North Korea Economic relations

Foreign Economic Relations

Exports were the key to South Korea's industrial expansion. Until 1986 the value
of imports was greater than exports. This situation was reversed, however, in 1
986 when South Korea registered a favorable balance of trade of US$4.2 billion.
By 1988 the favorable balance had grown to US$11.4 billion. Financing this persi
stent, although not unexpected, gap between domestic and imported resources was
a principal concern for economic planners. In the 1950s and 1960s, much of the t
rade deficit was financed by foreign aid funds, but in the last two decades, bor
rowing from and investment in international capital markets have almost complete
ly substituted for economic aid.
Aid, Loans, and Investment
Foreign economic assistance was essential to the country's recovery from the Kor
ean War in the 1950s and to economic growth in the 1960s because it saved Seoul
from having to devote scarce foreign exchange to the import of food and other ne
cessary goods, such as cement. It also freed South Korea from the burden of heav
y international debts during the initial phase of growth and enabled the governm
ent to allocate credit in accordance with planning goals. From 1953 to 1974, whe
n grant assistance dwindled to a negligible amount, the nation received some US$
4 billion of grant aid. About US$3 billion was received before 1968, forming an
average of 60 percent of all investment in South Korea. As Park's policies took
effect, however, the dependence on foreign grant assistance lessened. During the
1966-74 period, foreign assistance constituted about 4.5 percent of GNP and les
s than 20 percent of all investment. Before 1965 the United States was the large
st single aid contributor, but thereafter Japan and other international sponsors
played an increasingly important role.
Apart from grant assistance, other forms of aid were offered; after 1963 South K
orea received foreign capital mainly in the form of loans at concessionary rates
of interest. According to government sources, between 1964 and 1974 such loans
averaged about 6.5 percent of all foreign borrowing. Other data suggested a much
higher figure; it seemed that most loans to the government were concessional, a
t least through the early 1970s. International Monetary Fund (IMF) data showed t
hat imports financed through such means as foreign export-import loans with redu
ced rates of interest totaled 11.6 percent of all imports from 1975 to 1979. The
aid component of these loans was only a fraction of their total value.
During the mid-1960s, South Korea's economy grew so rapidly that the United Stat
es decided to phase out its aid program to Seoul. South Korea became increasingl
y integrated into the international capital market; from the late 1960s to the m
id- 1980s, development was financed with a series of foreign loans, two-thirds o
f which came from private banks and suppliers' credits. Total external debt grew
to a high of US$46.7 billion in 1985. Positive trade balances in the late 1980s
led to a rapid decline in foreign debt--from US$35.6 billion in 1987 to an expe
cted US$23 billion by 1991. Account surpluses in 1990 were expected to enable Se
oul to reduce its foreign debt from its 1987 level of about 28 percent of GNP to
about l0 percent by 1991.
United States assistance ended in the early 1970s, from which time South Korea h
ad to meet its need for capital investment on the competitive international mark
et and, increasingly, from domestic accounts. The government and private industr
y received funds through commercial banks, the World Bank, and other foreign gov
ernment agencies. In the mid-1980s, total direct foreign equity investment in So
uth Korea was well over US$1 billion.
The fact that South Korea was so dependent on foreign trade made it very vulnera
ble to international market fluctuations. The rapid growth of South Korea's dome
stic market in the late 1980s, however, began to reduce that dependence. For exa
mple, a dramatic rise in domestic demand for automobiles in 1989 more than compe
nsated for a sharp drop in exports. Furthermore, while Seoul's huge foreign debt
left it vulnerable to changes in the availability of foreign funds and in inter
national interest rates, Seoul's economic and debt management strategy was very
effective.
The South Korea's philosophy concerning direct foreign investment had undergone
several major changes tied to the changing political environment. Foreign invest
ment was not allowed through the 1950s. In 1962 the Foreign Capital Inducement A
ct established tax holidays, equal treatment with domestic firms, and guarantees
of profit remittances and withdrawal of principal. Despite the provisions of th
e act, there was little foreign investment activity until after the establishmen
t of diplomatic relations between South Korea and Japan in 1965.
