. If global trade negotiations are ever concluded under the DDA, the

tariff for the excess imports and the size of the TRQ would be changed to reflect the rules

of the DDA agreement. In the event of a switch to the TRQ system, the country-specific

quotas would end and the entire quota amount would be open to imports on an MFN158THEKOREANECONOMY

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10 Such an import quota is often called as Minimum Market Access (MMA)


159

basis.

The 2004 rice agreement, however, exacerbated the problem that Korea has faced in

recent years; rice consumption has been declining faster than production, creating a huge

amount of surplus rice. In response, Korea is considering introducing rice tariffs and

reforming domestic rice policies to provide aid to rice farms that are in accordance with

WTO rules, while encouraging farmers to reduce the area allocated to planting rice.

6.5 Import liberalization through FTAsSince the establishment of the FTA Roadmap in 2003, Korea has actively engaged in FTA

negotiations with over 50 countries. Korea’s first FTA partner was Chile. The FTA

negotiation with Chile started in 1999 and an agreement was reached in 2002. The National

Assembly ratified the FTA with Chile in March 2004. The first FTA negotiations boosted

confidence in pursuing FTA negotiations with other countries. FTAs with Singapore (2006),

EFTA (2006), ASEAN (2007) and India (2009) have gone into force since then. The FTA

negotiation with the United States was concluded in April 2007 and currently awaits

ratification by the legislatures in both countries. FTAs were concluded with the EU and

Peru in September 2010. FTA negotiations are currently being conducted with Canada,

Mexico, the Gulf Cooperation Council (GCC), Australia, New Zealand, Colombia and

Turkey.

6.5.1 The results of the FTA with ChileKorea’s concession on agricultural products identifies ten types of schedules for the

elimination of tariffs: immediate elimination; tariff elimination over periods of 5 years, 7

years, 9 years, 10 years and 16 years; seasonal tariffs; TRQ plus negotiations reflecting the

DDA negotiations; and exemptions.

The seasonal tariff was eliminated on Chilean grapes over a 10-year period from

November through April, when no grapes are harvested in Korea. The items subject to

TRQ+DDA includes beef, chicken, whey and plums. Items to be negotiated after the

conclusion of the DDA negotiations include garlic, onions, red peppers and certain dairy

products that are subject to high tariffs.

In 2009, imports of kiwi were seven times higher than in 2003 and imports of wine were

five times higher than in 2003. Total imports of agricultural products from Chile in 2006

increased about three times compared to 2003.

Exports of Korean industrial products to Chile have increased significantly due to the

reduction of tariffs after the FTA came into effect. Exports of automobiles to Chile have



increased from 22,510 cars in 2003 to 48,925 in 2006 and Korea’s share of Chile’s

automobile imports has increased from 18.8 percent to 25.7 percent. Also, exports of

mobile phones and TV sets have increased by an annual average of 108 percent and 24

percent, respectively. Total exports from Korea to Chile have increased around three-fold.

6.5.2 The results of the FTA with the United StatesNegotiations with the United States were concluded in April 2007 and the resulting FTA

is currently in the process of ratification by the two countries’legislatures. The agricultural

sector was the main issue in the negotiations. Korea agreed to eliminate tariffs on 587 items

out of 1,548 agricultural products once the agreement goes into force and to eliminate

tariffs for all agricultural products within 20 years, except for a few items such as rice and

rice products.

Although rice was excluded from the tariff concessions, Korea will grant zero duty

immediately on imports of U.S. corn feed and milling wheat once the FTA goes into effect.

The tariffs on imports of beef muscle cuts will decline from the current 40 percent to zero

in 15 equal annual reductions. The agreement includes a quantity safeguard of 270,000

metric tons for beef muscle cuts, growing at a compound 2 percent annual rate, to a final

safeguard level of 354,000 tons in 15 years. In year 16 and beyond, tariffs will be

eliminated and the safeguard will no longer apply.

The tariffs on oranges imported during the out-of-season period (March 1-August 31)

will be reduced from the current 50 percent to 30 percent immediately and then will be

eliminated in six equal annual reductions. In addition, during the in-season period

(September 1-end of February), a duty-free quota shall be established with an initial

quantity of 2,500 tons, with 3 percent annual compound growth in perpetuity. The tariff

imposed on imports exceeding the quota tariff will remain at the current MFN rate of 50

percent.

6.6 Future tasksKorea, a major food importer, has tried for more than three decades to strengthen its

own agricultural production and avoid imports. The trade policies of Korea imposed

strong barriers to imports and agricultural policies strongly supported domestic farm prices

and the production of certain commodities within closed borders.

Bilateral and multilateral negotiations have gradually reduced South Korea’s trade

barriers. In particular, in the negotiations under the auspices of the GATT ending in 1989,

Korea agreed not to invoke Article XVIII:B of the GATT for all tariff-line restrictions after

160THEKOREANECONOMY

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161

July 1, 1997. After the BOP agreement in 1989, Korea announced a three-year import

liberalization plan. The end of import licensing for all remaining restricted tariff lines was

spelled out in the 1995 agreement of the multilateral trade negotiations of the URAA.

Korea’s import barriers to agricultural products will be reduced significantly under the

various FTAs, particularly the FTA with the U.S.

The implementation of the URAA and trade liberalization under the various FTAs has led

to important changes in Korean agriculture. Greater exposure to the global economy

means that finding ways to increase competitiveness, together with appropriate adjustment

policies, have become urgent goals for Korea. However, achieving increased agricultural

competitiveness will be a major challenge given the prevalence of small farms and the high

proportion of older farmers.

According to the OECD, the aggregate PSE (producer support estimate) of Korea for

major farm commodities is over 50 percent. The consumer support estimate (CSE) is

always negative, representing an implicit tax on consumers stemming from government

programs that support producers. As a percentage, it measures the size of this implicit tax

relative to consumer spending on food. The aggregate CSE for Korea is highly negative,

suggesting that the implicit tax is equivalent to more than 50 percent of consumer spending

on major food items.

Therefore, efforts to open agricultural markets should continue. For example, Korea

may pursue additional bilateral trade agreements such as the one recently concluded with

the EU, while working toward a successful conclusion of the Doha Round of multilateral

trade negotiations. State trading enterprises could be reformed to allow for increased

competition, and tariff systems should be modified to reduce tariffs and increase trade in

general.

7. Liberalization in the service sector

7.1 OverviewService sector liberalization is a nebulous concept in Korea since there is no agreed

definition on what it should comprise. Disagreements over the concept arise from the fact

that (1) the service industry is not included in the same categories of traditional economic

activities as agriculture, mining and the manufacturing industry; and (2) trade barriers in the

service sector are not transnational in nature, such as tariffs, but instead are seen as arising

from domestic laws, regulations and administrative guidelines.

The service industry as defined by the Korean Standard Industrial Classification includes



13 sectors. The service sector’s share of GDP has risen and accounted for 62.1 percent in

2008. However, Korea has suffered a deficit in the service trade balance since the 1980s.

Table 4-15. Service sector in Korea (1960-2008)

Source: Bank of Korea.

Service sector liberalization began receiving public attention in Korea when the U.S.

wanted to open the country’s distribution and telecommunications sectors in the mid-

1980s. However, major steps in service sector liberalization had already been taken under

the voluntary liberalization policy, which was introduced by the government in the early

1980s. This represented a change from the international economic policy of Korea during

the 1970s, which was to restrict imports and promote exports. In the 1980s, the

government instead decided to encourage greater economic efficiency and reduce the

state’s role in protecting industry and intervening in the economy. The government also

promoted import liberalization and market opening measures.

The voluntary service sector liberalization of the early 1980s included easing restrictions

on overseas travel, relaxing rules on studying abroad, and eliminating investment

restrictions in the wholesale and retail industries. The liberalization in the mid-1980s

focused on the cultural sector, including films, telecommunications and distribution

services that were of interest to the U.S.

The 1990s was a period of full-scale liberalization in the service sector as the government

eliminated restrictions on sectors that had been protected for industrial and political

purposes. The Five-Year Plan for Foreign Investment Liberalization was introduced in 1993

and was amended three times to open more areas to foreign direct investment. In 1996,

Korea became a member of the OECD and it implemented many liberalization policies in

the service sector, including the Act on Foreign Investment and the Introduction of Foreign

Capital.

162THEKOREANECONOMY

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Share in GDP(%)

Share inemployment

(%)

Service Trade(100 million dollars)

Service investment(100 million dollars)

Export(A)

Import(B)

Balance(A-B)

FDI ODI

1960

1970

1980

1990

2000

2005

2008

n.a.

46.7

51.1

56.6

59.6

61.8

62.1

n.a.

n.a.

n.a.

53.6

67.4

71.1

72.9

n.a.

n.a.

25.7

96.4

305.3

451.3

759.9

n.a.

n.a.

32.9

102.5

333.8

587.9

927.2

n.a.

n.a.

-7.2

-6.1

-28.5

-136.6

-167.3

n.a.

0.1

0.4

2.8

83.8

84.8

87.0

n.a.

n.a.

2.5

4.5

34.7

28.2

115.0


163

The Korean economy experienced rapid growth in the 1990s and was recognized as an

advanced developing country. Korea was then put on a watch list by major developed

countries in terms of monitoring fair competition in the global market. Korea proclaimed

its support for liberalization and market opening as a member of the WTO and the OECD.

This process was accelerated by the 1997 financial crisis and the recommendations of the

IMF bailout program. The ceiling on foreign ownership was eliminated in major industries

in 1998. The restrictions on Japanese cultural products were also eliminated after 1998.

Liberalization in the service sector often means the elimination of domestic regulations.

In the following, we will investigate developments in service liberalization in Korea over a

period of time.

7.2 Liberalization in Mode 211areas

7.2.1 Tourism servicesGlobalization and liberalization gained momentum during the 1980s. The Korean

government actively sought ways to encourage Koreans to go abroad. In January 1983,

overseas tours were allowed for the first time, albeit with some restrictions.

Full liberalization of overseas tours occurred in 1989, after Korea had maintained a

positive balance of payments for several years and living standards had risen. Following

liberalization, the number of tourists from Korea increased to 448,727 in 1990, a rise of 235

percent. The numbers continued to increase despite a temporary fall in 1998 due to the

financial crisis. The share of tourists among those traveling abroad from Korea was more

than 50 percent. The balance of travel payment showed a surplus in 1988, but then fell

into deficits after 1991.

Table 4-16. The change in travel expenses (1988-1992)(Unit: 1,000 dollars) In

ternationalEconomicPolicy

1988 1989 1990 1991 1992

Balance of travel expenses 1,911,341 954,747 393,043 -357,888 -522,885

Travel expenses 1,353,891 2,601,532 3,165,623 3,784,304 3,794,409

Per capita expenses 1,867 2,145 2,028 2,239 1,857

11 The General Agreement on Trade in Services (GATS) defines four ways (Modes) of delivering or trading a services: Mode 1 iswhere services are supplied from one country to another, officially known as “cross-border supply”; Mode 2 is where consumersor firms make use of a service in another country, officially known as “consumption abroad”; Mode 3 is where a company sets upbranches abroad, officially known as “commercial presence”; and Mode 4 is where individuals travel abroad to provide servicesin another country, officially known as “movement of natural persons.”


Liberalizing overseas travel enjoyed widespread public support. Therefore, the

government took more steps to eliminate restrictions on overseas travel in 1995. The limit

on overseas travel expenses was increased from 5,000 dollars per month to 10,000 dollars

per month and regulations on overseas remittances were lifted. In 2001, foreign exchange

transactions were liberalized. The purchase of foreign real estate was allowed in 1995, with

an initial ceiling of 300,000 dollars. In 2008, the limit was increased to 1 million dollars and

the transaction only required notification to, but not the permission of, the government.

7.2.2 Educational servicesThe policy concerning students studying abroad was influenced by the goal of obtaining

the best education for those who are talented. Before the liberalization in 1985, personal

spending for studying abroad was tightly controlled, with many restrictions. Only about

600 students per year were allowed to study abroad at their own expense in the 1970s, but

the number increased to 7,000 by the mid-1980s.

7.3 Liberalization in Mode 3 areas

7.3.1 Uruguay RoundThe concession table of the Korean government in the UR shows that 78 out of 155

service sectors were liberalized. These included 31 areas in business services, 15 in

financial services, 9 in communication services, 8 in transportation, 5 in construction

services, 4 in distribution services and 3 in tourism services.

Table 4-17. Level of liberalization in the Mode 3 after the Uruguay Round

164THEKOREANECONOMY

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Korea U.S. EU Japan Philippines Thailand Singapore Australia Mexico China Average

Business

Telecomm

Construction

Distribution

Education

Environmental

Financial

Health & Social

Tourism

Cultural

Transportation

0.652

0.583

0.500

0.600

0.000

0.500

0.353

0.000

0.750

0.000

0.214

0.685

0.792

1.000

1.000

0.300

1.000

0.500

0.250

0.750

1.000

0.157

0.641

0.333

0.500

0.700

0.800

1.000

0.500

0.375

0.625

0.700

0.329

0.652

0.563

1.000

0.800

0.400

0.875

0.500

0.125

1.000

0.800

0.300

0.000

0.125

0.000

0.000

0.000

0.000

0.500

0.000

0.375

0.000

0.357

0.261

0.208

0.400

0.100

0.400

0.500

0.265

0.000

0.375

0.200

0.157

0.435

0.583

1.000

0.000

0.000

0.000

0.500

0.000

0.750

0.000

0.086

0.739

0.458

1.000

1.000

0.400

1.000

0.471

0.250

1.000

0.400

0.329

0.272

0.375

0.500

0.300

0.400

0.125

0.353

0.375

0.500

0.500

0.043

0.250

0.333

0.500

0.500

0.500

0.500

0.382

0.000

0.250

0.000

0.143

0.440

0.428

0.627

0.455

0.291

0.500

0.439

0.136

0.614

0.345

0.200

Total 0.442 0.578 0.513 0.555 0.166 0.234 0.347 0.568 0.269 0.269 0.380


165

Korea maintained restrictions on the employment of foreign professionals in every

service sector. Medical and dental services, film and videotape services, primary and

secondary school services, and news broadcasting and sports leisure services were not

subject to liberalization.

The overall level of service sector liberalization in Korea after the UR was lower than that

of advanced countries such as the U.S. and EU, but higher than other developing

countries. After the launch of WTO, Korea has tried to abide by the concession schedule

and open the service market more widely. As a result of this effort, foreign direct

investment in the service sector has increased. The government has promoted increased

service sector liberalization through multilateral and bilateral negotiations and voluntary

liberalization since 2000.

7.3.2 Accession to the OECDKorea joined the OECD in December 1996. As a result of the negotiations for OECD

membership, Korea was allowed to maintain regulations on 41 out of 91 sectors under the

OECD Code of Liberalization of Capital Movement and 10 out of 57 sectors under the

OECD Code of Liberalization of Current Invisible Operation. This reservation rate was very

high compared to the OECD average.

Table 4-18. The acceptance and reservation rate of Korea

Note: As of January 1st, 1997.

However, Korea introduced plans for further liberalization on capital movements.

Regulations on foreign direct investment in Korean companies were reduced or eliminated

and the limitations on overseas financing for Korean firms were also relaxed significantly.


Code of Liberalization ofCapital Movement

(91 sectors)

Code of Liberalization ofCurrent Invisible Operation

(57 sectors))Total

AcceptanceRate

Number ofReservation

AcceptanceRate


AcceptanceRate


OECD Average 89% 10 88% 7 89% 17

Korea 55% 41 82% 10 66% 51

Mexico 71% 26 75% 14 73% 40

Czech Republic 65% 32 82% 10 72% 42

Hungary 58% 38 81% 11 67% 49

Poland 56% 40 79% 12 65% 52


As a result, there was a sizable increase in the amount of FDI into Korea.

7.3.3 Changes due to the 1997 Asian financial crisisKorea recognized the need to attract more FDI as a means to recover from the 1997

Asian financial crisis. To this end, the Act on Foreign Investment was enacted, which

included streamlining FDI procedures, eliminating some regulations, and improving

preferential tax treatment and incentives. The number of business categories subject to

foreign investment restrictions was reduced from 113 in 1995 to 25 in 2008.

Another major change in FDI policy concerned corporate mergers and acquisitions.

Even though global FDI trends shifted from greenfield investments to M&As during the

1990s, the Korean government did not allow much M&A activity involving foreign

investors until it permitted friendly M&As in 1997. Restrictions on M&As were eased further

because of the conditions tied to the IMF loans that Korea received. In 1998, hostile M&As

were also allowed in Korea. As a result, the total amount of M&A-related foreign

investment was 44 billion dollars in 2008, accounting for 31 percent of total FDI.

Table 4-19. Type of FDI in Korea(Unit: million dollars, %)


7.3.4 The DDA negotiationsKorea made two rounds of submissions in the service sector to the WTO. The initial

submission was made in 2003. The acquisition of shares in broadcasting, communications

and aviation companies was to be restricted. Foreign legal consultant services were

allowed, but only in the form of representative offices. Auditing services would be limited

to sole proprietorships, auditing task forces, and accounting corporations consisting of

CPAs licensed under the Certified Public Accountant Act. Higher education and adult

education were partially liberalized. Foreign financial institutions could not undertake

financial services, except for financial leasing, that they do not conduct in their country of

origin. A single shareholder may own up to 10 percent of the stocks in a bank (or up to 4

166THEKOREANECONOMY

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1990 1995 2000 2005 2006 2007 2008 1990 - 2008

Total 803 1,970 15,265 11,566 11,242 10,515 11,705 141,943

M&A(Ratio)

0(0.0)

23(1.1)

2,865(18.8)

5,268(45.6)

4,309(38.3)

2,483(23.6)

4,426(37.8)

44,147(31.1)

Greenfield(Ratio)

803(100.0)

1,948(98.9)

12,399(81.2)

6,297(54.4)

6,933(61.7)

8,032(76.4)

7,279(62.2)

97,163(68.5)


167

percent in the case of a non-financial service entity) and 15 percent of stocks in a regional

bank without special authorization from the authorities. A single shareholder can own up

to 100 percent of a national or regional bank with special authorization by the relevant

authorities. Foreign exchange positions were to be regulated and oversold positions on the

spot foreign exchange market was set at 5 million dollars, or 3 percent of capital,

whichever was greater. The overall level of the offer in 2003 was lower than the current

level of liberalization.

7.3.5 The Korea-U.S. FTAThe Korea-US FTA has yet to be ratified by both governments, but it already has had a

significant influence on the liberalization of the service sector. A“negative system”

governing services was adopted, which helped to increase transparency. A“ratchet”

mechanism was also included to prevent a backward slide in the liberalization of the

service sector. Korea offered some preferential treatment to the U.S. in the areas of

telecommunications, broadcasting, and legal and auditing services.

7.4 AchievementsFollowing the Mode 3 liberalization in the service sector after 1990, FDI in service

industries showed remarkable growth. During the 2000s, the amount of FDI in the service

sector surpassed that in manufacturing sector and the gap between the two has grown

wider since then. In 2008, the service sector accounted for 70 percent of FDI and

manufacturing 30 percent (Table 4-25). FDI was strong in the financial, insurance,

distribution and business services.

Since the service sector is very important to the economic growth and improved living

standards, the Korean government is committed to improving productivity in the service

sector and will continue moves toward liberalization of service industries.

8. Financial opening

Until the 1980s, it was the norm for countries to maintain strict controls over the

movement of capital across borders. In the 1990s, capital market integration among

countries resulted in the rapid growth of the international financial sector. Korea wanted to

develop its financial industry and took steps towards the opening of its financial market.

But it was the 1997 financial crisis that accelerated moves toward throwing open the doors

of Korea’s capital markets.



Table 4-20. FDI by industry (1990-2008) (Unit: million dollars, %)

Financial liberalization focused on two aspects. One was foreign exchange liberalization

and the other was the opening of financial markets to foreign investors and participants.

8.1 Foreign exchange liberalizationFollowing Korea’s liberation from Japanese colonial rule in 1945, the country adopted

foreign exchange controls. Korea suffered from a shortage of foreign currency like most

developing countries then. The exchange rate was fixed by agreement between Korean

and U.S. governments. All transactions using foreign currency were strictly controlled by

the government and limited only to authorized institutions.

Korea’s foreign exchange policy has varied with changing circumstances. The Korean

government fixed its exchange rate to the U.S. dollar, subject to periodical readjustments,

until 1980. After 16 years of a U.S. dollar-based currency peg, a multiple currency basket

peg system was introduced in March 1980. In the late 1980s, Korea began to record huge

trade surpluses and faced international pressure to shift toward a more flexible exchange

rate system. The Korean government introduced the managed floating exchange rate

regime in 1990. Since the won-dollar exchange rate under this system was determined in

principle by market forces, the interbank foreign exchange market developed rapidly.

Foreign exchange market liberalization coincided with capital market liberalization in the

1980s. Significant opening measures were implemented through the 1990s. In January

1992, individual foreign investors were allowed to purchase domestic equities up to 3

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1990 1995 2000 2005 2008 1990-2008

Total895

(100.0)1,385

(100.0)10,281

(100.0)9,609

(100.0)8,191

(100.0)95,993

(100.0)

Agriculture, fishing and mining1

(0.1)1

(0.1)5

(0.0)3

(0.0)1

(0.0)522

(0.5)

Manufacturing550

(61.5)669

(48.3)5,921

(57.6)2,538

(26.4)2,421

(29.6)42,447(44.2)

Service344

(38.4)715

(51.6)4,355

(42.4)7,068

(73.6)5,769

(70.4)53,024(55.2)

Electricity, gas and water supplyConstructionWholesale and retail tradeHotels and restaurantsTransportation and warehouseTelecommunicationFinancial and insuranceReal estateBusinessCulture and entertainmentPublic and other

00

796650

1741

1523

012

203108

50

3582

2223

20111

70211126

1601,901

3178575417

5051

75827

416601

3,66126991128837

6018281232

10617

3,0394938688872

1,013932

9,4731,3142,7662,724

24,7682,7975,7301,232

277


169

percent of outstanding shares, but no more than 10 percent of a company’s shares in total

were to be held by foreign investors. The government unveiled a blueprint in June 1993

for the liberalization and opening of the financial sector, aiming at substantial progress in

financial market deregulation. Further capital account liberalization became inevitable

when Korea joined the OECD in 1996. But Korea was reluctant to liberalize its capital

account for fear of a dramatic increase in foreign capital inflows seeking high interest rates

in the domestic market.

Most of the important liberalization measures were adopted under the IMF program in

the aftermath of the 1997 financial crisis. In line with the IMF recommendations, the

government agreed to undertake bold liberalization measures. The capital markets,

including short-term money markets and the real estate markets, were opened completely

to foreign investors. In December 1997, the government raised the ceiling on overall

foreign ownership of stocks to 50 percent from the previous 26 percent. The individual

foreign shareholder ceiling was raised from 7 percent to 50 percent. These ceilings were

abolished completely on May 25, 1998. All regulations on the purchases of foreign debt

securities were eliminated in December 1997. At the same time, all domestic enterprises,

regardless of size, were allowed to borrow without limits from overseas, as long as the

maturity did not exceed one year. All short-term money market instruments, including

commercial papers and trade bills, also were fully liberalized on May 25, 1998.

The new system was implemented in two stages to allow sufficient time for

improvements to be made in prudential, regulatory and accounting standards before full

liberalization. The first stage of foreign exchange liberalization was implemented on April

1, 1999. The liberalization of restrictions on capital movements was accompanied by a

relaxation of rules governing the use of foreign exchange. The Foreign Exchange

Transactions Act replaced the Foreign Exchange Management Act in April 1999. In

particular, it replaced the positive list system with a negative list system, allowing all capital

account transactions except for those expressly forbidden by law. While foreign exchange

dealings in the past were based on real demand, speculative forward transactions were

permitted.

The first stage of the new system eliminated the one-year limit on foreign commercial

loans while liberalizing various short-term capital transactions by corporations and financial

institutions. Moreover, foreign exchange dealing was opened to all eligible financial

institutions.

The main components of the first phase of the foreign exchange liberalization program

were as follows: First, regulations on capital account transactions were converted into a

negative system, lifting all restrictions except for those limited by law or decrees. Second,



regulations on foreign exchange institutions were revised. For instance, requirements for

engaging in foreign exchange activities were changed from a licensing to a registration

system, thereby liberalizing the establishment of money exchangers. Third, safeguard

measures were established in the event of a sudden increase in either capital inflows or

outflows or extremely unfavorable market conditions.

The second stage of liberalization was implemented from January 2001. The notable

features of the second phase of foreign exchange liberalization are as follows:

First, restrictions on the obligatory repatriation of external claims were eased to enhance

the efficiency of overseas economic activities by both individuals and businesses, and to

provide adequate ex post facto control measures.

Second, ceilings on overseas payments by residents were eliminated, including the 5,000

dollar per remittance ceiling on donation payments, the 10,000 dollar ceiling on overseas

travel expenses; the 50,000 and 20,000 dollar ceilings on overseas stay and education

expenses respectively; and the 1 million dollar ceiling on emigration expenses for a family

of four. Instead, ex post facto control measures were introduced, including bank

designation, automatic reporting to the National Tax Service, customs declarations, and

prior notification to the Bank of Korea of large overseas payments.

Third, regulations and restrictions in many fields were abolished or eased. The major

changes were: (1) The regulations on the purchase and sale of foreign exchanges were

eased. (2) Restrictions were ended on won-denominated deposits or trusts with less than

one-year maturity held by non-residents in domestic financial institutions. (3) The range of

allowance for overseas borrowing and won lending was expanded. (4) OTC (over-the-

counter) securities transactions between residents and non-residents were liberalized. (5)

In addition to the liberalization of the purchase of overseas real estate properties by

corporations and financial institutions for business purposes, residents were allowed to

acquire overseas real estate for the purpose of establishing schools, hospitals or places of

worship as long as the Bank of Korea were notified of the transactions and approved

them. (6) Foreign exchange businesses were expanded. (7) Methods of corporate

settlement were expanded.

In May 2006, the Korean government accelerated the implementation schedule of

foreign exchange liberalization to support its plans to create a financial hub in Korea. This

was seen as promoting the development of a more sophisticated foreign exchange market.

The balance between foreign exchange supply and demand in Korea should be

achieved by means of relaxed regulations in the medium- to long-term. In the meantime,

the need to complement and further develop the current foreign exchange liberalization

plan has been raised in response to changes in economic conditions. The foreign

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exchange liberalization plan was revised and included the following components: (1)

facilitating the won’s internationalization; (2) liberalizing foreign exchange transactions,

including overseas investment by Korean citizens; and (3) improving the micro-structure of

the foreign exchange market by easing regulations on foreign exchange positions and

further stimulating autonomous market-making by market participants.

8.3 Capital market liberalizationIn the early 1980s, the government allowed foreign banks to set up branches in Korea in

order to attract foreign capital. The policy did not change in any significant way during the

1980s. In 1992, the government allowed foreign securities firms to open branches, but not

subsidiaries, in Korea. In 1996, moves were undertaken to open the capital market wider

due to Korea joining the OECD. In order to fulfill its obligations as a member, the Korean

government announced a plan to remove gradually barriers to foreign portfolio

investments and foreign direct investments in financial services from OECD countries. The

key elements of the plan announced in September 1996 included the following: (1)

Foreign banks and securities firms from OECD countries would be permitted to establish

subsidiaries in Korea by 1998. (2) Foreign investment ceilings for investors from OECD

countries were to be completely phased out by 2000. (3) Foreign investors from OECD

countries would be allowed to establish and hold 100-percent ownership of any type of

financial institution by December 1998. (4) Foreign investment consulting firms from OECD

countries would be able to offer their services without establishing a commercial presence

in Korea.

However, the liberalization process in the banking service sector was accelerated by the

1997 financial crisis. In order to attract foreign capital inflows, Korea opened its domestic

bond market at the end of 1997 and proceeded to complete the opening of the domestic

stock and money markets.

Important steps were taken in the spring of 1998 to increase foreign access to the

financial sector in Korea. Foreign banks and securities firms were allowed to establish

subsidiaries in April 1998. In addition, 100-percent foreign ownership of Korean financial

institutions was allowed in the same month and foreign nationals were allowed to head

Korean banks starting in May 1998.

A branch of a foreign bank is treated as an independent financial institution and its

operations are similar to those of subsidiaries of foreign banks, including retail businesses.

There are no restrictions on establishing subsidiaries of foreign banks in Korea. The

establishment of a new commercial bank, whether domestic or foreign, requires only the



permission of the Financial Supervisory Commission (FSC). The minimum capital required

to establish a national commercial bank is 100 billion won, and 25 billion won for a

regional bank. In addition, foreign banks in Korea have been allowed to establish local

branches in the domestic market since March 1998. Foreign exchange positions are

regulated and the maximum allowed oversold position in the spot foreign exchange

market is 5 million dollars or 3 percent of capital, whichever is greater.

The previous limits to bank ownership of 4 percent for national banks, 8 percent for

banks converted from other financial institutions and 15 percent for regional banks were

eased by allowing the acquisition of shares in excess of these limits as long as the FSC was

notified and gave its approval. Foreign bank ownership of up to 100 percent was

permitted in April 1999, although subject to an additional review by the FSC in line with an

increase in equity stakes beyond certain predetermined thresholds. Laws were enacted to

strengthen the power of the board of directors at banks and to improve transparency in

dealings with shareholders. Foreign directors have been permitted to sit on bank boards

since May 1998. Any foreign bank that meets the same conditions as a domestic bank is

allowed to enter the market. Korea First Bank was sold in September 1999 to Newbridge

Capital, a U.S. private equity fund, which was followed by the sale of Korea Exchange

Bank to Lone Star Funds, a U.S. equity fund, in 2003. Newbridge Capital subsequently sold

Korea First Bank to Standard Chartered Bank in 2005.

Ceilings on stock investments by foreign investors were completely abolished in May

1998, with the exception of investments in state-owned enterprises. The trading of

corporate and government bonds was completely opened to foreign investors at the end of

1997. Foreign investment in bonds issued by unlisted companies was allowed in July 1998.

The market for commercial papers (CPs) and certificates of deposit (CDs) were partially

opened in February 1998 and completely opened in May 1998. Restrictions on foreign

investment in domestic securities were eliminated along with the requirement that

domestic subsidiaries of foreign companies had to obtain government approval when

bringing in more than 1 million dollars in financing from abroad. These measures led to an

almost complete opening of the Korean capital market.

8.4. Evaluation of financial openingThe opening of Korean financial markets offers both benefits and risks. On the one

hand, it has promoted increased investments and economic growth by providing financial

resources at a lower cost and has contributed to the efficiency of domestic financial

markets. On the other hand, the financial opening may result in excessive capital inflows,

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particularly of highly volatile short-term capital, which increase the risks of macroeconomic

instability or lead to a financial crisis.

Empirical results have found that the net inflow of foreign capital into Korea is positively

related to domestic investments. In particular, overseas borrowing by domestic banks and

companies has positive and significant effects on domestic investment, while the net capital

inflows of both foreign direct investment and portfolio investments exert only weak

influence on investment conditions. Foreign bank ownership helped Korean banks

achieve higher efficiency, productivity and stability, although it did not necessarily lead to

higher profitability. Foreign investments in the Korean stock market have reduced the

effects of the so-called“Korea discount” phenomenon. Foreign investments have had a

positive effect on the price/earnings ratio and price/book value ratio of Korean companies.

In addition, the influence of foreign investors has not led Korean companies to cut capital

investment spending or excessively increase dividend payments, as had been feared by

critics of the financial market opening measures.

Challenges remain in terms of finding ways to reduce the risk of a sudden reversal in

capital flows that would result in a currency crisis, while means must also be found to

strengthen the supervision of financial markets, eliminate corruption, improve transparency

with better information disclosure mechanisms, and enhance corporate governance. These

measures would help lessen the chances of new financial crises. Financial stability would

be further strengthened by regional efforts on monetary and financial cooperation, such as

the Chiang Mai Initiative, the establishment of an Asian Monetary Fund and the expansion

of an Asian bond market.

9. Conclusion

At the beginning of the 1960s, Korea was one of the poorest countries in the world.

Then its exports suddenly began to expand rapidly, immediately following the three

devaluations in 1960 and 1961, as the devaluations nearly eliminated the overvaluation of

the domestic currency. Since then the Korean economy grew and industrialized at rates

that no one thought possible. This growth experience of Korea’s has often been described

as being“export-led” and“government-led,” for the Korean government’s intervention in

the market has been heavy-handed and extensive, especially in the 1960s and 1970s.

The unexpected sharp rise in exports, especially that of labor-intensive manufacturing

products, brought about a switch in development policy from import-substitution

industrialization to export promotion in the mid-1960s. Import policy began to be

liberalized at about the same time as the balance of payments improved. Korea joined the



GATT in 1967 and began to scale down export promotion measures in the early 1970s.

After a temporarily setback under the HCI policy in the 1970s, the import liberalization

continued in the 1980s. Between 1980 and 1997, Korea pursued a comprehensive market

liberalization policy in response to changes in both the domestic economy and the

increased influence of globalization.

The 1997 financial crisis was a significant turning point that led to extensive changes in

the Korean economy and society, which still continue today. Korea pushed ahead with

further trade liberalization and economic reforms. It eliminated trade measures that were

not compatible with WTO rules and phased out the import diversification program among

others.

In view of the discussion in this chapter, the role that the government played in Korea’s

rapid growth has been somewhat different from the conventional wisdom. The sudden

jump in exports in the early 1960s led to a policy switch from import-substitution

industrialization to export promotion, not the other way round. In addition, it is misleading

to say that Korea’s rapid growth was made possible only by government intervention. The

economy’s rapid growth and industrialization could begin when two major impediments to

international trade were eliminated. The first impediment was the overvaluation of won

and it disappeared following three devaluations in the early 1960s. This enabled the

Korean economy to realize its export potential in labor-intensive manufacturing, in which it

had a natural comparative advantage. The second impediment to trade and growth was

the protectionist import policy, which was the legacy of an industrialization based on

import substitution. The depressing effects of the protectionist policy on exports were

neutralized by the export promotion policy that began in the mid-1960s. This policy, in

effect, cleared the roadblocks for Korean exports to the global market.

The Korean economy was“government-led” to the extent that government intervention

in the market was always heavy and extensive, but its rapid growth was not. In addition, it

is misleading to disregard the role of imports in Korea’s growth. Korea’s amount of imports

was bigger than exports as they played an important role in economic development, and

the nation’s trade balance was always in deficit until the late 1980s. If Korea had been

denied access to imported machinery and industrial materials, but had been forced to rely

on Korean-made machineries and intermediate inputs, Korea’s exports would never have

been competitive in the global market. In this sense, Korea’s growth was not only“export-

led” but also“import-led.”

There were numerous policies other than those on trade and exchange rates that were

as important for Korea’s economic development. Regarding international economic

cooperation, Korea made great efforts to improve economic cooperation through bilateral

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and regional agreements and providing development aid. Important bilateral agreements

strengthened Korea’s economic and trade ties with the U.S., Japan, China and the EU.

Korea is well poised to enter a new era of economic relations following the FTA

agreements with the U.S. and the EU. In terms of regional economic cooperation, Korea

played a crucial role in initiating APEC in 1989 and the ASEAN+3 (Korea, China, Japan)

following the 1997 financial crisis. In the area of development cooperation, Korea has recently

embarked on increasing its development assistance and joined the OECD DAC in 2009.

As for agricultural liberalization policies, Korea earlier imposed trade barriers on imports

and provided farm subsidies to reduce the dependence on imported foods. However,

multilateral and bilateral agreements, including the UR and the pending Korea-U.S. FTA,

have gradually reduced these barriers to a significant extent. It is advisable that Korea

should make further progress in agricultural market opening.

On the issue of the liberalization of service and financial sectors, this chapter pointed to

a lackluster performance in the service sector in Korea. But following Mode 3 liberalization

since 1990, FDI in the service sector has increased remarkably. Liberalization of foreign

exchange and financial markets began with capital market liberalization in the 1980s, and

significant opening measures followed in the 1990s. Empirical studies found that net

inflows of foreign capital to Korea were positively related to domestic investment. It is

important, however, that measures must be taken to maintain financial and

macroeconomic stability to counter the risks created by the free flow of international

capital.

Looking ahead, attention must be paid to the challenges and future policy tasks. First,

the agenda for future international economic policy appears closely related to whether

Korea will be able to make its domestic market more investment-friendly. FDI can

potentially play an important role in Korea’s economy. But actual FDI performance is still

far below its potential largely because the overall investment environment in Korea is not

friendly enough. Second, Korea needs to put more effort into accelerating the DDA

negotiations and the negotiations of other FTAs, in particular with China and Japan,

following the conclusion of the FTA negotiations with the U.S. and the EU. Korea should

not slow down its market opening but build on its free trade commitments to strengthen its

competitiveness. Third, as liberalization progresses, it will become increasingly important

to create economic, social and financial safety nets to protect the economy against adverse

side effects. This is essential to gain public support for further economic reforms. Fourth, in

order to maximize the benefits of openness, Korea needs to continue its reform efforts and

create an efficient system of consensus-building for liberalization and open market policies.



