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The Economic Crisis and Restructuring in Korea

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The Economic Crisis and Restructuring in Korea Seminar Paper Collection Knowledge Partnership Project The Economic Crisis and Restructuring in Korea March 2004 Korea Development Institute (KDI) Cairo University Korea International Cooperation Agency (KOICA) Foreword In worldwide recognition that knowledge is a crucial factor to economic and social development of all the developing countries, the Korean government has entered into a new phase of official development assistance via the Knowledge Partnership Project. The Knowledge Partnership project aims at helping the economic development of all the countries through narrowing the gap by sharing experience and know-how of Korea’s development with the developing world. Given this spirit, this collaboration of the joint seminar on “Economic Crisis and Restructuring in Korea” was sponsored by Korea Development Institute and Cairo University on January 23, 2003, in Cairo, Egypt. Senior government officials and leading scholars from Egypt shared a diverse range of professional opinions on economic development models of Korea and Arab countries and also discussed various reform policy issues of Korea to give some policy implications on Egyptian economic transition to market economy. This collection includes all the papers presented at the seminar and complete transcript of all presentations and discussions. In particular, the transcript offers more wide ranges of development alternatives and policy options for economic restructuring and smooth transition to free market economy for Egypt. Furthermore, in this collection, the readers will encounter Islamic perspectives on economic development such as westernism, statism and external rentierism. We at KDI would like to express our sincerest appreciation for the close cooperation shown by Cairo University, particularly Dr. Mohammad Selim, Director, and the Center for Asian Studies, Cairo University, as well as thank numerous experts who have contributed extensively by preparing these materials. This volume will serve as another token to overall economic development and international cooperation between Korea and the Arab World. Contents 1. Korea's Economic Development Moon-Soo Kang, Korea Development Institute·········································································· 1 2. Models of Development in the Arab World Mohammad El-Sayed Selim, Cairo University········································································· 23 3. Transition from Authoritarianism in Egypt and the Republic of Korea Mustapha K. al-Sayyed, Cairo University················································································ 39 4. The Causes and Consequences of Korean Economic Crisis Moon-Soo Kang, Korea Development Institute········································································ 55 5. Corporate Restructuring and Governance Reform in Korea Young Ki Lee, KDI School of Public Policy and Management················································· 81 6. Financial Restructuring in Korea Dongsoo Kang, Korea Development Institute ········································································ 107 7. Flexibility, Instability and Institutional Insecurity in Korea Labor Market Joonmo Cho, Soongsil University ··························································································· 139 8. Appendix···································································································································· 175 Session I Korea's Economic Development* Moon-Soo Kang Senior Fellow Korea Development Institute _______________________________ ∗ Prepared for the Joint Seminar on Economic Crisis and Restructuring in Korea organized by Korea Development Institute and Cairo University to be held on January 22nd and 23rd, 2003. Korea’s Economic Development 7 Contents Chapter 1. Introduction ·················································································································· 7 Chapter 2. Development Strategies ····························································································· 9 Chapter 3. Economic Stabilization and Liberalization ··························································· 14 Chapter 4. Financial Crisis of 1997 ····························································································· 16 Chapter 5. Concluding Remarks ·································································································· 18 References ······································································································································ 22 8 The Economic Crisis and Restructuring in Korea List of Tables Table 2-1 The Korean Economy ································································································ 10 Table 4-1 Korea’s Total External Liabilities ············································································· 17 Korea’s Economic Development 9 List of Figures Figure 5-1 GNP Per Capita and Growth Rate··········································································· 19 Figure 5-2 Interest Rate Trend····································································································· 20 Figure 5-3 Inflation Rate (CPI) ···································································································· 20 Figure 5-4 Exchange Rate and Current Account Balance························································ 21 Korea’s Economic Development 7 CHAPTER 1 Introduction The Korean economy has achieved an unprecedented growth in the last three decades or so. Between 1965 and 1995 Korea's per capita GNP increased from US$105 to over US$10,000 while the share of agriculture in GDP decreased from 38% to less than 7% during this period. Exports recorded a substantial increase from US$0.2 billion to US$125 billion. Many factors have contributed to Korea's rapid economic growth. The first is a literate population capable of learning skills quickly, which played a key role in export-oriented labor-intensive industrialization during the earlier phases of development. Workers have been hard-working and disciplined in their drive to improve their socio-economic status. Secondly, a strong leadership committed to economic development and capable bureaucrats have also been critical. The military government led by General Park, which came into power by a coup in 1961, promised to Korean people liberation from poverty. With the success of government-initiated economic progress, public confidence in the government has been strong in Korea. Thirdly, credit may also be given to entrepreneurs. Korean entrepreneurs have proved themselves to be very dynamic and forward-looking. They have aggressively exploited overseas markets for trading, local construction and investment more recently. Despite high domestic market concentration, business groups have competed severely among themselves, not incurring much cost to consumers. Finally, Korea's economic performance owes much to government policies. The takeoff of the Korean economy started with the export-oriented industrialization strategy in the early 1960s. This strategy enabled Korea to utilize its available resources to its fullest potential which was mainly labor, and overcome the limitation of the small domestic market. Since the mid-1980s, a favorable external environment, particularly the strong Japanese yen, resulted in rapid export growth and a sizable surplus in the current account. The surplus, however, invited strong foreign pressure to further open the domestic market and appreciated the Korean won. The June 29 Declaration of Democratic Reform in 1987 unleashed workers' demand for wage increases and better working conditions. Substantial wage hikes coupled with strong domestic demand and progress in import liberalization worked together to deteriorate Korea's current balance. Korea’s international competitiveness began to deteriorate in the early 1990s due to the amassed structural deficiencies within the Korean economy. A major shock to the Korean economy occurred as a result of the terms of trade shock in 1996. The terms of trade deteriorated by approximately 20 percent in the 1996-97 period, the largest drop since the first oil shock of 1974-75. The terms of trade shock put extremely heavy pressure on the thin profit margins of firms. Another big shock to the Korean economy occurred with the bankruptcy of Hanbo Group in January 1997. Four others of the thirty largest chaebols also went bankrupt in 1997: Sammi, Jinro, Haitai and New-Core Groups. The failure of these chaebols revealed problems with low profitability and excessive leverage ratios in the corporate sector and faulty corporate governance in Korea. 8 The Economic Crisis and Restructuring in Korea Foreign investors had already become increasingly skeptical of the government’s willingness and ability to implement economic reforms and serious structural adjustment. In addition, the unanticipated intensity and power of contagion, first from Thailand and then Indonesia, came to bear its effects on Korea. This contagion coincided with a period of structural adjustments as well as a cyclical downturn in the Korean economy. In November 1997, less than a year after its accession to the OECD, Korea experienced a severe financial crisis. With its useable foreign exchange reserves nearly exhausted, the Korean government formally requested assistance from the International Monetary Fund to mitigate the external liquidity shortage and regain the confidence
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