Trade Promotion And Economic Development In Korea

Trade Promotion and Economic Development in Korea DoHoon KIM Vice President, Korea Institute for Industrial Economics and Trade May 29, 2006

Export-oriented Policies rather than Import Substitution……..…

2. Evaluating the “Export Promotion” Policy…………….……………

3. In order to Promote SMEs’ Exports…………………………………..

From Nobody to a World Leader………………………….. ……….…

2. Export-oriented Industrialization……………………………..……....

3. High Dependence on Human Capital…………………………………

4. Government-led but Respecting Market Mechanism……………...

Overview of Korea’s Economic Development…………………..3 Contents I Export Promotion and Development of Light Industries in 1960s ……7 II 3 4 5 6 7 10 12

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………………………………..

Developing Heavy & Chemical Industries in 1970s………………..14 Ⅲ 14 18

Building Infrastructure to Promote Trade …………………………….

Actively Participating in Globalization………………………… ……….

Export Diversification……………..……………………………………….

Overall Assessment………………………………………………………..

23 Towards a More Diversified Trading Country : 1990’s-present…21 Ⅳ 21 24 27 16 20

Strengths of Korea’s Economic Development……………...…………

2. Structural Economic Weakness…………………………………….……

2931 Strengths and Weaknesses of Korea’s Economic ………….....…29 Ⅴ

I. Overview of Korea’s Economic Development

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 ] 1. From Nobody to a World Leader 32.0 (2004) 14.4 Share of Manufacturing (in GDP(%)) Shipbuilding(world no.1) Automobile(world no.5) Semiconductor(world no.3) Steel(world no. 5) Wigs Eyelashes Clothes Plywood Major Industries 16,291 82 GDP per capita (in US$) 2005 1960

2. Export-oriented Industrialization [ Rapid increase of exports’ share in GDP (%) ]

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.

34 2000 36 24 26 32 28 24 14 9 3 2005 1995 1990 1985 1980 1975 1970 1965 1960

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

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.

1. Export-oriented Policies rather than Import Substitution Ⅱ . Export Promotion and Development of Light Industries in 1960s 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. Why outward-looking (export-oriented) development?

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. Major tools for export promotion policy

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.

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 (source: IMF, International Financial statistics , 1990 and April 1991) [ export and import growth rates (%) ] Japan U.S. Global Korea Japan U.S. Global Korea 5.2 8.7 11.1 8.9 10.1 4.6 11.0 13.8 4.5 9.6 11.8 8.8 9.6 5.0 11.8 14.3 16.1 10.9 22.4 26.6 15.7 6.8 24.2 23.3 3.9 6.9 14.5 3.9 10.0 5.3 10.1 9.6 34.1 58.2 36.9 47.1 42.9 28.0 42.2 36.7 Exports -3.0 19.5 17.8 2.9 16.6 22.5 11.4 15.7 11.6 4.7 9.1 14.2 19.5 3.8 23.0 8.6 33.5 32.7 -27.9 14.6 54.6 39.1 46.9 24.7 1962 1963 1964 1965 1966 1967 1968 1969 Imports

from a traditional agriculture-based economy to a manufacture-leading economy Dramatic change of export structure 100.0 100.0 100.0 Total 4.3 4.6 2.2 88.9 9.6 10.4 22.5 67.5 28.6 19.2 24.5 27.7 Agricultural Products Fishery Products Mining Products Manufacturing Products 1971 1966 1961

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.

Credit guarantee system to complement the shortage of collateral

provided by SMEs.

30% -> 45% for nation-wide banks

55% -> 80% for locally based banks

3. In order to Promote SMEs’ Exports Financial support for SMEs in Korea

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.

KOTRA’s 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.

In order to provide marketing assistance for SMEs’ exports

1. Launching “ Heavy and Chemical Industries Development Plan” Ⅲ . Developing Heavy & Chemical Industries in 1970s

Targeted industries

Labor intensive industries, which had fully developed during the

first stage of industrialization, started to demand materials

produced by heavy and chemical industries.

A pparel and textile for petrochemicals , electronic appliances

for steel and nonferrous metals , all light industries for

industrial machinery etc.

Importance of " Sequencing " in the Process of Industrialization

Steel , petrochemicals , shipbuilding , industrial machinery ,

nonferrous metals , and electrical industries.

Industrial complexes were established to locate targeted

industries.

M assive " policy loans " were mobilized to subsidize investments

of targeted industries.

General trading companies were introduced to facilitate exports

of targeted industries.

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.

Credit allocation by the government through the banking system

was the most powerful means of supporting selected industries.

B anks, 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.

Policy loans in Korea

[ Regulated and Market Interest rates(%) ] (source: Bank of Korea) 2. In order to Mobilize Investment Funds ■ Policy loans and government’s role for investments ■ Consumer price inflation Average borrowing cost(manufacturing) Curb rate General bank loan rate 49.8 41.3 44.9 24.0 18.7 15.4 25.4 28.7 2.5 8.6 14.7 11.3 18.7 13.4 NA 24.0 15.5 23.4 11.5 11.5 1970 1975 1980 1985 1990 Rates Year

Establishment of the HCI Promotion Committee.