References

Bank of Korea, “The Structure of Employment and the Relationship between Employment andIndustrial Output,”Monthly Bulletin, August 2009, pp.68-95 (in Korean)

Byun, Hyung Yoon (ed.), Korean Economy, 3rd edition, Yu Poong, 1996 (in Korean).Chung, Chang Young and Tae Kyu Park, Substantial Growth of Korean Economy, Jipmoondang,

1995 (in Korean).Debaere, Peter Marcel, Hongshik Lee and Joonhyung Lee, “It Matters Where You Go: Outward

Foreign Direct Investment and Multinational Employment Growth at Home,”Journal ofDevelopment Economics, Vol. 91, No. 2, 2010, pp.301-309.

Frank Jr., Charles R., Kwang Suk Kim and Larry E. Westphal, Foreign Trade Regimes andEconomic Development: South Korea, National Bureau of Economic Research, 1975.

Hong, Wontack, Trade, Distortions and Employment Growth in Korea, Korea Development Institute, 1979.Kim, HanSung, Mee Jin Cho, Jae-Wan Cheong and Min-sung Kim, “Korea’s FTA Rules of Origin:

Review and Future Strategy,”2008.Kim, Hyunjeong, “The Relationship between Outward Direct Investment and Domestic Capital,”

Policy Analysis, Vol. 14, No. 1, Bank of Korea, 2008, pp.1-41.Kim, Kwang Suk, “Korea,”in Demetris Papageorgiu, Michael Michaely and Armeane M. Choski

(eds.), Liberalizing Foreign Trade, Basil Blackwell, 1991, pp.1-131.Kim, Kwang Suk and Michael Roemer, Growth and Structural Transformation, Studies in the

Modernization of the Republic of Korea: 1945-1975, Harvard University Press, 1979.Krueger, Anne O., The Development Role of The Foreign Sector and Aid, Korea Development Institute, 1979.Lawrence, Robert Z. and David E. Weinstein, “Trade and Growth: Import-led or Export-led?

Evidence from Japan and Korea,”NBER Working Paper, No. 7264, 1999.Lee, Hongshik, “International Outsourcing and Employment: The Case of South Korean

Manufacturing,”mimeo, 2008.______ ,“The Destination of Outward FDI and the Performance of South Korean Multinationals,”

Emerging Markets Finance and Trade, Vol. 46, No. 3, 2010, pp.59-66.Lee, Junkyu and Hongshik Lee, “Feasibility and Economic Effects of a Korea-U.S. FTA,” Policy

Analysis, 2005.Lee, Kyu Sung, Financial Crisis of Korea. Pakyoungsa, 2006 (in Korean).Lim, Sung-Hoon and Hwy-Chang Moon, “Effects of Outward Foreign Direct Investment on Home

Country Exports: The Case of Korean Firms,”Multinational Business Review, Vol. 9, No. 1,2001, pp.42-49.

Nam, Chong-Hyun, “Does Trade Expansion Still Promote Employment in Korea?”The WorldEconomy, Vol. 31, No. 6, 2008, pp.720-737.

WEF, Global Competitiveness Report 2006-2007, 2007.Westphal, Larry E. and Kwang Suk Kim, “Industrial Policy and Development in Korea,”World Bank

Staff Working Papers, No. 263, 1982.Yoo, Jungho, “How Korea’s Rapid Export Expansion Began in the 1960s: The Role of Foreign

Exchange Rate,”Working Paper 08-18, KDI School of Public Policy and Management, 2008.

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Chapter 5

TerritorialDevelopment

PolicyJung Jay Joh, Young-Pyo Kim

and Youngsun Koh


179

1. Introduction

Territorial policy has many aspects, the most important of which is coordinating

territorial development and supplying physical infrastructure. When left to the private

sector, territorial development can turn chaotic because of the difficulty in coordinating the

different interests of concerned parties, including landowners. In addition, public goods

may be supplied in insufficient amounts in the private market. Building a road, for

example, contains the elements of both coordination and public-goods problems. The

government should play an important role in overcoming these problems by drawing up

development plans, imposing regulations, or investing in infrastructure.

In Korea, territorial policy has assumed other responsibilities as well. Rapid economic

growth generated price hikes in the real estate market. Due to its inelastic supply, the price

of land in some areas (in particular the capital region) rose much faster than general

inflation, which produced windfall gains to the landowners. The government was

sometimes held directly accountable for such price hikes as it carried out public

development projects. The public concern over rising inequality and social injustice led the

government to introduce various measures to suppress price hikes and distribute windfall

gains to the general public.

Another important task for the Korean government lay in fostering a balanced regional

growth across the country. Korea’s industrialization and modernization was inevitably

accompanied by the growth of cities. Cities provide large markets for labor, intermediate

and final goods, and knowledge. Workers, firms and consumers gather to the cities to

exploit the advantages offered by large markets. As the literature on economic geography

illustrates, this agglomeration process is often self-reinforcing and results in the growth of

large cities and falling population in rural areas (Krugman, 1991; Fujita and Krugman,

2004). The government is incapable of controlling the process completely, at least in a free

market economy (Brackman, Garretsen and Schramm, 2004). Nonetheless, in Korea, the

increasing gap between urban and rural areas in terms of education, jobs and other

opportunities generated public demand for government intervention. From the early years,

the Korean government has taken various steps to promote balanced growth, especially

between the capital region and other areas.

Korea’s territorial policy over the past sixty years has carried out these responsibilities in

close relationship with the country’s economic and social policy. Between the 1960s and

the 1980s, industrial development was concentrated in specific regions and“growth

centers,” with the aim of using limited resources efficiently to support the country’s rapid

Territo

rialDevelo

pmentPolicy


economic growth.

In the 1960s, the country’s first export park was launched in Guro-dong, Seoul. At that

time, the number of businesses wanting to locate in the export park far exceeded the park’s

capacity. The population of Seoul sharply increased from 10 percent of the country’s

population in the 1960s to 18 percent in the 1970s. The sharp rise in the number of

manufacturing operations in Seoul accelerated the population migration to the capital. The

nation’s rate of urbanization, which was 37 percent in 1960, jumped to 51 percent by 1970.

The population of Seoul, which was about 1 million at the time of liberation from colonial

rule in 1945, increased to 5.5 million by 1970.

In the 1970s, the Park Chung-hee administration (1961-1979) built large-scale coastal

industrial complexes in the southeast area of the country as part of the heavy and chemical

industry (HCI) drive. In the 1980s, The Chun Doo-hwan administration (1980-1988)

supplemented and completed the Southeast Coastal Industrial Belt, while providing more

infrastructures for industrial development, expanding the Saemaul (new village) Movement

and promoting the reforestation of Korea’s mountainous landscape, which had been

planned and started by the Park administration.

In 1988, Roh Tae-woo became president in a direct popular election, which ushered in a

period of democratization. The country hosted the Olympic Games in 1988 and established

diplomatic relations with communist countries, including Russia and China. In 1994, the

country adopted full-fledged local autonomy, thus opening the way for decentralization. Many

civic organizations were created and began to raise their voices on important social issues.

In the 1990s, the Kim Young-sam (1993-1998) and the Kim Dae-jung (1998-2003)

administrations focused on improving the regional distribution of infrastructure projects. At

the same time, they adopted a more market-oriented approach through the deregulation of

land use. This was a departure from the previous territorial policy that was characterized

by a myriad of regulations and plans. Under the New Economic Five-Year Plan, for

example, the Kim Young-sam administration imposed special assessment charges for

population overcrowding, which replaced previous regulations to limit building and

facilities in order to prevent a concentration of people.

In the 2000s, the modern transportation network was expanded to make it possible to

reach any place in the country within half a day. The Roh Moo-hyun administration (2003-

2008) stressed balanced regional development, pushing ahead with plans to build ten

“innovation cities” and six“enterprise cities” around the country, while establishing the

Multifunctional Administrative City, also known as Sejong City, in South Chungcheong

Province to promote the transfer of government and public institutions out of the capital area.

The current Lee Myung-bak administration (2008-2013) is concentrating on a plan to

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make more efficient use of the country’s land to improve national competitiveness. It is

taking steps to ease regulations over the capital region to develop it into a globally

attractive world-class metropolis. In addition, the administration is making efforts to

establish a management system for green growth and to pursue the restoration of four

major rivers.

The territorial policy has helped change Korea’s physical landscape rapidly in line with

its economic growth. As a result of continuous investment in roads, railways, seaports,

airports and other infrastructure, the current level of government capital stock compares

favorably with those in major economies (Joonook Choi, Decokhyun Ryu and Hyungsoo

Park, 2005). But the government has been less successful in other missions－namely,

stabilizing real estate prices and fostering a balanced regional growth－as its efforts were

overwhelmed by market forces.

In the following sections, we will give a more detailed explanation on the development

of territorial policy during the last six decades and assess its performance. Before we

continue, however, a brief look at Korea’s physical landscape and its administrative system

is warranted.

The Korean peninsula lies on the eastern rim of the Asian landmass, with access to the

oceans as well as to the continent. It encompasses a total of 217,330 km2－almost the same

size as Britain or Romania.1 Mountainous terrain accounts for some two-thirds of the

territory like Portugal, Hungary or Ireland. The peninsula features so many scenic

mountains and rivers that Koreans have often likened their country to a beautifully

embroidered brocade. The heavily indented coastlines of the peninsula are a beautiful

sight. There are more than 3,300 islands with a circumference bigger than 300 m.

The Republic of Korea occupies the southern part of the peninsula with a land area of

100,032 km2. The capital city of Seoul is located in the northwest region of the country

(Figure 5-1). Local governments in Korea consist of two levels. The upper level comprises

Seoul and six other metropolitan cities2 and nine provinces,3 while the lower level is made

up of 230 districts.4 The capital region often refers to Seoul and its neighbors, namely

Gyeonggi Province and Incheon Metropolitan City. When we include metropolitan cities in

the surrounding provinces, the country can be divided into six broad regions. Table 5-1

Territo

rialDevelo

pmentPolicy1 This figure on land area is from World Development Indicators (http://www.worldbank.org) and refers to year 2008.

2 Busan, Daegu, Incheon, Gwangju, Daejeon and Ulsan.3 Gyeonggi, Gangwon, North and South Chungcheong, North and South Jeolla, North and South Gyeongsang and Jeju. In Figure 5-1,“buk-do”means North Province and “nam-do”means South Province.4 Districts in metropolitan cities are called gu. Those in provinces are called si (urban districts) or gun (rural districts). Subdivisionsof districts are called dong within gu and si, and eup or myeon within gun. In this chapter, such subdivisions will be referred to astownship. Townships are administrative units of districts and are not political units.


indicates that the capital region has shown the strongest population growth whereas

Gangwon and Jeolla have continuously lost their residents. In 2008, the capital region

accounted for nearly half of the total population, Gyeongsang about one quarter and

Chungcheong and Jeolla 10 percent each.

Figure 5-1. Map of the Republic of Korea

Table 5-1. Annual growth rate of population by region

(Unit: %)

Note: 1) Capital region = Seoul + Gyeonggi + Incheon.

Note: 2) Chungcheong region = North and South Chungcheong + Daejeon.

Note: 3) Jeolla region = North and South Jeolla + Gwangju.

Note: 4) Gyeongsang region = North and South Gyeongsang + Busan + Ulsan.


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Regions 1970-1980 1980-1990 1990-2000 2000-2008 1970-2008Population

share (2008)

Capital regionGangwonChungcheongJeollaGyeongsangJeju

4.0-0.50.0

-0.61.72.4

3.1-1.5-0.1-0.90.60.8

1.7-0.30.8

-0.60.60.3

1.0-0.40.3

-0.7-0.20.4

2.6 -0.7 0.3

-0.7 0.7 1.0

49.23.0

10.110.226.31.1

Total 1.7 1.2 0.9 0.3 1.1 100.0


183

2. Agrarian land reform and post-war reconstruction from1948 to the 1950s

At the time of liberation in 1945, rural society was comprised of a small number of

farmers who owned their own land and a large number of tenant farmers. The

socioeconomic situation called for agricultural land reform to end the slave-like status of

the tenant farmers.

The constitution that established the Republic of Korea in 1948 guaranteed private land

ownership and proclaimed the adoption of a capitalist economic system. Unlike the North,

which employed a policy of land confiscation and the redistribution of land, agrarian

reform in the South was carried out with compensation paid to landowners. The reform

had considerable impact in promoting the capitalist system and economic development in

the South in the 1960s and afterwards.

The reform helped the South nurture a capitalist society by giving property rights to

farmers unlike those in the North, where collective farms were the norm. The guarantee of

private farmland ownership created the conditions for the guarantee of private property

rights in other forms of economic activities (Hee-nam Jung, 1995).

The Korean War broke out two years after the establishment of the Korean government,

and destroyed much of country’s urban infrastructure and industrial facilities. More than

half of the urban infrastructure, including roads, railways, bridges and power supply

facilities, were damaged. An estimated 20 percent out of 3.28 million houses were

destroyed. Large cities, including Seoul, Incheon and Daejeon, suffered severe damage. It

is estimated that the number of those who were displaced came to more than 2 million.

Most of them resettled in the cities. This placed a new burden on the cities at a time of

rapid urbanization.

The Rhee Syngman administration relied on“land readjustment projects” for

reconstruction activities. Under this system, all owners of the land in a certain area first

needed to agree in redeveloping their property as a whole. After the redevelopment, they

were allocated new lots. A fixed portion of each owner’s land was taken by the developer.

The developer, public or private, then sold it in order to cover the cost of development.

The program had the merit of reducing the government’s fiscal burden, as urban

development could be carried out with the costs mainly borne by landowners. The land

readjustment projects affected a total of 16.5 km2 in 23 cities, including Seoul, Busan,

Daegu and Incheon, from 1952 to 1959, with main focus on postwar rehabilitation and the

construction of new roads in urban areas.

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3. Development of industrial parks and population migrationto Seoul in the 1960s

The development of industrial parks in the country started in the early 1960s. In January

1962, the government announced the first of the Five-Year Economic Development Plans.

Shortly after, it proclaimed the Urban Planning Act, which replaced the Urban District Plan

Ordinance issued during the colonial period. Although the act was not aimed at the

development of industrial parks, it included a series of programs for their formation within

the scope of urban planning, and adopted land readjustment projects in support of urban

planning. Therefore, most of the industrial parks in the 1960s were created under the

procedures of the Urban Planning Act.

The government adopted a strategy of concentrating industries in regions with high

growth potential, rather than dispersing investments nationwide, in consideration of the

country’s limited financial resources. The regions selected for development included the

Seoul-Incheon area due to the existing infrastructure and availability of urban services;

Ulsan, with its advantageous location and port; and the Taebaek, Yeongsan River area for

agriculture and resource development. The plan for the Seoul-Incheon area was

implemented in the 1960s with the establishment of an export park. The Ulsan Industrial

Park, designated in 1966, was the starting point for the Southeast Coastal Heavy-Chemical

Industry Belt that would be established in the 1970s and 1980s. The Mt. Taebaek area was

designated for the development of raw materials, such as coal and cement. Cement would

play an important role in the Saemaul Movement later. Coal made possible the

reforestation of mountains as it replaced wood as fuel for households.

In the early 1960s, cheap labor was nearly the country’s sole development resource. The

government’s industrial policy was focused on the production of basic materials, such as

fertilizer, cement and coal, and the development of labor-intensive export industries.

Consequently, industrial parks were concentrated in Seoul, which had a sufficiently large

labor force and other resources. Under the Export Industrial Park Formation Act of 1964,

the first Korea Export Industrial Park was established in Guro-dong, Seoul. The site had

several advantages, including a sufficient workforce and easy accessibility to transport,

electricity and water. Work on the 114-acre site began in December 1964 and was

completed in February 1966.

The park attracted much attention and the site could not accommodate all the

businesses wishing to locate there. The government designated a second 98-acre and a

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third 294-acre park and planned for the development of additional sites in Incheon, near

Seoul.

The success of the first Korea Export Industrial Park caused a boom in the creation of

industrial parks by local governments. Nevertheless, the export industry parks located in

the heart of the capital boasted considerable advantages that other industrial parks outside

Seoul could not copy. The importance of Seoul to the nation’s manufacturing sector

increased. The national share of secondary industries (manufacturing and mining)

operating in Seoul rose from 23 percent in 1960 to 31 percent in 1970, with a

corresponding fall for other cities and provinces.

The country’s industrial structure changed greatly under the Five-Year Plans. The

primary industry’s share of GDP dropped to 29 percent by 1972 from 37 percent in 1962,

while the share of secondary industry rose from 16 percent to 24 percent in the same

period. This caused changes in the employment structure. The percentage of workers in

the primary industries fell from 63 percent to 51 percent between 1962 and 1972, while

those employed in secondary industries increased from 9 percent to 14 percent.

Industrialization promoted urbanization. The nation’s urbanization rate rose from 37

percent in 1960 to 51 percent a decade later. The population of Seoul increased from 1

million to 5.54 million between 1945 and 1970. This created a demand for large-scale

urban development projects. The government enacted the Land Readjustment Project Act

in August 1966. Land readjustment projects involved the building of large housing estates

and urban infrastructure, including roads, and were prevalent in the 1970s and 1980s.

Seoul’s modern district of Gangnam, south of Han River, was a prime example of these

projects.

Railroads functioned as an engine for the country’s economy by transporting an

increasing amount of everyday necessities and industrial supplies, such as fertilizer, cement

and grains. The amount of goods to be transported rose sharply as a result of the increase

in industrial production from the mid-1960s.

Railroads accounted for 84 percent of the nation’s transportation capacity in 1962,

compared with 10 percent for highways and 6 percent for air and maritime services. The

railroads were placed under severe strain in transporting goods, when the economy

achieved a growth rate of 19 percent in 1966.

By 1969, railroads still accounted for 72 percent of the nation’s transport, while the share

for highways and maritime and air services were gradually increasing to 13 percent and 15

percent, respectively.

During the first Five-Year Plan (1962-1966), projects were undertaken to pave the roads

in large cities and improve existing provincial roads, although the focus continued to be on

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constructing railroads. The building of the country’s first toll expressway was the brainchild

of President Park Chung-hee. It became the backbone for the country’s network of

highways. The Seoul-Incheon Expressway, opened in December 1968, was the country’s

first and contributed greatly to the increased transportation of goods around the capital

region. The 428 km-long Seoul-Busan Expressway was completed in July 1970 after only

two years and five months of construction.

4. Development corridors and the Saemaul Movement from1970 to 1987

4.1 Development of the Southeast Coastal Industrial BeltThe opening of the expressway linking the capital with the port city of Busan formed

the backbone for a development plan in the 1970s based on a Seoul-Southeast corridor.

The creation of the Southeast Coastal Industrial Belt, centered around Busan port, reflected

a strategy of developing specific regions for different purposes, taking into account their

access to resources and geographical advantages. Such a strategy was in step with the

“growth pole theory” and“the core-periphery theory” favored in the 1950s (Myrdal, 1957).

Under the Local Industry Development Act enacted in 1970, the country established a

system of providing state support for industrial parks, with 12 cities, including Seoul,

establishing local industrial parks in the early 1970s. These parks helped support the

growth of SMEs. But there were limits to how much light industry could contribute to the

country’s economic development.

As a result, President Park Chung-hee outlined his vision in his New Year press

conference in 1973 of developing HCIs as a top economic priority. In February 1973, the

government launched the HCI Drive Committee, comprised of the relevant ministers and

experts and headed by the prime minister. The HCI Planning Group, headed by the

president’s chief economic advisor, was created to serve as a working-level unit to provide

support for the Committee. The main function of the Committee was making final

decisions on the policies concerning HCIs, including a comprehensive development plan,

location and site plans, industry sector promotion plans, and industrial assistance

programs.

In February 1974, the government established the Industrial Complex Development

Corporation, charged with the construction of the industrial sites. The government invested

100 billion won in capital for the Corporation, which had special privileges, including tax

exemptions, the right to appropriate land, and the right to borrow from overseas with the

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approval of the construction minister.

Following a systemic review of the plan for the HCI drive, the government commenced

work on the giant coastal industrial complexes. These complexes, which would be larger

than the industrial parks in the country’s interior, were based on the concept they would

evolve into new industrial cities.

Three factors governed the creation and operation of the complexes. One was that the

complexes would promote economies of scale when it came to the production of iron and

steel, oil refining and industries based on non-ferrous metal manufacturing. Second, the

complexes would promote the efficient use of natural resources since there were only a

limited number of candidate sites able to meet the requirements for port facilities, water,

and proximity to nearby cities. Third, the complexes were meant to promote the growth of

new industrial cities. Changwon was developed as a completely new city, while Yeocheon

was developed as a satellite city close to an industrial park. The small towns of Ulsan and

Pohang grew into industrial cities.

Most of the industrial complexes were located along the southeast coast, including

Pohang, Ulsan, Onsan, Okpo, Jukdo and Changwon, while a few others were built in the

rest of the country, including Yeocheon at Gwangyang Bay on the southern coast and

Bukpyeong on the east coast.

These areas had previously been regarded as remote rural areas, but grew rapidly

between the mid-1970s and mid-1980s due to the HCI program. During the Chun Doo-

hwan administration, POSCO Gwangyang Steelworks and Daebul Industrial Park in Mokpo

were added to the Southeast Coastal Industrial Belt. Their inclusion was partly due to

political considerations to appease the Jeolla region, which had opposed the Chun

administration with an urban uprising in 1980, and partly out of a perceived need to create

a counter-magnet to the capital region.

Table 5-2. Designation of industrial parks (1974-1984)

Source: Yeong-hwi Yu (1998).

In the case of POSCO, its original steelworks in Pohang had reached full production

capacity and it needed to build a new steel plant. Asan Bay and Gwangyang Bay were

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Number of parks designatedSize (km2)

Total land size Size of industrial parks

Coastal industrial complexes 14 1,344.3 315.0

Interior industrial parks 15 27.7 16.8


considered as candidate sites. But it was pointed out that a steelworks in Asan Bay would

be close to Seoul and would contribute to the problem of overpopulation in the capital

region, while a steelworks in Gwangyang would contribute to the industrialization of

Jeolla, which was less developed. After debates among the relevant ministers and

interested parties, President Chun decided that Gwangyang Bay would represent the

westward extension of the Southeast Coastal Industrial Belt.

Meanwhile, the development of industrial parks in interior urban areas continued as in

the 1960s, but they were less important than the coastal industrial complexes in terms of

land size, the amount of attention they received by the government, and their participation

in the development boom.

The number of interior industrial parks grew to 15, covering a total area of 16.8 km2 in

the decade following the Industrial Park Development Promotion Act. But their size was

no more than 5 percent of that of the 14 coastal areas, which covered a total of 315.0 km2.

South Gyeongsang Province emerged as a main industrial region as a result of the

coastal industrial complex policy. Between 1966 and 1980, national employment in the

mining and manufacturing sectors increased by 9 percent. Only two provinces, Gyeonggi

and South Gyeongsang, recorded faster growth rates than this, while the rate for North

Gyeongsang was on a par with the national average. The number of workers in the mining

and manufacturing grew by 15 percent in South Gyeongsang compared to 17 percent for

Gyeonggi during this period. But between 1975 and 1980, the manufacturing job growth

rate was slightly higher in South Gyeongsang than in Gyeonggi.

Table 5-3. Changes in mining and manufacturing employment by region.

(Unit: %)


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Share Rate of change

1966 1970 1975 1980 1966-1980 1966-1970 1970-1975 1975-1980

Seoul

Busan

Gyeonggi

Gangwon

North Chungcheong

South Chungcheong

North Jeolla

South Jeolla

North Gyeongsang

South Gyeongsang

Jeju

28.8

16.3

8.7

7.3

3.2

6.2

4.8

6.3

12.6

5.2

0.6

31.4

14.7

11.9

5.2

2.7

5.7

4.0

5.6

11.4

6.7

0.6

28.9

16.7

17.2

4.1

2.3

4.3

2.8

3.8

11.4

8.2

0.3

21.2

15.2

23.1

3.1

2.1

4.5

2.7

3.6

13.0

11.1

0.2

6.6

8.4

16.8

2.6

5.8

6.6

4.6

4.8

9.2

15.0

0.6

12.9

7.5

19.3

1.8

5.8

8.2

5.5

7.4

7.6

17.7

7.6

8.1

12.7

18.3

4.8

6.2

3.6

2.3

1.6

9.9

14.3

-3.3

0.5

5.0

13.4

1.1

5.5

8.2

6.0

5.8

9.8

13.5

- 0.8

Nationwide 100.0 100.0 100.0 100.0 9.0 10.4 9.9 6.9


189

4.2 Attempts to curb growth in the capital regionThe population of Seoul grew 5.5-fold over 25 years, from 1 million to 5.54 million

between 1945 and 1970. The rapid population increase created social problems as the

reconstruction of housing, water supplies, sewage and roads in Seoul that were damaged

during the Korean War had not been fully completed yet. In addition, the concentration of

population and central administrative functions in Seoul was regarded as a serious security

weakness due to the capital’s proximity to North Korea.

In 1964, the government adopted measures to curb overpopulation in Seoul. However,

the measures were not effective due to the policy of encouraging industrial investments,

which led to Seoul’s continued growth.

Nonetheless, the government’s basic policy was still to control the concentration of

population and industry in Seoul by promoting economic and government activities

elsewhere in the country. Due to national security concerns, the government in 1970

created an urban plan that would curb population growth north of the Han River, an area

that was more vulnerable to an attack from the North. Since the concentration of the

population in Seoul created a serious problem for national defense, the issue received top

priority. In 1971, a system of Restricted Development Zones, or“greenbelts,” was adopted

under the Urban Planning Act, and the first such zones were designated on the outskirts of

the capital. Greenbelts were also created for 14 cities between 1971 and 1977.

Under the Distribution of Industry Act in 1977, measures were taken to encourage

businesses to set up operations outside Seoul. This included building the new Banwol

Industrial City near Seoul. However, only a small percentage of the factories in Seoul

relocated there.

In the early 1980s, the government enacted the Capital Region Management Planning

Act (1982) in another attempt to control the excessive concentration of population and

industries in the capital region. A Basic Plan for Management of the Capital Region was

unveiled in 1984 to cover urban development over the next 12 years. While the policy

measures governing growth in the capital region in the 1970s strongly smacked of direct

government intervention, those in the 1980s relied more on relevant legal and institutional

frameworks to affect changes.

In the 1980s, the measures to curb population and industrial growth in the capital region

included expanding the scope of regulations over Incheon and Gyeonggi. It was

recommended that industrial plants, universities and public institutions in the capital region

be relocated to other areas of the country. Businesses willing to move from the capital

region were given tax exemptions or tax cuts starting in the late 1970s.

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These policy measures influenced additional measures taken later in the 1990s. But

problems resulting from overpopulation in the capital region continued to grow, including

environmental pollution, deterioration in urban living conditions, and a growing gap

between rich and poor. As a result, the government’s emphasis shifted to promoting

balanced regional development among the regions rather than concentrating on efforts to

tackle problems within the capital region.

4.3 Infrastructure expansionThe building of ports was seen as crucial in providing the physical infrastructure

necessary for industry. Under the third Five-Year Plan (1972-1976), construction was begun

of second-generation ports to handle bulk cargo, such as coal. The country needed large

ports capable of handling large imports of raw materials needed for the nation’s economic

development. The development of port facilities also helped support the establishment of

the industrial parks.

The country’s transportation needs previously depended mainly on the railroads. The

successful completion of the first three Five-Year Plans (1962-1976) led to the development

of alternative transportation means, including expressways. The different transportation

systems competed with, and complemented, each other. By 1976, the railroads accounted

for 51 percent of the nation’s transport usage, down from 87 percent in 1962, while that for

roads grew to 22 percent from 9 percent.

In the latter half of the 1970s, the country changed the focus of its road transportation

policy due to new industrial demands. Under the second and third Five-Year Plans, the

primary attention had been on the construction of expressways. With the fourth Five-Year

Plan (1977-1981), the government concentrated more on the construction of industrial

roads to support the development of HCIs. Expressway construction was focused on road

projects that would link the industrial parks to the national expressway network.

In the early 1980s, the focus of expressway construction projects shifted to promoting

balanced development among the regions. The two-lane Daejeon-Mokpo Expressway was

expanded to four lanes to meet a sharp increase in traffic volume. Expressway sections

suffering from chronic congestion were also expanded, including those on the Seoul-

Incheon, Seoul-Busan, Daegu-Masan and South Coast Expressways. These road projects

helped develop backward areas. The percentage of paved roads, which was still only 34

percent of total roads at the end of 1981, jumped to 54 percent in 1986.

From the 1970s to the early 1980s, multi-purpose dams were built across the country,5

which increased water supplies needed by a growing population and industry. They

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marked a turning point in tapping water resources on the lower reaches of the rivers.

The concept of water resources development, once confined to the development of

small-scale irrigation facilities, expanded to cover the comprehensive development of

whole river basins, both for water resource management and flood control. The dams also

provided the basic infrastructure for further economic development.

4.4 SaemaulMovement and reforestationThe country posted record growth under the Five-Year Plans, but economic

development, which centered on industrialization, deepened the gap between urban and

rural areas. Many people left the rural areas to start new lives in the cities. The growing

discontent of the farmers became a political issue for the government. Unemployment and

poverty emerged as social issues. The farming sector was faced with a labor shortage,

which caused a rise in agricultural production costs and threatened the future of the sector.

It was necessary to improve the income of farm households and encourage people to

remain in rural areas by offering more employment opportunities. These challenges

required drastic measures to reverse the problems caused by unbalanced growth resulting

from rapid industrialization. The Saemaul Movement was thus started with the aim to

improve rural living conditions in such areas as roads, housing, water supply, sewage and

irrigation.

These government efforts included developing new varieties of rice as part of the Green

Revolution and carrying out large-scale reclamation projects to create farmland. The

Saemaul Movement, which also served as a national morale-boosting movement, sought to

reinvigorate the country. It stressed the principles of self-help, self-reliance and

cooperation and the movement was later adopted by factories in urban areas.

The Saemaul Movement was launched in 1971 with the aim of increasing the income of

the rural population by expanding various forms of economic activity. In the beginning,

the Ministry of Internal Affairs played a leading role in the movement, providing cement

supplies, for example, through the local administrative network. More ministries later

became involved in carrying out Movement-related programs, such as helping rural

households find alternative sources of work in the off-season, forming cooperatives for the

production of rice and barley, supplying electricity to rural areas, and building factories.

Central and local organizations, now known as the National Council of the Saemaul

Movement in Korea, were established to coordinate Saemaul activities carried out by the

5 On the Soyang, Andong, Daecheong, Chungju, Hapcheon, Juam and Imha Rivers, and the Nakdong River Estuary.

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ministries. The Saemaul Movement had three early objectives in promoting the

modernization of rural areas, which was summed up in the“three liberations”: liberation

from jigae, the A-shaped back-pack frame used to carry heavy loads (meaning

improvements in farming tools and transport); liberation from candlelight (meaning power

supplies); and liberation from chogajip, or straw-roofed houses (meaning improvements in

living conditions). Soon, the movement came to tap the community spirit among rural

villagers to promote development practices in various areas, including dairy farming,

fishing and local processing industries, in addition to farming.

For a time in the 1980s, farm household incomes were higher than those for urban

households, but the situation soon reversed again. There were increasing calls that a new

development strategy should be adopted to extend beyond the limits of an agriculture-

centered, village-level rural development program. It was agreed that the development

program should be carried out on a more comprehensive level to embrace all phases of

daily life, while bringing rural centers and outlying districts closer together. In 1982, the

Ministry of Internal Affairs adopted a new policy concept called Rural Settlement Area

Development to promote comprehensive development projects. Five urban and rural

districts (si and gun) were selected as a pilot project in 1985. The development plan,

however, was found to require too large a budget and thus it was replaced by township

(myeon) rural settlement area development projects under the Rural Area Rehabilitation

Act.

Figure 5-2. Changes in farm household income (1971-1982)

Note: Relative level = (farm household income / urban worker household income)х100.

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The industrial parks development boom in the 1980s created rural industrial parks

whose main purpose was to help rural households gain income from sources other than

farming. Previously, there were programs to create sideline jobs for farm households, such

as building Saemaul-related facilities. But they had many problems since they were carried

out in an uncoordinated manner and were not closely linked with the existing

infrastructure. In response, the government established small- and medium-sized industrial

parks in rural areas, offering various incentives, such as offering land at cheap prices, tax

and financial benefits, and streamlining approval procedures to attract businesses.

The government launched the Planning Group for the Development of Non-Farming

Income Sources in 1981 and enacted the Rural Area Income Source Development

Promotion Act in 1983. As a result, work on the development of rural industrial parks was

started, with the selection of model projects in 1984. The number of rural industrial parks

reached a peak between 1987 and 1990 before starting to decline. In the aftermath of the

1997 financial crisis, many businesses in rural industrial parks collapsed, leading to criticism

that the parks had housed many unprofitable and marginal businesses.

Reforestation efforts were made into a national campaign and all relevant administrative

units were mobilized as in the Saemaul Movement. Back in the 1940s and 1950s, wood

was used as the main household fuel and that was the biggest factor causing deforestation.

The problems associated with the destruction of forests would not be solved until the

1960s when fossil fuels gradually replaced wood. Forest acreage started to expand and the

number of trees in the mountains increased rapidly from 1973, reversing a decline that had

started in 1927. Slash-and-burn farming was stopped as the government offered financial

incentives to find alternative ways of making a living. Continuing demand for wood could

be met with imports, thanks to the liberalization of the international timber trade. In this

respect, it can be said the nation’s economic development basically stopped the

devastation of forests. Lester R. Brown, the founder and president of the Earth Policy

Institute in the U.S. said, “South Korea is in many ways a reforestation model for the rest of

the world (Brown, 2006).”

4.5 Promotion of large-scale reclamation projectsReclaimed land emerged as an alternative to the loss of farmland caused by the growth

of cities and industry. Land reclamation was seen as achieving several objectives. It met the

demand for more urban and industrial land, it created good quality agricultural land as the

country sought to achieve self-sufficiency in food production, it contributed to the

formation of the coastal industrial parks and port facilities, and it secured water resources

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for agricultural, industrial and household uses by forming reservoirs of desalinated water.

Under the Public Waters Reclamation Act of 1962, large-scale reclamation projects were

supervised by the Ministry of Construction, with the Ministry of Agriculture and Forestry

being responsible for developing farmland on the reclaimed land. Government and

private-sector projects created a total of 1,136 districts of reclamation land in the 1960s and

233 districts in the 1970s. But while the number of government reclamation projects fell in

the 1970s as more attention was paid to the building of the HCI complexes, private

businesses continued to carry out reclamation projects for the creation of farmland. More

reclamation projects were pursued in the 1980s. The Saemangeum Reclamation Project, for

example, was established toward the end of the Chun Doo-hwan administration with the

intention to promote the economic development of North Jeolla Province, a stronghold of

the political opposition.

The current focus is on completing previously planned reclamation projects. Since 1945,

the total area created by reclamation projects has amounted to 82,250 ha, while another

52,528 ha of land is in the process of being formed.

Table 5- 4. Reclamation projects (1946-2007)

(Unit: thousand ha)

Source: KRIHS (2008); Ministry of Food, Agriculture, Forestry and Fisheries (2008).

But there was growing controversy over the reclamation projects in the 1990s. Critics

said such projects were becoming economically inefficient since there was no need for

more farmland due to the surplus in the rice supply. As a result, reclamation projects in

Donga District in Gimpo and the Sihwa District in Hwaseong, both in Gyeonggi, were

switched from farmland to industrial use. In the case of the Donga Reclamation Site in

Gimpo, which was completed in 1991, it took a total of 10 years to decide how to use the

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Total Government-run projects Privately-run projects

Number ofdistricts

Land SizeNumber of

districtsLand Size

Number ofdistricts

Land Size

1946-1960 177 6 39 4 138 3

1961-1969 1,136 17 58 7 1,078 10

1970-1979 233 19 50 8 183 11

1980-1989 63 9 25 5 38 4

1990-1997 16 22 11 9 5 13

1998-2007 3 9 3 8 - -

Total 1,628 82 186 41 1,442 41


195

reclaimed land, which was finally set aside as a site for a thermal power plant and a part of

the Incheon Free Economic Zone. For the Sihwa project, completed in 1994, the

authorities abandoned plans for it to become farmland and a freshwater lake because of

the deterioration in the water quality after the construction of a tide embankment. Instead,

it will now be the site of the Sihwa Multi-Techno Valley, with the goal of creating a Green

City and a nearby international theme park. A tidal power plant, said to be the world’s

largest, is also nearing completion.

