You will review the evolution of the Korean economy decade by decade since Korea’s independence from Japan in 1945. Major policies of each decade will be explained and their effect on the Korean economy will be analyzed. Also, the backgrounds and limitations of important policies will be scrutinized. By doing so, you will be able to compare the Korea experience with the other developing countries’. 1. You will be able to explain how the miracle of the Korean economic development was made possible. 2. By examining internal and external conditions behind the decision making of major policies in Korea, you will be able to draw lessons that can be applicable to today’s developing countries. 3. You can explain how the Korean economy has interacted with the global economy in the past. 4. You can observe how economic theories and models can be applied to the Korean case.
The early 1990s
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From the course by Yonsei University
The Korean Economic Development
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From the lesson
The early 1990s
Module 12. The Early 1990s: In the early 1990s, the Korean economy has faced the end of high growth era. However, the Korean economy has failed to adapt itself to slower growth, and the problem of ‘high costs and low efficient’ economic structure emerged.
Meet the Instructors
Doo Won LeeProfessor
School of Economics
Welcome back, after the historical economic boom of the late 1980s,
the situation of the Korean economy in the early 1990s was not that favorable.
First of all, the high growth, that lasted for
20 years, was about to be over.
And the high cost, and low efficient economic structure had to be dealt with.
And by the middle of 1990s a lot of bad signs, such as,
bankruptcies of large companies began to emerge.
So, let's first take a look at backgrounds of the end of the high growth era.
Now, Korea has enjoyed more than 20 years of remarkable
economic growth from the early 1960s all the way to the late 1980s.
It was almost a record of economic growth over something like 25 years.
However, such a high growth can never be lasted forever.
This is what exactly Japan experienced ahead of Korea.
And many other East Asian countries experienced similar phenomenon.
The reason behind the ending of this high growth is several [INAUDIBLE].
First, as we accumulate more and more capita,
the modular productivity of capita will decrease.
This is simply one of the principle law of economics, more so,
as Korea get more and more old people,
the so-called demographic dividend that's about to be lost.
You can enjoy a lot of good aspect when your population
is growing and your population is dominated by young people.
However, that cannot last long.
More than anything else, this so-called
advantage of backwardness will be depleted as you reach a certain level of income.
In a developing country when they catch up with advanced country,
they actually enjoy some advantage.
Because they can learn from the experience of the advanced countries.
There are great scope for developing country to
catch up with advanced countries in terms of technological transfer.
But once you reach a certain level of income it's getting more and
more difficult.
And according to one calculate, Korea was about to reach such a level
in the early 1990s, or in the middle of 1990s.
Many middle income country they experience the same thing.
When they reach a certain level of income.
They have to face that potential growth rate will be slow down and
they really have to change the economic structure to cope with it.
Korea actually recognized this kinds of problem when they set up
the new Five Year Plan that lasted from 1993 to 1997.
Take a look at the target and also the actual Outcome.
If you look at the target, first of all look at the growth rate.
Policy makers at the time knew that we cannot continue to enjoy
high growth such 9% or 10%.
So the growth rate target was the modest, somewhere between 6% and 7%.
However if you look at the actual result at least until 1996,
we have truly behaved in different direction.
Korean policy makers I think they encouraged it more and more investment
in order to accelerate The growth.
So in 1996, for example, the actual growth rate was about 9%,
way higher than the target growth rate.
And in order to achieve this fairly high gross rate,
Korean companies had to invest more and
a lot of these investment We're overlapped and inefficient.
And the problem is we invest more and
more into the extension of the existing facilities, we have to import more.
So that's why the currency account deficit turns into red again,
as early as 1992.
And as we accelerate the growth rate,
the current account deficit actually grew bigger and bigger.
And this time, the current account deficit had to be financed by foreign debt,
especially short term foreign debt.
The one thing that we still have some puzzling consolation
is that the exchange rate is not quite changed,
even though the was increasing.
That is still puzzling, but.
We can understand why Korean Government try to maintain
stable exchange rate until 1997.
Until the very last moment of the financial crisis.
There are lots of advantages when you maintain stable exchange rate.
One of the biggest advantage is you can attract
foreign investment into your capital market.
Foreign investors they do not go into a country
whose currency will be depreciated.
So, maintaining stable exchange rate was critical to the Korean
government at the time in order to attract Falling investment.
And this is very important because Korea intended to join OECD in 1996,
and one of the condition before Korea join
the OECD was to open up our capital market gradually.
Anyway, if you look at the situation in 1996 and 1997,
the growth was overheated, investment was made too excessively,
current account deficit was increasing along with foreign debt.
And many of this growth was actually led not by investment
in the facility, which can be eventually good for
the future growth, but by investment into construction sector.
This table shows the contrast between Manufacturing sectors grows and
construction sectors grows.
And by the middle of the 1990s Korean economy had to deal with these problems.
Three high costs and low efficiencies.
In terms of the cost.
Labor cost was increasing and logistic cost including the real estate
cost was increasing and the financial cost was increasing rapidly.
And the financial cost was increasing not
rarely because that Korea had high interest rate but because
Korean companies depended too much on borrowing from the bank.
Because of this heavy borrowing, they had to pay a lot of
money just to serve their interest.
Even though this production cost was increasing, Korean economy and
the problem of low efficiency.
Labor productivity was not growing fast enough compared to the labor cost.
Investment was not made efficiently.
If you look at the increment capital ratio in this time it is rising very fast.
As a result, profitability of Korean companies,
especially large companies, was decreasing.
When you have rising labor cost which is
faster than labor productivity increase, you have rising unit labor cost.
This is also fairly problematic.
Unit labor cost determine the competitiveness of the companies.
And as you can see there it's rising fairly rapid in the middle of 1990s.
And as a result of these rising cost and low efficiency
One by one large companies began to collapse.
If you look at the table of this list of the large companies, it began as all,
yeah it's 1996 and it continues until the end of 1997.
Now Almost every month,
one large company after another declared bankruptcy.
And it created big turmoil in the market, because many small and
medium sized companies they had the trouble when the large company collapsed.
So this was really a bad sign which were emerging,
even before the Asian financial crisis.
And when the Asian financial crisis hit the market,
Korea was not quite ready to deal with it.
So, we will talk about the 1997crisis in the next lecture.
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