south korea final
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South Korea’s Economy
Agenda
Miracle on Han River
Asian Financial
Crisis
Industrial Policies
Sectorial Analysis
Macro Economic Indicators
Fiscal Policy
Monetary Policy
Expenditures and
Revenues
Banking and
Financial Structures
Currency Foreign Policy
Miracle on the Han River
Reasons
Export fuelled economic growth
Industrialization, education boom, rise in living standards
Urbanization, modernization, 1988 Seoul Olympics
Transformed from ashes of Korean war to a trillion dollar economy
Revenue Growth
Some Figures
US$30.3 billion
US$340.7 billion
8.7% per year
Real GDP 1960 1989
US$1226 US$80291960 1989
GDP per capita
Growth
Outward looking strategy in 1960
Counter - poor natural resource endowment, high savings rate, tiny domestic rate
Inflow of foreign capital was encouraged
Conservative monetary policy and tight fiscal policy in 1980’s
Financial Stability
Government Intervention reduced
Liberalization of imports and foreign investment policies
High investment in public projects
Double digit inflation bought under control
First surplus in 1986, US$7.7 billion in 1987 and US$11.4 billion in 1988
GDP
GDP (purchasing
power parity):
$1.335 trillion
(2008 est.)$1.306 trillion
(2007 est.) $1.243 trillion
(2006 est.)
GDP - real growth rate:
2.2% (2008 est.)
5.1% (2007 est.)
5.2% (2006 est.)
GDP (official exchange rate): $947 billion (2008
est.)
Rank: 15
Labor Force
Labour force• 24.35 million (2008 est.) [Total Population of 50.06
million]
Labor Force Ranking
Other Details
Poverty Line
• Total population below poverty line: 15%
Household income or consumption by percentage share:• Lowest 10%: 2.7%• Highest 10%: 24.2%
High tech industries
Samsung Group• Worlds largest conglomerate• High Tech Electronics
Hyundai-Kia• South-Korea: In top 5 Automakers
Display-Electronics• Worlds largest maker of LCD, Plasma, LED, CRT
Shipbuilding• Worlds largest Shipbuilding industry• Hyundai and Samsung Heavy Industries
Asian Financial Crisis
Asian Financial Crisis•a shortage of foreign
exchange in Asian countries
•inadequately developed financial sectors in the troubled Asian economies
•effects of the crisis on both the United States and the world
•the role, operations, and replenishment of funds of the International Monetary Fund.
It involves
four basic
problems or
issues:
Impact on South Korea
In return for IMF emergency loans, Korea agreed to several conditions and reforms:
Control inflation
Reducing current deficit
Increasing internatio
nal reserves
upgrading accountin
g and disclosure standards
Industrial Policies of South Korea
1960-2000
•Emphasis on exporting products from Light Industries e.g. textiles
•Export promotion measures e.g. tax deductions and export finance schemes
1960’s
•Focus shifted from LI to the build-up of high value-added HCI sector
•Preferential policy loans, selective protection, entry regulations, and corporate tax deductions
1970’s
•Direction of industrial policy changed toward R&D in economic development
•Export-led growth strategy was continued in sectors Semi-conductors, automotives, shipbuilding, metal, and small-sized aircrafts
1980’s
•Promotion of IT and biotechnology and development of SMEs
•Enactment of the Special Law on Innovation of Science and Technology in 1997
1990’s
R&D Expenditure in Billion won
1980 1990 2000 20030
1000
2000
3000
4000
5000
6000
R&D Expenditure in Billion won
2000’s
• Increase was from US$4.0 billion in 1989 to US$26.5 billion in 2004 -10.4 percent of total exports
Exports of semi-conductors increased
Supporting international marketing activities and exhibitions abroad
Tax benefits to R&D activities and FDI inflows
Recent policy to develop Eco-friendly industriesby investing $84.4 bn for next five years
Sector-wise analysis
Energy sector
Energy used in power generation consists primarily of oil, coal, nuclear & LNG
Limited domestic energy resources
Oil supplies 50 % of South Korea’s total energy consumption
South Korea is the 5th largest net importer of oil in the world
Hydropower & other renewable energy sources make up a small fraction
Agriculture sector
Heavily dependent on imported agricultural commodities
Agriculture's share of GDP has steadily declined to about 3% in the past two decades
Total imports of agricultural, fishery and forest products in 2008 totaled $22 billion
Korea is the 5th largest market for U.S. agricultural products
In 2008, agriculture trade deficit was $17 billion
Tourism sector
1988 : a boom year for tourism industry
Continuation of trend in subsequent years & the 2002 FIFA World Cup
Incheon International Airport, rated the best airport worldwide consecutively since 2005
In 2007, South Korea had 6.4 million visitors making it the 36th most visited country in the world
Industrial sector
Hyundai Kia Automotive Group is the world's fourth largest automaker, after Toyota, GM and Volkswagen
After recession country’s auto sales posted a combined 2.7% Y-O-Y increase in 2009
World's leading producer of computer memory chips & electronic products
World's largest shipbuilder
Macro Economic Indicators
GDP and Growth Rate
Definition• The sum of the value of new, final goods produced within the
domestic borders of an economy.