The Saemangeum reclamation project in North Jeolla has taken a similar path. The

project, which began in 1991, was originally intended to create 40,000 ha of farmland and

develop agricultural water resources, after the completion of a 33.4 km-long tidal

embankment by 2004. In 2009, it was decided that the plan should be changed in

response to many years of controversy that the project was destroying the ecological

system of the wetlands and was no longer economically feasible for use as farmland.

Under the new plan, the portion of the reclaimed land designated as farmland will be

reduced from 70 percent to 30 percent, while that for industrial and tourism use will be

expanded drastically. The government hopes to turn the area into a technology and

entertainment hub, the“City of Neo Civitas.” But its success as a world-class“luxury brand

composite city” will depend on whether it can remain a clean water area. It will be

necessary to take measures that will prevent the deterioration of water quality resulting

from the reclamation dikes, which earlier caused the environmental problems at Sihwa

Lake.

5. The pursuit of a better quality of life and globalization from1988 to the 1990s

5.1 Improvements in living conditionsPeople sought an improvement in the quality of life as incomes rose. In addition, a

series of pollution accidents in the 1990s prompted more attention being paid to

environmental issues. The importance of environmental protection was underscored by

the release of tons of phenol into the Nakdong River in 1991; the contamination of the

upper reaches of the Nakdong River on two occasions in 1994; the degradation of Sihwa

Lake due to reclamation; and an oil spill from a tanker, the Sea Prince, off the southern

coast in 1995.

The environmental challenges confronting the country had gradually increased with the

development of HCIs, the concentration of population in the cities, a rapid rise in the

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number of cars starting in the 1980s, and the emergence of a consumption culture based

on affluent lifestyles in the 1990s. However, the country has not kept up with these

economic developments in terms of establishing basic environmental facilities, such as

waste dump sites, ultramodern waste incinerators, or sewage treatment plants. Problems

associated with industrial waste and wastewater frequently became political and social

issues rather than just environmental management problems. By the 1990s, the country’s

environmental conditions had deteriorated to a level much worse than that in many

advanced countries.

In the 1990s, the government decided to adopt means to promote a more environment-

friendly economic development policy, including expanding waste treatment facilities.

Economic regulations were tightened to reduce pollution and new production processes

were installed to restrict the emission of pollutants. New environmental fees were

introduced since a system of special assessment charges on water and air pollutants

introduced in 1983 had not been tough enough to force the adoption of better

environmental practices by industry and consumers. The government, starting in 1992,

imposed additional environment charges on vehicle owners and polluting industries, with

the fees collected being used for investments in environmental protection. These measures

helped raise the public’s consciousness about environmental problems. But the fees

created controversy since the government held consumers and distributors partly

responsible for environmental damage, which was in contrast to the previous attitude that

put the burden mainly on industries to reduce pollution.

A waste-related deposit-refund system (1991) and a waste disposal charge system (1994)

were adopted to encourage the recycling of waste and more environment-friendly

consumption patterns. An E-Mark system was introduced to alert consumers to

environment-friendly products, along with a pay-per-bag trash system in 1995.

The waste disposal charges amounted to a type of environmental tax. Under the waste-

related deposit-refund system, for example, a company had to deposit an amount of

money to ensure that it dealt with harmful waste or substances that it had produced. The

pay-per-bag trash system that was imposed on individuals is credited with decisively

contributing to waste reduction.

As a result of these efforts, key environmental indices showed a considerable

improvement in the 1990s. The total amount of emitted pollutants in the air fell due to the

increased availability of less-polluting fuels and vehicles despite a rise in the annual

consumption of fuels. Solid waste showed a similar trend. With the adoption of the pay-

per-bag trash system, the per-capita amount of trash disposed daily was reduced to about 1

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kg, while there was a drastic increase in the rate of waste recycling and a sharp decrease in

the amount of waste stored underground or incinerated.

5.2 Housing construction projects and the public stewardship land policyIn August 1988, the Roh Tae-woo administration (1988-1993) announced comprehensive

real estate measures to reduce land speculation deals and increase the housing supply.

Under three laws enacted in December 1989, which reflected the concept of“public

stewardship toward land policy,” the government placed a limit on the ownership of

housing lots, imposed a tax on excessive profits earned from land sales, and introduced

development charges. In 1989, a composite land tax was adopted. Although these laws

were later ruled unconstitutional by the Constitutional Court, they played a considerable

role in suppressing real estate speculation and stabilizing the land and housing markets. In

addition, under the newly enacted Act on Posted Land Prices and Land Assessment, an

official system of posting land prices was introduced, with the standard land price serving

as the basis for calculating land taxes and special assessments (Young-pyo Kim et. al, 1991;

Mi-ock Chae, 1995).

On April 13, 1990, the government announced measures for controlling real estate

speculation and made it obligatory to register the ownership of all real estate with the

authorities. Under the measures, the categories of land subject to mandatory reporting, and

whose sale needed official approval, was expanded. More rigorous criteria were adopted

for real estate owned by firms for non-business-related purposes to discourage companies

from owning unnecessarily large real estate holdings.

While the government tried to suppress speculative demand for land, it sought to

increase the supply of land for new urban projects as it began to build 2 million housing

units in 1989 and develop five new cities in 1992. Such radical measures contributed

greatly to the stabilization of the real estate market in the early 1990s, although it caused

adverse side effects such as a shortage of construction materials.

At the start of the Roh Tae-woo administration, demand for housing was increasing, but

the supply of new housing remained at a paltry 200,000 houses a year due to insufficient

investments, which resulted in a housing shortage (Table 5-5). The housing supply ratio,

which stood at 71.2 percent in 1980, dropped to 69.2 percent by 1987, and house prices,

particularly those for apartments in the Seoul region, jumped dramatically. The soaring

prices for homes and jeonse (housing lease deposits) caused by the economic boom

added to the burden of housing costs for low-income families.

The housing shortage became a major problem for the government due to political

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Table 5-5. Housing stock and housing supply ratio (1980-2006)

Note: Housing supply ratio = (number of housings / number of households)х100.


protests about soaring housing prices. In May 1988, judging that only a drastic increase in

the supply of houses could solve the problem, the government announced a plan for the

construction of 2 million housing units over the next five years, which became a significant

turning point in the country’s housing policy.

The plan differed from previous housing policies in that homes were allocated on the

basis of a family’s income and earnings potential. Housing speculation was sharply

reduced by giving housing priority to those who did not own a home, while the homes

could not be resold within a specified period of time. The imbalance in housing

distribution was remedied to a certain extent. It also provided various ownership

incentives, such as financing support and tax benefits, to low income households.

The number of new housing units rose by 412,000 in 1988, 462,000 in 1989 and by

750,000 in 1990, compared to the annual average increase of 220,000 between 1980 and

1987. The housing plan was completed with the construction of 2.14 million houses (33

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Housing stock New houses built

(1,000 units)

Housing supply ratio

(%)(1,000 units) (Growth, %)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

5,319

5,460

5,640

5,852

6,061

6,104

6,303

6,450

6,670

7,032

7,357

7,853

8,631

8,798

9,133

9,570

10,113

10,627

10,867

11,181

11,472

11,892

12,358

13,669

12,988

13,223

13,534

2.1

2.7

3.3

3.8

3.6

0.7

3.3

2.3

3.4

5.4

4.6

6.7

9.9

1.9

3.8

4.8

5.7

5.1

2.3

2.9

2.6

3.7

3.9

2.5

2.5

1.8

2.4

212

150

191

226

222

227

288

244

412

462

750

613

575

695

623

619

592

596

306

405

433

530

667

585

646

464

470

71.2

70.5

70.2

70.2

70.1

69.8

69.7

69.2

69.4

70.9

72.4

74.2

76.0

79.1

83.5

86.0

89.2

92.0

92.4

93.3

96.2

98.3

100.6

101.2

102.2

105.9

107.1


199

percent of the total housing stock of 6.45 million as of 1987) by August 1991, which was

ahead of schedule. The government constructed 780,000 apartments as called for under

the plan, and the private sector built 1,430,000 units, which was in excess of the original

target. Private builders were given incentives to participate in the apartment construction

plan, such as replacing a ceiling on the sales price of apartments with a cost-peg system;

relaxing regulations on floor space and building-to-land ratios; and tax and financial

benefits. The housing supply ratio rose drastically. The country maintained a robust supply

of new housing in the following years.

Under the New Five-Year Economic Plan (1993-1997), the Kim Young-sam

administration refrained from state intervention in the market, while providing support to

the private sector for reviving economic growth. Its policy objectives were an increase in

the housing supply, the stabilization of housing prices, the provision of affordable housing

to low-income families, and improving the quality of existing homes.

The Five-Year Plan’s support measures for the private sector included the streamlining of

administrative procedures (particularly for building authorization and approval), relaxation

of regulations concerning building refurbishment or remodeling, and the development of

private rental businesses. It also included measures for the reduction of government

intervention in the market.

In sum, a total of 3.12 million housing units were built, compared to a target of 2.85

million, since the early 1990s. The new housing units included 1.16 million in the public

sector and 1.96 million in the private sector. By region, 1.37 million, or 44 percent, were

located in the capital region and 1.75 million, or 56 percent, in other areas. The housing

supply ratio rose from 69.8 percent in 1985 to 86.0 percent in 1995 and 92.0 percent in

1997.

5.3 Improving regional competitiveness in preparation for globalizationFrom the mid-1990s, there was strong push for deregulation so that the private sector

would take the lead in economic development. The private sector assumed a greater role

in land development, which had once been the preserve of the state sector. Individuals

were allowed to carry out land development projects in“semi-agricultural areas” as a result

of changes to the national land use plan. In August 1994, the Act on Attracting Private

Capital for Infrastructure Facilities was enacted to promote the financing by private capital

of infrastructure investment projects. Consideration was given to selecting special

economic zones to attract foreign capital. The Act on Foreigners’Land Acquisition and

Management was enacted to help foreign investors acquire domestic land easily. The

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Special Act on the Relaxation of Regulations over Business Activities was enacted to ease

rules concerning land use associated with business activities.

Agricultural regulations were also relaxed in connection with the need to improve the

competitiveness of the domestic agricultural sector in response to the opening of the local

agricultural market with the signing of the Uruguay Round agreement. Under the Farmland

Act, amended in January 1996, the ceiling on the ownership of farmland of 7.35 acres was

abolished in“agriculture promotion areas.” The ceiling on farmland ownership outside the

agriculture promotion area was raised to 12.25 acres. The longstanding principle that

farmland should belong to working farmers, together with the farmland ownership ceiling

that had been maintained since 1948, were relaxed or abolished, indicating a switch in

emphasis in the agricultural policy from equality to production efficiency.

The Kim Young-sam administration put stress on the establishment of large-scale

integrated local economic structures to promote balanced regional development while

strengthening local competitiveness in a globalized economy. The strategy focused on

eight select areas.6 This development approach was an extension of the regional growth

center strategy, but it encompassed a wider range of large provincial cities, industrial

complexes and outlying areas with a strong capacity for growth, rather than focusing on

the role of a single city as practiced under the regional growth center strategy.

One of the representative regional development projects promoted in the 1990s was the

West Coast Development Project. A relatively backward area in terms of production and

household income, the west coast area, comprising South Chungcheong and North and

South Jeolla, was a major target for development in terms of achieving balanced regional

development. The development project included the creation of the Gunsan Industrial

Park (which would serve as a launch pad for trade with China), the Gunsan-Janghang

Industrial Complex, and the construction of the 352 km-long West Coast Expressway.

Policy measures taken for the capital region in the 1990s were focused on increasing

national competitiveness in response to globalization. This was different from the regional

development policies adopted in the 1980s, which stressed balanced national

development. The new government believed balanced development should not be

pursued at the expense of market forces since this could result in a distorted economic

structure. The New Five-Year Economy Plan reduced the number of land use zones from

five to three for more flexible land use, adopted special assessment charges levied on

activities causing overpopulation instead of relying on regulations relating to physical200THEKOREANECONOMY

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6 Including Asan Bay, Daejeon-Cheongju, Jeonju-Gunsan-Janghang, Gwangju-Mokpo, Gwangyang-Jinju and a new industrialcomplex on the west coast.


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space, and eased regulations on the total size of areas zoned for factory sites in the capital

region.

In July 1994, under the amended Enforcement Ordinance of the Act on Industrial

Location and Establishment of Factories, 11 large-sized businesses engaged in seven high-

tech sectors, such as computer and electronics, were allowed to expand their facilities by

up to 30 percent in“growth management zones” in the capital region.

With increased local autonomy and the easing of various regulations that had been

imposed under the National Land Use Zoning Act, local governments started vying with

each other to attract high-tech businesses and international events. For example, the Pusan

International Film Festival, which started in 1996, has joined the ranks of the world’s top

five film festivals.

It has been pointed out, however, that the revision of National Land Use Zoning Act,

especially the integration of land use zones from five to three, caused reckless

development and adverse side effects, such as environmental damage, particularly in the

capital region, due to a lack of systematic planning supervision.

5.4 Infrastructure projects and the trend toward decentralizationIn the late 1990s, the government adopted policy guidelines to encourage more local

participation in the planning of infrastructure to promote balanced regional development

and improve economic efficiency, reversing a previous focus on top-down management.

Among the issues covered by the policy guidelines were ways to relieve chronically

congested sections of roads. Under the Third Comprehensive Territorial Development Plan

(1992-2001), proposals called for a grid-shaped expressway system, known as the 7x9

network, comprising seven north-south expressways and nine east-west expressways.

Plans also called for the building of radial or loop-shaped arterial expressway networks

around the big metropolises, including Seoul, Busan, Daegu, Gwangju and Daejeon.

Building such a gargantuan network of expressways could only be done at huge cost.

The situation was not financially favorable as road construction costs had risen sharply due

to the escalation in land prices following the real estate speculation boom starting in the

1970s. It was not possible to push ahead with the plan under the existing financing

arrangements.

The government replaced the Road Special Account Act, which had been enacted in

1988 for road construction, with the Traffic Facility Special Account Act. Under the new act,

67.5 percent of traffic taxes and the entire amount of car-related special excise taxes could

be used for the construction of roads, railroads and ports. As a result, infrastructure

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spending rose from 5.3 percent of central government spending in 1989 to 10.5 percent by

1999.

5.5 The Asian financial crisis and the relaxation of land use regulations In November 1997, the country was hit by a foreign exchange crisis. It was necessary to

undertake extensive economic restructuring and deregulation in various sectors. The newly

inaugurated Kim Dae-jung administration abolished many regulations on real estate

transactions to increase the number of sales. The requirement that real estates sales in

certain designated areas had to be reported for approval was abolished. Regulations on

land owned by companies for non-business purposes were cut drastically. The limit on the

ownership of land for housing and the excessive-profit tax on land sales was dropped.

Property-related taxes were lowered to increase demand for land in the private sector. The

government stepped up the stockpiling of land to counter shrinking demand for land in

the private sector.

There were limits to dealing with the problem of surplus land if only domestic financial

resources were to be relied upon during the economic crisis. As a result, the domestic

property market was completely opened to foreign investors in 1998. In addition, new

property financing techniques were adopted in 1998 to facilitate real estate securitization,

including asset backed securitization (ABS), mortgage-backed securitization (MBS) and real

estate investment trusts (REITs). The property market was stabilized by early 2000, helped

by such measures.

6. Promoting regional balance and green growth in the 2000s

6.1 Expansion of transportation networksThe country ushered in an era of rapid geographical accessibility with the construction

of the 7x9 grid-shaped expressway network, including the West Coast Expressway and the

Seoul Ring Expressway, and the launch of the Seoul-Busan High-Speed Railroad (KTX) in

April 2004. The total distance of expressways increased from 2,131 km in 2000 to 3,368 km

in just 7 years.

The west coast region has been less developed than the areas along the Seoul-Busan

corridor. However, it offers geographical advantages in connection with Korea’s growing

economic ties with China, the availability of sufficient water resources and much idle land

suitable for factories. Believing that the region had high development potential, the

government started building the West Coast (Incheon-Mokpo) Expressway, extending it

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from the Incheon-Ansan section, in 1990 and completed the 353 km-long expressway by

December 2001.

There was also a need to alleviate chronic traffic congestion in the capital region. In

1988, work began on the Pangyo-Guri Expressway as the first phase of the Seoul Outer

Ring Expressway. The project met stiff resistance from residents in some sections due to

concerns about environmental damage. Work on the 127 km-long ring expressway was

finally completed with the opening of the Mt. Sapae Tunnel in 2008.

In large cities featuring high population density and heavy traffic volume, subways have

played a pivotal role in transportation. Long-distance express buses making only a few

stops serve a role similar to that of subways.

With the restructuring of the public transportation system in 2004, Seoul adopted a

public transportation fare system based on integrated, distance-based calculations. With the

restructuring of the local bus system, electronic traffic cards (“T-Money”) came to be

widely used. As of 2008, about 90 percent of people using public transportation used the

traffic card for fare payments. Preparations are being made to have traffic cards replace all

other means of paying public transportation fare, including taxis, throughout the country.

Since the 1990s, the local bus companies in Seoul encountered financial problems as a

growing number of people chose to use private cars or the subway instead, with some bus

companies going out of business. The adoption of a semi-public bus system with private

operators is aimed at reviving their use. The Seoul authorities introduced reforms such as

creating four types of buses, indicated by their color, to serve different routes, including

express buses (red), trunk buses (blue), branch buses (green) and neighborhood buses

(yellow). Bus-only lanes also were established. The government offered to cover the

financial losses of bus companies in return for gaining the right to adjust bus routes. This

put an end to the practice where a number of routes were monopolized by a small number

of bus companies, causing inconvenience to passengers. The bus companies and the city

government have adopted joint management of bus company revenues.

6.2 Scaling back greenbelts and upgrading urban living conditionsFollowing the end of the financial crisis, the reckless development of“semi-agricultural

areas” emerged as a political issue in the early 2000s. This underscored the need for an

integrated approach to land management that would be conducted in an environment-

friendly way. In February 2002, the Act on the Basic Framework of National Land

Management as well as the Territorial Planning and Utilization Act were passed to achieve

this goal.

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Previously, urban planning was limited to urban planning zones. The new law required

that all urban and rural districts (si and gun) should create basic urban management plans

to cover all the land within their jurisdiction. The zoning system was restructured. “Semi-

agricultural areas” and“semi-urban areas,” which had been subject to reckless

development, were integrated into the“land management areas,” which were subdivided

into“plan management areas,” “production management areas,” and“conservation

management areas,” based on land suitability assessments. It was decided that urban land

development would be basically confined to“plan management areas.”

Under the newly adopted Class-2 Planned Unit Development Zoning, even non-urban

areas were subject to development and management planning, including surveys of roads,

landscape and zoning size, in a way similar to urban area development plans. Approval for

development projects was granted based on the availability of sufficient infrastructure and

whether the project was in harmony with its surroundings.

In areas where it would be difficult to expand infrastructure facilities to serve

development projects, the number and density of development projects would be limited.

In newly developed areas, the developer would be made to bear the expense for the

installation of infrastructure facilities, including those in adjacent areas.

In addition, the land suitability assessment system would be used to determine whether

a parcel of land should be developed or preserved based on a comprehensive review of its

physical, socioeconomic and environment factors.

Most of the large-scale development projects that had been carried out since the early

1960s were for housing, with many being“bedroom towns” that lacked basic urban

amenities. As a result, it was necessary to expand the concept of land development to one

of full-scale urban development to correct this problem. The Urban Planning Act and the

Land Readjustment Project Act were integrated with the Urban Development Act in January

2000. This combined land development methods with urban development methods, while

urban development criteria was applied to projects in both the public and private sectors

on a uniform basis.

In 2003, work began to restore the Cheonggye-cheon (stream) in central Seoul, which

had been covered with concrete for more than 40 years to support a road network. The

project, which had been initiated by Lee Myung-bak, the then Seoul mayor, was completed

in October 2005. The elevated highway that passed over the stream was demolished. The

project aimed to revive the downtown area, with plenty of recreation space along the

stream’s banks, and it has largely succeeded in that goal. The restoration project has

exerted considerable influence on local urban planning. It made people aware of the

country’s cultural and historical resources and awakened policymakers to the need for the

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creation of public spaces. In response, other local administrations have undertaken similar

water restoration projects, which have contributed to the improvement of urban

environments nationwide.

Areas of restricted development, or greenbelts, had been established between 1971 and

1997 to prevent urban sprawl and preserve the natural environment of cities. But the

concept met with increasing criticism that it represented an excessive infringement on

private property rights and steps were taken to abolish some greenbelts or relax restrictions

on their use in 1998.

The designation of greenbelts near small- and medium-sized cities, where there was little

possibility of urban expansion or environmental damage, was cancelled. In the

metropolitan areas of Seoul, Busan and Gwangju, the designation of greenbelts was

partially readjusted based on environmental impact assessments and comprehensive urban

development plans. As a result, 1,416 km2 out of a total 5,397 km2 in greenbelt space were

cancelled. For greenbelts close to large cities, 314 km2 out of 4,294 km2 were removed. It

can be said the greenbelts surrounding large cities still maintain their function of

conserving the natural environment. But critics claim that they have become less effective

in preventing urban sprawl, which was one of their chief goals (particularly in the capital

region), and they have hindered the orderly growth of large cities and reduced their

productivities.

6.3 Renewing balanced regional developmentThe issue of ensuring that the capital region and other areas could develop in a

complementary manner to achieve balanced regional development has been a difficult one

for many years. Various systems and policies set up in the past to solve the problem failed

to bring about any noticeable success. The Roh Moo-hyun administration (2003-2007)

announced a plan to move the central government’s administrative functions from Seoul to

a provincial location, triggering heated controversy. Although the plan to establish a new

administrative capital was ruled unconstitutional, the administration went ahead with a

modified plan for what was officially termed the Multifunctional Administrative City

(popularly known as Sejong City), and began construction.

The government also pushed ahead with its Innovation Cities project, with the aim of

achieving more equal distribution of the national wealth through the relocation of public

institutions to the provinces. In June 2005, the government announced the plan by

selecting which state institutions were to be relocated. In April 2006, the government

unveiled a Basic Plan for the Development of Innovation Cities. In February 2007, it

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enacted the Special Act on the Construction of, and Provision of Support for, Innovation

Cities and designated the areas. Work commenced in July 2007. The relocation of the state

institutions to the provinces is scheduled to be completed by 2012.

In addition, the government launched the Enterprise City Project with the goal to help

provinces gain financial self-sufficiency, promote domestic investment by means of urban

development projects using private capital, and revive local economies. The plan was

made in response to a proposal by the Federation of Korean Industries (FKI) in October

2003 to encourage increased corporate investments and create jobs. In December 2004, the

Special Act on the Development of Enterprise Cities was promulgated.

The Capital Region Readjustment Plan proposed by the Roh Moo-hyun administration

focused on growth management, unlike existing plans that imposed regulations on

activities that caused population growth in the capital region. The government announced

a principle of developing the provinces first, followed by the planned management of the

capital region. A partial easing of regulations were implemented, including raising the limit

on the total amount of land that could be set aside for factory sites and nature conservation

zones in the capital region. This included granting approval for the construction of a

factory by LG Phillips (now known as LG Display) in Paju (2003).

The Lee Myung-bak administration, which took office in 2008, noted that while the

measures taken by the Roh administration were meant to curb the concentration of

population and resources in the capital city, it achieved only partial success and failed to

respond in a flexible manner to changes in conditions. The new government announced

its intention to make adjustments to existing regulations affecting the capital region in order

to make it a world-class metropolis that would enhance national competitiveness, while

linking it to the policy of developing mega-economic regions outside the capital.

The government in October 2008 set out its plans for the capital region with methods to

promote the more efficient use of land to increase national competitiveness, while

maintaining the principle of developing the provinces first to be followed by the planned

management of the capital region. In the short term, it wants to remove excessive and

unreasonable regulations within the existing policy framework, while creating jobs and

increasing corporate investments. Over the medium to long term, it wants to achieve the

capital region’s global competitiveness through a fundamental improvement in the

regulation-based management system, while adopting systematic management of the

region to improve the quality of life and use of urban space. 206THEKOREANECONOMY

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6.4 Korea as a logistics hub for Northeast Asia On March 29, 2001, Asiana Airlines flight OZ 3423 flying from Bangkok landed at

Incheon International Airport, becoming the first commercial flight to do so and bringing

closer the vision of Incheon becoming a major hub airport for Northeast Asia.

Incheon International Airport was built as a first-class facility that compares favorably

with any existing airport in the world. Its features include the largest passenger terminal in

Asia, state-of-the-art information and communications systems, and the airport expressway

linking Yeongjong Island, where the airport is located, to Seoul. In the first phase, airport

facilities were built to handle expected demand over the next decade. A second phase was

completed in June 2008.

Despite steady growth in passenger traffic in the early days, the airport received only

average consumer approval ratings due to the indifferent attitude of the workforce and

cumbersome immigration procedures. The Incheon International Airport Corporation

responded by adopting a customer-oriented management system and strove to find ways

to improve cooperation among the parties involved in the airport’s operation, which

number more than 550 agencies and businesses and more than 30,000 employees. As a

result of these efforts, it was selected by the Airports Council International (ACI) as the best

airport in the world for four consecutive years (2006-2009). In addition, Incheon

International Airport started posting net profits in 2004, four years ahead of schedule.

Table 5-6. Incheon International Airport’s ranking in the ACI evaluation (2009)

In terms of port operations, the country aims to become a logistics hub for Northeast

Asia with the twin-hub port plan based on the container ports in Busan and Gwangyang.

Busan New Port, for which construction began in 1995, opened six berths in 2006 and 12

more in 2010. It is scheduled to have 30 berths by 2015. The Port of Gwangyang built its

container terminal, which has 16 berths, 12 of them able to handle 4,000 TEU-class ships

and four berths for 2,000 TEU-class ships. The port was opened in three phases between

1998 and 2007. Eight additional berths for 4,000 TEU-class ships are planned to be built.

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Rank World’s best airportsBest airports in Asia-

Pacific

Best airports amongmid- and large-sized

ones

Best airports selectedby passengers

1 Incheon Incheon IncheonIn Asia: Incheon

In Europe: SouthhamptonIn North America: Halifax

2 Singapore Singapore Singapore

3 Hong Kong Hong Kong Minneapolis


The twin-hub ports are focusing on attracting trans-shipment business for cargo originating

in the region, including the west coast of Japan, which will help to achieve its goal of

becoming a mega-hub port for Northeast Asia and serve as the starting point for the

Eurasian Railroad.

In order to become a regional logistics hub, the country needs to develop adjacent large-

scale logistics complexes that can cope with changes in global logistics networks, attract

the logistics operations of multinational companies, and be able to operate logistics

businesses to meet global standards.

Turning port areas into free trade zones is a worldwide trend adopted by many

developing countries. Joining this trend will help the country compete with ports in more

advanced countries and put it in an advantageous position to attract the logistics

headquarters of multinational businesses and leading global logistics businesses.

6.5 Green growthIn response to the public’s rising expectations for an improvement in the quality of life,

the government is adopting more stringent measures on environment and health matters as

well as the sustainable use and conservation of environmental resources, such as water.

With the advancement in economic structure and the increasing global attention on

environmental issues, the concepts of economic growth and environmental protection

have become intertwined. The government, considering environmental and economic

needs simultaneously, has concontrared on efforts to establish a management system for

green growth, that is, the management of greenhouse gases, the recycling of resources, the

development of environment-based industries and technology, and strengthening the

ability to adapt to climate changes.

The government enacted the Environmental Health Act in 2008, which established a

system for monitoring environmental pollutants and establishing environmental quality

standards. The government has adopted measures to develop environment-friendly and

pleasant urban environments, which is a departure from the passive attitude toward

environmental management in the past, which mainly focused on green growth.

The government has also pushed for environmental objectives to be included in urban

planning, including developing urban environmental assessment indices, guidelines for

biotope maps, and promoting eco-city projects. An air pollution management system was

adopted to reduce sulfur oxide, nitrous oxide and dust, which are the main air pollutants in

urban areas. In 2007, the government adopted the emission trading system to encourage

the voluntary participation of businesses in efforts to reduce greenhouse gases. It is also

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promoting the commercialization and use of low-polluting vehicles, such as hybrid cars

and buses powered by natural gas.

The land planning system has been overhauled to take into greater account

environmental factors. A preliminary environmental review concerning major development

plans is an example of such efforts. In the area of water environment management, the

project to restore four main rivers (Han-gang, Nakdong-gang, Geum-gang, Yeongsan-

gang) is closely connected with green growth, going beyond the framework of traditional

water quality management.

Recent measures have also dealt with climate change and green growth initiatives. Work

is underway to develop a greenhouse gas emissions coefficient, the compilation of relevant

environmental statistics, providing support for the establishment of policies by local

governments to deal with climate change, and creating more environment-friendly urban

environments. Efforts are being made to develop green growth-related technologies and

businesses, which will form the basis of the green growth movement, with the goal of

expanding into overseas markets.

7. An assessment of Korea’s territorial policy

7.1 Achievements

7.1.1 Dramatic changes in landscapeKorea’s physical landscape has undergone a sea change in the last six decades. At

present, the Republic of Korea is 100,032 km2, according to the latest published data by the

government. It has recorded a 5,803 km2 increase in its land size, a 6 percent expansion,

since 1948 mainly due to land reclamation from the sea.

The Korean population has increased 2.4-fold from 20 million in 1946 to 49 million by

2008. The country’s population density ranks third in the world after Bangladesh and

Taiwan, excluding mini-states like Singapore and Bahrain. The population of Seoul has

undergone explosive growth in the same period, increasing by more than seven times

from 1.5 million, or 7 percent of the entire population in 1946, to 10 million, or 21 percent

of the entire population, by 2008. As for the capital region, 49 percent of the entire

population lived in the area in 2008, compared to 21 percent in 1949. The country’s

urbanization ratio has jumped from 17 percent in 1946 to 50 percent in 1970 and 90

percent by 2005, meaning that nine of ten people live in urban areas. In contrast, the

number of people living in rural areas has plummeted from 75 percent to 6 percent in the

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same period due to industrialization and urbanization. This has resulted in the existence of

many“hollow” villages in rural areas.

Table 5-7. Population in the capital region

(Unit: 1,000 persons, %)


Table 5-8. Urbanization trends

(Unit: 1,000 persons, %)

Note: Urban areas include cities and towns with populations of 20,000 or more.


The Saemaul Movement, which started in 1979, helped raise the average annual income

of farm households by 12.5-fold from 356,000 won, or 79 percent of their urban

counterparts, in 1979 to as much as 4,465,000 won, or 103 percent of their urban

counterparts, by 1982. In the same period, rural roads were expanded by 64,686 km, a

total of 39,231 village community centers were built, and 258,000 farmhouses were

renovated. The movement helped rural villages achieve a dramatic improvement in living

standards, including the availability of better farming equipment, power supplies and

modern housing.

From the 1960s, the country adopted an export-oriented economic policy. In 1966, the

Guro Export Industrial Park was built in Seoul. Afterwards, large-sized industrial parks

were concentrated in the southwestern part of the country. Smaller regional industrial

parks, however, were established nationwide and later a series of industrial parks, known

as techno parks or urban hi-tech industrial parks, were built. By the end of 2008, there

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1960 1970 1980 1990 2000 2008

Nation (A) 24,989 30,882 37,436 43,111 46,136 48,607

Capital region (B)

Seoul

Incheon

Gyeonggi

5193

2,445

401

2,347

8,730

5,433

634

2,663

13,298

8,364

1,084

3,850

18,587

10,613

1,818

6,156

21,354

9,895

2,475

8,984

23,909

10,032

2,629

11,248

B / A 20.8 28.3 35.5 42.8 46.3 49.2

1960 1970 1980 1990 2000 2005

Nation (A) 24,989 30,882 37,436 43,111 46,136 47,279

Urban population (B) 8,972 15,385 24,810 34,723 42,214 43,949

Rural population 16,017 15,497 12,626 8,388 3,922 3,330

Urbanization ratio(B / A) 35.9 49.8 66.3 80.5 91.5 93.0


211

were a total of 742 industrial parks in the country, occupying 1,228 km2. A total of 1.4

million people were working at 48,871 businesses in the industrial complexes, which had a

total production amounting to 665 trillion won a year.

Figure 5-3. Changes in population distribution (1960-2005)

(Unit: person)

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Up until the 1960s, the state of housing in both urban and rural areas was poor, with

farmhouses, for example, having straw roofs. The current situation is far different. More

than half of homes are modern apartments. The number of homes, which stood at 3.3

million in 1950, increased 4.2-fold to 13.8 million by 2007 due to the government’s housing

construction policy. The number of homes built annually jumped nine-fold from around

50,000 in 1950 to 460,000 by 2005. As a result, the housing supply ratio, which fell from

82.4 percent in 1962 to 69.2 percent by 1987 due to the population increase and the trend

toward nuclear families, rose again to surpass 100 percent in 2000 and 108 percent by 2007.

Many new cities were built, including Ulsan, Changwon, Banwol (Ansan), Bundang,

Ilsan, Pyeongchon, Sanbon, Jungdong and so on, as part of the process of industrialization

and urbanization

7.1.2 National transportation networksAt the time of liberation in 1945, it took two to three days to travel from Seoul to the

outlying reaches of the country. Sixty years later, the same journey now takes less than half

a day thanks to the development of modern transportation and logistics systems. Most

households now have their own cars and the country has an extensive network of

expressways.

The number of cars has increased rapidly from around 7,000 in 1945 to 14,703 in 1948

and 16.4 million by 2007, with the car ownership ratio going from 2,881 people per car to

2.9 people per car as incomes rose and road conditions improved.

The amount of roads has grown 4.3-fold from 24,031 km in 1945 to 103,019 km by

2008. The percentage of paved roads has jumped from 0.03 percent to 98 percent in the

same period. The opening of the Seoul-Incheon Expressway (1968) and the Seoul-Busan

Expressway (1970) signaled the start of the expressway era. At present, the 3,368 km-long

expressway network forms the transport arteries of the country.

In 1945, railroads were the most crucial means of transportation of both people and

cargo. Prior to Korea’s division, the total distance of railroads came to 6,362 km. After the

partition, the total length of railroads in South Korea stood at 2,642 km. It has modestly

increased since then by 28.7 percent to 3,399 km. In 1975, the opening of the Seoul

Station-Cheongryangri subway line in Seoul ushered in the era of mass transit systems. In

2002, the high-speed KTX train started service between Seoul and Busan. The 300 km/hr

train covers the Seoul-Busan route in less than 3 hours.

As for the maritime industry, the ship Busan that returned from Qingdao, China on

August 15, 1945, the day the country was liberated from colonial rule, was the only ocean-

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213

going vessel in the country at that time. In the early 1960s, the government pushed for the

development of the maritime industry. By 2007, the total tonnage of the country’s ocean-

going ships was 18 million tons.

Figure 5-4. Infrastructure development (1960-2008)

As for ports, Busan Port became the country’s first to be equipped with a container

wharf in 1978. It continued to develop until becoming the world’s third largest port in

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terms of cargo handling capacity by 2000. Recently, however, newly developed Chinese

ports have pushed it back into the fifth place.

Commercial aviation began in the colonial period. In 1946, Korean National Airlines

(KNA) was established and it started domestic flights in 1948. In 1948, Northwest Orient,

the U.S. carrier, became the first airline to offer international flights from the country. In

1962, Korean Air took over bankrupt KNA and was the country’s only commercial airline

for 26 years. In 1988, Asiana Airlines entered the market. Since 2005, several small discount

airlines have started operations. Korean airlines now rank tenth in the world in terms of the

number of passengers and the volume of cargo they transport.

In 1958, Gimpo International Airport became the country’s main airport, replacing one

in Yeouido in the middle of Seoul that had served that role since the colonial period. With

the opening of Incheon International Airport in 2001, Gimpo Airport now mainly serves

domestic flights. Since its opening, Incheon International Airport has joined the ranks of

the world’s leading airports, ranking second in terms of the volume of international cargo

handled and tenth in terms of international passenger traffic.

Railroads played a central role in cargo transportation in the early years of

independence. With the construction of five cargo depots, including those in Gunpo and

Euiwang, in the 1990s, the country’s logistics sector underwent drastic changes. In the

2000s, the creation of a multi-modal sea and air transportation system offers complete

services from origin to destination.

In the 1960s, the convenience and route flexibility offered by buses caused the

disappearance of streetcars from the streets of Seoul. Since 1974, subways, along with

buses, taxis and private cars, have played a significant role in transportation in the large

cities. Recently, efforts have been made to improve sidewalks and bike paths as part of the

“Low Carbon and Green Growth” campaign.

7.1.3 Environmental protectionIt was in the late 1960s, as the country was industrializing, that the government and

public became interested in environmental issues, which initially focused on the issues of

health and hygiene. The environment emerged as a top policy issue in the early 1970s,

when waste and wastewater from urban and industrial areas was blamed as the main

sources of pollution. Demands to protect the environment increased rapidly in the 1980s in

response to frequent pollution accidents and a change in the public’s attitude toward the

environment.

