Tiding over Oil Crisis and the Fourth Plan

Paper for the Ninth Annual Meeting of the International Economic Consultative Group for Korea, March 29, 1977.

               I am sure that I need not dwell at length upon the profound effect of the recent resources crisis and the ensuing recession upon both the developed and developing nations of the world. The major impact of these events had made itself felt some while before our last meeting in July of 1975, and an evaluation of relevant policy responses was already well under way. While 1974 and 1975 were, without doubt, a difficult period for Korea, the International Monetary Fund was able to note as early as February 1976 that Korea had succeeded "in sustaining a respectable growth rate, in avoiding the emergence of serious unemployment, in reducing the inflation rate, and in containing the balance of payments deficit."

Developments during 1976 continued to be highly encouraging, reflecting the steady economic recovery of the major developed countries and the overall appropriateness of Korea's responses to the stresses of this period. Even during 1974-1975 the rate of growth had fallen only 1 percent below the average annual rate of 9.5 percent over the previous 11 years, and it rose to over 15 percent in 1976.

Export volume growth, which had declined from a 1962-1973 average of 38 percent to a low of 9 percent in 1974, returned in 1976 to a level of 40 percent; and terms of trade, which fell by 18 percent in 1974 and a further 9 percent in 1975, rose by 13 percent. Korea's current account deficit, which rose from an average of $340 million in 1972-1973 to nearly $2 billion in 1974-1975, dropped to $270 million, the lowest level since 1967. While debt outstanding increased at a rate of $1.3 billion annually during 1974-1976 to a total of $7.2 billion, the concurrent growth of foreign exchange earnings contained the debt-service ratio within a level of 12 percent during this period.

On the domestic scene, the strong external inflationary pressures of the last few years have largely been accommodated and internal inflationary pressures brought under control. Import costs, which more than doubled between 1972 and 1974, increased by less than 2 percent during 1975 and 1976, while domestic wholesale prices, which rose by nearly 80 percent during 1974-1975, increased by only 9 percent during 1976. Increase in money supply was held to 30 percent, with the export-generated expansion in the foreign sector being partially offset by contraction in the domestic sector as a result of increased private savings and surpluses in government finance.

Because any attempt to rapidly adjust to the sharp decline in terms of trade in 1974 and 1975 without accepting sizable balance of payments deficits would undoubtedly have led to large-scale unemployment, loss of growth momentum, and adverse consequences for long-term development, the essence of Korea's policy during that period was to continue investment in production capacity while remaining ready to respond promptly to the anticipated recovery in export demand, which would facilitate the long-term improvement of the balance of payments. Despite the recession, gross investment continued to increase at about 10 percent per annum at 1975 prices, and it is evident that Korea's response to the improved international economic climate of 1976 could not have been as prompt and dramatic without the substantial addition to production capacity made during this period.

In summary, Korea has maintained economic stability and weathered the threat to its balance of payments situation without losing growth momentum and with no serious setback in employment. It has achieved its major Third Plan objectives despite the unexpectedly unfavorable international environment, and enters the Fourth Plan period with a strong base for continuing growth and development.

The major goals of the Fourth Five-Year Plan are, in essence, to achieve further structural shifts in the industrial sector in support of continued growth; to enhance the long-tern viability of Korea's development and strengthen its balance of payments; and to improve distribution of the benefits of growth by maintaining the growth of employment and broadening the availability of essential services. To achieve these goals, the Fourth Plan will continue the basic strategy of export-led growth, which Korea has implemented so successfully since the early 1960s.

The decision to continue this strategy has involved consideration of two fundamental and interrelated issues: the desirability of a continued high growth pattern, and the vulnerability inherent in export-oriented growth. Let us first consider high growth.

High growth is not merely desirable; in the Korean context it has been, and continues to be, absolutely necessary. It has been not simply industrialization, but rapid and labor-intensive industrialization that has made possible increased job opportunities and household income despite the nation's rising population; and it is growth that has made possible the investment, however modest, in social development that Korea has heretofore not been able to afford. Since labor has been absorbed into high-productivity employment at a faster pace than the growth of the labor force, wages and employment have tended to rise faster than GNP and wage differentials in industry have tended to narrow.

