Chapter 2 & 3

Overview of the Koreas Development Process until 1997

The Challenges for Koreas Development Strategies
2006. 6. 8
Cheonsik WOO, KDI
cswoo@kdi.re.kr
2
Part I:
Part I: Synoptic Review of
Koreas Economic Development
Part II: Korea and KBE : Synoptic Review & Assessment Korea and KBE : Synoptic Review & Assessment
(1997~2002) (1997~2002)
Part III: The Korean Economy Today: Challenges from The Korean Economy Today: Challenges from
Long Long- -term, Structural Perspective term, Structural Perspective
Part IV: Part IV: Prospect and Key Policy Agendas Prospect and Key Policy Agendas
3
Part I:
Synoptic Review of
Koreas Economic Development
4
1. Transformation of the Korean Economy
A. Economic Growth
6 Five-Year Economic
Development Plans
2003P
1980 1962 1970
1995
5,000
10,000
67
87
11,432
7,355
1953
Per Capita GNI
(US$)
1990 1945
12,646
100(1964)
1,000(1977)
1998
Big Push
Liberation
(1945)
Korean War
(1950~53)
OECD
(1996)
F. Crisis
(1997)
5
B. Changes in Industrial Structure
Employment Structure
Manufacturing
63.0
7.9
28.3
1960
Service
Sector
19.2
71.5
9.3
Service
Sector
Agriculture /
Fisheries
Manufacturing
Agriculture /
Fisheries
2002
32.5
63.2
4.3
Service
Sector
Agriculture /
Fisheries
Manufacturing
36.8
15.9
47.3
Manufacturing
Agriculture /
Fisheries
Service Sector
GDP Structure
6
Export
Commodity
Profile
1960 1970 1990 1999 1980
HCI Product
Agricultural
Product
Light
Industry
Product
50%
Wig
Automobile Semiconductor Textile
2003
Semiconductor, Mobile
Phone, DTV, Display,
Automobile, Ship-building,
etc.
79.8%
14.1%
6.1%
C. Changes in Export Commodity Profile
- from Agriculture to Manufacturing /
- from Light Industry to Heavy and Chemical Industry
7
3.5
Russia
Japan
US
Australia
Denmark
Canada
UK
Netherlands
Korea
Spain
Italy
Poland
Austria
Switzerland
Finland
France
Germany
Turkey
China
India
Brazil
0
1000
2000
3000
4000
5000
6000
0 0.5 1 1.5 2 2.5 3
R&D expenditure as % of GDP
R
e
s
e
a
r
c
h
e
r
s

(
p
e
r

m
i
l
l
i
o
n

p
o
p
u
l
a
t
i
o
n
)
* Technological Capabilities: R&D
8
2. Economic Take-off with Outward-looking
Development Strategy (1960-80)
A. Economic Conditions of the early 1960s
Capital
Shortage
Weak
Technology Base
Underdeveloped
Private Sector
Abundant
Labor
Strong
Economic will
High Level of
Education
?
(-)
(+)
9
B. Working Mechanism of the Outward-looking
(Export-oriented) Development Strategy
Foreign
Reserves
R
e
p
r
o
d
u
c
t
i
o
n
S
Export
Promotion
Manufacturing
Processing
Private
Enterprises
Government
Technology
Development
Financial Tax Support
Well-educated
Labor force
Foreign Technology
Imports
Capital Good Imports
Raw Material Imports
Foreign Capital Inducement
(Economic Aids External Debt)
S
* Started with the First 5-Year Development Plan (1962)
M
a
r
k
e
t
M
e
c
h
a
n
i
s
m
10
C. Change in Industrial Policies during the 1970s
Mobilizing Financial
Resources (Policy Loans)
Selecting National
Champions (Chaebol)
Accelerating Competition
Iron and steel
Electronics
Petro-chemical products
Automobile
Ship-building
Machinery
Light Industry to Heavy and Chemical Industry (HCI)
(HCI drive set off in 1973)
from general export promotion to the picking-the-winners policy
- respond to wage increase
- respond to increased international competition in light industries
- nurture defense industries (the Nixon Doctrine)
11
3. Changes in Development Strategy(1980-2000)
A. Limits of the Government-led Development
Inefficient Resource Allocation
Macroeconomic Instability
Rising Inequality
Financial Suppression
due to Prolonged
Government Intervention
High Inflation and
Large Fiscal Deficits
Over-investment in
HCI
1979 : Negative Export Growth for the first time since 1960
1980 : Negative Economic Growth (-3.9%)
12
B. Stabilization Policies in the Early 1980s
Budget Freeze/Cut
Zero-Based Budgeting
Phasing-out of Policy
Loans and Interest
Rate Deregulation
Investment
Adjustment in HCI
Inflation
at around 3%
Inflation
at around 3%
Disinflation
Disinflation
Current Account
Surpluses
Current Account
Surpluses
Strong Exports
Strong Exports
GDP Growth of
8% per annum
GDP Growth of
8% per annum
High
Economic Growth
High
Economic Growth
13
* Technological Capability Building-up
+1960-1970s : Building institutions
- KIST (1966); MOST(1967); KAIST(1973)
- Technology Development Promotion Act (1967)
+1980s: National R&D Programs (NRDP, 1982)
- Private firms began to act
+1990s: Mission-oriented R&D by line ministries (Targeted, top-down)
- Private/public partnership in technology development
Govt : Private
Govt : Private
R&D/GDP (%)
R&D/GDP (%)
Researchers
Researchers
33
71 : 29
0.38
5,628
428
64 : 36
0.77
18,434
4,600
19 : 81
1.87
70,503
1970
1970 1970
1980
1980 1980
1990
1990 1990
GERD (US$, Mil.)
GERD (US$, Mil.) 16,000
25 : 75
2.64
198,171
2003
2003 2003
Changes in R&D Activities
14
4. Delayed Economic Reform and
Financial Crisis of 1997
Increased
Vulnerability to
External Shocks
IMF
Rescue Package
Massive Capital Outflow
Denied Rollover of
Short-term External Debt
Continued
Government Intervention /
Weak
Prudential Regulation
Large NPLs
in the Financial
Sector
South-east Asian
Crisis
High
Corporate
Debt Leverage
Widespread
Moral Hazard
15
Firm Failures and Unemployment, 1996-99
0
5
10
15
20
25
30
1
9
9
6