In the 1990s, the Not-In-My-Back-Yard (NIMBY) phenomenon became prevalent. A

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series of environmental and economic policies were adopted to reduce the release of

pollutants, along with systems designed to coordinate development with conservation

efforts. In the 2000s, there were increasing public demands for a qualitative improvement

in living standards. The government adopted a land environmental policy that required

land development plans to be assessed for their environmental impact, with the goal of

preserving and protecting ecological systems and promoting green growth.

The success in reforestation is one of South Korea’s most prominent achievements. In

the 1970s, coal briquettes replaced wood as a fuel, thus reducing the demand for wood

harvested from the forest. The tree volume per ha increased 17.5 times from 5.6 per ha in

1952 to 97.8 per ha by 2007. It is particularly noteworthy that the per capita tree volume/ha

ratio increased 7.4 times from 1.7 per ha to 12.9 per ha between 1952 and 2007 despite the

rapid increase in population.

One of the most serious environmental issues is global warming. The government is

pushing a“Low Carbon and Green Growth” strategy to help solve this problem. Korea has

also taken steps to protect the environment by reducing industrial pollution. It is taking

part in global efforts to reduce greenhouse gases and promote green growth initiatives.

7.1.4 Expansion of maritime activitiesThe county’s west and south coasts feature heavily indented and shallow coastlines,

meaning that it is easy to reclaim land from the sea. As a result of a survey carried out in

1962, a total of 71 areas (with an estimated size of 2,250 km2 in reclaimable area, of which

1,650 km2 was considered suitable for farmland) were selected.

By the 1970s, based on the skills and experience acquired in the previous decade, large-

scale reclamation projects were carried out to create industrial sites as well as farmland.7 By

the 1990s, the country’s per capita GNI had reached 10,000 dollars and the government

and public became more aware of the importance of tidal flats and coastal ecological

systems. As a result, a more cautious approach toward reclamation projects was adopted.

After liberation in 1945, the country started the development of a deep-sea maritime

fishing industry, beginning with small boats and later expanding to the use of ocean-going

vessels. Korea gained great experience in maritime activities and sent a team to explore the

Antarctic in 1985 and then built the Sejong Science Base there in 1988. The country

embarked on full-scale international maritime development in the 1990s and has extended

its activities worldwide.

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7 Leading reclamation projects included the Tide Embankments of Namyang Bay (1973), Asan Bay (1977), Sapgyocheon (1979) andthe Seosan Reclamation Area (1980).


The government enacted the Maritime Pollution Prevention Act in 1977 after it

participated in the International Convention for the Prevention of Pollution from Ships. The

chemical oxygen demand (COD) index of the country’s coastal areas rose along with

economic growth, but dropped to 1.40 by 2006 from a peak of 1.89 in 1994.

The country’s jurisdiction over maritime territories extends 12 nautical miles from the

shoreline as set under the Article 3 of the Constitution, and Article 1 and Article 3 of the

Territorial Sea Act. The base in the Antarctic is also recognized as part of Korea’s maritime

territory.

7.2 Unresolved issues

7.2.1 Stabilizing real estate pricesAs mentioned at the beginning of this chapter, one important policy goal of the Korean

government has been the stabilization of real estate prices. Various government projects to

build transportation networks, industrial parks and housing rapidly raised the land prices in

targeted areas. The concentration of populations in large cities resulted in skyrocketing

prices for residential and commercial properties. Property speculation became rampant.

Speculators, often from the well-to-do segment of the population, were blamed by the

public for escalating real estate prices. Rising housing prices were of particular concern.

In response to the perceived increase in social inequality, the government introduced

many measures to penalize speculative trading and curb windfall gains. For example,

heavy taxes were levied on the capital gains from housing sales; home ownership was in

principle allowed only to the actual residents of the home; and the renovation of high-rise

apartments to create more units was restricted as it would result in capital gains for the

existing owners. But these measures had an adverse impact on housing supply and

hindered the smooth functioning of the property market.

More often than not, the government relaxed the regulations during recessions to boost

the construction sector and stimulate the economy, and then tightened them again when

worries about over-heating and speculation increased. Between the late 1960s and early

2008, the government announced a total of sixty-one measures, alternating between

stimulus and stabilization packages.8 These short-term, “stop-go” policies increased

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8 Examples include the real estate speculation prevention tax (currently the capital gains tax) introduced as a part of the Act onSpecial Measures for Preventing Real Estate Speculation in 1967; the tightening of regulations at the end of the 1970s, followed byeasing in the early 1980s, tightening in the late 1980s, and easing once again at the end of the 1990s.


217

uncertainties in the market and severely damaged the credibility of the government, fueling

further speculation.

One notable innovation was the concept of“public stewardship toward land policy”

adopted in the late 1980s. The government placed limits on the ownership of housing lots,

imposed a tax on excessive profits earned from land sales, and introduced development

charges. These policies were, however, ruled unconstitutional and abandoned in the 1990s.

A more successful strategy to stabilize housing prices was the large-scale housing

construction project in the late 1980s. A target was set to supply 2 million units of housing

in 1989-1992. The project was completed with the construction of 2.14 million houses (33

percent of the total housing stock of 6.45 million as of 1987) by August 1991, ahead of

schedule. The housing supply ratio jumped from 69.2 percent in 1987 to 76.0 percent in

1992, and continued to rise to reach 93.3 percent in 1999. Between January 1991 and

January 1996, the price index of apartment sales declined by 1.8 percent per year across

the country and by 2.3 percent in Seoul (Table 5-9).

Table 5-9. Annualized growth rate of the price index for apartment sales

(Unit: %)


Entering the 2000s, housing prices began to rise again as the market recovered from the

shock of the Asian financial crisis. The Roh Moo-hyun administration adopted measures on

13 separate occasions to curb housing speculation and a surge in prices, including the Real

Estate Price Stabilization Measure announced in May 2003. Other measures included the

requirement that the price of a home sale be reported to the authorities; the introduction of

a comprehensive property tax with high rates; and more stringent rules on home loans,

such as the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) loan assessments.

Many believe that these measures to control demand, contrary to their stated goals,

played a role in increasing housing prices in 2006 and 2007 as they reduced housing

supply. Part of the measures were recognized for contributing to increased transparency in

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Apartment sales price index Consumer price

indexAll regions Seoul

Jan. 1986 - Jan. 1991

Jan. 1991 - Jan. 1996

Jan. 1996 - Jan. 2000

Jan. 2000 - Jan. 2006

Jan. 2006 - Sep. 2010

15.1

-1.8

0.6

10.2

4.3

14.4

-2.3

1.3

13.4

6.2

6.0

5.7

4.2

3.1

3.3

Jan. 1986 - Sep. 2010 5.5 6.5 4.4


the housing market and promoting stability in the financial market, but a larger part

signaled a departure from the market-based approach of the Kim Young-sam

administration, which gave the private sector a leading role in housing supply.

At issue is the conceptual and practical difficulty of separating“speculation” from

“genuine investment,” both of which are made in response to an expected rise in prices

that increases the inflow of money into the sector and stimulates an increase in supply.

Past experience indicates that efforts to curb speculative demand can destabilize the

housing market further and that the priority should be given to increasing housing supply,

especially in regions suffering shortages (Man Cho, 2010).

7.2.2 Promoting balanced regional growthFrom the early years, the Korean government has highlighted balanced regional

development as one of its major policy goals. The government has taken two approaches

to achieve this. One is curbing the concentration of population and economic activities in

the capital region. The other is promoting equal opportunities in terms of income, jobs and

education for all regions. These two approaches are not necessarily compatible with each

other. For instance, moving government offices and other public agencies from the capital

region to Chungcheong will contribute to reducing the concentration of activities in the

capital region, but may widen the gap between Chungcheong and, say, Jeolla. Indeed, the

growth of GRDP and per capita GRDP since 1985 have been faster in Chungcheong than

in Jeolla (Table 5-10).

The population concentration in Seoul drew increasing attention from policymakers in

the 1960s. The Park Chung-hee administration tried to curb population growth in the

capital region partly for military and national security reasons. In the 1970s, laws, plans and

policy measures for population control in the capital region were systematized, including

those proposed by the presidential office in 1972, the Economic Planning Board in 1973,

and the Seoul City Government in 1975. Measures included the designation of greenbelts

to prevent Seoul’s urban expansion; the imposition of taxes; restrictions on the number of

universities and students in the capital region; the relocation of government institutions to

the provinces; and the transfer of power from the central government to local

governments.

Targets were set to contain the population to under 6.3 million in Seoul and 11.0 million

in the capital region by 1981, when the First Comprehensive Territorial Development Plan

would be completed. The actual population numbers exceeded the targets, with Seoul’s

population reaching 8.7 million in 1981 and that of the capital region 14.8 million (Table 5-

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11). The failure can be attributed to an excessively ambitious plan that was not backed by

sufficient means to enforce it.

Table 5-10. GRDP by region

Note: 1) Capital region = Seoul + Gyeonggi + Incheon.

Note: 2) Chungcheong region = North and South Chungcheong + Daejeon.

Note: 3) Jeolla region = North and South Jeolla + Gwangju.

Note: 4) Gyeongsang region = North and South Gyeongsang + Busan + Ulsan.


Table 5-11. Population of Seoul and the capital region in 1981 and 1991

(Unit: million persons)

Source: Ministry of Construction (1977); Government of Korea (1992); KRIHS (1982, 1992).

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GRDP(annual growth, %)

Regions 1985-1990 1990-2000 2000-2008 1985-2008


11.56.8

10.49.89.98.7

5.84.16.75.56.15.2

3.92.65.02.63.32.6

6.7 4.4 7.4 5.6 6.2 5.3

Total 10.5 5.9 3.7 6.4

Per capita GRDP(annual growth, %)

Regions 1985-1990 1990-2000 2000-2008 1985-2008


8.49.1

10.511.19.58.0

4.14.55.96.15.54.9

2.93.04.73.33.62.2

4.85.26.96.56.04.8

Total 9.5 4.9 3.3 5.6

Per capita GRDP(capital region=100)

Regions 1985 1990 2000 2008


100.0 80.0 72.8 66.9 79.8 76.2

100.0 82.7 80.3 75.8 83.7 74.7

100.0 85.9 95.5 91.9 96.4 81.1

100.0 86.5

113.8 95.7

102.8 75.7

Total 85.0 89.1 97.0 101.0

End of the first TerritorialDevelopment Plan (1981)

End of the second TerritorialDevelopment Plan (1991)

Seoul Capital region Seoul Capital region

Projected population 7.5 13.8 11.9 18.9

Target population 6.3 11.0 9.6 15.8

Actual population 8.7 14.8 10.9 19.0


The Second Comprehensive Territorial Development Plan (1982-1991) introduced the

concept of“regional life zones” and promoted“regional growth centers” as part of the

push for decentralization. The plan divided the entire country into 28 life zones, of which

five were metropolitan life zones, seventeen were urban life zones and six were rural life

zones. The Plan also designated 15 cities as growth centers to lead the development of

adjacent backward areas. Among them, Daejeon, Gwangju and Daegu were selected as

the primary growth centers able to absorb the population moving to Seoul and Busan and

thus play a critical role comparable to that of Seoul. Twelve regional cities, which served as

provincial capitals or business centers with high growth potential, were selected as

secondary growth centers.

The population in the primary growth centers grew by 3.0 percent between 1980 and

1990 and that for the secondary growth centers by 1.5 percent, far short of the target of 4.8

percent and 4.4 percent, respectively. The higher population growth rates in the primary

centers compared to that for the secondary centers confirm that a policy to promote the

development of small regional cities may not be effective in reversing the population

concentration in the capital region and encouraging balanced regional development.

Table 5-12. Population growth in regional growth centers

(Unit: 1,000 persons)

Another attempt to discourage the migration from rural areas was made with the“rural

settlement area development program,” which would focus on the comprehensive

development of entire rural areas, including farm villages and towns. The program,

however, hardly prevented a decrease in rural population nor improved the income or

living standards of rural households.

Starting in 1986, rural industrial parks were created across the country to support projects

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1980 1990 1995Annual growth rate (%)

1980-1990 1990-1995 1980-1995

Entire population 37,436.3 43,410.9 44,606.2 (1.5) (0.5) (1.2)

Population of Seoul and Busan(A)

11,612.0 14,467.5 14,043.1 (2.2) (-0.6) (1.3)

Population in primary growthcenters (B)

3,361.5 4,511.4 4,978.8 (3.0) (2.0) (2.7)

B / A (%) (28.9) (31.2) (35.5)

Population in secondary growthcenters (C)

2,862.5 3,337.8 3,495.2 (1.5) (0.9) (1.3)

C / A (%) (24.7) (23.1) (24.9)


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designed to help rural households earn extra income from jobs other than farming. The

establishment of the parks reached a peak between 1987 and 1990, but started declining

afterwards. During and after the 1997 financial crisis, many businesses in the rural

industrial parks were closed and the parks were criticized as acting as temporary shelters

for marginal businesses.

The interest in balanced regional development declined in the 1990s as government

policies for the development of the capital region and other areas focused on measures to

increase the nation’s economic competitiveness in response to globalization. The stance

was reversed again in the 2000s by the Roh Moo-hyun administration, which pushed

ahead with balanced regional development with such measures as the relocation of

government and public institutions outside the capital region. The Roh’s administration

also strengthened regulations to curb the expansion of the capital region. But in the face of

intensifying global competition between firms, it had to bow to demands for deregulation

in some cases, approving the construction of LG Phillips Factory in Paju, near Seoul (2003);

relaxing the restrictions on the construction of new factories or expansion of existing

factories for 14 types of high-tech businesses located within“growth management zones”

(2004); giving approval to the chaebol for the construction or expansion of facilities for

eight types of high-tech businesses (2005); expanding development areas in“nature

conservation zones” (2006); and approving the expansion of factories for businesses

engaged in three sectors in the capital region (2007).

In short, government efforts to date to check the growth of the capital region or to

promote regional development have not been very successful. They also lacked

consistency over time. For example, regulations governing business categories allowed to

operate in the capital region have been eased, particularly for high-tech companies.9 Such

ad hoc deregulation, however, has led to unorganized territorial development and

damaged the environment. Some claim that policies on the capital region need a

fundamental reorientation to better protect the environment on the one hand and to

properly accommodate economic realities on the other (Jung Jay Joh, 2002; Yong-woong

Kim and Mi-sook Cha 2009). In particular, attention should be given to the increasingly

important role of big cities in the era of globalization and knowledge-based economies

(Gill and Kharas, 2007).

It is also suggested that development policies for the areas outside the capital region be

reformulated. Under the current economic structure, which depends on the service sector

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9 Similar changes have been observed in France and other European countries (Ancien, 2005; Bachtler and Yuill, 2001; de la Fuenteand Vives, 1995).


for 70 percent of its production and 60 percent of its employment, it is unrealistic to expect

that a large-scale physical investment to promote the manufacturing sector in non-capital

areas would generate economic growth there. Rather, the emphasis needs to be placed on

fostering the service sector in major regional cities and building“soft” infrastructure, i.e.,

the capability of regional communities to adapt and innovate themselves (Jong-il Kim,

2008; Youngsun Koh, 2008).

In the meantime, per capita GRDP has grown rapidly in the areas outside the capital

region (Table 5-10). Some regions, notably Chungcheong and Gyeongsang, have higher

per capita GRDP than the capital region. With the wide-spread increase in economic

activities, the gap in economic and living conditions between the capital region and other

areas has narrowed significantly over the decades (Table 5-13). A critical question is how

to sustain the dynamism of the Korean economy and facilitate a flexible reallocation of

resources between regions.10

Table 5-13. Index for economic and living conditions

Note: The index was calculated based on eight factors (i.e., employment in the manufacturing sector, the service sector and

professional services, number of college students, number of physicians, amount of per capita deposits, number of flush

toilets, and availability of clean water supply), with the national average set at 100.

Source: KRIHS (1999), p.46.

7.2.3 Other restrictions on land use The government places some restrictions on the use of land for various reasons, for

example to promote orderly territorial development, protect the environment, limit the

population concentration in the cities, and stabilize real estate prices. Restrictions have

taken various forms in Korea. Among them are the zoning system and greenbelts.

All plots of land in Korea are subject to the zoning system, which has provided clear and

consistent guidelines for their use. But the zoning system has also received many

criticisms. First of all, it cannot accommodate the diversity of economic and social activities

because it classifies all plots of land into a small number of zone-types and applies a222THEKOREANECONOMY

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1960 1970 1980 1990

Capital region (A) 210 189 147 115

Other areas (B) 71 65 76 88

A / B 3.0 2.9 1.9 1.3

10 See Chapter 3 for a discussion on the role of resource reallocation in Korea’s economic growth.


223

uniform regulation to them. This inflexibility becomes particularly disruptive as the

government earmarks specific plots of land for specific purposes well in advance of their

development. In addition, the complicated regulations imposed on each type stifle the

innovative use of land by the private sector. Recently, efforts are being made to increase

the flexibility of the system, but it is still too soon to judge their success.

Another important restriction on land use was imposed by the greenbelt system

introduced in 1971. As urbanization occurred rapidly during the 1960s, the cities began to

expand in a disorderly fashion. In order to preserve the natural environment around them

and to secure a healthy living environment for urban citizens, the Urban Planning Act was

enacted, which designated Seoul, five metropolitan cities, 28 urban districts (si) and 36

rural districts (gun) as greenbelts between 1971 and 1977. Initially, greenbelts were to

cover 5,397 km2 (5.4 percent of the country) but the current area is 3,980 km2 because of

the adjustment made in 1998.

The greenbelt system has made a great contribution to protecting the environment and

provided places for city dwellers to enjoy nature. At the same time, it has been criticized

for infringing on the property rights of owners, hindering the efficient use of land, and

hampering the competitiveness of large cities. An appropriate balance is needed between

the conflicting roles of the greenbelts.

8. Conclusion

The three central themes in Korea’s territorial policy have been (1) supplying physical

infrastructure for economic growth, (2) stabilizing real estate prices, and (3) promoting

balanced regional growth.

The first of these goals has met with tremendous success thanks to heavy government

investment. The number of industrial parks rose from nothing in the early 1960s to 742 in

2008. Housing units, which stood at 3.3 million in 1950, increased four-fold to 14 million,

and the housing supply ratio reached 110 percent in 2008. The amount of roads grew 4.3-

fold from 24,031 km in 1945 to 103,019 km in 2008. The Incheon International Airport,

which opened in 2001, has joined the top ranks of the world’s leading airports. Korea

succeeded in the reforestation of its mountains within a couple of decades. Korea sent a

team to explore the Antarctic in 1985 and then built the Sejong Science Base there in 1988.

These amazing achievements reflect the success of the Korean model of territorial

development, which has several distinctive features, including the partnership between the

government and private sectors, forward-looking leadership, the close interaction between

economic growth and territorial development, and the active participation of the Korean

Territo

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people (Yang-ho Park et al., 2010).

On the other hand, the Korean government has been less successful in the last two

goals. To curb the escalation of housing prices and penalize property speculation, the

government employed various measures, including levying heavy taxes on capital gains

from real estate sales, restricting home ownership to those only actually living in the

homes, and restricting the renovation of high-rise apartments. But these measures were

often relaxed during downturns to boost the construction sector and stimulate the

economy and then tightened again during economic recoveries. Such short-term, “stop-

go” policies damaged the credibility of the government and fueled further speculation.

More importantly, the measures to discourage speculative demand had an adverse impact

on housing supply and accelerated the price hikes. More successful were the measures to

increase the housing supply, such as the one adopted at the turn of the 1990s.

The Korean government also made recurrent efforts to promote balanced regional

growth by trying to curb the concentration of population and economic activities in the

capital region and reducing the gap in income, jobs, education and other opportunities

among different areas. Despite these efforts, the population in the capital region continued

to rise, as the benefits offered to workers, firms and consumers by large markets

overwhelmed policy actions. In the 1990s and 2000s, the globalization of the Korean

economy further narrowed the government’s room for maneuver.

In the meantime, the economic and social conditions of the areas outside the capital

region have improved. The per capita GRDP of some regions now exceed that of the

capital region. A higher level of GRDP does not necessarily mean a higher level of

household income or welfare, but it does indicate that economic activities have indeed

increased in these areas. These achievements are attributable mainly to the flexible

reallocation of resources from less to more productive regions. The future efforts should be

directed at maintaining such flexibility across the country and building“soft” infrastructure

in regional communities.224

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225

References

Ancien, Delphine, “Local and Regional Development Policy in France: Of Changing Conditions andForms, and Enduring State Certainty,”Space and Polity, Vol. 9, No. 3, 2005, pp.217-236.

Bachtler, John and Douglas Yuill, “Policies and Strategies for Regional Development: A Shift inParadigm?”Regional and Industrial Policy Research Paper, No. 46, European PoliciesResearch Center, University of Strathclyde, 2001.

Brakman, Steven, Harry Garretsen and Marc Schramm, “The Strategic Bombing of German Citiesduring World War II and Its Impact on City Growth,”Journal of Economic Geography, Vol. 4, No.2, pp.201-218.

Brown, Lester R., Plan B 2.0: Rescuing a Planet under Stress and a Civilization in Trouble, W.W.Norton & Co., 2006.

Chae, Mi-ock, A Study on the Improvement of Land Price Appraisal System, Korea ResearchInstitute for Human Settlements, 1995 (in Korean).

Cho, Man, “Korea’s Real Estate Market Stabilization Policy: Assessment and Implications,”mimeo, KDI School of Public Policy and Management, 2010 (in Korean).

Choi, Joonook, Deockhyun Ryu and Hyungsoo Park, The Sectoral Allocation of GovernmentFunctional Expenditure, Korea Institute of Public Finance, 2005 (in Korean).

de la Fuente, Angel and Xavier Vives, “Infrastructure and Education as Instruments of RegionalPolicy: Evidence from Spain,”Economic Policy, Vol. 10, 1995, pp.13-51.

Fujita, Masahisa and Paul Krugman, “The New Economic Geography: Past, Present and theFuture,”Papers in Regional Science, Vol. 83, No. 1, 2004, pp.139-164.

Gill, Indermit and Homi Kharas, An East Asian Renaissance: Ideas for Economic Growth, WorldBank, 2007.

Government of Korea, The First Comprehensive Territorial Development Plan, 1972 (in Korean).______ , The Second Comprehensive Territorial Development Plan, 1982 (in Korean).______ , The Third Comprehensive Territorial Development Plan, 1992 (in Korean).______ , The Forth Comprehensive Territorial Development Plan, 2000 (in Korean).______ , The Forth Comprehensive Territorial Development Plan (Revised Plan), 2006 (in Korean).Joh, Jung Jay, Narrow Land and Immense Ocean, Han-ul, 2002 (in Korean).Jung, Hee-nam, “A Study on Transition of Korea’s Land Policies in 1945-1995,”The Korea Spatial

Planning Review, Vol. 23, Korea Research Institute for Human Settlements, 1995 (in Korean).Kim, Jong-il, “A Study on the Economic Disparity between Regions,”in Youngsun Koh (ed.),

Regional Policy for the 21st Century: Goals and Strategies, Research Monograph 2008-03,Korea Development Institute, 2008, pp.77-135 (in Korean).

Kim, Yong-woong and Mi-sook Cha, New Regional Development, 2009 (in Korean).Kim, Young-pyo, et. al, Land Price Assessment Standard for Mass Appraisal, Ministry of

Construction, 1991 (in Korean).Koh, Youngsun, “Introducing a Block-grant System for the National Balanced Development

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Special Account,”in Youngsun Koh (ed.), Regional Policy for the 21st Century: Goals andStrategies, Research Monograph 2008-03, Korea Development Institute, 2008, pp.185-261 (inKorean).

KRIHS (Korea Research Institute for Human Settlements), Performance and Evaluation of theFirst Comprehensive Territorial Development Plan, 1982 (in Korean).

______ , Performance and Evaluation of the Second Comprehensive Territorial DevelopmentPlan, 1992 (in Korean).

______, Sector Report on the Fourth Comprehensive National Territorial Plan, Vol. 1, 1999 (inKorean).

______ , A Study on the Reestablishment of the System of Mountain Ranges in the KoreanPeninsula, 2004 (in Korean).

______, History of Korea’s Territorial Development over 60 Years, 2008 (in Korean).Krugman, Paul, “Increasing Returns and Economic Geography,”Journal of Political Economy, Vol.

99, No. 3, 1991, pp.483-499.Ministry of Construction, A Study on Measures Taken for the Control of Over-concentration in the

Capital Region, 1977 (in Korean).Ministry of Food, Agriculture, Forestry and Fisherie, Major Statistics on Food, Forestry and

Fisheries, 2008 (in Korean).Myrdal, Gunnar, Economic Theory and Underdeveloped Region, Gerald Duckworth, 1957.Park, Yang-ho et al., “The Policy and Performance in Korean Territorial Development over the Six

Decades,”paper presented at the International Conference on the Korean Economy: SixDecades of Growth and Development, Hotel Shilla, August 30, 2010.

Yu, Yeong-hwi, Industrial parks in Korea, Korea Research Institute for Human Settlements, 1998(in Korean).

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60YEARS


Chapter 6

Social PolicyYoungsun Koh, Seung Kwon Kim,

Chang Whan Kim, Young Lee, Joo Seop Kim,Sang Young Lee and Young-Ock Kim


1. Introduction

Korea’s economic growth in the past was accompanied not only by an increase in

average per capita income but also broad-based social development. Educational

opportunities expanded rapidly, with the enrollment rate in elementary school exceeding

90 percent by 1970. Job opportunities also expanded significantly, as the unemployment

rate plunged from 8 percent in the early 1960s to less than 3 percent in the mid-1990s,

while the employment rate rose from 50 to 60 percent. During the high-growth period

(from the 1960s to 1980s), Korea’s income disparity narrowed and was one of the lowest in

the world despite the inadequate coverage of the social security system. Women’s

participation in education and the labor market also increased markedly.

These favorable developments are attributable to many factors, including the explosive

economic growth and the rapid creation of jobs; the active promotion of mass education

by the government; and the labor market that has functioned smoothly in most part. From

the early 1990s, however, income inequality has been increasing while economic growth

has been slowing. Increasing income inequality is shared phenomenon among advanced

countries as their increasing volume of trade with low-wage countries and the increasing

importance of skill in a knowledge-based economy place their low-skilled workers at a

greater disadvantage. In addition, the rising proportions of the elderly, single-parent

families and one-person households tend to increase poverty levels. Adding to the

problem are widening productivity gaps between manufacturing and services, between

heavy and chemical industries (HCIs) and light industries, and between large and small

businesses.1 In the meantime, the employment rate ceased to rise in the early 2000s and

now remains at around 60 percent. The quality of education is found wanting at all levels

of schooling, as is the effectiveness of the social security system.

A critical question is how to maintain the economic and social dynamism that

characterized Korea up to now. Efforts should continue to promote economic growth and

expand job opportunities on the one hand, and to strengthen social policies on the other.

In particular, the education system needs to play a greater role in supplying high-quality

human capital and helping socially disadvantaged groups to move upward. The labor

market should be made more flexible and participation by young and low-skilled workers

encouraged. The social insurance programs should expand their coverage to workers on

the margins of the labor market.

1 See the discussions in Chapter 3 of this book.

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The following sections describe the development of social policies in the areas of

population, education, the labor market, welfare, health care and women, and discuss

current challenges and policy responses. The last section concludes the chapter.

2. Demographic changes

2.1 OverviewThe Korean population grew from 20 million to 49 million between 1949 and 2009. The

population growth was particularly strong in the early years, but slowed with the falling

fertility rate (Figure 6-1). In 2009, the population growth rate was 0.3 percent and the

fertility rate 1.15 children per woman. The current fertility rate is well below the

replacement level of 2.1 and is one of the lowest in the world. If the trend continues, the

population is expected to shrink starting in 2019.

Figure 6-1. Population growth and fertility rate (1961-2008)


With the improvement in nutrition and health care, the life expectancy at birth increased

from 52.4 years to 80.1 years between 1960 and 2008. The increasing life expectancy

coupled with the falling fertility rate has led to a dramatic change in the age structure

(Figure 6-2). The share of the elderly (65 years and over) exceeded 10 percent in 2008, and

is set to reach one of the highest levels in the world by 2050 (Figure 6-3).

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Figure 6-2. Population pyramid in 1955 and 2005

Source: Natinal Statistical Office (http://www.kosis.kr).

Figure 6-3. Share of the elderly (65 years and over) in total population (1950-2050)

Source: OECD (http://www.oecd.org).

Governments often try to steer the population toward an“optimal” size in the belief that

it has an important influence on economic growth, living conditions and the environment.

The Korean government employed various measures to control population growth during

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the early stage of industrialization, but sharply reversed course in the mid-1990s due to the

steep fall in the fertility rate. The next subsection discusses the development of population

policy in the past six decades.

2.2 Demographic history

2.2.1 Pre-liberation periodPopulation growth before the Japanese annexation of Korea in 1910 was characterized

by high birth and death rates. With the spread of modern medical services during Japanese

colonial rule from 1910 to 1945, the crude birth rate rose from 3.8 percent to 4.2-4.5

percent. In this period, many people left rural areas and migrated to either Manchuria or

Japan for better economic opportunities. The child population grew whereas the working-

age population declined and the senior population stagnated. Consequently, the

population dependency ratio increased from 77 percent in 1925 to 89 percent in 1944.2

2.2.2 Period of turmoil: 1945-1960At the time of independence, there were an estimated 16 million people living in South

Korea. Up to 1960, the population grew in spite of the war and economic difficulties. One

reason was the large number of Korean immigrants. Between 1945 and 1949, 2.1-2.5

million people came to South Korea from Japan, Manchuria and North Korea, which

accounted for 10-12 percent of the entire population in 1949. The population grew by a

record annual rate of 6.1 percent between 1945 and 1950.

Death rates during the Korean War rose sharply, with an estimated 1.68 million dying

between 1950 and 1953. The crude death rate between 1950 and 1955 was 32 per 1,000

people. During the war, 300,000 South Koreans were absorbed by the North and 650,000

North Korean refugees fled to the South, resulting in a net influx of 350,000 to the South

(Tae-hwan Kwon and Doo-seop Kim, 2002).

In 1955-1960, the“baby boom” led to an annual population growth rate of 3.1 percent,

which, excluding immigration, is the highest rate in Korea’s demographic history.

Furthermore, most of the returning Koreans decided to settle in urban areas rather than go

back to their rural hometowns. Most of them went to Seoul or cities in its adjacent

provinces (Gyeonggi or Gangwon), which produced rapid urbanization in the central

region of Korea.This caused the government to take population control seriously.

2 Dependency ratio and other demographic data are presented in the Annex table 6.

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2.2.3 Precipitous decline in fertility: 1960-1985The early 1960s marked a crucial turning point in Korea’s demographic history. Rising

birth rates and falling death rates created an economic challenge, along with a massive

migration from rural to urban areas. Fearing that overpopulation would undermine

economic growth, the government launched a family planning program, which included

the distribution of free birth control devices and an incentive-based voluntary sterilization

program. The government also legalized abortion in 1973. This contributed to the rapid

decline of fertility rates from the high of 4.5 in the early 1970s to 1.7 in 1985.

2.2.4 Stagnant population growth since 1985In a sharp contrast to the 2.0 percent annual growth in 1960-1985, the population grew

by 0.9 percent in 1985-2000. The fertility rate stopped falling and stayed at 1.4-1.7 children

per woman. In 2000-2009, however, the fertility rate plunged again to 1.1-1.2 and the

population growth rate fell to 0.4 percent.

With the birth rate below the population replacement level of 2.1 children per woman,

the government’s population control policy was destined to end. Regulations and

incentives to discourage births were largely abolished. The government officially ended its

population control policy in 1996. In a complete reversal from the earlier policies, it began

to actively promote births in the 2000s.

2.3 Assessment and future challenges Up to now, there is no sign that the government effort to return the fertility rate to the

replacement level is bearing fruit. It is not easy to raise the fertility rate as it is influenced by

a host of factors, including women’s willingness to participate in labor market, the

compatibility between work and family life for mothers, the cost of the care and education

of children, and the social acceptance of out-of-wedlock births.

More recently, a growing number of foreigners from less developed countries are

migrating to Korea (Figure 6-4). The influx of foreign workers into Korea began in the late

1980s when the country was suffering from a serious manpower shortage. There has also

been growth in international marriages, with women from less developed countries, such

as Vietnam, marrying Korean men. The government has undertaken various efforts to

minimize the difficulties experienced by these foreign wives but the efforts are generally

found half-hearted and ineffective. A more serious effort is called for to integrate foreign

immigrants into the Korean society.

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Figure 6-4. Share of foreigners in registered residents in Korea

Note: The registered residents do not include illegal residents.


3. Education system3

3.1 OverviewEducation rapidly expanded in Korea after the liberation in 1945. The number of

elementary school students increased from 2-3 million in the 1950s to 5-6 million in the

1970s (Figure 6-5), with their enrollment rate exceeding 90 percent in 1970 (Figure 6-6).

Similar gains were made in middle and high schools and tertiary education. As a result, the

literacy rate rose from a mere 22 percent in 1945 to virtually 100 percent now. The portion

of the population with tertiary education increased rapidly and is now the highest among

the OECD countries (Figure 6-7).

The successful expansion of education has been a key factor in Korea’s industrialization

and democratization during the last six decades. Without it, the“Miracle on the Han”

would have been impossible. Education affects economic development both directly and

indirectly. Directly, education creates human resources and accelerates technological

progress. Indirectly, education contributes to institution building and social development.

Furthermore, education improves social mobility when access to education is guaranteed

to all regardless of income levels.

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3 We thank Hisam Kim (KDI) for his valuable comments on this section, which we incorporated into the final writing.


235

Figure 6-5. Number of students

Note: Tertiary education in this chart includes four-year universities and graduate schools only.

Source: Korea Educational Development Institute (http://cesi.kedi.re.kr); Bank of Korea (2005).

Figure 6-6. Enrollment rate

Note: 1) Enrollment rate = number of enrolled school-age students / school-age population. The school-age

refers to 6-11 years for elementary school, 12-14 years for middle school, 15-17 years for high school,

and 18-21 years for tertiary education.

2) Tertiary education includes all post-secondary education in colleges and universities.

Source: Korea Educational Development Institute (http://cesi.kedi.re.kr).

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Figure 6-7. Population that has attained tertiary education (2008)

Source: OECD, Education at a Glance 2010: OECD Indicators, 2010.

The rapid expansion of education was possible due to both cultural factors and timely

government policies. Korea has had a long tradition of putting the highest priority on

education. The government also strove to expand education, starting from the primary

level and then moving upward to higher education.

Just one year after the Korean War ended, the Korean government implemented a six-

year plan (1954-1959) for achieving compulsory primary education. The government made

consistent efforts to expand the supply of teachers and classrooms (Figure 6-8). In 1959,

the advancement rate in primary education reached 96 percent (Figure 6-9).

With the expansion of education taking place in sequence, starting from primary

education and then working its way up to secondary education and finally tertiary

education, it neatly matched the stages of Korea’s industrial development. The primary

education system first provided workers suitable for the labor-intensive industries of the

1960s. The development of the secondary education system contributed to the growth of

capital-intensive industries in the 1970s and 1980s, while the expansion of tertiary

education in the 1990s laid the basis for the knowledge-based economy. This is being

followed now by discussions about expanding and improving Ph.D. programs in Korea.

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Figure 6-8. Investment in educational resources

(a) Number of teachers (b) Number of schools


Figure 6-9. Advancement rate

Note: Advancement rate refers to the portion of graduates who moved on to the next level of schooling. In the

case of elementary school, it refers to the portion of first year students among the relevant age group.


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Together with quantity, the quality of education improved slowly but steadily. Korean

students now rank among the top academic performers in international test score

comparisons. In the OECD’s Programme for International Student Assessment (PISA)

conducted in 2003, Korean students aged 15 ranked among the top four in four different

assessment areas; math, reading, science and problem solving. In the 2006 PISA, Korea

ranked fourth in math and first in reading, although it fell to the 11th place in science. In

the Trends in International Mathematics and Science Study (TIMSS) of 2003, Korea ranked

second overall, with a second place in mathematics and a third place in science.

In the rest of this section, we document the development of the Korean education

system and summarize its key characteristics, evaluate the Korean education system, and

review future challenges.

3.2 Development of Korean educationThe Korean education system has evolved through four different stages; organizing the

education infrastructure (1945-1959), supporting industrialization (1960-1979), education

reforms (1980-1999), and globalizing the education system (2000-present).

3.2.1 Organizing the education infrastructure (1945-1959)The Basic Education Act was promulgated in 1949, which established an education

structure consisting of one or two years of pre-school education, six years of elementary

school, three years of middle school and three years of high school, followed by four years

of tertiary education and at least one year of graduate school. The system was based on

the local autonomy of educational districts similar to the U.S. school system, reflecting

ideas that had been brought to Korea by the U.S. military government following liberation.

