New Challenges to Korean Economy

An address at Seoul Correspondent's Club, July 28, 1978.

              At this moment, the Korean economy seems to be approaching a decisive turning point. Since the inauguration of our First Five-Year Plan in 1962, the core of our development strategy has been export-led growth. Economic development of Korea thus began with the production of labor-intensive manufactured goods for exports. But the external environment of our economy has changed. The ever-tightening new protectionism against developing countries' manufactured exports on one hand and the change in our comparative advantage on the other hand challenge us to adapt to a new reality of economic life.

The high and sustained growth of the Korean economy was made possible primarily by the development strategy that emphasized external growth in general and export industries in particular. Considering the small domestic market and hamstrung by the notable lack of endowed natural resources, we felt, as we do now, that Korea had no workable alternatives to this strategy.

During the recent past, a number of trends have surfaced that made us review our policies. First of all, I point to the rise of new protectionism. It appears that a protectionist sentiment is riding a wave. Developed countries, headed by the European Community but not limited to it, have instituted various nontariff barriers against manufactured exports from developing countries since the oil crisis. Aggravated by the increase of their combined balance of trade deficit with the OPEC, developed countries adopted deflationary measures to reduce their trade deficit. As their deflationary measures took adverse effect on income and employment, protectionist pressures intensified.

Of special concern to us is the rapid proliferation of trade restrictions specifically designed to block exports from the so-called newly industrializing countries. Frequently, these countries have been blamed for causing negative employment effects, disorderly marketing practices, or unfavorable balance of payments in the developed countries. But unemployment in the developed countries cannot be attributed to international trade. On the contrary, as was pointed out by numerous studies, exports from developed countries to the newly industrializing countries have increased more than their imports of manufactured goods from the developing countries. Developing countries have spent practically all their export earnings and their borrowed amounts to import capital goods and industrial raw materials from the developed countries.

Throughout the two decades of the 1950s and 1960s, the developing countries were advised by the representatives of the advanced nations how to improve their economic future. We were encouraged, in more than one sense, to build our industries through increased domestic savings and higher labor productivity in light industries. That was the message we-the so-called newly industrializing countries-received from the framers and operators of the international economic order. We followed their advice. We tightened our belt. Now that we have succeeded, we are being "punished" for the very success we were advised to accomplish.

Korea has enjoyed a comparative advantage with labor-intensive, light industrial products. This, however, is gradually fading out. The increased income level and wider employment opportunities of the Korean worker plus economic challenges from other developing countries make it necessary for us to shift our primary concern to skilled and high-tech industries. Our goal is again to make the optimum use of our human resources, specializing in a more sophisticated labor force and employing it toward the most constructive participation in the world economy it can attain.

Another new trend that gave us an impetus to review our policies has to do with the composition of the domestic demand. Growth in disposable income has increased the demand for more diverse and highly valued consumer products such as protein- and vitamin-rich foodstuffs, durable consumer goods, and better housing. For a resource-poor economy, it has been difficult to satisfy the growing domestic demand while fulfilling its export requirements. Consequently, the domestic consumer had to take the back seat in the past. However, I feel that restraining internal consumption indiscriminately could backfire. We cannot and should not be indifferent to the quality of life.

What has the government been doing to meet these changes in the environment? Several new policies are either being implemented or under consideration. First, I should like to mention import liberalization. In 1977 alone, as many as 228 items were removed from the list of commodities that require import licenses. Another 133 items were removed from the same list as of last May 1. For another 188 commodities, the government announced a time schedule for a stepped-up removal. The old practice of restricting imports of commodities by end-users has been discontinued. Thanks to these changes in import policies, we expect Korea's total imports this year to increase some 25 percent over that of last year.

Secondly, we plan to continue diversifying our export products and areas. Heavy reliance on light industrial goods in which Korea specialized in the past will have to be changed. Our goal is to build machinery, electronics, and other heavy industries, capitalizing our trainable labor force. To this end, the government has plans for expanding higher and vocational education and it has liberalized technology importation. Although our rapid industrialization produced a pool of experienced people with managerial or technical know-how, their skills can be improved and upgraded to produce higher-valued industrial products. While 42 percent are employed in agriculture, it accounts for less than a quarter of the gross national product. By stepping up our manpower development, we plan to absorb them for a fuller employment.

It will surprise no one if I say that the chief problem facing the domestic economy today is inflation. Obviously, it affects the welfare of all fixed-income earners. It also puts our firms' viability in jeopardy, because inflation eats up their competitive advantage abroad. The present inflation is the result of a number of factors that converged simultaneously. Excess liquidity created by the rapid increase in foreign assets last year and deficit financing of government grain management, which swirled due to a bumper crop, added a great pressure on the money supply. Concurrently, money made available by the rising income of farm households and the earnings of construction companies and workers employed abroad found its way into the supply-shy domestic market. We all know, as a matter of common sense, that the higher the income the larger the proportion that goes for high-nutrition food and consumer durables. This was exactly what happened in this country, while a severe drought undercut farmers' capacity to supply.

Another cause of the inflation was also difficult to predict. Mostly because of the excess liquidity I referred to above, but also the unpredictable dry span during the early half of this year, a construction boom descended upon us. Given the low interest rate effective at that time and the expectation of a high demand for housing that was as hard as a piece of rock, it was only a matter of time until the excess liquidity financed the unprecedented real estate speculation.

It should be noted that all these causal factors are of a short-term nature. There is nothing that shakes the foundation of our economy. We remain strong in terms of our productivity, investment, export and growth, and our ability to cope with those tentative problems. As a matter of fact, the policies we have adopted against inflation are showing their results gradually but steadfastly. We are reducing government demand by restraining its spending programs that are not essential. The bank rate has been raised. We will control real estate speculation through various tax and administrative measures. No building permit is presently issued for large residential construction, and forthcoming measures on them will discourage speculation while reserving more construction materials for small housing projects. To meet the shortage of materials and skilled manpower, the government has already expanded facilities for vocational training and will devise special educational programs for future trainees. You may have noted already that materials in short supply are being purchased from abroad by the government for stockpiling. They will be released at strategic moments. I am confident that the Korean economy will again resolve the current exigency as it has done so repeatedly in the past.

In sum, the economic environment facing Korea is changing. The new developments present us challenges. They will test our strength and maturity. They beckon us to move vigorously in a new direction. We shall do our utmost to share the responsibility for building a prosperous and equitable economic order throughout the world. We will do so not through any unilateral actions, but through a multilateral consultation and coordination with our trading partners. We welcome such a coordinating mechanism in the Pacific Basin. Within our own house, we shall keep the momentum of growth. We shall direct the ingenuity and diligence of our people so that we can prosper in peace and harmony with our friends abroad.