0
1


1
9
9
6

0
4


1
9
9
6

0
7


1
9
9
6

1
0


1
9
9
7

0
1


1
9
9
7

0
4


1
9
9
7

0
7


1
9
9
7

1
0


1
9
9
8

0
1


1
9
9
8

0
4


1
9
9
8

0
7


1
9
9
8

1
0


1
9
9
9

0
1


1
9
9
9

0
4


1
9
9
9

0
7


1
9
9
9

1
0


2
0
0
0

0
1


2
0
0
0

0
4


(%)
0
5,00
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Overnight inter-bank call rate Unemployment rate
No. of firm failures
Source: Choi(2001), Bank of Korea, and National Statistical Office.
16
5. Swift Crisis Resolution and Economic
Recovery
Cleaning up
Non-performing Loans
Accelerating
Liberalization
Improving
Corporate Governance
Expanding
Social Safety Net
- Early Graduation from
the IMF Program
- Foreign Reserves of more than
USD 200bn in 2004
- Early Graduation from
the IMF Program
- Foreign Reserves of more than
USD 200bn in 2004
Improved
External
Positions
Improved
External
Positions
- GDP Growth:
-6.7% (98) 10.7% (99)
- Unemployment:
6.8% (98) 3.5% (04)
- GDP Growth:
-6.7% (98) 10.7% (99)
- Unemployment:
6.8% (98) 3.5% (04)
Rapid
Economic
Recovery
Rapid
Economic
Recovery
- Debt-equity Ratio:
396% (97) 182 (02)
- No. of Banks:
33 (97) 20 (01)
- Debt-equity Ratio:
396% (97) 182 (02)
- No. of Banks:
33 (97) 20 (01)
Stronger
Corporate and
Financial Sector
Stronger
Corporate and
Financial Sector
17
Corporate Sector Reform
- Chaebols: required to eliminate existing cross-debt guarantees
- Exit of 55 non-viable firms
- Corporate workout programs: IBRD to provide expertise
- Big deals: core competencies, reducing excessive capacity,
creating efficient management structures
Market Liberalization
- Eliminating foreign equity ownership ceilings
- Hostile M&As by foreigners
- Legal basis for FDI: FIPA (foreign investment promotion act)
- Phasing-out of remaining Import barriers
(e.g. import-diversification program)
18
6. Five-year Economic Development Plans
State-led Planning (1962-76); 1st, 2nd, and 3rd Five-
year Economic Development Plans
Suitable for an under-developed, small-sized economy with
a relatively simple structure
Focused on setting up sectoral investment plans and
mobilizing and allocating domestic and external resources
to support the implementation of the plans
Supplemented by annual Economic Management Plans
19
Indicative Planning (1977-91); 4th, 5th, and 6th Five-
year Economic Development Plans
To cope with the growing size and sophistication of the
economy
Giving a greater role to private initiatives
Reflecting a growing concern on equity issues
Medium-term Fiscal Plan introduced in the early 1980s to
bridge the gap between EDPs and annual budgeting
Not published to the public
Not tightly linked to annual budgeting
20
Part II:
Korea and KBE: Synoptic Review
21
The Knowledge Strategy of Korea
- Officially documented by
(1) KBE Master-plan (Strategy Report: MOFE-KDI 1999)
(2) Three-Year Action Plan (NEAC 2000)
- endeavor to seek for & anchor
New Development Paradigm for the Age of Knowledge Economy
* - though not widely recognized among the general public, but
Overall, many notable attainments but serious limitations as well
- policy initiatives until 2002 ended up as an unfinished mission
- engendering/confronted with a set of new overarching challenges
Knowledge Revolution/Derive stopped being a policy buzzword
- But basic spirit/tenet carried over to the present government
1. Summary
22
1999 00
98
97
5
10 11
12
1
4
Knowledge Campaign by the Press (esp. Vision Korea by Maeil)
The WB joined
(W B-OECD:
Koreas KBE Report)
Booze-Allen-Hamilton Report
McKinsey Report
Monitor Report
M
a
c
r
o
K
B
E
IMF
Crisis
NEAC
Crisis
Management
(-6.7 % G)
Rebound & Recovery
(10.9 % --> 9.3%)
12
Research
Project
Public
Hearing
Implementation
Strategy
Report
3-Years
Action Plan
Presidential
Mandate
Policy Forum
(KDI -MOFE)
01-02
Setback & Regaining
(3.0% -> 6.2 %)
?
World Knowledge Forum
Road to KBE: Background and Proceeding ( ~ 2002)
23
Since the financial crisis, Knowledge revolution set off &
a s
trong move toward a knowledge
trong move toward a knowledge
-
-
driven economy
driven economy
- - Synergetic Interplay of the New Private Synergetic Interplay of the New Private- -Public Initiatives => Public Initiatives =>
helped unleash the hidden energy and K helped unleash the hidden energy and K- -potentials of the Korean society potentials of the Korean society
Private-Sector
Initiatives
-Corporate, Media
- New and ongoing
New Policy
Drive/Support
Restructuring Efforts
& Knowledge Strategy
Huge Dynamic Energy and K-Potentials of the
Korean Society/People
* IT-Readiness, Huge Learning Potential, Will to Perform
* Suppressed for long and just waiting to be unreleased
The 1997
Crisis
24
2. The Strategy Report of 2000
1. Reinforcing Market Fundamentals
Thorough Reforms of 4 Major Sectors
* Financial, Corporate, Labor, Public
2. Full Opening-up/Liberalization
Attract foreign MNEs (Aggressive, Proactive)
Create New, Open Social/Cultural Environment
3. Upgrading Innovative Capacities
Education/Training, S&T/R&D, ICT, KBI
Fusion of internal & external resources
* Cope with the Impending Threat of New Digital Divide
3- Strategic Thrusts
25
Core
Micro-Policy
Areas
Transparency
Flexibility
Credibility
Full Opening-up
(Attracting MNEs)
Pillars of
Development
Strategy
Enhancing Internal
Innovative Capacity
Open Culture
Globally Connected
Better Supply Chain
Vision
MNEs & Rising Strategic Importance of East Asia (esp. China)
Chance for Far-fetching Structural Reforms due to the Crisis
High Absorptive Capacity (High Motivation & Learning Abilities)
Reliable Industrial and Tech. Base built on Indigenous Capabilities
Opportunities
Strength
Resources Gap (Absolute Gap in Knowledge, Technology, and Capital)
Institutional Gap (Gap in various Systemic Assets. eg. Basic Market Order)
Rapid Industrialization of China and Other NIEs
Erosion of Reform Momentum Danger of Social Disintegration
Weakness
A Leading KBE of the 21st Century
~ 2010: Harnessing Basis and Transforming into a KBE
~ 2002: Grounding-up of Basic Conditions needed for the Transition
Threats
Improving
Market Fundamentals
(Structural Reforms)
Education &
HRD
Science &
Technology
K-Industries
Social
Safety Net
Information
Infra
(2000 Strategy Report) Koreas KBE Vision & Strategy
26
Scope: Policy Actions for the Micro-Part of the Strategy Report
* The other 2 parts left to macro-restructuring policy underway
Contents: 5 Sectors, 18 Target Tasks; 83 Specific Tasks
- 5 Policy Areas: Information, Education&HRD,
S&T/Innovation, K-industries, Digital Divide
Goals
1. Leapfrog to top 10 knowledge-information leaders in the globe
2. Upgrade educational environments to OECD standard
3. Harness S&T base to help reach G-7 standard
Implementation and Monitoring
- 5 Task Forces involving 19 Ministries; 17 Research Institutes
* Each Task to be implemented by Relevant Ministry(ies)
* all to be tracked and coordinated by MOFE (6th Task Force)
- Report : the Private Committee of NEAC --> President
* NEAC (National Economic Advisory Council)
3. The Three-Year KBE Action Plan (Apr. 00~02)
27
Sector Target Tasks (18 Total)
Informitization
(20)
Complete a basic info infra, such as an optic cable network
Foster an education information network
Manage a national knowledge/ information system
Build a cyber government
Change mindsets with respect to IT
Build a sound and secure knowledge society
S&T/
Innovation
(15)
Reinforce a strategic approach in R&D investment
Facilitate industry-university- research centers cooperation
Build an efficient support system for research
Enhance an understanding of s&T and scientists
K-based
Industries
(16)
Build an industrial infrastructure for a KBE
Nurture a new knowledge-intensitve industry
Upgrade traditional industries through IT
Education and
HRD/HRM
(19)
Reform education system for creativity and competitiveness
Revamp vocational training system
Build a sound system for a fair and efficient labor market
Digital Divide
(13)
Expand access to information and IT training
Empower the vulnerable and enhance their life quality
The Three-Year KBE Action Plan: Contents
28
equity and debt ratio
0
200
400
600
94 95 96 97 98 99 00
0
200
400
600
Debt ratio(%) SME debt ratio(%)
Trends in FDI
0
1000
2000
3000
4000
5000
96 97 98 99 00 01
n
o
0
5
10
15
20
b
i
l
l
i
o
n
d
o
l
l
a
r
s
Cases Volume
Trends in R&D invest
0
50,000
100,000
150,000
94 95 96 97 98 99 00
SMEs Total
Market interest ratio(%)
0
5
10
15
94 95 96 97 98 99 00 01
Dramatic Changes resulted
- both in Macro- and Micro-Dimensions
- All in the Desirable Directions
Treds in Venture
0
2,000
4,000
6,000
8,000
10,000
12,000
97 98 99 00 01
n
o
.
0
0
0
1
1
1
1
Inbound FDI
Interest Rate
Venture Startups
R&D Investment
Firms Debt Ratio
4. Outcomes
29
Broadband Internet User (per 100 people)
13.9
3.2
0.8
0.3
0
2
4
6
8
10
12
14
16
Korea USA UK EU
Online Stock Trading (June 2000)
28%
1.8%
7.2%
40%
57%
0
10
20
30
40
50
60
Korea USA France Japan Sweden
366
731
1,634
3,103
10,860
19,040
0
95 96 97 98 99 00
24,380
01
Internet Users in Korea
IT Industry Output and Share of GDP
75.5
88.1
115
148
152
0
20
40
60
80
100
120
140
160
1997 1998 1999 2000 2001
T
r
i
l
l
i
o
n