Seoul had to mobilize both external and internal sources when it launched its Fi
rst Five-Year Economic Development Plan in 1962. The Foreign Capital Inducement
Act was amended in 1966 to encourage a greater inflow of foreign capital to make
up for insufficient domestic savings. A rapid inflow of investment followed unt
il 1973, when the act was changed to restrict the flow of investments. Beginning
in the late 1970s, however, the government gradually began to remove restrictio
ns as domestic industries began to grow and needed to be strengthened to cope wi
th international competition. But until the early 1980s, South Korea relied heav
ily on borrowing and maintained a somewhat restrictive policy towards foreign di
rect investment.
Donald S. Macdonald has pointed out that under the liberalization policy, restri
ctions on foreign direct investment were eased in 1984 and 1985. Seoul changed i
ts control policy on foreign investment from a "positive list" to a "negative li
st" basis, which meant that any activity not specifically restricted or prohibit
ed was open to investment. An automatic approval system was introduced under whi
ch all projects meeting certain requirements were to be immediately and automati
cally approved by the Ministry of Finance.
Seoul twice revised the negative list system after its initial introduction--fir
st in September 1985 and again in April 1987--to open more industrial sectors to
foreign investors. In 1984 there were 339 items, or 34 percent of the 999 items
on the Korean Standard Industrial Classification, on the negative list. As of J
uly 1987, there were 788 industrial sectors open to foreign investment. In the m
anufacturing sector, 97.5 percent of all industries (509 out of 522) were open t
o foreign investment.
In December 1987, Seoul announced a policy to liberalize the domestic capital ma
rket by 1992. The program called for liberalizing foreigners' investment funds,
offering domestic enterprises rights on overseas stock markets, and consolidatin
g fair transaction orders. Seoul planned to allow direct foreign investment in i
ts stock market in 1992.
Of the total direct investment in South Korea from 1962 to 1986, which amounted
to US$3.631 billion, Japan accounted for 52.2 percent and the United States for
29.6 percent. In 1987 Japan invested US$494 million, or 47 percent of the total
foreign investment of US$1.1 billion. Japan invested mainly in hotels and touris
m, followed by the electric and electronics sector. Direct investment from the U
nited States showed a remarkable increase since the early 1980s, accounting for
54.4 percent of the 1982-86 total investment. The United States invested a total
of about US$255 million, or approximately 24 percent of the 1987 investment. Cu
mulative United States investment was about US$1.4 billion by 1988.
There was a dramatic rise in foreign investment in the late 1980s. Approvals of
foreign equity investments reached an all- time high of US$1.283 billion in 1988
, a 21 percent increase over 1987. As in previous years, approvals for Japanese
investments were the dominant factor; they totaled US$696 million (up 41 percent
from 1987), followed by United States investors with US$284 million (up 11 perc
ent), and West European sources, US$240 million (up 14 percent). Investment appr
ovals in the service sector doubled in 1988 to US$561 million, which included tw
o large Japanese hotel projects totaling US$344 million. Investment approvals in
the manufacturing sector, however, declined from US$775 million in 1987 to US$7
10 million in 1988.
South Koreans began investing abroad in the 1980s. Before 1967 there was virtual
ly no South Korean investment overseas, but thereafter there was a slow growth b
ecause of Seoul's need to develop export markets and procure natural resources a
broad. In the 1970s, South Koreans invested in trading, manufacturing, forestry,
and construction industries. By the early 1980s, a sharp reduction in developme
nt projects in the Middle East led to a decline in South Korean investment there
. Mining and manufacturing investments continued to grow throughout the decade.
In 1987, out of a total South Korean overseas investment of US$1,195 million (74
5 projects), US$574 million was invested in developed countries and the remainin
g US$621 was invested in developing countries.