Expanded 6% over the past 4 years.
Worth 929 billion dollars or 1.50% of the world economy.
Two main reasons for increased GDP growth are:• Competitive education system.• Highly skilled and motivated workforce.
Shift from centrally planned economy to a more market oriented one.
Major concerns• Rapidly ageing population.• Structural inefficiencies.
GDP and Growth Rate (contd…..)
Inflation Rate
Definition: • A general increase in
prices measured against a standard level of purchasing power.
Well known measures:• Consumer Price Index
(CPI)• GDP Deflator
January 2010 figure• 3.7 Percent.
Recent trend:• Agriculture, livestock and
fishery products have gained strength in recent years.
• Domestic oil prices have come down and prices of non ferrous metals has continued to increase.
Inflation Rate (Contd…..)
Unemployment Rate
Labour force v/s non labour force:• Labour force: The number of people employed plus the
number unemployed but seeking work. • Non labour force: Those who are not looking for work,
those who are institutionalised and those serving in the military.Recent trends:
• Hiring in the agriculture, forestry & fishery dropped significantly in November 2009.
• Sluggish exports led to decreased unemployment in manufacturing sector.
• Hiring in private sector remained weak due to downward trend in construction sector.
• Employment in services sector soared due to Government’s job creation policies.
Unemployment Rate (Contd….)
Fiscal Policy
Pre 1997 era
The average growth rate in Korea had been well above 7% before 1997
The government had a very low external debt
But the privately owned debt for the country was quiet significant
It worked on “high-debt, high growth model”
External Debt
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
50
100
150
200
250
300
350
400
450
External Debt in $Bn
Present policies
The fiscal policy for 2010 is at 2.9% of the GDP
In order to fight recession the Korean government has decided to Frontload 70% Of 2010 Budget In First Half
Presently defense and social welfare constitute the highest chunk of budget
Monetary Policy
Key Points
Stock prices and exchange rates exhibited very unstable movements. Expanded the supply of Korean won. Banks’ deposit and lending rates
remained lowSouth Korea producer price inflation hit
a 10-month high.Pace of growth was not as expected
and shows a very slow pace. Increase in Open market Operations.
Interest Rates
Critical Questions
Two Critical Questions Still Remains• When will South Korea tighten up its monetary policy?
• How Current Monetary policy will tackle with ever rising Inflation?
Expenditure and Revenue
Expenditure
Government Spend is relatively very less compared to rest of the countries.
Mainly the expenditure is into Infrastructure, R&D, national defence, and education.
Mainly defence which accounts for 24% of expenditure
Now recently it was observed that focus is shifting from defence to health care.
Revenue
Tax, mainly indirect taxes
Disinvestment in Electrification, banking, communication and Manufacturing, but still remain major stockholder
• Government Enterprise• Government invested Enterprise• Government Subsidiaries• Government Backed Enterprise
Four Public Enterprises
Banking and Financing structure
Central Bank
2 parts of financial system:
• Monetary institutions: Central bank & deposit taking banks
• Other financial institutions
Central bank:
• Established on June 12, 1950
• Purpose: price stability• Issuing banknotes and
coins, formulating and implementing monetary and credit policy, serving as the bankers' bank and the government's bank.