K
o
r
e
a
n

w
o
n
IT Revolution a New Global IT Powerhouse
30
Successful corporate and financial market reforms =>
Korea firms debt-equity ratio has become even
lower than those of advanced countries.
Successful corporate and financial market reforms =>
Korea firms debt-equity ratio has become even
lower than those of advanced countries.
>> Some changes to the point of excessiveness
Korea
US
Japan Germany
Intl Comparison of Debt-equity ratio (%)
(the end of 2004)
* Figures for Japan and Germany are the end of 2002.
104
141
162
241
21
Debt Equity Ratios for Firms :
Large firms vs. SMEs
0
50
100
150
200
250
300
350
400
450
500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
SMEs
Large firms
31
Strong Supports from the Top Leadership
- Crisis and new Millennium: need a new initiative/hope
* helped by private-sector champion group (Media)
In todays global world, all citizens must become the next
generations intellectuals, Kim Dae Jung (former president of Korea)
cited by Kochan of MIT in his recent book
Timely and Due Regard to Digital Divide
- rural area; disadvantageous group; under-attended/tapped groups
- addressed at national welfare policy level
Dual Monitoring System (Strong & Weak points)
- Micro-areas addressed by 3-Year Action Plan
- Macro-areas addressed by the Crisis-Management/Restructuring Plan
4. Lessons of the Korean K-Model : Bright Side
32
Micro-Dimensions: Private + Public Initiatives well Matched
- existing/latent private-sector demands supported/bolstered the govt
* ICT, Venture startup
Proper Policy Mix (for IT) : Supply-side + Demand-Side
- Supply Side : distribution of low-priced PC, building
Infra(high-speed internet), support for venture startups
(KOSDAQ) and e-business
- Demand Side : offering massive computer training,
mandating S/W purchase to all government institutions
Tapping onto and collaboration with external expertise
- Collaboration/alliances with WB-OECD (Foreign consulting firms)
* WB-OECD report: complementary to Strategy Report and 3-year Plan
33
Deficiency in Implementation Strategy
>> Limitations/Problems of the 3-Year KBE Plan
WB-OECD(2000) says:
KBE requires an integrated systemic approach because of interactions
among policies & actors across traditionally disparate areas of policymaking
Undertaking key inter-linked reforms requires:
* buy-in from stakeholders and population at large
* coordination and setting of monitorable goals
* monitoring, evaluation & constant adjustment(Feedback mechanism)
* institutionalizing the process so that it spans changes in government
4. Lessons of the Korean K-Model : Deficiency Side
34
In Korea,
Poor coordination among government agencies yet
* though improving gradually (NS&TC, HRD Committee)
Insufficient public consultation and consensus building process
- strong legacy of top-down, centralized approach
- main policies vulnerable to political cycle
* problematic esp. in major micro-reform issues such as education
Inadequate/Insufficient Monitoring of Implementation
- Poor performance evaluation/monitoring mechanism/capacity
- NEAC-directed monitoring process did not work (self-complacency) .
* No effective feedback from anywhere
* Mechanical compilation of line ministries reports
Limitations of the first round of Koreas K-model became highly visible
around 2003, and with the coming of the new Roh government
=> searching for a new, more comprehensive strategy that
encompasses not only economic but social & political dimensions.
35
>> Socio-economic Environment of the Roh Administration in 2003
The Roh administration was inaugurated under a mandate for change
However, the new administration faced internal and external challenges
The Roh administration was inaugurated under a mandate for change
However, the new administration faced internal and external challenges
Create new political culture governed by rules and justice
Regain growth momentum and economic vitality
Alleviate regional disparity
Resolve tension on the Korean Peninsula
Create new political culture governed by rules and justice
Regain growth momentum and economic vitality
Alleviate regional disparity
Resolve tension on the Korean Peninsula
Mandate for Change
Mandate for Change Mandate for Change
Increased world economic and political
uncertainties caused by the Iraqi war
Potential downgrade of sovereign credit rating
due to the North Korean nuclear impasse
Slowdown of exports to Asia due to
the outbreak of SARS
Increased world economic and political
uncertainties caused by the Iraqi war
Potential downgrade of sovereign credit rating
due to the North Korean nuclear impasse
Slowdown of exports to Asia due to
the outbreak of SARS
External Challenges
External Challenges External Challenges
Economic slowdown due to a sharp decrease
in domestic demand
Continued financial market uncertainties
due to the SK Global incident and credit
delinquencies
Labor disputes and other social conflicts
Economic slowdown due to a sharp decrease
in domestic demand
Continued financial market uncertainties
due to the SK Global incident and credit
delinquencies
Labor disputes and other social conflicts
Internal Challenges
Internal Challenges Internal Challenges
5. New Vision & Strategy Work (2004)
36
>> Challenges to the Korean Economy
Rapid
globalization
Rapid Rapid
globalization globalization
Emergence of
China
Emergence of Emergence of
China China
Tensions on the
Korean Peninsula
Tensions on the Tensions on the
Korean Peninsula Korean Peninsula
Rapid
globalization
Rapid Rapid
globalization globalization
Emergence of
China
Emergence of ergence of
China China
Em
Tensions on the
Korean Peninsula
Tensions on the Tensions on the
Korean Peninsula Korean Peninsula
Slowdown in
growth
momentum
Slowdown in Slowdown in
growth growth
momentum momentum
Increased
social tension
Increased Increased
social tension social tension
Fast growth of China in both traditional and hi-tech sectors
Chinas increasing share of foreign investment into East Asia
Fast growth of China in both traditional and hi-tech sectors
Chinas increasing share of foreign investment into East Asia
Increased systemic risk due to political uncertainty in the Korean peninsula
Intensified geo-political complexity in Northeast Asia
Increased systemic risk due to political uncertainty in the Korean peninsula
Intensified geo-political complexity in Northeast Asia
Financial and corporate sectors under-prepared to meet global standards
Increased pressure to liberalize agricultural and service sectors (DDA, FTA)
Financial and corporate sectors under-prepared to meet global standards
Increased pressure to liberalize agricultural and service sectors (DDA, FTA)
Reduction in labor and capital inputs
Inadequate technological and institutional capabilities
Reduction in labor and capital inputs
Inadequate technological and institutional capabilities
Intensified conflicts across regions, genders, generations and income groups
Insufficient social safety net for the unemployed,
and worsening income distribution
Intensified conflicts across regions, genders, generations and income groups
Insufficient social safety net for the unemployed,
and worsening income distribution
+ Diagnosis: Problems are structural in nature and due to continuing challenges
+ Diagnosis: Problems are structural in nature and due to continuing challenges
37
Dynamic Korea
Dynamic Korea
Dynamic Korea
Regain economic vitality and
improve the welfare of the needy
Political, Administrative and Social Reform
Political, Administrative and Social Reform
Innovation Integration
Northeast Asian
Economic Hub
Upgrading
Technology &
Manpower
Market Reform
Enhancing
Social Well-being
Vision
Two pillars for
achieving vision
Seven
Strategic
Initiatives
Balanced
Territorial
Development
Stable Labor
Relations
Short-term
Action
>> Basic Scheme of the New Vision
- Dynamic Korea: a Nation on the Move -
38
Part III:
The Korea Economy: Challenges
From Long-term, Structural Perspective
39
Sagging and unstable economy
Losing growth momentum
Losing industrial competitiveness
Job instability (Jobless Growth)
Increasing disparity (new divide)
Sagging and unstable economy
Losing growth momentum
Losing industrial competitiveness
Job instability (Jobless Growth)
Increasing disparity (new divide)
Internal Strains

