The Korean Economy Evolution of International Trade Policy

The Korean Economy: Evolution of International Trade Policy and Challenges Korea Foundation Special Lectures on Korea 2015 Jung Soo SEO KAC, Keimyung University Daegu Korea October 22, 2015 Nazarbayev University

Korea Now On the 70 th Anniversary of Korea’s independence from Japanese Annexation, NSO released some interesting statistics for Korea Source: statistics. kr 2

Korea in the World ¢ These figures place Korea in 2014 as p 7 th largest trading countries by exports & imports (IMF WEO DB) p 13 th largest economy by GDP (IMF WEO DB) p 13 th highest internet penetration ratio (World Bank WDI DB) p 27 th largest country by population size (World Bank WDI DB) p 31 th richest economy by GDP per capita (IMF WEO DB) 3

20 Largest Economies in the World by GDP (2014) Rank Country GDP(US$M) 1 United States 17, 418. 93 11 Canada 1, 788. 72 2 China 10, 380. 38 12 Australia 1, 444. 19 3 Japan 4, 616. 34 13 Korea 1, 416. 95 4 Germany 3, 859. 55 14 Spain 1, 406. 86 5 United Kingdom 2, 945. 15 15 Mexico 1, 282. 73 6 France 2, 846. 89 16 Indonesia 888. 648 7 Brazil 2, 353. 03 17 Netherlands 866. 354 8 Italy 2, 147. 95 18 Turkey 806. 108 9 India 2, 049. 50 19 Saudi Arabia 752. 459 10 Russia 1, 857. 46 20 Switzerland 712. 05 Source: IMF World Economic Outlook Database 4

40 Richest Economies in the World by GDPPC (2014) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Luxembourg Norway Qatar Switzerland Australia Denmark Sweden San Marino Singapore United States Ireland Netherlands Austria Iceland Canada Finland Belgium Germany United Kingdom France Source: IMF World Economic Outlook Database 111, 716. 27 97, 013. 26 93, 965. 18 87, 475. 46 61, 219. 16 60, 563. 62 58, 491. 47 56, 820. 02 56, 319. 34 54, 596. 65 53, 461. 97 51, 372. 96 51, 306. 67 51, 261. 88 50, 397. 86 49, 496. 72 47, 721. 59 47, 589. 97 45, 653. 41 44, 538. 15 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 New Zealand United Arab Emirates Kuwait Hong Kong SAR Israel Brunei Darussalam Japan Italy Spain Bahrain Korea Cyprus Malta Saudi Arabia The Bahamas Slovenia Taiwan Province of China Portugal Greece Trinidad and Tobago 43, 837. 29 43, 179. 78 43, 103. 34 39, 871. 10 36, 990. 98 36, 606. 83 36, 331. 74 35, 823. 22 30, 278. 35 28, 271. 75 28, 100. 72 26, 115. 46 24, 876. 20 24, 454. 02 24, 034. 19 24, 019. 25 22, 597. 73 22, 130. 49 21, 653. 08 21, 310. 83 5

Korea in the World ¢ It is also indicated that Korea’s GDP in 2014 is 31, 108 folds bigger than that in 1953 p GDP per capita 424 times larger than that in 1953 p Korea’s exports (merchandise) in 2014 was 22, 907 times larger than that in 1956 p Korea’s imports (merchandise) in 2014 was 1361 folds bigger than that in 1956 p Thus making Korea’s external merchandise trade 2672 times larger that in 1956 p 8

Korea in the world But Korea is small in size of area with a slightly over 100, 000 km 2 of land area, ranked 109 th in size Smaller than Victoria but 1. 5 times bigger than Tasmania Arable land is roughly 17% of the area Not well endowed with natural resources With a very high imported energy dependence ratio of 95. 6% Country Size by Area ('14) (km 2) Population Density ('13) (persons/㎢) 100, 284 515. 9 Import Energy Dependence ('15. 04)(%) Arable Land('14)(ha) 95. 6 1, 691, 113 Source: Statistics Korea 9

Korea in the world Still confronting with hostile North Korea The devastated economy during the Korean War (1950 -1953) Short Lived but extremely bloody Life loss(incl. deceased, casualties & missing): 2. 81 million lives S. Korea: 650, 000 & UN: 150, 000 N. Korea: 800, 000 & Chinese: 1230, 000 Refuges: more than ½ total population Highly Destructive to industrial production capacity 42% of S. Korea’s manufacturing 60% of N. Korea’s industries And surrounded with super powers: US, China, Japan and Russia 10