• Governor, the Senior Deputy Governor, and 5 Deputy Governors, manage departments in the head office and 16 domestic branches
Financing History : A timeline
1960s: • Foreign credit based which decreased
towards 1980s• Generated need for domestic savings• Nationalization of banks1980s: • Current account became surplus fuelling
shortage of domestic savings• De-regulation of interest rates• 3 new commercial banks and 13 financial
institutions
History.. continued
Commercial banks focused on short term loans
Newer sources of funding for commercial banks
Relaxation of FOREX controls
Foreign investors: trust funds, convertible bonds, bonds with warrants
Banking sector today
Banks are largely no longer handmaidens to the chaebol
• Kookmin Bank (KB )• Shinhan Financial Group (SHG )• Woori Financial Group (WF )• Hana Bank -- 70% of the market
Big Four
Foreign investments
Retail banks shrunk to 11 in number
Other indicators : energy scenario
Oil: fifth: largest net importer of oil in
the world
Coal : 24 % primary energy
Hydropower and other renewable energy sources :
small fraction
Currency - won
All @Won
The won (원 ) (sign: ₩; code: KRW) is the currency of South Korea
Subunit: 1 Won= 100jeonTheoretical (not used)
Coins₩1, ₩5, ₩10, ₩50, ₩100, ₩500
Banknotes₩1000, ₩5000, ₩10000, ₩50000
First South Korean won
The won was first used between 1902 and 1910
Japanese invasion in 1910 : The won was replaced at par by the yen, made up of the Japanese currency and banknotes of the Korean yen.
Post world war II:
• Division in Korea (North and south)• Won replaced the yen at par• Only bank notes were issued by the Bank of
Joseon (1946)Central bank: Bank of Korea (1950)
Pegs for the first South Korean won
Date introduced Value of U.S. dollar in won
October, 1945 15
July 15, 1947 50
October 1, 1948 450
June 14, 1949 900
May 1, 1950 1800
November 1, 1950 2500
April 1, 1951 6000
Hwan
First South Korean won was replaced by the hwan on February 15, 1953
1 hwan = 100 won
In 1959, coins were introduced in denominations of 10, 50 and 100 hwan
The hwan also suffered from inflation and a series of devaluations occurred
Second South Korean won
The won was reintroduced on June 9, 1962 1, 5, 10, 50, 100 and 500 won notes were introduced by the Bank of Korea
Value was pegged at 125 won = 1 U.S. dollar
It became the sole legal tender on March 22, 1975 with the withdrawal of the last circulating hwan coins.
ISO 4217 code : KRW.
Won was allowed to float on December 24, 1997 after an agreement with IMF
Won was devalued to almost half of its value, as part of the East Asian financial crisis.
On June 23, 2009, the Bank of Korea released the 50,000 Won note
FX Rates
Wednesday, February 03, 2010
1 KRW in KRW
American Dollar 0.00087184 1147
Australian Dollar 0.000982502 1017.81
British Pound 0.000546271 1830.59
Chinese Yuan 0.00595169 168.019
Euro 0.000623455 1603.96
Hong Kong Dollar 0.00676948 147.722
Indian Rupee 0.0400826 24.9485
Japanese Yen 0.0790105 12.6566
Swiss Franc 0.000918849 1088.32
Malaysian Ringgit 0.00296384 337.4
S. Korean Won to US Dollar Currency Exchange Rate
Past Trend Present Value
S. Korean Won per One U.S. Dollar
South Korea:FOREX and GOLD reserves
FOREX and GOLD reserves rankings
Year Reserves of foreign exchange and gold
Rank Percent Change
2004 $155,400,000,000 4 -
2005 $199,100,000,000 4 28.12 %
2006 $210,400,000,000 4 5.68 %
2007 $239,000,000,000 5 13.59 %
2008 $262,200,000,000 6 9.71 %
2009 $201,200,000,000 6 -23.26 %
South Korea in News for FOREXSouth korea’s National Pension Service(NPS) announced that official foreign reserves stood at record high as of January end
According to BOK, Forex amounted to $273.69 billion
Increase is attributed to operating profits on forex reserves and redemptions at maturity by NPS of its currency swaps with BOK
Foreign Economic Policy
Exports
Exports
Imports
Imports
International Involvement
APEC – Asia-Pacific Economic Cooperation
• KORUS FTA 2006
Relationship with US
North-South Economic Ties
FTA with EU