Establishment of National Investment Fund.

mobilized public employee pension funds and a large portion of

commercial bank funds

in charge of providing the necessary support for government-

sponsored investment projects

defined the criteria of qualification for low-cost credit

How to mobilize funds for policy loans

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

3. Establishing Industrial Complexes for HCI Development and Trade Promotion What have been provided in Industrial Complexes?

making industrial complexes attractive for (foreign/domestic)

companies

providing many incentives

financial assistance for investment

tax incentives during a determined period

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)

How to make industrial complexes efficient & effective

A new jump in export structure fast growth in heavy and chemical products 4. Evaluating HCI Development Strategies 100.0 100.0 100.0 Total 10.4 45.6 44.0 12.2 57.9 29.8 13.9 72.1 14.2 Primary Products Light Industries Heavy & Chemicals 1981 1976 1971

Ⅳ . Towards a More Diversified Trading Country : 1990’s - Present 1. Building Infrastructure to promote Trade more dependent on trade Source : IMF [ Dependence on trade by countries] (Trade Volume/GDP,%) but no more direct assistance for promoting trade 69.3 20.7 24.4 63.5 2005 50.3 18.3 14.7 40.1 1995 65.7 13.5 22.5 23.2 1985 1970 2002 2000 1990 1980 1975 32.1 8.2 18.7 - 64.0 17.3 25.3 12.5 65.0 20.8 18.1 43.9 53.4 15.7 17.2 30.1 57.8 13.1 22.7 - 57.5 18.1 19.0 50.2 Korea U.S. Japan China

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 R&D activities

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

2. Actively Participating in Globalization

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

【 Top 10 export countries (%) 】 Source : KOTIS U.S. Japan China HongKong Taiwan Singapore U.K. Germany Malaysia Indonesia Country 2000 68.8 21.8 11.9 10.7 6.2 4.7 3.3 3.1 3.0 2.0 2.0 % % Country % Country % Country % Country 21.8 14.5 8.4 5.5 3.8 3.6 2.6 1.9 1.7 1.6 China U.S. Japan HongKong Taiwan Germany Singapore U.K. Indonesia Malaysia 29.8 19.4 5.8 4.4 2.8 2.7 2.7 1.9 1.7 1.7 U.S. Japan HongKong Germany Singapore U.K. Canada Taiwan France Indonesia 26.3 17.4 5.4 5.0 4.7 3.5 3.3 2.1 2.0 2.0 U.S. Japan SaudiArabia Germany Hong Kong Iran U.K. Indonesia Netherlands Canada 47.3 28.1 3.3 3.3 2.3 1.6 1.6 1.5 1.3 0.9 U.S. Japan HongKong Germany Canada Netherlands U.K. Vietnam Singapore Sweden 1 2 3 4 5 6 7 8 9 10 65.5 72.9 71.6 91.4 Total 2005 1990 1980 1970 Rank

【 Top 10 export items (%) 】 Source : KOTIS 2.6 Video Apparatus 2.1 Video Apparatus 3.0 Automobile 2.5 Semiconductor 1.5 Metal products 10 Garments Steel Plate-rolled Products Synthetic Resin Wireless telcom Vessel Petrochemical products Automobile Computer Semiconductor Item 56.6 2.7 2.8 2.9 4.6 4.9 5.3 7.7 8.5 15.1 Share 2000 Man made filament fabrics Steel Plate-rolled Products Audio Apparatus Computer Vessel Video Apparatus Footwear Semiconductor Garments Item 53.4 3.6 3.8 3.8 3.9 4.4 5.6 6.6 7.0 11.7 Share 1990 Video Apparatus Woods & Wood items Rubber Products Man made filament fabrics Audio Apparatus Vessel Footwear Steel Plate-rolled Products Garments Item 47.6 2.6 2.8 2.9 3.2 3.4 3.6 5.2 5.4 16.0 Share 1980 Iron products Tobaccos Footwears Confectionery Electronic goods Iron ores Wigs Plywood Textiles Item 81.1 1.5 1.6 2.1 2.3 3.5 5.9 10.8 11.0 40.8 Share 1970 3.6 Steel Plate-rolled Products 8 3.0 Parts of Automobile 9 6.2 Vessel 4 5.4 Petrochemical products 5 5.0 Computer 6 3.6 Synthetic Resin 7 10.5 Semiconductor 1 10.4 Automobile 2 60.0 Total 9.7 Wireless telcom 3 Share Item 2005 Rank

4. Overall Assessment again export-led growth high contribution to economic growth 【 Economic growth by export (1990 price base) 】 Economic growth by export (A, %) Year Economic growth by export (A/B, %) GDP growth rate (B, % ) 3.0 3.9 1.5 1.2 0.9 3.8 2.4 3.4 34.1 59.1 - 18.5 9.5 42.7 28.2 111.2 8.8 6.6 -2.7 6.5 9.5 8.9 8.5 3.1 1970 1975 1980 1985 1990 1995 2000 2003

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) 】 -4.0% Δ 67 1990-97 6.0% 4.9% -8.6% Balance/volume 1962-85 Year 1998-2003 1986-89 Δ 39 109 19 Trade balance

Ⅴ . Strengths and Weaknesses of Korea’s Economic Development: Lessons for Developing Countries 1. Strengths of Korea’s 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

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

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

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