The Prospects of the Korean Economy in the 1980s

 

Paper for the Program of the CSIS, Georgetown University, May 24, 1979.

 
Recent Developments
 

           During the past 17 years we have been busy building a viable economy, and it seems that we have made some progress. Judging by commonly used economic indicators, the performance of the Korean economy during the past two years has outpaced the target envisaged by the Fourth Five-Year Plan (1977-1981):

  • the growth rate of GNP has accelerated to 11.3 percent per annum;
  • per capita GNP exceeded the psychologically significant mark of $1,000 in 1977;
  • the unemployment rate was reduced to below 3 percent in 1978, creating a labor shortage;
  • real wages continued to rise at the pace of 10 percent per annum;
  • the agricultural population has declined in absolute numbers at the rate of 3 percent per annum;
  • the ratio of domestic savings to GNP reached 27 percent in 1978, reducing Korea's reliance on net foreign savings to only 3 percent of GNP;
  • exports continued to grow at the rate of 25 percent per annum, exceeding the cherished target of $10 billion in 1977;
  • receipts from invisible trade rose from $1.6 billion in 1976 to $4.4 billion in 1978;
  • the current account deficit was eliminated in 1977, and its recurrence in 1978 is not a major concern; and
  • the only target that has not been met is price stability. The consumer price index rose by 10 percent in 1977 and 14 percent in 1978, thereby leaving inflation Korea's foremost economic issue to date. I shall presently return to this question.

Thus, Korea largely has overcome typical LDC problems as a result of the rapid economic development. For us, this is a phenomenal change. Only 20 years ago, low productivity and income left no room for savings and investment, masses of unemployed people searched for a living and dignity in vain, or tried to eke out a subsistence on meager sized farms, and, to make things worse, neither the government nor the people knew what to do about them until the present government came into power.

 
Prospects in the 1980s
 

Standing at the threshold of a new era with a vision of joining the ranks of mature economies, Korea has to deal with a number of problems. The two fundamental questions facing Korean policy makers today may be phrased as follows: Can the present high growth rate be maintained beyond the 1970s, and can the continued high growth go together with price stability, social equity, and improvement of the quality of life? I shall take up these questions in turn.

 
The Growth Prospect
 

The export sector of the Korean economy has been the engine of growth since the early 1960s. Whether we will be able to maintain a 9 or 10 percent growth rate per annum in the years ahead will largely depend on how our export industries perform. With exports and imports totaling some 80 percent of our GNP, the foreign trade sector is indeed the main engine of growth for the Korean economy.

We are well aware of the changing international environment: World imports in real terms grew less than 5 percent a year during the 1970-1976 period; a probable slowing down of developed economies will slacken demands for imports; protectionism and other noneconomic trade barriers may not wither away; and competition with other developing countries for manufactured exports will become intensified.

Nevertheless, there are reasons why we are still confident about our export-oriented strategy. In the future, more and more of our exports will be made up of manufactured goods, particularly heavy and chemical industrial products. Their income elasticity in general has been larger than unity. The export share of heavy and chemical industrial products has already increased from 29 percent in 1975 to 33 percent in 1977 and to 35 percent in 1978. We can depend on the ingenuity and drive of our exporters. In the past ten years, they have expanded the country's export close to 30 percent per year. Today, they have more experience in finding new markets and supplying them with desired products.

Korea also improved the geographical diversification of its markets. In 1975, the United States and Japan together took 57 percent of our exports. In 1977, this figure was lowered to 52 percent and the share of the Middle East rose from 5 to 11 percent during the period. The share of exports to developing countries as a whole was some 30 percent last year, reflecting the growing importance of these markets to Korea. We expect this trend to continue as the export share of heavy and chemical industrial products increases.

Supposing that we fail to cope successfully with the less-than-promising environment for export-oriented growth, is it then necessary for us to give up high growth? My answer is no. The Korean economy can still move forward steadily with a "second engine of growth." Domestic savings on the order of 30 percent of GDP are high enough to meet other priority needs of the economy. We can redirect our investment to the domestic market, particularly to such less developed areas as housing, education, health, and other public consumption projects. In fact, that would be required anyway for equity considerations. What is important, in my view, is the flexibility and ingenuity with which the economy is managed in order to meet the changing conditions. In short, continued high growth of the Korean economy is feasible and desirable in the 1980s.

 
Growth and Stability
 

Korea is at present suffering from double-digit inflation, which was caused by a combination of various factors including excess liquidity, sectoral imbalances in supply and demand of certain commodities, and the recent rise in crude oil price and petroleum products.