Globalization
S&T revolution (IT, NT, BT etc)
Surging-up of China
( + DDA, FTA)
Globalization
S&T revolution (IT, NT, BT etc)
Surging-up of China
( + DDA, FTA)
External Pressure
Fundamental changes under way
- Industrial structure and leading players
- Market and policy environments
- Firm behavior/strategy and exterior interaction
- Polarization across/ within industries and firms
Fundamental changes under way
- Industrial structure and leading players
- Market and policy environments
- Firm behavior/strategy and exterior interaction
- Polarization across/ within industries and firms
Korea continues to undergo deep & fast structural changes
Mired into severe confusion / disputes about the Present and the Future
Korea continues to undergo deep & fast structural changes
Mired into severe confusion / disputes about the Present and the Future
1. Summary
40
Growth performance:
- more precarious since the 1997 crisis
- third business cycles under way now
Growth performance:
- more precarious since the 1997 crisis
- third business cycles under way now
3.1
(%)
19811990 19912000
1.7
7.8
1.2
6.3
0.6
5.2/4.6
20032012
Human
Capital
TFP
Labor
Capital
3.6
3.2
2.0
0.8
0.9
0.6
1.7
1.0
2.0/1,5
Long-term potential growth rate:
- forecast to fall esp. due to falling
labor input (aging problem)
Long-term potential growth rate:
- forecast to fall esp. due to falling
labor input (aging problem)
Growth Rate (1981-2004) Potential Growth Rate (1981-2012)
2. Short-term and potential growth
6.2
7.3
10.8
8.1
6.8
10.6
11.1
10.6
6.7
9.2
9.4
5.9
6.1
8.5 9.2
7.0
4.7
-6.9
9.5
8.5
3.8
7.0
3.1
4.6
-8
-4
0
4
8
12
1981
1985
1989 1993 1997 2001
G
r
o
w
t
h

R
a
t
e
(
%
)
2004
<Sagging and unstable economy> <Losing growth momentum>
2. Growth : Low, unstable trajectory
4.0
5.0
41
The elasticity changes erratically, but
appears to fall below the long-term trend lately
Source of Problems
Business downturn
- Rapid contraction of the service industry
Reduced labor demand in the manufacturing sector
- Rapid decline of labor intensive industries.
occupied mostly by SMEs
Inflexible labor market
- labor unions in public sector and large firms
- Restrictive lay-offs and hiring practices
1975 1980 1985 1990 1995 2000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
(2 Year Moving Average)
Trend Line
Source: KDI
* Employment Elasticity =
Employment growth Rate / Economic Growth Rate
On top of precarious and low growth,
a concern is rising over the sign of Jobless Growth
On top of precarious and low growth,
a concern is rising over the sign of Jobless Growth
Employment Elasticity (1970-2002) Current Situation and Issues
3. Jobless Growth
<Growth with Jobless employment>
2. Employment and Jobs
42
New challenges arise in both quantity & quality of jobs
New challenges arise in both quantity & quality of jobs
Employment rate remains low compared to advanced nations
* (96) 63.7 (02) 63.3 (03) 63.0 (04) 63.6 %
Employment gains occurred mostly in the non-regular jobs
U-shaped job-creation curve:
* Mid-level income jobs , while low- & high-level income jobs
2
Employment rate remains low compared to advanced nations
* (96) 63.7 (02) 63.3 (03) 63.0 (04) 63.6 %
Employment gains occurred mostly in the non-regular jobs
U-shaped job-creation curve:
* Mid-level income jobs , while low- & high-level income jobs
Employment Changes by Income-
Deciles Jobs Group (93~04)
Employment Changes by Income Employment Changes by Income- -
Deciles Jobs Group ( Deciles Jobs Group ( 93~ 93~ 04) 04)
(%)
Total Employment &
Non-regular Workers
Total Employment & Total Employment &
Non Non- -regular Workers regular Workers
(thousand persons, %)
2001 2002 2003 2004
Employ-
ment
21,572
3,636
22,169
(2.8)
22,139
(-0.1)
22.557
(1.9)
Non-
Regular
3,839
(5.6)
4,606
(20.0)
5,394
(17.1)
276
635
204
108
508
137
579
558
-73 -20
-200
-100
0
100
200
300
400
500
600
700
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
* The figures in ( ) are the rate of increase (%)
Lower
higher
26
<Growth with Jobless employment>
43
Also, mounting concern over greater income disparity
Also, mounting concern over greater income disparity
Gini-Coefficients (1992~2003)
0.25
0.27
0.29
0.31
0.33
0.35
0.37
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Payroll,
Urban Employees
Total Income, Urban
Employee
Total income,
Entire Workforce
* Income gap among wage earners (2/3 of total workforce) +
* among the whole workforce including self-employers and unpaid workers (1/3)
=> New Working Poor groups: SMEs labor, self-employers, and temps
4. Income Disparity
0.342
0.359
0.290
< Rising Income Disparity >
3. Economic and Social Disparity
44
Drastic changes in economic environment,
=> Rapid progress of Polarization (Divide)
Drastic changes in economic environment,
=> Rapid progress of Polarization (Divide)
Put up steadily during 1990s + amplified during the recent recession
Self-sustaining mechanism in effect
Put up steadily during 1990s + amplified during the recent recession
Self-sustaining mechanism in effect
Industries

