Crisis Management & Structural Reform and Trade Liberalization of the 80s

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From the course by Yonsei University

The Korean Economic Development

114 ratings

Yonsei University

The Korean Economic Development

114 ratings

You will review the evolution of the Korean economy decade by decade since Korea’s independence from Japan in 1945. Major policies of each decade will be explained and their effect on the Korean economy will be analyzed. Also, the backgrounds and limitations of important policies will be scrutinized. By doing so, you will be able to compare the Korea experience with the other developing countries’. 1. You will be able to explain how the miracle of the Korean economic development was made possible. 2. By examining internal and external conditions behind the decision making of major policies in Korea, you will be able to draw lessons that can be applicable to today’s developing countries. 3. You can explain how the Korean economy has interacted with the global economy in the past. 4. You can observe how economic theories and models can be applied to the Korean case.

From the lesson

1980s

Module 10. Crisis Management & Structural Reform and Trade Liberalization of the 80s: The Korean economy was close to foreign exchange crisis in the early 1980s. This module explains how Korea could avoid the crisis and stabilize the economy by the mid-1980s. It also introduces structural reforms and trade liberalization reforms. Module 11. Three Lows & Economic Boom of the 1980s: This module introduces favorable international environments called ‘three-lows’, which emerged from the mid-1980s. It introduces backgrounds of three-lows, and explains how these three-lows helped the Korean economy to enjoy the unprecedented economic boom. Also, it introduces how the democratization of the Korea society has influenced the economy.

Crisis Management & Structural Reform and Trade Liberalization of the 80s8:54

Meet the Instructors

Doo Won Lee
Professor
School of Economics

Now let's take a look at policy changes in 1980s.

As I mentioned earlier,

in the beginning of 1980s Korean economy was close to crisis.

Just like the Latin American foreign debt crisis of 1980s.

If you look at the background of the crisis, of course, there was the side

effects of heavy and chemical industries inside the Korean economy.

But outside the Korean economy,

the international economic environment turned into very pessimistic.

There were so called 3-highs in the early 1980s.

Following the second oil crisis, the oil price was high.

And, after the second oil crisis many industrialized countries,

they maintained high interest rate in order to stabilize inflation.

So, interest rate was high, which was bad news to Korea

because Korea had a very large amount of foreign debt.

Also, American dollar, USA dollar, remained high,

another bad news to South Korea because many of

South Korea's foreign debt were actually dollar.

Because of these very negative domestic and

international circumstance that's very close to crisis.

So in the early 1980s, more than anything else,

crisis management in order to avoid the crisis was the most important thing.

South Korean policy makers,

they did their best in order not to go default.

They did their best to persuade creditors

to extend the existing loans and renew the loans.

In one way or another, all these efforts succeeded, so

South Korea could avoid going to default.

After we avoid the crisis, from 1983,

the stabilization effort started in order to reduce inflationary pressure.

Monetary policy and also fiscal policy were tightened.

And also, it resulted in positive real interest rate,

improving the macroeconomic situation.

So eventually, in the middle of 1980s,

our saving ratio has become bigger than our investment ratio.

These tables summarize what I just mentioned.

If you look at it, you can see that money supply were reduced from

the middle of 1980s, and inflation subdued.

After we take care of inflation, South Korean policy makers,

they focused on structural reforms.

Structural reform was necessary because of heavy investment into HCI.

Actually, as early as 1979,

South Korean government has a plan to restructure and

to rationalize our excessive investment.

But this plan could not be implemented because of political chaos,

so it was actually the 1979-1980 investment

adjustment measure which restructured our economy.

So one by one, heavy and chemical industries,

they were restructured, and we called it Rationalization Policy.

And the way to rationalize our industries was, first of all,

Korean government did not allow new investment or

new entry into the existing HCI.

And then merging and acquisition were encouraged, and

government provided assistance under the condition

that industries would provide self-effort to revive themselves.

So after all of these effort were made, many industries,

they regained international competitiveness and profitability.

This is just one example, this is automobile industry.

If you take a look at the profits before and after these rationalization policies,

you can see that there was a big improvement.

From 1985, trade liberalization took place as well.

Until the mid of 1980s, if you look at the trade policy of Korea,

in terms of export, we always try to promote export.

However, in terms of the import, especially import of consumer goods,

it was heavily restricted in order to protect domestic industries.

These kinds of infant industry policy was rampant in

developing countries and it was very popular in Korea too.

However, now the philosophy behind the trade are changing.

Now we believe that protecting domestic industry cannot go on forever.

And it's not good for our domestic industries as well,

because too much protection can reduce the competitiveness.

So gradually but continuously, the trade,

especially in terms of import, liberalized.

And this was very comprehensive and profound.

So by the late half of 1980s, especially by the early 1990s,

at least in terms of the manufacturing sector,

almost every industry was opened to the import.

And it was voluntary.

Even though we got some pressure from advanced countries,

largely speaking, it was a voluntary act.

We did it voluntarily because we believed that it was necessary to

enhance the productivity and competitiveness of our industries.

Take a look at these tariff.

As you can see, the average tariff rate used to be over 20%,

but after this liberalization effort, it went down to close to 10%.

One example would be automobile industry.

If you look at it, tariff rate used to be as high as 200% for

the import of foreign passenger car.

And even though you pay 200% tariff, in many cases,

import of foreign car were simply prohibited.

But gradually, from 1987, this import

ban was removed and tariff was also reduced.

It also made the competitiveness of Korean

automobile industry much more stronger.

If you compare this experience to other countries,

it's very much similar to the the Japanese experience of 1960s.

For example, in terms of the passenger car,

Japan allowed the import of foreign passenger car in 1965.

In the case of Korea, it was 1987.

In terms of the color TV, Japan allowed the import in 1964,

when it was 1993 in the case of Korea.

And it was so, Taiwan introduced similar policies in 1960s.

And if you look at China, interestingly,

China also introduced trade liberalization policy from the middle 1990s,

and eventually China joined WTO in 2001.

I'm finished my lecture here, and next time we

will cover the remaining issues of 1980s.

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