REPUBLIC OF KOREA - World Bank · A key fture Vf the Plan is the target for exports which is set at $3.5 billion for 1976 (in 1969 prices). *Thle maLnufacturing sector 'Ls expected

RESTRICTED

Report No. PI - 9a

This report is for official use only by the Bank Group and specifically authorized organizationsor persons. It niay not be published, nuotped or ted without ank Group, authodo$i-n. TheBank Group does not accept responsibility for the accuracy or completeness of the report.

II9 I ZER~LNTATI 1N.tI±. 'LINAIK rO\JR tk%NBTION tA±ND V U j*

ThWT1?V-RNY I MrT/~%%T I T r%1-i r"T! /t%fT111"T'r I ef9tr%ely A rtvILN I Di EVEL OPMEN IPROBLEM ANIDN PROGRA

TTrT TTC I I- T A T r T. 7'T TIT fr\r'17 I r7'?TT In7-m- /-\7 TY T711 IC ATT'.IT ThTh \, T A 'kIL1INDLJU aJ I .I\ J.M.L. 1, rJ- V F-.LAJr1IVI1r.14 .I JIL...JL-1 vi.j .P-AN\J Mx%.L1v1

IN THE

REPUBLIC OF KOREA

Nrovember 15, 1971

Industrial F'rojects Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Currency EqiLvalents

U.S.1 1.00 = Won 315Won 1,000 = U.S.$ 3.17'Won 1,000,000 = U.S.$ 3174

Plan Periods

First Five Year Plan 1962-66Second Five Year Plan 1967-71Third Five Year Plan 1972-76

This reDort is on the findinLs of a mission organizedby the Industrial Projects Department which ccnducted a surveyof maninw and manuiacturing in Korpa during NovembPr/nP-rPnhPr1570. 'The composit-ion and responsibilities of members of themiFsion were as follows:

Frederirk T Noorer Mnipf of Mission

John 'rJ. P. Jaffe, Enagineer (Iron & Steel)Gmeorge Perazich, (Consultan.t) Engineer (^Nachinery)Karl Schoenemann, (Consultant) Engineer (Petrochemical)Jivat N. r'hadani, Industrial Econorist (Other

TABLE OF CONTENTS

Page No.

SUMARY .................................... i

PART ONE: ISSUES AFFECTING ALL INDUSTRIES

I. THE GROWTH AND STRUCTURE OF INDUSTRY, 1965-69 ... ........ 1

A. Record of Growth ................................. 1B. Geographic Distribution of Employment .... ........ 4C. Financial Indicators of Operations and

Profitability ............... .... ............... 5

D. Employment and Productivity .... ............ 6E_ Exnorts ........... ...................... ............... 7

F. Mining ............ . . ...................... 8G Price Trends -,8, ---- , --- .... ee.. 8

H. Summary. 9

II. THE THIRD FIVE YEAR PLAN FOR THE INDUSTRIAL SECTOR 18

A. Macroeconomic Targets and Objectives . . .18R The Macro-Model Projirtinn ---- 20C. Structure of the Manufacturing Sector . .24D. Determinantin of Tnd ry nOutput T pLevels . 2E. Composition of Demand . . .26

F. Export F'nreraqts 27G. Private and Public Consumption . . .29H. ranita1 Fnrmatinn ----- i 30I. Employment and Productivity . . .31J 4Limitatrinna in the Plan nd nsatrainta on

Development . . . 32K. Strlary of Recommendations . . .33L. Consequential Action by EPB . . .34

III. EXPORT PROMOTION AND IMPORT SUBSTITUTION PROGRAMS 55

A. Export Promotion ................................. 55B. I ort Substitution ......................... . 61C. Summary of Recommendations .64

IV. THE FINANCING OF INDUSTRIAL INVESTMENTS .66

A. Major Targets ..................... 66B. Deman.d fo Fur.ds - a-A d O Su o o f Sup

C. Interest Rates .. 70D.'. ~sLCorporation -w -th T a e W- V L....3'JV .......... Uents .L.LV.. 72

TALL OF CONTENT ( tuLLL.LLLue Pg

V. RESEARCH, DEVELOPMENT, AND TRAINING FOR INDUSTRY ...... 77

A. Ministry of Science and Technology .... ........... 77B. Oth'er Institutions ................................................. 7C. Supply of Trained Manpower ........... .. .......... 79

PART TWO: REVIEW OF MAJOR INDUSTRIES AND PROJECTS

VI. THE IRON AND STEEL INDUSTRY ........................... 81

A. Present Status ................................... 81B. Development Plan ................................. 85C. The Growth of Demand ............................. 86D. Summary of Recommendations ....................... 88E. Pohang Iron-and Steel Company (POSCO) .89F. Foundry Pig Iron Plant .96G. Special Steel Plant .98

VII. THE ENGINEERING INDUSTRIES .102

A. Existing Industries .. 102- Recent Growth Trends .102- Size of Enterprises and Ownership .103- Production Costs .103- Price Trends ............. 104- Imports and Exports .105- Import Content of Domestic Output .106- Extent of Capacity Utilization .107

B. Third Five-Year Plan Targets . .107- Consumption .108- Production .108- Imports .108- Exports .109- Investment .109- Program Implications and Conclusions .110

C. Heavy Machinery Complex . .112D. Shipyard Project .115

VIII. THE PETROCHEMICALS INDUSTRIES .......... .. ............. 133

A. Early Development of the Plan .................... 133B. The Naphtha Cracker and Cracker Products ... ...... 134C. The Downstream Plants ............................ 135D. Relationships between Naphtha Cracker and

Oil Refinery ........... 138E. The Program for Governmental Support .... ......... 140F. Costs and Prices ................................. 141G. Balancing Supplies and Demand .... ................ 144H. Summary ......... ................................. 146

TABLE OF CONTENTS (Continued) rage No.

IX. OTHER MANUFACTURING INDUSTRIES .151

A. Textiles .. 151Present Status .151

- Cotton Spinning and Weaving .................. 151- Wool Spinning ............................... 152- Synthetic Fibers and Textiles .... ............ 153- Future Prospects ............................. 155- Knitting Industry ............................ 155

B. Plastics .................... ..................... 157- Polyvinyl Chloride (PVC) ..................... 161- Polystyrene ................. ................. 162- Other Plastics ............................... 162- Future Prospects .............................. 163

C. Plywood .......................................... 163- Present Status ............................... 163- Future Prospects ............................. 164

D. Cement ......... ................................... 166- Recent History ............................... 166- Future Prospects ............................. 166- Recommendations .............................. 167

X. MINING INDUSTRIES ...................................... 170

A. Coal ......... .................................... 170B. Iron Ore ......................................... 171C. Tungsten ......................................... 172D. Other Minerals ................................... 173E. Minerals Exploration .......................... ,. 175

APPENDIX A - List of Standard Statistical References

APPEiDIX B - List of Organizations and Persons contactedby the Mission

BASIC DATA

Area 98,438 Sq. Kms.

Population - Total (mid-1969) 31.14 million

Rate of Growth (1969) 2.2 percentDLensity 'per Sq. Ktm.) 3L1

Gros,s NaL.iU.R r1roduuc,

otami (1969) 2, 30 u1 ]1Lon -won

Per capita (1969) l190 equivalenturow ri rate (1969 au consianu pricsu1. per-entuGrowth rate of' GNP (1962-69 at constant prices) 10.8 pErcent,

Industrial Origin of GNP (1969) 100 percent

Agriculture, forestry and fisheries 28 percentMnII.ing arnu maau±auurIng 2u

Economic overhead and construction 13Other services 33 !!

Gross Domestic Expenditure (current prices; as percentu of GNP)

ConFumption 00 o o

Private 8) 77 ?iPublic 10 11 11

G'ross Capital Formation 15 27 30

Current Deficit and Statistical Discrepancies -9 -15 -15

Financing of Investment196p 1968 1969

(i) As Percentage of GDP

Gross Domestic Ssvings: 7.3 13.7 17.3PUbL.Lc (-1.L.u (6.0) Q.1I)

Private (5.9) (7.7)(11.2)"Fr - -in Savings" 7.5 13.)4 12.6

'ii) As a Percentage of' Gross Capital Formation:

Gross National Savings: 49 51 58Public (9) (22) (21)Private (40) (29) (37)

"Foreign Savings" 51 49 42

-2 -

1965 1968 1969 1970

Balance of Payments Items (in million U.S.$)

Merchandise Exports (f.o.b.) 175 h86 658 882Merchandise Imports (f.o.b.) -416 -1,322 -1,650 -1,761

Deficit -241 -836 -992 -879

Receipts from Military Expenditures 74 217 2L9 232Other Services, Net -2c -a7 -51 -132

Balance of Goods and Services Account -195 -666 -794 -779

1965 1968 1969Prices: Annual rate of increase in percent

Consumer Prices (Seoul) 13.6 11.1 12.0Wholesale Prices 10.0 8.1 7.5

Employment in Industry 1965 1968 1969

Total 880,000 1,297,000 1,335,000Mining 80,000 11l,000 113,000Manufacturing 800,000 3,183,000 1,222,000

SUMARY

There was a mArked Pxpanq1nn of IndutLtrin1 artivitv in Korea dur:ng

the last half of the 1960's. Between 1965 and 1969, while GNP increased at:a-nnual rate of over 11% the value of indutrial outputi

at an average annual rate of about 22%. For 1970, output of industries wasestimated to have e du 1 ture a forestry at about 267of GNP. Employment in industry is now estimated to absorb about 1.4 millionpersons out of an economically active population of about 10 million.

.. _ A LC AA 4i ..U _ *. : *LL O 1.. A. y 1.*L L r A. _W A* _X y A - A. _e, C e t _ ab ou t 1 _ 1 n

ly impressive. Total export earnings rose from $175 million in 1965 to $622ill ±inJLL LLL I U ~ OIIU Lk~~ .~LLO.L ~and t:he share of induStEriaJI pJAro0Udu,cts A.ose from U 0% Lt. 7.

iii. ThIrle pr,nla indu-tr su=grus .,esue bye.po.mn advXLI. . ± L1 AJL1k LLLLJCI.L ±LIU-0 LU&. ~ UL~A .)j~ LLO L).Y C k'.J ICIL 0 C VQ.

added, are textiles and garments, engineering industries (including non-elec-Li cal, elec LriAc .. ± and. tasort e i.pment) a1n O chem1cals fnciU_1 g.. . Ler.. 1_

izers, plastics and synthetics). These have grown conspicuously in the pastfew years, anld have set- thle pace for future expansion.

iv. WULIth thLLe LLL.L%A X.LVt AL L.LOLL TiA.. Fv YerP. (TFYP) for te peiL.od I97I26Il, KoUrLa

is expecting to enter a new and ambitious phase of development, marked pri-.arly by a shift in ephasis to heavy (capital g,oods) industries Growth oGNP is projected at 8.5% per annum, and this is to be achieved largely throughgrow-.h of manufacturing industries at an annua'li rate of 13%. A key fture Vf

the Plan is the target for exports which is set at $3.5 billion for 1976 (in1969 prices). *Thle maLnufacturing sector 'Ls expected to supply a'liost O8/0 o

total exports and at the same time to develop heavy and cap-n.tal goods indus-tries in particular. Wille most manufacturing industries are expected tohave slowver rates of growth in 1971-76 than in 1965-69, notable exceptionsare metal industries, non electrical machinery, and transport equipment. Itis intended that domestic capital goods industties should provide a largershare of fixed capital for further growth, thereby reducing the demand forimports, and also provide a greater share of domestic value in exports sothat net foreign exchange earnings may be increased.

v. During the TFYP the main probiens in the development of the manu-facturing industries are likely to be the following: first, the successfulestablishment of the capitai goods industries, on which many other develop-ments depend, is a major undertaking covering a number of new large projects;and expansions of existing plants. Resources of all kinds will be strainedto meet t:he targets. Second, heavy fixed investment in new facilities andconsiderable working capitai will be required; yet there are some indicationsthat investment requirements have been underestimated, and if the projectedgrowth rate is to be achieved, foreign capital may have to supply a largershare than is now forecast. In that event the target for improvement in thebalance cf payments would not be achieved. Third, the pace of these develop-ments couLld result in persistent inflationary pressures. And finally, tomeet tne export targets, many of the heavy industries in metals and machinery

- ii -

must achieve export growth rates in the range of 25% to 40% annually. ThenrrlIl-tirnn andn mnrketing nrobh1Pm tn 'h .qolvdrl in tbh lafttpr rnnnprt;in nr

extremely complex.

vi. The following points briefly summarize the conclusions and recom-mendations of the reonnrt in trho order in which they appear in the text.

v-4. The -nacr^necorn4mi Tmodel tedo to e prvrn4at naoeoant- 4income and ut

put measures is a valuable first stage of planning; however, instability inthe coefficients makes it likely that bi aes dooccur. For this reason,further testing and refining of the model in the coming years is advisable.

viii. An input-output model of forty-three sectors (twenty-three cover-ing manufacturing) provides the details of the Plan forecasts for individualindustries. The model is based on updated 1966 data and will not be complete-ly rel Uiae for the later years of th 7FP. -soon as is feasible , a new

basic table should be prepared.

ix. The projections of final demand in the model are sometimes question-alDle. It SeeMS unlikelyv that the pattern of private consuu=er spend-in or, m.an-

ufactured goods (as shown by derived measures of income elasticity) willoccur in Korea 4n tis time period. J oveCm...0entL spedinAg on achU typ of

manufactured goods is projected at exactly the rate of growth of GINP, andInvesiV m LelnI' L iLLn £i1VentoriL eLsC, w . Li I1 J.aW :ALj: LL5 Ii0 X JJLVJ *LCu LV 6LUW CIL

17.3 percent for each industry. These figures also seem unrealistic.

x. The projected level of fixed capital formation in the manufacturinginlustriLes (and ' iU Lndueedu in tLile whlole econoury) is probabl-y ur.deresti.mated be-cause of low values for many of the capital coefficients. In one industry a

i single priority project would take over one-thiru of the aggregate level oIinvestment projected for the whole industry.

xi. In general, labor productivity in manufacturing has been underesti-mated and gross employment effects have been overestimated in the model.Moreover, the pattern of productivity growth among industries almost certain-ly has errors.

xii. Export promotion is stimuiated by an incentive system involving tax/ exemptions, customs duty drawbacks, and other elements. The cost of the sys-tem has been rising, now amounts to about 3U percent of export value (i.e.,it provides exporters with an effective exchange rate of about 400 won), andprobably cannot be supported in the future. The mission recommends a thor-ough review of the incentive system by a technical group.

xiii. The present tariff system on imports does not appear to be in accordwith the stated objectives of the TFYP. It provides high levels ot ettectiveprotection for many domestic manufactures, at apparently considerable coststo the economy. The mission recommends that a review of the tariff structureand rates be undertaken together with the review of the export incentive sys-ten'.

xiv. M'iarketing arrangements or institutions ror export promotion of cap-ital goods should be strengthened, either through creation of a new tradeorganization or bolstering present trading companies. In any case, thefunctions and responsibilities of the Korea Trade Promotion Corp. (KOTRA)should be strengthened.

xv. The programiLs for the development of the i4asan Free Trade Zone(MIAFEZ), particularly with respect to providing logistical support to newindustries, deserve increased emphasis and Government support.

xvi. Careful attention to new subcontracting arrangements betwveen for-eign firms and Korean processors is necessary to prevent the possibility cifa market squeeze on the latter. This is of some importance since subcontract-,-'ing arrangements are expected to increase during the TFYP.

xvii. Financing industrial investment will pose some problems in the fu-ture. The expectation that a much larger share of investment will be fi-nanced from internal sources (retained earnings, etc.) will require a rever-sal of recent trends which show these sources to be of declining importance.Present financial incentives are all in the direction of encouraging financ-ing through loans. This is in part the result of highly preferential inter-est ratess on certain types of loans. Some narrowing of the gap between thecommercial rate and the preferential rates may be advisable. Also the com--mercial banking system should be authorized to make credit available for ex-pansion of facilities in contrast to working capital needs.

xviii. In particular, the tax treatment of interest charges as a deduct-ible cost, while interest earned on bank deposits is tax-exempt, leads to aninflation in the demand for bank loans which are then accompanied by new timedeposits. A company can improve its after-tax position by altering its bor-rowing and deposits. A revision of the tax treatment of business interest isof primary importance for the future.

xix. A special problem exists with respect to twenty-six large corpora.-tions in which the Government holds majority interest or has financial com-mitments. A review of the position of these corporations is recommended todetermine whether the Government could divest itself of some of these inter-ests and. free funds for other developmental needs.

xx. Korea has created a strong research and development capability ina network of agencies and organizations. There are some areas of neglect,however, chiefly in the concern with quality control and maintenance ofequipment. Additional support for advice and assistance to medium and smallindustry through the MIedium Industry Bank is also needed.

xxi. In the iron and steel industry the Government should discourage theproliferation of new electric arc furnaces and encourage the expansion ofPohang Steel Company (POSCO) as the primary supplier of semi-finished prod-ucts. It is also necessary to try to reduce the general prices of steel

- iv -

products so that end-users can attain a competitive cost position in themarket. It may be desirable to have a review commlttee to evua1,ntp fuitlirenew investment above $1 million so as to ensure efficient use of resources.

xxii. POSCO itself should be required to set up a rigorous cost controlsystem to enunre that the nroiect costs do not escalate In the complex ofplants the cold mill should be deferred until demand exceeds the capacityof exictincg nplnts.q Consideraition shouii1d a1o he cgiven to hav(ing PCnCO con-

centrate on flat rolled and semi-finished products in sufficient quantity tosupply the non-intearated mills. In the first expansion phase it may be de-sirable to install a 5000 tons per day blast furnace in place of the 3500 tonsper Ayv furnace now envisaged.

xxlll. Th>.e foundry n4npig pla-nt and the special steel plant bo.th seemto be well conceived and planned and if they are undertaken in participationwlh- ,n exeri4 A enced thni pa-ulrtnrm thhou ld be able to supply prod-ucts

at competitive prices.

xxiv. The mechanical engineering industries are to expand greatly duringthe TFYP. There are several ty-es of 4-rnet4r,nigains that wu mater-4-aly m,

prove future planning. One of these is the extent and use of capacities inthese -industries . Specilal surveys of each industry are essential.ol1LLL~C IAUU~ L ~ .pL±CL. LI 0LI L.L ±LUU LLa- COILd. LU ±iIiLk6

unused capacities to future expansion programs. Also an investigation ofcompdadrive prdLUUUcLi[ clsULb ndIU LUUULL qUa.L.LLy 111 LlIbt lUUb LLL b ib L1eeued to determine the competitiveness of Korean industry in export markets.T1hese kindUs ofl studiJes are partiLcuLarLy ir[,portar.t 'n view ofU tLhLe targets

assigned to engineering industries in exports and in substitution for capi-ital goods imports. A review of Lnvestment requireents ill these LndULt!Z>compared to the investment levels forecast in the sectoral model indicatesthat the requirements are probably underestirnated. The rapid growth of cap-ital productivity implied in the forecasts appears overly optimistic.

xxv. The proposed heavy machinery complex consists of plants producingmachine tools, construction machinery, and severai otner product groups. Itis proposed that they share certain common processing stages. This approachhas been only partially tried in other countries. The scaie of operation,characteristics of product mix, and complexities of management are likely topresent many serious problems in the realization of this project. More de-tailed feasibility studies of costs and of economic compatibility of productsare needed before final investment decisions are made. Preliminary analysissupports the soundness of the shipyard project with potential market and re-quired investments confirmed from independent sources. Finding a competentforeign partner together with detailed feasibility studies are the principaltasks that remain. Financing of ship sales, especially in the domestic mar-ket, is another important aspect of this project that must be considered.

xxvi. The 1976 export target for ships is not consistent with the plannedexpansion of shipbuilding capacity. The Ulsan shipyard, according to spon-sor's estimates, is projected to export in 1976 less than 15 billion wonworth of ships which is only a third of total exports proposed in the TFYP.

Since the foreign market for smaller ships that might be built in existingor expanded facilities is not expected to grow, it probably will not be pos-sible to achieve such targets. Further study of this problem is recommencled.

xxvii. A large petrochemical complex of plants, based on a naphtha crackerat the oil refinery to supply feed stocks to downstream plants, is a priorityproject in the TFYP. A review of the project plan shows that in generali tihescales of the plants are below those typically found in the industry and thatthere are cost disadvantages due to small scale. The Government proposal fora subsidy in the price of naphtha will not offset these cost disadvantages.It is recommended that all downstream plants have provision for scaling to anaphtha cracker of 150,000 M1T per year of ethylene, rather than having somtescaled to 100,000 MT per year. This will balance capacities somewhat better.It also appears that Korea should not count on an export market for the petro-chemical intermediates. The project plans are the best alternative in thecircumstances, but the Government should hold strictly to design performanzesand cost control so that performance does not deteriorate and costs do notescalate.

xxviii. The textiles industries, which exported goods worth $200 million in1969, will sustain a high level of exports; but the target of $700 millionappears high. A range of $400-$600 million appears more reasonable. More-over, to maintain a competitive position it is probable that there will haveto be s-ome consolidation of small scale synthetics plants into a fewer numberof large plants.

xxix. In plastics, there is at present a great deal of overcapacity inpolyvinyl chloride facilities. Although demand is expectei to grow, furtherinvestment in such facilities should be discouraged for the present.

xxx. The plywood industry has scope for export oriented expansion, bui:must ensure imported raw material supplies on a long-term basis, and expori:incentives in this industry should be reconsidered in the light of net foreignexchange earnings.

xxxi. By the end of 1972 capacity in the cement industry will exceed 11million tons and it is planned to expand to 15 million tons by 1976. Sincecapacitv is now running ahead of demand, it seems advisable to defer thepost-19;72 additions until the demand can be more accurately known.

xxxii. The mining industries are not expected to play a very large role indevelopment. Additionial funds spent on mineral exploration appear to havesome potential benefits in possible new discoveries since Korea has not beenthoroughlv surveyed geologically. On the other hand the pronosed tax onBunker C oil to be used to subsidize coal mining and transport does not ap-near a wise iius of re:ouiir-es and meritsq further rnnqidrqtion.

I. THIE IJ0W`-1 ANIj aÛCTUR r LOF uuJ uSo1-69

A. Record of Growth

1.1 During the period 1965 to 1969 there was a marked expansion of in-dustrial activity.in Koreai. During that time the growth of most industrieswas sharply accelerated, new industries were established or the plans forthem were laid, and by 1970 the structure of industry was rather difterentfrom that of the early sixties. Equally important, these achievements haveaffected the expectation about the future.

1.2 Mleasured in 1965 constant market prices, gross national productincreased from 806 bil:Lion won in 1965 to 1,302 billion won in 1969, at anaverage annual growth rate of 11.3% and the contribution of manufacturingand mining activity increased from 157 billion won in 1965 to 339 billionwon in 1969, at an average annual growth rate of about 22%. The table thatfollows summarizes the annual growth of GNP and of mining and manufacturingoutput.

(Unit: Billion won, in 1965 constant market prices)

1965 1966 1967 1968 1969

GNP 805.85 913.82 995.16 1,127.32 1,302.02

Growth rate 7.4% 13.4% 8.9% 13.3% 15.5%

Ydining aridmanufacturing 157.54 181.43 220.20 279.64 339.07

Growth rate 21.0% 15.1% 22.5% 25.8% 21.2%

Source: Bank of Korea: Economic Statistics, 1970.

The share of GNP contributed by the mining and manufacturing sector rose from19.5% in 1965 to 28% in 1970. During the same period, the share contributedby agriculture and forestry declined from 37.0% to 23.8%. In money terms(1965 constant market prices) the contribution of the mining and manufactur-ing sector rose from 158 billion won in 1965 to 416 billion won in 1970,while that of the agriculture and forestry sector rose from 298 billion wonto 344 billion won. (For details see Table 1.1).

1.3 Turning from shares in GNP to employment, we find that during thefive year period 1965-69, the number of people employed in mining and manu-facturing increased from 880,000 to 1,335,000, an increase of 60%, whileemployment in all non-agricultural employment increased by only 8.2%; andemployment in agriculture increased by 8.4%. (Table 1.2.) Ttiese figuresinclude self-employed pesrsons and persons employed in establishments with

-2-

less than 5 employees, and are not directly comparable with the figures re-latin2 to establishments covered by the Census of lManufacturin2 establish-ments, which are mentioned later in this report.

1.4 The rapid growth of industry in both absolute and relative termswas accomnaniec( by equalylv imnressive growth of the gross value of exnorts.In 1965 Korea's total exports were worth about U.S. $175 million; and in1970 they earnedi aboiut UT. Tn millfon, an annual average rate of orntftbof almost 40 percent. Eighty percent of this increase was earned by manu-factured goods. (Table 1.3)

1.5 The indirces of industrial nroduic-tion compiled hv the Government ofKorea provide a convenient yardstick of the relative importance and growthof specific industrv groupsn The table that fnllows indir2tes the weightsassigned to the more important 2-digit industry groups, and their relativegrowth during the five years 1965-69 It will be noticed that textiles oc-cupy the most important position, with a weight of 15.5%; and production inthis group increased by 207%/ during the fIve-ytear period Chemricals startedwith a lower weight - 8.9%7 in 1965; but production of industries in thisgroup increased by 2637 during the same per4io, making them theo grmath lead-

ers. Transport equipment and electrical machinery had a smaller base in196; u their ratecs of growth were a'-so quite im.pressiv,a 2%ad24respectively. Other industry groups followed suit at a somewhat slower pace,

o . .4eU an av r a . .f_ure tof) A _ .JtO Lor hA1me Lrw th, of a' manuj c turi pr -

duction in 1965-69.

Indices of Industrial Production

CodeIndustry No. ViW> t 196 L966 1O. 196 1967 1968 1969

Manufacturing 2-3 100 100 124.4 161.8 217.9 265.3

Food 20 7.9 100 117.7 159.2 193.3 269.1

Beverages 21 5.6 100 127.0 157.8 167.8 208.5

Textiles 23 15.5 100 118.4 157.J 227.6 306.7

Apparel etc. 24 4.2 100 100.5 126.6 165.5 177.1

Chemicals etc. 31 8.9 100 125.0 203.6 319.3 362.5

Cement claystone glass etc. 33 7.2 100 119.7 144.3 163.3 201.7

Metal products 35 3.0 100 142.4 184.5 243.1 228.0

Machinery 36 3.2 100 102.6 190.5 209.0 177.4

Elec. machinery 37 4.0 100 177.2 /17J 3 2u4.4 324.1

Transportequipment 38 6.0 100 135.5 181.2 237.2 332.9

Sub-total 65.5%(10 categoeries)]

-3-

1.6 The total number of establishments (witlh 5 or more employees) en-gaged in manufacturing activities was 24,109 in 1968. 18,777 of these em-ployed 5-19 workers each, accounting for 165,000 workers (22 percent) outof 748,000 employed in all establishments. An additional 4,778 establish-ments, each employing 20-199 workers, accounted for 240,000 workers (32%');and 554 establishments, each employing 200 or more workers, had 343,401workers (46%). The table below showzs the relationship among number ofestablishments, workers and value added, by 5-size groups.

5-19 20-49 50-99 100-199 200 work'ersTotal Workers Workers Workers Workers and over

No. of establish-ments 24,109 18,777 3,237 1,025 516 554

% of total 100 77.8 13.4 4.3 2.2 2.3

No. of workers 748,306 164,994 95,633 70,673 73,606 343,400

Z of total 100 22.0 12.S 9.4 9.8 46.0

- flA hr *~~~~~~~~ ,., ' I ) h n, In '¶h I~ fl,' I '~Value A,dded: 3016,5 3474 4,944 22,344 I)3,942 93,741

(million Wlon)o ef total 100 12.1 8.3 7.4 7.9 64.3

Value Added perworker: 403 221 260 310 325 564

(000's Won)

% of average 100 54.8 64.7 78.5 80.7 140

Source: Census of Mining and Manufacturing, 1968.

It w-ill be noticed that 4.5% of the total number of establishments (thosewith 100 or more workers) employed 55.8% of the total number of workers inmanufacturing establishments and contributed 72.27 of the value added bymanufacturing. Value added per employee in establishments with 5-19 workersamounted tno only ahout 39% of value added ner worker in establishments with200 or more workers.

1.7 The size distribution of 16 major industry groups, with respect toemployment: and value aede d, is ind ate iP tii T 1e 1h4. Tn SiX industry

groups (textiles, wood products, rubber products, chemicals, basic metalproducts, -and el.ctri4cl weh4ry ) arnploym.nt i

4concnrate in 1arge

units with more than 200 workers each, to the extent of more than 50 per-cent. In six other industry groups, bet,een 255% and 50% of the total workforce is employed in large units; and only in the remaining four do we have

7%or more work-ers in ur.its with 'ess th-r 200 workerio each. These are

-4-

furniture and fixtures, petroleum and coal products, metal products, andnon-electrical machinery; but petroleum and coal products fall in this cate-gory only because of coal briquetting plants. The petroleum refining indus-try consists of onlv large plants. Similarly, within the maior groups com-prising chemicals and chemical products, and stone, clay and glass products,there are sub-groups which have highly concentrated employment in largeplants, e.g. synthetic fibers and fertilizers in the first, and cement inthe latter; and there are other sub-2roups which have many small nlants. andthe composite size distribution appears less concentrated in consequence.The nosition with resnect to value added indIcatps Romewhnt greater concen-tration, as may be expected. Out of the total value added in manufacturinginduttries in 19l6R which amouinted to 301445 million won, 193,741 'millionwon (64.2 percent) was attributable to 554 large establishments which em-nloypd 200 or more workers each; nnd onnly 3,474 Tmillion Twon (12A1 percent)was attributable to 18,777 establishments employing 5-19 workers each.

1.8 Through the establishment of new large plants and the expansion ofolder ones, Korean industry Ihas been moving to,,ward a position i w.hich thelarge firms are dominant. There are now several industries for which theconcentration ratio (i.e. the percent of output of employment represented by

the 3 or 4 largest firms) is high. As will be seen later, during the TFYPmuch of th e expansion will be in the forn of large plants, so that on theaverage Korean industry is becoming more concentrated. This trend may offersome advantages in efficiency and in the abi,44ty to mve swiftly in exportmarkets, but it also raises the possibility of restrictive practices in thedomestic market. This s a potent4al problem that hould be watchedcfully in the coming years.

B. Geographic Distribution of Employment

1.9 Table 1.5 indicates the geographic distribution of employment inmanufacturing industries in Korea. It w,Ill be noticed that in 1968 over 51percent of the total number of workers were located in Seoul and Pusan; andab_out 28 percent more were located ir. th-e I province of Gyengi(hic con-

tains Inchon), Cyeongsan North (which contains Pohang) and Gyeongsan (which

6 provinces. The concentration of industrial employment in Seoul and Pusans5 approxIiately twice as great as the concenltration o. populatLon thLerein

(about 24 percent); and the relatively higher concentration of industrialemployment in the three other provinces mentioned aDove is rejaLed Lo Lheirrespective port towns and other favorable conditions for industrial activi-ties. Inchon has a relatively longer history and really forms part of theSeoul area; and Pohang and Ulsan are being developed in accordance withGovernment plans. Industrial emplovment in these two port towns wii growrapidly in the next 3-5 years, as the steel and petrochemical complexes nowunder construction are commissioned and begin to develop secondary effects.

1.10 In the light of the TFYP and consequential developments, it appearsthat the present dominant position of Seoul-Inchon will be balanced withinthe next 10 years by the Pusan-Ulsan-Pohang area. The latter area will prob-

- 5 -

ably contribute as much to employment and output as Seoul-Inchon by 1980.Next in importance will be the Southwest region, comprising Gwangju, Yeosu,',ogpo; followed by the Eastern region, comprising Gunsan, Jeonju and Daejon,etc.

1.11 The mission found, in the course of discussions with Governmentpolicy planners and industrialists, an awareness of the cost and efficiencvimplications of location decisions; and in the context of an export-orienteddevelopment plan, areas in the vicinity of port towns with good transportlinkages would be giveni first attention. This should be especially usefulin planning efficient development of the transport network, and minimizingthe costs of physical development of the industrial infrastructure.

C. Financial Indicators of Operations and Profitability

1.12 The Bank of Korea has been collecting financial information from awide sample of industries for the past several years; and a brief summary ofsalient ratios relating to manufacturing industries is given below:

Payable FixedNet Profit Net Profit Net Profit Interest Assets

Year as % of as % of as % of as % of as % of CurrentGross Capital Net Sales Net Worth Total Ex- Net Worth Ratio

_____ __ _penses

1966 7.78 7.70 16.93 5.99 74.59 139.2

1967 6.77 6.74 17.01 5.43 77.01 130.0

1968 5.33 5.96 16.06 6.12 77.98 129.8

1969 3.67 4.31 13 57 7- 8R 79=8 12flC;

It will be noticed that Net Profit/Net Sales and Net Profit/Gross Capital ra-tios have (ecr-lin od siuhbtantr iay1 e -h vpyer Tho downtird tronA of the first

ratio reflects changing cost-price relationships in a wide range of indus-tries. n:irtr1it1r1xy thnose engagA in xvnnprts, eo. tovtilo, nanppre. woo.d

products, paper and paper products, chemicals and cement. Sales have beenmainta-ned and even invreaafl under severely co.pet-itivya and theincentive schemes sanctioned by Covernment have helped firms to achieve theirexport targets; but profitability has suffered. The decline in current ratio

probably represents both the effort to economize on working capital by reduc-fn- current assets as m.uch as possible, and tho 4incrase i., short tnr; borrow-

ings to bridge the gap created by the shortfall of profits. The latter trendC' ts -of ltd in the incrase4d ct.o of iCte e sO payments as a pCercentag of to.J

tal operating expenses. Altogether the figures indicate a trend which iscause for co, c ern, L L. )Icauae L LLU Ut L L L L .to LU [ LS expectedA to Lfina n1e11

a very considerable part of future growth out of retained earnings, and these

- 6 -

financial indicators of industrial operations in recent years create somequestions regarding this possibility. These are dealt with in greater de-tail in subsequent chapters.

D. Employment and Productivity

1.13 An examination of the relationship between employment and valueadded in different malor groups and sub-groups of industry yields some in-teresting results. The average amount of value added per employee in manu-facturing activity in 1963 was 403,000 won. The food and beverage indcustries,which employed 11.7 percent of the total number of workers in industry, coni-tributed 15.5 nercent of total value added. The tobacco industrv- whirih Pm-ployed only 1.2 percent of the labor, contributed 7.3 percent of the totalvalue added; this is partly accounted for by high taxes and monopoly pricingpolicy, but it is also a reflection of the modern equipment and high capitalinvestmpnt in the tobacco nroduircts induistryr The textile ind,icstrv rcnmn-rsc-

ing the weaving, apparel and textile goods industries, which employed 31.9nprrcnt- of t-hp labor forrp conntribhutpd only 19.6 nprcpnt- of valueadded.

This low figure is explained by the relatively backward condition of theweavinq indtLstry in Korea; low exnort nricesP and the high import contentof value of output in the more modern and export-oriented sector. It shouldbp noted, howuevr, th2t thp high l2hor ratio npr unit of vueIi aedert is cals

the explanation for the success of Korea in the textile export business.

1.14 The chemicals and chemical products industries, together withnetroleuim and conl products indusitries emTnloyed R 2 percent of the labor, and

contributed 18.3 percent of the value added in all industries; and this isexplained by the relatively capital intensive and automated nature of thebulk of industries in these two major groups. Most factories in these sec-tors are qui.te new - petroleuma refineri4 s, fertilizer factor4es, plasti.

resin and synthetic fiber factories, etc. They need relatively littlelab.or pCer unit of 4o -tp, an- Cven factories which J..pot I their major in=

puts report high value added on account of the large contributions made bytechLnology, pojwer anu fuel, and capital.

Iit dIuUbL1b wiiich co1- - - - - - -

5 Lngineering 'ndustrie, -shic compse luedtL pLroucts, non-elec-

trical machinery, electrical machinery and transport equipment, together em-oloved about 15.6 percent of the ilnustrial worK fLorce, and contribDuted 12L .8

percent of value added by industries. Low productivity per worker is mostconspicuous in metal products and non-electrical machinery industries. Inthese two sub-groups, the typical individual establishments are small, poor-ly equipped, and technologically backward. The Government of Korea hastaken note of this problem. One of the objects of the Third Five Year Planis to improve production technology in these industries, by bringing in newmachinery, organizing newer and larger manufacturing units, and rationaliz-ing production processes. The subject is dealt with in greater detail laterin this report.

1.16 The table below indicates the trend in growth of tangible fixedassets per employee during the past 4 years, and the ratio of value addedper employee to tangible fixed assets per employee.

-7-

(Unit: 000's won)Y~

Per Employee in Industry(1) (2) (3)

Tangible ValueFixed Assets Added (1) (2)

1966 373 266 1.40

1967 418 310 1.35

1968 646 374 1.73

1969 665 398 1.67

/a All values are in 1965 constant prices.

Source: Calculated by mission from basic data of Bank of Korea.

The value of investment per employee has increased fairly rapidly duringthe past four years, by about 78 percent at constant prices; and value addedper employee increased by about 50 percent during the same period. Column3 in the table above reflects the growing capital intensity of new industria:Ldevelopment. The investment required per unit of value added in new factor-ies for production of fertilizers, chemicals, synthetic resins and fibers,and electrical and electlronic equipment, etc. is greater than for simplerproducts in the food. beverage, textiles, and similar consumer goods indus-tries.

E. Exports

1.17 The growth of exports from Korea can be described in several ways,wihich all add up to a rather remarkable record. In 1960 Korea's total ex-ports were valued at $32.8 million. They passed the $100 million mark in1964, exceeded 8250 million in 1966. and reached $622 mnillion in 1969. Ex-port earnings for 1970 are estimated at about $1 billion. In 1969, 53 per-cent of Krirpa'q total exnorts went to the TJS.A. and Canada; and 21-4 per-cent went to Japan; 13 percent went to other Asiatic countries, (of whichbonnp Yonnc Taiwtnj PhilinninpA_ and Tndones.in took the hilk); and 8.8 npr-cent went to Europe, where West Germany and U.K. were the largest customers.