One of the most noticeable economic achievements in the 1980s was Seoul's revers
al of the balance of payments deficit to a surplus. This improvement was largely
attributable to strong overseas demand for South Korean products and to the red
uction in expenditures for oil imports. In addition, the "invisible" trade accou
nt (monies from tourism and funds sent home by nationals) had improved considera
bly in the late 1980s because of temporary increases in revenue from tourism, re
ceipts from overseas construction, and structural decreases in interest payments
.
South Korea's success in achieving a balance of payments surplus, however, was n
ot without some drawbacks. It led to harsh trade disputes with the United States
and other developed nations, as well as to inflationary pressures. To cope with
these problems, Seoul had to modify its enthusiastic promotion of exports in fa
vor of a policy restraining trade surpluses within reasonable limits.
An important measure restraining the growing foreign trade imbalance between Sou
th Korea and the United States was Seoul's decision to revalue the won against t
he United States dollar. A stronger won made American imports cheaper, increased
the cost of South Korean exports to the United States, and slowed, but did not
reverse, the growth in the South Korea-United States trade deficit as of 1989. T
he United States pressed for further appreciation of the won in 1989. In April 1
989, the United States Department of the Treasury accused South Korea of continu
ed "manipulation" of the South Korean currency to retain an artificial trade adv
antage. South Korean officials and businesspeople, however, complained that the
already rapid appreciation of the won was slowing economic growth and threatenin
g exports. In May 1989, South Korea avoided being called an unfair trader by the
United States and forestalled possible United States trade sanctions, but the n
ation paid a high price by promising to open up its agricultural market, ease in
vestment by foreigners, and remove many import restrictions.
Foreign Trade Policy
Seoul stated in 1987 that its foreign trade policy was structured for further ex
pansion, liberalization, and diversification. Because of the paucity of natural
resources and traditionally small domestic market, South Korea has had to rely h
eavily on international trade as a major source of development. Seoul also sough
t to diversify trading partners to ease dependence on a few specific markets and
to remedy imbalances in the present tendency to bilateral trade.
Exports and Imports
The rapid growth of South Korea's economy in the late 1980s led to significant i
ncreases in exports and imports. In the wake of the 1988 Seoul Olympics, South K
orea's trade surplus exceeded US$11 billion and foreign exchange revenue had inc
reased sharply. Seoul's trade with communist countries surged in 1988. Trade wit
h Eastern Europe was US$215 million, trade with China almost US$1.8 billion, and
trade with the Soviet Union US$204 million.
In 1989 total exports grew to US$74.29 billion, and imports totaled US$67.21 bil
lion. South Korea's annual trade exceeded US$100 billion for the first time in 1
988, making it the world's tenth largest trading nation.
During the 1960s and early 1970s, the commodity structure of Seoul's principal e
xports changed from the production of primary goods to the production of light i
ndustrial goods. After 1974 there was a rapid expansion in the production and ex
port of heavy industrial and chemical products. By 1986 the share of heavy indus
trial and chemical products in total exports had expanded to 55.5 percent (as co
mpared to 18.9 percent in 1980) whereas the share of light industrial products h
ad shrunk to 40.9 percent (as compared to 71.1 percent in 1980).
South Korea had depended greatly on the United States and Japan as its major tra
ding partners, with 75.6 percent of all exports going to these markets in 1970.
Success at diversifying export markets led to a reduction in the United States-J
apan export market share to 55.6 percent in 1986. The Middle East accounted for
12 percent of South Korea's export trade from 1972 to 1977, but its share declin
ed to 5.2 percent in 1986 because of the collapse of the construction boom in th
e Middle East and the Iran-Iraq war (1980-88). Exports to Western Europe decline
d from 18.8 percent in 1979 to 15 percent in 1986. Exports to developing areas,
such as Latin America (0.8 percent in 1972; 3.6 percent in 1986) and Oceania (0.
9 percent in 1972; 1.4 percent in 1986), grew.