Firms
Employment

Income
Innovative
Capacity
EducationHRD Investment
IT-readiness
Wage gap increase
Working-Poor enlarged
(SMEs, Temp, Self-employers)
Manpower
R&D Capabilites
Manufactures vs Services
IT vs Non-IT
LE vs SMEs
Circular Structure of Polarization
1. Structure
II. Polarization: the New Overarching Challenge
<Ref.> Polarization in Korea
45
Manufacturing
Services
0
3
6
9
12
15
2001 2002 2003
1/4
2/4 3/4 4/4 2004
1/4
Light Mfr
HCI
-10
-5
0
5
10
15
20
2001 2002 2003 2/4 3/4 4/4 2004
1/4 1/4
SMEs (< 300)
LE (> 300)
-2
0
2
4
6
8
10
90 92 94 96 98 2000 2002
Growth Gap: Sectors Growth Gap: Industries Earnings by firm size (KOSPI)
-200
0
200
400
600
800
1 2 3 4 5 6 7 8 9 10
(1,000)
Permanent
Contractual
0
5
10
15
20
25
2000 2001 2002 2003
(0.1M KRW)
Wage Gap New Jobs (93~2002)
Low-Paying High-Paying
0.24
0.25
0.26
0.27
0.28
0.29
0.30
92 95 98 2001 2004
1/4
Gini (Wages)
>> Cutting Dimensions of Polarization
46
5. Industrial Restructuring and Declining Competitiveness (1/2)
Polarization
Polarization Polarization
a few Korean MNEs in electronics and automobile sectors soaring
laying down a foundation for a dynamic, and innovation based growth
But, most SMEs and general products losing competitiveness
Services absorbing more labor, but performance sagged relative to mfr. etc
a few Korean MNEs in electronics and automobile sectors soaring
laying down a foundation for a dynamic, and innovation based growth
But, most SMEs and general products losing competitiveness
Services absorbing more labor, but performance sagged relative to mfr. etc
Change in
Industrial
organization
Change in Change in
Industrial Industrial
organization organization
dominance of the domestic conglomerates tripod structure
* domestic conglomerates (Chaebols) + foreign MNEs +
new technology-based SMEs (NTBFs)
subcontract relation btw large companies and SMEs changing
dominance of the domestic conglomerates tripod structure
* domestic conglomerates (Chaebols) + foreign MNEs +
new technology-based SMEs (NTBFs)
subcontract relation btw large companies and SMEs changing
Upgrading
of Firms
Activities
Upgrading
of Firms
Activities
focus shifting from production to R&D, sales, the other higher VA activities
business streamlining, spin-offs and labor shedding by big companies
emerging innovation networks (still undeveloped)
increased cooperation among firms, university and research institutes
focus shifting from production to R&D, sales, the other higher VA activities
business streamlining, spin-offs and labor shedding by big companies
emerging innovation networks (still undeveloped)
increased cooperation among firms, university and research institutes
< Deep and wide structural changes under way >
4. Industrial Restructuring and Competitiveness
47
Chinas export structure is rapidly converging with
that of Korea.
Chinas export structure is rapidly converging with
that of Korea.
<China>
<Korea>
Source: UNCOMTRADE
0%
20%
40%
60%
80%
100%
1993 2004
Medium-high tech
High tech
Low tech
Medium-low tech
Non-manufacturing
0%
20%
40%
60%
80%
100%
1993 2004
Medium-high tech
High tech
Low tech
Medium-low tech
Non-manufacturing
8
Particularly, China achieved a large increase in the export of IT products
Particularly, China achieved a large increase in the export of IT products
< Loosing Industrial Competitiveness : China Shock or Effect? >
48
Domestic
Production
Share
[Textile] [Light Manufactures]
2.1
5.5
11.8
4.0
6.8
15.4
Import
from
China
1 9 9 0 1 9 9 6 2 0 0 2
1.4
7.9
4.2
1.7
2.7
4.8
1 9 9 0 1 9 9 6 2 0 0 2
1.9
4.7
China
3.3
2.5
Kor
[Manufacturing]
1 9 9 0 2 0 0 0 2 0 0 3
6.9
10.5
China
5.8 8.2
Kor
[Textiles]
1 9 9 0 2 0 0 0 2 0 0 3
7.3
3.3
15.9
6.0
Domestic
Production
Share
Import
from
China
China vs Korea in Global Export Market Crowding-out by Imports from China
Food Textiles
Clothing
Wood
Product
Metals Minerals Computer Telecom
Equipment
Home
Appliances
Machinery precision
machine
48.6
19.4
6.4
22.9
3.5
6.5
0.0 0.0 0.0
1.0
0.0
5.6
35.8
31.1
12.5
13.2
25.0
37.5
20.8
11.8
13.3
11.1
1991~1997
2000~2003
auto
Proportion of the Vulnerable Korean Firms (%)
Light
Manufacturing
ICT
Products
Primitive estimate by KIET (2004)
49
As a result, widening gap as against big leading firms
As a result, widening gap as against big leading firms
* Productivity differential increased
- Especially in technology-intensive industries such as IT equipment and parts
* Productivity differential increased
- Especially in technology-intensive industries such as IT equipment and parts
Notable positive changes, but most SMEs remain inapt and vulnerable
Notable positive changes, but most SMEs remain inapt and vulnerable
* Passive or Reactive in overall business orientation and capabilities
- unable to proactively respond to rapid structural changes under way
- accustomed to surval under government protection/support