1.18 Table 1.7 indicates the growth of exports by major commoditygrops Ttwl e noticed t sx ot o th at Six i O f ten groups -av r.r signif i-

cant growth. Exports of "food and animals" (SITC:0) grew from $2& millionin 1965 to $50 nmill4or in 1969; fish and dried layer were the t o most im-portant commodities responsible for this, and apples and mushrooms helpeda little. Eports of " an

$900,000 in 1965 to $14.9 million in 1969, of which $13.6 million wereearr.ed by leaf tobacco. The r.extaJS..jor group, "crude -.aterial (inedble) 'J

(SITC:2), exports of which grew from $37 million in 1965 to $73 million in

- 8 -

1969, consisted of the following principal items: raw silk, ($26 millionin 1969) metalliferrous ores, ($26 million in 1969). crude minerals e.g.quartz, flourspar, steatite and talc, ($7 million in 1969), and vegetablematerials, e.g. Ginseng, Agar-agar (87 million in 1969)- Thp other threemajor groups are "manufactured goods classified by materials" (SITC:6)"machinery and transport enuinment" (SITC:7), and "mTi5cor11neo,s mQnnifac-tures" (SIIC:8). These three groups accounted for exports worth $106 mil-lion in 1965; and 8469 mTillion in 1969. In 1965 thges thr gFrOupS repnre-sented 60 percent of exports; and by 1969 their share in exports had grow.nto 75 nperrent

1.19 Tt will hp noticed that among manufactured goods cltssified bymaterials (SITC:6), plywood is the most important single item, accountingfor $79.2 million out of a total (for the g,roup) of $173.8 million. in 199;followed by textiles, worth $65.7 million. These two items accounted forR8 A perrebnt nf epnortsr in thisc: groupi. Othersl 4 . .F4antl 4- -a e rubbergoods, cement, iron and steel (sheet and tube), industrial bobbins andhousehold cutlery, tableware, etc. "Machiner, and transport e(SITC:7) included radios and allied equipment ($27 million in 1969), com-nonentc of omnpitorcs and rcarlulat-ing machines ($5 m4114iln), eletrica- l

switchgear ($7 million), and fishing boats ($6 million). Total exports ofitems included in th-i -aJ- group were valued at $531 million in 1969,ufrom $24 million the previous year. Among "miscellaneous manufactures"(QTCrN t pi p ite are (i) i and accessoriWes m,aAe of tex=tile fabrics (worth $85.3 million in 1969) (ii) knitted wear ($73.4 millioni;n 1969) (iii) wigs, h1,air piLeces an.d eyelahes ofL hul,,an andl art-ifca har1 1

.. ' J -/ LL/% WJ.6

,IQ. IU~CdI~ LIUidL~I L.L L±L ±La.d± 1. a-i

($61.2 million in 1969) and (iv) footwear ($10.4 million in 1969). Thefirst Lwo item will be ref erred to i.L UdetaiLL i,. the chlapter Udealin, w IItextiles.

F. Mining

1.20 The principal mineral products of Korea are coal, iron ore, tung-sten, gold and silver, zinc and lead, copper, graphite, flourite, kaolin andtalc; small quantities of other associated minerals are also recovered. Theindustry has recorded appreciable growth during the decade or the -60us.

Employment rose from 39,800 persons in 1960 to 113,000 persons in 1969; andthe gross value of output increased from 11,757 million won to 34,477 mil-lion won (current prices) during the same period. But in the context of thenational economy, the minin- industry plays a small part. In 1969, it con-tributed 1.3 percent of GNP, and employed 1.2 percent of the labor force.Its contribution to export earnings amounted to $51.9 million, 7.4 percentof total export earnings.

G. Price Trends

1.21 The annual average rate of increase in wholesale prices in Koreain the past four years has been about 6.74 percent. Food prices have movedup faster than other major groups, followed by machinery. Prices of textiles,fabrics as well as knitted wear, have stayed close to average. Table 1.6

shows the wholesale price indices for 8 major groups and "I sub=roups. "'lit- - -~I."J-& rLUUJI CtLLU I J 0 UL rL UP> UJJ.L

values of connodities imported into Korea for consumption as well as formonufacture have hecrasdsomewhat during th-e sam4e period; they * dec ined

from 1CO in 1965 to 96.3 in 1969; manufactured goods classified by mater-4o1~ irA t--r lnno~A 0 -.A -__ f-1- 1-. (42LIia1s le!d the declining trend, --- --r -olowe b.y crLude ,mat.LLLLials: (ir,edble)t:

and food items, in that order. Table 1.9 indicates the year by trend from1965 tc 1969. The-se figures do not 4nclude the costs of capita goods uu -ported by Korea for industrial establishments.

H. Summary

1.22 This brief factual and statistical recital indicates in a generaLway wh*ft was accouplished. Output J rose r-apdl-, .Llo IL,.ent L---OO -- ,

and exports increased most rapidly of all. The export record was made withavar4ety of products; many of them were sem

4-finisheA proAUcts or Jglh con=

a vat .tc ~Jt FL ~ LO *IMtL~J SA- S*-W '. -t. O~,U A. . Lh. t. - t I.u LO U LL LL L. U~

sumer goods. Among manufactured goods many of the products consisted ofliLghIt. asseb..l.y of impote components. Th.e ro,wt of -. ILaO output was LLt L.

accompanied by commensurate growth in financial profitability, but on the-whLole the recordu was sati.-sf-Pactory. In short most of the ec1 oli ------- .3indica=WL1U±~ LI~ I ~ Li LU Wd~ OL.LO A. L.LUty AIn OLLIUl ., LLLIJQ .. i.JL 4Lilt =%LULUIIL_L% .LLIUJ.La-C

tors pointed sharply upwards. Of course Korea started in 1965 at a ratherLow 'Vase .1LI a nuumber oUL respectLs, andu rouestL abso'lute figures tenLdU to b)e

translated into large percentage gains. Nevertheless, the achievements weresubstantial and by the end of the period KOLea was looking forw-ard to a CO.1-tinuation of the trends and in 1970 started the process of planning for anew stage of development to cover the period up to 1976.

- 10 -

Table 1.1

Industrial Origin of GNP

(Unit: Billion Won at constant 1965 prices)

1965 1966 1967 1968 1969 1970 1

Agriculture, foresty and fishery 311.63 345.91 326.90 330.84 370.36 367-37Fishery 13.62 15.07 17.56 20.08 20.80 23.80

rAkng and quArrying 14.73 15.67 16.87 16.63 16.88 i9.16Manufactulrixng 142.81 165.76 205.33 263.01 321.56 397.27Construction 27.64 3-.8h 38.47 53.87 74.44 79.07Electricity, water and sanitary services 10.26 12.24 15.77 19.32 25.11 30.63

Electricity and gas 9.18 11.09 14.27 17.43 22.79 27.63Transportation, storage and communication 32.14 37.67 45.56 56.80 67.37 76.54

Transportation and storage 27.00 31.87 38.68 48.15 57.19 64.58- .~~~2 L..~~~~i ~~...A O~~~I lfln~ I. , ,nr.- E1,- o-, - ,f Wnolesole aud ret-e il1 trade ''9.27 . 1f 9)7.43) 1.6).91± LU.60 22.L2 258)O.O8

Banking, insurance and real estate 12.75 13.79 14.59 17.71 19.31 23.00Ownershin of dwelling 27.99 28.93 30.09 31.0 33.08 34.R2Public administration and defense 39.94 42.71 45.78 48.23 50.25 52.65Services 59.04 63.79 70.36 76.50 82.87 90.80Education 15.81 17.16 18.00 19.20 20.40 21.87

Rest of the world 7.65 13.08 21.53 22.24 23.04 10.17-oss L ail^. pro-J -UctU 80,.8 QC 91 3.8 99.1 1,273 1,061 ,a22.33

Growth rates of GNP 7.L 13.4 8.9 13.3 1q.9 8.9

Composition: %

Agriculture, forestry and fishery 38.7 37.9 32.8 29.4 28.4 25.5l* ) 7 1 1 1 Q 1 Q 1 L , 7,LI' .UtU .. f A.LW ,.U .v .

Mining and quarrying 1.8 1.7 1.7 1.5 1.3 1.3Manufaftnrinv 17.7 18.1 20.6 23.3 24.6 26.7Construction 3.4 3.8 3.9 4.8 5.7 5.6Electricity, water and sanitation services 1.3 1.3 1.6 1.7 1.9 2.2Electricity and gas 1.1 1.2 1.4 1.5 1.7 1.9

Transportation, storage and communication 4.0 4.1 4.6 5.0 5.2 5.4__ __ __1 _ 1: _ __ J __ _ _ zII.nr I . 1 I . I . I'Transportatulon eu soand ragge .4 v. 77 4 4-4 4-7

hholesale and retail trade 14.8 15.3 16.5 16.9 17.0 18.2Banking; insuranne and real state 1.6 1.5 1.5 1.5 1.5 1.6Ownership of dwellings 3.5 3.2 3.0 2.8 2.5 2.4Public administration and defense 5.0 4.7 4.6 4.3 3.8 3.7Services 7.3 7.0 7.1 6.8 6.3 6.4

Education 2.0 1.9 1.8 1.7 1.6 1.5Rest of the world 0.9 1.4 2.1 2.0 1.8 0.7(]ross national products 100.0 100.0 100.0 100.0 100.0 100.0

Source: Bank of Korea

1/ Estimates.

Table 1.2

Persons Fnployed in Mining and Manufacturing

(Unit: 000's)

1965 1966 1967 1968 1969

Total 880 939 1,139 1,297 1,335

Mining 80 82 96 1L4 113

Manufacturing 800 857 1,043 Il83 1,222

Dourcet: Bank of KoDrea

Tal 1.3

TvYp,ort+.

(nn-+. $ 0008

1965~ 1966 1967 1968 1969 1 970 1'

TotaL 175,082 250,334 320,229 455,401 622,516 835,18':

Food and Animals 28,190 41,274 37,928 44,492 50,279 65,537

Beverage & Tobacco 898 6,892 7,019 8,621 14,850 14,231

Crude Materials (inedible) 37,033 46,680 58,0o5 61,506 73,042 99,973

Mineral Fuxel.s, etc. 1,899 1,505 1,772 2,298 4,837 8,7(1.

Animal and Veg. Oil and F?at 71 137 119 113 68 59

Chemi.c.aLs 380 714 2,359 3,116 9,754 11,413

Manufactured goods clas-sified by materials 66,414 84,176 101,382 143,599 173,826 220,887

Foodery and A rals2ortequipment 5,501 9,555 14,185 24,464 53,219 61,469

MisceLLaneous Manufactureds.1f3led 34, 487 59, 197 97, 239 167, 006 242, 345 352, 497

Not Al:AwhArn nliassifiAd 209 205 219 1RA 295 357

Source: Bank of Korea

1/ Estimates.

- 12 -

Size Distribution

No.. a Workars Value added (Wion, ]tillions)No. of Establishments in establishments employLng in establishments emploringEmploying Employing Employing -

Code tTotaIL 5 -99 100-199 200 &morge 5-99 100-199 2200 &, mori Total 5-99 100-199 200&moreNo. In(!u2try No. % _ _ % Total % - ) ,_ % %

23 Textiles 2,721 100 88.14 6.0 5.6 186,352 33.3 12.7 514.0 46,069 25.4 9.6 65to231 Sp'nning mill prodlucts 223 71 3 6.3 22.4 417,44b 7.2 4.4 88.14 16,848 3.5 3-0 93.5232 Weatving mill. 1,369 92.8 L4.2 -7.9 77,653 46.3 11.2 42.5 17,956 314.9 10.5 54.6

2314 Knitting mill " 670 85.5 8.2 65.3 45,777 33.0 20.2 46-.8 7,135 38.2 16. 1 h5.024 Footwear and apparel 3,586 97.4 C0.6 1,1 52,674 64.9 5.9 29.2 13,025 65.14 5.18 28.8

243 Weaving apparel 3,098 98.5 cl.5 1.0 45,,058 f.2 5.4 29.14 10,974 67.1 5.1 27.825 Wood & cork products 1,115 98 .6 0.14 1.1 3'1,373 38.8, 1.9 59?.3 1:2,089 33.6 1.5 614.9

252 Plywood & veneers 34 73.5 - 26.5 15,753 4.9, - 9'i.1 7,365 2.1 - 97.9

26 Farniture & fixtures 976 99 C4 ).3 0.3 11,724 90.6 3.I4 6.o 2,492 88.3 4.5 7.227 Pap?er & paper products 525 93 .1 2.9 4.0 18,504 50.31 11.4 313.3 8,666 21.9 14.1 64.028 Printing & puiblishing 1,018 95.6 2.1 2.4 215,075 50.El 10.5 313.7 9,398 43,.9 8.3 47.829 Leather & leather products 79 93.7 31.8 2.5 2.508 31.El 17.0 3L.2 783 51.8 10.2 28.030 Rubber products 135 80.O 8E.2 11.9 25,953 7.9 5.9 86.2 65,576 7.5 8.6 83.931 Chemicals & oiem. products 655 87.3 4.9 7.8 146,514 26.1 9.4 614.5 38,146 12.2 6.0 El.8

312 Fertilizers 16 37.5 6.3 56.3 65,342 It.0 1.8 914.2 12,966 0.2 0.1 99.7317 Synthetic fibers 6 33.3 16.7 50.0 8,0h9 1.3l 2.0 96.7 6S,554 1.4 0.7 98.9319 Other chemical products 223 91.0 3.1 5.9 9,471 38.14 9.6 52.0 14,219 28.0 10.5 61.532 Petrolewmn & coal prod. 851 98.0 1.3 0.7 14,994 69.2 10.7 20.1 17,325 20.1 6.8 73.233 Stone, clay & glass prod. 2,519 97.5 1.0 3.4 50,569 57.3 7.3 35.4 18,707 27'.5 3.9 68.6

3314 Oement 14 28.5 7.1 614.3 5,725 2.95 2.6 94.5 9,368 14.9 - 95.134 Basic metal industries 297 86.8 ,.14 8.8 23,817 22.0 C 6 5 71.5 11,565 16.2 8.4 75.435 Metal products 1,212 96.2 2.8 1.0 28,575 614.1i 16-3 19.3 7,269 59,9 24.9 16.236 Non-electrical machinery 1,097 97.1 1.9 1.5 2h,182 67.8 12.3 19.9 16,756 62.5 13.1 24.1437 Electrical Machinery 401 88.5 5.5 6.0 27,774 30.'5 10.9 513.6 10,472 214.1 10.9 65.0

338 Transportation equipment 895 95.2 2.1h 22"L4 36,753 1414.2 8.1 4'7.7 114,611 28.6 5.6 65.8

- 13 -

Table ,L . 5

Geographial Itstribution of ITloymnrit

1966 1968 ChangePercentage

Number of Number of changeworkers Percentage workers Percena Number Distributions 15966-68

2 3 -7 -7 TTWTF'T'otal. 56)6,66D5 10)0.0 7.48,233 100.0 181,568 l0i.0 32.0

Seoul 180,1i37 31.8 25L,229 34.1 74,042 40.8 -1

Busan 102,7'59 1L8.1 129,531 17.3 26,772 1U.7 26.0GCyenggi lbo 51,570 9.1 '71,24111 9.5 19,671 1C).8 38.2GCangweon Do :13,176 2.3 18,094 2.4 4,918 2'.7 37.:3Chung Choongbug Do :L3,711 2.4 12.2 2,892 1.6 21.-1(CungcheongnTn1 Do :33,2613 5.9 41,139 5.5 7,876 4.3 23.'7Jeonlabug, Do 29,108 5.1 33,178 4.l4 4,070 2.3 14.0Jeonlanann Do :36,176 6.4 43,292 5.8 7,116 3. 9 19.'7CGyeongsarigbugi Do 72,276 :12.8 91,378 12.2 19,102 1().5 26.5COeongsarignarn Do :30,591 5.4 145,029 6.0 14,438 8.0o 47.e2Jeju Do 3,8,48 0.7 4,519 0.7 671 C.4 17.4

Table 1=~6

smployment and Value kAde-d uy

Major Industry Groups and 3elected S0b-groups

1 2% V-'ue Atded Va'ue Added

Workers of Million Won of per worker; 000's WonTotal Total

Grand Total 825,810 325,988 395

Mi-ning: Total- 77i503 1Lj4 17

Coal 38,302 15,453 403

Metals 14,771 5,279 357

Stone and weaving etc. 3,069 589 192

clî t 127 1,

Non-Metalic 6,078 2,041 336

Manufacturing:Total 7L8,307 301,4h45 b3,

Fbod 61,805 8.3 21,997 7.3 356

Beverages 25,689- 3.4 24,762 8.2 960

Tobacco 8,771 1.2 21,919 7.3 2 L99

Textile 186,352 24.9 46,069 5.3 247

Fbotwear and Apparel 52,674 7.0 13,025 4.3 247

Wood and Oork 31,373 4.2 12,089 4.o 385

fnWtiturPe and Fituvres 11 72L, 1 - ;lg97 0.8 a 21'

Paper & Paper Products 18,504 2.5 8,666 2.9 468

Printing & Publishing 26,075 3.5 9,398 3.1 360

Leather and Products 2,508 0.3 783 0.3 .312

nabber Prod-acts 2595 .e 6,57e . 5

Ciemicals & Products 46,514 6.2 38,146 12.6 820

Petroleum & Coal Products 14,994 2.0 17,325 5.7 .155

Clay Stone Glass Products 50,569 6.8 18,707 6.2- 370

Basic Metal 28,817 3.9 11,565 3.8 4Ol

Metal Products 28,575 3.8 7,269 2.4 254

Machinery 2L7.182 2 6. 2.2 279

Electrical Machinery 27,774 3.7 10,473 3.4 377

Transport 36,753 4.9 14,611 4.8 398

Miscellenous 38,701 5.2 8,817 2.9 .228

Source: Oensus of Mining and Manufacturing Industries, 1968.

- 15 -

Table .7

External Trade and Payments

Comm2odity COmposition of Exprt

SITC (o 4Code Commodities (Jan-June) (Jan-June)

1965 1966 1967 1968 1_969 1969; _ 1970

0 Food and Liver Animals 28.2 41.3 37.9 44.5 50.3 22.3 16.7

03 Fish and Fish Prepoaration 17.8 21.7 26.9 25.8 29.0 12.5 16.6

05 Fruits and Vegetables, (including 5.5 11.2 9.0 15.6 16.4 8.7 3.0

dried laver)1 Beveraie and Tobacco 0.9 6.9 7.0 8.6 14.9 8.7 °-3

12 Tobacco 0.9 6.5 6.7 7.8 13 6 6.8 7.52 Crude Materials, Inedible (excluding

fuels) 37.0 46.7 58.0 61.5 73.- 29.9 41.3

26 Textile fibers (not manufactured) 7.7 12.9 17.0 20.0 27.1 11.0 17.7

(261) (Raw silk) 6.5 11.6 14.9 18.0 23.8 9.7 13.5

27 Crude Fertilizer & crude :materials 14.4 4.7 5.8 6.3 7.4 3.3 3-4

28 Metalliferrous ores and metal scrap 17.7 21.0 21.6 25.8 26.14 2.l4 16.4(281 ) (Iron ore) 6.7 6.1 6.1 7.3 6.1 3.1 2.7

(283) (Tungsten ore) 6.3 9.5 11.0 11.1 12.4 5.5 8.7

29 Crude animal and vegetable meterials 6.9 7.7 10.9 9.3 11.7 2.9 3-0

(292.4) (Ginseng) 1.9 2.0 2.9 o.64 5.9 0.8

(292.9) (Agar-agar) 2.3 2.9 4.7 1.8 1.6 1.0 0.6

3 Mineral Fuels 1.9 1.5 1.8 2.3 4.8 1.4 2.6

4 Animal and Vegetable Oils & Fats 0.1 0.1 0.1 0.1 0.1 0.1 0

5 Chemicals 0.4 0.7 2.14 3.1 9.8 0.9 5.1

6 Man,,factured Goods by material 66.4 84.2 101.14 143.6 173.8 85.1 102.3

62 Rubber manufactures 1.0 1.5 2.0 2.5 2.7 1.2 -

63 Wood and cork 18.2 30.6 36.6 65.9 80.5 46.2 43.2

(631) Veneer' sheets and plywoods 18.0 2 0 6. 65.6 79.2 15.8 142.6

65 Textiles 26.3 34.5 49.0 61.2 65.7 29.6 38.3

(652 ) Cottor fabrics, woven 10.5 10.1 12.6 13.3 18.6 8.2 12.1

66 Non-metallic mineral manufactures 2.8 1.6 1.0 0.9 5.2 2.2 1.7

67 Iron and steel 12.7 8.1 1.9 1.2 4.9 0.6 8.3

AR Non-ferrous metals 2.9 2.5 1.8 1.5 4.8 0.7 2.6

69 Manufactures of metal 2.2 4.2 7.0 9.7 9.8 4.6 5.9

7 Machinery and Transport Fquipment 5.5 9.6 14.2 24.5 53.2 12.6 21.5

71 Machinery, exclud-4ng electricall 2.5' 3.7 LO 14.2 8.9

72 Electrical machinery and appliances 1.5 5.1 7.4 18.9 36.7 13.5 21.9

73 Transport equipment 1.1 0.8 2.8 1.14 7.6 0.5 2.0

8 Miscellaneous Manufactured Articles 34.5 59.2 97.2 167.0 242.3 109.h 161.9

84 Clothing 20;7 33.4 59.2 112.2 160.8 74.5 93.9

85 Fnot±war 414.1 5.5 8.1 11.0 10.5 5.2 8.6

89 Miacellaneous manufactures 8.9 18.9 27.6 40.9 66.9 28.1 33.7-

(899) Human hair and wigs 6.8 15.5 23.3 35.5 60.2 20.0 50.3-

9 Not e±alhere (assified) 0.2 0.2 0.2 0.2 0.3 0.2 0=2

TotaL Exports 175.1 250.3 320.2 455.4 622.5 274.3 373.0

Exports to military forces in Vietnam a a 14.5 30.8 29.0 14-3 21.9

Grand Total 338.5 486.2 651.5 288.6 394.9

w COgures not availabl.,Source: Bank of Korea.

- 16 -

Table 1,7

External Trade and Payments

Commodi1ty Oomp.osition, Of E=vorts

SITC (f.o.b. in million U.S. dollars)

Code Oommodities (Jan-June) (Jan-June)1965 1966 1967 1968 1969 -1969 1970

o Fbod and Liver Animals 28.2 41.3 37.9 4-5 50.3 22.3 16.7

03 Fish and Fish Preparation 17.8 21.7 26.9 25.8 29.0 12.5 16.6

05 Fruits and Vegetables, (including 5.5 11.2 9.0 15.6 16.4 8.7 3.0

d.i-ed "aver)1 Beverage and Tobacco 0.9 6.9 7.0 8.6 1h.9 8.7 9.3

12 Tobacco 0.9 6.5 6.7 7.8 13.'6 6.8 7.5

2 Crude Materials, Inedible (excludingfuels) 37.0 46.7 58.0 61.5 73.0 29.9 41.3

26 Textile fibers (not manufactured) 7.7 12.9 17.0 20.0 27.1 11.0 17.7

(261) (Raw silk) 6.5 11.6 11.9 18.0 23.8 9.7 13.5

27 Crude Fertilizer & crude materials 4.4 4.7 5.8 6.3 7.4 3.3 3-.

28 Metalliferrous ores and metal scrap 17.7 21 0 21.6 25.8 26.L 2.14 16.1

(281) (Iron ore) 6.7 6.1 6.1 7.3 6.1 3.1 2.7

(283) (Tungsten ore) 6.3 9.5 11.0 11.1 12.1 5.5 8.7

29 Crude animal and vegetable meterials 6.9 7.7 10.9 9.3 11.7 2.9 3.0

(292.1) (Ginseng) 1.9 2.0 2.9 4.4 5.9 0.6 0.8

(292.9) (Agar-aear) 2.3 2.9 14.7 1.8 1.6 1.0 0.6

3 Mineral Fuels 1.9 1.5 1.8 2.3 4.8 1.4 2.6

h Animal and Vegetable Oils & Fats 0.1 0.1 0.1 0.1 0.1 0.1 0

5 C-Wiemicals O.X. 0_7 2.14 3.1 9.8 0.9 5

6 Manufactured Goods by material 66.1 81.2 101.1 113.6 173.8 85.1 102.3

62 Rubber manufactures 1.0 1.5 2.0 2.5 2.7 1.2 -63 Wood and cork i0.6 65.O Anc 4. 43

ana core ~ ~ ~ ~ ~~~1.2O 30~. U J~ , ,. --- , 4-).

(631) Veneer sheets and plywoods 18.0 29.9 36.1 65.6 79.2 45.8 42.6

65 Textiles 26.3 34.5 19.0 61.2 65.7 29.6 38.3

(652) Cotton fabrics, woven 10.5 10.1 12.6 13.3 18.6 8.2 12.1

66 Non-metallic mineral manufactures 2.8 1.6 1.0 0.9 5.2 2.2 1.7

67 iTron and stel 17 8.1 1.9 1.2 4.9 o.6 8.3

68 Non-ferrous metals 2.9 2.5 1.8 1.5 4.8 0.7 2.6

69 Manufactures of metal 2.2 14.2 7.0 9.7 9.8 4.6 5-9

7 Machinery and Transport Equipment 5.5 9.6 114.2 21.5 53-2 12.6 21.5

71 Machinery, excluding electrical 2.5 3.7 4.0 4.2 8.9 3.5 2.9

72 Electrical machinery and appliances 1.9 5.1 7.4 18.9 36.7 13.5 21.9

73 Transport equipment 1.1 0.8 2.8 1.4 7.6 0.5 2.0

8 Miscellaneous Manufactured Articles 314.5 59.2 97.2 167.0 212.3 109.14 161.9

8), Clothing 20:7 33.4 59.2 112.2 160.8 71.5 93.9

85 Fbotwear 4.1 5.5 8.1 11.0 10.5 5.2 8.6

89 Miscellaneous manufactures 8.9 18.9 27.6 40.9 66.9 28.1 33.7

(899) Human hair and wigs 6.8 15.5 23.3 35.5 60.2 20.0 50.3

9 Not elsewhere (Classified) 0.2 0.2 0.2 0.2 0.3 0.2 0.2

Total Exports 175.1 250.3 320.2 455.4 622.5 271.3 373.0

Exports to militarv forcens in Vietnam a a l4z5 30.8 29.0 14.3 21.9

Grand Total 338.5 486.2 651.5 288.6 394.9

a/ Figures not available,Sources Bank of Korea.

- 17 -

Table 1.8

Wholesale Prices Indices

for _ or Commodity Groups and Sub-groups

1965 1966 1967 1968 1969

1. All commodities: 100 lO0.8 115.8 125.2 13387

2. Foods 100 107.3 116.P, 129 2 246.-

Canned fish 100 121. 15 16 4.8, 94. 13eawed ( 100 121.8 135.4 147.8 217.6

3. Fibers & fiber prod. 100 110.7 120.0 127.2 130.1

Fabrics 100 114.4 122.6 129.0 13].-loitted goods 100 -1-10.8 127.8 132.1 131.*

h. Rubber & rubber Prod. 100 106.3 110.3 o05.4 I118.9

Rubber shoes 100 109.9 1138 113.6 129.3Tires/tubes 100 104.1 105.2 104.0 108.8

5. Chfmicals & chemicals 100 103.4 99.7 101.6 103.7prod.

Chemical fertilizers 100 1OQ.O 85.1 85.1 87.7

6. Metal & metal prcd. 100 112.4 114.M 123.0 129.L

Steel products 100 105.0 106.5 109.1 111.5Ncn-ferrus metals 100 108.2 118.6 126.8 136.1

7. Machinery & parts 100 115.7 127.8 13908 :LL3.4

- General purpose 100 116.5 131.4 169.6 176.2- Electrical 100 108.9 123.2 125.3 1

8. Miscellenous prod. 100 118.4 124.1 131.2 131.5

- Synthetic resin 100 89.0 85.3 71.6 67.7prod.

- Plywood 100 104.3 105.5 108.0 106.6

Source: 13K.

- 1a -

Table 1.9

(a) Terms of Trade: Unit Value Index Numbers

Year Exports Imports Terms of Trade

1965 100.0 100.0 100.0

1966 109.1 97.8 111.6

1967 11L.1 98.7 115.6

1968 !117.6 97.8 120.2

1969 11.1.8 96.3 116.1

(b) Unit Value Index Numbers for Selected Major Groups

Exports 31 2 ManuifactllrAd

Food, Animals Crude Materials good classified 4Year Reverages. Tobacro inedibhl by materials Others

196A 100.0 100.0 100.0 100.0

196 110,7 112.5 10L.7 111.8

19Q7 11.0 I 8_- 107.3 11L.7

1968 127.8 197=2 116.L 112.8

1Q6 129Q7 199. 7 113.3 10h.3

1965~ inn-n inn0. 100.0 100.0

1966 97.5 -98.6 93.5 100.9

1967 99.5 98.7 9)-.} 10q.0

1968 99.5 98.0 95.7 106 81c~~~~~ ~o o C' O 1fl7)Q-

1969;7 9107 9 07.0 3.817.

'(1-cur c O e

- 18 -

II. TI-E TRIRD FIVE YEAR PLAN FOR THE INDUSTRIAL SECTOR

2.1 During the period of the Third Five Year Plan, 1972 through 1976,the mining and manufacturing sector is expected to grow at a rapid ratethough somewhat less than has been actually experienced'in the last fewyears and also less than projected for the Second Five Year Plan. Growthis expected in output. exports, domestic supply of products, and employment,but with significant differences in the rates for these various aspects ofperformaince. There are also differences in the rates of growth among theindividual industries. In particular there is a quite different pattern iII

the Third Five Year P]!an compared to the Second. for the obiectives of in-dustrial deve:Lopment are shifting dramatically from the light (consumergoods)' industries to t:he heavy (canital goods) industries. This shift isthe result of a deliberate choice in development strategy, and is regardedas the Ioni rql and necersarv next nhase in the sii-ccssfu1 devl opnment of

the economy.

2.2 In fact, the over-all success of the Third Five Year Plan, intprrms of thie growth of in-omp and balance of payments objectives, dependsvery much on the results achieved in industry. Support for that conclusionis found in t-he inductru Aetnils of thle. TFYP in th-ei targetsc Hiht ha1-vie bee

established for industry and the kind of performance that is forecast innoutnuut exnortSc :nrnd .Tnn1nvmont_ rncuio.izPnt1u St lc n0r-cic:v-< tr o vinmirn

…J---r.--….,--.-- rv -- -J ~--~~~-~;~~~-~ ~~ ~~^^~the policies and programs that are expected to lead to the desired results.By -1th eand of 1976 the structure of induictry and its relative importarnce inthe economy will have changed, if the plans now being made are in factrealized., E7'veyTn if the talrget-s are only nprtiallu mTn.t thecr srtra of

4n-

dustry in 1976 will be quite different from that of the late sixties.

A. Macroeconomic Targets and Objectives

2.3 The guidelines for the Third Five Year Plan contain a number ofprovision6,c di,-arectly rlating,c to, ob'ectiye fovr the~ 4nA,,dF-4,,tr4a! sector a wel1

as others that apply indirectly. A target for exports, now set at $3.5 bil-lion. by l9'76, -is 14sted first amongs all' the major wobjecie of the P'an.

Over 80 percent of this total must be met by exports from manufacturing in-Ulustry. Developr,,ent o I L- t1e heavy m,achinery, mer.,als andu che.,ical in,dustriesis also high on the list of major objectives, both as an expanded base for

CXPO. L~~1kU ~u~ UL~LL LUL O UPiJLY.LyLI,LAL LUU6~UUL~dI CdiL ± (;PLLdJ 6UVUU'5exportLs andLu as a meanr Cor suppyin -ne. t prdut andca ita od

that are now imported. The net effect expected is an improvement in thebaLnc of paymLLents anLLdL a strer.gthening of the [Ln-Ustrail structure in thecountry. Although they are sometimes couched in different language, theruaalor obècti-ves irl .l1LU a to L ncrease an' diversify exports, an' LOproduce a much larger volume of import substitutes. These same objectivesappearedu in thne previous 'ive year plan, but tLe content or the programs LOmeet the objectives has changed.

2.4 To achieve the major objectives the ministries and other agenciesare instructed to develop the "policy programs and means" for each of tnesectors of the economy. The required measures in mining and manufacturing

- 19 -

have been defined to include: several specific projects in the iron andsteel, machinery, and petrochemical industries; increasing the productivityof all :industry; promotion of import substitution in intermediate goods; andimprovement of the international competitive position of the sector throughbetter rmanagement, quality control, and efficient scales of plants. Theexact content of the policy programs will be determined by the ministriesand confirmed by the Economic Planning Borad (EPB) during the next few years;they will involve commitments for direct government investment, plus regula-tions and incentives applicable to the private sector to induce it to performup to expectations. In any event, the policy programs must be effective,for the targets that have been set for the growth of output and income, andthe reduction in the balance of payments deficit that is forecast, are form-idable.

2.5 The macro-economic planning model sets a target rate of growth of8.5 percent for the gross national product for the period 1972-76 (8.8 per-cent for 1970-76), and establishes rates of growth for four sectors (i.e.agriculture, forestry and fishing; mining and manufacturing, social overheadcapital; and other services) to be consistent with the overall target. Inthe latest estimates of the macroprojections the rate of growth of both min-ing and manufacturing, and of social overhead capital has been raised andthat of other services has been decreased. The average rates of growth inthe Plan period are: agriculture, forestry, fishing 4.5 percent; mining andmanufacturing 12.8 percent; social overhead capital 13.2 percent; otherservices 6.0 percent. By 1976 these differential rates of sectoral growthwill change the structural origin of income and shift it away from the pri-mary sector and toward secondary industries and the services.

PercentagePercent of GNP changeAverage1962-69 1976

Agriculture, etc. 36.0 21.4 -40.5

MZining & IManufacturing 20.5 27.3 33.1

Social overhead capital 4:3.5 51.3 18.0

Thus income originating in mining and manufacturing is projected to increasEfrom one--fifth to over one-quarter of the gross national product in thisperiod. In 1976 it is estimated that Korea will have the same structure ofincome origin as Japan had in the late 1950's when, however, Japan had asomewhat higher level of per capita income than Korea is forecast to have in1976, or as Taiwan had achieved in the late 1960's. The implication is thatwith the intensive industrial development program of the TFYP the gap betweenthe level of developmient of Korea and Japan will not increase, though it willcontinue to be substantial.

- 20 -

B. The Macro-Model Projection

2.6 A macro-model has been used to obtain projections for the majoraggregate economic measures during t,ha TFvP. Thi4e model 4i As-4 ned toprovide reasonable and consistent annual estimates of investment, exports,

and sioe 4n the e4onomy, given the. targt rate of growthn of G(TP. I,

model consists of forty-seven equations and identities. Of these some arebehavioral equations whose poarm-meters nare typ.i call1,y derived from. regressionanalyses of national income data (e.g. value added in mining and manufactur-in.igas a percent of total v a lue aAAeA 4 regressed o-n per cncome to

derive the growth of that sector). The regression analyses normally usehistor4cal data for the peri4oC 1955-69J, blut Aatta AfromJ the period 1960=69

are also used to check on the stability of coefficients in the equations.Tn a nu.m.ber of cases the coefficiets are qute Aiferent for thet

4.. 114&UA Li. tO O Ll S,C. C& U L u -CCIA CL_ L LLJ L LU tw peF riods; consequently the forecasts also will differ. Few reasons are givenfPor preferring the coefficients dleriveA from 1955=69 Aata over those de-

4.LJA. pA.CL L .~LL L.LIC AUA. ..L L _ LL CC 4V U7 -P UI I _J.JVJ U LO LV L LlI .

rived from 1960-69 data. A test made on an earlier macro-model of the econ-omy LndiULcates clearly that there hIas lueen a sLructural shift Lin the ecooiiystarting about 1966 and that the coefficients derived from data of theearilier period give results that are often quite diferr. -rmheacua~a .L.xA. j L %AJ JI.V £CLLO LlUAO L& O C WUJJ_LCL '-..jC.LC U±. LCA.LCLIL 4&L UUI .LA LL _ a tUCI.I

results of the late sixties. 1/ For example, the model seriously overstatedthe leve l of investment, p.-Lrtl u.LarAly in mL.nLIng andu manufLactur'Lng -whLere theestimate was 58 percent higher than the actual in 1968. Adjustments haveUceen umae InI tne currentL acro-muouel to try Lo accOmOuuouate LO LItC ShiLts

that apparently have occurred, but the instability of the coefficients re-mains a problem and the lack of a long serles of annual data representativeof the later period compounds the difficulties. The macro-model will befurther revised in the coming months prior to final agreement on tne rore-casts for the TFYP.

2.7 From the forty-seven equations and identities in the macro-modelit is possible to choose seventeen that essentially represent the activitiesof the mining and manufacturing sector and these can be condensed to twelve.This is shown in the appendix to this chapter. There are separate groups ofequations to determine investment demand, corporate income and savings (asa major component of domestic savings), private and public spending on manu-factured goods, import demand, and export supply. Each block of equationsin the sub-model yields the projected values for one or more of the abovevariables.

2.8 The solution of the model for the mining and manufacturing sector(and similarly for the other sectors) derives the growth rate of value addedfrom the regression on per capita income. Output is then directly calculablefrom value added since in the model it is assumed that the former is 3.02times the latter; that is, it is assumed that value added is a constant 33percent of output. As will be seen later, this assumption of constancy has

1/ Cf. Kim Mahn Je, "Post mortem Test on the Adelman-Kim Model," EconomicReseearcIi 3CL , r,tU cIULL LsitL t.L eUL. l. f LAor. Ecnmcs fBusiness, Soogang

College (undated).

- 21 -

some effects on the estimates of employment in the sector. Since a largepart of value added is simply labor's share of income originating in thesector, and with labor productivity normally rising, even with a growingvalue of output (and hence of value added) a falling level of employment mayoccur if the rate of productivity growth is higher than the rate of growthof output.

2.9 In calculating the growth rate of this sector and in making ad-justments to it, the Economic Planning Board has followed the methods usedin analytical studies of the pattern of industrial development (i.e. thechanging sectoral origin of income) in a cross-section of countries. 1/This work shows that as per capita income rises there is a tendency for in-come originating in manufacturing to rise more rapidly than in other sectorsfor low levels of per capita income. The results of the forecasts of themacro-model are said to agree with these analytical studies which indicatethat, on the average, the ratio of income originating in the manufacturingsector to the GYP is about 33 percent at a per capita income level of $300-400. If the calculations, arrived at independently by Korea, happen to co-incide with the results arrived at from a cross-sectional study of many dif-ferent countries there is some comfort in the comparison. but there is noreason Why Korea should necessarily conform to an average pattern of manycountrie5;. Economic; physical; and socia1 conditions make each countryunique, in spite of common underlying elements that exist. By way of illus-tration; Korpe hns hppr decidedlv ahove auprapp in essentia1 nprts of its

development, for instance in export performance, and in recent growth ratesof the Gr.P. In particular, Korea wniild h ill-advised to ic t-hnes stuie-sc

to provide guidelines or targets for the growth rate of the mining and manu-factusrI ng sctor.^

2.10 Fix4ed invsment- 4n m4ning and manufacturing is directly calculablefrom the growth of value added by applying the incremental capital-output co-efficient. The value of the coefficient used in the macro-model iAs 2.94.

This value is higher than in the past, and presumably was selected becauseof the prni,ecaA ojhift to indusitriec that a ra vtvtivlyl cnaital 4nt-enive.

The coefficient of 2.94 is the highest marginal coefficient that has beenexperienced in tlhe last few years. For 1960-69 the average value of thecoefficient was 1.7 and for 1965-69 it was 1.6. Thus the level of invest-merit projeted f,-. ti,a TPVP ..4 11 nf,lm^ t-ba am-4 a -,, ba, 4--t,-,

Even so, the value 2.94 may overstate the aggregate investment requirements.In the input-output -AalA on t-he othr hand the value of the capital-output

ratio is only about half as large and on a year by year basis it varies from1.5 down to a low7 of 1.3. Thus! the level of in.vestmen.t projected ir. theinput-output model may be seriously biased downwards. This occurs because ofth,e low,- values ch-osen for thec capital-output coeffi.ilents for individual in-UILC ..Sf. V0tl0 ttOL --. J flS aJ.1.. SJS LI U tYC 3 L1.L± S *J L 0-1 V ~ LU34 *Ll

dustries that are expected to have high rates of investment in the Plan period.