Indirect Seoul-Moscow trade was estimated at about US$20 million in 1978, with M
oscow importing electronics, textiles, and machinery and exporting coal and timb
er. By the late 1980s, South Korea's global fur trader, Jindo, was expected to p
roduce US$20 million worth of fur garments annually in a joint venture with the
Soviet Ministry of Light Industry. South Korean businesspeople were offered such
Soviet products as instruments for nuclear engineering and technology for proce
ssing mineral ores and concentrates. In the first ten months of 1989, bilateral
trade between Seoul and Moscow reportedly increased 156 percent from 1988 figure
s to US$432 million.
Since the early 1960s, the structural pattern of imports had shown changes, part
icularly in the relatively decreasing share of imported consumer goods and the a
ccelerated growth of industrial supplies and capital equipment imports. The shar
e of consumer goods imported in 1962 was 24.1 percent of total imports; this sha
re declined to 9.8 percent of total imports in 1986 because of increased South K
orean production of these goods for the domestic market. The declining share of
raw materials as a percentage of imports during the early 1970s was reversed in
1974 because of the increased value of oil imports (caused by the 1973 war in th
e Middle East). By 1979 crude oil was 25 percent of South Korea's total import r
equirements. This figure dropped to 8.4 percent in 1988 because of the use of ot
her sources of energy and the decline in the price of petroleum in the late 1980
s.
South Korean exports to the United States in 1988 rose to US$21.5 billion, a 17-
percent increase over 1987; imports rose to US$12.8 billion, a 46-percent increa
se over the 1987 level. The percentage of total South Korean exports destined fo
r the United States market decreased to 35.3 percent in 1988 from 38.7 percent i
n 1987. At the same time, the United States' share of total South Korean imports
rose to 24.6 percent, up from 21.4 percent in 1987. By 1988 Seoul's favorable b
alance had grown to more than US$8.7 billion.
In 1989 imports rose to US$57 billion (up 18 percent from 1988) whereas exports
reached US$61 billion, a 2-percent increase from 1988. The trade surplus was red
uced from US$11.5 billion to US$4.3 billion and was projected to decline even mo
re. Invisible receipts rose 10 percent, but payments, mainly reflecting a big in
crease in South Korean travel abroad, were up 20 percent. Thus, the surplus on i
nvisible trade was reduced from US$1.3 billion to US$400 million.
IN THE FIRST THREE decades after the Park Chung Hee government launched the Firs
t Five-Year Economic Development Plan in 1962, the South Korean economy grew eno
rmously and the economic structure was radically transformed. South Korea's real
gross national product (GNP) expanded by an average of more than 8 percent per
year, from US$2.3 billion in 1962 to US$204 billion in 1989. Per capita annual i
ncome grew from US$87 in 1962 to US$4,830 in 1989. The manufacturing sector grew
from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987. Commodity trade v
olume rose from US$480 million in 1962 to a projected US$127.9 billion in 1990.
The ratio of domestic savings to GNP grew from 3.3 percent in 1962 to 35.8 perce
nt in 1989.
The rapid economic growth of the late 1980s, however, slowed considerably in 198
9. The growth rate was cut almost in half from the previous year (to a still-rob
ust approximate 6.5 percent), the inflation rate increased as wages soared even
higher, and there was speculation concerning a small trade deficit in the early
1990s. These developments all pointed to a gradual slowing of the expansion of t
he rapidly maturing economy. Nevertheless, it also was clear that rapidly rising
domestic demand would keep the economy healthy (even with a slight drop-off of
exports), unless a major political crisis were to shock the country.
The most significant factor in rapid industrialization was the adoption of an ou
tward-looking strategy in the early 1960s. This strategy was particularly well s
uited to that time because of South Korea's poor natural resource endowment, low
 savings rate, and tiny domestic market. The strategy promoted economic growth t
hrough labor-intensive manufactured exports, in which South Korea could develop
a competitive advantage. Government initiatives played an important role in this
process. The inflow of foreign capital was greatly encouraged to supplement the
shortage of domestic savings. These efforts enabled South Korea to achieve rapi
d growth in exports and subsequent increases in income.
