korea's economic success: strategies, challenges, and lessons for mongolia
DESCRIPTION
Korea's Economic Success: Strategies, Challenges, and Lessons for Mongolia. Choongsoo Kim Governor The Bank of Korea August 15, 2011. Contents. Ⅰ. Introduction. Ⅱ. Korea's Economic Development . Ⅲ. Overcoming Financial Crises: Korea's Choice . Ⅳ. G20 Korea Initiatives. Ⅴ. - PowerPoint PPT PresentationTRANSCRIPT
1
Korea's Economic Success: Strategies,Challenges, and Lessons for MongoliaChoongsoo Kim
GovernorThe Bank of Korea
August 15, 2011
0ContentsIntroduction
Korea's Economic Development
Overcoming Financial Crises: Korea's Choice
G20 Korea Initiatives
1Implications for Mongolia of Koreas Success 1 Snapshot of Koreas Success Purposes of Todays Lecture 2Introduction
2
3Modernization (1): Past vs PresentThe same place, 60 years apartGangnam circa 1950sGangnam 20103
4Modernization (2): Past vs PresentThe same place, 60 years apartCheonggyecheon circa 1950sCheonggyecheon 20104
5Industrialization: from low-tech to high-techTypical apparel factory circa 1960s Electronics factory 20105
6Bumpy Road but Steady Course to DemocracyProtest against despotcirca 1980sAdvanced to democracyPresent6
7Financial crises: 1997 vs 2008
1997 crisis2008 global crisis
78Per capita Income: US$ 82 (1961) US$ 20,759 (2010)
Size of GDP: US$ 2.1 bil. (1961) over US$ 1 trillion (2010)
Joined the OECD (1996)
Joined the OECDs Development Assistance Committee (2009)
Hosted the G20 Summit (2010)Development Outcomes
8
9Sustained Growth but not without DifficultiesGDP growth rate (quarterly, YoY)
2nd Oil Shock1997 Crisis2008 Crisis9
Quick Recovery from the Global Financial Crisis10GDP growth rate (quarterly, YoY) (%)Korea (t=1997 Q4)Korea (t=2008 Q3)10Purposes of Todays LectureTo share Koreas experiences in economic development and crisis management
To explain how such experiences were reflected in Korea Initiatives at G20 meetings of 2010To draw implications for Mongolia of Koreas economic development model11
11Brief Historical OverviewContributing Factors to Korea's Economic Success12
Korea's Economic Development
12Post-war reconstruction: 1945 through 1950s13Development Goals: Curbing hyper-inflation (peaked in 1951 at over 390%)Postwar reconstructionRestoring political and social stability
Targeting import substitution cum fiscal austerityForeign aid-dependent economic management Limited tangible outcomes with only moderate economic growth (Average annual growth rate was 3.8% during 1953-1960)
13Switch in economic development strategy
Key rationales:Need to resolve the balance of payments problems following reduced foreign aid Import substitution for non-durables almost completed Shortage of natural resources
Exports considered only as means to achieve economic development14
Import Substitution +Priority on StabilityExport-driven +Priority on GrowthExport-driven Industrialization: 1960s through 1970s14Export-driven Industrialization: 1960s through 1970s (continued) Five-Year Economic Development Plans (1st plan in 1962, six plans in total) Served as catalyst for economic miracle
Blueprint of government-led resource allocation in the absence of well-functioning markets
Helped improve policy continuity and flexibility over a long horizon15
15Economic Stabilization and Liberalization: 1980s through Mid 1990sSwift transition in economic development strategy to address growing macroeconomic imbalance
High inflation rate (CPI 29%, PPI 39% in 1980)
Burgeoning fiscal deficit: 1.4% of GDP in 1979 4.5% in 1981
Worsening CA deficit: 2% of GDP in 1978 8.3% in 1980
From state-led planning to indicative planning
Government: strategic vision
Private sector: specific actions16
Government-led +Growth Promotion Private Sector-driven +Stability Enhancement16Economic Stabilization and Liberalization: 1980s through Mid 1990s (continued)Stabilization Policies:
Monetary and fiscal tightening (cold turkey)
Domestic deregulation
Trade liberalization
Income policy (e.g., forward looking wage contracts)
Policy credibility earned by delivery of targeted outcomes
17
17
Outcomes:
Inflation rate (CPI): 29% in 1980 2.3% in 1984Fiscal balance: -4.3% of GDP in 1981 +0.2% in 1987
CA balance: -8.3% of GDP in 1980 +4.1% in 198618Economic Stabilization and Liberalization: 1980s through Mid 1990s (continued)Current account balance, Fiscal balance
Inflation18Albeit successful stabilization, vulnerability to external shocks remained
Heavy reliance on external demand
(export + equipment investment)/GDP ratio: 32.1% in 70s 42.5% in 80s 36.2% during 1990-96
Debt-ridden corporate sector
Debt-to-equity ratio: 336% in 1996
Increased exposure to foreign capital flows
Shortening of external debt maturity
Short-term debt-to-total external debt ratio: 50% in 1996
19
Economic Stabilization and Liberalization: 1980s through Mid 1990s (concluded)19Financial Integration and Economic Reform: Late 1990s through Present Two financial crises
Witnessed danger of ill-prepared financial integration (1997 crisis)
Triggered comprehensive reform
1997 crisis