1/ Cf. H. B. Chenery & L. Taylor, "Development Patterns: Among Countriesand Over Time," The Review of Economics and Statistics, November, 1968,and the literature cited there.

- 22 -

2.11 MIachinery and other capital goods needed for fixed capital forma-tion are supplied either by capital goods imports or by domestic production.The macro-model has two equations to represent these alternatives. One re-lates domestic production of capital goods to total fixed capital formation.and the other estimates imports of capital goods also as a function of fixedcapital formation. In both cases the coefficients in the equations are re-garded as policy variables; by varying them the proportion of capital goodssupplied by domestic production and imports can be altered. In the actualmodel calculations, the coefficient of capital goods imports has been belowthe average levels of 1960-69, primarily because of the obiective of decreas-ing the balance of payments deficit, so that the burden of supplying capitalgoods for fixed investment is increasinglv on the domestic nroduiction ofmachinery and metal products. This is reflected in the very high rates ofgrowth of outnpit that are roniected for these indiLqtri PA Thpir ratfe ofgrowth are the highest of those in the manufacturing sector.

2.12 Domestic savings of corporations are calculated by first estimat-ing corporate income asafunetlonof value added in. the manufacturing sec-tor and then estimating the marginal savings rate out of income after taxes.In the -. del corporate taxes are assumed to be a constant 19 percent of totaltax revenues. The marginal propensity to save is estimated at 66 percentbased or. data for 19..J55-J69J, th.ough if data for the sixties 4is used the ratleis only 61 percent. It is expected that a much higher proportion of futurecapitall r.eeAds willlibe financed from retair.ed ea..r.gs t-h-ar. has_ beer. trui

L.ajJ. OS. *UCLL0 WLL i/ A. fla*CC'i ±. iILL C O.LICt COt.L10 LuCI LSCL. UCC&L4L.. UC ±11

the past, and with a high propensity to save that result is theoreticallyachievable; h-owever, as is Aiscussed later, the financial ir.centives -in the

CL L± V U.LC &I.W I . ".C UL ~C C .LO L.L LLIC J1. ILCLLL%.±G.A .L LICL L.. CL .LI LAII

market are weighted in favor of financing by means of loans. CorporateCCV EIIV,L L Z IIU ±II Ltvu CI ox OI ; S. L.*.. VC LUV tLIdSl.5- J LIIL .A I. CZ . C , L , ,CL_S..L LC LM.LH CuLLL

availability, and production costs. In the past few years retained earningshave pro-vided a declining share o'f finance so that if the obJectives of theTFYP are to be realized with respect to financing expansions from retainedearnings, the trend will have to Ue reversed.

n din I _ _h _ - - _&^___1_..1_wJ_£_____1 4. I Jeparate cdaLUcLaUtlo dL are mae L'UL eaI.L IUCJUL LUUILUIICLtL U.L .UUpUL L

demand. The three largest import groups are capital goods; raw materialsfor domestic processiing or use; and Lmports useu iU expUrts. The two re-maining groups are food grains and petroleum.

- 23 -

T.pr of-+ -I. Tport of:

Capital Raw /1 Imports for_____4_-_ _- / p J - L_ Goods *raterial0s- Ex,,poL

GWrowth rate 170=-76 .. 2.0'JLLJWLL L~jL 7 IV I V~ J.I L.O.-Vu

Composition (%)

1976/E 44 t0 LO V 4L U

1972-76 23.6 28.1 38.1

/1 This category of imports is primarily intended for domestic use; butcontains elements wnich are related to exports, e.g. fuel for power,and imports needed for processing of domestic resources which in turnare used in export goods.

Imports of capital goods are expected to grow at slightly over 5 percent,which refLects the policy decision that domestic production of such goodsby the new heavy industries must supply much of the demand. By 1976 capitalgoods imports will be only 23 percent of total exports. If heavy industrydoes not rneet the targets that have been set, either imports will rise andthe projected improvement in the balance of payments will not occur, or alower level of growth of output, income and investment must be accepted.In that important sense, the performance of the heavy industries is one keyto the overall success of the Plan.

2.14 The allowable level of imports to be used in exports is also theresult of a policy decision. According to the model projections, such im-ports will continue to grow, at a rate of 26 percent per year, and by 1976are expected to account for 42 percent of all imports. Nevertheless, netexports (i.e. gross exports minus the imported content) will continue to im-prove and the deficit in the balance of merchandise trade is expected to de-crease from about $1 billion in 1970 (in 1969 prices) to about $400 millionby 1976. The import content of exports will rise steadily during the period,however. In 1962-69 it averaged about 30 percent but is projected to riseto over 47 percent in 1976 and to average over 46 percent during the Planperiod. Since in the model imports of all mining and manufacturing productsare assumed to be a constant 70 percent of gross merchandise imports, themajor change in the import pattern is a shift away from capital goods imports,to a lesser extent a similar shift away from raw materials for domestic pro-cessing and use, and a larger shift toward imports used in exports. Theseshifts are evidence of the emphasis on exports in the TFYP and they also in-dicate something about the direction of import substitution, which is pri-

*marily on capital goods, rather than on raw materials or intermediate prod-ucts. It is evident that the composition of imports could be changed with-out altering the forecasts of the deficit in the balance of merchandisetrade. If the import content of exports and of materials for domestic use

- 24 -

were curtailed, imports of capital goods could be allowed to rise, thuseasing the pressures on the heavy industries. But domestic industries toproduce non-capital goods for intermediate and final use are to some extentresource-limited and not in as favorable a position to expand as they havebeen in the past.

2.15 A target of $3.5 billion in gross exports by 1976 has been set asa major goal of the TFYP. According to the figures shown in the paragraphabove this translates into net exports of $1.9 billion. The macro-model con-tains one inequality to ensure that total available supplies of goods (i.e.domestic production plus imports) will be sufficient to meet domestic finaldemand, intermediate demands, and export targets. Thus the results fore-casted are at least internally consistent. During the Plan period totalmerchandise exDorts are proiected to increase at a rate of 22.8 Dercent.about half the average rate of the late sixties when they posted their high-est growth. By 1976 exports will amount to almost one-third of the GNP- butfor some of the key industries in the manufacturing sector the projectionsare more ambitiousc. For the groun of finished metals and mni-hinerv ind.ic-tries, exports are expected to increase by more than ten times from 1970 to1976 and in the latter year about half of their total output will be ex-ported, according to the detailed Plan forecasts. To reach such targetswill obviously renuire not only a ranid development of tbh nrodnrrtion baseof such industries but also a very intensive marketing effort.

2.16 The macro-model is useful for showing sectoral behavior or per-formanre in onttnut- investTTent_ and the sertoral rontribution to e3xportsand imports, but it does not show the structural changes within the sectorthat are to ocruir diuring the Plan nperinod= Sme indiiutries will grow mnrerapidly than others and their relative importance will change. In particu-lar the objective of developing heavy IndustrIes will radically change theirposition and importance. Such structural changes are best seen in the fore-casts provi by th- fortyt-the s e1a cptor ialnp-output model. An examin-t40n

of the manufacturing sector of the model provides the framework for the de-tai led. .omIodit-Uy and in-dusttALy anal.yses thLat fo tt er L4tC I .011..- par", of thi 4s

report.

C. Structure of the Manufacturing Sector

2.17 The sectoral model used for planning is a conventional input-outputmodel with forty-three sectors that cover agriculture, industry, trade, andservices. Of the total sectors defined, a sub-set of twenty three sectors,or slightly more than nalr or tne total, cover manuracturing. Lnis sectorstarts with the textile group (industries 10 through 12 in Table 2.1) andincludes wood products and paper; leather and rubber products; chemicals;basic metals (iron and steel and non-ferrous); finished metal products;machinery; and a miscellaneous category (which, however, contains the im-portant commodity wigs). Thus the definition of manufacturing covers allthe industries that are normally included within the sector, with the excep-tion of agriculturally-based industries such as food processing. The number-

- 25 -

ing of the industries and the descriptive titles have been preserved in al'Lof the tables annexed to this chapter so that comparisons with the origina:Lmodel can be made directly.

2.18 The sectoral model is based on an input-output table that wasoriginally prepared from 1966 data and updated to 1968, but the revision didnot involve wholly new data. It has sometimes been called a "synthetic" 1968table to indicate that fact. This is the model that is now being used tomake projections for the Third Plan period. As is well known, one of theshortcomiings of an input-output mode:L is the difficulty of keeping it up tc,date, to reflect technological changes and alterations in trading relation-ships among industries. The coefficients in the matrix should be changed ifthe mode!l is to give accurate results. At times particular technologicalchanges can be measured and incorporated in the model, for example, whenrailroads switch to diesels from steam; but when the changes are pervasiveand affect a number of industries, the only recourse is to construct a newtable.

2.19 The Korean input-output table, based on 1966 data as modified, isprobably sufficiently representative of the conditions that will exist upto about 1973 to be used for projections for that period, but in the lastthree years of the Third Plan period major structural changes will occur assome of the big investment projects are completed, particularly those inmetals and machinery. Consequently, the forecasts made with the model forthe late years of the Third Plan period will have some bias in them. Theanalysts in the Economic Planning Board are aware of these problems and havetaken certain steps to revise the coefficients in some industries, but theadiustments do not solve the problem. What is needed is a new input-outputtable based on current data. This is a rather large statistical undertaking.If it coiuld he at least started in the next year or so- the results might bieused during the Third Plan period to revise the projections for the latterhalf of thp Pl.n..

D. Determination, of Industrv Outout Levels

2.20 The levels of outiDut for each of the industries are derived i n thtnormal way. The vectors of final demand (i.e. private and government con-snnmntion sRend-ing- deliveries of nroduct for fixed cani tal formationn rhnngesin stocks, and exports) are first established for each year in accordancewith the qgidelinps on growth that have heen set in t-he macro-model - Nor-mally, the growth of consumption spending is estimated based on the incomeelasticit-v of demand for grouns of nrodurtq . Thp total level of pynorts hasbeen set exogenously and. this total must be distributed among the industries.Then the oit-it I evs renirired to meet the final demandnd nd the int-erTmed-iate demands in each year. are computed by multiplying the total final demandvector hv 1-he inverse matrix. The levelq of ,it-nuut i-in t-he model for 1970 andfor the final year 1976 are shown in Table 2.1, which also shows the growthrates foyr 1q70-176 and for 1965-69.

- 26 -

2.21 The ilanufacturing industries as a whole are expected to grow atabout 13 percent per year from 1970 to 1976 in contrast to the almosr 23percent rate registered in 1965-69. This growth rate is substantially high-er than the 9.7 nercent (average for 1970-76) that is estimated for 211

sectors in the economy. Ihe retardation of the growth of output is mostnoticeable in the neriod roughlv 1971-73. This is nreutimah1v hberaiue of

the policy of trying to halt inflationary pressures that have recently beenhitildino pin in the economy.

-722 Mont nf the mTnnniiftstiring indanctriec nre Pvcnpr-ted tn hnv 1 c1-n.0or

rates of growth in 1970-76 than in 1965-69, but there are some notable ex-ceptions Rubber products, iron and steel, non-ferrous metals and non-elec-trical machinery are projected to grow at rates that are substantially higherthan in the nat,- and the finishped metal products industry is expected to

continue the past rate o-f-expansion. Some of the changes are quite substan-e-inl fo-r cn m nlo irrnn lny CtcDl iC cvrvnortaol trn r-r!cc 4tc rntn of cynirY.t-

from 15 percent to 25 percent; and non-electrical machinery is to acceleratefrom 10 percent to 25 percent. These rates of growth are the result of thetargets that have been set for exports and for capital goods import substi-tution. If the targets are to be met, the expansion of these industries mustbe accelerated. It can also be observed that there is a shift away from theemphasis on light consu..er goods indu tries toward thne hn.e avy induA-trie.IThe former group was favored in the Second Five Year Plan that is coming toan endA. Th-e T.hird APlan favors thelatter group. m;e ueals and machineryai Lfu. A.j ALL.L LU A..a~A CA ~ LU Li . LQ.. L 6L SJU . A.Il £U LC. C 'iiu CL%aLtLLi% A.

industries have growtth rates roughly in the range 15 to 25 percent, whereasth_e 1ight industries are general'ly bue'low i15 percent, except inafecssLLL~ J±L LLJ .IUU~L L ~LLa1y UJW IJ j .. L .LIc e w cases

such as finished textiles and rubber products which are expected to contrib-ute muclhi of thei.r output to exports.

2L.23 Since t'ne 'Leve'l oi output is derived romiH thi'e ' hd!eiaL u estLi

mates plus those intermediate demands generated in the model, there is noindependent way of judging the credibility of the output estimates. It rmiaybe argued that since the rate of growth of manufactures is projected at alower level than has been achieved in 1965-69, there is reason to believethat the output levels projected can be achieved. But rates of growth canbe deceiving. In the years 1965-69 many or the industries expanded fromvery low levels of output. It is more difficult to nmaintain the pace oncean industry has matured. This can occur of course if domestic and externaldemands for the products continue to grow.

E. Composition of Demand

2.24 Table 2.2 shows the composition of demand in the sectoral model.Demand is divided into final demand and intermediate demand. The lattercategory is the demand for products by industry for further processing: itis the demand for inputs. Exports, which constitute one component of finaldemand, have been shown separately. Domestic production plus imports com-prise the total available supply of commodities.

- 27 -

2.25 For most industries the composition of demand changes very littlebetween 1970 and 1976, but in a few significant cases final demand is alarger part of the total in 1976 than it was earlier. Most such changesoccur because exports are projected at a much higher proportion of the totaLin 1976. This can be seen in the table. It is particularly true in tex-tiles, some chemicals, leather and rubber products, steel products, elec-trical machinery, and transport equipment. The table also indicates the in--dustries that primarily provide the intermediate products used in furtherprocessing and manufacture. These are the industries that should be madeefficient: and perhaps provided with moderate protection by the tariff sys-tem if any gains are to be made in reducing the import content of exportsor domest:ic goods. There are ten industries that deliver more than three-quarters of supply to intermediate demand. These include fiber spinning;paper products; the chemicals group; glass, clay and stone products; andthe metal group (principally iron and steel). Petroleum products are alsoincluded but unless crutde oil is discovered in the country, nothing can bedone to change the dependence on imports. As is shown later in the report,the tariff structure has provided the greatest protection to the light con-sumer goods industries because these were the source of most exports in thepast, but in the Third Plan Period it may be well to alter the structure toencourage the domestic production of intermediate goods. This should not bedone of course simply to protect a permanently inefficient industry.

F. ExDort Forecasts

2.26 It is evident from the model that the key to the forerasts of ner-formance by manufacturing industries lies in the export targets more thannnvthin- else. This Is amnlv demonstrated in Tables 2.3 nn6 24. Expnrtsof manufactured goods are expected to grow at 26.5 percent from 1970 to1976; and in the 1atter year almost one-third of total ouitnpit of the sector

will be exported. At that time the manufacturing industries will supplyalmost 80 nperpcnt Of tot2l exnorts. Tn absco1uite terms abounvit t2.7 1illion

annually must be marketed by 1976, compared to less than a quarter of thatamount estimated for 1970.

2.27 The ffgures for individual industries are sometimes more amhitiotLsthan the aggregate figures just cited. In 1976 five industries are expectedto export more than half of their outnu-t. In two rases (plywood and miscel-laneous manufactures, primarily wigs) this percent is already achieved, butexnorts of finished textile nrodurts are to rise from iuis t nuer one-tih,ird ofoutput to over one-half; rubber products from one-quarter to one-half; andelertri marfnenerb prnrincJinallv electronir equipnment, from ne-quarter to

two-thirds of output. Cither industries will be required to shift from beingnet imorer to nati expnnrterc of products (ar 3s , e r 4 m,, 4--

ports). For example, by 1976 Korea is expected to be a net exporter of steelproduct.s, finished metanl -p--4rct c-er _al m ner;, wheres i 1970

- 28 -

it was a net importer. - The rates of growth of exports for many of the in-dustries have been established at levels above 40 percent. This is the casefor the machinery industries, basic chemicals, and leather products, and itis over 30 percent for rubber products, other chemicals, glass, clay andstone products, steel products, and finished metal products. By the end ofthe Third Plan the composition of exports will change because of the emphasison the heavy industries. The various textile products will continue to bethe largest source accounting for about one-third of the total, but exportsof metals and machinery will have grown to slightly over 30 percent of thetotal.

2.28 The export targets that have been set for manufacturing industryare extremely ambitious. There is a very real possibility that they cannotbe achieved. The forecasts that have been made in the model are not hb-don detailed market studies by type of commodity, showing what the growth islikelv to be, what comnpetition exists at- various prires, and what -ro-ramnswill be needed to penetrate the markets. The information that is collectedand disseminated by the Korea Trade Promotion rornoration (KOTRA) is exten-sive and current, but it is not sufficient to construct a marketing strategynarticui-ilarlv for the new types of products that are to be exported duringthe Third Plan period.

2.29 The counter argument of course is that Korea was spectacularlysuccessful in expanding its exports in recent years; rates of growth insome years exceeded 40 percent. IWhat has been done in the past presumablycan be done again, and the analysts who cast doubt on the targets in thepast will be proved wrong a second time. But is the past record a goodguide for the future? During the late sixties over half of Korea's exportswere accounted for by four product groups: clothing (e.g. knit goods),plynood, wigs, and radi'os a similar applirances. Korea was als,o very suc-cessful in developing exports of minor products that in the aggregate con-trib uteUd substantially LLto th.e total; these included raw silk, fresh andfrozen fish, leaf tobacco, dried laver, and tungsten ores. Almost threequartLers of to tal exports went to tLWo countries - tLh e .T) and1 Tapan. Ilhe

exports of consumer goods occurred at a time of rising income and strong de-Uand in both countrLes. Price competition was not a .major factor in mostcases since the products are differentiated, style is important, and pricedifferentials can exist among competitive goous. ThCe miarkLet f.or metals andmachinery, a large component of the new export structure, is rather differ-ent. The products are standardized and are purchased on specification bybuyers who can and do compare quality, capability, and price among compet-ing products. The emphasis on these factors means that the producer and ex-porter of machinery must be prepared to match world market conditions in pre-

1/ It should be noted that exports and imports both occur within any in-dustry because there are multiple products in each classification.Exports and imports are not the same specific commodities. For ex-ample, standard machine tools might be exported while high precisionmachine tools are imported.

- 29 -

cision andu in cost. If rxm,for examLpe, an internationall;-y known .,.achiinebuilding firm with an established record were to become a co-sponsor of theheavy machinery complex planned in Korea, thIe pLUPspCLs foL success wul

be improved.

2.30 There is both a compositional and competitive aspect to the pros-pects for exports. The former refers to a shift among export products to-ward those that are growing more rapidly in international trade, and thelatter refers to the ability to increase the market share by taking businessaway from competitors. Korea is in a favorable position with respect tocomposition. Trade in metals and machinery has been growing more rapicdlythan for consumer goods. Imports of electrical and non-electrical machineryin Japan and the United States have been growing at about 25 to 30 percentand metal products at 20 to 30 percent; textile imports into the U.S. havebeen growing at only 15 percent and chemical products at slightly less tha:1that. But the rates of growth projected for Korean exports are higher thanthe growth of the market, so that it is only by obtaining a larger share ofthe market that the targets can be met. In view of the world-wide competi-tive conditions of the market, this may be difficult to do. Selling machinierysuccessfully is more difficult than selling wigs. In summary the mission be-lieves that the export projections for manufactured products are very opti--mistic and will require a greatly strengthened marketing effort and closerattention to production costs than has been required in the past.

G. Private and Public Consumption

2.31 In the final demand estimates of the model the patterns of growthof private and public consumption expenditures, deliveries of goods for fixedcapital formation, changes in stocks and total final demand (including ex-ports) are showm in Table 2.5 through 2.9. Private consumption spending isexpectecl to grow at a rate of 16.5 percent for manufactured goods and thecalculated income elasticity of demand is 1.6. This may be somewhat hiah inview of the level of per capita income and income distribution in the coun-try; also many of the individual income elasticities are highly suspect. Forexample, the elasticities for leather and rubber products (including tiresand tubes) are very low, yet for transport equipment (cars and bicycles) theelasticity is very high. Normally these would move together. In fact, theincome elasticities are very high for all three of the machinery industries,much higher than is typically found in countries where the income levels arehigher than in Korea. It seems unlikely that the pattern of demand repre-sented by the income elasticities would occur in Korea in this time period.It may be that the demands showin are a result of the treatment of privateconsumption spending almost as a residual, though there are other possibleexplanations. It does appear that a more careful examination of this cate-gory is desirable. On the other hand public consumption expenditures show astandard percent rate of growth in demand for all industries (with one ex-ception which seems to be an arithmetic error) and that rate is the same asthe projected rate of growsth of the GNP. While this is acceptable as a firstapproximation, further analysis of this category of demand should also beinstituted.

- 30 -

E. Capital Formation

2.32 Investment demand in the model consists of increases in. stocks anddeliveries of goods for fixed canita1 fnrmation= Becausce of the proceduresin constructing the input-output table, only the machinery industries andwnod nrndiucts dpliver nprndiirt d4irec-t-lv to* fi-xed rcapitaIl fnrTnnm-torn. Mnnl

other products that normally are required (such as iron and steel, metalnrour._ts Ptcr) channpl thepir innlits throngh the construction indusatry- whichin turn has a large input to fixed capital formation. Except for a few in-dustries t-ho rate of-inreas in ientorie i projected ata standard17.3 percent; however, for fertilizers, petroleum products, and coal productsther s ates range from 30 percent to 64 percent. MTy such large increases arerequired in those three industries is not clear. Moreover, a standard rateof 17.3 ~percent means that 4- to_ry- creaoes aFre. related neither to outu

levels nor to the growth in final demand, yet either or both of these typic-ally 1 o,.ver- the levels -f 4nventor4es that are carried-. i.- e e sntnfm lates ons

StUt .tV tt.* *4 -ta tc ..Ct tCU .LiC~ &tC ~ t .

inventories probably could be improved if that kind of relationship isanalyzed.A

2 *3 The actual amoint of f4vnA 4r tmrr nt- -t -t- o ; n,c T,,4-1 4,-. ; c h 4n;

dustry to support a growing level of output is computed in a special way inthe,Im.ode!. The required invest..ent ir. each ind us-tAti any year 4. i deter-

mined by subtracting actual output in year t-1 from actual output in year t~I1U LSA~.L UL~J L UJ Lili .AtL. SSLt U .. pLdJ U~L' LL LI d , L, \.L~J 1\J*U.UV .an d mu lt ip y n g by the nc.remental cptal=-output ratio (CR. 1, sual'ly of

course investment is required when the level of output cannot be met withexLstiLng capacL i ty 'and somUetilmes allowing .or 'ecumuu'a-onL o. stoclS- \ ow-

ever, satisfactory statistics on capacity and its utilization are not avail-able, and the procedure is an acceptable suLLstitute. *It should be noLed thatit means that the amount of excess capacity existing in the first year of thecalculation is carried on into later years, but with rising output this alsoimplies a rising rate of capacity utilization in the later years, so thatthe bias becomes less important.

2.34 Capital formation in each industry and the ICOR's are shown in theTables 2.10 and 2.11 respectively. They indicate that fixed capital forma-tion in manufacturing industry is expected to grow at only 6.6 percent where-as output is growing at 14.6 percent. The former rate seems low for thegrowth expected. There appears to be an underestimation of investment re-quirements in mining and m-'anufacturing, and possibly in other sectors sincethe over-all rate of growth of investment is only 5.5 percent. This resultcould occur if the ICOR's chosen are biased downwards. The analysts hadfour sets of ICOR's to guide them in their choice for use in the sectoralmodel: (1) a set based on an analysis of Korean wealth data; (2) the ICOR'sused in the Second Five Year Plan; (3) Japanese data of 1955; and (4) U.S.data of 1947. An examination of all sectors of the model indicates that forseventeen industries the ICOR estimated from the wXealth data w,as chosen andfor ten others the Second Plan ICOR was used. In other cases the ICOR chosendiffered markedly from any of the others. The estimation of ICOR's is no-toriously difficult; estimates will vary depending on the data used, thetime period, the degree of aggregation of products or industries, the prod-uct mix, and other factors, but based on the results shomn in the projections

- 31 -

of fixed capital formation in total, it would be prudent to re-examine thecalculations and the values that have been used. There is support for thissuggestion in the fact that in the four sector value added aggregation fromthe input-output model, the aggregate ICOR is loxwer than has been experiencedin the past.

I. Employment and Productivity

2.35 The sectoral model also showqs the changes in employment in manu-facturing that are expected to occur during the Plan. Independent estiratesof labor productivity havE! been derived for each industry, and expressed asthe number of employees required per billion won of output. By multiplyingthis set of figures by the output level in each year, employment in each in--dustry iS obtained. The labor productivity rate and the derived employmentlevels are shown in Tables 2.12 and 2.13 respectively. The annual laborproductivity rates of increase vary widely from 0.2 percent in steel to 16.1percent [n coal products. In fact, the estimates are, in many instances,almost surely in error.. For example, in iron and steel a major new projectwill be completed in 1973 and labor productivity rates will almost certainlyrise fairly rapidly. In contrast, there is nothing in the technology of coalproducts (e.g. briquett:ing) to suggest suclh a high rate of increase in laborproductivity. The mission discussed these figures with the analysts of theEconomic Planning Board, and it appears that the estimates are biased be-cause of the time Deriod chosen and possiblv the methodology used. Presum-ably revisions will be made in the estimates in the coming months.

2.36 The results of the calculations indicate that labor productivityin manufacturing as a whole will increase only at a 3.1 ner.ent rate; hbutfor all industries the rate is 6.7 percent. Thus the biases in the esti-mates myv he in a different dirertion in other sectorsr FOr the recent pastlabor productivity increases in manufacturing have been independently esti-tnnted at more than twire the rate of 3.1 nper-ent> This loei rate alo leadrl

to a very high rate of increase in employment in manufacturing, above 11 per-cent. Finallvyin three industries (i-e. wood nrodurts, petroleum, roalproducts), the rate of increase of productivity is higher than the rate of1ncrerse of ouitnuit so that emnlovment is nroiected to decreraep an odd oc-

currence in an expanding manufacturing sector. From all the evidence boththe nrodutct-ivit-v rat-es and the derived empnlovment levelsP are in error and

will require correction.

2.37 In summary, the sectoral model is a useful tool for showing pro-jected strnctural chanoes in the eConomv and nlso for nrovirfding a guide to

the performance expected from industry during the TFYP. In its actual ap-plication, and prior to final use, certain revisionsic in severa1 of the cate-gories of final demand would yield improved results, and, in particular, theexport targets thnat largeaoly drive thez mnodl cshouldl hb relnted to th- cir-f44cpolicies and programs that may reasonably be expected to lead to the desiredresuilts.

- 32 -

J. Limitations in the Plan and Constraints on Development

2.38 Both the macroeconomic model and the sectoral model concentrate onobtaining projections that are internally consistent as determined by thestructural and behavioral conditions that are set in the equations. Themajor limitation is the omission of prices and monetary variables. Neitherof the models as presently constituted can address the problems of changesin prices and potential inflationary pressures in an economy that is aimingat a high level of growth requiring increases in domestic savings while atthe same time foreign savings and the deficit in the balance of payments areto decrease. Nor can the models evaluate the effects on investment and out-put decisions of monetary policies aimed at stabilizing the economy and con-taining inflation. These kinds of considerations are analyzed outside ofthe models. The situation is not unique to Korea; it is typical of mostcountries that use planning models. There are times when this is a perfect-ly valid way to handle the problems; but during the TFYP the Korean economyis expected to operate under considerable pressure in order to meet the ex-port targets; to shift the emphasis in industrial develonment to canitalgoods industries, and to decrease the inflow of foreign capital. All thisis to be accomnlished while at the same time industrial output continues togrow at about 15 percent per year. In these circumstances, it would be de-sirable tn hnvp an analvRis of monetary factorA and nolicips to comnlementthe analysis of output, investment, etc. levels in the planning models. Theinfnrmition on mTnnPv-f1owq deiscrihPd in Chanter TV nrovidpe a basis for this

kind of analysis. The new Korea Institute of Development might undertakesucoh wnrk.

2The efforts to Tmintain resnabnnle nriro stability withoutsriu

inflation may conflict with programs for the maintenance of a high rate ofgrowth in industry. Many coutrieunrrie ladD iint'or t-is dilemma, that is

the reason for suggesting continued attention to both monetary factors andreal fct-rv-c i the prorncc of nlanningc Ar th-eo tima f tho w.rritin, of this

report, the policies for achieving stability were reflected in developmentplannng in a retardationof expansion rates in the period 1971-73. Tn thefour-sector model, capital formation in 1971 and 1972 is projected at lessthan the previous two years and only catches up after 1973. Presu.mnbly after1972 the pressure on prices will not be so great, though one cannot arriveat this conclus-on simpnly from the model results. It seemnc likely that this

will be a continuing problem, and that the industrial growth that can beachieved bmy be affected in t.e course of f ing aoi

4J. An m .. v _ se : 1p sLanfaJ. .1er _e plAnJ_ Onles s thS.C *fs4T< . tvivL ;>t u.>l > j u -L.LL 1 . , "I 1 - 1---

of achieving both the desired growth rate and a decrease in foreign capitalrequLre,enits because the capital coefficients (i.e. ICOR's) used to coLLpute

investment requirements appear to be low and hence the level of investment islow. If, as seems reasonable in view of the capital intensive nature of in-dustrial development in the TFYP, the aggregate capital coefficient risesfrom the level of 1.6 applicable during 1960-69 to about 1.8, the totalamount of investment to sustain the growth rate would rise and most of theincrease would probably be in foreign loans and investments. Since the do-mestic marginal savings rate is already assumed to exceed 22 percent, it is

- 33 -

unlikely that domestic savings could be pushed further to supply the largeramount of investment, and the alternatives are (a) a higher level of foreigncapital. inflow with an increase in debt and a worsening of the balance ofpaymnents position, or (b) a decrease in the projected rate of growth, or atleast a. deferral of certain capital intensive projects. There exists a po-tential constraint on the rate of growth if it seems undesirable to increasethe amount of foreign capital and domestic capital is unable to fill the gap.

2.41 According to the sectoral model, employment in manufacturing isexpected to grow from 1.5 million in 1970 to 2.8 million in 1976, so thatlabor supply may provide a further constraint on expansion, as labor mustbe attracted from other industries. As has been mentioned earlier, the em-ployment estimates may be biased upwards because of the low estimates ofgrowth in productivity, but even if employment may be lowver than forecastthe problem of labor availability will not be automatically solved. Ofpossibly greater significance is the fact that wag,e rates have been increas-ing faster than productivity, and production costs have consequently tendedto increase. For manv traditional export products a rise in labor costscould result in a weakening of the competitive position and a loss of mar-kets thus endangering the export target that has been set in the TFYP.

K. Summarv of Recommendations

2.42 Planning procedures and methodology are well develoDed in Koreawith the macroeconomic model to show tne projected behavior of national in-come azgregates and the sector model to show the individual industry details.The economic models have imperfections, as described above, and revisions ofthem will imnrove the effectiveness of planning.

2.43 The macroeconom:ic model has been under review and as model-buildersrealize, the process of modification goes on continuously. The Korean modelneeds work to imnrove the estimates of the coeffirients but some of the dif-

ficulty is due to a lack of a sufficient time series of data. In other cases,however, the structural or behavioral equations need modification. The re-lationships postulated are sometimes overly simplified. The model can alsobe utilized more fully than it has been, particularly in determining the re-sults of adopting alternative kinds of policies. At present a single set oEpolicv v.ari1abPs and ronst-raints are c-hoePn and a single set of results isproduced. It would be very desirable to run the model a number of times(since the cost of dfoini so is rather sm1A 1) anA to tpst the sensitivitv ofresults ito changes in policies. This kind of test has not been made withths mdnepl -althogah nnrmally this is one of the mTninr hnnpfitc: t-ht- c:hntilAbe realized. In making five year projections with the macroeconomic model,the analysQts- should calc the results ofahrane o. outcomes that varywith significanit changes in the important policy variables (such as the im-nnrt cfnoeifilcints c. * '-). TlPii a na ly xtic a l workl, sh-il n -b- e. A- fffcCult

to undert:ake with the present staff.

2.44 Of equal, or perhaps greater, importance is the need for combining;.macroecon0mic cal.culato4 as -4 b-ud ear,y 4 decio4ns as. reresented, for ex

ample, by, the overall resources budgets, to arrive at annual operating plans.

- 34 -

Korea is now at a stage of development where detailed control over individ-ual projects and industries throughout the economy has become too complex tobe completely controlled from the center. Yet guidance from the centralgovernment and changes in public policies are reantired to correct laggingperformance or to check overly-ambitious activities. Annual operating plansare a means to identify Droblems that are likely to be criticalduring theyear and to indicate the resources that will be available for developmentand the policies that may be instituted. Such an annual operating planwould provide guidelines both to ministries of the government and to theprivate sector. It would be appropriate for this work to be started by theEconomic Planning Board, in conjunction with the new Korea Institute of De-velopment. Basic work will have to be done on the appropriate design ofthe Plan and the methodology to be used since the Plan must combine thebudgetary data, the macroeconomic model, and probably parts of the flow offunds and sectoral models.

2.45 The sectoral (input-output) model should be retained as an essen-tial nart of the planning framework. It provides informationr in a unifi edform that is directly related to national income aggregates and the macro-economic model. Tn particular the mission recommends that in the conductof censuses of manufactures, commerce (and agriculture also), the statisti-cal format of the flow table of an input-output model be retained an'd usedfor detailed industry breakdowns. This means that detailed distributionsof costs (including value added) and sales (including sales to the variouscategories of final demand) will be available for individual industry analy-sise This format is a useful way to organize the collection of s -atistics.However, for planning purposes and forecasting, the 43-sector model is cost-lv both in time and man-ower. The mission st-aff discussed with the analystsof the EPB a possible shift to a 14-sector model in the future. About 9sectors are identified in the national income accounts and one of thesecould be disaggregated into 6 additional sectors to show some of the detailsin manufacturing industries. A 14-sector rodel is probaulysufficient forthe indicative planning that the sectoral model provides. At that level ofaggregation there are many ot hLer statistical series also available. if insome cases greater detail is needed (as for instance in the analysis of ex-ports), the necessary information could be provided by independent analysesoutside the formal framework of the model. With a 14-sector model the workloal will be s,a"uler anu tne analysts can spend more time exploring thesignificance of alternative plans. This would be a distinct advantage.The riuissioru endorses the shift to the 14-sector model for future planninguse. Initially, joint models might be prepared to determine what is lostby the aggregation.

L. Consequential Action by EPB

2.46 In response to the recommendations mentioned in the preceding sec-tion, the EPB has taken some steps to modify its sectoral model and some ofthe assunmptions in the TFYP. The main points on which action has been takenare mentioned below:

- 35 -

(i) The classification of the 43-Sector model has been aggregated into14 sectors at: the final stage. Data derived from this aggregatedmodel have been used for checking the internal consistency of theTFYP.

(ii) The figures regarding private and public consumption expenditureduring 1972-1976 have been recalculated on the basis of data forthe years 1960-1969, compiled and analyzed by the Bank of Korea.The table below compares the earlier figures with the revisedfigures. It will be noticed and public that the figures forprivate consumption expenditure for manufactured goods for 1970have been revised upwards substantially. The rate of growth forprivaLte consumption expenditure during the TFYP has been reducedfrom 13.8 to 12.3 percent per year, while the rate of growth forpublic consumption expenditure has been increased substantially.

(Unit: Billion Won-1969 Prices)

A. Private Consumption

Rate of Growth1970 1976 1970-76

1. First Estimate

(i) All industries 1,606,740 2,570,010 8.2(ii) Manufacturing 336.752 713.163 13.3

(iii) (ii) as percentageof (i) 20.9 27.7 -

2. Revised Estimate

(i) All industries 1.592.232 2.466.582 7.5(ii), Manufacturing 596,294 1,188,219 12.3

(iii) (ii) as percentageof (i) 37.4 48.1 -

B. Government Consumption

1. First Estimate

(i) All industries 234,147 383,478 8.4(ii) Manufacturing 13,057 21,195 8.4

(iii) (ii) as percentageof (i) 5.6 5.5

2. Revised Estimate

(i) All industries 251X968 4S7;918 10_5(ii) Manufacturing 31,119 96,395 20.5

Niii) (ii A--, nprerntnagp

of (i) 12.3 21.0

(iii) The projections of changes in inventories, which affect the invest-ment calculations, have been revised, and the growth rates now rangefrom 14 to 24 percent per year for different sectors; but the totalintermediate demand projections have been held down to a iow averageby assumed reduction of inventories in the agricultural sector, atan average annual rate of about 16 percent. Tnis may not be reai-istic; and the figures would need further analysis, in order toobtain a more reliable estimate of needs for capital fonnation.

2.47 Tnese changes do improve to some extent the consistency of projec-tions for the TFYP period. But it would be advantageous to run the model anumber of times, and test the sensitivity of results to changes in variousassumptions particularly the incremental capital-output ratios for differentsub-sectors of manufacturing industries.