Nevertheless, there is still a significant degree of unemployment and underemployment in Korea, and analysis of demographic projections and alternative growth rates suggests that progress toward social and economic goals can be maintained only if employment keeps pace with the growth of the labor force, which is expected to increase at least 3 percent per annum. This requires a GNP growth of at least 9 percent a year if unemployment is to be contained within the present level of about 4 percent. Meanwhile, there is a pressing need for further investment in health, housing, education, manpower development, and welfare-services which, while supportive of growth, must be paid for by growth. Thus the traditional question of a trade-off between growth and equity is of little relevance in Korea; and high growth will continue for some time to come to be the most effective means to further improve the distribution of income, raise the standard of living, and expand the services available to the nation's citizens.

On the basis of these considerations, the Fourth Plan makes the following aggregate and sectoral projections. GNP, rising at 9.2 percent per annum in 1975 prices, will increase from $19 billion in the planning base year of 1975 to $34 million in 1981. Population will increase from 35.5 million to 38.8 million, at a rate of 1.6 percent per annum. Per capita GNP will increase from $532 to $863 in 1975 prices, and to $1,512 in current prices.

The decline from the Third Plan overall growth rate of 10.9 percent reflects the much slower growth of exports projected for the next five years. This will have its most immediate effect in the mining and manufacturing sector, where growth will decline from 20 percent per annum during 1972-1976 to 14 percent during 1977-1981. Growth in the other sectors will decline by only about 1 percent. In terms of structure, however, mining and manufacturing will continue, as they did during the Third Plan, to steadily increase in significance. Their share of GNP will rise from 32 percent in 1976 to 41 percent in 1981, while the share of the agro-fishery and the infrastructure and services sectors will decline to 18 and 41 percent, respectively.

Some 28 percent of total Fourth Plan investment will be in mining and manufacturing, 10 percent in the agro-fishery sector, and 41 percent in infrastructural development. Social development will take 21 percent of total investment.

An average investment ratio of 26 percent is planned. Some 92 percent of gross investment will be financed by domestic savings, which will rise, in 1975 prices, from 21 percent of GNP in 1976 to 26 percent in 1981.

Public savings will be maintained at the current level of 6 percent per annum, while private savings will rise from 15 percent in 1976 to 20 percent in 1981.

The inflow of long-term capital is expected to average $2.5 billion per year in current prices. The magnitude of direct private investment will continue to be fairly small, and the plan projects new long-term loan commitments at an annual average of about $1.4 billion from commercial and $1.1 billion from official sources. It is hoped that multilateral agencies such as the World Bank and the Asian Development Bank will provide about half of the new official commitments.

Total outstanding debt with a maturity of one year or more is estimated to increase from $7.2 billion in 1976 to $15 billion by 1981, with a rise in the total debt-servicing requirement from about $1.1 billion to almost $2.6 billion. Korea's foreign assets, however, will also increase from $100 million to $2.8 billion as a result of overseas lending to finance capital goods exports, and foreign exchange holdings will increase from $2.9 billion to $5.9 billion. With the increase of foreign exchange earnings at a pace faster than debt, the debt-service ratio will decline steadily from an estimated 12 percent in 1976 to around 10 percent in 1981.

The Fourth Plan assumes that terms of trade will be constant at a level that is 10 percent better than the rather unfavorable terms of 1975, but 3 percent below 1976 terms. Export unit prices are projected to rise at 5 percent annually, while import prices will rise by 8 percent in 1977 and at 5 percent for the remainder of the plan period.

The volume of commodity exports is expected to grow at approximately 15 percent annually, rising in value from $7.8 billion in 1976 to $20.2 billion in 1981. The share of manufactured goods will increase from 85 percent of commodity exports in 1975 to 92 percent in 1981. Import volume will continue to grow at approximately 12 percent annually, rising in value from $8.1 billion in 1976 to $18.9 billion in 1981. Invisible trade will continue to show a deficit balance of around $400 million annually during the plan period, and net transfers a positive balance of around $200 million. On this basis, the plan projects the elimination of Korea's trade and current deficits by 1979.