Rooted at domestic structural vulnerability
Followed by major restructuring and financial opening
2008 global crisis
Exogenous shock beyond domestic control
Revealed shortcomings of the current international monetary system
Korea Initiatives at G20 for global solution
Strengthening of macroprudential policies20
20
21Outward-looking Development StrategyFlexible Adaptation of Economic Policies Emphasis on Market Principles
Contributing Factors to Korea's Economic Success 21Outward-looking Development Strategy22Reap the benefits of open economy:
Efficiently utilize changes in external environment
Strengthen competitiveness through global competition
Take advantage of economies of scale
Minimize government failure and prevent corruption by market
discipline (imported through exports)
But constantly exposed to external shocks and spill-over risks,both financial and real
Took challenges posed by the risks by pursuing further market opening and reform, in view of:
Those risks being manageable with prudent policiesMarket opening being the most effective way to upgrade the economy to an advanced level
22Outward-looking Development Strategy (continued)Korea signed FTAs with the EU and the US*. * waiting for ratificationSignificance:Show Koreas firm commitment to free trade Help fight against the specter of protectionism at this critical juncture Provide an exemplary case for cooperation between countries of large difference in size and development stage
2323Flexible Adaptation of Economic Policies 24Import substitution (1950s)Light industry orientation (1960s)Growth-acceleration/poverty reduction (1960s-70s)Financial suppression (1950s-70s)Government-led growth (1960s-70s)Capital account controls (1950s-80s)Export promotion (since the 1960s)Heavy and chemical industry orientation(1970s)Sustainable growth with durable stability(since the 1980s)Financial deregulation(since the 1980s)Private sector-led growth (since the 1980s, particularly after the 1997 crisis)Capital account liberalization (since the early 1990s) 24Emphasis on Market PrinciplesSteady transition from government-led to market-driven economy through liberalization
Upheld market principles even under government-led growth (e.g., indicative planning)
Strong will to economize interacted with tangible economic success
Entrepreneurship enabled firms to take risks for returns and lead technology development
Forward looking patience induced households to save and learn more for the future (Confucian ideology)
Government invested in education, and encouraged private investment through partial risk-sharing and tax incentives
2525Financial Crisis of 1997Global Financial Crisis of 2008
26Overcoming Financial Crises: Korea's Choice
26
27Comparing the 1997 Crisis and the 2008 CrisisStock price, Interest rateExchange rate, Capital inflow*1997 Crisis2008 Crisis1997 Crisis2008 Crisis* Changes in liabilities including portfolio investment, financial derivatives and other investment27
28Comparing the 1997 Crisis and the 2008 CrisisCA/GDP, International reserves1997 Crisis2008 Crisis1997 Crisis2008 CrisisGDP growth rate(quarterly, YoY), Unemployment rate28Accumulated structural weakness Massive capital outflow Failures of big companies29 Contagion from Southeast Asian crisis IMF rescue package+Government-ledrestructuring< 1997 crisis > Ill-sequenced capital account liberalization
Heavy reliance on external debt
Inadequate foreign reserves
Denied rollover of short-term external debt
Collapse of investor confidenceUnprecented monetary tightening
Financial and coporate restructuring
Fiscal backing Overvalued FX rate
CA deficits
Debt-ridden corporate sector
Lax risk managementIncreased vulnerability to external shocks+Comparing the 1997 Crisis and the 2008 Crisis29DeleveragingFlight to qualityIMF support ?
No, not this time30Sufficientpolicy space< 2008 Global Crisis > Comparing the 1997 Crisis and the 2008 CrisisProcyclicality of capital flows
High trade linkage to advanced countries
Global imbalances
Housing bubble in advanced countries
Subprime crisis
Counter-cyclical macro policies
Flexible FX rates
Ample liquidity buffer + SWAP with the Fed
Capital outflowJittery financial marketCollapsingglobal demandExport Growth Quickrecovery+Macroprudential reformGrowth rebounded by 2009
Bank levy
30
31G20Development Issue Global Financial Safety NetsG20 Korea Initiatives
IV31
32G20 meetings
32Formed in 1999
G7 + 12 EMEs* + EU
* Argentina, Australia, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey
Account for 85% of world GDP
* share in world GDP
Emerged as a premier forum for global economic issues * First summit meeting in Nov. 2008 (ministerial meeting until 2007)
Basic Facts about the G2033Economic weight* of G7 and EMEs(%)3334Korea Initiatives at the G20Development IssueGlobal Financial Safety Nets
34Korea Initiatives at the G2035Focus on shared growth for all countries
Seoul Development Consensus for Shared Growth helps developing countries increase their capacity rather than providing more financial aid.