Primary education was made compulsory, but the Korean War delayed the attainment of

this goal. The Ministry of Education launched a six-year program of compulsory enrollment

in 1954, and the advancement rate to primary education rose to 96 percent by 1959.

Education spending increased and new classrooms were built. The government also

created a legal and institutional framework for improving the quality of higher education in

the late 1950s.

The eradication of illiteracy made great strides under a five-year plan adopted by the

Ministry of Education, the Ministry of Domestic Affairs, and the Ministry of Health and

Welfare. The illiteracy rate fell dramatically from 78.2 percent in 1948 to 4.1 percent in

1958.

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3.2.2 Supporting industrialization (1960-1979)Dramatic increases in the number of primary and secondary school students required a

large-scale investment in school facilities. School facilities were expanded under the first

two Five-Year Economic Development Plans in the 1960s. Targets for building schools

were exceeded and investment doubled, and the serious shortage of classrooms was

gradually resolved. By 1971, the system of teaching students in two shifts a day was

abolished nationwide, except for lower-grade students in primary schools. A large number

of private schools were established to meet the strong demand for education in the 1970s.

The government decided to end the entrance examination to middle school, first in

Seoul in 1969 and then in the rest of the country in 1971, in order to eliminate the burden

placed on elementary school students in preparing for the entrance examination. The

resulting rise in the number of middle school students led to a corresponding increase in

the number of students attending high schools. But then the competition to enter a select

group of prestigious high schools intensified, and led the government to decide in March

1973 to introduce the“high school equalization policy,” which assigned middle school

graduates to high schools through a lottery. This system was first applied to high schools in

Seoul and Busan in 1974 and then gradually introduced in other regions. This had the

added benefit of encouraging more middle school students to attend high schools.

Vocational training programs at the high school level were started to produce the skilled

manpower needed for industrialization. Higher education also received greater attention as

industrialization required a large number of students trained in science and engineering.

Rapid economic development in the 1960s prompted the government for the first time to

prepare a plan for higher education in line with its economic development agenda. The

objectives of higher education changed from creating elites to developing systemically a

broad range of talents needed to support economic growth. Starting in 1968, the

government successfully managed to produce more students majoring in science than in

liberal arts by imposing student quotas on universities.

The government established a plan to restructure the universities and passed the Private

School Act in 1963 to address quality degradation resulting from the sudden surge in the

number of university students. The plan and the law were later modified to become less

restrictive, but they were the first instruments used by the government to tighten its control

over universities.

3.2.3 Education reform (1980-1999)The high school equalization policy and the increase in the number of schools eased the

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4 But this quota policy increased not only university enrollment but also university graduation because, in fact, most studentseventually graduated once they had been admitted to the university.

competition for high-school entrance, but at the same time it intensified the competition for

university entrance. During the late 1970s, private tutoring and spending additional years

after high-school graduation preparing for the university entrance examination became

very common and began to be recognized as a serious social problem.

Figure 6-10. Number of high school graduates and university entrance quota

Source: Ministry of Education and Human Resources, White Paper on Education, 2007.

In response, extreme measures were taken in 1980 to curb private tutoring. The

government outlawed private tutoring and abolished admission examinations for individual

universities and instead forced them to select students based on the national examination

administered by the government. It increased the quota for freshman while leaving

unchanged the quota for graduating students, in order to make it easier for high school

graduates to enter universities but more difficult for university students to graduate.4

Despite the government’s efforts, educational reform remained an important social issue.

In the mid-1980s, the Education Reform Council was set up for the first time as a

government body. In the early 1990s, the Commission on Education Reform was

established. The Commission issued policy proposals on May 31, 1995, which were then

referred as the 5.31 Education Reforms.

The basic premise of the 5.31 Reforms was that Korea needed to restructure the entire

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education system in preparation for a knowledge-based society. The goal was to create an

open learning society, or Edutopia. There were 48 different objectives outlined in the

reform plan, including administrative deregulation, decentralization of the school system,

curriculum reform, an increase in government education spending to 5 percent of GDP,

and the use of information and communication technology (ICT) in schools. One of the

important changes was giving communities more say in operating local schools by setting

up an advisory council in each school with the participation of parents, teachers and the

local government. The creation of autonomous schools was also proposed, to which

greater autonomy was allowed in terms of student selection and curriculum choice than in

other schools. The curriculum reforms focused on fostering the talents, aptitudes and

creativity of students to prepare them for a globalized and knowledge-based economy.

In the mid-1990s, requirements for the establishment of universities or colleges were

eased. As a result, many low-quality private colleges were newly established in the areas

outside the capital region where land prices were lower and development regulations were

weaker. Although it has expanded accessibility to higher education, concerns were raised

about the quality of some of these higher education institutions.

3.2.4 Adjusting to a demand-centered education system (2000 to the present)

Education in Korea since the start of the 21st century has focused on the development of

students who can excel in the globalized economy. Given that the quantitative expansion

of education has been accomplished, the improvement in educational quality becomes the

more important mission, which needs education reform in schools and universities that

enables them to better meet the demand of students, parents and companies. Three

principles were emphasized for this goal－autonomy, competition and accountability.

The 5.31 Reforms purported to achieve the same goal with their focus on school

autonomy, but the decentralization of the school system fell short of expectations. The Lee

Myung-bak administration in 2009 sought to revive these efforts with an education

liberalization plan, which would give schools more power to choose their own curriculum

and teachers. This would result in a competitive education system populated by a number

of diverse and unique schools.

Lifelong education is also receiving renewed interest in the 2000s. The Lifelong

Education Act was introduced in 2000 to promote initiatives in this area. The Lifelong

Learning Agency was established in 2008. The 2000s also witnessed many other

developments. The Basic Human Resources Development Act was enacted in 2002.5

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Tuition-free education up through middle school was started in 2003. Reform measures to

improve the quality of higher education were implemented, including the“Brain Korea

21” in 1999, the University Structural Reform Initiative (2004-2009),6 the introduction of a

professional graduate school system (2007), the New University for Regional Innovation

Initiative, or NURI (2005-2009), and measures to enhance cooperation between industry

and academia.7 The Lee administration adopted the High School Diversification 300

Project, which would allow middle school graduates to choose among various types of high

school according to aptitude and ability. The government is also undertaking a three-stage

plan to allow universities more autonomy in their operation such as student selection.

Meanwhile, the use of ICT has been increasing in the education system. The National

Education Information System, or NEIS, was introduced in 2003 to keep records on every

teacher and student on a Linux-style platform although its implementation nearly touched

off a nationwide strike by the Teacher’s Union. As for tertiary education, the University

Information Disclosure System was recently implemented for students and parents to have

access to selected information on all universities and colleges nationwide via the internet,

which would facilitate demand-centered restructuring of higher education.

3.3 Key characteristics of the Korean education system The key characteristics of the Korean education system can be summarized as follows.

First, Korea achieved a rapid expansion of education based on a sequence of first

focusing on primary education, then secondary education, and finally tertiary education, in

line with Korea’s economic and social development. The elementary education expanded

rapidly in the late 1950s and achieved the universal education in the early 1960s when

Korea embarked on industrialization. The enrollment rate of middle school students

jumped in the 1970s and exceeded 95 percent in the early 1980s, while that of high school

students surged in the 1970s and the 1980s to surpass 95 percent by the early 1990s.

Finally, tertiary education expanded rapidly in the early 1980s and the mid-1990s. The fact

that 82 percent of Korean high school graduates went on to university in 2009 shows that

Koreans have achieved a nearly universal access to higher education.

5 Under the act, the government must prepare a human resource development plan every five years. The plan must containgovernment directives for human resource development, including instructions and guidelines to related administrative bodies,the private sector and central and local government agencies.

6 The higher education reforms included reducing student quotas, promoting the consolidation of financially weak universities,reorganizing the administration of national universities, and encouraging universities to reform their internal structures to improvetheir competitiveness.

7 Other programs were launched to strengthen the competitiveness of universities, including the Education Information DisclosureSystem Initiative (2008), the Talent Development for Leading Industries in Regional Economic Zones Initiative (2009) andStrengthening University Education, a program combining the NURI project and college specialization projects.

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Second, the enrollment rate in Korea has been very high by international standards.

Taejong Kim and Young Lee (2007) and Young Lee (2010) ran a cross-country regression

of enrollment rates on (log of) GDP per capita and its squared term. They found the

enrollment rate for primary education in Korea in the early 1960s was around 13 percent

higher than the predicted value, and that for secondary education in the early 1980s was

also 12 percent higher than the predicted value. It was found that the enrollment rate for

tertiary education in the late 2000s was 46 percent higher than the predicted value.8

Third, the private sector has played a key role in the development of Korea’s education

sector. In 2009, 46 percent of high school students were enrolled in private schools, and 79

percent of university students were enrolled in private universities (Figure 6-11). These

ratios are much higher than in other OECD countries, suggesting that expansion of upper-

secondary and tertiary education has relied heavily on private resources.

Figure 6-11. Fraction of students attending private institutions (1965-2009)

Source: Ministry of Education, Science and Technology and Korean Educational Development Institute, EducationStatistical Yearbook, 2008.

Fourth, the government has directly and extensively intervened in primary education. In

2009, only 1 percent of elementary school students attended private schools. This is in

sharp contrast to the limited government financing of higher education.9 The intervention

in secondary education falls in the middle, with about half of students attending private

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8 In fact, there is suspicion that too many people are receiving higher education. The difference in wages between high schoolgraduates and junior college graduates is very small (see Figure 6-20 in the next section).


9 But the Korean government does intervene in tertiary education. The number of students has been under government control, andpart of the personnel and financial management is under government scrutiny.

schools. A less government involvement in upper level education is an appropriate choice

because the positive externality of education is smaller for upper level education.

3.4 Evaluation and challenges Not only in Korea but also elsewhere, education has played a key role in economic

development, directly by creating human capital and accelerating technological progress,

and indirectly by contributing to institution building and social development. There is

extensive literature examining the role of education in economic growth starting from

Barro (1991) and Mankiw, Romer and Weil (1992).

In the Korean case, Young Hwa Kim et al. (1997) explored the question of how much

each level of schooling contributed to economic growth. They concluded that the

contribution of primary education to economic growth gradually decreased, while that of

secondary and higher education increased over time. In related research, Jang (2007)

studied the role that each level of education played in Korea’s economic development.

During the 1960s and 1970s, primary education made the biggest contribution to the

economy as is found in most other developing countries. But with economic growth in the

1970s and 1980s, secondary education started to contribute more. The contribution of

tertiary education to economic growth in the 1980s was relatively small, though positive.

Despite these achievements to date, the Korean educational system has many problems

as well. Many people believe the current system with strong government intervention does

not fit with a knowledge-based economy and society where creativity and diversity matter

much more than before. A supply-centered education system was necessary at the early

stage of development because it enabled the government to expand education quickly at

low cost. But it is now blamed for many problems.

A lot of students and parents express dissatisfaction with the public education system

that is not very responsive to changing demands. They accordingly resort to private

tutoring or choose to study abroad. Table 6-1 shows that private tutoring is very common

and expensive in Korea. Indeed, some argue that private rather than public education has

been the major factor behind the excellent performance of Korean students in international

academic tests.

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Table 6-1. Private tutoring in Korea (2007)

Note: 1) Of those attending private tutoring.

Note: 2) As a percent of household income (salary and wage earners) in 2007.

Source: OECD (2008).

Many firms are not satisfied with college or university graduates and spend a large

amount of money on training new employees. Many colleges and universities have been

slow in transforming themselves to meet changing demand, and the mismatch between

jobs and academic subjects is severe (Table 6-2). There are many graduates who cannot

find a job after graduation and become inactive (Figure 6-12).

Table 6-2. Employment rates after graduation and study-job matches of tertiary education

(Unit: %)


Demographic changes are providing challenges to service providers in the higher

education market. The school-age population is on a downward trend because of the

extremely low birth rate, which will create problems particularly for private institutions that

depend heavily on tuitions.

To meet these challenges, the Korean education system needs a fundamental reform.

First of all, students and parents should be given a wider range of choices. Various

regulations on the operation of schools and universities should be relaxed to encourage

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Participa-tion rate

(%)

Average hoursof

participationper week1)

Per capitaexpenditure(thousandwon) 1)

Share2)

(%)

Totalexpenditure

(trillion won)

Share ofGDP

(%)

Total 77.0 10.2 288 8.0 20.0 2.2

Primary school

Middle school

General high school

Vocational high school

88.8

74.6

62.0

33.7

10.0

11.9

8.3

7.4

256

314

388

198

7.1

8.7

10.7

5.5

10.2

5.6

3.9

0.4

1.1

0.6

0.4

0.0

Fields of study Employment rate Study-job match rate

All higher educational institutions 76.1 72.3

Education

Medical and pharmacy

Engineering

Social sciences

Art and physical education

Natural sciences

Humanities

73.1

89.2

78.2

73.1

79.9

72.5

68.5

86.2

92.9

76.8

62.8

77.7

67.0

50.2


diversity in educational programs and expand the range of choices for consumers. To help

them make their choice, the government should provide detailed information on the

performance of individual service providers. An evaluation system of teacher and school

performance is also needed. The reform will strengthen the competition between service

providers and contribute to enhancing their service quality.

Figure 6-12. Inactive youth in the 15-29 age group with tertiary education (2004)

Note: 1) Inactive youth refers to those neither in employment nor in education or training (NEET).

2) Data for Korea and New Zealand are for 2005. For educational attainment in the United Kingdom, they

are for 2003.


Equally important is the effort to enhance the equity of educational opportunities. The

educational gap between rich and poor is widening. The government needs to provide

more need-based scholarships and improve the income-contingent loan scheme

introduced in 2010. To finance these programs, existing financial support to universities

should be carefully scrutinized for their effectiveness because many support programs have

been criticized for strengthening government controls on universities and promoting the

rent-seeking activities.

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4. Developments in the labor market

4.1 OverviewThe Korean labor market underwent profound changes in the last 60 years in close

relation to the overall development of the Korean economy. The abundant supply of

cheap labor in the 1960s propelled the growth of labor-intensive industries. The rise of

heavy and chemical industries (HCIs) since the 1970s increased the demand for skilled

labor. The demand for skill grew further with the development of the ICT industry since

the 1980s. The latter also raised the premium on education, experience and individual

adaptability to changing labor demands. The globalization of the Korean economy

accelerated these changes.

Similar to other markets for factors of production, the labor market needs to be efficient

and flexible to function properly. But it is differentiated from other factor markets in that

the factor in this case is the human being. The government has intervened in the market to

protect workers against abuses by management, promote their skills, and provide income

support for the unemployed, even if it entails some loss of efficiency and flexibility.

The most urgent issue right now is boosting the employment of youth, women and the

elderly in the face of decelerating population growth and increasing income inequality. A

concerted effort across various policy areas is called for. In the labor market, it is necessary

to reduce employment protection for individual dismissals and increase temporary

employment to a level comparable to other OECD countries

This section will review the development of the Korean labor market over the last 60

years, highlight its important features, and discuss policy issues.

4.2 Changes in the labor market

4.2.1 The first turning pointOver the last 60 years, there were three notable turning points in the Korean labor

market. The first of these occurred in the mid-1970s when the world of unlimited labor

supply as described by Lewis (1954) came to an end (Moo-Ki Bai, 1982). During the first

phase of economic development from the 1960s to the mid-1970s, a significant amount of

the underemployed labor force was in rural areas and manpower continued to flow in a

steady stream into urban areas. The economic powerhouses at this time were labor-

intensive industries such as those producing wigs and shoes that only required simple,

low-skilled labor. This type of labor was readily supplied by vocational high schools and

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the corporate training centers of large enterprises.

Figure 6-13. Unemployment rate

Note: There was a change in the definition of unemployment in 2000. Previously, the unemployed were defined

as those who were without work and had actively looked for work in the past one week. In 2000, the

period was extended from one to four weeks. Both series based on old and new definitions are presented

in this figure.


As the unemployment rate declined rapidly from 8 to 4 percent (Figure 6-13), however,

the seemingly unlimited labor supply began to dry up, signaling the end of the Lewisian

world. In the second half of the 1970s, the transformation of the economy to one based on

heavy and chemical industries (HCIs) somewhat lowered the growth elasticity of labor

demand in the manufacturing sector. But this was countered by the increased demand

from the construction sector that experienced booms in the domestic market and in the

Middle East. The shortage of construction labor actually led to steep wage hikes in this

sector (Figure 6-14). Overall wage growth outstripped output growth by a large margin in

1976-1978 (Figure 6-15).

In 1980, the economy, and the labor market in turn, entered difficult times due to a

combination of factors including the second oil shock, rice crop failures and political

instability. The unemployment rate shot up to 5.2 percent and stayed above 4 percent

throughout the first half of the 1980s. HCIs in particular had to go through restructuring in

this period. Nonetheless, the economy was able to regain its balance before any

irreversible damages were done to the labor market thanks to its high wage flexibility.

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Figure 6-14. Growth of unit labor costs

Source: OECD (http://stats.oecd.org).

Figure 6-15. Growth of wages and output per work

(a) In current prices

(b) In constant prices

Note: Wage in constant prices was obtained by deflating wage in current prices with the consumer price index.

Output per worker was obtained by dividing GDP with the number of workers.

Sources: Ministry of Employment and Labor; Bank of Korea (http://ecos.bok.or.kr); National Statistical Office

(http://www.kosis.kr).

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4.2.2 The second turning pointThe second turning point for the Korean labor market happened in the late 1980s.

Taking advantage of the“three lows”10 and the wave of trade liberalism sweeping across

global markets, the Korean economy expanded quite rapidly in size. The labor market also

experienced unprecedented changes. Employment jumped in the manufacturing and

service sectors, pushing unemployment rates down to 2.5 percent in 1988 (Figure 6-13).

Price stability and wage hikes significantly increased the purchasing power of the working

class. In 1988-1989, wage growth exceeded productivity growth (Figure 6-15).

This was also when the mismatch between labor supply and demand among different

sectors became an issue. Measures were discussed to attract the elderly and women into

the labor market, and importing labor from abroad was considered for the first time.

During this period, political democratization gave vent to the oppressed voice of

workers. The labor movement started to grow rapidly in July and August of 1987 after the

formation of the Hyundai Motor Labor Union in Ulsan, one of the major industrial cities in

the nation. The demands of the unions were two-fold; better wages and the guarantee of

freedom for union activities. The demands for wage increase were mostly accommodated

and resulted in a two-digit growth rate in wages as the government refrained from

Figure 6-16. Number of labor disputes

Source: Korea Labor Institute (http://www.kli.re.kr).

10“Three lows”refer to the low energy prices, low international interest rates, and the low value of Korean won against Japaneseyen. The “three-low period”usually refers to 1986-1988.

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intervening with police forces or arresting union leaders. This led to a surge in unionization

and wage strikes in almost all industrial complexes in the nation (Figure 6-16). Company-

controlled unions were ousted as democracy extended its reach to trade unions as well.

The number of unions rose from 2,700 in June 1987 to 7,800 in 1989, while union

membership increased from 1.05 million to 1.93 million. Labor union participation rate

rose from 12 percent in 1986 to 19 percent in 1989 (Figure 6-17).

Figure 6-17. Labor union participation rate


Table 6-3. Workers by status

(Unit: %)


Entering the 1990s, wage growth slowed and came in line with productivity growth by

1993 as the nation suffered a recession following the end of the“three-low” period

8

1 0

1 2

1 4

1 6

1 8

2 0

196 3 196 8 197 3 197 8 198 3 198 8 199 3 199 8 200 3 200 8

( %)

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1989 1994 1999 2004 2009

Total workers 100.0 100.0 100.0 100.0 100.0

Non-salaried workersSelf-employed workersUnpaid family workers

40.828.812.1

37.127.110.0

37.628.19.5

34.027.16.9

30.024.35.7

Wage and salary earnersRegular employeesTemporary employeesDay laborers

59.232.416.99.8

62.936.417.59.0

62.430.221.011.2

66.033.822.59.7

70.039.921.78.4


(Figure 6-15). But working conditions kept improving as indicated by the rising share of

salaried workers and regular employees among all workers (Table 6-3, Figure 6-18). The

employment rate continued to rise in this period for both male and female workers (Figure 6-

19).

Figure 6-18. Share of salaried workers and regular employees


Figure 6-19. Employment rate


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Production workers in manufacturing were placed in a particularly favorable position.

Thanks to the educational reform of 1981 that doubled university capacity, the supply of

highly-educated workers increased greatly from the second half of the 1980s. In contrast,

the supply of production workers in manufacturing decreased, causing a serious labor

shortage and steep wage growth for these workers. This is reflected in the falling premium

on education through the mid-1990s (Figure 6-20).

Figure 6-20. Wage by worker’s educational attainment


4.2.3 The third turning pointThe Korean labor market encountered its third turning point in the mid-1990s. The

advance of ICT since the 1980s reduced the demand for low-skilled workers carrying out

simple, repetitive functions and placed them at a disadvantage vis-a-vis highly-skilled

workers. In addition, globalization further aggravated the weakening status of low-skilled

workers as imports from low-wage countries (especially China) increased and as domestic

firms moved their plants to these countries to reduce production costs. Globalization also

intensified competition between firms and increased their need for flexible labor

management in response to constantly changing business conditions.

As a result, overall job security declined and wage distribution deteriorated. The share of

temporary employees among salaried workers started to rise in 1994 (Figure 6-21). The

wage premium on education rose again in the latter half of the 1990s despite the increasing

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‵


supply of university graduates (Figure 6-20). The wage gap between young and prime-age

workers also widened in the midst of the falling supply of young workers. The gap

between workers within the same educational or age group also increased (Won Duck

Lee, 2004). These changes indicate a rising premium on skill, experience and individual

adaptability to changing labor demands.

Figure 6-21. Share of temporary employees and day laborers


The economic crisis at the end of 1997 served to increase uncertainties in job security

and exacerbated the income inequality. The crisis propelled the corporate labor-

management paradigm into abrupt and profound changes. Firms turned more careful in

their investment and recruiting decisions, and began to rely more on outsourcing and non-

regular employment. Employment adjustment became an ongoing process, and wage

disparity rose as firm’s compensation and training systems were adjusted in favor of the

highly-skilled workers.

4.3 Recent changes in the structure of the labor market

4.3.1 Increasing role of female workersBetween 1963 and 2009, employment grew three-fold from 7.6 million to 23.5 million.

In this period, the share of female workers in total employment increased from 35 to 42

percent. The female employment rate increased steadily from 34 percent in 1963 and

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reached a peak of 49 percent in 2007, before experiencing a setback in the following years

due to the global financial crisis (Figure 6-19). In contrast, the male employment rate has

fluctuated between 70 and 75 percent since the 1960s and contributed little to the rise of

the total employment rate.

Female workers played a particularly important role in the 1960s and 1970s in labor-

intensive industries. In the 1980s and 1990s, their labor market participation continued to

expand as more women completed high school or university. Most noticeable has been

the increased labor market participation of women in the age group 25-29 (Figure 6-22).

Figure 6-22. Female labor market participation rate by cohort

Note: The data for 2009 was substituted for the data for 2010, which was not available at the time of publication.


In spite of progress to date, Korea’s employment rate is still lower than that of many

other OECD countries (Figure 6-23). There is the urgent need to encourage the labor

market participation of more women to minimize the impact of the decline in the working-

age population on output growth. Efforts are required to help increase the supply of

affordable and reliable childcare services, reduce very long working hours, and eliminate

various practices that make it difficult for women to reconcile work and family life. SocialP

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Figure 6-23. Employment rates in OECD countries (2008)


4.3.2 Employment expansion in the service sectorThe employment share of the agriculture, forestry and fishing industries declined

dramatically since the early 1960s. Currently, only 7 percent of all workers are in the

primary sector (Table 6-4). The employment share of manufacturing rose in the early

industrialization period but began to fall after reaching a peak of 28 percent in 1989. Its

share is now 16 percent. The number of workers in manufacturing went down from 5.2

million in 1991 to 3.8 million in 2009.

Table 6-4. Employment by sector

(Unit: 1,000 workers, %)

Note: Data for‘mining and quarrying’and‘public utilities’are not presented here because their shares are very small (less than 1percent).


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TotalAgriculture,forestry and

fishingManufacturing Construction Services

Wholesale andretail trade, hotels

and restaurantsOther services

1963

1970

1980

1990

2000

2009

7,563(100)

9,617(100)

13,683(100)

18,085(100)

21,156(100)

23,506(100)

4,763(63.0)

4,846(50.4)

4,654(34.0)

3,237(17.9)

2,243(10.6)

1,648 (7.0)

601 (7.9)

1,268(13.2)

2,955(21.6)

4,911(27.2)

4,293(20.3)

3,836(16.3)

192(2.5)

281(2.9)

843(6.2)

1,346(7.4)

1,580(7.5)

1,720(7.3)

1,952(25.8)

3,114(32.4)

5,064(37.0)

8,442(46.7)

12,959(61.3)

16,182(68.6)

-

-

2,625(19.2)

3,935(21.8)

5,752(27.2)

5,536(23.6)

-

-

2,439(17.8)

4,507(24.9)

7,207(34.1)

10,646(45.3)


257

The service sector has expanded its employment continuously. The number of workers

increased from 2.0 million in 1963 to 16.2 million in 2009, and the employment share rose

from 26 to 69 percent. Within the service sector, wholesale and retail trade, along with

hotels and restaurants, accounted for about half of the employment in 1980 but one third

in 2009. The number of workers in these businesses fell from 6.0 million in 2002 to 5.5

million in 2009, indicating a continuous restructuring in this sector.

4.3.3 Increasing share of professionals and clerical occupationsBy occupation, the group of professionals, technicians, administrators and managers has

increased its share in total employment since the 1960s due to the growth of knowledge-

based industries and enhanced skill requirements (Table 6-5).

Table 6-5. Employment by occupational group

(Unit : %)

Note: There were changes in the classification of occupational groups in 1993, 2000 and 2008.


The proportion of clerks also had been increasing before the financial crisis of 1997,

which led to a widespread restructuring in firms and a sudden 13 percent drop in clerical

jobs between 1997 and 1999. In the 2000s, however, the increase resumed.

On the other hand, service and sales workers saw their share falling in the 2000s. The

share of machine operators, assemblers and manual workers is also stagnating at around

33 percent. These indicate the deteriorating position of low-skilled workers.

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Professionals, technicians,administrators and managers

ClerksService and

sales workersAgriculture, forestry

and fishing

Machine operators,assemblers, and manual

workers

1963

1970

1980

1990

1993

3.3

4.8

5.3

8.7

10.4

3.5

6.0

9.3

13.0

15.4

15.3

18.8

22.4

25.7

28.5

62.9

50.2

34.0

17.8

13.3

15.0

20.2

29.0

34.8

32.4

1993

2000

15.3

18.9

12.9

11.6

21.1

23.8

12.1

10.0

38.7

35.7

2000

2008

18.6

22.4

11.9

14.9

26.0

23.5

10.0

6.7

33.5

32.6

2008

2009

20.9

21.2

14.8

15.3

24.0

23.4

6.7

6.5

33.6

33.7


4.3.4 High incidence of non-standard workers and self-employmentThe Korean labor market is distinguished from those in other OECD countries by the

prevalence of non-standard workers (temporary employees or day laborers) and self-

employment (Figure 6-24). 　

Figure 6-24. International comparison of the employment pattern

(a) Temporary employment (2007)1) (b) Self-employment (2008)

Note: 1) Reference year is 2004 in Mexico, 2005 in the United States and 2006 in Australia.

Sources: OECD (http://www.oecd.org); OECD (2008).

First, a large number of workers work as temporary employees or day laborers with a

short duration and low job security. In 2009, 43 percent of salaried workers were either

temporary employees or day laborers.

The incidence of non-standard work is particularly high among women, older workers

and the less-educated, whereas younger and highly-educated male workers mainly enjoy

regular jobs. In 2006, the share of non-standard workers was 20 percent in large firms with

300 and more employees and about 50 percent in small firms with less than 5 employees.

As a result, two-thirds of non-standard workers were employed in small firms with less

than 30 employees. Non-standard workers employed in large firms with more than 300

employees were only 7 percent.

The share of non-standard workers among salaried workers started to rise in 1994 but

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reversed course in 2001 (Figure 6-21). Their absolute number stayed at 7.2-7.3 million

since 2002, but the healthy increase of regular employees caused their share to fall (Figure

6-25). The dynamics behind such changes is not well understood. The study by Yong-

Seong Kim (2009) suggests that some non-standard workers do move upward by finding

regular jobs, but many others exit the labor market to be replaced by new entrants who

have regular jobs.

Figure 6-25. Workers by status


Figure 6-26. Share of the non-salaried workers


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Second, the self-employed accounted for 24 percent of all employment in 2009. Their

share, however, had been falling since the 1960s (Figure 6-26). The trend stopped in the

1990s but resumed in the 2000s. More dramatic has been the decline in the number and

share of unpaid family workers. Again, it is not clear how these changes are related to the

increase of regular employees. In any case, the transition toward regular employment

looks desirable as it will lead to increased job stability, a smaller underground economy,

and greater coverage of social insurance programs.

4.3.5 Increasing share of part-time workersThe share of part-time workers has been increasing over the years (Figure 6-27). In

2008, 15 percent of all workers spent less than 36 hours per week in their jobs, and 9

percent less than 30 hours per week. Part-time employment declined a little in 2009.

Figure 6-27. Share of part-time workers in total employment

Note: Part-time workers are defined as spending less than 30 hours or 36 hours per week in their jobs.

Source: National Statistical Office (http://www.kosis.kr); OECD (http://www.oecd.org).

The share of part-time employment in Korea is still lower than those in many other

OECD countries (Panel (a) of Figure 6-28). In the Netherlands, for example, part-time

employment accounts for one-third of total employment. Korea ranks in the middle in

terms of the full-time employment rate (Panel (b) of Figure 6-28). The rising number of

part-time jobs would help increase the overall employment rate.

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Figure 6-28. Incidence of part-time employment (2008)

(a) Share of part-time employment (b) Employment rate

Note: Reference year is 2004 in Mexico.


4.3.6 Minimum wageThe minimum wage system was introduced in 1988 to protect low-skilled workers. It

was first applied to firms with 10 or more full-time employees in the manufacturing sector.

Coverage was extended to firms with 10 or more employees in 1990 across all sectors, to

firms with 5 or more employees in 1999, and finally to all firms in November 2000.

The minimum wage has been continuously raised in nominal value since its

introduction. As a percentage of the median or mean wage, it initially declined until 1996-

1997 and then began to rise (Figure 6-29). In 2008, it corresponded to 39 percent of the

median wage and 32 of the mean wage. Its level is still on the low side in terms of

international comparisons (Figure 6-30).

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Figure 6-29. Trends in the minimum wage level


Figure 6-30. The level of minimum wage in OECD countries (2008)

Note: Reference year is 2005 in Mexico and 2006 in Turkey


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4.3.7 Working HoursThe Labor Standards Act of 1953 stipulated the maximum working hours of eight hours a

day and 48 hours a week. After 36 years, the weekly ceiling was lowered to 44 hours in

1989. After another 15 years, it was lowered further to 40 hours in July 2004. The 40-hour

ceiling was initially applied to firms with 1,000 or more employees and then was gradually

extended to firms of different sizes. As of 2010, firms with 20 or more employees are

subject to the 40-hour ceiling.

Even with the ceiling, overtime work is allowed up to 12 hours a week, provided that it

has been agreed upon between workers and the management and that the hourly pay for

overtime work is at least 50 percent higher than that for normal work.

The number of hours worked per worker per year has been declining over the last two

decades (Figure 6-31). Between 1986 and 2008, it declined by 23 percent from 2,923 to

2,256 hours. Nevertheless, Koreans currently work the longest hours in the OECD area

(Figure 6-32). Such long working hours partly (but not entirely) reflect the low incidence of

part-time work and makes it difficult to reconcile work and family life.

Figure 6-31. Hours worked in Korea


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Figure 6-32. Hours worked in the OECD area (2008)

Note: Reference year is 2004 in Turkey.


4.3.8 Labor market flexibilityAs pointed out by Grubb, Lee and Tergeist (2007), the Korean labor market is suffering

from a duality between the core and the periphery, with the former showing high

inflexibility and the latter high insecurity (Table 6-6).

Table 6-6. Flexibility and security in the Korean labor market

Source: Byung You Cheon et al.(2006).

At the core is a group of workers who mostly have regular jobs in the manufacturing or

public sector or in large corporations. They often have labor unions to represent them,

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Main occupants

Flexibility Security

Numericalflexibility

Functionalflexibility

Employmentprotection

Social safetynet

Active labormarket policies

Core

Regular workers in themanufacturing sectorand/or in largecorporations

Very lowflexibility

Very lowflexibility

HighIncluded incoverage, albeitineffective

Included incoverage, albeitinefficient

PeripheryNon-regular workers inthe service sectorand/or SMEs

High labormobility, lowjob security

No flexibility Very lowMostlyexcludedfrom coverage

Mostly excludedfrom coverage


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enjoy a high level of employment protection, are covered under the social safety net

(public pensions, unemployment benefits, etc.), and participate in active labor market

policies (training, etc.). Numerical and functional flexibility is very low as firms have

difficulty in adjusting labor inputs in response to changing demands.11 The core is

structured around the unionized segment of the labor market, which is small in Korea

compared to those in other countries (Figure 6-33).

Figure 6-33. Labor union participation rate in OECD countries (2008)

Note: Reference year is 2005 in Mexico and 2007 in Iceland.


In contrast, the periphery of the Korean labor market is populated by the workers who

usually do not have regular jobs, work in the service sector and/or in SMEs, enjoy a very

low level of employment protection, and are excluded from the coverage of social safety

net and active labor market policies (ALMPs). Their job security is very low and functional

flexibility is irrelevant to them.

In international comparisons of labor market flexibility, Korea shows an average

performance. For example, in a comparison of 33 OECD countries, Korea ranked 21st in

the dismissal of permanent workers, 19th in the regulations on temporary workers, and 6th

in collective dismissal, taking the 16th place in the overall ranking (Table 6-7).

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11 Broadly speaking, numerical flexibility refers to the ability of a firm to adjust its quantity or timing of labor inputs to accommodatechanges in demand, whereas functional flexibility relates to the ability of a firm to deploy workers between tasks as demand fordifferent types of labor changes.


Table 6-7. OECD employment protection index (2008)

Note: Scale from (least restrictions) to 6 (most restrictions).


Such comparisons, however, should be made with care. First of all, as the OECD index

is focused on regulations concerning dismissal and temporary employment, it does not

take into account wage or functional rigidities within the internal labor market of large

corporations that result from a seniority-based pay scheme, labor union interference in

managerial decisions (such as the deployment of workers), and other inappropriate

practices.

On the other hand, the statutory employment protection loses much of its meaning

when applied to the periphery of the labor market where market forces take precedence

over laws and regulations that lack an effective enforcement mechanism. The overall labor

market flexibility can therefore be substantially higher than implied by the OECD index.

The rigidity seems concentrated at the core that has very militant labor unions and is

protected from competition by their monopolistic position in the product market.

4.4 Labor market challengesBecause labor demand is a derived demand of the product market, changes in the

product market have triggered changes in the labor market. In the 1960s and 1970s, when

labor-intensive industries were leading economic growth, less-skilled labor found ample

job opportunities. As the economic importance of HCIs increased in the 1970s and 1980s,

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Protection of permanentworkers against

(individual) dismissal

Regulation ontemporary forms of

employment

Specificrequirements for

collective dismissal

OECD employmentprotection index

United States 0.56 0.33 2.88 0.85

Canada 1.17 0.22 2.63 1.02

United Kingdom 1.17 0.29 2.88 1.09

Japan 2.05 1.50 1.50 1.73

Korea 2.29 2.08 1.88 2.13

Italy 1.69 2.54 4.88 2.58

Germany 2.85 1.96 3.75 2.63

France 2.60 3.75 2.13 3.00

OECD average 2.09 2.12 2.75 2.21

Korea’s rank 21 19 7 16


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demand for skilled labor increased. Following the advent of ICT in the 1990s, demand for

labor in the ICT sector has increased rapidly.

Korea has also experienced changes in labor-management relations over the past 60

years. In the early years, greater emphasis was placed on economic growth than on

workers’rights. With democratization beginning in the latter half of the 1980s, the number

of trade unions increased rapidly and created a new terrain for labor-management

relations. These changes have had positive effects on workers’welfare, but the spread of

adversarial labor-management relations and militant labor movements is now widely seen

as disrupting Korea’s social and political stability and threatening its sustained economic

growth.

The Korean labor market is currently undergoing further changes. The remainder of this

subsection summarizes necessary policy responses to these changes.

The most important issue is raising the employment rate that still lags behind those in

other advanced countries. This requires efforts to create demand for labor as well as to

encourage the supply, and needs a concerted effort across various policy areas. Important

tasks include maintaining macroeconomic stability; promoting market competition and

entrepreneurship; enhancing the quality of educational services across all levels of

schooling; and improving ALMPs, in particular for those on the margin of labor market.

