Trade Promotion and Economic Development in Korea

1
Trade Promotion and Economic Development in Korea
May 29, 2006

• DoHoon KIM
• Vice President, Korea Institute for Industrial
  Economics and Trade

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Contents
I
Overview of Koreas Economic Development..
3

• From Nobody to a World Leader...
• 2. Export-oriented Industrialization..
  ....
• 3. High Dependence on Human Capital
• 4. Government-led but Respecting Market
  Mechanism...

3 4 5 6
Export Promotion and Development of Light
Industries in 1960s7
II

• Export-oriented Policies rather than Import
  Substitution..
• 2. Evaluating the Export Promotion
  Policy.
• 3. In order to Promote SMEs Exports.
  .

7
10
12
3
Developing Heavy Chemical Industries in
1970s..14
?
14

• Launching Heavy and Chemical Industries
  Development Plan
• 2. In order to Mobilize Investment
  Funds.
• 3. Establishing Industrial Complexes for HCI
  Development
• and Trade Promotion
• 4. Evaluating HCI Development Strategies
  ..

16
18
20
Towards a More Diversified Trading Country
1990s-present21
?
21

• Building Infrastructure to Promote Trade
  .
• Actively Participating in Globalization
  .
• Export Diversification...
• Overall Assessment..

23
24
27
Strengths and Weaknesses of Koreas Economic
.....29
?

• Strengths of Koreas Economic Development...
  
• 2. Structural Economic Weakness.

2931
4
I. Overview of Koreas Economic Development
1. From Nobody to a World Leader

• Korea was one of the least developed countries
  in terms of industrial
• development in early 60s ? It has been
  transformed into one of
• leading industrial countries in the world
  during the last 40 years.

Korea in 1960 and in 2005
5
2. Export-oriented Industrialization

• Korea's industrial development has been
  achieved through export-
• oriented strategies.
• During 1960s and 1970s, the period when Korea
  accomplished the
• development of major industries, export
  growth outpaced GDP
• growth.

Rapid increase of exports share in GDP()
6
3. High Dependence on Human Capital

• Korea, which had nothing to rely on when it
  started its economic
• development, has had to intensively take
  advantage of abundance of
• labor forces.
• Fortunately, right labor forces, unskilled and
  skilled, were there to
• support appropriate industries.

• 1960s unskilled and cheap labor forces for
  labor intensive industries
• 1970s skilled labor forces (engineers) for
  heavy and chemical
• industries
• 1980s researchers and scientists for
  technology-oriented industries

7
4. Government-led but Respecting Market Mechanism

• Korea's industrial development seems to be
  known as characterized
• by government-led development.
• It has been government-led one in the sense
  that government
• mobilized various measures to support
  industrial development.
• But, Korea has been pursuing its economic
  development fully
• respecting the conditions of comparative
  advantage that have been
• imposed by international economic
  environments.
• From the earlier stage when the government
  played an important role
• in supporting industries, Korea let the
  market conditions select
• specific industries that the government
  should support.

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?. Export Promotion and Development of Light
Industries in 1960s
1. Export-oriented Policies rather than Import
Substitution
no domestic market for manufacturing goods. poor
endowment of natural resources. need for
importing indispensable goods such as food,
energy, and capital goods.
Two important steps
boosting savings is important but hard ? to
increase interest rates. unexpected growth in
exports ? to depreciate the national currency.
9
allowance for retaining foreign exchange
earnings. exempted from import controls and
tariffs. financial support for exporters at
preferential rates. tax concessions. fiscal
policy in favor of key industrial firms. a
sliding-peg system of exchange rate adjustment.
export targets set by the government. awards
from the president.
10

• Major industries that were developed during
  1960s

• labor-intensive industries such as wigs,
  artificial eyelashes,
• clothing, and plywood
• they were not pre-selected by the government
• but selected by entrepreneurs themselves that
  were responsive
• to international market conditions

• Export promotion became the first priority in
  economic policy with
• various measures to achieve this end.

11
2. Evaluating the Export Promotion Policy
Export growth rate
One of the fastest countries in the world during
1960s 1960 41 million ? 1970 1,048 million
export and import growth rates ()
(source IMF, International Financial
statistics, 1990 and April 1991)
12
Dramatic change of export structure
from a traditional agriculture-based economy to a
manufacture-leading economy
13
3. In order to Promote SMEs Exports
Two major financial assistance measures
The Korean government has preferred financial
assistance to tax incentives in terms of
promoting SMEs.

• Credit rationing scheme for SMEs it obligates
  all commercial banks
• to lend more than a certain proportion of
  annual incremental loans
• to SMEs.

• 30 ? 45 for nation-wide banks
• 55 ? 80 for locally based banks

• Credit guarantee system to complement the
  shortage of collateral
• provided by SMEs.

14
In 1962, the government set up KOTRA, initially
the Korea Trade Promotion Corporation , to assist
business to explore foreign markets. Some 103
Korea Trade Centers (overseas branches) are
operating in 74 countries as of now. KOTRA also
runs 13 regional branch offices in Korea.

• KOTRAs functions for promoting exports of SMEs

• KOTRA introduces overseas buyers to the most
  appropriate
• business partners in Korea.
• KOTRA dispatches groups of Korean exporters
  abroad to explore
• global markets.
• KOTRA organizes international exhibitions in
  Korea as well as
• large-scale Korean product shows in strategic
  markets abroad.
• KOTRA operates the Cyber Business Center at
  its Seoul
• headquarters where overseas buyers can hold
  online business
• meetings with domestic companies.
• KOTRA provides domestic and foreign firms with
  trade-related
• information gathered by its local and
  overseas networks.