This brings us to a consideration of the vulnerability inherent in export-oriented growth. While such growth is subject to the fluctuations of the international market, this has its positive as well as negative aspects-to which our past performance stands witness. It is, in any case, the only practical direction of growth open to Korea at this time if it is to overcome the constraint of a limited domestic market and ensure a competitive scale of industrial operation, and is to sustain the necessary level of savings and maintain favorable aggregate capital-output ratios, which have been lower in export activities than in production for the home market.

The implications of the recent resources crisis have been realistically assessed, and we fully realize that certain conditions that contributed to the earlier growth of Korea will no longer prevail in the post-recessionary world. The conditions that do exist, however , and that can be reasonably projected, give us reason to believe that a continuing steady increase in Korea's exports is quite feasible, although at a much slower rate than in the past.

Real exports of manufactured goods from the developing countries to the OECD nations are expected by World Bank to grow at 12 to 15 percent per annum during the next five years. Under these conditions, Korea need do little more than maintain its share vis-a-vis other countries in order to attain its export goals. In its efforts to increase its share, Korea enjoys the advantages of an industrial head start, established links with major markets, and wage levels that, while they undoubtedly will increase, will do so at rates that reflect increases in productivity and will thus permit the maintenance of competitive export pricing.

In emphasizing the feasibility, and indeed the necessity, of export-oriented growth for Korea, I do not wish to appear to ignore the fact that a proper balance must be struck between economic growth and exposure to the vagaries of the international market.

There are a number of measures that must be taken to reduce Korea's vulnerability as our ratio of trade to GNP increases. We must, for instance, maintain larger reserves of goods and grains to cope with fluctuations in domestic and international production and prices, and must increase our stockpiling capacity for other essential imported commodities and raw materials. We must maintain larger foreign exchange reserves in order to sustain investment, employment, and growth in the event of any future recessionary spell. Most importantly, we must continue to strengthen Korea's creditworthiness in the international financial community in order to be in a position to borrow when and as needed. Insofar as such creditworthiness is a function of the strength of our current account, we must continue to exert every possible effort to expand export earnings through the diversification of products, services and markets.

Growth and equity are, as I noted earlier, mutually supportive. Korea's Fourth Five-Year Plan, while maintaining the essential momentum of national growth, also reflects the increased investment in social development that past growth has made possible. Under the Fourth Plan social development expenditures will increase, in constant terms, to almost twice the level attained during 1972-1976 and will constitute more than one-fifth of total investment.

Education and manpower development expenditures will increase by almost 200 percent. Enrollment and matriculation rates will increase at all educational levels, and there will be extensive improvement of middle, high school, and junior college facilities, especially for science and vocational training.

Public health expenditures will increase by more than 450 percent. An efficient low-cost health delivery system will be established, expanding upon the existing framework of municipal and provincial hospitals and providing for the construction and improvement of a nationwide network of local health care centers. Infant and childbirth mortality will be reduced by almost 50 percent, the tuberculosis rate halved, parasite infestation cut by two-thirds, and the ratio of doctors to population significantly increased.

A foundation will be laid during the Fourth Plan period for the establishment of a comprehensive body of social security and welfare services. In the meantime voluntary medical insurance and national pension programs will gradually be implemented, and the present compulsory industrial accident insurance program will be extended to a wider range of firms and the benefits increased.

Housing constitutes one of the nation's most pressing social needs, and will constitute almost 70 percent of all social development expenditures. A total of 1.3 million housing units will be built, and the ratio of housing units to households is expected to improve from 75 percent in 1975 to 80 percent by 1981.

While these measures will by no means constitute the complete fulfillment of Korea's social development needs, their implementation will bring about a significant improvement in the conditions that now prevail-which, in turn, are vastly better than those of a decade ago.

In summary, I believe it is fair to say that Korea's Fourth Five-Year Plan constitutes the most rational ordering of developmental priorities in the light of present circumstances and available resources, while providing a body of realistic economic and social goals toward which we must direct our efforts in preparing for the further challenges and opportunities of the 1980s.

Implicit in these goals is the understanding that sustained growth is essential if Korea is to establish and maintain a viable position within the world economic community and provide an increasingly satisfactory measure of well-being for its citizens; and we are confident that the appropriateness of these commitments will be confirmed by the nation's social and economic achievements in the years ahead.