Geopolitics of Korea Russia Kazakhstan DPRK USA China Source: googlemap Japan Ro. K 11

¢ Korea’s Economic Development… Korean Economy is The Miracle on the Han River (World Bank, 1993) p Asia’s Latest Miracle(Times, 2011. 15) p ¢ How did Korea achieve such a miraculous economic growth? 12

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Pre-1960 s ¢ Average Growth Rate, 1953 -1960 p ¢ ¢ § Resulting Market Saturation National Priority Goal: Reunification of Korean Peninsula Source of Economic Growth? p ¢ 5. 3%p. a. Foreign Assistance from US Growth Strategy? Industrialization & Inward Looking p Import Substitution p 14

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1960 s The Take Off ¢ Political Leadership Committed to Economic Development Came into power: 1961 Military Coup p Government-Led Economic Development p § 1 st Five-Year Economic Development Plan(FYEDP) (1962 -1966) & 2 nd FYEDP p ¢ Average Economic Growth Rate (1962 -1971): 9. 9% p. a. Growth Strategy Outward Looking & Export Promotion p Manufacturing; Labor Intensive manufacturing p 16

1960 s The Take Off ¢ Policies and Incentives How to make export competitive? p “Getting Prices Right” p § Unified Exchange Rate System (1961) § Devaluation of Korean Currency by 50% (1964) p Tax Concessions § Import Liberalization § Free import of materials and equipment used for export activities § Negative Import List System (1967) § Generous waste allowance for export business 17

1960 s The Take Off ¢ Policies and Incentives p How to make export competitive? p “Getting Prices Right” § Unified Exchange Rate System (1961) § Devaluation of Korean Currency by 50% (1964) p Tax Concessions § Free import of materials and equipment used for export activities § Generous waste allowance for export business 18

1960 s The Take Off ¢ Policies and Incentives p Non-Pecuniary § Export Target § Monthly Export Meeting convened by President § Social Respect p Normalization of Diplomatic Relationship with Japan (1965) § Foreign Capital § Export Market § Source of Advanced Technology 19

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1970 s: Creating Comparative Advantage ¢ 1972 -1981 Average Growth Rate: 9. 0% p. a. p 3 rd (1972 -1976) and 4 th (1977 -1981) Five Economic Development p Creating Comparative Advantage § Heavy Government Intervention § By promoting Heavy and Chemical Industries § Iron & Steel, Non-Ferrous Metal, Shipbuilding, Petrochemical, Machinery and Electrical § Capital-Intensive & Energy-Intensive 21

1970 s: Creating Comparative Advantage ¢ Backgrounds p Losing comparative advantage & Needs to Upgrade Industrial & Export Structure § due to rapidly rising wages § Catching-up by ASEAN § Protectionist barriers against NIES’ export p Non-Economic and Political Reasons § The Nixon Doctrine (1969) § Koreanization of Korean Security: Withdrwal of US troops from § Korea The fall of Vietnam (1975) 22

1970 s: Creating Comparative Advantage ¢ Policies Used p “Carrots and Sticks” p Government Subsidies and Tax Concession § Preferential & Policy loans to HCI § Negative interest rate, combined with higher inflation rate § Easy excess to foreign capital with government guarantee p Protection of HCI against import § 2 nd stage import substitution 23

1970 s: Creating Comparative Advantage ¢ Policies Used p “Carrots and Sticks” p Export Promotion by promoting large firms § Created General Trading Companies § Samsung (1975) § Highly Restrictive export target § 1975: US$50 million; 1979: US$301 million § In returns for substantial rewards including cash subsidies for export earnings p SMEs were discriminated 24

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1980 s: Quest for Liberalization and Globalization ¢ Five Year Economic Development changed to Five Year Economic and Social Development p 6 th (1982 -1986) & 7 th (1986 -1991) FYESDP p Emphasizing Stability, Balance, Efficiency § Through Stable Prices, Openness, Competition, Social Development, Social Welfare p Average Growth Rate 1982 -1991: 10. 2% p. a. 26