By emphasizing the industrial sector, Seoul's export-oriented development strate
gy left the rural sector relatively underdeveloped. Increasing income disparity
between the industrial and agricultural sectors became a serious problem by the
1970s and remained a problem, despite government efforts to raise farm income an
d improve living standards in rural areas.
By the early 1970s, however, the industrial sector had begun to face problems of
its own. Up to that time, the industrial structure had been based on low value-
added and labor-intensive products, which faced increasing competition and prote
ctionism from other developing countries. The government responded to this probl
em in the mid-1970s by emphasising the development of heavy and chemical industr
ies and by promoting investment in high value-added, capital-intensive industrie
s.
The structural transition to high value-added, capitalintensive industries was d
ifficult. Moreover, it occurred at the end of the 1970s, a time when the industr
ial world was experiencing a prolonged recession following the second oil price
shock of the decade and protectionism was resulting in a reduction of South Kore
an exports. By 1980 the South Korean economy had entered a period of temporary d
ecline: negative growth was recorded for the first time since 1962, inflation ha
d soared, and the balance-of-payments position had deteriorated significantly.
In the early 1980s, Seoul instituted wide-ranging structural reforms. In order t
o control inflation, a conservative monetary policy and tight fiscal measures we
re adopted. Growth of the money supply was reduced from the 30 percent level of
the 1970s to 15 percent. Seoul even froze its budget for a short while. Governme
nt intervention in the economy was greatly reduced and policies on imports and f
oreign investment were liberalized to promote competition. To reduce the imbalan
ce between rural and urban sectors, Seoul expanded investments in public project
s, such as roads and communications facilities, while further promoting farm mec
hanization.
These measures, coupled with significant improvements in the world economy, help
ed the South Korean economy regain its lost momentum in the late 1980s. South Ko
rea achieved an average of 9.2 percent real growth between 1982 and 1987 and 12.
5 percent between 1986 and 1988. The double digit inflation of the 1970s was bro
ught under control. Wholesale price inflation averaged 2.1 percent per year from
1980 through 1988; consumer prices increased by an average of 4.7 percent annua
lly. Seoul achieved its first significant surplus in its balance of payments in
1986 and recorded a US$7.7 billion and a US$11.4 billion surplus in 1987 and 198
8 respectively. This development permitted South Korea to begin reducing its lev
el of foreign debt. The trade surplus for 1989, however, was only US$4.6 billion
dollars, and a small negative balance was projected for 1990.
In the late 1980s, the domestic market became an increasing source of economic g
rowth. Domestic demand for automobiles and other indigenously manufactured goods
soared because South Korean consumers, whose savings had been buoyed by double-
digit wage increases each year since 1987 and whose average wages in 1990 were a
bout 50 percent above what they had been at the end of 1986, had the wherewithal
to purchase luxury items for the first time. The result was a gradual reorienta
tion of the economy from a heavy reliance on exports toward greater emphasis on
meeting the needs of the country's nearly 43 million people. The shifts in deman
d and supply indicated that economic restructuring was underway, that is, domest
ic consumption was rising as net foreign demand was falling. On the supply side,
the greater growth in services mirrored what the people wanted--more goods, esp
ecially imports, and many more services.
By 1990 there was evidence that the high growth rates of the late 1980s would sl
ow during the early 1990s. In 1989 real growth was only 6.5 percent. One reason
for this development was the economic restructuring that began in the late 1980s
--including the slower growth of major export industries that were no longer com
petitive on the world market (for example, footwear) and the expansion of those
industries that were competitive, such as electronics.
The Japanese Role in Korea's Economic Development
The Government Role in Economic Development
The Government and Public and Private Corporations
Financing Development
Industry
Energy
Agriculture
Forestry and Fishing
Money and Banking
Labor
Foreign Economic Relations