* Korea has been running Knowledge Sharing Program since 2004
Discussing Development Issue helps strengthen legitimacy of G20. Development Issue
35Korea Initiatives: Global Financial Safety Nets (GFSNs)36Global crisis reveals a number of shortcomings in the international monetary system including:
Absence or malfunctioning of international adjustment mechanism to correct global imbalances
Under-regulated capital flows often resulting in booms & busts
Heightened volatility in major exchange rates
Financial interconnectedness amplified and propagated shocks quickly around globe to affect innocent bystanders
Not only emerging but also advanced economies need financial safety nets
GFSNs should be more efficient than self-insurance (i.e., risk-pooling)
36
37Korea Initiatives: GFSNs (continued)Exchange rate Volatility
Volatility jumped in times of crisisEver-increasing self-insurance?Foreign Reserves/GDP(%)37Enhanced liquidity provision by the IMF (Flexible Credit Line + Precautionary Credit Line)
Need to construct a multi-layered network for certain, sufficient, stigma-free liquidity support while minimizing moral hazard
Global level: IMF assistanceRegional level: regional financing arrangementsBilateral level: swap lines between central banks
To be pursued along with other G20 agendas (e.g., reducing global imbalances, financial regulatory reform)38Progress made Korea Initiatives: GFSNs (concluded)Going forward
38
39Implications for Mongolia of Koreas Success
VMy Understanding of the Mongolian EconomyImplications of Koreas Success39
40Close Ties between Mongolia and Korea
MongoliaKorea
40My Understanding of the Mongolian Economy 41Transition to a market economy since 1990s, rapidly overcoming initial economic and political difficulties and global financial crisis Geographically land-locked but high growth potential due to abundant natural resources
Vulnerable to commodity booms and busts Need to develop non-mineral sector for sustained growthNeed to strengthen macroeconomic stability41Mongolian Economy (continued) 42
42Mongolian Economy (concluded) 43
4344Implications of Koreas Success44Upheld key principles such as efficiency, openness, long-term planning, and flexibility in designing development strategy
But also tailor development strategy to countrys circumstances
Best utilize countrys comparative advantages (e.g., natural resources, large land area, natural heritage for tourism etc.)
Be mindful of constraints and weaknesses (e.g., volatility of commodity prices, weak fiscal stability, underdeveloped non- mineral sector, etc.) 45
(1) Tailored Development Strategy 45Sustained and efficient investment is key to growth and development.
Investment is the most reliable and robust explanatory variable in growth regressions. Public investment could play a catalytic role in promoting private investment.
SOC investment is crucial for growth take-off while education investment is essential for sustained growth.
46
(2) Investment is Key 46Large and sustained public investments in SOC
Investments were initially targeted to growth-hub regions for maximum efficiency before being diversified in the 1980s and 1990s for more balanced regional development.
Investments guided by medium-term Economic Development Plans to ensure continuity and minimize uncertainty
Public-private partnership (PPP) actively utilized in the 2000s to promote efficiency and tap into large private resources for financing47SOC Investment in Korea
47Example: Seoul-Busan Expressway (1968-70)48
The main expressway that connects Koreas two largest cities and other industrial hubs
48Example: Seoul-Busan Expressway (continued)49 Background`Failed to secure financing from World Bank, which rejected funding based on cost-benefit analysis
Turned to domestic funding (including reparation fund from Japan)
* total cost: 42 billion won (16% of annual government budget)
FinancingForward looking investment plan with long-term perspectiveExplosive increase in passenger and cargo transportation amid rapid industrialization
49Example: Seoul-Busan Expressway (concluded)50Revolutionized distribution and transportation network Contributed to regional development and export competitiveness
Set the stage for development of construction and auto industries
Facilitated external funding for subsequent major construction projects (e.g., World Bank changed its view and granted loans for the ensuing construction projects)Results
50
51(3) Outward-looking StrategyNonrenewable commodity exports are the main driver of growth in Mongolia at present but cannot be sustained.
Limited base for domestic demand due to small population Development of the non-mineral sector may first target domestic demand but should ultimately be guided by export orientation
Geographic proximity to two large countriesChina and Russiacould be attraction for FDI
51Preserving policy space and flexibility is critical for economic and financial stability against external shocks.
Mongolias heavy dependence on volatile commodity exports puts particularly high premium on policy space.
Fiscal policy should play a major stabilization role in commodity exporters, including managing national wealth for consumption smoothing across generations (e.g., Sovereign Wealth Fund)
Saving windfall gains from commodity booms could help avoid the so-called resource curse.
Monetary policy geared toward price stability under flexible FX regime with due consideration on FX liquidity (foreign reserves)
(4) Preserving Policy Space and Flexibility52
52Maximize the benefits of integration while minimizing the attendant risk
Appropriate sequencing is essential: trade integration first, followed by steady but gradual (and well prepared) financial integration
Continuously upgrade domestic institutions for financial regulation, trade, and foreign investment
Adapting to new global economic and financial order emerging after the global financial crisis(5) Integration into Global Economy53
53
Thank You!
54