1980 s: Quest for Liberalization and Globalization ¢ Backgrounds for Switch Over p Internal Pressure § Sectorial Imbalance and Social Inefficiency § Associated with HCI Drive & Moral Hazard § Socialization of Private Risk § Excessive Capacity with Lower Capacity Utilization: 20% § Political Instability § Assassination of President & 2 nd Military Coup § Poor Harvest § High Inflation associated with Rapidly rising international oil and resources prices p External Pressures § High International Interest Rate § Slowdown of Global Economy 27

1980 s: Quest for Liberalization and Globalization ¢ General Policy Stance To correct excesses and imbalances p From export earnings to enhanced international competitiveness p By giving more private initiatives p Continuing liberalization p § Unilateral Import Liberalization § Privatization of banks by selling government shares(1981 & 1983) § Retained the gov’t right to appoint CEOs of commercial banks § Privatization of Interest rate (1988) § Introduction of a negative list system for Inward FDI (1984) 28

1980 s: Quest for Liberalization and Globalization ¢ Political Liberalization June 29 Declaration of Democratization (1987) p 1 st Democratic Change of Government p § Accompanied Massive Industrial Dispute & Outward FDI ¢ Hyper Economic Growth (1985 -1988): 11% p. a. p Due to favourable external conditions: “ 3 Lows” or “ 3 Blessings” § Low International Interest Rate § Low Currency Value § Low International Oil and Resource Prices 29

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1990 s: Crisis and Reforms ¢ 8 th FYESDP (19912 -1996) p Crisis Hit the Korean Economy (1997 -1998) & Massive Economic and Social Reforms were Conducted § Average Growth Rate (1992 -1996): 7. 2% p. a. p Background § International Competitiveness Eroded § Due to fast rising wages § Growth of Nominal Wages: over 19% p. a. § Revaluation of Currency by 8. 65% (1987 -1989) 31

1990 s: Crisis and Reforms ¢ 8 th FYESDP (1992 -1996) p Background § Slowdown of the Economy § Consumption-led Growth § Current Account turned in deficit again § Further Acceleration of Globalization § Capital Account Liberalization § Korea Joined OECD in 1996 32

1990 s: Crisis and Reforms ¢ Crisis Hit the Korean Economy in 1997 p Massive contraction of the Korean economy § By - 5. 5% § The Value of Currency Plummeted § By 40% in 1998, relative to that in 1997 § Unemployment skyrocketed § Unemployment rate in 1998: 7% § 2. 6% (1997) § No of the unemployed in 1998: 1. 49 million people § 0. 57 million (1997) 33

1990 s: Crisis and Reforms ¢ Reforms conducted p Corporate sector reforms including Chaebols § Big deals Public Sector p More Foreign firms’ investment p ¢ § Increased FDI, especially M&As Government-led Reforms slowed down with a quick economic recovery p 9. 6% p. a. Growth Rate (1999 -2000) p 34

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In the post Crisis Period: Globalization & Challenges ¢ In the Post Asian Financial Crisis period: Globalization and Regional Trading Agreement (RTAs) p ¢ Actively Pursuing Free Trade Agreements Background p p p Substantial Slowdown of Korean Economy Average Economic Growth Rate (2001 -2014): 4% p. a Slow Down of Population Growth and Aging § § p Average Population Growth Rate (2001 -2014): 0. 5% People with 65 and Older: 13% RTAs expanding rapidly, § § § esp. since the establishment of WTO(Jan 1, 1995) 604 RTAs Reported to WTO & 398 RTAs are being effective (January, 2015) Free Trade Agreement (FTA): 220 (58%) 36

No of RTAs: Notification & In-force (1948 -2015) Source: WTO (http: //wto. org/english/tratop_e/region_e/regfac_e. htm)

In the post Crisis Period: Globalization & Challenges ¢ Korea’s FTA Status: p FTAs in force (11) § Chile, Singapore, EFTA(4), ASEAN(10), India, EU, Peru, USA, Turkey, Australia, Canada p FTAs signed (5) § Columbia, Turkey, China, New Zealand, Viet Nam 38

