A Case of Successful Adjustment : Korea's Experience During 1980-84

Jorge Márquez-Ruarte, and Bijan Aghevli

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1985
• eBook ISBN: 9780939934515

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Contents

Prefatory Note

I. Introduction

II. Historical Background

The Period of Rapid Economic Growth

The Emergence of Difficulties

III. The Years of Crisis (1979–80)

Policies

Fiscal Policy

Monetary Policy

Exchange Rate Policy

Energy Policy

Economic Developments

Situation at the End of 1980

IV. The Years of Recovery (1981–82)

Policies

Fiscal Policy

Monetary Policy

Exchange Rate Policy

Structural Policies

Economic Developments

Situation at the End of 1982

V. The Years of Adjustment (1983–84)

Policies

Fiscal Policy

Monetary Policy

External Policies

Structural Policies

Economic Developments

VI. Overview

APPENDICES

I. Structure of the Public Sector

II. Structure of the Financial Sector

Formal Financial Sector

Banking System

Nonbank Financial Institutions

Securities Market

Informal Financial Sector

III. Statistical Tables and Charts

TABLES

Section

II.

1. Pattern of Growth, 1960–78

2. Investment and Savings, 1960–78

III.

3. Selected Economic Indicators, 1979–84

IV.

4. Selected Monetary Aggregates, 1982

5. Velocity of Money, 1978–82

VI.

6. Debt Indicators for the 20 Largest Debtor Countries, 1983

Appendix III.

7. Operations of the Central Government and the Consolidated Public Sector, 1979–84

8. Cyclically Neutral Balance and the Fiscal Impulse of the Public Sector, 1979–84

9. Monetary Survey, 1979–84

10. Exchange Rates and Competitiveness, 1978–85

11. Expenditure on GNP in Constant 1980 Prices, 1979–84

12. Industrial Origin of GNP in Constant 1980 Prices, 1979–84

13. Balance of Payments, 1979–84

14. External Debt, 1979–84

CHARTS

Appendix III.

1. Selected Economic Indicators, 1979–84

2. Financial Position of the Public Sector, 1979–84

3. Monetary Developments, 1979–84

4. Interest Rates and Velocity, 1979–84

5. Monthly Exchange Rate Developments, 1979–84

6. External Developments, 1979–84

7. External Debt Indicators, 1979–84

The following symbols have been used throughout this paper:

• … to indicate that data are not available;
• — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
• – between years or months (e.g., 1979–81 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
• / between years (e.g., 1980/81) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

Appendix I Structure of the Public Sector

In this paper, the public sector in Korea is defined to include the Central Government and five public enterprise funds—Railways, Communications, Supply Fund, Office of Monopoly, and the Grain Management Fund. These funds are organized along departmental lines and their operations are closely linked with those of the Central Government.

The transactions of provincial and local governments are excluded because the appropriate data are not available on a timely basis. These levels of government have only limited authority to tax and to borrow, and generally run small surpluses. They receive about half of their revenue in the form of grants from the Central Government. Based on past patterns, consolidating these levels of governments into the public sector would increase both revenue and expenditures by about 6 percentage points of GNP and would leave the overall deficit slightly smaller.

Owing to limited availability of data, 19 nonfinancial public enterprises in which government ownership exceeds 50 percent, and which are financially autonomous, also are omitted from this paper’s definition of the public sector. Total expenditure of the nonfinancial public enterprises was estimated at around 10 percent of GNP in 1984.

The operations of the public sector are carried out through a complex funding structure comprising a general account, various special accounts, extrabudgetary funds, and other nonbudgetary transactions. The general account covers the activities of government ministries and agencies, and comprises about 80 percent of central government expenditure and net lending, as well as the bulk of central government revenues. Special accounts are established for specific projects and for those cases where revenues are earmarked for particular expenditures. Extrabudgetary funds are set up to support specific government objectives, primarily through net lending operations. The most important of these latter funds, the National Investment Fund and the National Housing Fund, are included in the Central Government, while the Grain Management Fund and the Supply Fund are included with the enterprise funds. Also included in the central government operations are two nonbudgetary items, consisting of foreign borrowing directly on-lent to the private sector and foreign military sales credits. Central government revenues are recorded when they are deposited with the Bank of Korea, and expenditures are recorded on the basis of checks issued.¹ The fiscal year, which is the calendar year, includes a complementary period of 15 days in the following January.

In January 1982, telecommunications was removed from the Communications Enterprise Special Account (one of the five enterprise funds), when the government-invested corporation, Korea Telecommunications Authority (KTA), was established. The management of KTA is independent of the Ministry of Communications, and it does not have access either to budgetary support or to financing by the Bank of Korea. Foreign borrowing on-lent to KTA by the Central Government is counted in net lending of the Government. Currently, the Communications Special Account includes only the relatively small postal service. In January 1983, the Civil Servants’ Pension Fund and the Special Account were removed from the Central Government and their functions shifted into the private sector with the establishment of the independent Civil Servants’ Pension Management Corporation. The fund is fully vested, and at the end of 1983 about 70 percent of its total invested assets (excluding cash and fixed assets) were held in private sector securities.

Appendix II Structure of the Financial Sector

The financial system in Korea consists of a highly regulated formal sector, composed of deposit money banks (DMBs) and nonbank financial institutions (NBFIs), and an unorganized sector commonly known as the “curb market.” This dualistic structure is an important characteristic of the Korean financial system. Credit demands that cannot be met in the formal sector, because of interest rate ceilings or credit allocation policy, are satisfied in the curb market. Consequently, pressures on the formal sector caused by excessive regulation are partly released through the curb market.

The formal financial sector is highly segmented, with financial institutions specializing in particular segments of the market. The demarcation between financial institutions is effected by an extensive regulatory framework. Banking regulations focus on separating various financial functions, maintaining a fairly high degree of specialization, and reducing competition among financial institutions. Substantial barriers to entry and to branching exist, and the introduction of all new services or debt instruments requires prior approval.

Formal Financial Sector

Banking System

The formal financial sector is dominated by the banking system (i.e., DMBs) which accounted for nearly 60 percent of total domestic liabilities in 1983. The banking system is composed of 7 nationwide commercial banks, 10 local banks, 7 specialized banks, and 48 domestic branches of foreign banks. The nationwide commercial banks have an extensive branch network (over 400 branches) throughout the country, while local banks’ branches are confined to the province in which their head office is located. Unlike the commercial banks, which were established under the General Banking Act, each specialized bank has been established under its own special law and has its own specifically defined purpose.¹ The branches of foreign banks are all located in Seoul and Pusan. As a consequence, these banks do not have substantial domestic currency deposits and rely extensively on borrowings from their head offices, on foreign exchange swap transactions with the Bank of Korea and, since March 1985, on rediscount from the Bank of Korea.

The importance of the banking system in the formal financial system has declined steadily since the early 1970s. The ratio of bank deposits to total deposits of the financial system fell from 85 percent in the early 1970s to less than 60 percent in 1984. Within the banking system, the seven nationwide commercial banks held about half of total bank deposits at the end of 1983, while specialized banks held about 40 percent, and local banks held 10 percent. Foreign branches held only 2 percent of total bank deposits.

Nonbank Financial Institutions

NBFIs can be classified into four categories according to their principal activities: (1) sav...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Prefatory Note
• I. Introduction
• II. Historical Background
• III. The Years of Crisis (1979–80)
• IV. The Years of Recovery (1981–82)
• V. The Years of Adjustment (1983–84)
• VI. Overview
• Appendices
• Footnotes