- 37 -

Table 2.1

Output and Rate of Increasein the sectoral model

(billion won)

Rate of increase

No. Industry 1970 1976 1970-76 1965-69

10 Fiber spinning 105.80 224.38 13.4 23.e

11 Textile fabrics 165.92 363.89 14.0 16.2

12 Finished tex,, prod. 168.48 416.53 16.3 19.6

13 Lumber & plywTood 51.5() 89.74 9.7 28.C

14 Wood prod. & furn. 14.2() 21.18 6.9 18.7

15 Paper prod. 35.2i7 67.02 11.3 13.6

16 Printing & pub. 42.43 62.45 6.7 14.8

17 Leather prod., 16.014 32.55 12.5 6.14

18 Rubber prod. 26.35' 76.71 19.5 7.3

19 Basic chemicals 19.01 54.49 19.2 23.6

20 Other chem. prod. 60.81 115.87. 11.3 23.S'

21 Chemical fertilizer 24.02 33.86 5.8 4708

22 Petroleum prod. 53.731 133.14 16.3 40.7

23 Coal prod. 41.58 63.34 7.3 12.1

24 Glass, clay, stone 63.86 117.50 10.7 23.8

25 Iron & steel 14.16 54.45 25.2 1503

26 Steel prod0 53.28 125.52 15.4 29.6

27 Non-f'errous metals 8.57 45.89 32.3 4.1

28 Finished metal prod. 23.39 51.46 14.0 14.7

29 Non-elec. macho 27043 104.29 24.9 9.8

30 Electrical mach. 78.72 237.69 20.2 40.7

31 Transport equip. 96-72 161.56 9.0 39.8

32 Misc. mfg. 51.26 155041 20.3 30.2

All industries 392006 6835.58 9.7 16.5All manufactuing 1242,514 2808.92 14.6 22.9Percent of total 31.7 41.1

- 38 -

Table 2.2 - The Composition of Demand in theSectoral Model

Per Cent

Output & Imports 1970 1976

No. industry 1970 1976 Exports Final Inter Exports Final Inter

10 Fiber spinning 1h8.33 336.61 8.6 24.8 75.2 11.6 23.5 76.5

11 Textile fabrics 219.58 512.21 17.6 63.1 36.9 25.6 63.1 36.9

12 Finished tex. prod. 168.67 4L6.99 37.8 91.8 8.2 50.6 93.9 6.1

13 L,,mber & plywood 59.29 98.24 46.5 48.2 51.8 50.2 52.8 47.2

1Li Wood prod. & furn. 15.76 24.83 .1 53.1 46.9 1.4 55.0 45.O

1c Paper prod. 52.L7 91.30 0.0 8.1 91.9 .1 9.3 90.7

16 Printing & pub. 45.23 70.55 - - - 55.5 44.5 - - - 52.2 47.8

17 Leather prod. 16.42 33.42 .7 67.8 32.2 26.9 65.0 35.0

10 Rubber prod. 26.93 77.51 26.2 55.7 44-3 50.0 66.1 33.9

19 Basic chem.Icals 58.a1, 119e71 0.0 .1 99.9 .1 2.2 97.8

20 Other chen. prod. 92.12 223.30 5.7 14.7 85.3 13.8 23.2 76.8

2L Chemical fertilizer 27.78 38.75 10.4 12.1 87.9 13.2 20.5 79.5

22 Petroleum prod. 59.83 145.36 - - - 6.7 93.3 - - - 14.5 85.5

23 Coal prod. 72.' 6 157.95 - - - 57.6 h2L). - - - 56.6 1c3.h

2h Glass. clay, stone 76.69 131.81 2.7 6.o 94.0 9.5 15.9 84.1

25 Iron & steel 32.77 80.63 - - - .1 99.1 - - - .1 99.1

26 Steel prod. 69.59 147.99 4.6 5.5 94.5 15.6 16.6 83.4

27 Non-ferrous metals 24.47 67.50 10.0 10.4 89.6 14.3 14.6 85.1h

28 ,Mn-i shed metal prod. 27.32 6L.44 .9 24.0 76.0 26.5 39.4 50.6

29 Non-elec. mach. 124.34 236.33 0.0 80.4 19.6 7.8 75.9 24.1

30 Electrical mach. 114.12 345.9)4 18.4 43.1 56.9 46.7 67.3 32.7

31 Transport equip. 151.61 278.70 .2 60.3 39.7 9.9 70-0 30.0

32 M..isc. mfg. 68=00 177e49 4l.2 79.2 20.8 71.6 85.8 14.2

1752.22 3874,59 12.7 45.6 54.4 23.6 51.4 48.6

Xm + D (% of °m + Mm)

1970 67.11976 72.2

- 39

Table 2.3 - Imports anid Ex.ports in the Sectoral Model(Billion Won)1969 Prices

R_____rt .. G (rowt.hNo. Industry _Eorts :o rts Minus I]mports Rate 70-76

1970 1976 1970 :1976 1970 1976 E]xorts Imports

10 Fiber spinning 12.82 38.98 42.53 112.23 - 29.71 - 73.25 20.3 17.5

11 Texltile fabrics 38.64 1:3114_3 53,66 1148.32 - 15.02 - 16.89 22.6 18.5

12 Finished tex. prod. 63.30 2:10.96 .19 .446 63.61 210 .50 22.1 15.9

13 Lumber & plywood 27.57 49.31 7.78 8..50 19.79 40.81 10.2 1 .5

114 Wood prod. & fur:niture .,81 3.50 1.56 3,.65 - .75 - .15 27.6 15.2

15 Paper prod0 .69 1.31 17.20 24,.28 - 16.51 - 22.97 lL1.3 5.9

16 Printingw & publishing - 2.80 8.10 - :2.80 - 8.10 ] 19.3

17 Leather & leather prod. 1.16 8.98 .38 .87 .78 8.1:1 4O.7 14.8

18 Rubber prod. 7.06 38.41 .58 .80 6e.48 37.6'1 32.3 5.5

19 Basic chLemicals ' ,14 1.214 39.43 65.25 - 39.29 - 614.01 143.9 8.8

20 Other Chemical prod. 5.23 30.93 31.31 107.43 - 26$.08 - 76.50 314.5 22.38

21 CheriLcal fertilizer 2.88 5.1). 3.76 4.89 - .88 .22 10.0 14.5

22 PetroleuLm prod. -- 6.10 12.22 - 6.10 - 12.22 ----- 12.3

23 Coal prod0 --- 30.88 94.61 - 30.88 - 94.6:1 -*--- 20.5

214 Glass, clay, stone 2.05 :L2.459 12.83 14.31 - 10.78 - 1.82 35.1 1.8

25 Iron and steel -. 18.61 26.18 - 18.61 - 26.18 3.2

26 Steel prod. 3.23 23.00 16.31 22-47 - 1:3.08 53 38.6 3,0

27 Non-ferrous metaLs 2445 9.6a9 15i90 21.61 - 1:3.45 - 11,9:3 25.7 2.8

28 FinishedL metal prod. 2 16.2? 1.93 9.98 - 'L.58 6.29 38.5 16.3

- 40 -

Table 2.3 - Inports and Exports in the Sectoral Model Page 2(Billion Won)1969 Prices

xports Gro-wthNo. IndLustry Erportvs Imports Minus Imports Rate 70-7'6

_____ _ _ 1970 1976 1970 1976 1970 197W7 Ex_ ots __orts

29 Non-electrical machiney .136 18.54 96.91 132.014 - 96.05 -113. 50 68.5 5.3

30 Electrical mach. 20.95 161.50 35.h0 108.25 - 14.45 53.25, 40.5 20.05

31 Transport equipment 2.143 27.62 53.89 117.1-4 -5 2.46 - 89652 149.9 136,5

3;2 MIisc. manufactuwring 28l.03 127.04 16.74 22.08 11.29 104.96 218.6 4.7

All Industries 1410.20 1170.10 638.10 1281.20 -'227.90 -11.10C 20.2 124,3

Rll Manufacturing 223,15 9,16.30 5b9.68 1065.67' -286653 -149.27 26.5 13-.1

Percent of total 54.21 78.3 79.c9 83.2 --

- hi -

Table 2.L

R.nnrrt. :q a P'rnpnt of' Ont,inAt

No. Tndustrr 1970 1976

10 Fiber spinning 12.1 17.4

11 Textile fabrics 2.3 36.1

12 Finished textile products 37.9 50.6

13 Lumber and plvwood 53. 5 9

11h Wood products and furniture 5.7 16.5

1_ Paner nrodiicts 2.0

16 Printing and publishing

17 Leather nroducts 7.2 27.6

18 Rubber T)rotucts 26.8 50.1

19 gas4i- cnhmnircAs 0.7 2n3

20 Otehr cheAmical products 8.6 26.791 (1hPnr1 frhp 4.14 199n 17 1

22 ?etroleuiu produts

23 Coal products--

2.Lf A.J.ICA..)I 9csa- mac".J -1A ,J 37 0*7

30 Sec, ccAJ. ' US4S J67

3 Trans4ol4. eq,,4 4 4re 2. 17 '

2 4.=__n .A_|.&LQ*~S~Lt _JJ~ nJa . pA. J'.Aflu o.

vo ru;:Ru~Mc" ieo-asrs MLa-n"--;v-U-tL7 lr ,I l

LL O;lec t , or s -LO ;6.1

ian-ufacturing 18.0 32.6

- 42 -

1dUilt: C..,

Private. Uu-w-lion

(Billion won)1969, prices

IncomeRate of Elasticity

No. Industry 1970 1976 Growth of demand

10 Fiber spinning 22,701 37,024 8.5 .96

11 Textile fabrics 98,805 188,531 11.3 1.36

12 Finished textile prod. 89,900 178,010 11.4 1.37

13 Lumber & plywood 18 24 4.9 .44

14 Wood prod. & furn. 44,513 5,711 4.0 .31

15 Paper prod. 2,764 5,751 13.0 1.60

16 Printing & Pub. 21,708 31,052 6.2 .63

17 Leather & leather prod. 9,120 10,526 2.4 .09

18 Rubber prod. 6,707 10,644 2.5 .10

19 Basic chemicals 240 340 6.o .60

20 Other chemicals 5,941 16,376 18.4 2.37

21 Chemical fertilizer - -

22 Petroleum prod. 2,553 17,443 37.7 5.13

23 Coal prod0 41,271 87,449 13.3 1.64

2h Glass, clay, stone 1,350 5,548 26.4 3.51

25 Iron & steel - - -

26 Steel nrod. _ _ _

27 Non-ferrous metals -

28 Fini.hed metal nrod. 3.630 6,737 10.6 1.29

29 Non-plen- mnachinerv 2,6h2 14,307 32.7 4h.4l

30 Electrical maGh 0 .7;586 .45.107 34.4 4.66

31 Trnnsportt eneiiipi 7j182 35,034 30.6 h.11

32 Misc0 mfA0 8,121 17,539 13.7 1.7

Manufacturing 336,752 713,163 13.3 1.64All Industries 1,606,740 2,57o,0o0 8.2 .91

- h3 -

Table 2.6

Government Consumption

(Billion won)1969 prices

Rate ofNo. Industry 1970 1976 Growth

10 Fiber spinning

11 Textile fabrics 31 51 8.6

1? Finished textile prod. 236 387 8.6

13 Lumber & plywood 78 128 8.6

14 W/Xtood prod. & furn. 6h9 1,063 8.6

15 Paper prod. 432 507 2.7

16 Printing F pub. 3.211 5,262 8.6

17 Leather & leather prod. 13 22 9.2

18 Rubber prod. 991 1,624 8.6

19 Basic chemicals 280 459 8.6

20 Other chemicals 1 542 2,527 8.6

21 Chemical fertilizer 371 609 8.6

22 Petroleum prod. 1,238 2,028 8.6

23 Coal prod. 232 380 8.6

24 ^Glass, clay, stone 158 260 8.7

25 Iron &c steel - -

26 Steel prod. 16 26 8.4

27 Non-ferrous metals 33 55 8.9

28 Finished metal prod. 317 519 8.6

29 Non-elec. machinery 791 1,295 8.6

30 Electrical mach. 566 925 8.5

31 Transport equLp. 1,097 1,799 8.6

32 Misc. mfg. 775 1,269 8.6

Mlanufactuuring 13,057 21,195 8.4Ai II dust-3 I4. r - - n-rel ,1I1.7 3o-8 1.7O 0 I-A-LU. LILU LitsZ±:: 6£)4qL14 Jf -)O%)14 (U Uo LI

Tnblp 2.7

Tnti,P2 in S+ircks

(Billion won)

Rata ofNo. Industry 1976 Growth

10 Fiber spinning 1,209 2,986 16.2

11 Textile fabrics 1,272 3,315 17.3

12 Finished textile prod. 860 2,242 17.3

13 Lumber & plywood 912 2,378 17.3

14 Wood prod. & furn. 181 471 17.3

15 Paper prod. 346 901 17.3

16 Printing & pub. 185 482 17.3

17 Leather & leather prod. 838 2,),84 17.3

18 Rubber prod. 225 587 17.3

19 Basic chemicals 211 550 17.3

20 Other chemicals 788 29053 17.3

21 Chemical fertilizer 1i5 2,215 64.0

22 Petroleum prod. 207 1,654 41.5

23 Coal prod. 221 1,497 37.6

24 Glass, clay, stone 1,033 2,692 17.3

25 Iron & steel 191 498 17.3

26 Steel prod. 617 1,523 16.3

27 Non-ferrous metals 50 131 17.3

28 Finished metal prod. 273 712 17.3

29 Non-electrical mach. 651 1,697 17.3

30 Electrical macho 143 372 17.3

31 Transport equip. 1,011 29634 17.3

32 Misc. mfg. 548 1,430 17.3

Manufacturing 12,085 35,203 19.5All industries 44.,160 54,680 3.6

4 5 -

Table 2.8

Deliveries of Products forLN -xed -- Ct'l U%-+tio

(Billion won)10°6 -4 -

Rate ofNo. I]ndustry 1970 1976 Growth

10 Fiber spinning

11 Textile fabrics

12 Finished textile prod.

13 Lumber & plywood

14 Wood prod. & furn. 2,213 2,906 4.7

15 FPaper prod.

16 Printing & pub.

17 leather & leather prod.

18 Rubber prod.

19 Basic chemicals

20 Other chemicals

21 Chemical fertilizer

22 Petroleum prod.

23 CID.1 prnod.

2h G:lass. clav, stone

25 TIron & steel

26 SitAAl nrned.

27 Non-farrorii mAtnln

28 Rlnished metal pnrod.

29 Non-elec. mac hinirv 95,o82 II3,632 2.J,

30 El!ectrical mach; 1 9j400 2 9819 2.0

31 T Anspot eqIip.. 79,676 127 ,9I6 8.5

32l aMIndC tries 5,16,38o 75,10 1.A7-nufac+~~~~~~~~ t- re 21,5 30WL-,Lo82.

All :Industries 598,140 785.,420 4.7

- 46 -

Tah I 2=9

Total Final 7)PmAnei(Billion won)1969 nrices

IncomeRate of elasticity

No. Industry 1970 1976 Growth of demand

10 Fiber spannmng 36,73U 78,985 13.b 1.69

1-1 Textile fabrics 138,751 323,040 15.1 1.90

12 Finished textile prod. 154,799 391,595 16.7 2.13

13 Lumber & plywood 28,579 51,837 10.6 1.23

14s Wood prod. & furn. 8,363 13,652 8.5 .96

15 Paper prod. 4,230 8,464 12.3 1.50

16 Printing & pub. 25,104 36,796 6.6 .69

17 Leather & leather prod. 11,130 21,710 11.8 1.43

18 Rubber prod. 14,986 51,260 22.8 3.00

J 9 Basic chemicals 875 2,592 19.8 2.57

20 Other chemicals 13,500 51,882 25.5 3.39

21 Chemical fertilizer 3,369 7,930 15.3 1.93

22 Petroleum prod. 3,998 21,125 32,0 4.31

2_ Coal prod. 4172 89,326 13.5 1.67

24 Glass, clay, stone 4,587 20,994 28.5 3.81

25 Iron & steel 191 498 17.3 2.21

26 Steel prod. 3,860 24,544 36.2 4.91

27 Non-ferrous metals 2,533 9,862 25.8 3043

28 Finished metal prod. 6,569 24,235 24.2 3.20

29 Non-electric mach0 100,031 179,469 10.2 1.20

30 Electrical mach. 49,144 232,758 29.5 3.96

31 Transport equip0 91,398 195,035 13.5 1.67

32 Misc. Mfg. 53,863 152,387 18.9 2.44

Manufacturing 798,312 190 89,945 16.5 2.10

All industries 2,857,383 4,922,684 9.5 1.10

Table 2.10

Total Capital Fbrmationin the Sectoral Model

iBillion von)199R pticeu

No. InLdusta I170 12:r6 of, Icrease

10 Fiber spinning 11,643 12,368 lF

11 Textile fabrics 11f,43 11,584 O.B

12 Finished textile prod. 3,554 5,469 7.5

13 Lumber & plywood 3,227 4,9)5 7.2

1L Wood prod. & furn. 1,1i0 1,1144 0.6

15 Paper prod. 7,442 6,329 -

16 Printing & publishing 1,655 1,825 1.6

17 Leather & leather prod. 1,029 2,542 16.3

18 Rubber prod. 1,465 3,329 16.3

19 Basic chemicals 9,295 7,960 -

20 Other chemicals 59,58 4,117

21 Chemical fertilizer 8,764 5,576

22 Petroleum prod0 8.,47o 15,809 1100

23 Coal prod. 2,383 2,143 -

24 Glass, clay, stone l2,239 19,176 9,4

25 Iron & steel 4,498 9,964 14.2

26 Steel prod. 4,97 10,420 13.0

27 Non-ferrous mietals 1,267 8,786 38.0

28 Finished metal prod. 2,123 3,796 10.1

29 Non-elec. machinery 3,057 15,610 31.0

30 Electr-Leal mach. 4,793 10,398 13.3

31 Transport equip, 13,723 16,892 3.6

32 Misc. mfg- 3,03J. 4,015 4.9

All sectors 604,355 833,598 5;All zsfg. 125,2 1 183,471 6.6% mffg/all 20.7 22.1

Table 2.11

Value Added Coefficients and ICOR'sIn the Sectoral Model

No. Industry Value Added TIGRCoefficient

10 Fiber spinning .308 .319

11 Textile fabrics .2h44 185

12 Finished textile prod. .285 o053

13 Lumber and plywood .180 .211

14 Wood prod. and furniture .296 .279

15 Paper products .28h .602

16 Printing and publishing .334 .208

17 Leather and leather prod. .326 .073

18 Rubber products .228 .170

19 Basic chemicals .408 .880

20 Other chemical prod. .347 .232

21 Chemical fertilizer .439 .983

22 Petroleum products .425 .676

23 Coal products .118 .348

24 Glass, Clay, stone .365 870

25 Iron and steel .219 .865

26 Steel products .202 h24

27 Non-ferrous metals .240 .8h6

28 Finished metal products .281 .h00

29 Non-elec. machinery .345 .442

30 Electrical machinery .31 .2Lt2

31 Transport equipment .24h .564

32 Miscellaneous mfg. .294 .089

- 49 -

Table 2.12

Labor Productivity in TFYPFrom the Sectoral Model

Ind. Rate of Incr'ease ofNo. industry Productivity

10 Fiber spinning 2.7

11 Textile fabries 3.7

12 Finished tex. prodi. 1.6

13 Limiber - plywood .7

14 lWood products 13.5

15 Paper products .6

16 Printing & pub. 3.8

17 Leather prod. 2.7

18 Rubber prod. 1.8

19 Basic chemicals 3.4

20 Other chemicals 3.5

21 Fertilizer 3.i4

22 Petroleum prod. 14.7

23 Coal prod. 16.1

24 Glz,ss, clay, stone 3.2

25 Iron & steel .3

26 Steel prod. .2

27 Non-ferrous metals .3

28 Finished metal prod. .6

29 Non-electrical mach. 9.1

30 Eletc. machinery 3.4

31 Transport equip. 5.6

32 Other manufacturing 7.1

33 All industries 6.7

34 All manufacturing 3.1

50 -

Table 2.13

Fzployment bv Industrv

Thousands Rate ofNo. Industryr 1970 1976 Increase

10 Fiber sninnine 102.6 176.8 9.5

11 Textile fabrics 253.0 IA0.2 10.1

12 Finished textile products 3hh.6 770.L Th.3

13 Lumber & plvwood Ll.6 70.0 9.1

1) Wood nrodicts A f'urniture 24.1 Ie.4 - 7.2

15 ~P>per nv.rhdcts 32~.8 fO 10.6

16 Pintinga& publishinog J,2.0 )I92 2.7

17 Leather products 20.9 36.o 9.5

18 Ruhber prontirfs 31h.h 90.0 17.lt

19 P'noi c-hP?mnitsq, 17-5 ~ ),o.6 I15.1

20 Other chemianl proCcs5, 87.1 7.5

21 GC.emical fertilizer 13.0 14.9 2.3

22 Petoem prpducts 18.0 2.0 -29.301~ ~~J*S. ' 1P.-f 067 o-

241. m ~ ,..1 -ls r t^ ,°1. 137 A 7 1

te Tro_, a-A s'eelt a <11. 7

26J. g'el~ p c-A'. - 45 80.3 15.Ii

1%V7 1,T... - _-.~j. -1A n'4 1. il el Non.-fer.-Iu'S Uwkat 's7 6.9 304 _)-.9 £1Ir iU-±V2 L - L~ --I -.. 1.n1.7 )U0L-4%I

eV riLished!U M1da.L pdUUcUt . 40J.4 UU.V -.L_)4

29. Non-electrical iMachinery 35L8 77.3 13.7

30 Electrical machinery 71.1 ;74L.4 10.1i

31 Transport Equipment 91.5' 107.7 2.8

32 Miscelianeous manufacturing 94.1 183.8 11.8

Al industries 9808.2 11575.6 2.8

All Manufacturing 1473.6 2772.9 11.1

Percent of Total 15.0 24.0

51

APPENDIX

Sub-Model of the Mlnine andManufacturing Sector

The suih-mondel of the mn4ing anA "r.ufacturing st 4i der4ved

from the macro-model by choosing the following seventeen equations andidentities. "Theey have been nu.mbered exactly 9s in "MAcro Planning Modelfor the Third Five Year Plan," April 15, 1970.