Korea’s FTA Source: Customs, Korea 39

Korea’s Trade with FTA Partners (2013) 40

In the post Crisis Period: Globalization & Challenges Korea actively participated bilateral free trade agreement as well as mega-regional trade agreement such as RCEP or TPP Shifting Korea’s Trade Policy paradigm Why? To reduce costs associated with the Spaghetti Bowl Effect Asia is the most active in Global Supply Chain Management Need to help firms to improve efficiency in production To counteract the possible trade diversion effect of megatrading blocs such as EU, NAFTA, MERCOSUR etc. To Tone down regional security threats Can Korea-Kazakhstan be Partners in the era of FTAs and Mega FTAs? 41

Changes in Korea’s Trade Paradigm and Strategies 42

Korea’s Economic Development ¢ How Did Korea Achieve it? p p 7. 5% p. a. Economic Growth Rate (1953 -2014) With a fairer income distribution § p Significant Structural Changes § § ¢ Gini Coefficient: 0. 344 (1965) => 0. 307 (2012) From Primary to Industry From Light Manufacturing to Capital Intensive and Technology Intensive Why? p p Leaders Committed to Economic Growth and Development Accountability and transparency in International Economic and Trade Policy § § § p p Outward Orientation Globalization through a main level of openness Strategic, Pro-active Policy makings Competitive Macroeconomic Policy Promoting Competition 43

Economic Development of Korea: Growth Path and Challenges Rapid economic growth Accompanied a Fair Income Distribution: Gini Coefficient 1965 1976 0. 344 1970 0. 332 0. 391 1990~19 97 0. 281~0. 0. 357 295 1982 1998 1999 2000 2001 2006 2012 0. 316 0. 32 0. 317 0. 319 0. 306 0. 307 Significant structural changes In Outputs In exports Agriculture-Industry-Service Primary – Manufacturing L-intensive-Knowledge-intensive Export Share (%) Primary Light Manufacturing Heavy and Chemical Manufacturing IT Others 1962 1977 1982 1987 27. 5 10. 3 13. 8 7. 9 6. 0 63. 4 56. 3 52. 2 43. 5 42. 3 9. 1 33. 4 34. 0 48. 6 51. 7 　 　 1991 3. 5 36. 5 60 15. 4 44. 6 2001 2014 2. 7 2. 8 2. 2 16. 4 6. 2 6. 4 80. 9 91 91. 4 27 22. 4 23. 9 53. 9 68. 6 67. 5 44

GDP by Economic Activities(%) 1953 Primary(Agriculture, Forestry & Fishery) 1962 1971 1981 1991 2001 2014 30. 1% 25. 9% 16. 6% 9. 8% 4. 9% 3. 3% 2. 3% 0. 7% 0. 3% 0. 2% Mining 2. 0% 3. 5% 2. 7% Manufacturing 2. 8% 4. 9% 9. 3% 16. 9% 20. 9% 25. 1% 31. 6% 32. 0% Electricy, Gas and Water 0. 1% 0. 2% 0. 5% 2. 1% 2. 2% 2. 1% Construction 3. 9% 5. 5% 10. 0% 10. 6% 12. 1% 6. 8% 4. 7% 4. 4% Services Source: nso. kr 1. 8% 0. 9% 1. 6% 61. 1% 60. 0% 60. 9% 59. 8% 62. 4% 59. 0% 59. 1% 45

<1960 s-Mid 1980 s> Gov’t Gov’t Busin ess Peop le Gov’t Entrepreneurial Leadership Busine ss Business Peop le Gov’t Leadership & Business Power People Gov’t Leadership & Business Power & People Power 46

KOREA-KAZAKHSTAN: A QUICK REVIEW 47

　 Area (km 2) Kazakhstan and Korea: Now (ranking) Agricultural Land (%) Population (million; 2015) (ranking) 65 and overs (%) Life Expectancy (years) Population Growth Rate (%; 2014) Birth Rate (per 1000 popltn) (ranking) Fertility Rate(child born per woman) (ranking) GDP (US$) Exports (US$) Major Export Products Imports (US$ Billion) Major Import Products Major Natural Resources Reserves (ranking) 　 Mobile Phone (2014) Internet Users (2014) (ranking) % of Population Military Expenditure (% of GDP) (2012) Source: ciafactbook Kazakhstan 2, 724, 900 (9 th) 77. 4 18. 2(61 th) 7. 17 70. 6 1. 14 Korea 99720 (109 th) 18. 1 49. 1 (28 th) 13. 00 80 0. 14 19. 15 (19 th) 8. 19 (220 th) 2. 31 (92 th) 1. 25 (220 th) 212. 3 billion 87. 3 billion 46. 7 billion machinery and equipment, metal products, foodstuff 1. 41 trillion 572. 7 billion semiconductors, petrochemicals, automobile/parts, ships, wireless communication equipment, flat display, steels, 525. 5 billion crude oil, petroleum products, semiconductors, coal, steel Crude Oil: 30 billion barrel (12 th) Crude oil: 0 barrel Natural Gas: 2. 407 trillion m 3 (15 th) 28 million 10. 6 million (45 th) 59. 3 5. 748 billion m 3 (89 th) 57. 2 million 44. 9 million (13 th) 91. 5 1. 21 2. 8 oil and oil products, natural gas, ferrous metals, chemicals, machinery 48