* especially weak in technological (R&D) capabilities
- SMEs with technological innovation capabilities: 18.1%
(higher than in the past way, but still below advanced countries (30~40%)
* also weak in other upstream and downstream activities
- design, marketing (esp. international), brand-exploitation etc.
- requisite professional business services market under-developed
* Passive or Reactive in overall business orientation and capabilities
- unable to proactively respond to rapid structural changes under way
- accustomed to surval under government protection/support
* especially weak in technological (R&D) capabilities
- SMEs with technological innovation capabilities: 18.1%
(higher than in the past way, but still below advanced countries (30~40%)
* also weak in other upstream and downstream activities
- design, marketing (esp. international), brand-exploitation etc.
- requisite professional business services market under-developed
Overall Competitiveness Position of the Korean SMEs
< SMEs in Korea >
50
Productivity Gap against Large Firms
Increased across industries and among firms since the crisis
Increased across industries and among firms since the crisis
* labor productivity: SMEs gap against large firms enlarged steadily
* TFP: SMEs once outperformed large firms -> reversed during 90~97 -> gap widening
- TFP growth during 1998~1991: SMEs 8.87 vs LEs = 15.21
* labor productivity: SMEs gap against large firms enlarged steadily
* TFP: SMEs once outperformed large firms -> reversed during 90~97 -> gap widening
- TFP growth during 1998~1991: SMEs 8.87 vs LEs = 15.21
>> Productivity Gaps (1)
0
20
40
60
80
100
120
140
160
180
200
1984 1990 1995 2002
1-9 10-19 20-99 100-299 >300
0
2
4
6
8
10
12
14
16
18
20
1985-1989 1989-1997 1998-2002
(%)
1-9 10-19 20-99 100-299 > 300
Labor Productivity
Total Factor Productivity
Size groups are in number of employees
51
Changes in Productivity by Industries
0
5
10
15
20
25
30
1985-89 1989-97 1998-01
T&C
Chemicals
Semi-conductor
E Parts
IT equipment
Auto
(%)
0
50
100
150
200
250
300
350
400
450
1984 1990 1995 2001
T&C
Machinery
E&E
million Won per capita
Chemicals
Auto
Machinery
>> Productivity Gaps (2)
Increased gap between SMEs and large firms is driven by quantum leap of
Koreas vanguard firms in Electronics
Increased gap between SMEs and large firms is driven by quantum leap of
Koreas vanguard firms in Electronics
* Productivity of EE, esp. IT equipment, electronic parts, quantum leaped since mid 90s
(led by Koreas vanguard companies such as Samsung, LG, Hyundai etc.)
* In 2001, Productivity of EE is ten times higher than T&C
* Productivity of EE, esp. IT equipment, electronic parts, quantum leaped since mid 90s
(led by Koreas vanguard companies such as Samsung, LG, Hyundai etc.)
* In 2001, Productivity of EE is ten times higher than T&C
Labor Productivity
Total Factor Productivity
52
Export share & Income-generating effect Income generating effect of exports(UGDP/Uexport)
Week competitiveness taxing Korea more and more
Polarization btw Exports-Domestic Demand (recession)
Week competitiveness taxing Korea more and more
Polarization btw Exports-Domestic Demand (recession)
* Import-dependency keeps rising (equipment machine:94 (98) 7 137 (03))
* Spillover of exports falling since mid 90s (esp. in IT sector)
- employment creating effect : 25.8 (95) 15.7 (00)
* Import-dependency keeps rising (equipment machine:94 (98) 7 137 (03))
* Spillover of exports falling since mid 90s (esp. in IT sector)
- employment creating effect : 25.8 (95) 15.7 (00)
Export Share (%)
I
G
E
Auto
Machinery
Semi-
Conductor
Chemicals
IT
Equipment
0.3
0.4
0.5
0.6
0.7
0.8
0 5 10 15
1990
1995
2000
0.55
0.60
0.65
0.70
0.75
1980 1983 1985 1988 1990 1993 1995 1998 2000 2003
0.70
0.63
0.58
*
* Figure for 03 is estimate
[Parts, Materials, and Machinery Industries]
Income-generating effect of advanced nations: Japan 0.89 (00), US 0.91(90)
53
Job quality & income disparity largely reflect Koreas
undeveloped service sector
Job quality & income disparity largely reflect Koreas
undeveloped service sector
Employment Real GDP
Korea
Japan
US
Germany
20
30
40
50
60
70
80
90
80 86 92 98 01
(%)
Korea
Japan
US
Germany
40
50
60
70
80
80 86 92 98 01
(%)
Source: OECD, STAN D/B
Share of the Service Sector
28
Service sector has expanded steadily in employment while Real GDP
has remained stagnant at 50~52% Low-productivity in Korean service
sector
Service sector has expanded steadily in employment while Real GDP
has remained stagnant at 50~52% Low-productivity in Korean service
sector
< Under-developed Services Sector>
54
Productivity & Employment Changes in Korean Service Sector (92. 97, 02)
Productivity & Employment Changes in Korean Service Sector (92. 97, 02)
Labor Productivity (10 thousands KRW)
E
m
p
l
o
y
m
e
n
t
(
T
e
n

