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Source: U.S. Department of Commerce, Survey of Current Business

August 1991, Vol. 71, NO. 8, Table 11.3

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1/ Economic Planning Board (EPB) estimate. 27 Data are for end of period. Sources: Embassy estimates; Bank of Korea; Economic Planning Board; and the Ministry of Finance


General Policy Framework

The South Korean government's economic policies in the


early and mid-1980s emphasized rapid export-led development, protection of domestic industries, and the reduction of the Republic of Korea's large external debt. Government intervention in the economy to promote these objectives has been pervasive tho oughout the post-Korean war era. Restrictions on foreign participation in the economy through trade and investment have been common. In the latter part of the decade, removal of explicit import prohibitions and rapidly increasing domestic demand began to push Korea toward a more mature stage of economic development one which will see more balanced growth with less reliance on exports as catalyst for economic growth.


After three straight years (1986-1988) of unprecedented economic growth years in which real GNP grew more than 12 percent annually --South Korea's rate of economic growth slowed to 6.8 percent in 1989, as the economy adjusted to fundamental changes, including a doubling of real wages following democratization. Fearing that the "economic downturn" signalled a trend toward slower growth and declining export competitiveness, the government of the Republic of Korea implemented stimulating policies aimed at promoting industrial restructuring and restoring competitiveness. The growth rate rebounded to 9.0 percent in 1990 and stayed there through the first half of 1991, exceeding the rate of 7.5 to 8 percent calculated by the Bank of Korea as optimal for the South Korean economy. South Korean government estimates show real GNP growth of 8.7 percent in 1991.


The higher than targeted growth in 1991 came largely as result of strong export performance (up 14 percent in the first eight months of the year) and active domestic demand especially in the construction sector. Import growth of 17.7 percent (primarily raw materials and capital goods) pushed the current account into a deficit of $10.8 billion in the first ten months of 1991. To finance the deficit, South Korea expanded foreign borrowings. Thus, net foreign debt exceeded $10 billion for the first time in three years $10.6 billion at the end of June. Inflation continues to plague the overheated economy, running 12.5 percent on an annualized basis, the highest increase in 10 years. Delays in ports and on roadways hampered distribution, exacerbated trade friction in some areas, and highlighted the need for investment in infrastructure.

The total money supply (M2) increased an average 18 percent during the first eight months of 1991, but, due to inefficiencies in the financial sector, domestic interest rates also rose to about 20 percent. Average monthly wages for the first four months increased 16 percent, despite the government's efforts to keep wage increases to single digits. Unemployment averaged 2.5 percent in the first half of the year.

Alarmed by the unexpected current account deficit in July and August and high inflation rates, President Roh on September 5, 1991 blamed his economic team for their "overly optimistic stance" and ordered them to work out a new basic economic package. "Measures to improve balance of payments (BOP) and price stability" were announced on September 19, 1991 and included holding the M2 growth rate to 18.4 percent


in the final quarter of 1991 and reducing 1992's national budget increase to 6.8 percent over 1991's final budget.

Despite these steps, analysts question whether the government can stick to policies of restraint over the short term, particularly given the four elections coming up in 1992. Even assuming government policy does not become more stimulative, the economic planning board projects growth in 1992 above the economy's long-term potential, with continuing current account deficits, and inflation of nine to ten percent. After five and half years of growth averaging 10.6 percent, the South Korean government recognizes that slower growth is now needed. While that correction may be postponed by the government's election-related decisions, it cannot be put off indefinitely. The South Korean economy is likely to experience slower growth and continuing adjustments in the next few years, as the economy makes the transition to higher wages and the government attempts to reduce inflation and improve international competitiveness.

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The won depreciated against the U.S. dollar for the second year in a row after four consecutive years of appreciation, dropping 3.3 percent or 24.5 won from 716.4 won per U.S. dollar on December 31, 1990 to 740.9 won on September 16, 1991. As of September 16, 1991, the won had depreciated against the dollar by 6.3 percent since March 2, 1990 (the date the "market average rate" system was implemented), and by 10.1 percent since the end of April 1989 (peak). On September 2, 1991, the government announced that the daily fluctuation band (DFB) of the won-dollar rate would widen to plus/minus 0.6 percent, compared with the previous ceiling of 0.4 percent. Under the provisions of the seventh five-year plan, the range of DFB will be gradually expanded to shift to a floating exchange rate system in 1996. The role of market forces in the exchange market remains restricted by the existence of pervasive controls on capital and exchange flows both into and out of the Republic of Korea.

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South Korea's economy is based on private ownership of the means of production and distribution. The government, however, has actively managed the South Korean economy through a variety of means including comprehensive economic development plans, regulatory policies, and financial market controls. The import regime was structured to allow easy entry of raw materials and capital equipment needed by competitive export industries while consumer imports were severely restricted. Since the mid-1980's the Republic of Korea has eliminated most explicit import prohibitions outside of the agricultural area.

Many of the problems U.S. exporters now experience in South Korea are rooted in the maze of regulations which make up complicated licensing requirements, rules for inspection and approval of industrial goods, country of origin marking requirements, and other standards often inconsistent with


international norms. "Special laws" have given line ministries broad powers to "stabilize" markets by controlling imports. The South Korean government also has intervened to direct the flow of foreign investment to priority development sectors. In the services sector, even in those industries where foreign investment is permitted, investors have encountered a restrictive regulatory regime that often has limited their operations. Under the provisions of the U.S.-South Korean "Super 301" agreement, the South Korean government agreed to eliminate the border closure provisions encompassed in the "special laws" and to dismantle the investment approval process and move to a more transparent notification system. Effective January 1, 1992 some firms with less than 50 percent foreign ownership were permitted to notify rather than wait for government approval of new investment.

The government of the Republic of Korea has taken some concrete measures over the past two years to improve the treatment of foreign financial institutions in South Korea, including increases in the ceiling on issuance of certificates of deposit by foreign banks, elimination of the ceiling on foreign banks' paid-in capital in South Korea, and permission for foreign securities firms to establish branches in South Korea. However, the government of the Republic of Korea continues to deny national treatment to foreign financial entities in significant areas. In particular, foreign banks continue to face severe difficulties in meeting the local financing needs of their traditional clients. In the securities area, stiff criteria for branch establishment and a limited scope of permissible activities effectively limit the attractiveness of the South Korean market for foreign securities firms.

Three formal, and several informal, rounds of bilateral financial policy talks have been held since February 1990 to provide a mechanism for addressing specific market access problems that u.s. banks and securities firms face and for encouraging broader liberalization of South Korea's financial, capital, and exchange markets. The reforms the government of South Korea has implemented deregulation of interest rates, liberalization of foreign exchange controls, and opening of capital markets are gradual and limited. The U.S. Government has called on the government of the Republic of Korea to develop and publish a comprehensive blueprint with clear timetables for the full liberalization of its financial sector.

South Korean tariff rates remain higher than the average rates of OECD nations but lower than the average tariff rates of developing countries. Under the current tariff schedule, South Korea's average tariff rate for all products was 11.4 percent in 1991. In January 1991 the South Korean government announced that it would postpone a five-year tariff reduction plan for one year until December 31, 1991 to offset revenue cuts resulting from the elimination of the national defense tax. Tariff rates remain high in some areas of interest to the United States, particularly agricultural products. The average tariff rate on agricultural products is 19.9 percent. It will be reduced to 17.8 by 1993 and to 16.6 percent by 1994.

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