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Economic Study of South Korea

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Economic Study of South Korea Economic Study of South Korea Presentation Transcript

  • Economic Study of South Korea -Group 5 Sreedhar G. Mayank Tripathi Poonam Khaitan Shivam Mehrotra Shaurya Vikram Singh
  • ContentsHistoryEconomyEvents under the First RepublicEvents under the Second RepublicEvents under the Military RuleEvents under the Third RepublicEvents under the Fourth RepublicEvents under the Fifth RepublicEvents under the Sixth Republic
  • US- South Korea TiesGraphsFindings [Contents contd.]
  • HistoryAlso called the Republic of Korea (ROK)Established on 15 August 1948Its history is marked by alternatingperiods of democratic and autocraticrule as follows: First Republic(1948-1960) Second Republic(1960-1961) Military Rule(1961-1962) Third Republic(1963-1972) Fourth Republic(1972-1981) Fifth Republic(1981-1987) Sixth Republic(1987-Present)
  • EconomyToday it is a high-tech industrialized economy.Per capita GNP, only $100 in 1963, exceeded $9,800 in 2002.Chaebols a South Korean form of business conglomerate. Samsung, Hyundai and LGEarlier the centrally planned , government-directed investment modelNow market-oriented
  • Economic OverviewGDP(PPP) $1,541trillionReal GDP Growth Rate 3.4%(27-10- 2011)GDP per capita $29,997Unemployment rate 3.1%Inflation rate (CPI): 4.2%(Nov. 2011)Industry Electronics,Telecommunications,Autom obile production,Chemicals Shipbuilding,SteelTrade : Exports 47 Billion USD Imports 43.1 Billion USDMajor export markets China (23.2%) U.S. (10.1%) Japan (5.8%) Hong Kong (5.3%) Singapore (3.6%)Major importers China (16.8%) Japan (15.3%) U.S.(9.0%) Saudi Arabia (6.1%) Australia (4.6%).
  • United States sixth-largest trading partner and is the 12th-largest economy in the world
  • Events under the First RepublicFirst Republic of South Korea was South Koreas firstindependent government, ruling the country from 1948 to1960-the Rhee administrationThe government took in vast sums of American Aid inamounts sometimes near the total size of the national budget.Major Events The Korean War Introduction of hwan
  • The Korean War(June 25, 1950 - July 27, 1953) Broke out when the two Koreas barely managed to maintain socio-economic stability. Damage Estimates: The war destroyed majority of the industries and industrial infrastructure By August of 1951, 44% of factory buildings and 42% of production facilities lay in ruins Power production plummeted down to a miserable level of 11 thousand kHz, about one-eighth of the earlier production level of 80 thousand kHz Foreign trade deteriorated from US$208 million to US$2.9 million All these factors led to serious Inflation
  • Destruction Ratios:Textile Industry 70%Chemical Industry 70%Agricultural Machinery Industry 40%Rubber Industry 10%Power Plants 80%Overall Industry Destroyed 51%
  • Hyper Inflation: War expenses were equivalent to 50% of the national budget Temporary increase in taxes could not meet the huge demand in war expenses Hence, during the first three months of the war, the total money in circulation was increased by 72% South Korea also had to provide UN forces with loans in Korean currency according to the Taegue Agreement - an agreement of UN forces expenditure Result- 79% of the money increased during the3 year period of war Increase in Money in Circulation June 24, 1950 - July 31, 1953 24 times by December 31, 1953 42 times
  • Distortion of Two Major Economic Reform PoliciesThe Farmland Reform Bill(1950) Farmers who wanted to buy distributed farmland had to pay 150% of the average annual product,30% each in five years with farm products(not in money) The tax rate was applied progressively from a 15% to a 28% level 1/3 of farm products had to be sold to the government at an official set price , according to the newly established Law of Grains Management(1950) Old landlords were forced by law to sell all the farmland that was in excess of 3 chongbo(1 chongbo=0.993 hectares) and received a voucher called Farmland Price Securities However the real value of vouchers plummeted with soaring inflation rate
  • The Enemy Property Privatization Bill(1950) Sales of the confiscated enemy properties (production facilities or business firms) through auction But landowners were not interested because the real value of vouchers plummeted the difficulty of operating business in times of war By the end of March 1953, less than 7% (20,955 cases) of the enemy properties (29,906 cases) were sold Thus the reform failed to make up fiscal deficits with sales revenue of enemy properties
  • The Long-term Consequences of the US Aid During the war the government took in vast sums of American aid , in amounts sometimes near the total size of the national budget initial aid items were food, medicine and other necessary consumer goods these caused the fall of domestic farm product prices decreasing the income of farmers Some Korean agricultural products such as wheat and cotton eventually disappeared completely due to the sharp decline of their prices. US destroyed the agricultural industry through aid made the Korean economy dependent on the US economy perpetuated its dependency by controlling the Korean economy through aid, loans and direct foreign investments But the US aid was also very effective in stabilizing the Korean economy The postwar average annual inflation rate was reduced to 20% from 120% of the preceding period