T

p
e
r
s
o
n
s
)
)
Wholesale
Retail
Hotels
Restaurants
TransportStorage
Telecom.
FinanceInsurance
Real EstateBusiness
Edu R&D
Medical Health
Others
0
50
100
150
200
250
300
350
400
450
1000 2000 3000 4000 5000 6000
92
97 2002
29
Most of employment gain in service sector since 1990 occurred in
low-productivity traditional service sector
Most of employment gain in service sector since 1990 occurred in
low-productivity traditional service sector
Employment in high-productivity sectors has been stagnant/shrunken
* traditional services : wholesale/retail/restaurants/hotels
Employment in high-productivity sectors has been stagnant/shrunken
* traditional services : wholesale/retail/restaurants/hotels
< Under-developed Services Sector>
55
Productivity Changes in Service since 1990
Productivity Changes in Service since 1990 Productivity Changes in Service since 1990
(1992=100)
Service Total
Transport,
Telecom
Finance
Insurance
Real Estate &
Business Services
40
60
80
100
120
140
160
180
200
1992 1994 1996 1998 2000 2002
Level relative to yr. 1992
>> Emerging Trend in Korean Service Sector
Jobs Creation by Work Type & Industry
Jobs Creation by Work Type & Industry Jobs Creation by Work Type & Industry
Mfg, Construction, Service
-30
-20
-10
0
10
20
30
40
50
60
70
Mfr
(Temp)
Services
(Temp)
Const
(Temp)
Mfg
(Perm)
Services
(Perm)
Const
(perm)