Production Function

(2) Vm v

(O~ T ' n/.A 1?(9 Im 2.4^ r

(13) 7 ? I )A 7. L I .1'0 TYi I ..P AJ V r . ISt'J V

\S'J/ If V

(17) 7mf = W I

f 1,7 TM Am_ cn T

I I / A. s t. i * i

Savings

)1l' c 3.. +) n 68(I- )0¶

(23 'c = .JJ -F- TO.O~ (2I) Y -14.2~ q.10

~~~~~q ^ l zV 'c -

d',rN nr - a naa fl Wk4 1L -14.ZIU 1 .aj V

c m

Consumer Demand

(28) C = -76030 + .45,3C

(29) Cm - 0.89 Cgo go

Import Demand

(31) Mk -. 508 + IF - .318 Pm

(33) Mi 91.985 + .285V - .524P

(34) Mx - mXm + 63X

(35) M ' .696MrmG

- 52 -

Export Supply

d m mm(39)x = 3.021V - D -I I-C - c + M

m. m. .. f i m go

(40) X { Xd

(43) Dm = .113V + 1.253V + .624V + .092V

The sub-model can be condensed somewhat to arrive at a fewern-wuber ofJ equations.

Ir.v e s 1-u-1e nt Dlyeund -

lHe macro-U-LoueL assumes tlat O =3J.02V V, -WLLre O i8 OULptu.m m mTherefore equation (9) now becomes (the equations are now given a prime).

(9) ' I_ = .97 m 0_mU-

where .97 is the marginal capital-output ratio (ICOR) in the sector withrespect to its own output.

Equation (13) can be substituted in (17) to get the form(17)' Iim 3.452 + .068V

thus linking inventories in the sector directly to the GNP. Equation (16)remains as before since the percent of fixed investment needs (machinery,equipment, etc.) that this sector must supply is a policy variable thatbears an inverse relationship to the coefficient of fixed investment in (31)which estimates capital goods imports. Thus investment demand in mining andmanufacturine consists of the three equations (9)', (16), (17)'.

Domestic Savings

Equations (19), (23), and (25) can be condensed to the followingsingle equation

(19)' S, = 12.401 + .006 0 -IrT

.re5s i a coeff£c4ent tno relate corporate taxes directly to total taxrevenues. It may be constant or a policy variable. Equation (23) assumesLltdt Ltle mIrLginLald coUlrUoat s a av Ln raUUeIOi s v. Savings0 are nw -1 L eW -related to output.

- 53 -

Consumer Demand

Equations (28) and (29) remain as shown.

Import Demand

The import demand equations cannot usefully be condensed. Equa-tion (31) e-^mptit- 4ng capital goods imports treats t1he cenpffic4ent nf fixedinvestment as a policy variable, and as mentioned above, if this coeffi-cient decreês (capit,a-l good%As impora reqirevdA foir f4vaA 4,inaatn,pnt ep-

crease), the coefficient in equation (9) must rise; that is, domestic pro-du-tior. of 8uch goods must Increae to fill the gap.

rJ1_O __L. -a..- --5 r

Equations (33)I e.dA (34) cac eimot f egoods foyr domestice

production and imports of goods to be used in export goods respectively.EquaJtjCi0o,a (1) ir.dica4te tatA. o 4--*-+.eA materials for domestic pro-duction are required per dollar of output of the mining and manufacturingsect.or. Tn equalon f34) the parhmeter relating Imports of raw aterialsfor exports goods to exports of manufacturing and mining is treated as apol-icy varicab-le. r -If domestic productior. of such. good-As ir.creases sha.~lythe value of this coefficient will decrease.

Export Supply

Equations (39) and (40) can be combined and rewritten as follows:

(39)' 0 + M - X 2 D + Im + I' + C + Cmru m m - U m F v m go

JL11s equation says tnat totaL available supplies, that is, output plus Jm-ports minus projected exports, must be at least large enough to meet in-ternal domestic demand for manufactured products (i.e. intermediate demand,demand for fixed investment and inventories, and private and governmentconsumption Uemana for these prouucts)j , Equation (433) calcuLates the 'n-termediate demand for manufactured products and remains as shown.

The sub-model of the mining and manufacturing sector in condensedform consists of the twelve equations described above pius tne productionfunction. It is largely a matter of choice whether the selection of seventeenoriginal equations is used or the condensed set, though the latter set showssome of the relationships more directly and hence may be somewhat simpler tointerpr,et.

- 54 -

Definition of Symbols:

V : GNP

V : Value added in mining and manufacturing sectorm

I : Fixed investment in the sectorm

Ii : Increase in inventories (total)

Im : Increase in inventories in the sector

I. : Gross domestic fixed capital formation

F : inputs from the sector for fixed capital formation

S : Net corporate savings

Yc : Corporate income (before taxes)

TC : Corporate taxes

T : Total tax revenues

C : Total consumption spending

C : Private consumption of manufacturing goods

Cgo : Government consumption (total)

cm : Government consumption of manufacturing goodsgo

Mk : Capital goods imports

Mi : Imports of materials for domestic manufacture

Mx : Imports of materials for export goods

Mm : Imports of mining and manufacturing goods

MR: : Gross commodity imports

X : Exports of mining and manufacturing goodsm

X : Gross exports

xd : Export supply capacity for mining and manufacturing goods

D :Intermediate demand for mining and manufacturing goodsm

P_ : Index for actual foreign exchange rate, 1965 = 100.

III

EXPORT PROMOTION AND IMPORT SUBSTITUTION PROGRAMS

3.1 The double objectives of expanding and diversifying the commoditybased for exports ancd encouraging the substitution of domestic productionfor imports have been assisted by several government incentive programsthat were formulated in earlier years and are expected to continue duringthe Third Plan period. So far as is known, no major changes in theseprograms are now being proposed; consequently it presumably is expectedthat irL their present form they will be effective in achieving the objec-tives. For reasons partially discussed in the previous section, the ex-port target of $3.5 billion annually by 1976, about 80 percent of whichmust bet supplied by nanufactures, may be very difficult to achieve inspite of the fact that the rate of growth proJected is lower in the ThirdPlan thian it was in the recent past. An export level of $3.0 billion by1976 is probably more reasonable. The import substitution programs in-volve a; greater substitution of domestically produced capital goods forimported capital goods, and the net import content of exDorts is proiectedto increase, so that intermediate goods produced domestically will apparent-ly not be greatly emnhasized in impc,rt substitution. The multiplicity ofobjectives in the Plan, some quite different from those adopted before, re-quire an effective set of nolicies and nrograms if they are to be fullyrealized.

A. Export Promotion

3.2 The present set of programs for export promotion consists of asystem of subsidies and exemntions applirable to Pxnortprq to nrovide in-centives to export, plus institutional arrangements to collect and dis-seminate infnrmnt-inn nn nrfea nand T mnrket cnonditionn, asnd tn-n nprnvide train-

ing for businessmen in the conduct of export trade. A free export zone hasalso been established at MaAan to enrourage new export plants.

3.3 The exnort inrentive system consists of the follnwing elements:

(a) Tax exemntionn fnr Pemn-rtrsQ The exemnt-innc int-itrl

100 percent of the business tax, which is a form ofturnover tax on gross receipts; 50 percent nf the c-or-

porate income tax, and 50 percent of the personal in-compe tax. rTh rantea vindAr f-h hbsir4.aas tnv orn gross

receipts range from .3 percent to 2.0 percent. Thehighest marginal tax rate on pr4vate (closed) corpo-rations is 49.5 percent and on open corporations it is27.5 percent, so that the exeemption can amount to al=most 25 percent or 14 percent of net income over 5million won (about $1,000).

(b) Customs duty and commodity tax exemptions on importedmaterials that are used in the manufarture of exnort

goods. The median customs duty on such materials isnormal1y about 25-30 ner-ent. The c-mnfdity tax is anad valorem tax with rates ranging from 2 to 100 percent.In addition exporters 1my ha prim4tted ton 4mnnrt materialsthat are on the restricted or prohibited list.

(c) Wastage allowance. The amount of a material that may beimported duty free includes an all^ ance for wa-tage orscrap involved in converting the material to final use.

(d) Discount on public utility charges. There is a 30 per-cent redAuction on electric power chlarges fror export

L.LL LJAL IL L...jLL ..LIAL .J ~jJ.industries, and 30 percent on railway freight chargesfor -Inerals 'for export

(e) Prefe~rential ir.terest r-a t es- -on M loar.s. L Eô =r c%anLborrow up to 240 won per $1 of exports at a rate of 6percent, w-Lereas Lthe normal cuUUimerciLaL rate is .- t percent. The same rate applies to loans for import of rawmaterials used ir. ex-ports. MciatLiinery 'UUL.L.LtS can also

borrow at 12 percent for the construction of facilitiesunuer Llte proviSioLns oi a Law Lo pro-mLoe suchL llUUZSLL.LVCS,

and there are a number of other preferential rates thatare discussed later.

Inese provisions of thre incentive system uo nol necessarily ai-

fect the operation of individual industries in the same way. The extentof the incentives will depend on such factors as the degree and type ordependence on imported materials, relative production costs, degree ofcapital intensity of production, sources and distribution or capitai andoperating funds, terms of sales arrangements, and other factors. In factit is almost certainly true that the incentives have a markedly different-ial effect, but there are only a few studies of the operation of the in-centives on industry, and these are based on sample data. i/

3.4 Calculations have been made of the average value of the exportincentives over the years and the statistics seem to indicate that thevalue of the incentives to export industries has been rising. The Bankof Korea has estimated the value at about 90 won per dollar of exports in1969, in contrast to 75 won in 1967 and 83 won in 1968. All such figuresare subject to error, but it appears that the subsidies amount to about30 percent of export value, or, alternatively, that exporters were effec-tively obtaining an exchange rate (including subsidies) of about 400 wonper dollar in 1969. Of the total subsidy, the tax exemptions account for

',/ E.g. Korea, Taers Associ4to4., "A St-uAdy- ofthe C^mpa:ative-i I LD.. JIL~ L a%J..U L £r..L. ILJ A. % '.7~ A.

International Competitive Strength of Export Industries," Seoul,i non

2VU .

- 57 -

about 30 percent, the customs duties and commodity tax exemptions forabout 55 percent and preferential interest rates for about 15 percent.The va:Lue of wastage allowances and public utility charge discounts can-not be separately estimated. However, it is generally believed that thewastage allowances are excessive and contribute directly to increasedprofitability of production for the domestic market. In spite of thefact that estimates of subsidies are subject to error, it is apparentthat the value of the subsidies to industry is substantial.

3.5 The value of the system to industry cannot be equated to thecost oi- the system to the economy in any simple way. The elements ofthe system affect real resource costs in different ways. It may be ar-gued, for example, that tax and custom duty exemptions are not a realcost since. :Ln the absence of such subsidies, exports would not occurand hence no taxes or duties would be collected. This is undoubtedlytrue for many industries; that is, the incentive system is effective instimulating exports, but it is not necessarily true for all industries,since some of them undoubtedly could compete successfully without thesubsidies. It is appropriate to exempt export industries from internaltaxes and duties that nlace them at a cost disadvantage in internationalcompetition.

3.6 The case for preferential interest rates is somewhat differentAnd moTA rnmnlpye Teip nrov4isnn of rapnta1 at- a rate of 6 nprcent for

export finance permits the companies to compete in terms of credit andnayment arranpements that arp rnmmnnlv rpnequrpe in intprnati4nal trade:

and also to acquire needed imported inputs; however, in Korea it appearsthat , through onnsant rorll-over of loans, thesa fu:nds nrp in fart bhing

used to finance fixed facilities. Because of apparent shortages in theavai1zabil44ty, of firnAa for faciliti4es awnano4niia anued tho MC, d4ffe-anrpene

between trade loan rates of 6 percent and commercial rates, an advantageof enrgagig in export trade is the privilege of obtaining funds at thepreferential rate and using them for expansion. Moreover, the prolifera-t_on of such funds may constitiiut 8 threat to T- m netary stab ility throughrediscounting. A study prepared by the Korean Industrial DevelopmentRpQparrh Tnst"iotua shows thAt those tradel loansa hav1p averaged aboiiut 2j4

percent of the money supply in the late sixties, and have been as high as34 percent ioa slngle year. './ With eprspro4ected to grow to $3.5billion by 1976, much of the total being in capital goods exports thattyA4pialv vq,anei4= oth4 a h4iher poportir.y of ar.A lor.er term credit than

consumers? goods, the potential expansion of credit and the dangers tomonetary-, stab 4 1 4

-y 11 be heightened unless ft Arise a narrowng of th egap between preferential rates and commercial rates. The monetary effectsand the effects on reall resource ase th.roughth opertio of theexor

incentive system need to be evaluated for the Third Plan period. Under

1/ "The Structural Reorganization of Export Industries," Table 2-3-4.

the present system Korea mav not be obtaining its exports in the most ef-fi.Lcent way. 1IP ' t_er poinLtL requirs soV LULrLIeL xpLanLLULL.

3. 7 A rl=jor reason advanced for encouraging the development ofmanufacturing industries lies in the belief that, through backward and

IC_ __ - -- -.-- - IC …1Lorward linkages g'ving rise to UILL efLL.'cieUL U5 UL LrUULstce5 sLL ULLIo L

industries, the net social benefit in these industries exceeds the purelyprivate benefit. Since domestic markets oLLenI are too small Lo supportan efficient scale in manufacturing, the development of export marketsthrough subsidies wiii permit the expansion or industry. In tnese cir-cumstances an appropriate criterion for setting the rate of subsidy ineach industry might be to subsidize each net dollar of foreign exchangeearned to the same degree, that is, to provide a uniform subsidy basedon value added or, alternatively, based on value added plus the proport-ion of domestically supplied inputs. 1/ If the subsidies are arranged inthat way, the benefits measured by domestic value added (i.e. nationalproduct) for a given level of subsidies would tend to be maximized.

3.8 It can easily be shown that if that criterion is adopted, thenominal rate of the subsidy given each industry should vary in relationto the value added. A simple example will illustrate the point. Ifindustry A has a value added of 30 percent and industry B 15 percent, andif the policy decision is to provide an effective subsidy of 30 percent,the ad valorem rate of subsidy should be 9 percent in industry A and 4.5percent in B. The rates of subsidy in the two industries are in the sameproportion as the values added. The argument applies also if value addedplus domestic inputs is the base. As a practical matter the subsidy ratesmight be altered if it is felt that some newer export items would havegreater trouble penetrating the market than some older ones that have al-ready succeeded. Only a commodity-by-commodity analysis could determinethe appropriate modification of the pattern. So far as is known, noanalysis of this kind has been undertaken of the Korean export subsidysystem. A few crude comparisons seem to indicate that the subsidies givenare not in proportion to values added.

Industry No. Commodity Subsidy Value Added(Won- per $~1) (Plercent-)

12) Clothing I sweaters 42. 58.IL '..,.L LIi±L.L J WLX0 t..U .U

13 Plywood 88.8 21.141# LIIeet:1 L 4 J. U JU .J

30 Radios 65.2 31.4*1~~~~$~~~ 4^ f ,%^ 32 Wigs IL.L .4

it can be seen from the figures that the ratios of subsidies are quite

1/ Cf. U.N. Conference on Trade and Development! "Incentives for In-dustrial Exports," New York, 1970, a study prepared by the secre-tariat of UNCTAD.

- 59 -

different from the ratios of values added. 1/ The comparisons are crudeand fragmentary, but they do indicate that the system of subsidies maynot be providing the right incentives and that, at the least, a furtherexamination of the operation, of the system of incentives would bedesirable.

3.9 The study by the Korea Traders Association of export incentivesand the competitiveness of Korea's exports casts more serious doubts onthe system. It shows that there is negative value added in all of thecommod:lties examined except dried laver. Negative value added means thatthe costs of the inputs, valued at world prices, exceed the value of out-put, a:Lso valued at world prices. It is unlikely that this conclusioncan be true across the board; one can rightly be skeptical of the metho-dology employed in the study. But it is likely to be true for some in-dustries, such as automobiles and perhaps others. The existence of nega-tive value added is a signal for reform of the subsidy program. Itcertainly cannot support an argument in favor of higher subsidies, sincethat would simply eXLcerbate the situation; basic improvements in pro-duction techniques and costs, and a more sharply focused use of exportsubsidies are needed.

3.10 Costs and prices of internationally traded commodities andmanufactures of Korean origin have been rising much faster than in Japanand the U.S.A., and the rapid growth of exports from Korea has been large-ly supported by the export incentive system. If the exchange value ofthe Wonwere allowed to reflect the changing international price relations,it would be substantially lower than it is. In consequene7e, there wouldbe less need for export incentives and subsidies; and the demand for im-ports would also be contained. In the absence of such basic correctiveaction, however, there is need for a detailed review of the existing sys-tem of export subsidies. The last major overhaul of the export subsidiessystem was undertaken in 1964, and another is now overdue.

3.11 The export promotion proRrams also include three institutionsthat provide financial and other services to exporters. These are theKorea Exchange Bank, the Korea Trade Promotion Corporation (KOTRA) andthe Masan Free Trade Zone (MAFEZ). Each of these institutions shouldcontribute to the exDansion of trade during the Third Plan. Two of themhave only recently been created. The Korea Exchange Bank provides mediumand long term (over 6 months and up to 5 years) financing on a deferred-payment basis for the export-import trade. The sources of the funds arethe government, foreign banks, and bilateral lendine agencies; in Jananand the U.S. The Bank potentially can make it easier and simpler for a

1/ The industry numbers and the value added figures are from the sec-toral model. The commodities and the subsidy figures are from thestudy of the Korea Traders Association, op. cit., pp. 178-94. Theva:Lue added figures are calculated taking account of customs dutieson inputs but not on the basis of world prices for output; thus theva:Lue added figures are not those under free market conditions.

manufacturer to obtain necessary financing. The major concerns arewhether the amount of funds available will be sufficient to finance thevolume of demand, and whether the Bank can balance successfully the dif-ferent kinds of demand for export and import finance. For example, basedon ratios of the past volume of trade loans to exports, a level of $3.5billion in exports might generate a demand for 250-300 billion won an-nually and the demand could go higher with the projected change in thecomposition of exports. In the extreme case, if exporters were able toborrow the maximum amount now permitted, the volume of credit generatedwould be about 800 billion won. The present banking system is ill pre-pared to mobilize such volumes of funds.

3.12 KOTRA has over forty offices throughout the world to collect in-formation on prices and market conditions in foreign countries, to dissem-inate it to Korean exporters in daily bulletins and other reports, and toprovide buyers' guides to the available products. Its research activitiesinclude preparation of specific market reports, and each month a meeting isheld with the Ministry of Commerce and Industry to consider programs for ex-port promotion. The research department is responsible for producing oneidea a month for expanding exports of each commodity. These services arean essential part of marketing, and undoubtedly have contributed to thepast success of the export programs. The needs in the future, however,are likely to require a greatly strengthened marketing effort. It is onething to renort retail prices and market conditions for shoes, artificialflowers, plastic products, etc. since the markets are generally well arti-culated and continuous information is available at both wholesale and re-tail levels; the level of consumer spending on the items is also generallyavailable. The mnarketing of lathes. drills- nresses. and other kinds ofmachinery and metal products is rather different. Sales are on an individ-ul, ri-stnm-iep hbasis. There nre fewer standard trade practices and con-ventions. The market is less centralized than for consumer goods. Thehiibyer frnqu,ntly expcwnprs that extensive customer services will be nrovided-Consequently marketing means getting to know individual companies or agencies,and requires an. ability to discuss techni -l details of the nroduct as wellas financial terms for the total package. KOTRA is not in a position to dothis now, and a marketing capability miust ha createa either in ROTRA or in

some new agency, in cooperation with the prospective machinery and metalp_oAucts exporters. The miss-4,n r ncomeAd t1hat oan vlutatin ha inAde nf19

* V ..tO ~a .A. UCVJ Xa. 0 .LSt LUs ~f-'.JS*L the marketing and service arrangements that will be required for the newtypes of exports AUrin._g thle TLird Plan. period.

4. 14 L1 .he Masan Iree ITrale one was created by 1aw o nUaJnuary 1, 1970

and is in the early phase of its development. It is located at Masan port(68 'Km. west oL rP-uan) nd is a bonded ara pu y f ort industries

either wholly foreign owned or with a minimum of 50 percent foreign parti-cipation. Targets have been set Lor thLIe fLLrst phase oU its operation.

They include attraction of 100 medium scale plants to the zone, $100 millionin exports within a few years, arid it is expected thatL p-yULeLLS LouL wages,

domestic raw materials and utilities will result in domestic retention ofI 'I - 1 -3- .a- 30 percent of the total export values. Inree plants are aLredUy locadLU

in the zone. In support of the attractions of producing under bond and tax

_ 61 -

advantages offered to the producers, the government will provide a fullrange of logistic support services. including transnortation facilities,repair and maintenance, simplified customs and other clearances, banking andfinancial serv4ces and the like. Artual deliverv nf these sunnort servicesas promised may determine the success of the venture. Free trade zoneseither tend to srnw rwiiirklv ancl arp cnr-rPtfii1_ nr t-hpv Innatiii.h nnd itbecomes; difficult to attract new firms. It may then not be feasible tomaintain even a minimum nf the support seruvire promised. For thni reasnithe mission urges that all of the elements of the promised package be car-ried through on schedul.p MAFFZs isa model fn-r a4milnr 7znes in nther

areas later. Its experience will greatly affect the future success of thiskind nf nrnovam -

3.1 1n T1.m1m r1. t.un ma40r steps re suggested for strengthening theexport promotion programs. One major suggestion is for a review andprnNnhih 1 r.f-,m..of e Art incenives and subsidies. T other -hief need

is a marketing organization capable of promoting and selling the heavyindustrial products that are scheduled for e--ort in the next five years

B. T,or usiu4.

CZ1 T,;,e system fo protectior. ofdmsi .auatrrg filp

substitutes seems to be partly the result of deliberate choice by thepolicy=,,k.ae.s, and partly thle .Lesult of Lhe needU to conLtrol'. iUport Udemanubecause of an overvalued exchange rate. In total the system includes ageneral. andU a -variable schedule of tariff rates applicable to difLerentproducts, exemptions from payment of duties on certain imported inputs,specLa± treatment ior certain kinas or imports, ana pronlDiLions or re-strictions on the import of a number of commodities. Regulations on ad-vance deposit requirements and on other credit terms for import financehave also been changed from time to time, usually as an element in themonetary stabilization program. In general the result of the multiplicityof policy instruments used makes it difficult to judge the extent of pro-

-- _.t _ _ Ir of po afints _ , -s f r. ,_ tectLoUX a-ioraea Lo inaiviaual industries. ivany of the points mentionecearlier in this section about the uncertain effects of the export subsidysystem apply equally to import protection. Tney are in fact two parts ofthe same total problem.

3.16 If domestic production costs are higher than international costs,as is frequently the case, domestic industry can compete with importedproducts only if it is protected. The degree of effective protection isnot given by the nominal rate of duty on output, but by the degree ofprotect:Lon to value added in the industry, which is the sum of factor earn-ings (wages, interest, profits, etc.). It is this sum that represents netresource use. Effect:Lve protection in the industry is defined as the

- 62 -

protection that the tariff system provides to the value added component. 1/ThC-e concept is the sar..e as htas bDeen AiJLscussedl earlier iLn LthLe reportl ii cLnL=

nection with the effective rate of subsidy. The effective rate of protect-tion is expressedU in terms ofL the ratio ofL actual LU va'lue auUedU Lin the indIus-

try (that is, with all tariffs included) to the value added that wouldoccur in the absence of the tari'fs. T'L.e rate Jtself is th's ratio minusone. For example, if the actual value added is 100, and after adjustingfor tariff protection the value added is 80, the effective rate of pro-tection is 100/80-1, or 25 percent. Normally, value added after the ad-justment is lower than before because of tne tariff on the product, DUt itmay be higher after the adjustment in which case there is negative valueadded.

3.17 Tne important question is wnether the protection afforded to im-port substituting industries is in accordance with the policy-makers de-cisions, which, among other factors, should be seeking to protect thoseindustries in which value added is relatively high or industries that sup-ply intermediate (or capital) goods used in further processing or in fixedcapital formation. A study of the import substitution industries of Koreawas conducted by faculty members of Seoul National University. 2/ Caicuia-tions were made of the effective rate of protection, as defined above; forfour major groupings of products the average eftective rates of protectionwere as follows (in percent): consumer goods 136.7; investment or capitalgoods 56.4; intermediate goods (processing natural raw materials) 54.8; in-termediate goods (high level processing) 57.6. 3/ The effective protectionrate to consumer goods is more than twice as high as for capital or inter-mediate goods. The report also found that the high rates of protectionwere generally received by industries in which labor productivity was re-latively low and where skill levels were also low, and the report conclud-ed that the existing tariff system did not serve the investment prioritypolicies of the Second Five Year Plan. It is appropriate to ask whetherthe tariff system, as it is now structured, is likely to meet the invest-ment policies of the Third Plan any better. Although some changes in therates have been made in the past few years, they apparently have not re-versed the effects shown by the report. The relative size of the ratesof effective protection are not in accord with the priorities for indus-trial development set forth in the Third Plan.

1/ For a discussion of the concept of effective protection see: B. Balassa,"Tzariff Protect4on i st Journal of Political Eco-

nomy, LXXIII, Dec., 1965, and W. A. Corden, "The Structure of a TariffLysteLm andA the Effectlve Protecti Rate," J o

LXXIV, June, 1966.

2/ Faculty members of Seoul National University, Analysis of Korea's ImportSubstiLution Industries, Seoul, 1966.

3/ Ibid., Table 7.

- 63 -

3.18 The analysis of effective rates of protection is now five yearsold and a new phase of industrial development is starting. The missionsuggests that a review of the policies and instruments for import protect-ion be merged with the review of export subsidies and that the combinedstudy of subsidies and tariffs be focused on reforms that will simplifythe system, make it less susceptible to distortion through special exempt-ions, and also make it more responsive and effective in meeting the object-ives of the Third Plan. An analytical task force that is well supportedwill probably be required to carry out this review.

3.19 One specific point needs to be mentioned here. Apart from thegeneral rate of tariffs whIch is annlicable to most imnorts at either 40%or 50% ad valorem, there is a special rate, which is often much higher inamount. This is calculated at 70% (if the general rate is 40% or less) or90% (if the general rate is over 40%) of a figure which is arrived at bydeducting from the rpT,ortpd dompqtis market nrirs of t-hp commodity, the SUI,r

for competing imports., of c.i.f. price, the general duty paid, handlingchargpq ana an nllnwownrv of 307 of rcif- nrirce thhp 1at hpine nrestimblyvan implicit profit allowance. The intention of the special duty appearsto he to mop un t-hp surplus prof-fit t-ihat wouild onthPrwi-4sP accri,p to the im-porter, in view of the reported selling price of the commodity in domesticmnrlct;- hbut it hlasQ wn side effects- firQtlvy the 1evel of t-ot1 tqriffprotection for domestic manufacturers is escalated to high levels; secondlythe 30n allowanc nue -oe 4 f. price which is recoanIzed asca mnrgin to theimporter establishes aL high level of profit on imports. There is need tocon.sIder both these questions specfifcally, and to establish more reasonablelevels cf protection for domestic producers on the one hand and profits forimpor ter-s on the other.

3.20 The m-acro-model proections show that the Import content of ex-ports is expected to rise to 47 percent by 1976. Net export proceeds willcontinue to trow because gross exports are ri sing, but thi4s proJection ofa continued high level of imported materials for incorporation in exportsmennns tht the p14-I of subontractng w.11 be contInue.A and 4n fact

expanded, during the Third Plan. Subcontracting is the practice of im-porti-n a raw material or semi-fin.. shed product, pro4cessing it further in

the Korean plant, and re-exporting for final processing into a finishedproduct. TD-M re=export ix often. to t1e samUe foreign comLpany that suppliesthe raw material, so that the Korean plant represents one stage of a ver-ticall integrat-ion of producti on. T.o.e net- contribution to fcore-ign exch-angeU-LU-CL LLLUC5L a LLSL 04 J JLA L L.~ a-IS SC1 t.L .- L LA '5-ULA. L.O255 AJ..1 t.fa±

5

earnings is represented by the value added plus other domestic materialsthat may be useAu. Subcon.tracti.g for ore stage of production mlay bCe U.Leonly way that a country can break into a new market and acquire needed skillsanA capita'. It 'as work-ed successfully 'or Korea in the pas-, b-ut J. isA515 j. L La A.L I LIa WIJA NU 0U.~ L U.L± LJL L\SA.5 .LL LLISOj50L U hL

not without risk. Separation of the stages of production, with control ofthLe raw clater.a± stage an' the fLinOL -ised2 product stage -n Uoter hands,the possibility that the intermediate processing stage might be squeezed.XIL1s can occur thIrough apprpiaLely setting Lith prices at WhILch LLIt raw

material is sold and the re-exported product is purchased. In verticallyLntegrat,ed industries in otner countries tle practice of setting prices so

- 64 -

as to eliminate profits at one processing stage and recapturing them atanot WCL er s noUt'UUnUo L .on L * typically UocULrs WierL e Llt eLeb 'LsrIL WC L rUIILLtUr

by a firm over most production stages and is most apt to be exercised whenmarkLet con'U'LtULorLs fLor the inal produucts worsen.

3. 21 Such a squeeze on costs and profits in particular industriescould have serious effects on the development of the industry. W4hethertnere exist conditions in the subcontracting arrangements in Korea tnatgive rise to this possibility depends on who takes the risks, who suppliesthe investment, and wno sets the prices and on what basis. If the agree-ments are for a number of years, if there is a true joint venture in shar-ing risks and costs, and if there are reasonable guarantees for a continu-ing flow of production, the risks of a squeeze are unimportant. Sincesubcontracting arrangements are obviously expected to increase in thecoming years, it would be prudent to ensure that the arrangements containprotective features. in the longer run, however, it would be desirableto develop alternative sources of supply (domestic if feasible) and al-ternative markets so that the import content can be reduced and the mar-kets broadened and diversified. This direction for policy and programsin import substitution deserves attention in the future.

C. Summary of Recommendations

3.22 The preceding discussions have shown how important the programsfor export promotion and import substitution are to the overall success ofthe TFYP, and also how costly it may become to continue the export incen-tive system in its present form. For these reasons the mission reemphasizesthe recommendation for a study of export incentives and tariffs so thatmore effective policies can be adopted in the near future. Although themission cannot predict the detailed outcomes of such a study, the broadoutlines for a new set of policies seem reasonably clear and are summarizedbelow. The recommendations that are made are not a substitute for a de-tailed study; they are presented to advance the consideration of the prob-lems and to suggest where solutions lie.

3.23 In the absence of adequate adjustment of the exchange rate ofthe Won, the continuous increase in domestic costs and prices, at a ratesubstantially faster than that experienced in markets for Korea's exports,has generated pressures for increasing export incentives, and has alsocontributed to the growth of import demand. In discussions with Governmentofficials and businessmen it was apparent that they recognized the needfor a realistic adjustment of the exchange rate, as an alternative to theincreasingly cumbersome system of incentives and subsidies for exports andhigh tariffs on imports.

3.24 If the exchange rate of the Won is suitably adjusted to reflectthe relevant price relationship in Korea and its export markets. it wouldbe feasible to simplify the structure of subsidies for exports, and togive due consfderation to (1) value added in an industry, (2) the percent-age of output exported and (3) special difficulties of entering new export

- 65 -

markets. The exact details should emerge from the study that is recommend-~IL ~LLUJJJ.. ±aL~jA~ JA ~~jJ.J L ±tL.~~ .LV ~ A.J A AWj.L A J. I._ ~LA JU.Aed . -Along thle si.rpli4:fica-ions oF export incentives, 'or example, it shou]-d

be possible to reduce or eliminate the preferential interest rates on tradeloans.

J. 4i DoU iar as tle: custLos uuLues on 'Lmports are concernedu, Lt Ld:j

been shown that the effective rate of protection is highest on consumergoou's or -Wnich the rate is over twice thfe effective rate on interneduLategoods and capital goods. It should be possible to reduce considerablytile rat:es on many lirnes of consumer goods, particularly tnose that arewell established in the country and have shown that they can survive com-petition from imports. Tne structure of duties should now emphasize rea-sonable protection to those industries that produce intermediate goods(particularly those with high values added) and capitai goods (if tnegood i s being emphasized in the TFYP production targets).

3.26 KOTRA should be strengthened in its marketing efforts by theaddition of staff that knows the problems of the metals and machinery in-dustries, and preliminary work should be undertaken to canvass potentialmarkets for these products in the U.S., Western Europe, and Japan. Analternate solution is to establish a separate Export Trade Corporationthat can deal directly with the customers and supplying marketing servicesto producers. Marketing is a key to a successful export effort in metalsand machinery products.

3.27 It may also be desirable to exercise selectivity in capital goodsprojects that are specifically export-oriented and to devote the majoreffort to ensure that they succeed, rather than to spread the effort, andthe projects, over a wide range of products.

- 66 -

IV. THE FINANCING OF INDUSTRIAL INVESTMENT

A. Major Targets

4.1 The expansions projected for the manufacturing industries duringthe Third Plan will require heavy fixed investment in new facilities andan increase in working capital, including provision for advancing an in-creased amount of trade credits in support of export sales. In accordancewith policy decisions, the expansion of investment is to be accompanied bya sharn shift away from foreign sources of finance toward domestic sources,with a very large increase in the proportion of investment financed frominternal cornorate savings. The expansions plus the targeted shifts in

sources of finance will impose a burden on domestic finance that will bediffiriilt tn meet in the years ahead. The results that are achieved willdepend on the ability of corporations to generate and retain savings, theommnercinl hbnks7' ahilitv tn nrnvide long-term finance bv mobhilizincg nri-

vate savings, and the effectiveness of the tax and money market incentivesin inducing iuse nf the funds fnr investment- The nrnblems nan he seen by

examining the estimated demand for and supply of funds, the change in thecom.position of sources of finance, and the character of the incentives inthe tax system and the money markets affecting the use of funds.

4.2 The macro-model establishes the major target for the financing ofgross invest.ent. It shows domestic Savings -rjsng frm 1 of G-.D

in 1969 to over 20 percent by 1976 and averaging 19.3 percent for the ThirdPla_ S1'4n peri eod. F nAAo14reig.n1 5A@ ^..JaL E .L LJCL LV . 1. .JL C..L

5L* iova[D t VJ .L b OL ._ jL *._ M L WC LU X

2.7 percent of GNP in the same period. Put in,another way, domestic savingsfi1nanced 6^1 percent ofc gross investm>ent in4 96 ar.d -ar expected to spl

88 percent of investment needs in 1976, with foreign savings falling from 38percent to 1i.2 perLent of thLOe tutal. TI spite of Lr absolut r ments

foreign savings are expected to fall from just under $800 million in 1969tO ?JJU Uh1 ilULI 0 'I "'. o mLee - tL e target uuudo est i sav in s IvImust -LoW Uy

over 10 percent annually. This projected shift sets the framework of theconditions for uisaggregated estiruates of Linancing by source 'in the comingyears. There must be consistency between the macro-targets and the sub-sector analyses. It is entirely possible OL course thlat tle ratLo of for-eign to domestic savings might be higher than forecast, but the analysis ofthat possibility goes beyond the scope of this discussion, which is limitedto the problems primarily affecting industrial investment.

B. Demand for Funds and Sources of Supply

4.31 T.e Ae.m.anA -'or f~unAs for fi-r.ar.cing of invest..ent (f4xed -apt-1'1 .2 I.L ifiiL.i L S.LL " 0 .501 1. AiaiL.-Lb *A .tii 00~ \L.it ---- .Ll-i "pJ L

formation plus working capital) by the corporate sector of the economy hasbeen estLmated from h'e flow or f uns lata b1y a group at Sogang llniversLty. 1

1/ Sogang University, A Study of Money Market and Industrial InvestmentFinancing in Korea, November 1970.

- 67 -

The corporate sector in the flow of funds data is not synonymous with themanufacturing sector, since it includes corporations in other sectors of theeconomy and excludes non--corporate business in manufacturing, but from avail-able published statistics it was not possible to break down the flow of fundsfor manufacturing alone. For purpose of this discussion the corporate sectoris assumed to be representative of industrial financing conditions.

4.4 The estimates of demand for funds and the distribution of the totalamong internal and external sources of funds are shown in Table 4.1. Thefigures show total requirements rising from 550 billion won in 1969 to 725billion won in 1976, or a rate of growth of 4.1 percent in this period. Ashas been shown in Chapter II of this report the rate of growth of totalcapital formation in manufacturing in the sectoral model is 6.6 percentand it is 5.5 percent for all industries. Questions were raised about thecredibility of these estimates, since in view of projected growth in outpul:and the slhift to heavy industries, the investment figures appear to beunderest:imated. Yet t:he financial model shows total corporate financialrequirements growing more slowly than either capital formation or output.There may be some explanation of this forecast, possibly in some (implicit,assumption about the rate of turnover of funds, but it would be advisableto examine the structture of the financial model to determine if the para-meters in it are realistic.

4.5 Regardless of the accuracy of the estimate of total funds; thepattern of change in the sources of finance can be seen from the table.Internnllv genPrat-ed fi'nds~ are exrpeted t-n rise frnm 1 to-n 3 nperrent nfthe total, the largest gain of any of the sources. Domestic bank loansalso m-ust inroreae, and. topfhpr wit-h int-ernnl nu,rr'es .will arcount fortwo-thirds of all requirements whereas in 1969 they accounted for abouthalf. Stock issues (a direct methnd of financp) ar onhviounly not- nuntpdon to any large extent, and foreign investment and loans will be cut inhalf and in 1976 wtll account for less than 9 percent of the needs. Thechanges from the past, when foreign sources accounted for a large percentof t-hp tota-il: anurd mTucih of t-hp act-iue stimuil us, are obvious.

4A6 Some of the deta are shown mnore clearly in the nproJ ct nat-terns of finance for fixed capital formation by corporations. Table 4.2shows that capital consumption allowances and other internal financing(through reinvestment of earnings, etc.) will together account for over45 percent of fixed investment, with other domestic finance in the form ofbank loans, other types of loans and equity and debt instruments, account-inc- f-- aout, a thirA. _ Th -o A-_ct--r .--sbC :A l Ao F, r^r4A :3hnhi.fi o b- Tus domestic souces supposed to _rov-de about80 percent of fixed capital needs by 1976, in contrast to less than halfin 1969 . Irn orduler to :r.eet the targets, in absoJlute amnount, the renvest-.ment ofE corporate retained earnings must increase by more than 100 percentand bank -loans plus othier dom.estic fAinancial m'ean.s buy ,-uore thlan 1-60 pretThe burdean is clearly on the business firms themselves to increase self-in-vestmlent andU onL thle domestic buankling syster, Lto proviLdLUe thLe fLunds for fixeAcapital formation. If this does not occur, either the rate of growth of theJnndustri,al sector- will lag or the balance of pay,-,ents target in the T.J.rdPLan wil:L be±. r dL dL byL a1 hLghL U

Plan wil'L be eroded by a higher inflow of foreign capital.

- 68 -

4.7 Capital consumption allowance should continue to rise, thoughprobably more rapidly in later years after the heaviest investment has beenmade. Normal depreciation in Korea is on a declining balance basis, whichpermiLts more rapd UepreciLat'Lon o assets than does straight line. inereare also additional allowances for special industries. Export industriesCaln ada 15 to 30 per cent more U'epeLngI oLn tile etAentlL oi ex!p-OrtS. Meaiumand small industries get 30 percent additional, and petrochemicals get20 percent. Also all assets located In industrial pLolIoLMLon estates areentitled to 20 percent additional. These are generous allowances and shouldprovide runas for fixed investment.

4.8 Ine commercial banking system has been supplying only short-termloans, ostensibly for working capital purposes. About 97 percent of com-mercial bank loans in 1969 were of this type. Tne Korea Development Bankhas the majority of its loans for financing of equipment and facilities.But it is well known that businesses use even short-term loans for financ-ing fixed investment. With the burden of financing the expansion of in-dustry increasing it will be necessary to authorize and encourage the com-mercial banks to raise substantially the share of loans with maturitiesfrom three years to five years for fixed capital formation. The regressionequations of the Sogang University study indicate that commercial and spe-cial bank loans should supply 60 percent marginally of private corporationinvestment requirements. 1/ The economy and the banking system will have tomobilize savings to permit the necessary expansion of loans. It is disturb-ing to note that in July, 1969 and again at the end of 1969 and carryingover into 1970 the commercial banking system had less than the legally re-quired reserves. One can only infer that the banks were permitted, orencouraged, to do this by the monetary authorities and that the conditionarose because of the demand for loans. Normally this condition should notbe allowed and penalties should be imposed if it occurs since the settingof reserve ratios is part of monetary control policies. As indicated below,part of the pressure on the banking system occurs because of the existenceof preferential interest rates for avarietyof loans, plus the special taxtreatment of interest payments, so that in effect the incentives are all inthe direction of financing investments by loans rather than from othersources.

4.9 Raising capital through the sale of stocks and debentures undoubt-edly will rise in the coming years. Government tax policy favors the opencorporation through imposition of a maximum marginal tax rate of 27.5 percenton open corporations and 49.5 percent on private (closed) corporations. Inaddition the latter pay a 5.5 percent tax on retained earnings and the formerare exempt. Nevertheless, some private corporations fear the loss of controlif they go public, and if stock is to be successfully sold and held, the di-vidend rate must be competitive with alternative investment possibilities,particularly bank deposits on which the maximum rate is 22.8 percent fordeposits held over one year. Institutions such as the Korea Development