The government has been attacking the problem with determination and has adopted the following measures:

  • build up a budgetary surplus equivalent to about 10 percent of total government expenditure budgeted for FY 1979;
  • pursue a restrictive monetary policy in order to reduce the growth rate of money supply (M2) to some 25 percent per year by the end of 1979;
  • assist the producers of basic necessities that are in short supply by giving them fiscal or credit priorities;
  • impose a temporary restriction on the construction of government and commercial building as well as large-sized private homes for high income families;
  • discourage speculation in land with administrative and tax policies;
  • postpone some selected government and private investment projects that are not judged to be urgent;
  • speed up import liberalization in order to increase the supply of necessary commodities; and
  • strengthen the regulation of monopolistic practices that inhibit fair trade and free competition.

There is no doubt that these anti-inflation policies pose quite a challenge to the policy makers and business community. But we are convinced that these measures will be effective in arresting inflation. They should produce visible results during the second half of this year.

Politically as well as economically, inflation is no longer tolerable in Korea. Fortunately, we find ourselves in a better position than anytime in the past to cope with the problem, because there are now fewer constraints on the economy in terms of domestic savings, balance of payments, and fiscal-monetary options. In my view, a prolonged slow growth is not the answer to the problem of inflation. Rather, a reform of financial intermediation, elimination of sectoral imbalances and supply bottlenecks, restructuring agricultural production, and enhancement of competition in the market are the essential instruments for harmonizing growth with stability. These mainly involve reallocation of available resources rather than a long-term slowing down of the economy.

 
Equity and Quality of Life
 

Studies on Korean income distribution uniformly conclude that Korea's development is one of the successful cases. Benefits of growth were fairly well diffused among various economic sectors and income levels. However, we are concerned with signs of skewed income distribution that became noticeable in the late 1970s. The recent deterioration may be related, among other factors, to (1) acceleration of inflation, (2) appreciation of land value accompanied by speculation, (3) the changing structure of the economy in favor of capital-intensive industries, and (4) business concentration.

In order to counter these trends, we are pursuing several policies. In addition to the anti-inflationary measures outlined above, we have introduced a health protection and insurance program in 1977, the National Welfare-Pension Program has been legislated and only awaits proper economic conditions for implementation, and the tax system has been revised frequently, mainly for equity considerations.

At this stage of development, Korea cannot afford to provide all those social welfare programs found in developed countries, nor do we feel all of them are worth imitating. Our approach at present is to give emphasis to investments in the public services sector. Investments in low-cost housing, education, health services, urban transportation, and other public facilities will have an added favorable impact on the quality of life.

The agricultural price support program, though costly, played an important role in improving terms of trade for farmers and in bringing about urban-rural income balance. We feel that the emphasis should be shifted gradually toward assisting the farmers to increase agricultural productivity as a means of improving their relative income. Aid for the integration of farm land, introduction of new technology, speeding up the mechanization of agriculture, and building small-scale industrial projects to increase off-farm income will receive a renewed emphasis. A large-scale housing program for farm households has been implemented since January 1978. The Saemaul Movement will continue to play a pivotal role in our rural modernization.

 
Korea in the World
 

In the western periphery of the Pacific Ocean, a new economic era has dawned. Japan, Korea, Singapore, Taiwan, and now even China with her vast resources and trade potential together constitute the most dynamic economic region of the world. America's investment in Asian security and prosperity during the postwar era has given these countries an environment that was conducive to the mobilization of their innate drive for self-improvement.

Korea wants to be a responsible, active, and cooperative partner in this New Asia. We shall expand our trade with our neighbors in the region and we shall cooperate with them to preserve the momentum of growth.

Since 1945, the American people and their government have given us more help than all others combined. Without this generous assistance of the 1950s and 1960s, and the capital, advanced technology, and a sizable market for our exports, Korea would be a very different country today. American business in particular provided its Korean counterpart with an inspiration, a pool of learnable experiences in modern management, and lately a good-natured competition, all of which we cherish and appreciate. In order to promote this partnership even further, we could, for example, combine American capital and technology with Korean business drive and productivity and offer them to other developing countries.

What we must reaffirm is that America's partnership with Korea has been a worthwhile adventure, and that it has more in store that will serve our mutual interests in the future.

 
Conclusion
 

To conclude, let me summarize my main points:

  • we will strive to maintain the present high-growth momentum;
  • we will continue our export-oriented growth strategy;
  • we will try to balance growth with stability;
  • we will insure greater equity and improve the quality of life;
  • we will accelerate scientific and technical manpower development;
  • we will improve financial intermediation;
  • we will participate more actively in the international economic arena; and
  • we will strive to strengthen our partnership with the United States.

Our past records convince us that we have the will and means to accomplish these goals. Our answer to future problems is determination, flexibility, pragmatism, and a good deal of common sense.