15
?. Developing Heavy Chemical Industries in 1970s
1. Launching Heavy and Chemical
Industries Development Plan

• Targeted industries

• Steel, petrochemicals, shipbuilding, industrial
  machinery,
• nonferrous metals, and electrical industries.

• Importance of "Sequencing" in the Process of
  Industrialization

• Labor intensive industries, which had fully
  developed during the
• first stage of industrialization, started to
  demand materials
• produced by heavy and chemical industries.
• Apparel and textile for petrochemicals,
  electronic appliances
• for steel and nonferrous metals, all light
  industries for
• industrial machinery etc.

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• A veritable industrial targeting policy
  launched indirect support
• in the form of export promotion in 1960s ?
  direct support for
• specific manufacturing sectors deliberately
  selected by the
• government in 1970s.

• Industrial complexes were established to
  locate targeted
• industries.
• Massive "policy loans" were mobilized to
  subsidize investments
• of targeted industries.
• General trading companies were introduced to
  facilitate exports
• of targeted industries.

17
2. In order to Mobilize Investment Funds
Policy loans and governments role for
investments

• Policy loans in Korea

• Credit allocation by the government through
  the banking system
• was the most powerful means of supporting
  selected industries.
• Banks, practically owned by the government,
  were directed to
• allocate loans to targeted industries on a
  preferential basis.
• During the latter half of the 1970s, the share
  of policy loans in
• domestic credit rose steadily from 40 percent
  to over 50 percent.

Regulated and Market Interest rates()
(source Bank of Korea)
18

• Establishment of the HCI Promotion Committee.

• in charge of providing the necessary support
  for government-
• sponsored investment projects
• defined the criteria of qualification for
  low-cost credit

• Establishment of National Investment Fund.

• mobilized public employee pension funds and a
  large portion of
• commercial bank funds

19
3. Establishing Industrial Complexes for HCI
Development and Trade Promotion

• land provided by Ministry of Construction and
  Transportation(MOCT)
• or local government

• access roads, industrial water supply,
  electricity, communication
• system, pollution control, land scraping and
  other facilities(e.g.
• schools, housing, recreation, medical
  centers) provided by MOCT
• and/or public utility corporations such as
  Korea Land Development
• Corporation, Water Resource Development
  Corporation, and
• Agriculture Promotion Corporation

• financial support by central or local
  governments

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• making industrial complexes attractive for
  (foreign/domestic)
• companies

• easy to recruit workforces(skilled or
  unskilled)
• easy to ship products(markets, highways,
  railroads, ports)
• well-connected to public utilities(electricity,
  water supply,
• communication)
• providing proper living facilities for
  managers(schools, housing
• medical centers)

• providing many incentives

• financial assistance for investment
• tax incentives during a determined period

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4. Evaluating HCI Development Strategies
A new jump in export structure
fast growth in heavy and chemical products
22
?. Towards a More Diversified Trading Country
1990s - Present
1. Building Infrastructure to promote Trade
more dependent on trade
Dependence on trade by countries (Trade
Volume/GDP,)
Source IMF
but no more direct assistance for promoting trade
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electronic commerce
taking advantage of world class broadband network
trade fairs
promoting exhibition industries supporting
participation in world top level fairs such as
COMDEX , Cebit
training trade professionals
universities Korea International Traders
Association
Supporting RD activities
24
2. Actively Participating in Globalization
more engaged in globalization

• overseas economic cooperation activities
• trade negotiations such as DDA FTA
• FTAs in effect Korea-chile, Korea-Singapore,
  Korea-EFTA
• FTAs in negotiation Korea-ASEAN, Korea-India,
  Korea-USA,
• Korea-Canada
• FTAs in preparation Korea-MERCOSUR, Korea-EU

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3. Export Diversification
in terms of trading partners
from developed countries towards developing
countries trade concentration with major trading
parters is decreasing
in terms of exporting products
More High Tech Products More IT Products
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? Top 10 export countries () ?
Source KOTIS
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? Top 10 export items () ?
Source KOTIS
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4. Overall Assessment
again export-led growth
high contribution to economic growth
? Economic growth by export (1990 price base) ?
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export volume
1980 17.5 billion ? 1990 65.0 billion ?
2000 172.3 billion ? 2005 284.4 billion
in search of a more balanced trade
further market opening needed
? Trade balance (1 billion) ?
30
?. Strengths and Weaknesses of Koreas Economic
Development Lessons for Developing
Countries
1. Strengths of Koreas Economic Development
Respecting market system
industries with comparative advantage have been
promoted letting the market conditions select
specific industries that the government should
support
Relatively stable political system
enabling rapid decision making and policy
implementation allowing elite bureaucrats to
react appropriately to environments
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Accumulation of human capital
high priority placed on education relatively
abundant labor forces for each period cheap and
educated workers for labor-intensive industries
in 1960s and 1970s ? skilled workers for heavy
and technology-oriented industries in 1980s and
1990s
High savings and capital investment
10 of GDP in 1960s ? 30 throughout other
periods
32
2. Structural Economic Weaknesses
Concentration of economic power
chaebol's economic power ? constraining fair
competition moral hazard problems

Weak financial sector
financial sector reform lagged behind other areas
government intervention ? moral hazard problems
low productivity, profitability and flexibility
33
Rigid and immature industrial relations
union activity suppressed until mid 1980s labor
law reforms to strengthen basic labor rights in
1987 ? labor market flexibility declined
Collusive relations between government and
business
undermining efficiency, fairness and public
respect for the bureaucracy