1/ Ibid., pp. 83, 96.

- 69 -

Finance Corporation and the Korea Investment Development Corporation thatprovide underWr-iting i.nVestmenL banking, and oLner marKet services for tneprivate sector should be encouraged, and indeed are; but ultimately thesuccess of raising capital through stock sales wiii depend on the growtn oIsavings in the economy and the ability to attract the savings to investment:in stocks. Tne market is imperfect and needs to be cultivated and informed.One cannot sensibly predict the volume of capital that might be raised inthis way in the next few years.

4.10 Retained earnings have provided a decreasing share of finance tocorporations in 1966-69, and in the last year accounted for less than 10 per-cent of the funds used. In the TFYP corporate income should rise rapidlyand, with more open corporations, the ratio of corporate taxes to corporateincome should decline, and corporate savings should rise. Thus, internallygenerated funds (earnings plus capital consumption allowances) may be ableto meet the target of providing one-third of the finance required; however,this really assumes the most favorable outcome and could be upset by risingcosts, continued inflation, or a retardation in the rate of growth of mar-kets, particularly export markets. Before corporations can reinvest earn-ings they must generate and retain profits. The record of the past fewyears in this regard does not inspire confidence in the forecast that intern-ally generated funds will supply a significant part of fixed capital forma-tion in the next few years.

4.11 Most businesses find it necessary to get some of their funds fromthe unorganized money market (UMM) where interest rates typically run from3 to 5 percent per month. The UMM has provided a growing amount of fundsand in 19369 was estimated at about 22 billion won or almost 6 percent ofcorporate needs. 1/ Professional money lenders apparently provide a largepart of the total, but in recent years borrowings from relatives or friends(including officers or owners of the corporation itself) has become moreimportant. Insofar as corporate financing is concerned this can lead tosome undesirable results. It is possible for an officer or owner to lendmoney to his own corporation at the curb rate. The corporation withholds16.5 percent of the interest paid as a tax, but the lender's identity is notdivulged. He remains anonymous. Moreover, it is reported that in some casescorporations report some of their operating income as originating in UMMlending, thus getting the break between the 16.5 percent tax on the interesi:and the 27.5 or 49.5 percent marginal corporate tax rate. 2/ Borrowing frornofficers or owners is a way of transferring funds from the corporation tothe individual via the high interest payments, with the added advantage tothe individual that he remains unknown to the tax authorities. Corporateborrowing; of this kind may be unrelated to actual business needs. In mostcountries the financial dealings of officers with their own corporation are

1/ Ibid., pg. 62

2/ Cf. Kang Il Kyn, "UN* - Its Extent and Trend in Business Borrowing,"USAID/K, Dec., 1969.

- 70 -

most carefully scrutinized and regulated, and the mission recommends thatregulatory and reporting measures, involving full disclosure, be institutedin Korea. For effective tax administration it would be desirable to stripaway the anonymity of all such lenders to corporations, but it is recognizedthat as a practical matter it may be difficult to achieve this change intraditional business behavior.

C. Interest Rates

4.12 In Korea there is an extensive system of preferential interestrates on loans for support of certain specified activities, notably thepromotion of exports and the expansion of selected industries. The systemof rates is illustrated in Table 4.3. The ordinary commercial rate is24 percent but for financing of exports or raw material imports for incor-poration in exports the rate is 6 percent and for equipment loans the rateis 12 percent. As has been mentioned earlier, the preferential rate of6 percent is part of the package of export incentives, but these funds arefrequently used for expansion of facilities. It has been estimated thatin 1969 preferential interest rate loans amounted to 45 percent of all bankloans and that the indirect subsidy of interest by these rates (in contrastto the commercial rate of 24 percent) amounted to 38 billion won. 1/

4.13 It is obviously an advantage to industry to have access to fundson these preferred terms, and industrial enterprises will resist attemptsto cut back on the amounts available to them. But for the future the ques-tion is whether the preferences are necessary and whether the country canafford the distortion and expansion in demand that is very likely to occur.The suggested re-examination of export incentives may indicate the possi-bility of dispensing with some part or all of the interest rate differen-tials. And a review of other preferential rates, as in equipment loans,would be desirable to determine the policies for the future. So long aspreferential rates exist, with big differentials over ordinary rates,government intervention in the market and a form of rationing of creditwill be required. With the plans for the much larger role of the domesticbanking system in financing capital formation during the TFYP, some read--lustment in the structure of rates (but not necessarily a lowering of thecommercial rate) to narrow the gap might be effective.

4.14 The demand for bank loans is undoubtedly exaggerated because ofthe link between the creation of bank loans and the creation of time andsavings deposits held by private corporations. The link occurs because inKorea interest naid is fully deductible as a cost in computing net incomesubject to tax, but interest earned on time and savings deposits in banksis t,e-pypmnt- With thp bank loan rate at 24 nercent and the deposit in-terest rate on time and savings deposits at 22.8 percent, and given themarginal tax r2tes on nrnporatp incompe it nays the rorporation to try to

'./ Soan Unvrit,o. i.p.10

~J~JbC * b-n ca p ra e-_ rb'- - - -_ - -

- 71 -

borrow more than the actual needs. This can be illustrated with a simpli-fied example. Suppose a company has a need for 50 won working capital butactually is able to borrow 100 won. The extra 50 won raised the interestcharge by 12 won in the course of a year, and decreases the net profit ofthe corporation. If that amount were not borrowed, gross profit would pre-sumably be higher by 12 won but net profit would only be higher by 8.7 woIIto an open corporation (marginal tax rate of 27.5 percent) or 6.1 won toa closed corporation (marginal tax rate of 49.5 percent). This is the nel-income foregone because of borrowing the extra 50 won. On the other handif the funds are deposited with the bank, the interest earned is 11.4 wonand that is net to the corporation since the interest is tax exempt. Thusby linking bank loans with the creation of time deposits the corporationis able to shift its income sources so as to raise its net income. This ispossible only because interest income from bank deposits is tax exempt.It is also possible that some of the pressure comes from the banking systemitself in requiring installment savings deposits as a condition of the loan.If this is the case, the rules on collateral for loans should be changed.

4.15 That something akin to the example has actually been occuring inKorea is evidenced by the figures shown in Table 4.4. The data are fromthe flow-of-funds and show the actual transactions during the year in ques-tion. It is clear that after the interest rate reform in 1965 the ratio oftime and savings deposits held by corporations to their bank loans beganto rise, and in 1969 new deposits created were over 60 percent of new bankloans. A simple regression equation indicates that on the average 50 wonin deposits are created per 100 won in bank loans. Thus the linkage be-tween loans and deposits is a close one and a substantial one. It appearsthat the demand for bank loans has been inflated by at least one-third asa result: of the linkage and the tax exempt status of deposit interest. Ithas been suggested several times that business interest income should betreated the same as other income for tax purposes, and one expert in taxmatters has also suegested that in lieu of a complete reform banks withold16.5 percent of interest paid to businesses as a tax. 1/ Such changes wouldhave a corrective effect on the market for credit and should now be speci-fically considered by the government. During the TFYP the burdens on thebanking system to supply funds for capital formation will be large enoughwithout artificial inflation in the demand.

1/ R.H. Johnson, R.R. Nathan Associates, Inc., "A Survey of Korea'sFisc:al System in Relation to the Third Five-Year Plan", prepared forthe Ministry of Finance and USAID, September 19, 1970.

- 72 -

D. Corporations with Large Government Investments

4.16 A special problem exists with respect to twenty-six corporationsin which the government has a substantial financial interest through stockownership or loans and in which it has representation on the board of di-rectors. These companies are often among the largest in the industry (forexample, Inchon Iron and Steel, Korea Fertilizer Co., Shinjin Motors, KoreaShipbuilding and Engineering Co.) and represent a wide range of capital andconsumer goods. The government has often acquired its interest because atsome point the company experienced financial and other difficulties andrequired assistance, though in other cases the government provided funds tohelp start the company and has maintained its interest. In any event thegovernment has some degree of control over the policies and performance ofthese companies. When the government is a majority shareholder or thelargest single shareholder, the control that could be exercised is as com-plete as the government chooses. In some cases a minority private owner ispermitted to manage the company.

4.17 The financial records of these corporations were not available tothe mission, but the government's financial interest in total is of the orderof several hundred billion won. In the interests of the best use of theseresources for development, an examination of the current status and futureprospects of each of the companies should be made. Companies that have largegovernment loans should be expected to liquidate them on some reasonablebasis to demonstrate economic viability. Loans should not be a quasi-permanent bulwark against the market. Where the government is a largeshareholder, it might consider selling its shares to private investors, ifthe company is profitable, or if the company continues to be in difficulty,a reorganization may be required. It is not appropriate to channel taxrevenues to support companies that cannot establish themselves profitablyin the market. Through liquidation of loans, sales of stocks, and reorgan-ization of activities, government funds would be freed for other develop-mental needs. An evaluation of these possibilities deserves some nrioritvin the next year or so. It might be appropriate to ask a mixed public andnrivate t-omnmi9sion to mnke an evaluatinn and nresent its rpcommpndatinns

4L 1 Theb financing osf iInAuictr-ril inuat-mPnt in thc 4TYP ic rn npartof general monetary and credit management in the economy. Current prac-tices and policies seem to result in some i4nefficienc4 in the use nf f4nn-cial resources, and these effects are likely to be magnified in the futureunless changes are ins tituted. From the examples presented that are appli-cable to industry, a proper review of financial policies with respect toifnterest rat"es ar.d credit pol-icies -411 almost certainly -equire att-ention4. L.L IC L LO%OOLA tCA. .j~..L.C .. ., L. -L. - Lf4 flf.LY .. L O LflLtf

as well to tax policies and the operation of the banking system. There aresifLI±L ±CdicLant i4.~~ jJL UL) ±CI LLpcL UrbeLLLLVth UC c.Vb.LUU.

- 73 -

Table 4.1

Total Financial Requirements

of Corporations, 1969-76

(1969 Constant Billion won)

1969 1976 Fate ofAmount % Amount % growth

1. Financial requirements 5h9.9 100.0 725.4 100.0 4.1

a. Internal 106.6 19.4 239.h4 33.0 12.3b. External 443.3 80.6 486.0 67.0 1.4

2. Comaposition of external 443.3 80.6 486.0 67.0 1.4

a. Dcmestic 319.3 58.1 421.3 58.1 4.1(i) Direct* 155.0 28.2 172.7 23.8 1.6(ii) Indirect** 164.3 29.9 248.6 34.3 6.1

b. Foreign 124.0 22.5 64.7 8.9 -9.5

* Stocks and debentures, government loans, trade credit** Bank loans- insurance and trust loans

Sourcet Sogang Universitv, A Rtudv of Monev Market and IndustrialInvestment Financing in Korea, November 1970

- 74 -

Table 4t.2

Sources of Finance for Corporate

Fixed Investment, 1969 and 1976

Source Percent

1969 1976

Fixed capital formation 100.0 100.0Capital conswmption allow. 22.6 35.2Other internal financing 7.6 10.4External financing 69.8 544a. Domestic* 17.9 32.7b. Foreign 51.9 21.7

* Including bank loans, stocks

Source: Sogang University, A Study of Money Market and IndustrialInvestment Financing, November 1970, derived from pp. 90-91.

Table 4.3

Selected Interest Rates on Loans

Bank and type of loan Rate (%)

1. Commercial banks

a. Commercial bills 24.0b. Export and import bills 6.0c. Machinery industry pramotion 12.0d. Overdrafts 26.0

2. Korea Development Bank

a. Government fundsEquipment funds 12.0Operating funds 18.0

b. Important industrial funds*Equipment funds 12.0Operating funds 18.0

c. Other industrial fundsEquipment funds 20.0Operating funds 23.0

d. Foreign loan funds (AID loans) 8.0-10.0

e. Internal funds-ordinary loans 10.0-12.0

3. Medium Industrv Bank

a. Medium industrv equipment 20.0

b. Government funds for equipment 12.0

* Funds for electricitv, coal, shipbuilding, iron and steel, andothers designated by Presidential decree.

Source: Bank of Korea, Monthly Economic Statistics

- 76 -

Table 4.4

Corporate Bank Deposits and

Bank Loans(billion won)

(1) (2) (3) (4)Year Time and Rnnk (3W2)

Savings Deposits Loans (percent)

1964 2h|0 2419.9

1 965 3168 163471 1.

1966 h1J7 1424- '30

1967 11384 32330 35.2

1968 94R 108 3 7

!969 81i0J4 5 133' -55 60-.-7

at end of 137172 332480 41.3

1969

Source: Economic Statistics Yearbook, 1970 pp. 67-87.

- 77 -

V. R V DESARC11, DEV-T A-M-T AMr ''AT?A ?ITWTr FOR Th\TnrTCTVV

A. Ministry of Science and Technology

u Over e past few years Korea nas snown an awareness of LIIe nieeufor a capability in research, technological development, and training toimprove productivity, and has created within the public sector the Ministryof Science and Technology (MOST) to take responsibility for research anddevelopment (R & D) programs that will contribute to national growth anddevelopment. The government has simultaneously encouraged and activelysupported the establishment ot private institutions that are devoted towork on a range of topics in this area. The development of this capabilityin a loosely-knit group of public agencies and private institutions repre-sents one of the most successful, and perceptive, programs in the countrytoday. The existence of this capability is particularly significant now,when Korea is entering a new and more complicated phase of industrial de-velopment, with the emphasis on more careful cost controls, better applica-tion of technology, and more efficient production.

5.2 The establishment of MOST, and the range of its responsibilities,is rather unique among developing countries and even for many developedcountries. It is responsible for the support of R & D activities in indus-try and government, including analyses of the future needs for scientificand technical personnel. It also directs the government programs in atomicenergy and geology. The seriousness of purpose in strengthening R & D activ-ities is evidenced in part by the target set for these aotivities in theTFYP. The objective is to provide, by 1976, one percent of the GNP forscientific and technical research and of this, ten percent is to be earmarkedfor the mechanical engineering industries. The government gives further sup-port by allowing an additional 30 percent depreciation, in excess of normaldepreciat:ion, on facilities and equipment devoted to research and development.

5.3 The government can, and does, draw on the resources of a number ofprivate and mixed public-private institutions for work on specific topics.Most of the institutions also do contract research for private industry andmany do work on their own account with financial support drawn from diversesources. A brief description of some of these institutions will illustratethe extent of present capabilities.

B. Other Institutions

5.4 The Korea Institute of Science and Technology (KIST) was foundedin 1966 with financial support from the governments of the Republic of Koreaand the U.S. Professional and technical assistance in establishing KIST wasprovided by Battelle Memorial institute of Columbus. Ohio, which is consid-ered to be a sister institute. Collaboration and support has occurred in

- 78 -

severnl nroiects, nnt- ir the-q anlusis of priorityu nprn -ct ill -eta!,s an--

machinery that are now an important part of the TFYP. KIST performs re-seanrrh work- and pilot- plant- noperations in ,m,nt-riale and mealury Ao

technology, chemistry and chemical engineering, electronics and mechanicala n cr4n.on -4 c nnr. oro-^-4.^ owudies relatedA to indus1trial Aevelpmen1 I_.ts

work program has ranged from laboratory analyses of the production of yttriumoxide from monazite sands to a project znalysis of a new large shipyard.Since its inception five years ago, KIST has undertaken an impressive range

oFwork. It is an outstandin.g exar,.ple of a researchJ andJ UdeL.lVp.it: org,ani--zation; however, the true test of its capability - and the major opportuni--ies 4o 01 contrlbutLng to tLe developr.ent ofL thLe country - lie in the years

ahead.

5.5 The Korea Industrial Development Research Institute (KID) has pro-v'ded a num',ber of economic analyses and nianagement studies for governmenc

and industry, including a study of the reorganization of export trade citedearlier in this report. KID has conducted studies of manpower development,budget and similar financial systems, analyses of tariff rates for electricpower, and studies of industrial training, to name only a few topics. Forthe Economic Planning Board and the Ministry of Commerce and Industry, KIDhas undertaken several studies related to the development of the TFYP.

5.6 Tne Korea Productivity Center (iCC) is most concerned with train-ing of labor and programs to raise productivity. It has now under conside-ration new programs to increase productivity in the export industries, andto establish a training center for low cost efficient autCmation in industry.These programs are aimed at important problems in the industrial sector.

5.7 The universities, trade associations, and other private organiza-tions and public agencies are contributing in special ways to research andtraining, particularly in the establishment of technical and other institu-tions. The Federation of Korean Industries has promoted and supported theconcept of industrial estates and has aided in the provision of labor train-ing by individual member firms. The lack of specific mention of efforts byother organizations simply reflects the fact that the mission had only alimited time in which to cover the field.

5.8 What has been accomplished to date is impressive, but much remainsto be done. It is probably no exaggeration to say that an important "export"that Korea can make to the developing countries is the experience and thelessons learned in creating and employing a research and development cap-ability. At the present time Korea is in the phase of "adaptive" R & D,which involves the absorption of known technologies and the adaptation ofthem to the conditions in the country. To a limited extent (primarily inKIST) it has an "innovative capability - the creation of new ideas and tech-nioues." Full development of the former type of capability is essential dur-ing the TFYP. The problem for the government is to see to it that these

* 79 -

* 5.LL~LUJ. I ~I L )J.L u LLJLL .L~LLL L . 1W. L.LLL AL A. L. . J U± 1 L A~I , LU CV J5.9 Thre current situatifon is not without its blem',shes, however.There are some areas that are relatively neglected. One of these is indus-trial qUtLLt.y ct auhZUILL anUn dInU LcoC LILa.qIL LLdLiCp 0t equlpment. reLbULILL..A.L u1 LL

UN Development Program report being discouraged at the lack of interest inthis topic and at the poor practices that can be observed in industry.Since att:ention to quality control and maintenance are required for effi-cient production, it might be appropriate for the Ministry of Commerce andIndustry and the Federation of Korean Industries to explore this problemwith the UNDP team. Also, the Medium Industry Bank, with the assiscance ofother personnel of the UNDP, has a program to aid medium and small businesswith problems ranging from accounting procedures to production technology.It is a modest program, and there is much more that could be done.

C. Supply ot Trai.ned Manpower

5.10 As part of the TFYP, estimates have been prepared of the demandfor and supply of scientific and technical personnel. These estimates areshown in the following table.

Estimates of Scientific and TechnicalManpower Demand and Supply, 1972-76.

Excess orType Demand Supply Shortage

1. Scientific andtechnical specialists 22660 38000 15340

2. Skilled workers 27500 19700 -7800

3. Craftsmen 244400 198500 -45900

Source: Third Five Year Plan.

The estimates show that there is likely to be a deficit of skilled workersand craftsmen; but in the highest class of scientific and technical personneL,an excess supply is anticipated. There is reason to suspect that the estima-ted demandls are seriously understated, since, given the projected outputincreases for industry and the former composition of the labor force, thedemand figures in the table are low for all three classes of personnel. Thisis likely to be particularly true for engineers, chemists, and similar pro-fessional personnel. Complaints are heard in Korean industry about the lackof this type of personnel. On the other hand Korean industry is normally nol:in the habit of seeking out and employing recent graduates, as, for example,by sending recruiters to the universities. This habit has to be learned.On the whcole it does not: seem likely that Korea will have an excess of pro-fessional personnel in t:he near future.

- 80 -

5.11 The estimates of a surplus of scientific and technical personnelmay simply reflect the fact that the quality of expected supply does notmeasure up to the need, even though the total numbers available are adequate.The fact is that insufficient attention has been paid to turning out gradu-ates that are fully qualified in their scientific or technical specialty.Industry does not have an excess of fully trained or qualified personnel

from which to choose. When considerations of quality are introduced, thereis almost surely no excess supply of trained manpower.

5.12 The mission believes that continued attention to adaptive research

and develonment and training of labor are essential to achieving the indus-trial output goals in the TFYP. Some efforts in this direction could bestrengthened; as indicated above. The Ministry of Science and Technology

and the Office of Labor Affairs, in conjunction with private industry andothpr organizations; should have these nroblems as a high priority in nro-gram development.

- 81 -

VI. THE IRON AND STEEL INDUSTRY

A. Present Status

6.1 This section discusses the present status and known developmentplans of the iron and steel industry in Korea. Existing basic productionfacilit.Les are genera:Lly small-scale. There are currently only two inte-grated iLron and steel works in Korea, the larger being the Inchon Iron WorlksCompany at Inchon and the smaller the Dongkuk Steel Ilill Company at Pusan.The other steel producers are scrap based and there are a large number ofrerollers. The development of the iron and steel industry in Korea is spear-headed by the Pohang Iron and Steel Company, which is now under construction.Proposals for a foundry pig iron and special steel plant are included in theTFYP.

6.2 Information on the industry was obtained in meetings with thestaff of the EPB, Ministry of Comnmerce and Industry (M4CI), Federation ofKorean Industries, Korea Development Bank, Korea Industrial DevelopmentResearch Institute and Korean Institute of Science and Technology and fromvisits to the plants of nearly all the important steel producers and re-rollers in Korea.

6.3 The iron and steel sector in Korea is characterized first, by alack of balance between its ironmaking, steelmaking and rolling facilities;second, by the fragmentation of production facilities; and third, by thehigh average age of the production facilities. The lack of balance is il-lustratedl by Table 6.1 which shows the demand and supply statistics 1/ ofsteel products and semi-finished products and raw materials for 1968, thelast year for which thiese data are available. It is significant that im-ports of finished products constituted only 27 percent of total consumption,whereas :Lmports of raw materials and semi-finished products constituted 52percent of total consumption.

6.4 The fragmentation of the industry is illustrated by Table 6.2,which shows the number of existing plants and their production capacity asof May 19I69. Certain changes have taken place since these data were col-lected, but the picture thev nresent still holds good. In an industrv norm--ally characterized by the large scale of facilities, there are, in Korea,fifteen steel raking facilities and forty-five rod mills. Collectively thesteel making facilities have an average annual capacity of only 50,000 tonsand the rod mills an average annual canacitv of less than 14.000 tons. Thesmall scale of the facilities results in high costs of production.

1/ All tons are metric tons.

- 82 -

TABLE 6.1

Demand arnd Sunply Statistics for Steel Productsand Raw M'faterials (1966)

DomesticItem Consumption Production Irmort

(in tousand tons)ShaDes, bars and rails

Structural snapes 65 43 22Steel bars 74 46 28Reinforcing bars 279 279 _Wire rods 71 51 20Rails 18 - 18

Sub-total 507 i19 88

Flat-rolled rproductsPlates 70 30 40Sheets 166 99 07Skelp 14 1 13Pipes 83 64 19

Sub-total 333 194 139

Other productsSteel castings 8 8Steel forgings 5 5Li V±L4. UUJ. ~3 44S,- L4-.J

Sub-to-tal 53 13 40

Total 893 526 267(C-rude QAe-L) (,05jv0') (736) 3i).L4)

Iron castingsCast iron p'pes 33 28 5Iron castings 77 76 1

Sub-total 110 104 6

Total 1003730 273

Raw materials and semi-finishedproucts

Pig iron 125 46 79Scrap 568 177 391Ingot 370 365 5Billet 22 - 22Hot coil 128 128

Total 1.213 588 625

ivrr: " ersiPq on _ n-trnintinn n4O an Tntogrnt.d Tron and Steel-1

Mill and Development of the Steel Industry in Korea".da+ted J- 1r 1969 e

TABLE 6.2

Number of Existing Plants and Production Capacity(in thousand tons)

May 1969Number of .4nnualPlants Capacity

Pig Iron (3) ( 203)Blast Furnaces 2 78SI/R1U Process I. 125Ferro-Alloys* 3 11.7

Steel (15) ( 756)Open Hearth Furnaces 3 163Converters 9 220LD Oxygen Converters 1 45Electric A=rnaces 5 328

Rolling (q5) (1.196)Blooing and Billet Mills 3 150it.ruGltural nnd laTire Rod Mor 33 s S5 621.

M1edium and Hfeavy Plate IRills 1 100Hot Strip H.ills 2 56Cold Strip Rills 2 150

S+êl P8lMes7 116 ,

Source: The M4inistry of Commerce and Industry

Notes : 1) Ferro-alloys are not involved in the totalfi-Lgurjs of.- 1,1ne irorimtijIng sector. :U

2) The total number of plants in parenthesesGo nlobt coirc.Lde -wth 'L'Uh tUota'l OfL those IVkind of facilities, because some plantsare equipped with rore than two }dnds offacilities.

- 84 -

6.5 The age of the steelmaking and rolling facilities in Korea aS ofthe end of 1966 is shown in the following table. Of the facilities in ex-istence at that time none were constructed in the 1960's. only 11 percent inthe 1950's, while the remaining 89 percent dated back to the 1940's. Thisis another factor that leads to high nroduction nosts.

Age of Stelmalking and Rolling FacilitiesIn Korea as of End of 1966

(4n urnits)

Contemponrnry M_____ Out,-A-rr t t aL(1960s) (1950s) (1940s)

Cupolas - 9 9Steelmaking furnaces 6 31 37Rolling mills 6 57 63

Total 12 97 109

Source: Office ofL PLannLnLg andU Coordination fuor tLhCe Prime Minister,Evaluation Report on 1st Five-Year Economic Development Plan.14n r%

New facilities constructed since the beginning of 1967 inciude the ironmakingplant at Inchon Iron Works, electric arc furnaces and plate mills for DongkukSteel MiLL Company (Dongkuk) and Korea Iron and Steei Company and cold reduc-tion mills for IJnion Steel Company, Pusan and Ilssin Industria'l Company,Seoul. While these recently completed installations have tended to reducethe average age of the steelmaking and rolling facilities vis-a-vis thatshown in the table, the fact remains that the steel industry in Korea com-prises a high proportion of obsolete plant and equipment.

6.6 Korea has only two integrated iron and steelworks at the presenttime. The larger is the Inchon plant of the Inchon Iron Works Company, whichhas a capacity of 140,000 ingot tons per annum and facilities for the pre-reduction of iron ore pellets, electric smelting, open hearth steelmaking androlling of small and medium sections and sheets. The iron-making processrepresents one of the first commercial applications of the SL/RN process and,after protracted teething troubles, the kiln is now believed to be operatingnormally. However, the economics of using an ironmaking process which in-corporates electric smelting in Korea where power is inherently high-costwould appear to be questionable. It is unlikely, therefore, that the capac-ity of the Inchon Iron Works will be expanded by duplicating the existingfacilities. The other integrated plant is the Pusan plant of Dongkuk whichhas a variety of small iron and steelmaking facilities including one 100 MTper day blast furnace, two cupolas, five side-blown converters and threeelectric arc furnaces. Rolling facilities include a 6-foot wide Lauth platemill, and a 12-inch and 8-inch bar mill. In view of the congested lay-outof the site any expansion of steelmaking capacity of the Pusan plant would

- 85 -

probabJy be based on the installation of additional arc furnace capacity.Including Dongkuk there are altogether six electric arc furnace plants inKorea. As can be seen from Table 6.2, the majority of the structural andwire rodi mills are rerolling mills which are largely dependent on importsfor their inputs of billets and rerolling scrap.

B. Development Plan

6.7 In order to create a modern steel industry in Korea, which wouldbe internationally comnetitive in terms of both the nrice and aualitv of itsproducts, the government decided late in 1969 to go ahead with the construc-tion of an integrated iron and stePlw!orkq at Pohangc Thi. plant will havean initial production capacity of 1,032,000 crude steel tons per annum andwill 50n9ist o)f the fr11nwin ma40r nrnoiidrt-inn facilit-ies

raw materials stocikyardc3,650 tons/day sinter plant80 rha.mher cnLe noven inatallatinn

2,600 ton/day blast furnaceB.O.F. shop containing two 100-ton converters2 high blooming and slabbing millAn', wid4el Semrn-Cnt-4i,nii-aQ t-r4p mill

billet mill

As a matter of policy the mill will be so operated as to make available tothe existing, privately-owned, non-4ntegrated m4 ] - -semi=finished steel prod-ucts (billets, hot rolled coil, sheets and skelp) at low prices. The gov-ernrenar Q-sUstance to thUe pr-ojct includes the provisior. of th requireA

infrastructure works - harbor, water supply, road and railroad facilities.ABank missionr. visiteA Ktorea 4nr. ctob-er/Nover,,er I'll to evaluate the proj-i.'~~~XiU~~ ~ ~ VA~~.LU.~~~U *UUL~~~~ .LIL JLLL'U~~~~~L/ L'V~~~~1IIU~~L I~~U v LU w L. a.A.U liL I LLL ; JL LAL0L

ect, and its findings are set forth in a report entitled "Pohang Iron andSteel Co;rpany LT-iMted, Pro;ect Evaluation" dated December 29, 1969. Thcurrent status of the project is described later in this section.

6.8 Having decided to go ahead with the construction of the POSCO milLthe government should not lose sight of the oo-lng overri4 4ing consieraE'- ~~~~~' - ~~L L A. LL AUL I %4L

tions. First, since POSCO is conceived essentially as a semi-finished prod*-ucts m,ul1, it should ainan.tain this role through its .uture exparsion stages,Already the incorproation in the project of a plate mill previously orderedby the Cho 'il Compar.y hias led Lt alteratLionl of the plan for slab sales toDongkuk .nd Korea Iron and Steel Company. These mills will have to continueto impo;LL. LLLr reqULremLCents. LL LU L[he Lir!st stage expansion plan aWULLoLUL-al rolling capacity were to be installed without a corresponding expansion ofiror and steelmaking capaciLty, billet sales would presunably be eliminated aswell. IThe rerolling mills would thus again become dependent on imported bi.-Lets anu rerolling scrap. POSCO's expansion plans should take into accountthe demarLds for semi-finished products which originate from the decentralizedsector of tne economy. Second, as stated in the last paragraph or tne Bank'sevaluation of the POSCO project, the economic justification of the initialstage of the project depends upon the expectation of an early expansion ofcapacity to two million tons per annum. Consequently, developments in the

- 86 -

iron and steel sector which are likely to delay the expansion of POSCO,should be discouraged. These include the installation of new electric arcfurnaces, currantly proposed by Dongkuk, Kangwon, Ilssin and other companies,as they would have higher production costs than POSCO. 1/ This is principal-ly because Korea is already a net importer of scrap, so that the scrap re-quirements of anY neTjl electric arc furnace plants would have to be importedin their enttirety. ft is apoarent that it will take longer to expand POSCO'siron and steel making facilities than to install additional arc furnace ca-pacity. There is no doubt, however, that in the long-term the optimum wayof increasing Korea's capacity to produce semi-finished products Is by anearly expansion of POSCO's basic steelmaking facilities. Third, as a corol-larv; the governmen-: mav wish to set up under the Steel Tndsqtrv Promot_onLaw a review committee to evaluate and rationalize projects in the iron andteel sesrt-nr -with ain investment cost in excess of; savy S millinn. ThIscommittee would have as its objective the elimination of fragmentation of

ri.'ti f-v nn the one hand and noPTinvestmpnt- nn t-hp other Fnitrtbh th

-government should undertake to work out a pricing policy aimed at reducingthe general price level of sem4f-finished and finis hed steeal products at thecompletion of the POSCO project, without making it impossible for some exist-ino producers, rwhosa C05t trurt-re m2u hp hiaher, to- cnntinueo operatir4.s.

b r -'- - -…'---This does not mean that the pricing policy should be designed to protect orkeen i.n operati all exicting facilitieso Some o f theao ouitmoedAA f-4il4-

ties could be eliniinated, but for meeting peak demands or demands i4n a grow-4

,-, n,e_lrho- th nra c!! r ,,j ,,r.o (Atr rho ma4nn 1 nrn >A..nr4-=g-M -+%- tj-;- thr -n- *".

6.9 ~ In r ., with I ne,wnt.he -orcept un.derlyi4ng t-e O DflC On -r--4

- t- gov rn

ment is currently promoting tè construction of a foundry pig iron plant andspecial steell plant, both og -P ia 4are A- inen- to ---Apirso go0 LC~. LOULII 1 . siLI - - -- E LL* EA U LO 0 - jJt- Wt U 6uwu

quality raw materials to the mechanical engineering industry in Korea atcorupetit:ve prices- These two projects have been reviewed by a Japanesemission and will proceed only after the participation of an experiencedtechnical partner hols bleen secured. T.h~ey are both desgne tc fil -agaLeI~IL1J.4± dL L1~J.kiY~ UULL ~LUL~. itULa UL.VLIU L.L4.L a galp

in Korea's industrial. st-ucture and deserve support. Additional informa-tiUon on thLLe 'ouIUXy pig Lroii aiU specal steel proJects 'Ls provided Laterin this section.

C. The Growth of Demand

6.10 The annual demand for steel products in Korea has increased from163,000 tons in 1960 to an estimated 1,532,000 tons in 1970, wnich corre-sponds to a growth rate of about 25 percent per annum. Many demand fore-casts were made during the 1.96Os, both by Korean as well as by foreignagencies and companies, but because of the rapid rate of growth they allerred on the side of conservatismi

1/ Source: "A Comparative Study on Production Cost of Ingot betweenElectric Furnace Steelmaking and Integrated Steelmaking,October, 1969, by Study Committee on the Integrated Ironand Steel Industry, ROK.

- 87 --

Table 6.3

Annual Demarmi for Stedl Product,siluEic ttans)

A c t u a I P r o I e c t e d

7t,-roLot!l producttat

Bars, Sa-.3es, JWd vire 82 55 111 150 122 162 255 328 501 659 7219 907 1,147 1,331 1,534 1,75L4 1,9Plates; C,et: a a rd otoiD 54 32 118 126 79 126 1244 300 332 ! 445 51,1 658 794 938 1,U13 1,31,2 :L,5

SE;-totaj 136 87 229 276 201 288 399 629 8351 1.10, 123 0 1,565 1,54,1 2.269 2,672 3OS6 L

Cahti.gs:

Ca!%t Lroa. ca3t -.ao AM.B pipes 25 25 29 bi7 49 51 62 81 111 158 167 237 2,47 31 317 344 2?Cast a:.i fcrged steel prtactse 2 3 4, 6 7 6 27 34 5S. 52 65 75 84 98 116 136 15?

Z.-tr tal 27 28 33 53 56 57 89 115 1611 210 252 312 131 379 1,33 ,80

Total 163 11"; 26i 329 257 345 488 744 1,00. 2,314 1,5.32 1,877 2,272 2,643 3, 1Q5 3,576 4,-115

An pEscet of 1969 12 9 20 25 20 26 37 57 76 100 117 143 :173 202 236 272 313

3o-e, St'-d!ee on Conr,truxtLon of an Thtogratel fzot and Steel Mill and Development of the Steel Irdu try in Korea, auly 1969?'ZOO DezadL Forecast. 1970.

- 88 -

6.11 TThen the decision to go ahead with the construction of the POSCOmill was taken. the Study Committee which had been responsible for the proj-ect up to that stage was dissolved. More recent market forecasts have most-lv been the work of POSCO. To obtain an indenendent check on the methodionony

employed and on the validity of its assumptions, POSCO approached tlhe Re-sparrh Department of the Janan Tron and Steel Federation whiih commep-ted in

detail in a report dated September 1970. The demand forecast shown ;n Table6= u ic iinr1i-ood to inrornorat-e t-h Japanese comments This de:rcnd fore-

cast is based on the correlation between value added in the mining and manu-facturing industries and steel dem>nd. GP during the Third Filve Year Planperiod is assumed to grow at an average rate of 8.5 percent per annum, whichis less than the actual growth rate of Q 9 percent achieved in thle period1961 to 1969. Also the growth rate of 12.8 percent forecast for value addedin the mining and manufacturing industries is lower than the previous rate,of 18 percent. The POSCO forecast corresponds to an average growth rate of18 percent for steel. Tf the .major target s for. cLapital goods production hIL-ave

to be adjusted downwards, steel demand would also decrease.

6.12 If consumption of steel continues to grow at a rapid rate, errorsLif Lth e orUer oL I or I percentage points in. forecasting dem4anA would mean

only that actual consumption would reach a given figure a few months earlieror 'Later than expectedU. Lrovided therefore that thlie growth oL L consumptionof steel shows no signs of suffering more than a temporary downturn, thesteel unuustry in Korea in the period 171 to 1976 shlouldU Ue undergoingalmost continuous expansion of capacity. In these circumstances the gov-ernment's main concern should bIe thle pror.ot'Lon of enterprises capable orproducing the iron and steel inputs required by Korean consuming industriesat the required standards of qua'lity anu comipetitive pri ces. Tle POSCO pigiron foundry, and special steel projects are all designed to satisfy thesecriteria.

6.13 Since with increasing consumption a growth rate of 18 percent perannum becomes increasingly difficult to sustain, the government should en-sure that systematic market forecasts are carried out on a period basis.The expansion plans of the industry should subsequently be adjusted to re-flect any changes in the projected growth of demand.

D. Summary of Recommendations

6.14 There are several recommendations that emerge from this analysis.First, the government should discourage the proliferation of new electricarc furnace plants and, instead, plan on expanding POSCO's iron and steel-making facilities at an early date. In this way, POSCO could assume itsrole as an efficient supplier of semi-finished products to the non-integratedmills in Korea. Second, it is suggested that the government consider set-ting up, under the Steel Industry Promotion Law, a review committee to eval-uate and rationalize projects in the iron and steel sector above an invest-ment cost of say $1 million. Third, the government should undertake to workout a pricing policy aimed at reducing the general price level of semi-finished and finished steel products at the completion of the POSCO projectswithout making it impossible for some existing producers to continue opera-

- 89 -

tions. Fourth, periodic market forecasts for iron and steel products shouldbe carried out and the industry's expansion plans adjusted to reflect anychanges in the projected growth of demand.

E. Pohang Iron and Steel Company (POSCO)

Capacity and Product Mix

6.15 This project is for the construction of integrated iron and steelmaking and rolling facilities with a rated capacity in the first stage ofdevelopment of 1,032,000 :Lngot tons per annum. The proposed product mixwould initially be as fol'Lows:

Metric Tons per annum

Billets 141,000Plate 184,800Hot strip mill products

Hot rolled coil 183,000Hot rolled sheel: 220,000Skelp 180,000

Sub total 583,000

Total 908,800

6.16 The project was reviewed in depth by the Bank in October and Novem-ber, 1969. 1! The conclusions of this review, a- stated -n paragraphs 73 and74 of thie evaluation paper, were as follows:

"The POSCO Project, if viewed as the first step towards the ulti-maate estoablis-men.t of a large integrated iron. arnd steel p..1 nt and sub,ect tos

the modiEications discussed in this paper, is technically well conceived andutilizes ~established tehr.olo,y for the -- of n hot rolled ----- ---bszand billets. Based on the existence of suitable technical assistance arrange-ments, the protection requidrements in Stage I are not unreasonable and can,for all practical purposes, be expected to disappear after the completion otStage II.

"I.khe econo.-.i;: rate of return or. tbhe in vestmuent ir. the; pr-ojectassuming that Stage II will be implemented some two years after the comple-tio of7 42 7'-p T i .no,- unrAson AAb1- low an ma e oppotunitySAA F.4t.L..lC .S J V- 6 .J0 CS . C too L COUS . .V 05Cc. uSay approaLcb LC.I V Vp L U

cost of capital, if long-term average import prices stabilize at a plateauso-.ehat higher than prevaiRled i4n th,e mi=96s ut lowaer th-an at present.0L4LU-WLCL L .L.

5L LA U LLC.L p.VOU.u J.C 5& 5c S , V CL .L W - . -LUALL O .c&

Without the proposed expansion to Stage II, however, the economic rate of

1/ IBRJ) - Pohang Iron and Steel Company Limited, Project Evaluation,December 29, 1969.

- 90 -

return would be inadequate. The economic iustification of the initial stageof the project therefore depends upon the expectation of an early exDansionof capacity to two million ingot tons per annum, which the demand forecastfor the products of the proposed mill appears fully to support."

6.17 The most important changes which have taken place since this re-view are first, the increase in the width of the hot strin mill to 60 inchesand second, the incorporation in the project of the 132-inch wide, 4 highDlate mill. which the Cho'il Companv had earlier ordered from Voe.t of AuIg-tria. It appears that the Cho'il Company was dissolved and the POSCO wasasked to take over its nhligations under its purchase contract with Vnpqt-The effect of adding a plate mill to the originally proposed rolling facili-tipes is firqt, tn increseAQ the nriocrt -nct-t scornd, to eliminnte l r.f

slabs; and third, to increase sales revenues.

6.18 The elimination of slab sales is an important factor in the marketbechiia POSC0 was originally co.ceived fasemi-fir.ished products plant,which would supply the existing non-integrated Korean rolling mills withtheir inputs of billets, slabs, and hot rolled coils. The largest of thesenon-integrated mills are Dongkuk Steel Mill Company and Korea Iron and SteelCompany, which have electric arc furnaces but cannot cast ingots large enoughto be processed to plate in their Lauth mills, and the two existing cold re-duction mills, Union Steel Ma.ufactur-.g Company (TT4ôn Steel) -and Tlssin

Industrial Company (Ilssin). At full capacity operation the two plate millswould require about 30,90-0.0 J tons of s.labs and th.e #.VWo ôld mi.ll about 250,000ntons of hot rolled coil per annum. Union Steel and Ilssin are currently ex-pandi n g their capacity to about L790,nn0 tons of hot rolled coil per aIntu.All four mills are at present wholly dependent on imports for their inputso0f sl zab s ar.d h. ot rol lIIedA co l. LIn addition, there are a large n Uber of non=integrated bar, rod and structural mills which operate on purchased billetsand rerolling scrap. ThL'eir com-bined requirements iLn In75, the_ first fullULALI L~LLS.LJ.JLL~ OL.LajJ .LLIJ.L UAjLUU±LI~U ~MU±L~W~.UL1 .LL a ,IJ LIAV 1 LJ. L. L kALU±

year of operation of POSCO, are projected to be 608,000 tons of billets, ofwhi.h 'J.JrA is expected to suppAlyL I '4 I , toU sULLZ LLLLU, theS- LL trLeU LVUdL Lin

greater consumption by POSCO of its own semi-finished products rather thanoLifering ther, fLor sale to non-integrated m-.lls, which Wda startLed by LLIe JI-clusion of the plate mill in the POSCO project and would be accentuated bythe auition, utnder tne first expansion plarn, olf a structural anud coLU mill,runs counter to the concept of POSCO as a semi-finished products plant. Thegovernment may therefore wisn to review wnether the considerations ieading upto the decision to construct POSCO as a semi-finished products plant arestill valid and, if so, require POSCO to offer a given tonnage of slabs,billets and hot rolled coil for sale, as long as there is a domestic demandfor them. As a corollary, the expansion plans of POSCw should take intoaccount specifically the domestic demand for semi-finished products.

Implementation