  • Mishaps of the Korean Government Economic Policies Korean government was responsible for fostering consumer goods industry and later on paving the way for the rise of big-business oriented Chaebol structure Operational production facilities were favored with much lower interest rates for their loans , mostly 10% or lower compared to the general bank loan rate of 18.25% Loans were allocated in favor of big firms This contributed to the establishment of special government-business nexus and corruption Cartels such as the Korea Textile Association were formed , which could monopolize raw material aid However they could establish neither optimum level of production scale, nor competitiveness in international markets the unemployment rate was estimated to be 45%
  • After the war South Korean policymakers set upon stimulating economic growth by promoting indigenous industrial firms selected firms in targeted industries were given privileges to buy foreign currencies and to borrow funds from banks at low rates erected tariff barriers and imposed a prohibition on manufacturing imports Import-Substitution Industrialization (ISI) set in these Directly Unproductive Profit-seeking activities (DUP) caused efficiency to falter and living standards to stagnate
  • HwanTo counter the inflation the first South Korean currency thewon the hwan was introduced in 1953 This was done at the rate of 1 hwan = 100 won The hwan was nominally subdivided into 100 jeonHowever the lowest denomination issued was 1 hwanThe hwan also suffered from inflation and a series ofdevaluations occurred
  • Pegs for the South Korean hwanDate introduced Value of U.S. dollar in hwanFebruary 15, 1953 6015 December 1953 180 August 15, 1955 500February 23, 1960 650 January 1, 1961 1000February 2, 1961 1250
  • Events under the Second RepublicThe student revolution caused parliamentary election in 1960.The Democratic Party - the opposition, gained powerUnion membership and activity grew rapidly Teachers Union, Journalists Union, and the Federation of Korean Trade Union were formedThe government formulated a five-year economicdevelopment plan, although it was unable to act on it prior tobeing overthrownThe Hwan lost half of its value against the dollar between fall1960 and spring 1961
  • Events under Military RuleThe military coup détat led by MajorGeneral Park Chung-he on May 16, 1961,put an effective end to the SecondRepublicThe Supreme Council was the first SouthKorean government tointroduce economic planningThe first South Korean five-year plan wasinaugurated in 1962Shift to a strategy of stimulating growththrough export promotionqualification for the special treatment wasquantifiable and objective thus the room for DUP becamesignificantly smaller
  • per capita output doubled in the following decadeSouth Korea became an industrialized countrythe share of agriculture in GDP fell from 45 percent to 25percent the share of manufacturing rose from 9 percent to 27 percent
  • Events under the Third & Fourth RepublicThe Third Republic was initiated by announcing the Five YearEconomic development PlanThe core was an export-oriented industrialization policy"Development First, Unification Later”The economy grew rapidly with vast improvement inindustrial structure(heavy chemical industries)Capital was needed for such development-foreign aid fromJapan and the United Statesimproved the standard for livingthe government controlled pricesthe rural economy steadily lost ground
  • Despite social and political unrest,the economy continued toflourish under the export-based industrialization policythe 3rd and 4th five-year plans focused on expanding theheavy and chemical industries(HCIs) - steel production & oilrefiningmost of the profit went back to repaying the loans andinterestlarge conglomerate Chaebols were continuously receivingpreferential treatment and soon came to dominate thedomestic marketLow interest loans to chaebols -- selected for the task ofdeveloping different sectors of HCISuccessfully expanding the capital-intensive industries morerapidly than the rest of the economy
  • Events under the Fifth & Sixth RepublicStarted in 1981 with election of Chun Doo-hwanTight monetary laws and low interest rates contributed toprice stabilityNotable growth in the electronics, semi-conductor, andautomobile industries.The country opened up to foreign investmentsGDP rose as Korean exports increased.However, the economic growth widened the gap between therich and the poor, the urban and rural regions
  • The Sixth Republic began in 1987 and remains the currentrepublic of SouthIn the 1990s,liberalization of capital account followed causingrapid accumulation of short-term external debtsMajor Events Financial Crisis of 1997 Re-introduction of won
  • Economic Crisis of 1997 November 1997, Korea was hit by a currency-cum-banking crisis Official assistance from the IMF Korea has implemented many institutional and policy reforms Today, it has gone far toward strengthening its financial sector Country not likely to become a victim of another financial crisis.