Three groups deserve special attention in this regard. The first is youth. In 2009, 39

percent of the unemployed were aged 15-29. The unemployment rate of this age group

(8.1 percent) was way above the total unemployment rate (3.6 percent). The actual

number of youth looking for work is probably much higher than the official statistics

suggest because many of them are discouraged from entering the labor market.

Of particular concern is the low job market performance of university graduates.

Currently more than 80 percent of high school graduates move on to higher education, but

many university students do not seek work after graduation or find jobs in their field of

study (OECD, 2008). Ways must be sought to help high school graduates to make

appropriate choice between higher education and work, and to facilitate the school-to-

work transition of university graduates.

The second group is women. More women are entering the labor market, equipped

with better qualifications than before. The increasing accessibility of childcare services and

changing social attitudes to female workers are encouraging their participation. But job

security is generally low as many of them belong to the peripheral labor market, and the

gender gap in wages is larger than in other countries.12 Furthermore, sexual discrimination

is still an issue despite the improvements made in recent years. Long working hours

present another challenge for female workers who want to reconcile work and family life.

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While it is difficult for the government to change social attitudes and business practices,

efforts are still needed to closely monitor the determinants of the female employment rate

and intervene when necessary.

Promoting the employment of the elderly will also gain greater importance in the near

future. Currently, the elderly employment rate in Korea is among the highest in the OECD

area as many people cannot depend on the underdeveloped public pension system in

their later years (OECD, 2008). But as the pension system matures, more people will

choose to retire early, driving down the overall employment rate in the midst of declining

population growth. Minimizing the disincentives to work while providing adequate income

support to the elderly will become an important economic and social issue.

Lastly, labor market flexibility should be enhanced. Employment protection is relatively

high in terms of individual dismissal and temporary employment. The regulations are

currently not very effective when it comes to the periphery of the labor market, but as the

share of regular employees rises and that of non-standard workers decline, their

effectiveness will increase. The labor market rigidity, especially at the core, is partly the

result of government policies and partly of social customs and business practices. The

government should make a consistent effort to increase the flexibility of the labor market

by revising relevant laws and by increasing the competitive pressure in the product market

through strengthened competition policy, external liberalization and privatization of public

corporations.

5. Social welfare system

5.1 OverviewThe fast economic growth since the 1960s was accompanied by relatively stable income

distribution (Figure 6-34). Increasing job opportunities offered by industrialization helped

many people escape poverty and support themselves and their families. The government

could not afford expensive redistribution policies because of the limited tax base, but could

still eradiate absolute poverty that had been so prevalent earlier and improve income

distribution.

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12 The average wage of female workers was 62 percent of that of male in 2009 when other factors were not controlled for.


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Figure 6-34. Growth and distribution of income in 1965-1989

Per capita GDP growth (%)

Income of the top 20 % / Income of the bottom 20%

Note: Average over 1965-1989.

Source: World Bank (1993).

In the early 1990s, however, income distribution stopped improving and inequality

began to rise (Figure 6-35). Many explanations have been offered for the turn of events,

including (1) globalization and the rise of the knowledge-based economy that put low-

skilled workers at a greater disadvantage, (2) growing productivity gaps between

manufacturing and services, HCIs and light industries, and large and small businesses, (3)

stagnant employment growth, (4) an inadequate social safety net, and (5) an aging

population.

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Figure 6-35. Gini coefficient (1982-2008)

Source: Gyeongjoon Yoo (2009).

Table 6-8. Development of the social security system

Source: Won Duck Lee (2008) and other sources.

The economic crisis of 1997 had a particularly significant impact on income distribution

and poverty. In response, the government increased support to the unemployed and the

poor. Important changes in the post-crisis period included the extension of coverage of the

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Social insurance Public assistance Social services and others

The1960s

Government Employees Pension (1960);Military Personnel Pension (1963); IndustrialAccident Compensation Insurance (IACI, 1964)

Livelihood Protection Act (1961)Children’s Welfare Act (1961);Social Security Act (1963)

The1970s

National Welfare and Pension Act (1973);Teachers Pension (1975); Health Insurance forWorkers (1977); Health Insurance forGovernment Employees and Teachers (1979)

Health Care Protection Act (1977) Social Welfare Service Act (1970)

The1980s

Health Insurance for the Self-Employed (1982);National Pension Scheme (NPS, 1988)

Act on the Welfare of the Elderly(1981); Act on the Welfare of theMentally Disadvantaged (1981); Acton the Welfare of Women andChildren (1989)

The1990s

Employment Insurance System (EIS, 1995); EISextended to all types of enterprises (1998); NPSextended to all types of workers (1999);Integration of all health insurance societies intothe National Health Insurance (1999)

Act on the Employment Promotionof the Handicapped (1990); Pre-school Age Children Care Act(1991)

The2000s

IACI extended to all enterprises (2001); Long-term Care Insurance (2008)

National Basic Livelihood SecurityProgram (2000); Emergency ReliefProgram (2006); Earned Income TaxCredit (2008); Basic Old-age Pension(2008)

Act on the Prohibition ofDiscrimination against the Disabled(2007).


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Employment Insurance System (EIS) to all types of enterprises in 1998, and the

introduction of the National Basic Livelihood Security Program in 2000 (Table 6-8).

With the expansion of the social security system, welfare spending has been growing

rapidly (Figure 6-36). Health and social protection each accounts for about half of welfare

spending.

Figure 6-36. General government welfare spending


Despite its rapid growth, the current level of social expenditure13 is far below that of

other advanced countries (Figure 6-37). The gap is especially large in the cases of old age

and health. This reflects the relative underdevelopment of the Korean pension system and

the smaller demand for health care in Korea, the latter being attributable to lower income

levels and a younger age structure of the population until recently. But social expenditure

will rise rapidly in coming years as more people become eligible for pension benefits, the

income level increases, and population aging proceeds. Hyung-soo Park and Byung Mok

Jeon (2009) expect that even when no new programs are added in the future, Korea’s

social expenditure will reach a level comparable to that of other OECD countries by 2050.

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13 Social expenditure as defined by the OECD is different from the spending on social protection and health as defined in the Systemof National Accounts (SNA). Social expenditure includes active labor market programs and housing, which are classified intoeconomic affairs and community development in SNA, respectively. It also includes mandatory private spending such asseverance pay in Korea


Figure 6-37. Social expenditure in Korea and other countries (2005)


It is not certain, however, whether increasing welfare spending will help reduce income

inequality because the latter is determined by a multitude of factors as mentioned above. A

coordinated effort of macroeconomic, education, labor market, welfare and other policies

is required in the uphill battle against the increase in income inequality and poverty.

5.2 The development of the social welfare system

5.2.1 Pre-1960 periodDuring the period of Japanese colonial rule, the Chosun Relief Order provided the first

modern public relief program in Korea. But it has been criticized for serving political ends

rather than being a genuine social welfare program (Yong-hwan Lee et al., 2006; Seop-

joong Shin et al., 1999; Chan-young Yoon et al., 1998).

Welfare programs between the signing of the Korean War armistice in 1953 and the

launch of the first economic development plan in 1961 comprised mainly of offering

emergency relief assistance to refugees and orphans displaced by the war. Little more

could be done since the government lacked funding to support welfare programs. Article

19 of the Constitution spoke of giving public assistance to the most vulnerable, namely the

old, the disabled or the unemployed.

Limited access to welfare services was offered to the poor, women and children, and the

disabled. The government did not provide much assistance, which instead was mainly the

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responsibility of civil organizations, overseas aid institutions and religious bodies. The

government’s role was mostly confined to setting up welfare institutions for injured soldiers

and policemen and their families, which provided public assistance, jobs and housing.14

Other early steps toward creating a social security system included the Labor Standards Act

in May 1953 and the Charter for Children in 1956. The former did not have much real

meaning given the dearth of profitable businesses and the lack of the government’s

administrative capacity. Much the same applied to the latter.

5.2.2 1960-1980: Low priority on welfare programsKorea’s top priority during this period was economic growth as reflected in the Five-

Year Economic Development Plans that dominated the government policy. Despite the

low priority on welfare programs, however, several steps were taken in this period toward

building a proper social security system in Korea.

The Livelihood Protection Act was introduced in 1962 to provide public assistance to the

poor. It was criticized for stigmatizing its recipients because of its implicit suggestion that

they were to be blamed for their poverty, but it was still an important step. In addition, the

Social Security Act was enacted in 1963 to serve as a framework for welfare programs. In

the same year, the Military Personnel Pension was introduced in addition to the

Government Employees Pension that had been introduced in 1960. The Health Insurance

Act was established but it did not stipulate compulsory participation for any group in

Korean society.

In 1964, the Industrial Accident Compensation Insurance Act was introduced in line with

the Economic Development Plans to provide support for workers suffering disabilities as a

result of industrial accidents. It was the first social insurance program implemented in

Korea. In addition, an industrial rehabilitation center was established under the auspices of

the National Labor Office in 1971 to provide occupational training.

There was also a growing recognition of the need for welfare programs to take care of

the elderly. The submission of the Basic Plan for Social Development in 1968 by the Social

Security Review Committee led to several follow-up proposals, including the establishment

of the Act on the Welfare of the Elderly, the development of pension programs, the

expansion of medical facilities, the provision of employment opportunities for the elderly,

an increase in the legal retirement age and the designation of the Day for the Elderly. The

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14 These specialized welfare programs were the result of the Military Relief Act of 1950, the Police Relief Act of 1951, and the Act onPensions for Deceased or Injured Military and Police Personnel of 1952.


suggestions, however, failed to draw much attention from the government, which was

preoccupied with economic growth.

In 1973, the National Assembly passed the National Welfare and Pension Act, but it was

not implemented due to adverse social and economic conditions, including the two global

oil shocks of the 1970s. Only the Teachers Pension was added to the public pension

system in 1975.

In 1976, the Health Insurance Act was revised to stipulate compulsory participation of

workers at firms with 500 or more employees beginning in 1977. The coverage was

extended in 1979 to include those at firms with 300 or more employees. The year 1979

also witnessed the establishment of a compulsory health insurance program for

government employees and teachers. It is significant since the introduction of compulsory

health insurance was done at the behest of government rather than in response to public

demands. As for low-income households, the Health Care Protection Act was introduced in

1977 to provide them with medical services.

A welfare program for the disabled was also introduced in the 1970s. The Ministry of

Health and Social Affairs announced in 1978 the Comprehensive Welfare Program for

Mentally and Physically Disabled Persons. Although the program was largely limited to

public assistance measures, it did introduce rehabilitation treatment policies as well.

To summarize, basic social insurance programs were introduced in the 1960s and 1970s,

including the Industrial Accident Compensation Insurance (1964); pensions for government

employees (1960), military personnel (1963) and teachers (1975); and health insurances for

private sector workers in large firms (1977) and government employees and teachers

(1979). In addition, basic programs of public assistance and social services were

introduced for the poor and the disabled. These programs were quite limited in their scope

but Korea could improve income distribution due to the rapid growth of labor-intensive

industries and the rapid increase of job opportunities.

5.2.3 1980-1997: Social welfare gains attention Toward the end of the 1970s, the government-led, growth-first strategy that had been

pursued since the 1960s began to produce various social problems. The improvement in

income distribution stopped or was partially reversed as the government actively promoted

capital-intensive industries at the cost of macroeconomic stability (Il SaKong, 1993, p.18).

The poor, in particular, were affected by rising inflation. With the improvement in general

living conditions, public attention was drawn to the income gaps between rich and poor

and between different regions of the country. These developments highlighted the need

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for larger and more effective welfare programs.

The Chun Doo-hwan administration that came into office in 1980 announced a radical

departure from past economic and social policies. It placed priority on promoting private

initiatives and stabilizing inflation. It also set out as a goal“the establishment of a welfare

society.”15 The revised 1980 constitution made firm commitments on the state’s

responsibility to provide a social safety net and this was followed by the enactment of

major laws on welfare programs. Welfare spending jumped in the early 1980s (Figure 6-

36).

In 1981, a pilot project was started to provide a community-based health insurance

program to residents in rural areas, while the company-based health insurance program

was extended to firms with 100 or more employees. Coverage was then extended to

companies with 16 or more employees in 1982 and 5 or more employees in 1988.

Meanwhile, the community-based program was extended to all rural residents in 1988 and

to all urban residents in 1989. This resulted in the creation of a universal health insurance

system (Table 6-9), a feat that was accomplished in only 12 years, the shortest time it has

taken anywhere in the world (Deutsche Gesellschaft fur Technische Zusammenarbeit,

2005; Ensor, 1999).16

Table 6-9. Participants in the National Health Insurance Program

(Unit: million persons, %)


The Livelihood Protection Act, which provided public assistance, was revised in 1982 to

expand the types of assistance that could be offered to the destitute, with the aim of

providing better access to education and jobs.

The introduction of the Act on the Welfare of the Elderly in June 1981 created the legal SocialP

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1977 1980 1985 1988 1989 2000 2005 2008

Total Population (A) 36.4 38.1 40.8 42.9 45.1 47.0 48.1 48.6

Participants (B) 3.2 9.2 18.0 28.9 40.0 45.9 47.4 48.2

B/A 8.8 24.2 44.1 67.4 88.5 97.6 98..5 99.1

¨

15 The government policy objectives laid out by the Chun administration included establishing a welfare state; developingdemocracy; building a society based on justice; reforming the education system; and promoting culture.

16 It took 127 years for Germany, the first country to introduce a national health insurance program in 1854, to expand coverage toall German citizens. In the case of Japan which introduced health insurance much later with a more advanced economy, it took36 years.


basis to offer welfare benefits to the older population. Starting from 1982, people aged 65

or older received discounts on the use of mass transit, museum admissions and visits to

public baths and barber facilities. A free medical diagnosis program for the elderly was

introduced in 1983.

In 1987, a pilot project was launched to provide welfare services to older persons forced

to stay at home. Two years later, the government began an allowance payment program

for the elderly. This involved paying 10,000 won a month to 76,000 heads of households

who were aged 70 or older and who were receiving some form of assistance. Regulations

on nursing homes for the elderly were introduced in 1988 and those governing senior

citizens’community centers in 1989.

The National Pension Scheme (NPS), covering workers in firms with 10 or more

employees, was implemented in 1988. In 1992, the compulsory coverage was expanded to

firms with 5 or more employees. It was expanded further in 1995 to farmers, fishermen

and the self-employed in rural areas, and finally in 1999 to the self-employed in urban

areas. This completed the move toward a universal public pension scheme.

Welfare services for the disabled were expanded as well. Between 1985 and 1987, a

program was implemented to modernize welfare facilities for the disabled. A

Comprehensive Welfare Program for the Disabled Persons was launched in 1986, and a

pilot program to register the disabled for services was carried out the following year.17

In 1989, the government launched a program to increase the housing stock and supply

rental housing to low-income households in response to the sharp rise in housing prices

and rental costs. The program continued until 1992 and the housing supply ratio18 jumped

from 70.9 to 79.1 percent between 1989 and 1993.19

The Act on the Employment Promotion of the Handicapped was passed in 1990 and

implemented the following year with the goal of providing jobs for the disabled and

encouraging their social integration. The law required that public enterprises and private-

sector firms with 300 or more employees employ the disabled until they accounted for 2

percent of the total workforce. This was an important step in providing economic support

to the handicapped.

The Pre-school Age Children Care Act was enacted in January 1991 to expand childcare

facilities, improve the protection and education for children, and support children in

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17 These programs were undertaken with the view that Seoul would host the Paralympics Games as part of the 1988 SummerOlympic Games. Korea recognized the importance of this event in light of the growing international movement to support thehuman rights of the disabled.

18 Housing supply ratio = number of houses÷number of households.19 See Table 2-13 in Chapter 2 for a long-term trend of the housing supply ratio.


277

families in need of assistance. In 1998, the government stopped requiring that childcare

facilities be certified before going into operation, but instead only be registered with the

authorities. This was to encourage the expansion of childcare facilities. The system was,

however, changed back to the certification system in 2004.

Another important development in this period was the introduction of the Employment

Insurance System (EIS) in 1995. With this, Korea came to have all four types of major social

insurance programs.

The EIS is comprised of two programs, one being the traditional unemployment benefit

program and the other a group of ALMPs such as wage subsidies, vocational training and

employment services. The idea was that preventing unemployment through ALMPs was as

important as providing relief measures to the unemployed. Initially, the unemployment

benefit program covered firms with 30 or more employees and the ALMPs those with 70 or

more employees. The coverage was expanded rapidly in 1998.

To summarize, the period from 1980 to the mid-1990s witnessed an important change in

the stance toward welfare policies, with the introduction of two social insurance programs

－the NPS (1988) and the EIS (1995)－and the creation of universal health insurance

(1989). The Livelihood Protection Program and welfare services for the disabled, children

and other vulnerable groups were expanded. These changes accelerated the growth of

welfare spending.

Nonetheless, welfare spending amounted to only 3.5 percent of GDP in 1997. Only

those workers at firms with 30 or more employees were covered by the unemployment

benefit program of the EIS. The old-age pension of the NPS was not available to retirees

because it required at least 15 years of prior contribution while the NPS had been

introduced less than 10 years earlier.20 The public assistance and welfare services provided

limited benefits and the delivery system was not well organized. The economic crisis of

1997 exposed the weaknesses of the Korean social security system and played a catalytic

role in its subsequent enlargement.

5.2.4 Post-1997: Social welfare reaches maturityThe economic crisis produced extreme hardships. The unemployment rate skyrocketed

to 7 percent in 1998 from less than 3 percent in preceding years. Due to the limited

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20 In 1997, there existed about 150,000 beneficiaries of the disability pension, the survivors’pension, or the special pension for theelderly. The last type of pension benefit is granted to those who were aged between 45 and 60 in 1988 when the NPS wasintroduced and have contributed for at least five years before retiring at the age of 60 or older. Since then, pension beneficiarieshave increased in number and totaled 2.8 million in 2009.


coverage of the EIS, only 10 percent of the unemployed could receive unemployment

benefits (Figure 6-38). The Gini coefficient rose by 13 percent from 0.27 in 1997 to 0.31 in

1998 (Figure 6-35).

Figure 6-38. Recipients of unemployment benefits

Note: There was a change in the definition of unemployment in 2000 that created discontinuity in the data.

Source: Korea Employment Information Service (http://www.keis.or.kr).

The increasing unemployment and poverty raised public awareness about the need for a

well-functioning social safety net and helped forge a national consensus on the issue. This

coincided with the election of Kim Dae-jung as the new president, which represented the

first peaceful transfer of power to the opposition in Korea’s postwar history.

In response to the crisis, the government increased wage subsidies to firms that retained

redundant workers and expanded vocational training for the unemployed within the

framework of the EIS. In March 1998, a public works program was introduced to create

jobs directly with public money. This program played a major role during the crisis in

providing emergency support to the poor. Unemployed college graduates could also

benefit from government-paid internships at private companies.

At the same time, the government made important changes to the EIS and the public

assistance program. First, the coverage of the unemployment benefit program of the EIS

was extended rapidly in 1998 to firms with at least 10 employees (January), to those with at

least 5 employees (March), and eventually to those with one or more employees

(October).21 Since then, the beneficiaries of the EIS have increased in number (Figure 6-38).

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Second, a new revised public assistance program, the National Basic Livelihood Security

Program (NBLSP), was introduced in 2000. The NBLSP stipulated the state’s responsibility

to guarantee minimum living standards for the whole population by providing benefits to

households below the poverty line. It has been, however, criticized for discouraging

participants from seeking employment because their benefits decline by the same amount

as their earnings increase. All types of benefits (health, housing, education, etc.) are given

to those below the poverty line, but none at all to those above it. These features impart to

the beneficiaries a strong incentive not to work and escape from poverty.

Other important changes under the Kim administration were the consolidation of the

various national health insurance schemes into the National Health Insurance (NHI) in

1999 and the revision of the National Pension Act the same year. The latter finally

completed the process of bringing all workers under the compulsory system and at the

same time adjusted the contribution and benefit scheme to make the program more

financially sustainable in the long term. Specifically, the replacement rate22 was reduced

from 70 to 60 percent for participants who had contributed to the NPS for 40 years and

earned a wage equivalent to the average among the NPS participants. It also required the

government to make a forecast estimate on the long-term financial conditions of the NPS

every five years and submit a report to the National Assembly.23

While the first NPS reform embodied in the revised Act failed to eliminate the financial

instability of the NPS, it was still a remarkable achievement given the difficulties other

countries have experienced in their pension reform. Success factors included the very small

number of NPS beneficiaries at the time, the public’s concern about the tax burden of

future generations, the advocacy role of research institutions such as KDI, and the

economic crisis of 1997 that weakened resistance to reforms of any sort.

The Roh Moo-hyun administration (2003-2008) that followed the Kim’s administration

(1998-2003) placed an even greater emphasis on welfare policies.24 Various new programs

were added in this period. Among them, the Emergency Relief Program (2006) offers

temporary assistance to the households suffering a sudden loss of income. The Long-Term

Care Insurance (2008) provides in-kind benefits to the severely disabled older persons. It is

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21 Still, only 10 percent of the unemployed could receive unemployment benefits in 1998 because the eligibility depends on aminimum period of contribution to the EIS. The minimum size of firms subject to the ALMPs of the EIS was lowered to 50employees (January), 5 employees (July) and one employee (October).

22 The replacement rate is the amount of pension benefit as a percentage of the retiree’s average wage during his working years.23 In addition, the minimum pensionable age was scheduled to rise from 60 to 65 years between 2013 and 2033 (by 1 year every 5

years). The contribution rate which had been raised from 3 percent in 1988 to 6 percent in 1993 and 9 percent in 1998 was to stayat that level in following years. The minimum contribution period was reduced from 15 to 10 years for the old-age pension.

24 Another important policy agenda of the Roh’s administration was correcting regional imbalances across the country, which wasviewed by many as another form of income transfer policy.


funded by a surtax on the contribution to the NHI. The Earned Income Tax Credit (2008)

supplements the earnings of low-income workers with cash benefits to encourage their

participation in the labor market and support their living conditions. The first benefits were

offered in 2009 for earnings made in 2008. The Basic Old-Age Pension (2008) is a public

assistance program for the elderly with low incomes. In 2008, 60 percent of those aged 65

or more were to benefit from the program. The target was raised to 70 percent in 2009.

Given the small amount of benefit per recipient,25 the program invited criticism for

spreading scare resources thinly over a large segment of the older population.

Another notable development was the rapid increase in spending for the care and

education of pre-school age children starting with the Roh’s administration (Table 6-10).

Spending grew by 43 percent per year in 2002-2010. It had multiple purposes, including

securing equal opportunities for children’s educational development, investing in human

resources, encouraging child-bearing, and promoting the labor market participation of mothers.

Table 6-10. Spending for the care and education of pre-school age children

(Unit: billion, won, %)

Note: The spending includes both the central and local government spending.

Source: Hee Jung Yoo (2010).

In the meantime, the NPS underwent a second round of reforms in 2007. Based on the

result of the long-term financial projection published in 2003 that predicted that the

accumulated savings in the NPS would be depleted by 2047, the government began an

intense consensus-building process to arrive at a reform formula. The business community

preferred a drastic cut in benefits to minimize the growth in contributions, whereas labor

unions and civic groups opposed benefit cuts (National Pension Service, 2008). In the end,

most parties agreed to the necessity of reform, and a middle ground was found by

reducing the replacement rate by 10 percentage point from 60 percent in 2007 to 50

percent in 2008, and then by 0.5 percentage point each year over the next 20 years to

arrive finally at 40 percent in 2028.

Despite the reform of the NPS, total welfare spending kept increasing rapidly in this

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2002 2003 2004 2005 2006 2007 2008 2009 2010

Spending

(Growth)

226 277

(22)

433

(56)

702

(62)

1,177

(68)

1,558

(32)

2,225

(43)

3,285

(48)

3,997

(22)

25 In 2010, the maximum benefit was about 80 dollars a month for a single person and 130 dollars for a couple in a country with percapita income of about 1,600 dollars a month.


281

period. In the mid-2000s, it became the largest spending category, surpassing economic

affairs, education and defense (See Figure 1-16 in Chapter 1).

It is of interest that all administrations in this period advocated some form of“workfare.”

For example, the Kim’s administration adopted“productive welfare” as its slogan and

emphasized that while welfare programs should be expanded, they also needed to be

structured in a way that would allow recipients to develop their own capabilities and

eventually become self-sufficient and no longer dependent on state support. However,

such rhetoric was not evident in actual policies such as the National Basic Livelihood

Security Program, which contained strong disincentives for seeking work.

5.3 Assessment and future policy directionsDespite its relatively short history, the social security system in Korea has expanded and

matured to the point where it is deeply embedded in society. But there are a number of

difficult challenges that still must be tackled in order that it can reach full fruition.

The first issue concerns the effectiveness of the system, that is, whether it is serving its

purpose of reducing poverty and inequality. For now, the relative poverty in Korea is

rather high among OECD countries (Figure 6-39) and the role of the tax and transfer

system extremely limited (Figure 6-40).

Figure 6-39. Relative poverty rate

Note: Poverty rates are defined as the share of the individuals with equivalized disposable income below 50

percent of the median for the entire population.


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Figure 6-40. Impact of taxes and transfers in reducing poverty among the entire population

Note: In Korea, taxes and transfers reduced the relative poverty rate from 17 to 15 percent.


But care is needed in interpreting these data. As explained at the beginning, income

distribution is influenced not only by the social welfare system but also by economic

conditions and many other institutions and policies. In particular, the apparently meager

role of the tax and transfer system in Korea appears mostly attributable to the

underdevelopment of the NPS.26 The problem, however, is that even when the NPS is fully

developed, many retirees would not be able to benefit from it because about 40 percent of

workers are not currently covered by public pension programs (Figure 6-41).

The low coverage ratio is also observed in the Industrial Accident Compensation

Insurance and the EIS. This comes primarily from the prevalence of self-employment and

temporary employment in Korea’s labor market (Figure 6-24), with many working at small

businesses or in the service sector.27 Such employment patterns severely limit the

government’s ability to include all workers in social insurance programs.

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26 Workers in countries with mature public pension systems tend to save less and their capital income from savings afterretirement tends to be smaller. See Kyung-Mook Lim and Hyungpyo Moon (2003) for empirical evidence on this issue. In thesecountries, most retirees would be counted as being poor in terms of market income, and public pensions by themselves wouldplay an important role in reducing poverty.

27 The coverage ratio rises when the workers legally excluded from participation are subtracted from the denominator. Forexample, the coverage ratio of the EIS was 39 percent of total workers, 57 percent of wage and salary earners, and 82 percent ofeligible workers in 2007 (OECD, 2008, p.126).


283

Figure 6-41. Participants in work-related social insurance programs

Notes: 1) Public pensions include the National Pension, the Government Employees Pension and the Teachers

Pension, and exclude the Military Personnel Pension.

Notes: 2) In the case of the National Pension, those exempted from paying contributions for various reasons are

not counted as participants.

Sources: National Pension Service (http://www.nps.or.kr); Government Employees Pension Service

(http://www.geps.or.kr); Korea Teachers Pension (http://www.ktpf.or.kr); Korea Workers’

Compensation and Welfare Service (http://www.kcomwel.or.kr).

To enhance the effectiveness of the social security system, efforts should be made to

encourage the workers on the margins of labor market to participate in social insurance

programs by, for example, reducing their contribution rates. Other important tasks include

streamlining the complex programs of public assistance and social services, strengthening

the delivery system, and focusing the resources on the most needy.

The second issue is to minimize the adverse impact of the tax and transfer system on

work incentives. As explained earlier, the National Basic Livelihood Security Program

(NBLSP) has a serious defect in this regard. Of course, it is quite possible that many

beneficiaries of the NBLSP are already working in the informal labor market as self-

employed or temporary workers, and not disclosing their income to the authorities in order

to keep NBLSP benefits. But encouraging people to cheat on the system is in itself

undesirable. To reduce the disincentive to work, discussion is underway on reforming the

NBLSP by making its in-kind benefits (health care, education, housing, etc.) available to

those over the poverty line or by limiting its coverage to those unable to work.

This issue is not, however, restricted to the case of NBLSP. Other programs such as

childcare support often bases the amount of benefits offered on the level of household

income. The dilemma is unavoidable as long as the government wants to target resources

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on people in need. Still, attention should be paid to the aggregate impact of various

programs on the work incentives of households, which has never been identified to date.

Fortunately, the disincentive to work resulting from the tax system is rather weak, not

only because of the large informal labor market but also the low statutory rates of taxation

and social security contributions as can be inferred from the tax wedge (Table 6-11). But

given the rapid increase in social security contributions (Figure 6-42), it is important to

minimize the growth of welfare spending and increase its cost-effectiveness.

This leads us to the third issue of assuring the long-term financial sustainability of the

Table 6-11. Average personal income tax and social security contribution rates on gross labor income

(2008)

(Unit: %)

Note: 1) Average annual gross wage earnings of adult, full-time manual and non-manual workers in the industry.

Source: OECD, OECD Tax Database, 2009 (http://www.oecd.org).

Figure 6-42. Trends in tax burden

Source: OECD, OECD Revenue Statistics, 2009 (http://www.oecd.org).

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% of average wage1) 67 100 133 167

Central government tax (A)

Local government tax (B)

Combined (A+B)

Employee social security contributions (C)

‘All-in’(D=A+B+C)

Employer social security contributions (E)

Total tax wedge ((D+E)/(100+E))

1.6

0.2

1.8

7.6

9.4

9.8

17.4

4.4

0.4

4.9

7.6

12.5

9.8

20.3

6.9

0.7

7.6

7.3

14.9

9.5

22.3

8.6

0.9

9.5

6.5

16.0

8.7

22.7

Average tax wedge of OECD countries 33.5 37.4 40.1 41.9


285

social security system. Of particular concern are the NPS and the NHI. As mentioned

before, the NPS is expected to run out of its savings by 2060 and turn into a pure pay-as-

you-go system, imposing a heavy burden on future generations. The NHI spending has

been increasing over the years (Table 6-6), and is set to increase further due to the rise in

income levels, the development of more expensive technologies and equipment, and

population aging. It is already costing the government about 4 trillion won (0.4 percent of

GDP) each year.

Table 6-12. Main indicators of the National Health Insurance (1977-2008)

(Unit: 1,000 persons, %, billion won)


Because there is a limit to increasing the tax revenues and social security contributions,

serious efforts are required to constrain the spending growth of the NPS and the NHI,

while fulfilling their fundamental roles of securing old-age income and access to affordable

health care for the public.28

The final issue is about redefining the respective responsibilities of individuals and the

state in social security system. With ever rising income levels, individuals are better

positioned than before to prepare themselves for various risks that used to be the sole

responsibility of the state. Private pensions and private health care in particular should be

encouraged to play a larger role in this regard.

At the same time, private service providers should be allowed to enter the market for

social services such as childcare, education, employment services, job training and health

care. Their increased participation, while carrying some risks, can help promote

innovation, customer orientation and cost-savings in the delivery of services (Shleifer, 1998;

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28 One option for the NPS is to adopt a notional defined contribution system as in Sweden that is immune to macroeconomic anddemographic shocks (Palmer, 2008).

1977 1980 1985 1990 1995 2000 2005 2008

Participants(% of the total population)

3,200(8.8)

9,226(24.2)

17,995(44.1)

40,180(93.7)

44,016(97.6)

45,896(97.6)

47,392(98.5)

48,160(99.1)

Revenue (A)Insurance contributionsGovernment subsidies (B)

14.914.30.3

113.095.51.2

639.2597.8

1.7

2,432.1 1,883.5

363.9

5,614.4 3,600.7

755.3

9,827.7 7,228.8 1,552.7

21,091.1 16,927.7 3,694.8

29,787.1 24,973.0 4,026.2

Expenditure (C)(% of GDP)

5.1(0.0)

91.3(0.2)

648.3(0.7)

2,164.0 (1.1)

5,076.4 (1.2)

10,744.2 (1.8)

19,980.0 (2.3)

28,273.3 (2.8)

Balance (A-C) 9.8 21.6 -8.8 268.0 538.0 -916.5 1,111.1 1,513.8

Balance (A-B-C) 9.5 20.5 -10.5 -95.9 -217.4 -2,469.2 -2,583.7 -2,512.4


Pearson and Martin, 2005). This does not imply that the state should play a less important

role; rather, it should keep financing these services and make sure that service quality and

distributional equity is not compromised.29

In summary, greater efforts are needed in the future to enhance the effectiveness of the

social security system; to minimize its adverse impact on the incentives to work; to assure

long-term financial sustainability; and to redefine the respective responsibilities of

individuals and the state and make greater use of private service providers. Korea’s social

security system has achieved a lot of progress, and will continue to if these efforts bear fruit.

6. Health care services

6.1 OverviewOver the past 60 years, the quality of health care in Korea has risen rapidly along with

economic growth. Rising living standards increased demand for health care services, which

resulted in increased investments in medical resources and the introduction of new medical

technologies and medicines.

In the beginning, Korea opted for a health care system based on free-market principles

in terms of both funding and providing services. A big change in the funding arrangement

took place when the compulsory social insurance system was introduced to parts of the

population in the 1970s. The National Health Insurance (NHI) finally came to cover the

entire population in 1989.

With the introduction of NHI, the use of medical services increased sharply. The rate of

untreated patients fell to 7 percent in 2006, while the life expectancy at birth and the infant

mortality rate closed the gap with advanced countries (Figure 6-43).

The increase in demand for medical services has also produced a sharp rise in health

expenditures, from 3.9 percent of GDP in 1980 to 6.5 percent in 2008 (Figure 6-44).

Meanwhile, the share of the public expenditure in total health expenditure rose from 20 to

55 percent, and the share of out-of-pocket expenditure fell from 76 to 35 percent (Figure 6-

45). Increased health care expenditure has become a burden on government finances and

the NHI scheme, with measures to control costs now being sought (see Table 6-12 in the

previous section). The current level of total health care expenditure is still lower than in

other OECD countries, but will rise in the future as per capita income continues to grow

and the population aging continues (Figure 6-46). 286THEKOREANECONOMY

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29 An example can be found again in Sweden (Blomqvist, 2004).


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Figure 6-43. Health outcomes

(a) Life expectancy at birth (2007)1) (b) Infant mortality (2007)2)

Notes: 1) Reference year is 2006 in Canada, France, Korea and United States.

Notes: 2) Reference year is 2006 in Canada, Italy, United Kingdom and United States.


Figure 6-44. Health expenditure in Korea

Source: OECD, OECD Health Data, 2009 (http://stats.oecd.org).

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Figure 6-45. Out-of-pocket and public health expenditures

Source: OECD, OECD Health Data, 2009 (http://stats.oecd.org).

Figure 6-46. Health expenditures in OECD countries (2008)

Note: Reference year is 2007 in Australia, Denmark, Greece, Japan and Turkey, and 2006 in Luxembourg and

Slovak Republic.


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While the public sector has increased its role in funding health expenditures, private

sector providers still dominate service delivery. In 2008, only 10 percent of general

hospitals were owned by the central or local government, 3 percent of specialized

hospitals, and 0.1 percent of clinics (Table 6-13). Local governments ran a total of 3,456

health centers, health clinics and their branches, but they are very small in scale.30 A large

percentage of hospitals and clinics are owned by individual physicians (21 percent of

general hospitals, 61 percent of specialized hospitals and 98 percent of clinics). Individual-

owned institutions are just like any other private for-profit enterprises in that there is no legal

limit to what their owners can appropriate in profits from providing health care services.

Table 6-13. Number of hospitals and clinics by ownership (December 2008)

Notes: 1) Includes long-term care hospitals, dental hospitals and Korean traditional hospitals.

Notes: 2) Includes dental clinics and Korean traditional clinics.

Notes: 3) Health centers, health clinics and their branches operated by local governments.

Notes: 4) Midwifery centers.


Many institutions defined as“legal persons,” such as universities and religious bodies,

also own and operate health care institutions. Of particular importance are“medical legal

persons” introduced with the revision of the National Medical Act in 1973 that required all

legal persons to be non-profit. Many for-profit institutions converted into non-profit

medical legal persons to enjoy tax benefits. Medical legal persons made up 31 percent of

general hospitals and 27 percent of specialized hospitals in 2008.

There has been great progress in building up health care resources. In the 1960s and

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Generalhospitals

Specializedhospitals1) Clinics2) Others Pharmacies

Total 312 (100.0) 2,197 (100.0) 51,612 (100.0) 3,507 (100.0) 20,833 (100.0)

Govern-ments

CentralLocalMilitary

230-

(0.6)(9.6)-

104124

(0.5)(1.9)(1.1)

121522

(0.0)(0.0)(0.0)

-3,4563)

-

-(98.5)

-

---

---

Legalpersons

SchoolReligiousSocial welfareTrustMedicalOthers

65-2

239727

(20.8)-

(0.6)(7.4)

(31.1)(8.7)

532

4837

58255

(2.4)(0.1)(2.2)(1.7)

(26.5)(2.4)

333

86121247341

(0.1)(0.0)(0.2)(0.2)(0.5)(0.7)

------

------

---

1--

---

(0.0)--

Individual physicians 66 (21.2) 1345 (61.2) 50,732 (98.3) 514) (1.5) 20,832 (100.0)

30 The number of physicians working in health centers, health clinics and their branches accounted for only 3.3 percent of the totalpracticing physicians in the last quarter of 2009.