6.19 The basic engineering for the POSC0 project is being undertaken bya Japanese group consisting of Nippon Steel Corporation and Nippon KokanKabushiki Kaisha. This group is responsible for the preparation of bid

- 91 -

specifications, drawings and schedules for the principal production facili-ties, which are to be constructed on a turnkey basis; overall coordinationof the individual facility packages; and training both of POSCO's construc-tion engineers and key operators. POSCO also has an engineering consultancyagreement with the Broken Hill Proprietary Company, Ltd. (BHP) of Australia,under the terms of which BllP reviewed the preliminary engineering report,will consult with and advise POSCO in connection with the recommendations ofthe Japanese group, and assist POSCO in respect of further arrangements toprovide steel works facilities. The arrangement whereby the engineeringresponsiblity for the prolect rests squarely with the Japanese group, butPOSO is free to consult with BHP on questions of policy rather than detailis regarded as eminently satisfactory.

6.20 According to the general construction schedule prepared by theJapanese group, the suppliers of all the principal production facilitiesshould have been selectied and contracts placed with them before the end of1970. The scheduled completion dates range from September 1, 1972, for theDlate millL to August 1. 1973. for the blast furnace and start-up of inte-grated operations. Given the single responsibility type of contracts forthe maior nroductfon facili=ties and the narticipatfon of Sankvu. an exner-ienced Japanese steel works construction firm, in the project these comple-tion datesi are -onn-idered achievahle. The commissionnin of the plant willalso be dependent on the timely completion of the infrastructure works -

harbor, water supply, road and railrona - which are the reanonnihilitv ofthe Minist-ry of Construction. No problems are expected in this area, al-though eomne irc-k ws T.Tda i3c-noveread in the harhor whic-h will h-avte to he dredgredr

out to provide adequate depth of water.

Capital Cost

6.21 The construct:ion cost of the POSCO project, including the platemill, is xi- est-i.ated at approximately $290 mi4lli4on equivalent. Thi4 -st4-

mate breaks down as shown in the following table.

Stuamary of Construction Cost

ForeignExchange T ocal Currer.cy Toal1

(in $ million) (in Won billion) (in $ million)

Original plant facilities 123.7 16.3 190.3Dlate M41I1 25.4 1.I 70.6

Construction facilities 5.9 19.0Suprtrg facilities J.10.

Indirect construction cost 0.1 0.3

Total 163.1 39.4 290.2

- 92 -

6.22 £.C a. Paragraphjs 19 0 and 20. of th B±, TI -ark 0 -1 -s L 4 evaluation of A r. the --- -r-- -J

ect 1/ state:

"Although the estimated foreign exchange cost of the productionandu I -n=pLant I transp.or tu a tLion f a ciHities is deemL.ed tL o b) e fLulJ.ly i nL.LV-L .Lve

would be realistic to expect some increase when the definitive estimate,I.asedu orn detailed d r aw ing L an6 -tLd s p e i.fi4.cations, iO Ls L- prk e p-arI ed. There will alsL,d~ IJ e.I±U U W.L~OL p~ £ L L U1) L LpL U LIL W .Z 0LsoJ

be an increase in equipment cost associated with the installation of a 60"rathAer tlllan a 408" wide mI.iL .L

"h.o,.ever, iLn ouir evaluation ofL the project we h'ave takr-en $11.nillion for the foreign exchange element of the cost of the production faci-ltites and e$7°,.5 u,illi on eqWuvalen,t, at tLe present rate- OL ex-'arnge L'OrJ.-.Le dLU y~ / J. ULL.L.LLI 1!UV±- I~d L Li~ L~I IdCU. UxCIIgl U

the local cost element for a total construction cost of $210.0 million.Th1is flgure should be regarded as lying at the low end of the range of prob-able construction costs and, at this stage, a 15 percent provision for con-titngencies would be appropriate. A realistic esLimate can be computed onlywhen POSCO and its consultants have received firm quotations from Japaneseequipment suppliers 3nd Korean coIStruction companies."

il,e bUasice cap'Lta'l cost estLmuate has, except fLor th'e addition Of the--.late mill, remained practically unchanged since these remarks were written.JNow tnat orders for ail tne major production raciilities have been piaced,it would appear timely to reestimate the construction cost of the projectand allow an adequate provision for contingencies to cover unforeseen ex-pcnses, which normally occur towards the end of the construction phase.

6.23 There is a tendency, at the detail design stage of any large in-d.astrial project, for the engineers and operators to select more elaborateequipment and instrumentation than that on which the feasibility study wasb-sed. POSCO is therefore urged to prepare an up-to-date capital costestimate ana then co set up a rigorous cost control system to monitor com-mitments aznd disbursements for the project. Since the declared aim of POSCO.LS to help c-eveiop the exisuing private enterprises in the steel sectorthrough the supply of intermediate products at low prices, the effect ofpossible cost overruns on the selling prices of these products should becarefully evaluated before a decision to commit additional funds is taken.it should also be borne in mind thet any additional loans, which may be re-quired to finance cost overruns, are likely to be granted on less favorableterms than those which POSCO has received to date.

Cowpe titiveness

6.24 POSCO's latest estimate of selling prices is shown below.

1/ Ibid.

POSCO's Estimated Selling PricesSelling Price

Product ($ per ton)

Billets 103.08P.ot rolled coil 108.48

Hot rolled sheet 119.27Hot rolled skelp 117.08Plate 155.62

With the exception of the prices for billets and plate, these projected sell-ing prices aze in llne wtavr *4 -a dr..esti4 se.l14- pr4ces ln Wester. Eurone

and Japan during the last quarter of 1970. Domestic selling prices for bil-1can~n 4 , .nfa rnnn er of 1970. Dometsn c e.. nin p4 ce4nt n4nlets and plate in W!esteLr.n Euro.---anrd Japan showed a w Ae v-riation durinathis period. POSCO's projected selling prices are within the range of pub-lished4 -p4CriS 1bUt SoM-- a t- bov0- the 1orest price.-v- r- - a -- ovff_ .- - --- rB;

6 .25~ 11-A seUllingjL..a pr t 4Cl*Ll SLA *LA..CL~.IL. t jC.- 4A cl.AS ar6.25 Th sellig pri;es of plate and hot- rollled Coi l are partiual

important, because they will have a marked influence on the competitivenessof th-b e p-roposeAm new sh.ipyar Ad a .- TUl san andAon t-he export. potentia-4.al of the ex-isting cold reduction mills. Unless the shipyard can purchase POSCO plateatl essentiall1.y the same price as TJapanese plate, it w-,ill e severely 'andi=-

CL O~~* LLO.J.yI.I~ ~LJV jA. S.~ C sACjCL~O p. L. A .L. W.L.L. U ~ VL.Ly SlSL

capped vis-a-vis its Japanese competitors.

6.26 The two existing cold reduction mills presently purchase their re-qu.irementLs or' [hot rollJed coil from Japan on credit terms. * [lere i'Ls a dutyof 11.5 percent on imported hot rolled coil, but a draw-back system appliesin the caLse of re-exports. In order not to impair the export potential OLthe cold mills POSCO will have to match the price, before duty, of importedJapanese hot rolled coil, and possibly also be able to offer more than 60-day payment terms.

Future Expansion

6.27 The first expansion plan envisages an increase in capacity of thePOSrw piant to 2.4 million crude steel tons per annum. Tnis would be accom-plished by the installation of a second blast furnace and the expansion ofthe sinter and coke oven plants, the addition of a third B.O.F. converter to

the steelmaking plant and the installation of a continuous slab and bloomcaster. Tne plan also envisages the installation of a rail and structuralmill, the! installation of a cold reduction mill and the provision of ancil-lary facilities. hnis expansion plan would be implemented in stages. Thefirst part of this plan would consist of the cornstruction of the rail andstructural and cold reduction mills. Tne ultimate capazity of the plant isstated to be more than 5 million crude steel tons per annum.

6.28 The following conm.ents are offered on the proposed first stage ex-pansion plan. First, the construction of additional rolling mill capacitywithout a simultaneous expansion of basic iron and steelmaking capacity wou:Ldfurther reduce sales of semi-finished products and, in turn, make the non-integratetd mills rely to an even greater extent on imports. Second, after

- 94 -

the expansion of Union Steel and Illsin, cold rolling capacity in Korea willDe approximateL.y I750,0U00 Lto..s ptr arLIIULU. ille pLrUUoeU rUO;CO cU.LU tdUULct..LUI1

mill should therefore be timed so as not to come into operation before thedomestiLc demand for cold rolled products exceeds the combined capacity orthese two mills, in terms of either tonnage, dimensions, or quality. Thisis not expectea LO occur before 197/. Tnira, mocern structural mills navea high capacity and are expensive to install. POSCO should therefore care-fully investigate whether an automatic beam welding facility, such as Pulmax,would not be capable of producing the required structurals from plate at alower cost. This method of producing beams would not lend itseif to theproduction of rails. The demand for rails is projected to reach 62,500 tonsin 1976 and could perhaps be satisfied by one or another of the Korean roll.--ing mills, leaving POSCO free to concentrate on the manufacture of semi-finished and fiat-rolled products. If tne production of rails were allottedto the proposed Kangwon plant at Pohang, then both rails and cast accessories,such as switch and cross-over sections, could be produced in the same plant.

6.29 Last, and most importantly, it is considered that the first stageexpansion plan should include a second blast furnace complete witil ore hand-ling, sinter, coke-oven and steelmaking tacilities. The second blast turnaceshould be on stream before the first blast furnace has to be shut dcwn forrelining, which would probably be some time in 1976. By then the demand forsteel in Korea, based on the macro-economic variable and end-use methods, isprojected to be about 3.5 million tons of finished products, equivalent to4.7 million crude steel tons per annum. Most of the finished products couldprobably be produced by Korean mills, which means that the demand for domes-tically produced ingots would by 1976 be on the order of 4.0 million tons.Consequently, there appears to be no good reason why POSCO's iron and steelmaking plant should not be expanded as part of the first stage expansionplan. The decision to have the second blast furnace in operation by 1976should form part of an overall policy to discourage the installation of newelectric arc furnace plants on the part of the smaller producers, which isdiscussed elsewhere in this section.

6.30 Once the principle of including additional iron and steel mnakingfacilities in the first stage expansion plan is accepted, the next step willbe to determine the optimum size of the blast furnace. If the second blastfurnace were sized to balance the proposed crude steel capacity of 2.4 mil-lion tons, it would have a daily production capacity of about 3,500 tons ofiron. It can probably be shown, however, that to be internationally compet-itive, POSCO should have no more than three blast furnaces at the ultimateexpansion stage of 5 million crude steel tons per annum. It would be pru-dent, therefore, if the second blast furnace were sized so that the combinedcapacity of the first and second blast furnace corresponded to an annualcrude steel production of 3 million tons. On this basis the second blastfurnace would have a daily production capacity of about 5,000 tons of iron.A blast furnace of this size would have a specific production index of atleast 2.0 tons of iron per day per cubic meter of inner volume. The re-auired inner volume would therefore be about 2,500 m3 and the hearth diam-eter about 11.7 m. These dimensions are very similar to those of NipponSteel's Sakai No. 1 furnace.

- 95 -

6.31 It is apparent that the size of the blast furnace to produce agiven quantity of iron is largely a function of the specific production in-dex asstzmed in the calculations. The probable index for POSCO's No. 2 fur-nace should. therefore. be carefully estimated, having regard to the compo-sition of the burden and proposed operating practice; and this index used todetermine the size of the furnace. The index will certainly be higher thanthe conservative figure of 1.56 used in sizing the first furnace. If a5.000 torLq ner day blasbt fuirnape wprere fnt-alled in the first epvnans-inn stagqas suggested above, it would not be required to operate at its maximum capac-itv duringv itc initial nmni cgnn It wnsil,A thaerafnor ha proAided with athick lining to reduce its inner volume and be run at a low driving rate.The sam.e principle has been adopted for the TTSIMTAS No. 3 blAst furnace inBrazil, which Nippon Steel is currently engineering. The complementarysinter, coke-oven and steelmaking facilities would not have to be increasedbeyond the capacity required for the 2.4 million tons stage.

Summary of Recommendations

6.32 It is suggested that the government consider whether POSCO shouldsupply, th1 bulk, -f the-~ se.i=iise prdcs eure yteo-ntgaeI-AJ WU .LZ'. J W ~ ,!& LLJ. .IJa I JU UU A%#- JL t%JUJ. L& U U)' CL=I LLO.LL.4L&L=6 =M

Korean roLling mills and, if so, ensure that a given tonnage of slabs, bil-lets -an hot rolleA coil will be offered ICor sale as long as there Js a-. .. .L. .L. U U A.0 aC =. CL .LJL1 aO #-L=I ~L=domestic demand for them.

6.33 POSCO should prepare an up-to-date estimate of the constructioncositU ofL the proJect and set up a rigoro-us cost control system to mUonitorcommitment:s and disbursements for the project.

6.34 The cold mill included in the first stage expansion plan should nol:come on stream before domestic demand for cold rolled products Lxceds theexpanded capacity of the existing cold mills. This is not expected to occurbef'ore 1977.

6.'5~ i POSC shoul èiwwether ;:he shapes to 'De rolled' 'Ln the proposeclU. -Ja sho .A Lu.ld rev±ew WaZl LLiL L1 ~LIdf ~ LUD U±e l L1 UU

structural mill could not be produced more cheaply by an automatic beam weld-inLg machine. If so, the production of rails should be allotted to anotherrolling mill, leaving POSCO free to concentrate on the production of flat-rolled and semi-finisned products.

6.36 Consideration should be given to the inclusion in the first stageexpansion plan of additional iron and steel capacity to enable POSCO tomaintain its role as a supplier of semi-finished products to the non-inte-grated mills.

6.37 The economies of installing a 5,000 tons per day blast furnace inthe first expansion plan, in place of the 3,500 tons per day blast furnaceas at present envisaged, should be investigated in the light of the probabletiming of the second expansion plan.

- 96 -

F. Foundry Pig Iron Plant

Project Status

6.38 Tne project is for the construction of a foundry pig iron plantwith a capacity of 200,000 tons per annum. It is one of the four projectsidentified in the KIST Plan for Development of Korean Mechanical EngineeringIndustry dated 1970, which is expected to make a significant contribution tothe development of the mechanical engineering sector in Korea and thus to theeconomy as a whole. Specifically, it would provide a new domestic sourceof foundry pig iron for the manufacture of iron castings.

6.39 After its inclusion in the KIST report, EPB prepared a prospectuson the project, which is dated July 1970. This prospectus served to enlistthe sponsorship of Kangwon Industrial Company Ltd., a leading Korean indus-trial enterprise, for the project. Kangwon subsequently prepared a summaryreport, dated September 1970, and opened discussions with a number of Japa-nese groups regarding possible technical and financial participation. AJapanese industrial mission, headed by Mr. Akazawa, visited Korea in Novem-ber 1970 to study the four projects identified in the KIST report. Thereport of the Akazawa mission is understood to have recommended certainmodifications to the foundry pig iron project, but a copy has not yet beenreceived by the Bank. The following comments are therefore based on theEPB prospectus and Kangwon summary report.

6.40 At present little or no foundry pig iron is produced for sale inKorea. The domestic foundry industry produces its requirements of pig ironby melting and recarburizing steel scrap in cupolas. This method suffersfrom two principal disadvantages. First, tramp elements in the scrap arenot eliminated and detrimentally affect the quality of the pig iron, andsecond, the cost of the pig iron is greatly influenced by the price ofscrap, which fluctuates between wide limits. The concept of developing anew source of foundry pig iron to produce good quality iron at an economicscale is therefore fully justified. On the basis of established technology,the proposed blast furnace plant represents the optimum means of achievingthis oblective.

Market

6.41 The consumption of iron castinzs in Korea in 1968 was 133.000 tons.The production of cast iron pipes, machinery castings and general iron cast-ings aconmted for 23.4, 17.9 and 14.5 npercent of total consumntion repnee-tively. Based on the demand forecast for crude steel developed by POSCO in1969 the demnnd for iron crstings and foundrv npi iron is nroerted to 1 in-crease as shown.

- 97 -

Demand Projection for Foundry Pig Iron(in thousand tons)

Crude Iron FoundryYear Steel Castings Pig Iron

1970 1,532 187 93.51971 1.877 239 118.51972 2,047 247 123.51973 2,407 281 140.51974 2,820 317 158.51975 3.291 344 172.01976 3,836 403 201.5

6.42 The demand for foundry pig iron in this table is taken as 50 per-cent of ithe proiected demand for iron castinas. which is rouzhlv midwav be-tween the experience of Germany and Japan on the one hand and current Koreanexnerience on the othpr. Sinne the nronnpsd pignic irn fniondryv is not exnected

to be in full operation before 1976, there is good agreement between itsrated raiar'ity anA the nro,ected damnna fnr fnirnAi-v irnn in Korea=

At- flull crapacity-u noperat-inn t'he prvoducirtAi opn od f the. fntdnrv in-

cludes 21,000 tons of ingot molds and stools for the POSCO project. Whileit is clear that these molds and stools will be cast in the pig iron foundry,there appears to be some doubt as to whether they will be made from hot metalsu-plied by POSC0 or from f iror. proA -- A 4n tbe pi iror. pThispoint should be resolved at an early date.

Description of Project

6.44 The major facilities proposed for the project are a raw materialpreparati.or. plant, s-in::er plant bl-s --rac an i csig.ucie NToaUJ.Y./flfl fDA.CIL& L, OA.U~~~ LCe& J.O* , U*L MO 1. LU& ,AtC~ fLA%A F4 .r CL.~L4 U -5 ua, -L --

coke ovens are foreseen, as the sponsor proposed to purchase coke, presumab:Lyfrom POSCO. .hais may require tCh.e 4nstallation of aAAdiioral coke oves nothe part of POSCO. A sinter plant is required, because POSCO's sinter plani:willA. proUA.L e si.r.ter of ahighe basiciy tbhan that suitabe for the opera=

tion of the foundry iron blast furnace.

6.45 The technical aspects of the project have presumably been studiedbly the Akazawa .- sin By coordinatin.g the des-ign of th-e POSCO and foudrSL&C "AJ.Md.MWM iLLLMM±ULL. 1))' LIUUALLC1LJ..Lr LL11- Ut:Z.LrL1 UJ. L1I LIJVO'.AJ LA J.SJAL&UJ.y)

pig iron projects and the (separate) iron and steel foundry and rolling millproject a.t PLohLang, whc is- als bein prmoe byK.-gw ig.fia,OL WLL.LCH Ls a UC.LL&r, jJLVULLLJLU iVy r1LUr&WU&L,, ci .L .A..L..CLLI.&

economies in the provision of mechanical and electrical services, mainten-ane n repaiLr facilities, andu Laboratory equiLpment couldU probably be

secured.

Capital Cost

6.46 Tne capital cost of the project, excluding interest during con-struction but including working capital, is estimated at $16.352 millionequivalent.

- 98 -

Estimated Construction Cost

Foreign LocalExchange Currency Total

(in $ thousands equivalent)

Land 1,000 1,000Buildings 500 500Equipment and facilities 6,430 2,100 8,530Design, engineering and miscellaneous 770 1,200 1,970

Sub-total 7,200 4,800 12,000Working capital 4,352 4,352

Total 7,200 9,152 16,352

Excluding working capital, the estimated construction cost of the plant is$60 per annual ton of pig iron which is regarded as realistic.

Construction Schedule

6.47 The proposed construction schedule, based on the start of sitepreparation in January 1971 and the conclusion of a technical assistancecontract in March 1971, shows test operation of the production facilitiesin December 1973. Thus, the time allowed for the design and constructionof the foundry pig iron plant is nearly as long as that allowed for thePOSCOO project and should be adequate.

Production Costs

6.48 According to the EPB prospectus the proposed selling price offoundry pig iron is $75 equivalent per ton. This figure includes an allow-ance for profit of $12.90 per ton, which corresponds to 17.2 percent of theselling price. No doubt the calculation of production costs will be reviewedand adiusted by the technical partners in the proiect. The proposed sellingprice of foundry pig iron is, however, claimed to be $10 per ton less thanthe selling price of imported pig and no more than the price of imported No.1 heavy melting scrap at the time the Bank mission was in Korea. Given thenarticination of an experienced technical partner in the design and initialoperations stages, the plant probably should be able to supply good qualityirnn at a cnmnptitivup nrie-e.

r.= Snpeial Steel plant-

6.4Q The nvn;irt iQ fnr thp rnncrttwetinn nf n cnprial ctPel nlant witha capacity of 60,000 tons of steel bar per annum. Like the foundry pig ironplar.t it is another of the four proJects ident4fiAeA 4i the KIST nlnr. fov the

….----.t e IS la -- -

development of Korean mechanical engineering industry of 1970. EPB followedthe same p r a n t 1he case of the four.dry pg iron p1lar.t. A prospec-

- 99 -

tus was prepared on the basis of which the sponsorship of Korea Heavy Indus--trv Comnanv. whi^h is already engaged in manufacture of rarbon tool andstructural alloy steels, was enlisted. The project was also reviewed bythe Akazawa mission, but its findings arp nn+- knez^ tn the Bank at thin time.The special steel project is believed to be the least developed of the fournroipets rpenmmendpd in the KITT rennrt. Th0 fOllnwinag commonta ara basedon the EE'B prospectus.

6.50 According to the EPB report domestic production of special steelis characterized by poor. quality andA soae f tye Conseunly,_,_ V} M_v.. % _F -~~~--b- of ype Cos * Equently,-

the entire planned production of the special steel plant can be considereda… import substitution. Th.ere is no dlou- bt. Lhat. Korea needs a domestic.source of special steel. to supply the needs of the developing machinery in-dustr, and that, given suitable technical assistance arran.g emets, the pro=posed steel qualities can be produced in Korea. Special steel plants of

-* -- - %: a .. .. a"fr -J. a0Ls &v& ' W 1.'LL uc v & LL6 a . ...LLI ...... LOL&I..VLJL ..L.. LL W6 A.cx

developing countries.

Market

6.51 The consumption of special steel in Korea in 1969 amounted to45,000 tor,s which represented 3.6 percent oiL totaL steeL denuand. Iid-ustri-alization is, however, expected to increase the proportion of special steelto I.5 percent OL totaL steebL Udemand by 1976. Based on tne dUemanu iorecastfor crude steel developed by POSCO in 1969 the demand for special steel baris projected to increase as snown below.

Demand ProJection for Special Steei Bar(in thousand tons)

Crude Special SpecialYear Steel Steel Steel Bar

1970 1,532 54.0 32.41971 1,877 65.5 39.31972 2,047 79.5 47.71973 2,407 96.5 57.91974 2,820 117.0 70.21975 3,291 142.0 85.21976 3,836 172.0 103.2

Tne demand for special steel bar in this table is taken as 60 percent of theprojected demand for alL special steel products. A sample survey taken in1968 showed that this ratio was 66.8 percent.

6.52 Since the special steel plant is not planned to be in full opera-tion before 1976, there would appear by then to be ample demand for its prod-ucts. In fact, if the dlemand for special steel bar exceeds the capacity ofthe plant., it will be possible so to arrange the product mix that variationsin quality and size will be kept to a reasonable minimum.

- 100 -

Description of Project

6.53 The plan calls for the establishment of a special steel plant toproduceo hbva of aspeific.t4atinon carhnn, snring, alloy,1 bar-in st-a4nles anA

heat-resistant steel. The proposed major production facilities are fiveelectric arc fur.naces and one irduction fwrnae,n t-heven rehant- ftvrn.acO,

medium section and a small section rolling mill, a forging press, five heattreatment fur.n.aces and finiuhlng and inspection equipment. If the plan.t isalso to produce seamless tubes, as suggested by Korea Heavy Industry, theproposed list of equipmenrt would, of course, have to be m.oA4i44eA.

Capital Cost-

6-.5 T., qle capital cost of the project, excluXdAing i.trsJdrrgcowrcU Jt &LA~ 1 .. JO .J I.& J.UL .LI .L %4~LULL.LLL6 %-LULZL.LUL,;

tion but including working capital, is estimated at $13.329 million equiva-.lent.

Est.imated Conrstructi-on Clost

Foreigr, LoaExchange Currency Total(ia $ thbousands equivalent)

T' __ I .,nn s^

Lana' JJU .v Ju

Buildings 1,000 1,000Equipment and facilities 5,760 2,510 8,270

Sub -total J, V .3,80 9,600Working Capital 3,729 3,729

Total 5,760 7,569 13,329

Excluding working capital, the estimated construction cost of the plant is$160 per annual product ton which is regarded as realistic.

Construction Schedule

6.55 The construction schedule calls for the project to be constructedin 1972 and 1973. Production in the first two years of operation has beenprojected on the basis of 50 and 80 percent of installed capacity. Provideda suitable technical assistance agreement is concluded in the first half of1971, there is no reason why the proposed construction and start-up scheduleshould not be adhered to.

Production Costs

6.56 According to EPB the Dronosed average selline nrice of specialsteel bars is $354.64 equivalent per ton. This figure includes an allowancefor nrofit of S3S-31 ner ton. which corresnonds to 9.9 nercent of the sell-

- 101 -

ing price. No doubt the calculation of production costs will be reviewedand adjusted by the technical partners in the project. The average sellingprice of special steel bars is, however, claimed to be some $37 per ton lessthan the present selling price of equivalent imports and no higher than theprice prevailing in Japan.

6.57 The special steel plant project will fill a gap in Korea's indus-trial structure. It is conceived on conventional lines and as now envisagedit is large enough to bes economic. Given the participation of an experiencedtechnical partner in the design and initial operation stages, it should beable to supply high quality special steel products at competitive prices.

- 102 -

VII. THE ENGINEERING INDUSTRIES

7.1 This section deals with three aspects of the engineering industriesin Korea: past trends and current situations; TFYP targets and their impli-cations for the growth of the Korean economy; and a general appraisal ofthe two priority projects: a construction machinery -- machine tool complex,and a large shipbuilding enterprise. An effort is made to assess changesin ownership, size of establishments, productivity, costs, prices, importand export patterns and other relevant indices that have occured in threeprincipal machinery manufacturing industries and in several more importantsubgroups. This section also assesses future policies and prospects in thedevelopment of Korean engineering industries especially as expressed inTFYP targets with principal emphasis on the practicability of achievingset goals. Finally, the feasibility of the two priority projects is evaluated.

A. ExistinR Industries

Recent Growth Trends

7.2 The three major groups of industries producing non-electricalmachinery, electrical machinery and communication devices, and transportationequipment are beginning to play an increasingly important role in the Koreaneconomy. In 1968 they produced goods worth some 91 billion won or nearly12 percent of the entire manufacturing sector's output with a labor forcerepresenting less than 11% of the sector's employment. Between 1963 and1968 employment by machinery producers almost doubled with the output risingby nearly seven times. Value added in the process of manufacture by theseindustries also increased rapidly, from about 5 billion won (in currentDrices) in 1963 to 32 billion won in 1968 or nearly 6.5 times. This sub-stantial growth was caused principally by the rapid investments in the manu-facturina sector esneciallv during the Second Five Year Plan.

7.3 Changes in employment-, nwitnitt. and v2ueT added per emnlovee duringthe 1966 to 1968 interval in each machinery group are summarized in Table7.1 which ahnow greater nrndiirtivitv inrrpAses in nnn-electrical mnchineryand transportation equipment than in electrical machinery. Althoughexperiencin- the- mont rapnid growth this 1atter industryv isc characte-riz7d hu

highly labor intensive operations in the assembly of radios, TV sets,tran.sistors and similar devices, so that opportur.ities for tehooiainnovations have been limited. It is also a relatively new industry start-i.g at a higher level of technology than the other machInery groups; thusits productivity would not be likely to increase as fast.

7.4 With the exception of the manufacture of prime movers and steelships al'l subgroups have experier.ceAd significant growth between 10966 and1968. Total value added, in current prices, in the process of manufacturinghLas more tihani doubled i thle Cautomobile andLfL La mar chiner indusries more

- 103 -

than tripled in the hea,. electrical mc.rh4re,g- and indust-rial appanratus

groups and nearly quadrupled in the electronics industry (see Table 7.2).Providing-; a rough moasure of the progress in produc tr tivty the ratio of valueadded per employee has also increased in all industries except ship building.C-reatest im..prove...e.nts were achieved by the a automoble assemklers, electron4ic

construction and mining equipment manufacturers and least by the producersof marine engines ad.d textile equi-pment.

Size ofr Enterprisjes -ar, .esi

7.5 WILA -1-t ehe -xcep-Uon of automobile assel-my plants, railway carmanufacturing and rolling stock repairing facilities, assemblers of elec-trorn'c devices, one shipbuilding an.d a few consUruction an.d minn.g machinerybuilders, engineering industries are characterized by a large number ofsmaJ.± et:erprises . ul ioUmt 1 , I 0U iacltories, prouucing LIonLL-e'LectrLca'

machinery as reported in 1968 Census of Mining and Manufacturing 97%employed 'Less than 100V workers (see appenuix TaD.Le C-l JUL ) ut UU;rouc Ud .Ly

about 60% of total output. These are generally marginal producers andthe'r value added per employee is generally much smaller thar in largerplants.

7.6 In the heavy electrical machinery group small establishments employ-ing less than 100 workers represented nine-tenths of all plants, providedjobs to one third of the labor force but produced only a fifth of totaloutput. i:n the electronic industries group there were four iarge establish-ments with a labor force above 500. These plants produced in 1968 nearlytwo-thirds of total output with a value added per employee some 25% higherthan in small establishments employing less than 100 workers. In the trans-portation equipment group small pliapts provided 44% of employment but producedonly a sixth of total output. Most of the output was produced by establish-ments employing over 500 workers. Roughly 40% of total employees engagedin such establishments produced about three-fourths of industry's output.

7.7 Ownership characteristics also vary widely among different engine-ering industries. Corporate ownership is more prevalent in the electricalmachinery and electronics industries in which some 87% of 1968 output wasproduced by joint stock companies. In the transportation equipment indus-tries such companies produced 65% of output and in the non-electricalmachinery group less than 46%.

Production Costs

7.8 Production costs have been changing in these industries. In theelectronics industry, for instance, according to data reported by theCensus, in 1966 labor cost represented less than 11% of total value ofoutput as compared with 12.8% in 1968; in the automobile industry the corres-ponding figures were 6.7 and 3.5% respectively. In the textile machineryindustry labor costs represented 17.5% of value of output in both 1966and 1968. Since materials and components represent a large proportion ofproduction costs the above mentioned changes might have been influenced by

- 104 -

relatively steeper rises in prices of final products than in wages andsalaries, as well as by improvements in labor productivity. Internationalcomparisons of wage rates for three principal occupations in the machineryand equipment manufacturing industries are summarized in the following table.

/ Comparison of Wages Between/ Korea and other Countries

(Mid-1970 in U.S.$ per day)

Occupations Korea Taiwan Hong Kong Singapore

Electronic Assembly 1.55 1.34 1.77 1.02Machinist/Tool

Maker 5.25 - 4.3 5.00Machine Operator 2.85 - 3.01 3.50

Source: Comparative Labor Costs - Stanford Research Institute - SeoulMeeting, September 16-19, 1970, p. 8.

7.9 In the course of visiting several machinery manufacturing plantsand fartories nroduring electronic enuinment and comnonents; the mlssfonobtained data which illustrates composition of production costs. From thisand nther sources it is evident that materials renresent a large share oftotal costs. In the manufacture of agricultural tractors, for instance, ma-terials and imnortpd romponents repnresented in 1970 somne 00Z of total nro-

duction cost. To produce a 39 HP tractor whose FOB price in 1970 was 1.1mllioin won, abhnvit 860,000 nnon we-re snpnt for mnterials and imnorted comno-

nents and less than 100,000 won for labor. Comparative figures for a 20 HPhigh speed diesel engIne which sold (FOB) for 250,000 n .on were 170 and 30thousand won respectively. In a die casting plant total production cost in1969 of brass, bronze and aluminmn products mounted respctielyto 430,870and 360 won per kilogram of finished products. The corresponding materialcosts- were 3116.5,7310, and 292 won -and l a bor costs only 40, 80 and 32 won ner

kilogram. Roughly 25% of total labor cost in each case was spent on meltingopera4tons, 50% for preparing m..oulds and the re.4*kinder for finish.n oper-ations. For the three products administrative costs ranged between 4 and 7%of total prodUct4on expenses. ',

fL -- 1

0IV Domest'Lc user's price trenlus for seLect,e proucts ae iJLLustrateuin Table 7.3 which shows that all prices have risen in recent years exceptthe prices of cargo ships anu radios whIich Lave declined; thLe priLce of sral

electric motors has remained stable. Among the farm machinery items,

1/ TFYP, Basis for Heavy Industry Development, September 14, 1970.

- 105 -

power tillers and threshers recorded a price rise between 1966 and 1969of 38 and 42% and of the three types of machine tools, the price of planersrose less steeply than that of lathes and shapers. Steepest price increaseswere reported for telephone equipment, ranging from 40% for hand sets to70% for battery operated switchboards.

7.11 A comparison of Korean domestic and export prices in 1970 withthose in Japan as reported by the mission's plant visit questionaires anda preliminary Economic Planning Board study, Price Comparison BetweenDomestic Producers Unit: Prices and World Market Prices, are illustrated inTable 7.4. The export price of power tillers and diesel engines was lowerthan the domestic price and that of looms and twisting machines higher thanin Japan.. For the silkh and rayon looms Korean export price is comparableto the dcmestic Japanese price but in the case of twisting machines it isonly half as large. Kcrean domestic prices of outboard motors, ball bearings,electric motors and diesel engines appear to be substantially higher thanJapanese prices although part of the difference is no doubt due to the lagof one tco two years in the base period used in comparison.

7.12 The mission did not have time to prepare a comprehensive analysisof the ability of Korea,n machinery manufactures to compete with Japan, butif these illustrations are indicative of the general situation it wouldappear that in addition to electronic products with a very successful export:program Korea is competitive in looms, twisting machines and smaller boilers,but not in such mass produced items as electric motors, bearings and engines.Largely because of economies of scale, heavy dependence on imported specialsteels and components, and perhaps less skilled manpower and inexperiencedmanagemenat, this situation is likely to prevail in the near future in manybranches of the machinetry industry. Except in the labor intensive electronicindustries, shipbuilding and possibly certain types of textile equipment,Korean machinery makers will continue to find it difficult to compete withJapan.

Imports and Exports

7.13 During the Second Five Year Plan significant increases wereexperienced both in imports and exports of machinery. Total imports ofall kinds of machinery and equipment rose by more than 3 times, from $175million in 1966 to $620 million in 1969. During this same period exportsincreased bv more than 5 times, or from $10.2 million to $55.4 million,thus indicating a substantial improvement in the import/export ratio(see Tables 7.5 and 7.6). Nearly half of all machinery imports in 1969consisted of various items in the non-electrical machinery group. Textilemachinery and leather working equipment, prime movers, pumps and compressors.machine t.ools and mechanical handling equipment comprised about two-thirdsof all itportR. Tn that same year non-electrical machinery producerscontributed about 16% of exports. Of some $8.9 million exported more thanhalf was contributed by nffice machine manufarturers, some 14% by nroducersof prime movers and slightly more than a tenth by sewing machine makinge-nterrprises.

7.14 Imports of different types of electrical machinery accounted in1969 for less than a fifth of total imports. Of some $114 million importedin that year more than 45 percent went for the purchase of electrical gener-ating machinery, switchgear and power distribution equipment. The electric-al machinery group accounted in that year for about $37 million or some two-thirds of all exports. Various electronic products contributed $27 millionrepresenting nearly three-quarters of total exports by electrical machinerymanufacturers.

7.15 Among different types of transportation equipment imported in1969, ships, automobile and truck parts and railroad rolling stock were themost important. Of some $172 million imported, ships accounted for nearly40% auto and truck parts for more than 30% and rolling stock for about 18%.Four years earlier about three-quarters of total import value was spent forthe purchase of ships. But smaller ships, used principally by the fishingindustry, were also an important item in the export of transportation equip-ment. In 1969 more than six million dollars of such ships were exported outof total transportation equipment exports of $7.4 million.

Import Content of Domestic Output

7.16 A great deal of effort was expended in recent years in attemptingto reduce the import content in final products. Stress has been placed onefforts to increase value added and save foreign exchange requirements. Inthe absence of comprehensive studies on this subject it is difficult tosay whether or not such efforts have been effective in all engineering indus-tries, but if the data presented in Table 7.7 can be regarded as representa-tive of the three major groups of machinery and equipment producers, thereare indications that considerable success has been achieved. As may beobserved from these data imported content of automobiles and trucks in rela-tion to import price of assembled units or components is still high althoughit was reduced by some 10% in the 1967-69 period. Rail cars are leastdependent on imports and for both ships and buses, import requirements in1969 were about 30% of total value of output. In the case of buses a largeportion of imports consisted of engines, transmissions and similar accesso-ries. Considering the fact that steel plate is imported and that enginesand much of other auxiliary equipment must also come from abroad the 30%figure for ships may be on the low side.

7.17 Among the non-electrical machinery items, import content ofcotton and silk looms was substantially reduced in recent years and in1969 only about 5% of total value of inputs came from foreign suppliers.From plant visit questionnaires completed by six large establishments, whichproduced in 1969 some 8.5 billion won of non-electrical machinery, theaverage imnort content was renorted at about 28% of the value of outDut.

7.18 Tn the ele.trical machinery industry groun relatively smallerprogress was made in reducing the import content. Electrical motor andtransformer maniifrtui,rers continiup to import some 25% of their value ofoutput which consists largely of special steels that are not expected tobe produced n Korea. Ae a rsalult further prngrPecs lnno thi-- lin will

- 107 -

be difficult. Tne situation is just the reverse in the case of electronicproducts and telephone equipment. Due to rapidly planned expansion of theseindustries, future progress in import substitution is expected. Thethree pla,nts which supplied data on the mission's plant visit questionnaireproduced in 1969 some 7.6 billion won of output (consisting principally ofTV sets, radios, refrigerators, air-conditioners and other household applian-ces); they reported that in 1969 the Imported content representea 16% ofthe value! of output.

Extent of Capacity Utilization

7.19 The mission attempted to assess the magnitude of idle capacity.While many groups in Korea have been concerned with such studies and realizetheir importance in projecting expansion during the TFYP no suitable ana-lyses were available. From scattered information (summarized in Tables 7.8- 7.10) the general impression is gained that, based on a sample of 125establishments in the engineering industries, some 80% of machine hourcapability in 1968 was utilized. When considering repair, maintenance andsimilar problems and the fact that no substantial expansion has takenplace in these industries in the past two years this means that nearly allpractically attainable capacity is being utilized. But as these data alsoshow, in the textile and agricultural machinery groups and in the ship-building industry there was substantial idle capacity. Even some of the verylarge producers of electronic equipment visited by the mission staff reporteda considerable amount of idle capacity, but in these rapidly growing industriesit is not uncommon to have excess capacity, especially as idle facilitiesgenerally represent floor area and small investments in machinery and equip-ment. Manufacturers of large transformers, motors, pumps and similar heavymachinery stated, however, that they are operating at about 60% of capacityand if the demand can be expanded and a higher utilization rate achieved,this would result in considerable economic benefits.

B. Third Five-Year Plan Targets

7.20 The Third Five-Year Plan places a great deal of emphasis on the'deve'lopmlent o'L e..giLneer'..g iLndustr,Les. I..e 119776 pro'duct'Lon target fLorthese industries calls for an output of nearly 600 billion won in constantprices or 3.7 times greater than iEt was in 1969. 'leir snare of totaLKorean exports in 1976 is projected at about 21% compared with 6% in 1969.Dur'ng the same interval imports of -machinery and equipment are plannr,ed tobe reduced from about 55% to about 30% of total domestic demand. The prin-cipal strategy in the development of these industries is to construct aseries of large plants with priorities placed on building a Heavy Machin-ery Machine Tool Compiex togetner witn sucn materiai suppliers as a specialsteel manufacturing works, the pig iron foundry in the Pohang area adjacentto the steel mill, and a large shipyard at Ulsan. New transportation mach-inery manufacturing enterprises are expected to be built in the Seoul-Inchonarea and plants designed to produce light electricai equipment will be io-cated in the Yosu or Kunsu region. Total investments during the TFYP (1972-76) in the engineering industries are estimated at 145 billion won as mea-sured in 1969 prices. Of this total, government plans to invest approxim-ately 29 billion won or 20%, principally for land acquisition, structures

- 108 -

and utilities. The remainder is expected to be invested by Korean privateenterprises, or as joint-ventures with foreign partners.

7.21 Several types of indices summarized from EPB reports indicatevery substantial growth targets for these industries in the period 1969 to1976. These are presented in Table 7.11 with a brief analysis as follows:

Consumption

7.22 In all three principal machinery groups, Korean consumption isprojected to rise from about 320 billion won in 1969 to 730 billion in1976. The fastest rise, by about 2.6 times, is projected for the trans-portation equipment industries, especially in the domestic requirementsfor trucks, buses and passenger cars. While the electrical machinerygroup is projected to expand by about 2.3 times, the growth of electronicindustries will be at a considerably faster rate and domestic consumptionof transistors and assemblies, which will presumably be incorporated intofinal products, is projected to expand by more than eight times. Domesticconsumption in the entire non-electrical machinery group is projected tonearly double, but the growth rates of automobile engines, transmissions,other automobile accessories and bearings will be much faster.

Production

7.23 The output of all engineering industries, according to EPB plans,is projected to rise from 164 billion won in 1969 to nearly 600 billion in1976. The rate of growth is over 20% per year. Of the total gain of 436billion won, about 40% will be contributed by transportation equipmentmanufacturers, and about the same share by the electrical machinery pro-ducers. In the non-electrical machinery industries, the largest increasesare projected for engines, transmissions, bearings and related automotiveparts. According to these plans, Korea is expected to satisfy all domesticdemand for such equipment out of local production. Preliminary discussionsare now underway with a large U.S. automobile transmission manufacturer fora joint venture enterprise to design and manufacture transmissions for alltrucks and passenger cars to be produced in Korea. Such a large operationwould be expected to compete with imports and tend to reduce domestic carnrices which are now 2-1/2 times the import price. Similar arrangementshave been made with Ford-International concerning the establishmen of alarge engine manufacturing enterprise and a ioint venture agreement involv-ing an investment of some $19 million has been concluded.