  • Causes In 1990, Korea’s current account balance started to deteriorate because rising inflation appreciation of the Korean won the recession of the world economy Current account recorded a deficit of $8.7 billion Banks and Business Firms finance long-term investments with short-term foreign borrowings Causing maturity mismatches
  • Remedies As it was a liquidity crisis, a rapid infusion of hard currency reserves was critical The IMF together with other international financial institutions offered $58.4 billion to bail out Korea Out of this, $23.4 billion was reserved as a second line of defense that would be made available to Korea by G-7 countries
  • Major Reforms Implemented to achieve the following objectives: (1) to reduce the likelihood of a similar crisis in the future by cleaning up the balance sheets of financial institutions (2) to evolve a financial system that can best help the nation resume growth with stability
  • Reforms Till DateThe contents and significance of the reforms that have beenactually undertaken to date can best be reviewed under sixheadings:I. Reforms designed to strengthen the legal and regulatory infrastructure,II. Reforms implemented to rehabilitate the financial sector,III. Reforms aiming at strengthening prudential regulation,IV. Reforms to reduce moral hazard,V. Reforms to promote capital account liberalization andVI. Reforms to strengthen the corporate governance of financial institutions
  • Won• Another attempt to control inflation• In 1962, the second South Korean won was• reintroduced• Rate of 1 won = 10 hwan• This finally caused inflation to slow down
  • Current ScenarioEconomic The slowing global economy and falling exports slowed growth to 3.3% in 2001 Consumer overspending and rising household debt, along with external factors, slowed growth to near 3% again in 2003 Economic performance in 2004 improved to 4.6% due to an increase in exports Remained at or above 4% in 2005, 2006, and 2007. With the onset of the global financial and economic crisis in the third quarter of 2008, annual GDP growth slowed to 2.3% in 2008 and just 0.2% in 2009.
  • US- South Korea Ties As Koreas economy has developed, trade and investment ties have become an increasingly important aspect of the U.S.-R.O.K. relationship American firms have long been major investors in Korea Koreas leading firms have begun to make significant investments in the United States The IMF reforms also improved the trade relations Signed a comprehensive FTA that would eliminate virtually all barriers to trade and investment between the two countries, in 2007
  • Tariffs on 95% of trade were to be eliminated within 3 yearsof implementation,All the remaining tariffs to be removed within 10 years ofimplementationThe FTA will generate billions of dollars in increased trade andinvestment between the United States and the Republic ofKoreaBoost economic growth and job creation in both countries.
  • Graphs
  • Phillip Curve for South Korea
  • Won and USD Exchange Rate
  • FindingsSouth Koreas economic growth potential has fallen becauseof a rapidly aging population and structural problems that arebecoming increasingly apparent.Foremost among these structural concerns are the rigidity ofSouth Koreas labor regulations, the countrysunderdeveloped financial markets, and a general lack ofregulatory transparency.Korean policy makers are increasingly worried about diversionof corporate investment to China and other lower wagecountries, and by Koreas falling foreign direct investment(FDI).