1970s, Korea suffered from a severe shortage of health care workers, medical facilities and

equipment. The situation has improved since then (Figure 6-47), and in the late 2000s

Korea surpassed developed countries in terms of the number of hospital beds and

advanced medical equipment. The latter has attracted criticism that there is excessive

investment in the sector. As of 2008, the number of hospital beds per 1000 persons was

7.8, which was higher than the OECD average of 5.6, and the number of CT scanners and

MRIs per 1 million persons was 36.8 and 17.6, respectively, surpassing the OECD average

of 22.8 and 11.6.

Figure 6-47. Increases in health care resources

(a) Number of hospitals (b) Number of clinics

(c) Number of health professionals

Source: Ministry of Health and Welfare, Statistical Yearbook, various issues.

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The last several decades also observed the increasing importance of the health care

industry to the national economy with the increase in health care expenditure. It has

created new jobs and value-added services and has contributed to the development of a

knowledge-based economy. Health care products such as medicines, medical equipment,

dietary food products and cosmetics make substantial contributions to the national

economy, with the domestic output of the health care industry increasing from 20.2 trillion

won in 1985 to 89.8 trillion won in 2006. Still, the health care industry has not reached the

level of importance as it has in advanced countries.

A major challenge is the aging population, which has led to a rise in chronic diseases.

The number of people dying of cancer has increased by 45.5 percent from 94.5 per

100,000 people in 1987 to 137.5 in 2007, and the percentage of people with major chronic

diseases such as hypertension and diabetes continues to rise. In response, the attention of

policymakers to disease prevention and health promotion has intensified. The National

Health Promotion Act was enacted in 1995 and disease prevention and health promotion

projects became a key priority. In addition, the Korea Food and Drug Safety Headquarters

was established in 1996 to ensure the safety of medicines and foods. It was upgraded in

status to the Korea Food and Drug Administration in 1998.

In July 2000, new reform rules prevented doctors from dispensing medicine, which

became the sole preserve of pharmacies. This was to prevent a potential conflict of interest

in which doctors overprescribed medicines in order to collect a percentage of the sales.

In the late 2000s, there was a growing awareness that health care should not only be

regarded as a social service but also as a future growth industry, with more attention being

paid to its commercial aspects. Some progress has been made in deregulating the health

service and promoting health care R&D, but there remains more room for further actions.

6.2 Development of health care policy

6.2.1 Pre-1961 periodBetween 1945 and the early 1960s, little attention was paid to national health care

because of limited resources. Still, efforts were made to provide basic health care services.

The government promulgated the National Medical Act in 1951 and set up 500 health

clinics throughout the nation to deal with urgent tasks such as treating infectious diseases

and providing medical relief during and after the Korean War. The health clinics were

replaced in the early 1960s by bigger health centers in accordance with the Health Center

Act. The number of health centers grew from 80 in 1960 to 87 in 1961 and 189 in 1962.

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The government also focused on creating an organized management system for medical

services and medical facilities.

6.2.2 1962-1976: Building the basic health care infrastructurePublic health issues were relatively ignored between the early 1960s and the mid-1970,

with investments in the sector being low, as Korea focused on economic growth under the

first three Five-Year Plans. Some reforms, however, were introduced in public health care.

The Health Insurance Act was introduced in 1963 and a pilot project was launched. In

August 1970, the revised Health Insurance Act introduced a compulsory national health

insurance system to some segments of the population. The state-run medical insurance

fund was to provide insurance coverage to civil servants, military personnel and workers

overseas. Voluntary medical insurance cooperatives also were to be established for other

types of workers. But the Act could not be implemented due to a lack of financial and

medical resources. A mandatory health insurance system was finally introduced 1977 to

cover companies with more than 500 employees.

Family planning projects were a key component of health care services in the 1960s as

the government sought to curb high birth rates. This was complemented by efforts to

promote health care programs aimed at women and children to reduce the high levels of

infant mortality, which made parents want many children to compensate for the death of

some and was a main cause for the high birth rates at the time.

There were also efforts to expand the infrastructure for the provision of basic and

essential health care services despite scarce government resources. Programs were focused

on dealing with the control of infectious diseases, tuberculosis, leprosy and parasites. This

was achieved through regional health care networks that tried to reach villages that

normally lacked a doctor and taught ways to achieve a healthier lifestyle. For urban

populations, there was increased attention on a rise in chronic diseases, such as cancer and

hypertension, caused by industrialization.

6.2.3 1977-1994: Growth in health care servicesThe introduction and expansion of the NHI system was the defining feature of health

care policy during the late 1970s and 1980s, which led to the increased use of medical

services. By the late 1970s, Korea started to pay more attention to social development

issues. These changes were reflected in the fourth Five-Year Plan (1977-1981).

Under the plan, medical care was extended to recipients of public assistance, while

compulsory national health insurance was introduced for firms with 500 or more workers.

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In 1979, the insurance system was extended to civil servants, private school employees and

firms with 300 or more workers, and in 1981 to firms with 100 or more workers. In 1988,

the system expanded to include firms with five or more workers and the self-employed in

rural areas, including farmers and fishermen. This was followed a year later by providing

health insurance to the self-employed in urban areas. With that step, Korea completed the

development of a universal national medical insurance system in the short span of 12

years, one of the fastest rates in the world in achieving that goal.

The introduction of the NHI system represented a significant turning point in the

development of health care in Korea. First of all, it underscored the national commitment

that all citizens should be entitled to health care and this should be provided on an

equitable basis and in an efficient manner.

The NHI system led to a dramatic increase in the use of medical services and the

estimated number of untreated patients fell to 7 percent of the population by 2006. The

number of hospitalized days per insured person annually increased from 0.1 days in 1977

to 1.32 days in 2006. The annual number of days of visits to hospitals by outpatients rose

from 0.7 days to 14.7 days, raising concerns about the excessive use of medical services by

the public.

The NHI scheme shifted the supply of medical services from a market-based system to

one in which government played a bigger role by funding medical expenditure. The

government requires all Koreans to contribute to the NHI system and all hospitals and

clinics to accept NHI patients. Such compulsory participation created controversy, but has

been seen as improving public access to medical services.

The NHI system led to the systematic collection of medical data, which has improved

the efficiency of health care services and policies. Before its introduction, there was no

systematic information on the rates of disease contagion and the use of medical services,

which proved a liability in establishing data-based health care policies. Based on

information about patients collected from the NHI system, health care resources can now

be applied more effectively.

Finally, the NHI system was a key driver in bringing medical services to rural villages. A

village health pilot project was started in 1976 in selected farming areas, where village

leaders could serve as health care advisors. Another pilot project established health centers

in remote areas and dispatched nurses to serve as community health practitioners after six

months’training. The Act on Special Measures for Health Care in Farming and Fishing

Villages was introduced in December 1980, which promoted the establishment of health

care centers and clinics in rural areas.

The government encouraged the establishment of private hospitals in rural regions

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starting in 1980 by offering financial assistance for the building of medical facilities and the

purchase of equipment. The expansion of the NHI system to cover all rural residents in

1988 led to the establishment of hospital-grade facilities in 41 districts.

The NHI program also led to the growth of medical resources and services in the private

sector to meet increased demand. There was a corresponding rise in the number of

doctors and medical workers, along with an increase in the number of medical schools and

hospitals. General hospitals expanded by 6 times between 1975 and 1990, while

specialized hospitals grew by 2.6 times and clinics by 1.8 times.

6.2.4 Post-1995 periodIn 1995, the enactment of the National Health Promotion Act marked a dramatic shift in

long-term health care planning from a focus on treating serious diseases to one on

preventing diseases and promoting a healthy lifestyle. The reason for the shift was a

change in disease patterns. While acute infectious diseases declined dramatically in the

1970s and 1980s because of increased vaccine supplies and improved sanitation, chronic

diseases such as hypertension, diabetes and cancers multiplied due to lifestyle changes, an

aging population and deteriorating environmental conditions.31

The government started the National Health Promotion Fund in July 1997, which was

financed by a 2 won tax per pack of cigarettes. In 1998, the Ministry of Health and Welfare

set up a department to implement health promotion programs such as hypertension

control. The number of key health promotion centers increased from nine to 19 between

1998 and 1999 and the“Korea Health Fair” was held in 2000. The National Health

Promotion Plan 2010 was launched in 2002, with the goal of achieving improvements in

physical and mental health by 2010, including raising the disability-adjusted life expectancy

from 66 years in 2002 to 75 years in 2010. The health promotion tax was raised to 354 won

per pack of cigarettes in 2004, which supported activities at all of the 246 health promotion

centers nationwide.

The government also introduced a significant change in the organization of the NHI

system to improve managerial efficiency and address the financial instability of the

community-based health insurance scheme.32 The latter was merged with the scheme for

civil servants and private school employees33 in October 1998, and then with the company-

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31 The number of typhoid cases fell from 4,221 in 1970 to 370 in 1995, while the number of tuberculosis cases declined from 171,464in 1970 to 31,114 in 1995. In contrast, deaths due to major chronic diseases such as cancers, heart disease and diabetes grewannually by 2.6, 10.7 and 6.7 percent, respectively, between 1983 and 2007.

32 The community-based scheme had been administered through the Insurance Societies for the Self-employed. There existed 227such societies at the time of merger.


295

based insurance scheme34 in July 2000. At first, the mergers led only to the consolidation of

administrative organizations of the different schemes. The full consolidation of their

financial systems followed three years later and the cross-subsidization between the

different groups of participants began in earnest. The National Health Insurance

Corporation (NHIC) is now in charge of administering the entire NHI system as the single

insurer of the public health insurance scheme.

Questions remain whether the consolidation produced promised efficiency gains and

promoted fairness in the burden of contribution among participants. The number of the

NHIC regional offices fell by one-third after the consolidation as did the number of its total

employees,35 but the lack of consumer choice and competition between insurers in the

single-insurer system can reduce NHIC’s incentive to improve efficiency further. The

impact of cross-subsidization on the fairness is more difficult to assess because data on the

income of the self-employed and other community-based participants is far less complete

than that of company-based participants.

In 2000, there was a dramatic reform that separated the functions of doctors and

pharmacists in terms of dispensing medicine. Doctors could no longer dispense drugs

directly to patients, who now had to buy them from pharmacists. At the same time,

pharmacists could no longer sell antibiotics and other types of medicine to consumers

without a doctor’s prescription. Additionally, the NHI system separated reimbursements for

pharmaceuticals from medical care.

The new system was meant to crack down on the over-prescription of medicine as well

as to curb the abuse of drugs. Other objectives included encouraging the specialization of

medical and pharmacy practices, promoting the early diagnosis of diseases by requiring

patients to visit doctors instead of relying on the advice of pharmacists, and improving the

patients’right to know. The system was slated to come into effect in August 2000, but the

government, doctors and pharmacists reached full agreement on its implementation only in

November after both doctors and pharmacists shut down their operations in protest at the

new measures.

The system continues to remain controversial. Medical cost rose sharply since then, 36

and there is no clear sign that the abuse of drugs has been curbed. Still, the reform is

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33 This had been administered through the Insurance Society for Government and Private School Employees.34 The company-based scheme had been administered through the Insurance Societies for Employees. There existed 140 such

societies at the time of merger.35 The number of regional offices fell from 385 to 241 and the number of employees from 15,653 to 10,454 (Sang Seok Lee, 2003).36 Possible reasons for the sharp rise include the addition of pharmacist’s dispensing fees to the cost of drugs and the increased

prescription of expensive drugs by doctors who now have no incentive to prescribe less expensive drugs.


generally accepted as irrevocable and a step in the right direction.

Another challenge that the government had to deal with was the mounting NHI deficit

that began in the mid-1990s. Until then, the NHI system had been financially stable, with

reserves of 4 trillion won at the end of 1995. But it suddenly recorded deficits from 1996, a

situation made worse by the 1997 financial crisis.

Several major reasons have been citied for the growing deficits. One was that increases

in the NHI premiums were not large enough to keep up with the increase in health care

expenditures caused by an increased use of medical services, an aging population and a

rise in the number of expensive medical treatment. In addition, the policy of separating the

functions of doctors and pharmacists created a deficit of 1.9 trillion won in the NHI system

by 2002, which exhausted its accumulated reserves and forced the government to resort to

short-term borrowing to fill the gap. In response, the government enacted the Special Act

to Stabilize National Health Insurance Finances in January 2002, which required the

government to finance a fixed portion of NHI spending from the general tax revenue.

At the same time, however, the government boosted spending growth. A target for the

benefits coverage ratio was established to ease the burden of out-of-pocket expenditures

by patients (August 2005). The out-of-pocket ratio for seriously ill patients, such as cancer

patients, was lowered to 10 percent (September 2005), the meal costs of hospitalized

patients came under benefits coverage (January 2006), the out-of-pocket payment for

hospitalized children under 6 years of age was exempted, and similar benefits began to be

provided for medicines used to treat rare or catastrophic diseases. As a result, the NHI

benefits ratio reached 64 percent in 2006, with the benefits ratio for cancer patients

increasing from 50 percent in 2004 to 66 percent in 2005.

In the mid-2000s, the government focused on expanding the public health care system.

Various initiatives37 were formulated and incorporated in a comprehensive plan for

promoting public health care. The plan included developing community-based hospitals,

strengthening cancer programs at the national level, and reinforcing measures to tackle

infectious diseases, with a budget of 4.3 trillion won appropriated from 2005 to 2009. In

addition, 235.9 billion won in special taxes targeted for rural area development was used

to improve the medical facilities at public health centers in rural areas.

In the meantime, a free trade agreement between Korea and the United States (KORUS

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37 Health Plan 2010 (2005), Combat Cancer 2015 (2006), Strategy for Executing Health Investment (2007), Public Health CareExpansion Plan (2005), Basic Plan for Emergency Care 2005-2010 (2005), Government Plan for Health Care Development (2003),Basic Plan for Health Care Personnel (2006), 2010 Health Care Industry Development Plan (2006), Korean Traditional MedicineDevelopment Plan (2005), and others.


297

FTA) was finally concluded on April 2, 2007 after 14 months of negotiations. A major issue

for negotiations concerning health care was the further opening of the Korean market to

U.S. pharmaceutical products. The opening of health care service market was reserved for

future negotiation (Table 6-14).

Table 6-14. Agreements of the KORUS FTA in the health care sector (December 2008)

* Reserve the opening of health care service market.

* Establish an independent body to review recommendations and determinations

regarding South Korean pricing and government reimbursement for medicines and

medical devices and to improve transparency in the process for making those

determinations.

* Seek mutual recognition on GMP (Good Manufacturing Practice).

* Seek mutual recognition of GLP (Good Laboratory Practice).

* Seek mutual recognition of approval process on generic drugs.

* Establish a framework for discussing mutual recognition of qualifications or licenses for

nurses and other medical personnel.

* Maintain the current system protecting data of identical or similar drugs.

* Accept current patent terms on drugs regarding extension of patent period due to the

approval process.

* Establish measures to implement permission and patent linkage in Korea in a way that

minimizes the burden on the industry.

* Establish justifiable remedy measures by setting up an independent procedure in which

one can file an objection.

* Clarify opinion collection procedure and process.

* Avoid unethical business practices.

Another significant change was the partial opening of the health care service market.

The Act on the Designation and Operation of Free Economic Zones was revised on

January 27, 2005 to allow foreign medical institutions to treat local citizens within the free

economic zones. Additionally, the Special Act on the Establishment of Jeju Special Self-

Governing Province and the Development of Free International Cities was promulgated on

February 21, 2006 to allow foreign medical institutions to be established on the island of

Jeju. Although these measures have not resulted in the establishment of a single foreign-

owned hospital in these areas, it is seen as a major step in terms of establishing the

principle for the further opening of the medical services sector later.

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6.3 Assessment and future challengesAll countries aim to have medical systems that deliver high-quality services at affordable

prices to all citizens. But no country has yet successfully accomplished this goal. Countries

where the government is responsible for delivering services often have inefficiencies, long

waiting times for patients to receive medical attention, and poorly-motivated medical

personnel. Countries where the health care services are dominated by the private sector

tend to have higher medical expenses and less public access to medical services.

Korea is known to offer health care that is as good as that in developed countries in

terms of providing accessible and affordable services. However, the health care system in

Korea also has a number of problems in terms of the quality of medical services, its

financing, and its ability to reach the most vulnerable parts of society. Not only is Korea

faced with an aging population and a rise in chronic diseases, it must also deal with changes

resulting from the anticipated opening of the medical sector due to free trade agreements.

In meeting these challenges, the following efforts are needed.

First, the institutional arrangements to improve the quality of health care services must

be strengthened. Most importantly, the government should step up its efforts to generate

and disseminate information on the service quality of individual providers (Heesuk Yun

and Youngsun Koh, 2009, pp.136-151). This will enable consumers to make informed

choices and promote quality competition between service providers.

Second, a more integrated and more customer-oriented delivery system is needed to

reduce costs and improve service quality. In particular, an institutional arrangement is

needed to align the operation of new long-term care programs, such as those created

under the Act on Long-Term Care Insurance for Senior Citizens in April 2007, to the overall

medical service delivery system.

Third, there is an urgent need to expand the NHI coverage for serious and costly

illnesses such as cancer. At the same time, it is necessary to improve the financial health of

the NHI by increasing its revenue and reducing its spending on non-essential services.

Drug reimbursement rule that encourages the use of lower-price ones among standard-

quality drugs can reduce pharmaceutical costs (Heesuk Yun, 2008). When increasing

premiums, care must be taken to improve the fairness of contributions across population

groups, especially between company-based and community-based participants.

Fourth, greater emphasis should be given to disease prevention and health promotion.

More proactive investment is needed to provide protection against disease risks for each

age group, from new-born babies to senior citizens, while setting up a life-long health

management system for everyone.

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Fifth, wide-ranging deregulation is needed in the health care industry. One example of

regulation is prohibiting for-profit“legal persons” from entering the market while allowing

individual physicians to own and operate for-profit hospitals and clinics (Table 6-13). Such

regulations on market entry and business conduct should be minimized to promote

investment in the health care industry and its convergence with other industries (Heesuk

Yun and Youngsun Koh, 2009). In particular, allowing for-profit medical legal persons

would be a great step forward in deregulating the market.

7. Women’s economic and social participation

7.1 OverviewWomen made up a large part of the labor force during the 1960s when Korea launched

its economic development with labor-intensive light industries. They continued to play an

important role during the subsequent period of accelerated growth. Meanwhile, Korea’s

economic and social developments have improved the prospects for women’s participation

in the political system, the policy-making process and civil society. The expansion of

women’s participation has been and will remain important in the transition from a

developmental society to a mature society based on tolerance and respect for the rights of

minorities (Jae Yeol Lee, 2008).

This section aims to review educational developments and the economic and social

participation of women. For the purpose of exposition, we will divide the past six decades

into four separate periods: the establishment of the Korean government and postwar

reconstruction (1948 to 1960); the full-scale push for economic growth (the 1960s and

1970s); democratization and the transition to a market economy (the 1980s to 1997); and

Table 6-15. Women’s role in Korea’s economic and social development

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Area Historical development

Expanding women’sparticipation in the labormarket

1. Post-war reconstruction (1948 -1959)2. Economic development (1960-1979)3. Transition to a market economy (1980 -1997)4. Recovering from the economic crisis (1998-2008)

Developing female humanresources

1. Expanding primary education (1948-1959)2. Expanding secondary education (1960-1975)3. Expanding higher education (1976-1995) 4. Further expansion of educational opportunities (1996-2008)

Expanding women’s socialparticipation

1. Social participation during post-war reconstruction (1948-1959)2. Passive expansion of women’s participation (1960-1979)3. Active expansion of women’s participation (1980-1994)4. Strengthening gender policies and institutionalizing supports (1995-2008)


the maturation of society and the recovery from economic crises (1997 to the present).

Table 6-15 gives an outline of major themes.

7.2 Historical development

7.2.1 Post-war reconstruction: 1948-1959Korean society was marked by chaos and poverty during the Korean War and the post-

war reconstruction period. Primary industries dominated the economy, with the

agriculture, forestry and fishing accounting for 47 percent of GDP in 1953 and employing

an estimated 70 percent of the workforce. Women’s labor participation was mostly in these

sectors. According to a 1948 survey conducted by the government, the number of women

working in companies with more than five employees was 40,268, which was 18 percent

of the total female working-age population of 223,030.

The main welfare policy for women was the provision of public assistance for war

widows, who numbered as many as 700,000. The government also focused on providing

primary education for women to improve literacy rates and conducted campaigns to

encourage the participation of women in the post-war reconstruction of society. Women

were granted the right to vote under the 1948 Constitution. The Labor Standards Law

included provisions for maternity protection and banned discrimination against women.

These provisions had been adopted from advanced countries, but had little impact on the

actual working conditions of women in Korea.

Vocational training focused on low-skill jobs for war widows. The government built

state-run homes for single-parent families to provide shelter and encourage economic self-

reliance by providing simple vocational training. These institutions were financially

supported by foreign aid, including the supply of basic items as well as sewing machines.

There were 62 homes for single-parent families in operation by 1956, but there were still

too few of them to meet rising demand for their services. In 1957, the Labor Guidance

Institution for Girls was established to provide vocational skills for knitting, sewing,

hairdressing and embroidering to older girls who had to leave the orphanages or girls who

could not attend primary and middle schools.

7.2.2 Full-scale economic development: the 1960s and 1970sThe state-led economic development program during this period mobilized women into

the industrial workforce. Women formed much of the workforce in the labor-intensive

light industries, such as the textile, garment and leather sectors, and their low wages

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enabled these industries to enjoy a comparative advantage for a long time. Women

workers also played a leading role in the labor movement against company-controlled

unions in the 1970s.

Women were excellent workers in terms of skill and diligence. They moved to the cities

for jobs to support their poor families in the villages, stayed in dormitories or poor private

housing, and endured long working hours of more than 12 hours per day. It was estimated

that 2 million women worked in these industries.

The shift of employment patterns from primary industries to manufacturing increased the

size of the female labor force. In 1963, the number of women having jobs or seeking work

was 2,835,000 and their labor force participation rate was 37.0 percent. The number nearly

doubled to 5,349,000 and the participation rate rose to 43.3 percent by 1979.

Figure 6-48. Labor force participation rate

Source : National Statistical Office (http://www.kosis.kr).

Young women between the ages of 15 and 19 formed a major part of the labor force in

the early stages of industrialization. In 1963, 14 percent of this age group worked and this

increased to 17 percent by the early 1970s. The portion of young female workers declined

after 1975 because of improved access to education.

The Korean government focused on light industries during the early stages of

industrialization due to the comparative advantages offered by cheap labor, but this

strategy was soon challenged by other emerging economies. As a result, the government

decided to strengthen capital-intensive industries from the mid-1970s. These industries had

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less use for female workers. Woman accounted for 22 percent of the manufacturing

workforce by the mid-1970s, with most women finding clerical, service and sales jobs

instead.

Although increased opportunities for secondary education were becoming available

during this period, half of the women in the mid-1970s entered the job market with only an

elementary school education, with most of the rest having attended secondary schools.

Only a very small number of women had access to higher education.

Although women did not participate actively in politics during this period, they were

important actors in their local communities. They were involved in community

development projects, family planning programs, and the Saemaul (new village)

movement. However, the role of women was limited somewhat by the fact that the

community development projects were mostly organized and operated on a semi-

governmental basis that resorted to traditional stereotypes of gender roles.

7.2.3 Transition to a market economy: the 1980s to 1997Educational opportunities expanded with the decision in 1971 to end the entrance

examination system for middle schools, followed by the same decision in 1974 for high

schools. The ratio of female elementary graduates who entered middle schools rose from

70 percent in 1975 to 99 percent in 1985. But female advancement into higher education

did not keep pace with that of secondary education because of the cultural preference for

families to give priority to sons, with only 36 percent of students in higher education being

women in 1995.

Table 6-16. Advancement rate into tertiary education

(Unit: %)

Source: Ministry of Education, Science and Technology and Korean Educational Development Institute, Statistical Yearbook ofEducation, various issues.

Since the 1980s, the market economy began to displace the state-led industrialization

model in Korea. In addition, the advances in information technology changed the methods

and structure of production. The increasing role of services in the economy provided more

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General high school graduates Vocational high school graduates

Female Male Total Female Male Total

1980

1995

2000

2005

2008

35.4

75.8

84.6

88.8

88.6

41.9

70.3

83.4

87.8

87.2

39.2

72.8

83.9

88.3

87.9

5.0

17.2

35.7

62.0

69.5

15.7

21.4

48.2

72.7

75.7

11.4

19.2

42.0

67.6

72.9


303

job opportunities for women than in the industrial sector, which led to a rise in the female

labor force participation rate. More educated women were entering the labor force as well

as an increasing number of married middle-aged women.

The government set up“Working Women’s Centers” to provide vocational training for

married women who were re-entering the workforce. The centers were state-funded and

operated by women’s groups, such as the YWCA, and provided short-term job training

courses for office administration, dressmaking, cooking and patient care. Large companies

also tried to hire more married women with university degrees in response to the labor

shortage caused by the economic boom of the 1980s.

The increase of married women in the labor market did not mean there was no

interruption in careers due to marriage, births and childcare. The work participation

pattern of women by age had an M-shape, with a steep decline in the late 20s as many

women married and had children. Since the 2000s, the trend toward late marriage has

meant this decline is now seen in the early 30s for women (Figure 6-22).

During this period, women formed organizations that took a leading role in the

campaigns for democracy and women’s rights. The labor movement for clerical women

workers became active and won several cases to abolish gender discrimination in terms of

recruitment and retirement benefits. One successful legal case was the ending of

discriminatory personnel practices for female bank clerks in July 1991. The first lawsuit

case against sexual harassment in the workplace was finalized in 1993 after a seven-year

struggle in the civil courts. The case attracted public attention to the fact that sexual

harassment is not related to personal issues, but is a matter of working conditions, leading

to sexual harassment prevention education at work.

Women’s groups suggested various policies and laws to curb violence against women

and other violations of their human rights. This encouraged the government to adopt

policies that promoted gender equality, such as the Equal Employment Opportunity Act. It

was introduced in 1988 and marked a turning point in the employment of women by

banning discrimination against women when it came to hiring, wages, training, job

placement, retirement and dismissal. And for the first time, the central government created

in 1988 an agency to oversee women’s affairs, although it was eliminated in 1998 as part of

an effort to reduce the state bureaucracy.

7.2.4 Recovery from the economic crisis: 1997 to the presentThis period has seen an increase in education levels among women and in female social

participation. The introduction of the Framework Act on Women’s Development in 1995

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was the starting point for the institutionalization of women’s policies since it established the

government’s responsibilities to promote women’s rights and gender equality. The

introduction of affirmative action quotas for female candidates in parliamentary and local

elections and employment in government offices brought great changes. The Equal

Employment Opportunity Act was expanded into the Act on Equal Employment and

Support for Work-Family Reconciliation. Various policies were also introduced to support

female entrepreneurs, help develop career opportunities for middle-aged women who

were returning to the workforce, and improve gender equality in employment. All these

efforts created very positive changes in promoting the participation of women in political

and social areas, including leadership roles.

Government controls on university enrollment quotas were abolished in 1995, which

improved women’s access to higher education. The number of possible careers for women

was increased with the establishment of an engineering faculty at Ewha Womans

University and with more student enrollments in science and engineering faculties at other

women’s universities. Women also had a greater chance to enter professional institutions

that had previously banned or limited female students, including the Air Force Academy,

the Military Academy, the National Tax College, the Korean National Railroad College and

the Korean National Police University.

Since the mid-1990s, knowledge-based industries in the areas of financial services,

health, education, public service and others, created lots of professional jobs. But the 1997

Asian financial crisis brought big changes in the labor market. Female employment fell by

7.3 percent in 1998 from the previous year, while the decline for men was 5.1 percent.

Women were more affected by the crisis because many of the small firms that went

bankrupt tended to employ female workers and women were first to be laid off in many

cases. In a survey of 270,000 workers who lost their jobs, women formed a higher

proportion than men in every sector and industry (Soon Kyung Cho, 1999). Especially in

the financial and banking sectors, which were the most affected by the 1997 financial crisis,

the rate of resignations by women in low positions was high and part-time employment

among women increased dramatically. In cases involving two major financial services

companies in 1998 where both members of married couples worked, the women were the

first to be targeted for layoffs. In addition, 86 percent of“voluntary” resignations involved

women (Young Ju Kim, 1998). Not only during the economic crisis in 1997, but also

during other economic downturns, including the credit card crisis in 2003 and the recent

global financial crisis in 2008, the number of female workers declined more sharply than

their male counterparts.

Women’s economic participation has been growing steadily in the last 60 years, but

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women with higher education have a relatively low rate of labor participation. The

employment rate of female university graduates is nearly the lowest among OECD

countries, with a gap of nearly 20 percentage points below that of the OECD average.

Table 6-17. Employment rates of persons with tertiary education (2008)

(Unit: %)

Note: Tertiary-type A programs are largely theory-based and are designed to provide sufficient qualifications for entry to advanced

research programs and professions with high skill requirements, such as medicine, dentistry or architecture. Tertiary-type B

programs are typically shorter than those of tertiary-type A and focus on practical, technical or occupational skills for direct

entry into the labor market.

Source: OECD, Education at a Glance 2010, 2010.

7.3 Policy direction for the future Women will play an increasingly important role in maintaining Korea’s economic

growth. Korea has an abundant but underutilized pool of highly educated women. The

participation of women in the labor market increased steadily between the late 1940s and

1990s, but has stagnated since then. It is crucial to identify the obstacles that are preventing

more women from entering the workforce.

In comparison with other countries, the most noticeable characteristic of the female

labor market in Korea is career interruption. Due to strong stereotype views of gender

roles, many women stop their careers for family reasons, including giving birth, childcare,

supporting children’s education, and housework, despite the increased job opportunities

for women.

In this situation, it is essential to create better support systems for women to reconcile

work and family life. It would only be effective if the system incorporates changes in its

design and thinking. For example, instead of establishing general policy objectives such as

expanding and improving the quality of childcare services, it would be more practical to

redesign childcare policies so they support the employment of women. Companies should

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Tertiary- type B Tertiary- type A and advanced research programs

Males Females Males Females

United States

Japan

Germany

United Kingdom

France

Italy

Canada

83.5

92.9

88.1

89.3

90.3

82.2

86.9

77.5

64.8

80.7

83.7

82.3

68.2

79.2

89.3

93.4

90.1

90.1

86.7

86.6

86.0

79.0

66.9

81.2

86.3

80.2

76.1

79.6

Korea 89.8 62.0 88.9 60.7

OECD average 88.1 78.2 89.8 79.9


be encouraged to provide more part-time job opportunities for women and adopt flexible

working hour system while existing initiatives should be reviewed to make concrete

measures for improvement.

The policies to support the participation of women in society should put more focus on

social attitudes, customs and culture. In order to protect women’s rights and realize equal

employment, it is important to promote gender perspectives in all aspects of life.

8. Conclusion

Over the past 60 years, Korea has come a long way and has achieved broad-based social

development commensurate with tremendous economic growth. The access to education

expanded rapidly, with most of the young now receiving higher education. The

employment rate rose continuously, helped by rapid economic growth and the increasing

participation of female workers in the labor market. The government has also extended the

coverage of the welfare system to all segments of society. Health care services have

progressed in terms of both quantity and quality, and now the availability of health care

services is similar to that in developed countries.

Nonetheless, Korea currently faces many challenges in the area of social policies. The

centralized education system with its emphasis on mass education has been successful in

producing qualified labor force for rapid industrialization, but has also been criticized for

being inadequate in promoting diversity and creativity in a knowledge-based economy.

Public distrust of the state education system is reflected in the large number of students

receiving private tutoring. There is an urgent need to restructure the current system by

giving more power to local communities and individual schools and by expanding the

range of choices for students and parents.

The Korean labor market has functioned quite efficiently in creating jobs and meeting

industrial demand. But the dualism between the core and periphery of the labor market

presents an important challenge. The government should promote functional and

numerical flexibility at the core by relaxing employment protection, while improving

income security on the periphery by extending social welfare and active labor market

programs to non-standard workers. The rising share of regular employees among workers

will help shrink the periphery, but it can also increase the overall inflexibility of the Korean

labor market unless strict legal employment protections are weakened to make it easier to

dismiss individual workers. Efforts are also needed to encourage labor market participation

by women and help them reconcile work and family life.

The social welfare system also needs major improvements. Its effectiveness is

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constrained by its failure to include the large number of non-standard workers, the

complex and unorganized structure of the welfare programs, an inefficient delivery system,

and an insufficient focus on the most needy. These problems need to be addressed

properly to improve the effectiveness of the social welfare system. In addition, the adverse

impact of the system on work incentives should be minimized, in particular by reforming

the National Basic Livelihood Security Program. The long-term financial sustainability of the

social insurance programs also should be enhanced with fundamental reforms of the

public pension scheme and National Health Insurance. At the same time, the private sector

should be given a greater role in providing social services, with the government retaining

its role in funding and monitoring these services.

Of all social welfare programs, the health care programs achieved the greatest success,

covering the entire population under the NHI and, to some degree, making health care

accessible and affordable to all. In an effort to further improve the system, the government

should focus on enhancing the quality of health care services, integrate the delivery

system, expand NHI coverage for serious and costly illnesses while minimizing

expenditure on other services, and shift the focus of health care policy to disease

prevention and health promotion. Equally important is the deregulation of the health care

industry to strengthen competitiveness.

All of these are formidable challenges. Based on its past success, Korean social policy

should ready itself for another big leap forward.

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Lim, Kyung-Mook and Hyungpyo Moon, “The Impact of Public Pensions on Household Savings,”inKyungsoo Choi, Hyungpyo Moon, Inseok Shin and Chin Hee Hahn (eds.), Population Aging inKorea: Economic Impacts and Policy Issues, Research Monograph 2003-06, Korea DevelopmentInstitute, 2003, pp.227-276 (in Korean).

Mankiw, N. Gregory, David Romer and David N. Weil, “A Contribution to the Empirics of EconomicGrowth,” Quarterly Journal of Economics, Vol. 107, No. 2, 1992, pp.407-437

Ministry of Education and Human Resources, White Paper on Education, 2007 (in Korean).Ministry of Education, Science and Technology and Korean Educational Development Institute,

Statistical Yearbook of Education, various issues.Ministry of Health and Welfare, Statistical Yearbook, various issues. National Pension Service, The 20 Year History of the National Pension Service, 2008 (in Korean).OECD, OECD Economic Survey: Korea, 2008.______ ,OECD Revenue Statistics, 2009.______ ,OECD Tax Database, 2009.______ ,OECD Health Data 2010, 2010.______ , Education at a Glance 2010: OECD Indicators, 2010.Palmer, Edward, “Social Policy in an Ageing Society: Trends and Implications,”in Sang-Hyop Lee,

Andrew Mason and Kwang-Eon Sul (eds.), Social Policy at a Crossroad: Trends in AdvancedCountries and Implications for Korea, Korea Development Institute, 2008, pp.81-107.

Park, Hyung-soo and Byung Mok Jeon, A Study on the Medium- to Long-term Fiscal ProjectionModel to Analyze the Fiscal Impact of Welfare Programs, Report for the Ministry of Health andWelfare, Korea Institute of Public Finance, 2009 (in Korean).

Pearson, Mark and John P. Martin, “Should We Extend the Role of Private Social Expenditure?”OECD Social, Employment and Migration Working Paper, No. 23, DELSA/ELSA/WD/SEM(2005)2,OECD, 2005.

Permani, Risti, “Education as a Determinant of Economic Growth in East Asia: Historical Trends andEmpirical Evidence (1965-2000),”paper presented at the Asia-Pacific Economic and BusinessHistory Conference, University of Melbourne, February 13-15, 2008.

Shin, Seop-joong et al., Social Welfare Legislations in Korea,University Press, 1999 (in Korean).Shleifer, Andrei, “State versus Private Ownership,”Journal of Economic Perspectives, Vol. 12, No. 4,

1998, pp.133-150.SaKong, Il, Korea in the World Economy, Institute for International Economcs, 1993.World Bank, The East Asian Miracle : Economic Growth and Public Policy, Oxford University Press, 1993.Yoo, Gyeongjoon, “Changes in Poverty among the Korean Population and the Underlying Factors,”

KDI Policy Forum, No. 215, 2009 (in Korean).Yoo, Hee Jung, “Childcare Policies to Cope with the Low Fertility,”paper presented at the Conference

for National Fiscal Management Plan 2010-2014, Korea Development Institute, June 24, 2009 (inKorean).