E
m
p
l
o
y
m
e
n
t

(
t
e
n

T
)
0
0.5
1.0
1.5
2.0
2.5
W
a
g
e

(
10
M

K
R
W
)
Employment Changes
Wage
Toward late 1990s, a new trend appears to set in.
Toward late 1990s, a new trend appears to set in.
The modern business-related sectors started to pick up in productivity,
compared to traditional sectors
After 2000, the service sector created most high-paying permanent jobs
The modern business-related sectors started to pick up in productivity,
compared to traditional sectors
After 2000, the service sector created most high-paying permanent jobs
56
Korean out-bound FDI has been steadily increasing, whereas
in-bound FDI has been sluggish after peaking in 1999.
Korean out-bound FDI has been steadily increasing, whereas
in-bound FDI has been sluggish after peaking in 1999.
As for manufacturing, the amount of out-bound FDI has
exceeded in-bound FDI during 2001-03.
- The pick-up of in-bound FDI in 2004 was mainly due to technical factors
such as introduction of shortened tax-exemption period (from 10 to 7 yrs)
beginning January 2005.
As for manufacturing, the amount of out-bound FDI has
exceeded in-bound FDI during 2001-03.
- The pick-up of in-bound FDI in 2004 was mainly due to technical factors
such as introduction of shortened tax-exemption period (from 10 to 7 yrs)
beginning January 2005.
(Trillion won)
0.0
4.0
8.0
12.0
16.0
20.0
1991 1993 1995 1997 1999 2001 2003
In-bound
FDI
Out-bound
FDI
(Trillion won)
< All industries >
< Manufacturing >
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1997 1998 1999 2000 2001 2002 2003 2004
In-bound FDI
Out-bound FDI
22
< Underperforming FDI & the Threat of Hollowing-out>
Part IV:
Prospect and Key Policy Agendas
58
Project: National Vision and Long-Term Fiscal Strategy (MPB-KDI)
* Launched July 2005 (now underway)
O Design a vision plan with long-term well-calibrated financing strategy
- ensure implementablity of the plan, spanning political cycle
- prepare for the distant, but anticipatable future (2030)
esp. tackling Aging, Social Cohesion, the Korea Peninsula Issues
O 1 year budgeting 5-years rolling plan long-term planning
O Spending within revenue strategic/pro-active fiscal policy
O 6 Policy Areas: Growth momentum, HRD, Social welfare,
Globalization, Social Capital, Governance
* Social capital & National Governance added as two keystones
Specialists on S&TE, Sociology, political science, public
administration etc joining T/F
O Vision : Prosperous and Decent Korea :
whether to co-prosper or to co-perish?
1. Vision 2030 : A New Korea for the New Future
59
>> New Agendas and Mandates
1. Reform to Secure Extra-financial Resources
Overhauling of taxation system : Property tax, service sector
New Budget allocation Rule among Big Budgets Sectors
- Education vs S&T vs ICT vs SME vs social welfare
2. Decentralization/Regionalization
- Korea too big to make a single unit of big policy experiments
- Implementation/Experiments at Sub-national level desirable
* Needed for Edu&HRD, R&D/Innovation, Social Welfare etc.
* Induce constructive competition among Regions
3. New Leadership & Conflict Resolution Mechanism/Capacity
- New Government Leadership
* Market vs Government
- Social Capital (Was the Red Devils Syndrome Dream?)
60
Establish an advanced national system for technological innovation
- Increase R&D investment, Integrate technological, human resources, and
industrial development policies
- Establish a new system for industry-academia collaboration
Education reform
- Increase diversity and specialization through decentralization & deregulation
Establish an advanced national system for technological innovation
- Increase R&D investment, Integrate technological, human resources, and
industrial development policies
- Establish a new system for industry-academia collaboration
Education reform
- Increase diversity and specialization through decentralization & deregulation
Upgrading Technology & Manpower
Upgrading Technology & Manpower
25
2. Policy Focus 1 & 2
33
Ensure minimum living standard for all, and encourage sound
economic activities
- Stabilize real estate market: Implement comprehensive measures, Rationalize
tax code, etc.
- Expand the social safety net: Extend the coverage of welfare, Reinforce
welfare delivery system, etc.
- Promote social equality: Enhance female participation and representation, etc.
Ensure minimum living standard for all, and encourage sound
economic activities
- Stabilize real estate market: Implement comprehensive measures, Rationalize
tax code, etc.
- Expand the social safety net: Extend the coverage of welfare, Reinforce
welfare delivery system, etc.
- Promote social equality: Enhance female participation and representation, etc.
Enhancing Social Well-Being Net
Enhancing Social Well-Being Net
61
1) Increase Budget (Strategic Fiscal Plan)
- esp. on higher education & pre-school sector
- to help the needy students/family
2) Small Institutional Reform
- Tighten Performance Monitoring
* budget as an investment not expenditure
- Information Disclosure
- Deregulation (esp. concerning the
usage of school properties/ facilities)
3) Big Institutional Reform
- Educational Administration
- Governance of Universities
- Equalization Policy
- Tax System
The Magic Triangle to Revitalize
Koreas Education & HRD
Huge hindrances & mounting skepticism for problem solving
The Case of Education: Suggestion for Possible Solution:
- Big Deal to Ride out of the Policy Deadlock Situation
- New alliances & compromises among various key players
62
Strategic inducement of In-bound foreign direct investment
Strategic inducement of In-bound foreign direct investment
Lift remaining restrictions, Improve investment incentives
Strengthen internal capabilities for a logistical, financial and R&D hub in
the region
Lift remaining restrictions, Improve investment incentives
Strengthen internal capabilities for a logistical, financial and R&D hub in
the region
25
3. Policy Focus 3 : FDI & FTA
33
Korea has far under-performed in its potential
as a destination for FDI.
Korea has far under-performed in its potential
as a destination for FDI.
During 2000-02, Korea was ranked 18th out of 140 countries
in potential for attracting FDI, but
Koreas actual total in-bound FDI ranked 107th (UNCTAD,2004)
During 2000-02, Korea was ranked 18th out of 140 countries
in potential for attracting FDI, but
Koreas actual total in-bound FDI ranked 107th (UNCTAD,2004)
63
0%
20%
40%
60%
80%
100%
K
o
r
e
a
H
o
n
g

K
o
n
g
S
i
n
g
a
p
o
r
e
C
h
i
n
a
Language &
living
conditions
Cost
competitiven
ess
Favorable
policies
High-skilled
labor force
Industrial &
technological
Rigid labor
market
High labor
cost
Inconsistent
& opaque
policies
Others
Regulations
32.0%
15.5%
15.5%
10.7%
26.3%
< Competitive factors in attracting FDI by country > < Discouraging factors in doing business in
Korea >
25
According to KDIs survey of foreign investors, Korea offers
competitiveness in market size, industrial and technological
base, and high-skilled labor force.
According to KDIs survey of foreign investors, Korea offers
competitiveness in market size, industrial and technological
base, and high-skilled labor force.
However, rigid labor market and regulations act as barriers.
However, rigid labor market and regulations act as barriers.
[Ref.] Factors behind Decrease in In
[Ref.] Factors behind Decrease in In
-
-
bound FDI
bound FDI
(1/2)
(1/2)
25
64
>> Policy Focus 3 : FTA
>> Policy Focus 3 : FTA
Chile, Singapore, EFTA
Canada, ASEAN, USA, Japan, Mexico
China, EAFTA, India, MERCOSUR, EU
FTA completed
Negotiation in
progress or to be
started
FTA under
consideration
Koreas Promotion of FTA
FTA : Asia and Beyond
FTA : Asia and Beyond
Korea seeks to be a global partner through FTA and initiative to be
a Northeast Asian Economic Hub.
- Korea aims to enhance regional cooperation and become a R&D, logistical and
financial services hub in Asia.
Korea seeks to be a global partner through FTA and initiative to be
a Northeast Asian Economic Hub.
- Korea aims to enhance regional cooperation and become a R&D, logistical and
financial services hub in Asia.
65
To Conclude:
The 1
st
round of Knowledge Revolution over with Korea
- essentially vital early awakening stage
- successful awakening of substantial some, invoking of new
energy and momentum, and phasing in new policy initiatives,
The 2
nd
round of Knowledge Revolution yet to come
- from awakening of some to the awakening of all, &
- from phasing-in to more difficult task of rooting down
and routine change management
- will take more robust government leadership matched by
broader private support and participation (engagement of all)