(USB$ ) Source: Korea Customs

Source: Korea Customs

Source: Koreaexim Bank 51

Korea’s F야 by Industry (1980 -2014) (Invested Amount)(US$M) Manufacturing 31, 044, 11% Mining 19, 152, 7% 99, 112, 35% Whole Sales and Retails 22, 467, 8% Banking and Insurance 25, 310, 9% Reality and Lease 30, 872, 11% 52, 962, 19% Source: Koreaexim Bank Speciality, Science and Technology Service Others 52

Korea –Kazakhstan Trade (1992 -2014) § Korea-Kazakhstan Diplomatic Relationship § January 28, 1992 § Korea-Kazakhstan Trade has expanded rapidly § US$88 million (1993) to US$1468 million(2014) § Exports § US$41 million(1993) to US$907 million (2014) § Imports § US$ 47 million (1993) to US$ 561 million (2014) § But still remained below its potential Year Export (USM$) Import (USM$) Total Trade (USM$) 1993 41 104 57 82 273 604 1, 074 907 47 31 51 49 242 334 249 561 88 135 108 131 515 938 1, 323 1, 468 1999 2000 2005 2010 2013 2014 Source: kita. net 53

Korea –Kazakhstan Trade (1992 -2014) Source: kita. net 54

Korea’s Top 10 Imports from Kazakhstan (2014) 　 Products (SITC 2 digit) Imports Growth Rate (%) 　 　 Total 560, 771 209. 9 1 33 Petroleum and Petroleum Products 372, 193 - 2 67 95, 808 0. 1 3 52 72, 228 2. 9 4 68 13, 022 5. 0 5 29 6, 948 -0. 1 6 89 Steel and Iron Inorganic Chemicals Non-ferrous Metal Non specified Unprocessed meat and vegetables Miscellaneous n. e. s 155 75. 2 7 59 Chemical Products, n. e. s. 137 -54. 7 8 77 Electrical Apparatus and Machinery 80 -30. 2 9 26 Textile and Textile Waste 49 - Industrial Machinery and Equipment 46 - 10 74 Source: kita. net 55

Korea’s Top 10 exports to Kazakhstan (2014) 　 Products(SITC 2 digit) Exports (US’ 000) 906, 958 Growth Rate (%) 268. 6 388, 723 267. 4 62, 270 34. 1 　 　 1 78 2 57 Total Automobile Plastics(Materials) 3 76 Communication and Recording Equipment 61, 692 52. 3 4 77 Electrical Machinery and Equipment 53, 077 131. 2 5 87 46, 981 32. 6 6 72 46, 832 28. 3 7 67 Other Scientific and Control Apparatus and Equipment Special Industrial Machinery Steel and Iron 36, 308 108. 7 8 74 Industrial Machinery and Equipment 35, 129 68. 8 9 82 Furniture, Bedding, Mattress etc. 18, 418 -4. 2 10 09 Other Food and Food stuffs 16, 906 6. 2 Source: kita. net 56

Korea’s FDI in Kazakhstan (1990 -2014) § In total , US$ 2. 45 billion § Finance & Insurance (29. 1%) § Construction (17. 1%) § Manufacturing (15. 6%) § Realty and Lease (11. 0%) Source: kita. net 57

Korea-Kazakhstan Relationship ¢ ¢ Economic partnership between Korea and Kazakhstan p In trade and FDI: getting stronger but remained less than its potential Why? Lack of mutual understanding p Other reasons? p ¢ How? 58

Thank you very much 59