Yoon, Chan Young et al., Social Welfare Legislations I, Nanam Press, 1998 (in Korean).Yun, Heesuk, “Issues on Drug Pricing and Reimbursement in Korea,”Korea Development Institute,

2008 (in Korean).


Yun, Heesuk and Youngsun Koh, Improving the Regulatory Environment of the Health Care Industry,Research Monograph 2009-01, Korea Development Institute, 2009 (in Korean).

310THEKOREANECONOMY

SixDecad

esofG

rowthandDevelo

pment


60YEARS


Appendices

Annex tablesCommittee members

Advisory group

한한한한60한한_eng2_App:한한한한60한한_eng2_App 10. 12. 09 한한 4:01 Page 1

Annex tables

Annex table 1. Major macroeconomic indicators (1953-2009)

Appendices313

Real growth Consumer price Current account Consolidated centralof GDP Savings rate inflation Interest rate1)

balance government balance

Unit % % of GNDI % % % of GDP % of GDP

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

-

5.6

4.5

-1.3

7.6

5.5

3.9

1.2

5.9

2.1

9.1

9.7

5.7

12.2

5.9

11.3

13.8

8.8

10.4

6.5

14.8

9.4

7.3

13.5

11.8

10.3

8.4

-1.9

7.4

8.3

12.2

9.9

7.5

13.1

10.4

10.3

8.6

13.9

12.8

10.8

9.0

11.7

11.0

14.4

14.0

13.2

16.6

15.4

18.2

21.4

17.4

15.3

17.0

22.8

21.5

19.1

24.7

28.2

30.6

29.7

24.3

24.3

25.6

28.9

30.9

31.2

52.5

37.1

68.3

23.0

23.1

-3.5

3.2

8.0

8.2

6.6

20.7

29.5

13.5

11.3

10.9

10.8

12.4

16.0

13.5

11.7

3.2

24.3

25.3

15.3

10.1

14.5

18.3

28.7

21.4

7.2

3.4

2.3

2.5

-

18.3

18.3

18.3

18.3

18.3

17.5

17.5

17.5

15.7

15.7

16.0

23.0

26.0

26.0

25.2

24.0

24.0

22.0

15.5

15.5

15.5

15.5

18.0

16.0

19.0

19.0

20.0

17.0

10.0

10.0

10.0-11.5

10.0-11.5

-5.2

-2.4

-2.6

-1.7

-0.2

2.0

0.9

0.7

1.6

-2.4

-5.3

-0.9

0.3

-2.9

-4.6

-8.5

-8.4

-7.7

-8.9

-3.4

-2.2

-10.4

-8.7

-1.1

0.0

-2.0

-6.5

-8.3

-6.4

-3.3

-1.8

-1.4

-0.8

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-1.0

-2.2

-4.5

-1.6

-3.8

-4.4

-2.8

-2.6

-2.5

-1.4

-3.0

-4.3

-3.9

-1.4

-1.2

-0.8


Note: 1) Before 1990, discount rate on commercial bills by deposit money banks. In 1990-1995, general lending rate. Since 1996,

weighted average of corporate lending rates.

Source: Bank of Korea (2005a), Bank of Korea (http://ecos.bok.or.kr), OECD (http://stats.oecd.org), National Statistical Office

(http://www.kosis.kr).

314THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

12.2

12.3

11.7

6.8

9.3

9.7

5.8

6.3

8.8

8.9

7.2

5.8

-5.7

10.7

8.8

4.0

7.2

2.8

4.6

4.0

5.2

5.1

2.3

0.2

34.9

38.4

40.4

37.6

37.8

37.9

36.9

36.9

36.4

36.2

34.8

34.6

36.6

34.6

33.0

31.1

30.5

31.9

34.0

32.1

30.8

30.8

30.5

30.0

2.8

3.0

7.1

5.7

8.6

9.3

6.2

4.8

6.3

4.5

4.9

4.4

7.5

0.8

2.3

4.1

2.8

3.5

3.6

2.8

2.2

2.5

4.7

2.8

10.0-11.5

10.0-11.5

11.0-13.0

10.0-12.5

10.0-12.5

10.0-12.5

10.0-12.5

8.5-12.0

8.5-12.5

9.0-12.5

11.7

12.1

15.3

9.7

8.9

7.9

6.9

6.5

6.2

5.9

6.3

6.8

7.4

5.8

4.1

7.0

7.5

2.3

-0.7

-2.7

-1.2

0.2

-0.9

-1.6

-4.0

-1.6

11.3

5.3

2.3

1.6

0.9

1.9

3.9

1.8

0.6

0.6

-0.6

5.1

-0.1

0.2

1.2

0.0

-0.8

-1.7

-0.6

0.3

0.4

0.3

0.2

-1.4

-3.7

-2.4

1.1

1.1

3.1

1.0

0.6

0.4

0.4

3.5

1.2

-1.7


315

Annex table 2. Nominal exchange rate of won to the U.S. dollar (1945-1970)

Appendices

Official rate

Free market rates

Japan Other U.S.

export dollars export dollars dollars

1945 Oct. 1 0.015 n.a. n.a. n.a.

1947 Jul. 15 0.05 n.a. n.a. n.a.

1948Oct. 1 0.44 n.a. n.a. 0.74

Dec. 15 0.45 n.a. n.a. n.a.

1949Jun. 14 0.90 n.a. n.a. 2.17

Nov. 1 0.90 n.a. n.a. 2.55

Dec. 1 0.90 n.a. n.a. 2.83

Jan. 1 0.90 n.a. n.a. 3.48

Apr. 1 0.90 n.a. n.a. 2.98

May 1 1.80 n.a. n.a. 2.28

1950May 15 1.60 n.a. n.a. 2.28

June 10 1.60 n.a. n.a. 2.42

June 15 1.80 n.a. n.a. 2.42

Oct. 1 1.80 n.a. n.a. 2.42

Oct. 1 1.80 n.a. n.a. 2.58

Nov. 1 2.50 n.a. n.a. 3.42

Dec.1, 1950 2.50 n.a. n.a. 6.12

Mar. 11 2.50 n.a. n.a. n.a.

1951 May 1 2.50 n.a. n.a. 9.83

Nov. 10 6.00 n.a. n.a. 18.2

1952 Average 6.00 n.a. n.a. n.a.

1953Aug. 28 6.00 n.a. n.a. 26.4

Dec. 15 18.0 n.a. n.a. 38.7

1954Nov. 10 18.0 77.7 74.0 65.6

Dec. 13 18.0 80.9 78.0 71.1

Jan. 10 18.0 92.3 83.5 77.2

1955

Apr. 18 18.0 75.6 46.6 74.8

Jun. 27 18.0 80.2 56.3 75.3

Aug. 8 18.0 95.0 82.0 80.2

Aug. 15 50.0 95.0 82.0 80.2

1956 Average 50.0 107.0 100.8 96.6

1957 Average 50.0 112.3 105.7 103.3

1958 Average 50.0 122.5 101.5 118.1

1959 Average 50.0 139.9 124.7 125.5

1960Jan. 20 50.0 164.1 132.0 132.0

Feb. 23 65.0 171.8 138.7 144.9


Note: 1) “Japan export dollars” refers to the rate at which dollar earnings from exports to Japan were traded on the market, and

“other export dollars” the market rate at which the earnings from exports to the rest of the world were traded.

Note: 2) ‘NT’ stands for‘no transaction’ and‘n.a.’ for‘not available.’

Source: Frank, Kim and Westphal (1975), Table 4-1, pp.30-31.

316THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1961Jan. 1 100.0 156.3 141.6 139.8

Feb. 2 130.0 147.9 145.4 148.3

1962 Average 130.0 NT NT 134.0

1963 Average 130.0 169.8 174.5

1964May. 3 256.5 314.0 285.6

Average 214.3 254.0 n.a.

1965Mar. 22 256.5 279.0 316.0

Average 265.4 NT n.a.

1966 Average 271.3 NT 302.7

1967 Average 270.7 NT 301.8

1968 Average 276.6 NT 304.1

1969 Average 288.2 NT 323.6

1970 Average 310.7 NT 342.8


Annex table 3. Share in gross value-added

(Unit: %)

Appendices317

Agriculture,Mining and Light

Heavy andPublic

forestry and Manufacturing chemical Construction Services

fishingquarrying industries

industriesutilities

1953 47.3 1.1 9.0 7.1 1.9 2.6 40.0

1954 39.8 0.9 11.8 9.3 2.5 3.1 44.4

1955 44.5 1.0 11.6 9.3 2.3 3.6 39.3

1956 46.9 1.1 11.6 9.3 2.3 3.3 37.1

1957 45.2 1.5 11.2 9.0 2.2 4.2 37.9

1958 40.7 1.6 12.8 10.1 2.7 4.1 40.7

1959 33.8 1.8 14.1 11.1 3.0 4.3 46.0

1960 36.8 2.1 13.8 10.6 3.2 4.1 43.2

1961 39.1 1.9 13.6 10.0 3.6 4.4 41.0

1962 37.0 2.0 14.4 10.3 4.1 4.6 42.1

1963 43.4 1.6 14.7 10.3 4.4 3.9 36.3

1964 46.8 1.8 15.6 10.9 4.7 3.7 32.1

1965 38.0 2.0 18.0 12.3 5.7 4.7 37.2

1966 34.8 1.9 18.6 12.3 6.3 5.1 39.6

1967 30.6 1.9 19.1 12.5 6.6 5.3 43.0

1968 28.7 1.5 20.1 12.5 7.6 6.2 43.5

1969 27.9 1.4 20.3 12.7 7.6 7.2 43.2

1970 29.1 1.6 18.5 11.2 7.4 1.3 5.1 44.3

1971 29.5 1.5 18.3 10.8 7.5 1.3 4.4 45.1

1972 28.6 1.2 20.0 12.7 7.3 1.4 4.0 44.9

1973 26.5 1.1 23.0 13.6 9.4 1.2 4.2 43.9

1974 26.4 1.3 22.4 11.0 11.4 0.7 4.3 45.0

1975 26.9 1.5 22.2 11.1 11.1 1.1 4.5 43.7

1976 25.5 1.2 24.1 11.7 12.4 1.2 4.4 43.6

1977 24.2 1.5 23.9 10.9 13.0 1.4 5.3 43.7

1978 22.2 1.4 24.1 10.5 13.5 1.4 7.4 43.5

1979 20.7 1.2 24.4 10.1 14.3 1.8 8.2 43.7

1980 16.0 1.4 24.6 10.2 14.3 2.1 7.9 48.0

1981 16.7 1.5 25.0 10.3 14.6 2.3 6.8 47.7

1982 15.6 1.4 24.9 10.0 14.9 2.4 7.3 48.4

1983 14.3 1.3 25.9 9.9 15.9 2.7 7.5 48.3

1984 13.4 1.2 27.2 10.2 17.0 2.9 7.2 48.0

1985 13.3 1.2 26.7 9.8 17.0 2.9 6.9 49.0

1986 11.7 1.2 28.3 10.2 18.1 3.2 6.2 49.3



318THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1987 10.5 1.1 29.5 10.6 18.9 3.0 6.4 49.5

1988 10.4 0.9 30.1 9.8 20.3 2.6 6.7 49.2

1989 9.7 0.8 28.4 9.0 19.4 2.4 7.8 50.9

1990 8.7 0.8 26.6 7.8 18.8 2.1 10.4 51.5

1991 7.7 0.7 26.7 7.7 19.0 2.0 11.2 51.6

1992 7.5 0.6 25.9 7.4 18.4 2.0 10.7 53.3

1993 6.7 0.5 26.0 7.1 18.9 2.1 10.8 53.9

1994 6.5 0.5 26.3 7.0 19.3 2.1 10.2 54.4

1995 6.2 0.5 26.7 6.2 20.5 2.0 10.1 54.6

1996 5.8 0.4 25.8 5.9 19.9 2.0 10.3 55.8

1997 5.3 0.4 25.4 5.7 19.7 2.0 10.4 56.5

1998 4.9 0.4 26.4 5.9 20.5 2.3 8.8 57.3

1999 5.0 0.3 27.2 6.1 21.0 2.5 7.7 57.3

2000 4.6 0.3 28.3 6.0 22.3 2.5 6.9 57.3

2001 4.4 0.3 26.6 5.6 21.0 2.6 7.1 59.0

2002 4.0 0.3 26.2 5.4 20.8 2.6 7.2 59.8

2003 3.7 0.2 25.8 4.8 20.9 2.6 8.0 59.6

2004 3.7 0.2 27.7 4.5 23.2 2.4 7.8 58.1

2005 3.3 0.3 27.5 4.3 23.2 2.3 7.6 59.0

2006 3.2 0.2 27.1 4.1 23.0 2.3 7.5 59.7

2007 2.9 0.2 27.3 3.8 23.4 2.2 7.4 60.0

2008 2.7 0.3 27.9 3.9 24.0 1.3 7.0 60.8

2009 2.6 0.2 27.7 3.9 23.8 1.8 6.9 60.7


Annex table 4. Share in total employment

(Unit: %)

Appendices319

1963 63.0 0.7 7.9 - 2.5 25.8

1964 61.7 0.7 8.2 - 2.4 27.1

1965 58.5 0.9 9.4 - 2.9 28.3

1966 57.8 1.0 9.8 - 2.5 28.9

1967 55.1 1.1 11.6 - 3.0 29.2

1968 52.4 1.2 12.7 - 3.5 30.2

1969 51.1 1.2 13.1 - 3.6 31.0

1970 50.4 1.1 13.2 - 2.9 32.4

1971 48.2 0.8 13.4 - 3.5 34.1

1972 50.5 0.5 13.6 - 3.7 31.7

1973 49.8 0.4 15.8 - 3.4 30.6

1974 48.0 0.4 17.3 - 3.9 30.4

1975 45.7 0.5 18.6 - 4.4 30.9

1976 44.4 0.5 21.3 - 4.2 29.5

1977 41.7 0.8 21.6 - 4.9 31.1

1978 38.4 0.8 22.3 - 6.1 32.4

1979 35.8 0.8 22.8 - 6.1 34.5

1980 34.0 0.9 21.6 0.3 6.2 19.2 18.1

1981 34.2 0.9 20.4 0.2 6.2 19.8 18.5

1982 32.1 0.8 21.1 0.2 5.8 22.1 18.2

1983 29.7 0.7 22.5 0.2 5.6 22.3 19.1

1984 27.1 1.0 23.2 0.3 6.3 21.8 20.6

1985 24.9 1.0 23.4 0.3 6.1 22.6 22.0

1986 23.6 1.2 24.7 0.3 5.7 22.4 22.3

1987 21.9 1.1 27.0 0.3 5.6 22.1 22.3

1988 20.6 0.8 27.7 0.3 6.1 21.6 23.2

1989 19.6 0.5 27.8 0.3 6.5 21.3 24.3

1990 17.9 0.4 27.2 0.4 7.4 21.8 25.3

1991 14.6 0.3 27.6 0.4 8.5 22.2 26.7

1992 14.0 0.3 26.2 0.4 8.9 23.6 27.0

1993 13.5 0.3 24.5 0.3 8.9 25.4 27.5

1994 12.6 0.2 24.0 0.4 9.1 26.5 27.7

1995 11.8 0.1 23.6 0.3 9.4 26.5 28.6

1996 11.1 0.1 22.7 0.4 9.5 27.3 29.3

Agriculture,

forestry and

fishing

Mining and

quarryingManufacturing Public

utilitiesConstruction

Wholesale and retailtrade, hotels and

restaurants

Otherservices



320THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1997 10.8 0.1 21.4 0.4 9.6 27.7 30.5

1998 12.0 0.1 19.6 0.3 7.9 27.9 32.4

1999 11.3 0.1 19.8 0.3 7.3 28.3 33.2

2000 10.6 0.1 20.3 0.3 7.5 27.2 34.4

2001 10.0 0.1 19.8 0.3 7.3 27.2 35.6

2002 9.3 0.1 19.1 0.2 7.9 27.1 36.5

2003 8.8 0.1 19.0 0.3 8.2 26.4 37.5

2004 8.1 0.1 19.0 0.3 8.1 26.0 38.8

2005 7.9 0.1 18.5 0.3 7.9 25.4 40.1

2006 7.7 0.1 17.5 0.3 7.9 24.9 41.9

2007 7.4 0.1 17.1 0.4 7.9 24.4 43.1

2008 7.2 0.1 16.8 0.4 7.7 24.1 44.2

2009 7.0 0.1 16.3 0.4 7.3 23.6 45.7


Annex table 5. Major trade indicators

Appendices321

Exports by country2) Exports by industry

AdvancedEmerging and

PrimaryHeavy and

Lightdeveloping chemical

economieseconomies

industriesindustries

industries

Exports of goods Won/dollar real

and services exchange rate1)

Unit % of GDP 2005=100 % % % % %

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

2.0

1.1

1.7

1.4

1.5

2.1

2.7

3.4

5.4

5.1

4.8

5.9

8.6

10.4

11.5

12.8

13.5

13.2

14.5

18.9

27.9

26.1

26.3

29.4

29.7

27.7

25.9

31.2

33.2

31.8

31.7

33.9

32.0

35.1

37.6

35.6

30.2

13.1

10.4

10.3

8.6

13.9

12.8

10.8

9.0

11.7

11.0

14.4

14.0

13.2

16.6

15.4

18.2

21.4

17.4

15.3

17.0

22.8

21.5

19.1

24.7

28.2

30.6

29.7

24.3

24.3

25.6

28.9

30.9

31.2

34.9

38.4

40.4

37.6

-

-

-

-

-

-

-

-

-

-

-

-

85.2

86.2

90.0

92.6

88.7

91.7

93.1

93.3

93.6

90.2

87.7

84.4

79.6

80.3

79.8

72.2

71.3

71.6

73.3

77.0

77.6

83.4

85.7

85.1

83.2

-

-

-

-

-

-

-

-

-

-

-

-

14.8

13.8

10.0

7.4

11.3

8.3

6.9

6.7

6.4

9.8

12.3

15.6

20.4

19.7

20.2

27.8

28.7

28.4

26.7

23.0

22.4

16.6

14.3

14.9

16.8

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

17.5

13.9

12.1

12.8

13.4

17.6

12.2

18.0

14.9

14.1

11.7

10.4

7.9

6.8

5.8

5.2

6.1

5.8

5.5

5.3

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

12.8

14.1

21.3

23.8

32.5

25.0

29.9

35.0

35.4

38.1

41.8

44.0

49.0

51.8

55.4

57.0

51.9

52.0

55.4

55.4

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

69.7

72.0

66.6

63.4

54.1

57.4

58.0

47.0

49.7

47.8

46.4

45.6

43.0

41.3

38.8

37.7

42.0

42.1

39.1

39.3


Note: 1) Real exchange rate is obtained using consumer price indices.

Note: 2) Classification of countries follows IMF, World Economic Outlook, October 2010.

Source: Bank of Korea (http://ecos.bok.or.kr); OECD (http://stats.oecd.org); Institute for International Trade (http://www.kita.net);

National Statistical Office (http://www.kosis.kr).

322THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

27.6

26.0

26.8

25.9

26.2

28.5

27.7

31.7

44.3

37.2

38.6

35.7

33.1

35.4

40.9

39.3

39.7

41.9

53.0

49.9

37.8

37.9

36.9

36.9

36.4

36.2

34.8

34.6

36.6

34.6

33.0

31.1

30.5

31.9

34.0

32.1

30.8

30.8

30.5

30.0

80.4

75.0

71.0

66.8

66.8

67.3

61.2

60.7

62.6

65.0

65.7

61.8

60.1

57.5

56.2

52.7

51.1

47.2

43.9

42.1

19.6

25.0

29.0

33.2

33.2

32.7

38.8

39.3

37.4

35.0

34.3

38.2

39.9

42.5

43.8

47.3

48.9

52.8

56.1

57.9

4.9

4.6

4.2

3.8

3.9

4.9

6.9

7.2

7.9

4.4

2.8

2.7

2.5

2.7

2.7

1.5

1.6

1.5

1.8

-

56.6

60.0

62.9

66.2

68.8

72.7

71.8

72.5

73.4

77.6

81.0

80.9

82.7

84.8

87.2

89.6

90.7

91.5

91.7

-

38.5

35.5

32.9

30.0

27.2

22.5

21.3

20.3

18.7

18.0

16.2

16.4

14.9

12.4

10.1

8.9

7.7

6.9

6.4

-


Annex table 6. Demographic trend

Total population Dependency ratio(%)

(thousand (growth,persons) %)

0-14 65+

Appendices323

1949 20,189 - - - - - - -

1955 21,503 1.11) - - - - 74.3 6.0

1960 25,012 3.12) - - - - 77.3 5.3

1961 25,766 3.0 - - - - 79.3 5.4

1962 26,513 2.9 - - - - 80.5 5.5

1963 27,262 2.8 - - - - 81.2 5.6

1964 27,984 2.6 - - - - 81.9 5.7

1965 28,705 2.6 - - - - 82.5 5.8

1966 29,434 2.5 - - - - 82.8 5.9

1967 30,131 2.4 - - - - 82.5 5.8

1968 30,838 2.3 - - - - 81.8 5.7

1969 31,544 2.3 - - - - 80.4 5.6

1970 32,241 2.2 31.2 8.0 4.530 61.93 78.2 5.7

1971 32,883 2.0 31.2 7.2 4.540 62.33 76.2 5.8

1972 33,505 1.9 28.4 6.3 4.120 62.72 74.5 5.6

1973 34,103 1.8 28.3 7.8 4.070 63.09 72.2 5.6

1974 34,692 1.7 26.6 7.2 3.770 63.46 69.7 5.7

1975 35,281 1.7 24.8 7.7 3.430 63.82 66.6 6.0

1976 35,849 1.6 22.2 7.4 3.000 64.17 63.5 6.0

1977 36,412 1.6 22.7 6.8 2.990 64.51 60.8 6.0

1978 36,969 1.5 20.3 6.8 2.640 64.84 58.3 6.0

1979 37,534 1.5 23.0 6.4 2.900 65.17 56.2 6.1

1980 38,124 1.6 22.6 7.3 2.820 65.69 54.6 6.1

1981 38,723 1.6 22.4 6.1 2.570 66.19 53.2 6.2

1982 39,326 1.6 21.6 6.2 2.390 66.67 51.8 6.3

1983 39,910 1.5 19.3 6.4 2.060 67.14 50.2 6.3

1984 40,406 1.2 16.7 5.9 1.740 67.81 48.2 6.4

1985 40,806 1.0 16.1 5.9 1.660 68.44 46.0 6.5

1986 41,214 1.0 15.4 5.8 1.580 69.11 43.9 6.6

1987 41,622 1.0 15.0 5.9 1.530 69.76 42.0 6.7

1988 42,031 1.0 15.1 5.6 1.550 70.30 40.2 6.9

1989 42,449 1.0 15.1 5.6 1.560 70.82 38.7 7.0

1990 42,869 1.0 15.2 5.6 1.570 71.28 36.9 7.4

1991 43,296 1.0 16.4 5.6 1.710 71.72 36.0 7.5

1992 43,748 1.0 16.7 5.4 1.760 72.21 35.3 7.7

1993 44,195 1.0 16.0 5.2 1.654 72.81 34.6 7.9

Crude deathrate (per

1,000population)

Crude deathrate (per

1,000population)

Totalfertility

rate(%)

Lifeexpectancy

at birth(years)



324THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

1994 44,642 1.0 16.0 5.4 1.656 73.17 33.9 8.1

1995 45,093 1.0 15.7 5.3 1.634 73.53 33.0 8.3

1996 45,525 1.0 15.0 5.2 1.574 73.96 32.2 8.6

1997 45,954 0.9 14.4 5.2 1.520 74.39 31.2 8.9

1998 46,287 0.7 13.6 5.2 1.448 74.82 30.5 9.3

1999 46,617 0.7 13.0 5.2 1.410 75.55 29.8 9.6

2000 47,008 0.8 13.3 5.2 1.467 76.02 29.4 10.1

2001 47,357 0.7 11.6 5.0 1.297 76.53 29.0 10.5

2002 47,622 0.6 10.2 5.1 1.166 77.02 28.6 11.1

2003 47,859 0.5 10.2 5.1 1.180 77.44 28.0 11.6

2004 48,039 0.4 9.8 5.0 1.154 78.04 27.4 12.1

2005 48,138 0.2 8.9 5.0 1.076 78.63 26.8 12.6

2006 48,297 0.3 9.2 5.0 1.123 79.18 25.9 13.2

2007 48,456 0.3 10.0 5.0 1.250 79.56 25.0 13.8

2008 48,607 0.3 9.4 5.0 1.192 80.08 24.1 14.3

2009 48,747 0.3 9.0 5.0 1.149 - 23.1 14.7


Annex table 7. Educational participation and resources

(Unit: 1,000)

Number of students enrolled Number

of

teachers

Number

of

schoolsNational

schools

Public

schools

Private

schoolsTotal

Appendices325

Source: Korean Educational Development Institute (http://cesi.kedi.re.kr).

1965 21 4,896 25 4,941 79 5.1

1970 13 5,671 65 5,749 101 6.0

1975 14 5,515 70 5,599 108 6.4

1980 16 5,569 72 5,658 119 6.5

1985 16 4,768 72 4,857 127 6.5

1990 16 4,783 69 4,869 137 6.3

1995 14 3,828 63 3,905 138 5.8

2000 12 3,956 52 4,020 140 5.3

2005 11 3,965 47 4,023 160 5.6

2009 11 3,419 44 3,474 175 5.8

1965 3 415 333 751 19 1.2

1970 4 673 641 1,319 31 1.6

1975 5 1,199 823 2,027 47 2.0

1980 6 1,508 958 2,472 55 2.1

1985 9 1,889 884 2,782 70 2.4

1990 8 1,617 650 2,276 90 2.5

1995 9 1,876 597 2,482 100 2.7

2000 7 1,442 412 1,861 93 2.7

2005 6 1,624 380 2,011 104 2.9

2009 6 1,637 363 2,007 109 3.1

1965 3 207 216 427 8 0.7

1970 4 264 323 590 10 0.9

1975 7 476 640 1,123 20 1.2

1980 15 673 1,008 1,697 27 1.4

1985 19 831 1,303 2,153 40 1.6

1990 19 856 1,409 2,284 58 1.7

1995 20 843 1,296 2,158 56 1.8

2000 19 915 1,137 2,071 63 2.0

2005 15 879 869 1,763 79 2.1

2009 16 1,050 899 1,966 89 2.2

1965 31 3 97 132 7 0.2

1970 49 2 120 171 9 0.1

1975 65 1 159 225 11 0.1

1980 142 5 421 568 21 0.2

1985 279 5 925 1,210 33 0.3

1990 292 6 1,106 1,404 42 0.3

1995 699 24 1,507 2,230 59 0.3

2000 830 41 2,263 3,134 57 0.4

2005 790 44 2,432 3,267 65 0.4

2009 770 46 2,469 3,285 70 0.4

Elementary

school

Middle

school

High

school

Tertiary

education


Annex table 8. Labor market indicators(Unit: %)

326THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

Unemployment

rate

Employment

rate

Regular employees

among workers

Nominal wage

growth

Labor union

density

1963 8.1 52.0 - - 9.4

1964 7.7 51.4 - - 11.5

1965 7.3 52.8 - - 11.6

1966 7.1 52.8 - - 12.1

1967 6.1 53.5 - - 12.4

1968 5.0 55.1 - - 12.1

1969 4.7 55.1 - - 12.5

1970 4.4 55.1 - - 12.6

1971 4.4 54.9 - 20.9 12.7

1972 4.5 55.2 - 10.2 12.9

1973 3.9 56.1 - 16.5 13.2

1974 4.0 56.6 - 31.9 14.8

1975 4.1 55.9 - 29.5 15.8

1976 3.9 57.4 - 35.5 16.5

1977 3.8 57.2 - 32.1 16.7

1978 3.2 58.0 - 35.0 16.9

1979 3.8 57.2 - 27.4 16.8

1980 5.2 55.9 - 24.3 14.7

1981 4.5 55.9 - 20.7 14.6

1982 4.4 56.1 - 15.8 14.4

1983 4.1 55.3 - 11.0 14.1

1984 3.8 53.7 - 8.7 13.2

1985 4.0 54.3 - 9.2 12.4

1986 3.8 54.9 - 8.2 12.3

1987 3.1 56.5 - 10.1 13.8

1988 2.5 57.0 - 15.5 17.8

1989 2.6 58.0 32.4 21.1 18.6

1990 2.4 58.6 32.8 18.8 17.2

1991 2.4 59.1 34.8 17.5 15.4

1992 2.5 59.4 36.0 15.2 14.6

1993 2.9 59.1 36.6 12.2 14.0

1994 2.5 60.1 36.4 12.7 13.3

1995 2.1 60.6 36.7 11.2 12.5

1996 2.0 60.8 36.0 11.9 12.1

1997 2.6 60.9 34.3 7.0 11.1

1998 7.0 6.4 32.8 -2.5 11.4

1999 6.3 56.7 30.2 12.1 11.7


Note: There are breaks in the series of unemployment and employment rates between 1999 and 2000 due to the change in the

definition of unemployment.

Source: National Statistical Office (http://www.kosis.kr); Ministry of Employment and Labor; OECD.

Appendices327

2000 4.4 58.5 30.2 8.0 11.4

2001 4.0 59.0 31.1 5.6 11.5

2002 3.3 60.0 31.0 11.6 10.8

2003 3.6 59.3 32.8 9.4 10.8

2004 3.7 59.8 33.8 6.5 10.3

2005 3.7 59.7 34.6 6.4 9.9

2006 3.5 59.7 35.4 5.6 10.0

2007 3.2 59.8 36.8 5.9 10.6

2008 3.2 59.5 38.2 3.5 10.3

2009 3.6 58.6 39.9 -0.6


Annex table 9. Participants in work-related social insurance programs

(Unit: 1,000 persons)

328THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment

National

Pension

Scheme

(A)

Government

Employees

Pension

(B)

Teachers

Pension

(C)

Public

pension

(A+B+C)

Employment

Insurance

System

Industrial

Accident

Compensation

Insurance

1960 - 237 - 237 - -

1961 - 238 - 238 - -

1962 - 251 - 251 - -

1963 - 272 - 272 - -

1964 - 288 - 288 - 82

1965 - 305 - 305 - 161

1966 - 333 - 333 - 222

1967 - 358 - 358 - 336

1968 - 375 - 375 - 489

1969 - 392 - 392 - 683

1970 - 415 - 415 - 779

1971 - 450 - 450 - 833

1972 - 449 - 449 - 1,078

1973 - 441 - 441 - 1,320

1974 - 456 - 456 - 1,518

1975 - 491 40 531 - 1,836

1976 - 506 44 550 - 2,270

1977 - 539 47 586 - 2,647

1978 - 552 70 622 - 3,100

1979 - 568 79 647 - 3,608

1980 - 648 89 738 - 3,753

1981 - 683 99 782 - 3,457

1982 - 668 108 775 - 3,465

1983 - 670 110 780 - 3,941

1984 - 682 117 799 - 4,385

1985 - 697 124 821 - 4,495

1986 - 717 127 844 - 4,749

1987 - 738 133 870 - 5,357

1988 4,433 767 141 5,341 - 5,744

1989 4,521 810 150 5,481 - 6,688

1990 4,652 843 154 5,649 - 7,543

1991 4,769 885 159 5,812 - 7,923

1992 5,021 922 165 6,109 - 7,059

1993 5,160 940 171 6,271 - 6,943

1994 5,445 948 175 6,568 - 7,273

1995 7,257 958 181 8,396 - 7,894

1996 7,426 971 192 8,589 4,331 8,157

1997 7,357 982 203 8,542 4,280 8,237

1998 6,580 952 206 7,739 5,268 7,582


Source: National Pension Service (http://www.nps.or.kr); Government Employees Pension Service (http://www.geps.or.kr); The

Korea Teachers Pension (http://www.ktpf.or.kr); Korea Workers’Compensation and Welfare Services

(http://www.kcomwel.or.kr).

Appendices329

1999 10,749 914 208 11,871 6,054 7,441

2000 11,763 909 211 12,883 6,747 9,486

2001 11,802 913 216 12,932 6,909 10,581

2002 12,248 931 221 13,400 7,171 10,571

2003 12,617 948 225 13,790 7,203 10,599

2004 12,387 965 230 13,582 7,577 10,473

2005 12,490 986 237 13,713 8,064 12,070

2006 12,804 1,009 246 14,059 8,537 11,689

2007 13,160 1,022 251 14,432 9,063 12,529

2008 13,310 1,030 257 14,597 9,385 13,490

2009 13,572 1,048 - 14,619 9,760 13,885


Annex table 10. Health care indicators

330THEKOREANECONOMY

SixDecad

esofGrowthandDevelo

pment


Total

expenditure on

health

Out-of-pocket

expenditure on

health

Public

expenditure on

health

Practising

physiciansHospital beds

% of GDP

% of total

expenditure on

health

% of total

expenditure on

health

Density per

1,000

population

Density per

1,000

population

1980 3.9 75.6 20.0 .. ..

1981 4.0 75.9 19.8 0.50 ..

1982 4.0 71.0 22.5 0.55 ..

1983 3.9 68.3 25.6 0.54 ..

1984 3.7 65.8 28.6 0.57 ..

1985 3.7 64.1 29.6 0.61 ..

1986 3.6 66.5 28.2 0.65 ..

1987 3.5 65.7 28.7 0.68 ..

1988 3.7 63.1 30.8 0.74 ..

1989 4.2 63.0 31.4 0.80 ..

1990 4.2 58.4 36.3 0.83 2.3

1991 4.0 60.5 33.9 0.90 2.5

1992 4.2 59.7 33.5 0.97 2.6

1993 4.1 58.3 34.4 1.03 2.9

1994 4.1 55.0 33.6 1.07 3.2

1995 3.9 54.6 36.2 1.12 3.3

1996 4.1 51.9 39.2 1.17 3.5

1997 4.1 48.9 41.6 1.23 3.7

1998 4.2 44.3 46.4 1.27 3.9

1999 4.5 43.9 47.4 1.31 4.3

2000 4.8 45.2 45.5 1.30 4.7

2001 5.3 39.3 52.3 1.39 4.5

2002 5.1 40.3 5 1.3 1.49 4.8

2003 5.4 40.4 50.4 1.57 5.1

2004 5.4 40.0 51.1 1.57 5.4

2005 5.7 38.8 52.1 1.63 5.9

2006 6.1 36.5 54.7 1.69 6.5

2007 6.3 35.5 55.2 1.74 7.3

2008 6.5 35.0 55.3 1.86 7.8

2009 .. .. .. 1.94 ..


Members of the Committee for the Sixty-Year History of theKorean Economy

Il SaKong Chairman of the Committee for the Sixty-Year History of the Korean Economy

Oh-Seok Hyun President of Korea Development Institute

Ki-Yual Bang Former President of Korea Energy Economics Institute

Suk-Ho Bang President of Korea Information Society Development Institute

Wook Chae President of Korea Institute for International Economic Policy

Sung-kyou Choi President of Korea Railroad Resaerch Institute

Kee Yeon Hwang President of Korea Transport Institute

Dong Seop Jin Former President of Korean Educational Development Institute

Hak-so Kim President of Korea Maritime Institute

Jin-Woo Kim President of Korea Energy Economics Institute

SukJoon Kim President of Science and Technology Policy Institute

Tae-Joon Kim President of Korea Institute of Finance

Taehyun Kim President of Korean Women's Development Institute

Young-Yong Kim President of Korea Economic Research Institute

Sang Bong Oh Former President of Korea Institute for Industrial Economics and Trade

Se-Ik Oh President of Korea Rural Economic Institute

Ki Seong Park President of Korea Labor Institute

Tae Joo Park President of Korea Environment Institute

Yang-ho Park President of Korea Research Institute for Human Settlements

Byoung-Jun Song President of Korea Institute for Industrial Economics and Trade

Yun-Hi Won President of Korea Institute of Public Finance

Advisory Group

Chang Yung Chung Yonsei University

Jung Jay Joh Former Minister of Maritime Affairs and Fisheries and President of Korea Maritime Institute

Kwang Suk Kim Kyung Hee University

Chong-Hyun Nam President of Institute for Global Economics

Heeyhon Song President of Asia Development Institute

Hacheong Yeon Myongji University

Appendices331



The Committee for the Sixty-Year History of the Korean EconomyTHE KOREAN ECONOMYSix Decades of Growth and Development

YEARS


60

년년년년년년년년년년년년년년년년년년년년년년

Editors


THE K

OREAN EC

ONOMY

Six Dec

ades o

f Growth

and Develo

pmen

t

The Comm

ittee for the Sixty-Year History of the Korean Econom

yEditors

Il SaKong and Youngsun Koh60년년년년cover-print_ok:60년년년년cover-print_ok 10. 12. 21 년년 10:42 Page 1

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