Imports

7.24 Since import substitution is a principal goal of the TFYP in theengineering industries' sector, all growth taratsa call for a slower risein imports and greater dependence on domestic production. Whereas in1969 some 55% of all machinery and equipment was purchased abroad, by 1976this ratio is expected to decline to about 30%. In the expansion of elec-t-roniLc industries, stress is placed on domestic productior., th,-c imports of

components in 1976 are expected to be only slightly higher than they werein 1969. Ir. the non=electrical .-,achLir.ery ind imports are pro4ected

- 109 -

to decline from 82% of domestic consumption in 1969 to about 60% in 1976.The corresponding ratios in the transportation equipment industries are39 and 36% respectively. Apparently the greatest progress in importsubstitution is expected to occur in the manufacture of trucks and passengercars. Import of components as a share of total consumption is planned todecline irom about 41% in 1969 to 26% in 1976. During this same period theimport-export ratio in all engineering industries is projected to declinefrom 10 :o one to 1.6 to one. The shift from imports to domestic productionin the engineering industries is one of the major features of the TFYP.

Exports

7.25 The TFYP also stresses in machinery and equipment exports.While in 1969 machinery exports contributed less than six nercent oftotal Korean exports, in 1976 they are expected to contribute more than20%. Actual value of exports by the engineering sector is nro'iected toincrease by over 200 billion won. About half of this increase will comefrom the elettronir%8 incdustries andi slightly less than a fourth will becontributed by ship builders. In comparison to 1969, a sharp rise ofnon-elec:riral mAchinery expnorts is planned hbt these will continue to besmall in percentage terms, comprising less than 10% of the total in 1976.Althouigh thp pro4aectad rica 4n e, arrtS of alpctrnn-ir deviices will renutire

a very much greater promotion and marketing effort than in the past, thisnrnoraAm connt4ninuea tihe trar.A that wa act-eahlishae 4in tha 12fa sivti4e

Invea I-maent

7 9 A A-u,.5 1 4*n.,o-smantS 4- i-ha a-oA4

n--r4 r - 4-A-ei-.4 AC! p:np1 fta toc -n

grow from 21.6 billion won in 1970 to 42.9 billion in 1976 (Table 7.12);during the same int-erval tL LhAe output is estimatedA to 4. crease bJy about three

times. The annual rate of growth of output is over 20% but in investmentit is onL-; 12%.. Il-Lis iLplies cor,sidAerable im.provenents An capital product-

ivity. Considering the fact that new investments are to be made in capitalintensive 4industi4ae, t-h 4m1 4aA oa.

4#-F1 I -f _.tn-4- -nnas t-Q ha low

even when allowing one or two years lag between investments and production.Total invest.m..en- ir. 4 er., ,...ire -- 4 .a,.d- A-< -t -eh TFYP (1972-76)

at a .LLCLL Ln ~L%IC CIL.L L5

.LLLLL5 L~ AJ- 'J- - -LL5

-tt ktL -.I~ - -I

is projected at about 145 billion won. As will be seen in the last sectionof t1-his chapter, nearly a for; of 4 thistotl ..ill be neede for _ the ez1~.I- t~5AP LIOjFL~ ~ Z~.Ly a LUJUL LI IJ 6LII.LO #LJLO.CL W.L.L.L U= LLI==U=L LJL% L.1II1a..

machinery and shipyard projects and the remaining three fourths apparentlyare ~OLass U Lto bUe suLL.Li.ct'LeL Jfor all other LaciliteLL. Ine view of tepo

jected magnitude of such facilities, total investment appears to be serious-ly uLLUL=Ls0 L.i,-,aIteU. Ol.L the total investmuent of 'OA billion won earmarklel fo-r

the 1970--76 period 40% will be required for various transportation equipmentindustries andU 34% Lfor non-e'LectronLc machin.ery. L'Lle various e'lectriLcaLL

machinery and electronic industries, although expected to generate some 72%oLf exporLts, will requiLre only about ill. of total investLmenLt. AL capitaLl/

output ratios in the electronic industries to a large extent explain thisdisparity. As is apparent from Table 7.12 during the TYr annual invest-ments in the non-electrical machinery industry are projected to range be-tween 20 and 36% of tnhose in the entire engineering sector, and in trans-portation equipment industries from 25 to 54%. Although annual growth of

- I I -I-I IV-

investments, except in 1975 appears to follow a fairly smooth growth curve,in actual practice there is likely tn hp far greater bunching in the 1973-75period. Considering the amount of effort needed in preparing detailed fea-sibility~ studies engneringo de-14i,n -in arnoivO fina~-ncin andt gereally,.,i

long delivery periods for key equipment, there is very likely to be a yearor two lag in all planned irnvestments. Mn,y of the proJects are not, at pre=sent, very far advanced in this process.

Program Implications and Conclusions

7.27 To achieve the above described expansion program, many constraintswill' neeA to be overcome. It has been o ted, fo: instance, that somLe 1i50billion won of private investments will be needed during the seven yearper-LOA i _ o ,7n__a SJ_. or o f average about 21 .1411- wo 4._A _ _u I LU I - I I I § -. v t-X V & vw v a_ ^ & w& s > i

will mean a substantial acceleration of promotion efforts to attract domes-tic anld LloreiLgn capiLta'L. YVL.le past exerience ir. attractirg foreign andUdomestic investments in the electronics industries has been quite success-Lul, the expect-edU s'lower rate ofL growth ofA. LtIhes indUUsLtriL, Lthe I..L.LI.L;eU

number of potential new large foreign (U. S. and Japanese) investors nota J XL :auy ± 11 A. XLUI d, LU LJ.L= WL.LLl L.L. .L L L:L=0. l.= WL.L.L.

make it necessary to mount an intensive promotional effort to raise newcapiLtal. rlULeUVerL,LL ' L ' IUL1 .. AI CiLLtLtac;L inVetoLrUL LLI lightL LoW

capital-intensive electronic industries in which the construction periodauu qU.LIIIeL U~LLVe ie dLt: L=LcLICLYWUL LUL LUdHL I.II LIIUbr- PLUUCif.Llgand' equ'pmment 'Ue 'J. 'L - ae r eltvl shote tha in -hs -producing_

heavy machinery which require extensive engineering designs, long deliveriesof ke- equipment, and- rLany m-nths for start-up -e -t o p

required are far less in the former group, and turnover of capital is morerapid. in neavy engineerlng industr'Les, the elapseU tLme between initiationof a project, completion of financing arrangements and full scale productionis usually quite long. hnus even with the most efficient operation con-siderable delays are generally experienced before profits can be realizedand operating profits on capital and on sales both tend to be smaller.As a result risks are higher and investment commitments more difficult toobtain.

7.28 In addition to existing incentives to investors rrom the govern-mental Fund for Machinery Promotion, and similar sources for the promotionof electronic and ship building industries, it is suggested that the Invest-ment Promotion Bureau in the EPB might be strengthened. It would be help-ful to have a special staff of engineers, economists and experts in market-ing, advertising, and promotion to coordinate efforts in attracting new in-vestors in the machine building industries, and to arrange for pre-feasibil-ity studies of major projects in industry. In cooperation with the Ministryfor Commerce and Industry and with outside consultants, such a staff mightinterest potential investors and stimulate them to carry out their own de-tailed analysis. The suggestion made in Section III of this report for agreatly strengthened marketing arrangement to assist exports of capitalgoods also bears repetition here.

7.29 Since the demand Eor mechanics, tool makers, machinists, machineoperators, welders, maintenance men and similar occupations will tendto grow at a fast pace, the implications for manpower requirements shouldbe carefully studied. Current training programs carried on by the Officeof Labor Affairs with the support of the United Nations Development Pro-gram and the International Labor Office will need to be related to man-powger and skill requirements implied in the projected expansion of en-gineering industries.

7.30 An examination of projected demand for individual types ofmachines and of size of plants in which they will be produced does notprovide sufficient evidence that the new enterprises will be largeenough to become competitive in international markets. While it isrealized that a general plan cannot deal with snecific Droblems, thepre-feasibility studies which will be prepared by government agenciesand private corporations must analyze the ability of pronosed new enter-prises to produce and sell machinery at competitive prices. As was men-tioned in the previous section there is ev4denrp that- excent in electronicsand possibly certain textile equipment, both the price and quality ofKorean machinery nroducts are not at nresent cnmnptiHixp in wnr1d markets.This is partly due to small scale production and excessive product di-versification in a sfnole nlant. and in part tn the tendenrv for the smallplants to be entirely self-sufficient. Planned development of materialsand comnonpntl- indu.Qtrips as enuisaged for examnle, in studrles4a h-i the KorpanInstitute of Science and Technology is designed to remedy this situation.

7.31 Both the demand and investment requirements must be studied indetail Except for heavy electrical m,chnery anrd apparatus, (whichare tied to electric power generation and thus probably realistic), demand

pronrtios fo mot oter cmi.dities- were est4 -+--A rather .rudely,

relying mostly on extrapolation of past trends. In the case of machinetnnls, future dem-and is 4 enerally related to the growth of G, whIch isuseful as a first approximation but is insufficient as a basis for firmmarket pro4ections. WIth regard to exports of electronic equipment,demand projections are based essentially on certain modifications ofpast growth rates. This assumes a con.tinua.tio of a l and grow-ing U.S. market wqhich may be difficult to achieve.

7.32 Even if the projected demands for engineering goods are realistic,the mission. feels that the ,rnvestment requirements are not. It is forinstance difficult to reconcile the fact that in the non-electricalmachinery industry the heavy amchinery complex alone is expected to needsome 38% of all investment earmarked for that group during the TFYP whilesom.e two dozen other large projects including large automobile engineand transmission plants are expected to be built for the remaining 62%.

7.33 Among some two dozen individual enterprises which are plannedto be built during the TFiP to produce machinery, engines, automobiletransmissions, bearings and other components, according to EPB plans,

- t12 -

a new shipyard and a heavy machinery complex have been given high priority.In addition to satisfying domestic requirements, by 1976 the shipyard isexpected to earn, through exports, some $50 million in foreign exchangeper year. The heavy machinery complex is primarily intended to produceequipment formerly imported and less than 10% of its output is expected tobe exported. Total investment in these two projects is estimated at nearly$110 million. Although a great deal of preliminary study has been givenco these projects and more detailed feasibility analyses are now und-erway.their production programs, investment requirements, and cost structure arestill highly t:entative. Accordingly, the mission was able to perform onlya Dreliminary review of these projects, in order to identify several problemareas and to su)gest certain additional questions that need to be addressed-

C. Heavy Machinerv Complex

-7 3L The Concept. It has been realized that the traditional approachof producing a variety of machinery products in a large number of smallpiants generally results in high costs and thus severely penalizes thecumpetitive position of domestic industries. Because of diseconomies ofsmall scale and a relatively low level of technology. to a large extentKorean machinery industry is at present capable of competing with foreignsunDliers in only a very limited number of Droduct linen- and. due to l2rko£c domestic facilities, eqttipment users normally must import a large shareof their needs. As has been noted earlier. without an efficient domsti1-machinery industry the projected economic expansion during the TFYP woAuldrequira large imports of machinery and causes a nerinuti drain on Knrenrfc,reign exchange resources.

7.35 To achieve tlhe desired economies of scale the Heavy MachineryGomple- (WfTl.) as sonce-ived by t-he Korean TnQtiftit- of Reis-nre and TechrroloXIST) is designed to have a diversified product mix to be produced b'r a

vreirti-ca11y integrated (omnlpl rncnist-ifng of four ,r rinc7panl rom,7no facllit4es.

Fo7owinTg certein earlier approaches, on the basis of existing facilitiesar. prlisllryYn,v-rke dr.an iammrveons the rdcoi wasn se-lect-d t-o

yield a maximum commonality of manufacturing operations to be performed byl zndi a A steel founlr4es, a larbe LLdern ma.chine shop, a fabricating shlop

and general assembly shop in which final products will be put together.Envlsaaed a-s pUarI-.0 of th.e care also Lertad4n othler aux4 --..-a fcL aL iLt

such as utilities, research and design center, maintenance and repair group,00 1, pattern anA .miould-ma!-, ing shops, forge, heat treatingIL facilies, andLUUL j L "~ idL ImU' Lu'.Li 6 IJJ, £L tA.~ I u nL LaL L . L C CLLIU

purchasing and customer service organizations. Because of highly diversifiedCU-cLULtoite 's, deaL LiLaLJoL proLduct .L.Lre iiC expectd L*U ILdVv sprLe bdsa tes

organizations but even here certain common approaches to advertising andrrLerket development are expected to produce sig-i-ica, - -co..omies.

7,36 The product lines and production programs of the proposed machinerycomplex are summarized in Table 7.13. This is a modification of the originalplant de-veloped by KIST jointly with the Battelle Memorial institute of

- 113 -

Columbus, Ohio. 1/ The report setting forth the plan is a detailed, analyt-ical document that is impressive in its presentation of the material.Agricultural tractors, forklift vehicles, and presses have been added by thegovernment-selected industrial sponsor.

7.37 From the table it can be observed that there are two main productlines (a) machine tools, and (b) construction equipment, plus additionalproducts such as presses, hvdraulic devics (1i.e.-va-Tlves, pumps, etc.),transmissions for the construction equipment, some fabricated productsand foun,lry products, the latter primarily for internal plant use. Thelist of products within each major group is extensive; for example, themachine tool eroups include virtually the full range of standard machinetools.

7.38 The product lines for the complex were selected by a methodologythat started with the conceDt of "building block products", that is,those involving a specific production sequence or set of processes. Fromamong the wide range of possible products, the final groups were selectedby application of an explicit set of criteria, each criterion being givena numerical weight. There were eleven such criteria; six of them accountedfor over 80% of the total weight. In order of importance these six criteria:a produci:ion cost advanitaee should be nossible: backward linkages shouldencourage development of other industries; exports might be developed;there is, high valinp addQd: the technnlogv necessarv is closelv comDatiblewith present abilities; and the industries should serve a large domesticmarket demand or need- Having scored the various product nossibilitiesaccording to these criteria, the analysts then arrived at a grouping of thenreferredl ones and nrnreeded to work out the costj market demand. andfinancial requirements of the group. Their recommendation was to establishthe hpa'Y,% Tnmachinery complex rwi-th the nprndiict 1-fnea indicated in the table.

7.39 This approach is quite novel and has been partiallyr tried in otiher

countries, but many serious problems remain to be solved before a firmb8is4 foi- decision is -in hand. With certain modifitations of its nresent

production program and some additional cost analysis, which will be suggestedfurtiher in this cet-iony, this annpear t-n be a logical nrogram for the

development of Korean heavy machinery industry. Since there are manymah4inne, or castin-r operations, for instance, that con hb perfnrm-ed hby thesame equipment for the manufacture of hydraulic devices, transmissions,m,nihtne t:ools .and const:rction equip-r.ent, this new approach permitQ laroerand more automated plants and a higher utilization of capacity. Also, thegreaote-r t-ho Inmm.,Môlity-A of poats- i-he lessa spe.4i,li zd i tho equi-inment

needed as compared to conventional methods. But at the same time schedulingof production lines to min4m-.ze doimwnt-n.e, qual4ty control, and managementare much more difficult. Korean planners are, however, aware of suchdiffi4cut1 i1s aiid aero posng, 4n - 1 ^1-ot-4_n W4..-.; a---4-.n nnri-nv-r nr

consultants, to develop an extensive training program.

_t/ VKS'"l . anl for Develop,.er.t of vorean MechLa4-.il Enegine-r in- h A , I,

170l. I_-II, 1970.

- 114 -

Costs and Prices

7.40 While it is realized that unit cost studies performed by KISTand shown in Table 7.13 were based on 1963 U.S. census data (with theappropriate adjustments to Korean factor costs) which are intended toserve onlv as crude bench marks for further analysis,. the industrialsponsor in its prefeasibility study has apparently accepted them as final.Their current investment, production and profitability analyses are basedentirely on these crude cost studies and the mission believes that agre2t deal of additional analysis is needed before final investment andproduction decisions could be made. Rather than relying on these pre-.1iminarv findings. detailed feasibility studies by the snonsor shouldinclude a part by part breakdown of each machine in the program. Common-l4itv of nnrts should be Identified and machine time reauired to nerform

each operation estimated to determine the specific equipment types andcapacitips Tonether with the aqssimed Iahor and mAterial costs orevafling

in Korea, reasonable unit cost estimates for each component could bederivJed- R' adding ecrh cnmnnnent onst and assembling them into thefinal product, equipment unit cost could thus be estimated with reasonable;acrttraACv

7.41 The proposed nr4ies of pnroduiitc of the HMG raise q eniptinns a

7-o the abili.ty of H!!C to produce profitably at those prices. Inquiries.-̂bout U.T C costs and nrirpc fnr mnrh4ne tnnlsc nf nm.parable niqulitappear to indicate that these may be as much as 2 to 3 times higher thanhose propos-ed by- the KIST analyses AQ m.ay be obsered frnm Table 7.13,

the proposed prices of the HMC are often considerably lower than current1.S priACe! In 19 Q70 4fo At ance_ Korea purch-sEd i,n the U.S. 8 lar-e

(20-25 ton) bulldoz.ers at $50,000 per unit and several smaller front[Loaders '1t2 -o I1/2) r-d,4- yar for n15-,20 tT.h 4 1

European and Japanese prices are some 20-30 percent below U.S. prices, theLproposed HIM' b,rnl.t prF'l¼ces are below U.S. ep:ices. It is qeto lewther

they will be able to achieve the considerable cost savings implied by the_ur e I*_ i s On. ot.hrO han, A -4-1 %55ua A ar5 pr-hces .. to 1 a - A F . A_ 4A AO

be charged by the Korean enterprise are double those in U.S. while pricesof [uechanical. arL Aiylraul.Lc presses are cor,parable to J ..) pr1ices.

1.42 EstIL, te cri osts asaperto b o lhuhhg ao'IL StUl±aI-IL -A UII.L.L. f- ad±sU ajJpp L.U Li JLIW CL.LLLLUUrL1 L&.LrLL .td.UIL

intensity and low wages in comparison to the U.S. could compensate formucn of thle difference. * l1en it . s reaLL'lzedu, Lor instance, hLlat. to

produce a 25 ton bulldozer requires some 4,000 man-hours of machiningtime, total cost of such labor 'n U.S. would b- approximately $16,000while, even at productivity rates 50 percent below U.S., in Korea itwould cost iess than $5,000. Thus the savings of $11,000 on this opera-tion alone would go a long way towards closing the gap between costs inthe U.S. and those proposed in the heavy machinery complex. Although,as was stated earlier, more systematic studies are needed to appraise theeconomic feasibility of this project, this illustration appears to indicatetha. in comparison to U.S. unit costs, those estimated by KIST are perhaps

- 115 -

not unreasonable for some products. H1owever, in comparison to Japanese

costs or those of large U.S. firms producing construction machinery in

Singapore or Hong Kong the unit cost comparisons presented in Table 7.13

would be much less favorable.

Investments

7.43 The industrial sponsor of the heavy machinery project estimates

total investments of about $50 million of which some $32 million would

be needed In foreign exchange= Anproximately a fifth of the total rep-

resents working capital. For the purchase of machinery and equipment$24 million has been earmarked: for the engineering design fee and for

training engineers and management personnel abroad one million dollars

each has been estimated. Since no details of the basis of the cost

estimates are available, these must be regarded as highly tentative. Only

when detailed feasibility studies brcome available and each piece of equip-

ment required for the production process is specified and priced would one

be able to arrive at a reLiable investment figure- Suggested deletion

of agricultural tractors because of high production costs would signi-

ficantly alter both output and investmoent program. The deletion of this

product line from the plan should be considered.

Profitability

7.44 As estimated by the sponsor a net profit of $4.2 million is

expected to be realized or about 9 percent on the $A6.2 million sales

in the year at which full capacity of operation is achieved. In

addition to production costs and general administrative and selling ex-

penses, about $3 million is earmarked for interest charges and $1.2

million for depreciation, but no provision is made for taxes. The

estimated level of net profit on sales is higher than has typically been

achieved, on the average, by Korean industry aand is also high for

capital goods industries. The calculation assumes that full capacity

output can be produced and sold at the indicated prices. Both of these

assumptions should be subjected to more careful analysis in the full

leasibllity study.

7.45 In short, the hea-vy machinery complex deserves to be considered

as a high priority, but many of the estimates so far presented can only

be regarded as tentative and should be validated or revised prior to

a final decision on the scale, product lines and financial needs.

D. SHIMFLARD PROJECTT

7.46 In 1969 Korea imported about $65 million worth of steel ships

for its ocean going and coastal trade while at the same tirme exporting

some $6 million worth of fishing boats. Thus, with the emphasis on import

- 116 -

substitution, the growth of the shipbuilding industry is given highpriority during the TFYP. In addition to modernizing the principal ship-yard in Pusan, which has recently concluded contracts to build severalsmall tankers, the TFYP calls for the construction of a large newfacility at Ulsan. The government has chosen the industrial sponsor forthis new shipyard and, building upon previous analysis by KIST and itsconsultants, a prefeasibility study has already been prepared. A siteof about 650,000 square meters has been purchased and arrangements arein progress to obtain a foreign partner and secure the needed invest-ments. Additional work on a detailed feasibility study is beginning.

Projected Market

7.47 The Korean demand for new cargo ship tonnage is projected toincrease from about 200,000 in 1970 to 900,000 gross tons in 1976.During this period a shortage of shipbuilding capacity is expected togrow from 170 to 660 thousand gross tons per year. In 1969 nearlythree quarters of all Korean ocean-going trade was transported by foreignships. According to recent estimates by the Shipping and ShipbuildingResearch Council of Japan (SSRC) by 1973 a serious shortage of ship-building capacity is expected to develop. In 1975 the world demand forships of 100,000 gross tons and over is projected by SSRC at 7.1 milliongross tons annually while the available capacity is only about 4.1 millionzross tons. The backlog of orders held by Japanese shipbuilders as ofJanuary 1, 1971 is estimated to exceed 20 million gross tons which isenough to keep all Japanese yards fully occupied for 2 years. Continua-tion of a strong sellers' market coupled with rising labor costs isexpected to push uD the price of large ships from $70 per dead weight(T)DW/T) ton in 1970 to $100 in 1974. 1/ In addition to meeting domesticneeds bv 1976- Korea exnects to exnort annually some 500,000 gross tonsof new ships or slightly more than 2 percent of projected world demand. 2/At $100 ner Dw/T the program will bring in less than a half of the foreienexchange earnings projected for this industry in 1976 according to EPBd.m2nd fnrec2sts (see Table 7.11).

Production Program.

7.48 if the shipyard is commnletDz h the end of 1Q73 na plannned inthe following year it expects to produce 600,000 gross tons of threed4fferent s1hip sizes: 54,000 T).J/T, inn00 nnnWJT andi9n nnn00 DliTJ/ .Eahsize will have a separate building berth. In 1976 projected output is

1/ Cross tor. roughlly equal-s TDW./r plus Q e^n41 I W O LUL J~AL I' i'rq L. U JL J'L O.L W ~ .&

2/ Report for KIST, "Enoansion of Korean ShipbuildInsg Facilities" byA.J. Coyle - Senior Advisor, Battelle Memorial Institute, Dec. 29, 1970.

- 117 -

expected to reach 770,000 DW/T. These are tentative targets and con-sidering the time it takes to complete financial arrangements and en-gineering design there are likely to be some delays in this schedule.

Investment Program

7.49 The sponsor estimates total investment requirements of about$59 mil:Lion as follows:

(Million U.S. dollars)

Purpose Local ForeignCurrency Currency

1. Land improvement 4.84 -2. Civi1 wnrk-c 7.00 8.403. Bui:Ldings 1.30 1.604. Machinery & equipinent 0.65 8.735. Engineering fee - 3.006. Working apittal 9.64 8.617. Contingency 4.03 1.00

TOTAL 27.46 31.34

On the lbasis of the consultant's studies that have examined investment inthree large recentlyr bui4lt o-r m^ne%rPvn4izd shipyairds (NipponnKka' Tsu,

Japan; Litton's at Pascagoula, Miss. and Bethlehem's at Sparrows Point,UA) the above estima--tes appear realistic. One possibleA- Ia in theconstruction of this facility suggested by consultants is to combinem-aterial har.dlir.ng ar.d subassem,.ly prefabricatior. used Ain the Nippon.

Kokan's yard with Litton's flat-slab erection techniques and launchingUock. WI.L.L 'lsan appears to have certaiLn pysical advantages over othersites examined by the consultants, additional test borings are needed toconfir.m the reported geollogy of theL shoal area and to- Aet.... loa

bearing qualities of the proposed building site.

Costs and Prices

7.50 In their extensive studies of the proposed shipyard KIST has~~ ~~~ I~. AAn T%T-TI'1attempted to compare present Kourean costs Lfor buildingL smal 4,000 DWTIL

cargo ships with those in Japan. Their findings indicate that Koreancosts are about 28 percent higher, due principally to higher materialcost and lower labor productivity. Other KIST comparisons for a large60,000 DW/T oil tanker assuming similar technology in both countriesshows the following results:

Production Cost ($ Million)

Items Korea Ja?an

Material

Hull 4.62 4.20Er.gi,.e 1. '/ .1

O..'L o~~~~~ai..J n i f..

eubtotal~~~~~ 6'9 63%.IjU LU a.L U.7JU J

1UUbor t/ 1.0I '.50

OVLerheau and i -u rUeCJL'tLon t0.78 0 _n

T ota.l C os t 8.7118

This brings total cost per DW/T to about $145. The above comparisonsassume that the cost of material in Korea will be 10 percent higherthan in Japan and that labor productivity will be 10 percent lower.While in the long run these may be realistic assumptions, the missionfeels they are somewhat optimistic for the initial years of operationat full capacity. The favorable cost comparison shown in the tableabove probably cannot be achieved quickly. If wages rise in Korea, theadvantage shown in labor costs would diminish rapidly unless productivityalso increased to offset the wage effect. It seems likely that costsin Korea will be higher than in Japan for some time, but lack of capacityin Japanese yards will permit a shift of some business to the Koreanyards.

7.51 The new shipyard projected for Ulsan will build both smallerships for the domestic market and large oil tankers for export. Theproposed average selling price of $119 DW/T which needs to be verifiedby detailed cost analysis may, however, be competitive with projectedworld prices of $100 per DW/T considering higher prices which will becharged for smaller ships to be sold in the domestic market. To meetcompetition government subsidies might be needed in the initial years,but in view of the rapidly growing market and shortage of shipbuildingcapacity the mission feels this is a good proiect and its realizationshould be encouraged. However, there are questions of the ability tostart. simultaneously, production of three different sizes of shipsranging from 50,000 to 200,000 DW/T. Although there obviously aremany common elements in production technologv among the different sizes;

1/ Assumes import of engines.

2/ Assumes 1.65 million man-hours in Korea and 1.5 million in Japan;Wage rates: gnrna gn-WiIhr- _TapnA $1.00/hr.

- 119 -

the larger sizes do involve somewhat different scheduling and technicalproblems. It has been suggested that there is a "learning curve" effect,and that prior to undertaking production of the larger sizes (i00,000-200,000 DW/T) Korea should first absorb the technology for 50,000-60,000DWIT production. The lag in moving into the larger sizes might beseveral years. Since faulty performance would seriously impair thereputation and the success of the shipyard, it would be advisable todetermine the extent of the differences and to appraise the abilityto absorb all the technology at one time. This appraisal might dictatea change in the sequence of investments in the new shipyard. The mis-sion recommends that this kind of appraisal be undertaken before finaldecision on the project.

Profita:bility

7.52 According to the sponsor's preliminary analysis, it isestimated that full capacity will be achieved in 1976. When operatingat such capacity, the shipyard is expected to earn an annual net profitof about $5 million, as indicated by the following estimates:

Items Amounts

Sales 91,140Cost of Sales 77,057Profit of Sales 14,083Management, Overhead Selling,

Expenses, etc. 3,377Operating Profit 10,706Interest Cost 2,640Gross Profit 8,066Depreciation 3,046Net Profit (Tax Exempt) 5,020

Net Profit - 5.5 percentSales

Net Profit - 8.5 percentInvestment

Although the cost of training Korean labor is probably included undermanagemtent cost, absent from the above estimates (unless these wereincluded under engineering fees as part of the total investment program),are the hiring of foreign engineers and experienced manazement personnelof which some 500 would be required for several years, according to theconsultant's report. Also. since the cost of some 120,000 tons ofsteel p,late and other steel products which will be required for capacityproduction renresents between 25 and 30 percent of total nroductioncost, detailed feasibility studies being performed by the sponsor mustbe able to rrunt Wit.ih eonfidenre on deliverv of the nlate at competitiveworld prices by the Pohang steel mill.

- 120 -

7.53 The figures used in the profitability calculation can onlybe regarded as tentative at this time. As with the investment andproduction costs, a more careful and detailed analysis is required. Thefirst evidence is reassuring, but that evidence is not based on detailedengineering and economic estimates. These should be made the basis onwhich a final decision is reached.

Conclusion

7.54 Considering the favorable forecast of the world market, Korea'spotential advantages of low labor costs, and the availability of a laborforce, the prolect appears promising, and with some early governmentassistance and a choice of an experienced foreign partner could be aprofitable enterprise. If a joint venture includes one of the large oiltanker fleet operators, thus assuring a certain portion of the marketfor the shipyard's output. its success would be substantially enhanced.

- 121 -

Table 7.1

Production, Employment and

Productivity in the Machinery Industries

1966-68

1966 1968

Production (Million W) 44,907 90,762

Non.-Electrical 9,743 14,969

Electrical 13,188 29,675

Transport Equipment 21,976 46,118

Enmplo_me:nt 70,753 88,709

Non-Electrical 22,005 24,182

Electrical 18,354 27,774

Transport Equipment 30,394 36,753

Producti'rity (000 W) 240 308(Value added per employee--adjusted for price changes)

Non-Electrical 180 238

Electrical 290 324

Transport Equipment 260 342

_ource: Mining and Manufacturing Census.

- 122

Table 7.2

Value Added, BEployment anid Productivity

ini 9eLected Industry roups

1966 1968 PercentValue Added u e: r Carige

Value Added E:ployment per Bhuployee Value Added Empiloymrient per Employee Value AddedPer(Million W) (Ninxber) (000 Won) (Million W) iiRbelr (000 Won) 1Nloyee_

(1) (2) (3) (h) - (5) (6) col 6/13

3610 Prime Movers 74L4.4 3,419 209 606.8 2,375 391 87.1

3620 Fa3riL Machinery 244.8 2,094 118 529.3 2,9';0 179 51'.7

3630 Oonstruction & lIfininig 374.2 1,874 199 477.0 925 5L6 159.3MaLchinery

36L0 MetaLL Working Machinery 317-3 1,894 167 364.5r; 2,466 228 315.5

365'0 Textile Machine3ry 658.2 3,162 2C0 1,221.6 4,517 2'71 30.3

3710 Electric MachinerL y &Industrial Apparatus 832.0 3,053 273 2,682.3 6,904 3138 42.1

3730 Communications Equip-ment (electronics) 760.8 3,205 137 2,890.2 8,90 316 130.7

3811 Marine Engines 519.1 2,532 205 704.3 2,8:L3 250 22.0

3812 Steel Sh,ip Buildling& Repairing 2,133.4 3,840 555 1,249.2 4,51 270 4B.7

3831 Motor Vehicles 2,381.4 4,817 4593 6,607.6 5,097 1,300 163.7

Sources Census of Mining and Manufacturing

- I C, -

Table 7.3

Domestic User's Recent Price Trends 1966-1969

Selected Machinery

PercentTv-nA IJn4 ts 1Q°S6 16 nP

(Current Prices)W.ater PumnpS (3" dia.) a (nn W) 7,l 8.9 20

T..44.,S. (irs P4. u4.t .4 r\1/ UpnIn. 800.0 1 .0 ,8

.,Xs \ s v w ,,~~~~~~~~~~~~~~~~J . * " LE,^' V'/

~ UJJV .±AJ .L U. 1"6AA.L L1uwL/- jJJ. J -,L J*.JV.W ,

Plers ('2f. "2U.0 ,v.O 20Shapers ,' ( )1s/ LO,' A8. 660.0 37

..ectr.ic Mbtors (10 'L n 3!.0 38-.0 a

rTLn ~~~I', an- y,' %. It an- /- Iransforimers (100 Kva.j ) 2.0 265 18

Ships (,0000 D. W. tons) D.W? tw on) 263.0 258.0 -2

Power Tillers (6 Hr) (000 W) 21.0 30.0 L)

Cotton Loom (56:" wide) 130.0 177.0 36

Silk & Rayon Loom (6-3: wie) : 4.0 U OO.U , U

'wisting Machine (200 spindles) 250.0 320.0 28

Sewing Macrine (domestic) 3.8 4.8 26

T-V set 65.0 86.0 32

Radio 4.8 h.5 -7

Telephone (hand set) 5.2 7.3 40

Telephone S)witchboard (Local battery) " 112.0 190.0 70

Source: 1j Industry in Korea p. 88 and 93. All others from mission's plant. visit

questionnaires.

- i24 -

Table 7.

T- .esicand Exp,ort- 'LLce Compari So 0 -

WY.LVJ. 1.1 IjVII'0 "LI U4.JJd. L VI±U - IIAU.LUL~.± PIvUUU1,5-

Dmestic Bxbport JapanProducts Units (FMB) (FAS) (IRB)

1970 1970 l968-1969

Power Tillers (6 HP) $/unit 1,100,00 900.00

Miesel Engine (30 HP) " 1,050.00 930.00

Cotton Loom (56" wide) " 690.00 900.00 -

it It (52" wide) " 860.00 - 1,375.00

Silk & Rayon Loom (63" automatic) " 1,150.00 1,260.00 1,300.00

Twisting Machine (200 spindles) " 1,260.00 1,370.00 2,700.00

Marine Outboard Motor (10 HP)/ " 650.00 - 390. 00

Beat4ngs (Ball) 2 / #6201 0.52 - 0.246310 " 2.35 - 1.901210 II 3.70 - 1.3)6203 t 0.55 - 0.2h

Electric Motors - 1.5 Kw. " 115.00 - 85.oo5.5 " " 565.00 - 240.007.5 " " 700.00 - 310.n0

Diesel Enines 20-5h HP $IHP 75.00 - 65.oo

nilaers - 1 .000 Ks'. stea-m/hr $/unit 5j600.00 - 8,700.nn3,000 " 1 " 1)4,000.00 - 13,500.005.00 [t it " " 19,200.00 - 1,100.~

____s - 6 ft. " 6,h0.nn - 6 cw, 8 " 7,200.00 - 6,500o00

__ IJLJLUL'A %,VD -LL U Ll% .LJLM %CLVJ . V I-WUFJLXCLW.LV FA%0%A%J'.LLI. % LiAl0 L iu I .C IS 119.L.L VU UlLidt1

quality could vary substantially and these data should be regarded only asa crudu apro ira,ions. -Lhar LeIC rae/ Cje 35 LIU d3)6U YLrIVp.

2/ refers to whole sale prices.

Sources: Mission' s plaxit visit questionrnaire and the EPB Study indicated in the text

- 125 -

Table 7,5

Trends in Machinery Importsbyse d 10s 4 96-1069

(million $U.S.)

Groups 190o i968 ±yoy

Non-ElectricalMachinery 8 283.0

Prime Movers 5.9 40.4 47.3interno Comb EnginAnes 2.7 .15 6.1

Metal Working Mach. 5.5 11i 13.3Machine Tools 3.3 1.

Textile & leather Mach. 28.6 69.6 71.4

Mining Machinery 1.6 30.0 20.7

Pumps & Compressors 10.6 18.0 26.3

riechanicld Ha rid.rLgU L

Equipment 4.6 14.8 15.2

Bearings 0.4 0.8 1.1

All OthArs 26.5 94.7 112.0

Electrical Machinery -w~~~~ 2 .1 ~~~~~~~~~~~25211 .7Power rachiuery ,., 6. 1.

Generators 1.4 16.7 16.9Motors 0.5 3.6 2.7

Switch Gear & accessories 4.4 17.2 19.9

Distr. Transformers 1.4 5.4 4.1Wire & Cable (insulated) 0.9 2.5 2.7

Tele-CmnunicationEquipment 6.5 23.5 18.4

Telephone & Telegr. 3.1 4.8 4.9

TngtrLments & Controls 1.6 4.6 6.3

All Others 3,0 14.4 34.8

Transportation Equipment 36.1 154.3 172.5Rolling Stock -rTJ T.Tl 31h4

Automobile Parts 7.3 61.9 53.4Passenger Cars 3.4 15.5 21.5Trucks 2.1 36.9 26.6

A4rcraft & Parts 0.7 l.1. i.6

Ships 26.8 61.6 65.9

All Others - 1.4 10.2

r iS-J.S10J. rMachLLnery 3 19.2 26.5

Miscellaneous Machinery 28.8 - -

TOTAL 154 552.4 ~ 619.7

Source: Plan For Develonment of Korean Mechanicel m-ngneering Industry

V. II Korea Institute Of Science and Technology - Adapted fromTable 4 p. 90

- 126 -

Table 7.6

'frends in Machinery Exports - by Selected Groups 1966-1969(In $1,000)

Type 1966 1968 1969

Non-Electrical Machinery 3,655 4,i61 8,894

Prime Movers 1,600 503 1,217Office Machines 2,374 4,978Textile Machinery 634 116 367Sorwing Macnines .708 309 1,0I 4Constr. & Mining Machinery 4 127 110All Others 70 32 1,20 8

Electrical Macninery 5,10i i8,934 3.50,6

Power Distr. Equipment 295 3,880 7,100Communication EVipmenr1- 3,328 4,867 6,174Semi-conductorsc/ 29 8,590 20.609All Others 1,449 1,597 2,804

Transportation Equiprment 803 1,368 7,639

Auto Parts 4,6 932 853Snips 132 22 6,269All Others 235 414 517

Precission Machinery 596 1,061 2,131

Optical Instrum.ents 254 747 1,L99Musical Instruments 240 209 394All Others 140 105 238

Total 10.157 25,524 55,351

1/ Principally Radio Sets.

2/ Transistors.

Source: Ministry of Finance.

- 127 -

Table 7.7

Changes in Import Content as Percent of ImportedValue,, of Produ-c,+s - Sealece a I+teT+aw

Items 1967 1968 1969

(P e r c e n t)

Non-Electrical Machianer

DLesel Engine (DA 120) 75 64 n.a.Marine faTesel EIgine PMR 30 30 20Kerosine Engine (KA-3) n.a. 20 n.a.rP4ler- T'v 5)l 27 °7 7.J

Power Sprayer n.a. 85 n.a.L,A;aper °

Cotton Ioom 20' 10 5lk'1 T-o- 20t- 10 5

Srwing Machine (Household) 6 6 0

leearings (Ball) 70 70 n.a.

Electrical Machinery

Transformers 30 30 25to,-s4- 2V7 2)7 2

T-V Sets 45 38 35

Refrigirator n.a. 23 15Electr-4 U.cFar, rcn a. a. 4 - a.Watthour Meter 13 13 10

Telephone aes v10

Auto-Switch Board 25 15 10WU m-e &OE %Cab].e 3°W C. 15~Battery (dry) 18 15 10Battery (stog 10 n.a. n.a.

Trar.sport Equ 4iXe.L.L CULO U _pme-rL4JIA VL

Passenger .- - fej%o.. na/ .) 7 7

"i it (Crown) 79 n.a. 68U I~~~t 11-&- - '70 AR

Truck (6 ton) 75 75 65J}lWlVV.L V-JLUL (__ r(14

Rail Cars (freight passenger) 20 10 5

Bus n.a. 35 30

Soure:; MiniLsry oI Commerce ana Industry.

n.a. not available

- 128 -

Table 7.8

Extent of Capacity Utilization in Korean

Engineering Industries 1968

Number of Capability Actual CapacityP 1 a n t s a- stan-drd 0Opration Utilization

Type of Machinery included shiftn 1 p~~~~~~~~~~~r~~~~ -I -.- I . --- -- I 571 (Tnh1n,.q IT mRpnn mrs rPerent) I

ON-erall' Engfineering

Industries . . . . . . 125 24,065 19,182 79.7

Non-ElectricalI"chinery . . . . . 18 2,55 1,698 67.2

iex,i"Le r P JAUlnery- . . . . . 9 1,589 1,U w5

Source: Council for Economic and Scientific issues

Table 7.9

Extent of Capacity Utilization in Korean

Farm Equipment Industry 1968 (in Units)

Capability Actual CapacityType of Equipment at standard eubput Utilization

shift (Percent

Water Pumps . . . . .... 74,000 9,300 13

Engines . . . . . . . . . 20,000 8,200 41

Power Tillers . . . . . . . 10,000 5,370 54

Rice Hullers . . . . . . . 9,380 6,000 64

Rice Polishers . . . . . . 4,500 3,600 87

Barley Polishers . . . . . 8,000 7,500 9h

Source: The Korean Farm Tool Industry Cooterative as reported inIndustry in Korea 1970 p. 90.

- 129 _

Table 7.10

Extent of Capacity Utilization in 1970

in Selected Plants

- -st1mated- -r_paci ty

Plant Ptincipal Products Utilization

1. Transformers, Mbtors, CGenerators 57

2. Copper Wire and Cable 25

3. Cargo Ships 25

4. Agricultural Machinery 30

5. Bearings (Ball & Roller) 87

6. Engine Pistons & Accessories 96

7. Textile Looms, Twisting and Winding Equip. 70

8. Sewing ]achines and Household Appliances 60

9. T-V Sets, Radios, Refrigerators, Fans 60

10. Telephone Equipment, Watthour meters 48

11. Telephone Equipment and Switchboards 55

12. Electronic Components 65

13. Electronic Components 90

Source: M4-sion's plnnt V4isv t cniAstionnaire - total value of output ofthese plants was about 18 billion won or approximately 20 per--cent, of -t.h.e 1 QoR nitput of all engineerine industries.

- 130 -

TAbLE 7.11

Consumption, Production, Imports and Exports of Machinery

Equipment and Components

1969 and Targets for 1976

(in billion Won 1969 prices)

----------------- … 1969--------___________1976 -- ___

Consumption Production Imports Exports Consumption Production Imports Exports

Non-Electrical Machinery 113.59 23.19 93.00 %561 217.79 10h.29 132.04 18.54

Constr. Mach. & Agric.Tractors 6.00 - 6.00 - 10.30 10.30 - -

Mhchine Tools 1.80 0.73 1.07 - 3.82 L3h - 0_52Pumps and Compressors 3.29 0.81 2.47 - 5-56 5.47 - 0.42Blowers 0.53 o.42 0.11 - 1.39 1.39 - -

Power Tillers and Threshers 1.31 1.31 - - 2.83 3-15 - 0.32

Looms (cotton and silk) 0.80 1.00 - 0.20 1.58 1.74 - 0.16

Ehgines (gasoline-automotive 1,08 - 1.08 - 3.94 3.94 - -Hefrrig. Mach. (Industrial) 0.82 - 0.82 - 2.25 2.25 - -

Bearings (roller and metal) 1.42 1.16 0.26 - 4.15 5.77 - 1.56Transmissions (automobile etc) 2.54 0.36 2.18 - 13.10 13.10 - -Valves (engine and others) 1.08 0.70 0.38 - 4.02 4.16 - 9.14Springs (leaf) 1.36 1.36 - - 3.31 3.31 - -

Electrical Machinery 79.39 61.89 29.83 12.0 8 184.4h 237.69 108.25 161.5o

Generators 4.89 - 4.89 - 5.75 4.35 1 353/ 0 05Motors o.63 0.54 0.09 - 1.09 0.82 0:2

-of ~ ~ ~ ~ ~ _ ° .C .% _0 R1 R Son o ,-,Trnsfrmr 4_.52 4. .5 v q - _. .& 17.A cf,., v O.v

Switchgear and Circ. Breakers 2.Ml - 2.11 - 7.55 7.55Wlelders 0.66 0.27 0.39 - 2.21 2.21 - -

'Adre an. Cable 1.26 1.32 0.0 -A 3.86 3.96 _ 0.10

Coe"Enication Equip '(Principally-----flectroniscs LL.07 24.20 lz.41 2I 05.57 181.8 13.3J

Radioe (incl. car radios) F72_ 2 -.-M 17.70 - 1§.I0?.T. Neu A1.3 1.93 - Q.90 3.00 16.50 - 13.50Tran~eitefe and Asseemlies o.16 4.96 - 4.oO 1.34 2. 11 - i8.77Integrated Circuits - 4.82 - 4.82 - 14.97 - 14.97All Others (incl. parts and

components) 8.26 8.01 12.41 - 58.13 112.59 13.38 53-36

Transnortation EuiDment T'2.617 79-00 49.81 2.23- 327.7 255.12. 117.14 44.50

Trucks 19.70 12.03 7.67 - 155.70 116.90 38.8 -Buses 14.63 5-25 1.38 - 30.40 25.8 14.6 -Pass. Cars 17.50 11.27 6.23 - 72.8 54.6 19.4 -Ships (steel) 22.50 3.72 18.78 - 28.30 54.6 18.2 44.502/Rail Cars kr-te~iht ar,d Pas-

sanger)and Rolling Stock 10.31 1.36 8.95 - 3.18 3.18 4/

All Major Groups - 'Total Ji t 1614.08 172.6_4 17.17 729.Y7 97.08 3I7L"3 2214.514

1/ Based on actual exports shown in Table 7 - Differ considerably from the EPB-43 sector analysis probably dueto classification differences.

2 These are aggregates of individual projections and differ appreciably from sector projections. Importedcontent of cars, trucks and ships assumed to be 25 Dercent of value of output and of buses 15 npere-nt.

/ Assumes imports of special steels.

All locomotives are expected to be imported but no estimates are available.

/ As is shown later o. under the description of the p et -s ta a h o amount is more realistic.

Source: Economic Planning Board's Demand Projections.

Tabl A 7.12

Proimrted ArLrnminl TnvaqtmAnt. in RnilneArina'Industries - 1970 -

(In million won - 1969 prices)

Non-eiectr. fA..ectrica! Transport TotalMachinery Machinery Equipment

Year Value Percent Value Percent Value Percent Value Percent

1970 3,057 14.2 4,790 22.2 13,723 63.6 21,570 100

1971 5,719 34.0 5,150 30.6 6,061 35.4 16,830 100

1972 2,937 20.3 4,o96 28.3 7,446 51.4 14,479 100

1973 4,921 23.3 7,076 33.6 9,146 43.1 21.143 100

1974 8,700 25.6 11,753 34.3 13,834 40.1 34,287 11)0

1975 10,770 33.3 8,639 26.5 12,960 40.1 32,369 100

1976 15,610 36.2 10,398 39.3 16,892 2h.5 42,900 100

Total 51,714 28.2 51,902 28.3 80,062 43.6 183,578 100

Rate oF 31.3 13.8 3.6 12.1Growth

Source: Economdc Planning Board - 43 Sector Projections

- 132 -

Table 7.13

Proposed Production PrvTi for t..e Heavy Machine.- Con1le - 1976

EstimatedValue

Proposed of Output EstimatedQuantity Estimated nnit Priece (1970 priees U. S. nntT /

Items and Specifications (Units) Unit Cost (1970 f rices) $ illions Price 1970-

MACHINE TOOLS

Lathe (5-7 HP Gen. Purpose high quality 1,500 3,5h0 4,4 30 6.65 ) 2 toDrill Press (2-3 HP high quality) 1,000 620 780 0.78 3 timesSnaper (5 HP 20"-30" stroke) 250 1,7h0 2,200 0,55 thoseMilling Machine (5-7 HP high quality) 350 3,400 4,200 1.47 show* inGrinding Machine (Cvlinder, internal) c1l. 3.& Surface Type) 500 5,000 6,300 3.15

b- total 12.60

CONSTRUCTION EQUIP1MNT

Bulldozer (Crawler Mounted 20-25 Ton) 100 28,6oo 35,100 3.50 50,000Road Grader (12 Ton - 12 ft. mold board 35 8,800 11,000 0.38 30,000Road RolUer (5-8 Ton and 8-13 Ton

variable weight) 100 4,400 5,500 0.55 -

ScraDer (with tractor 10 cu. yds.) 30 30,600 38,300 1.15 25,000Front Loader (Crawler mounted 3 yds.) 45 18,200 22,800 1.03 40,000Power Shovel (Crawler mounted 3/4 yds.) 70 17,500 22,000 1.54 30,000

-_ r . i.e un * nnn A nn 7 ,An 7 An Cnn

Forklift (3 Ton) 200 6,600 5,700 1.14

Subto-tat 16'089

PRESSE.S

Mechanical Press (150 Ton) 10 16,000 20,000 0.20 20,000Hydraulic Press (300 Ton) 1o 20,000 25,000 0.25 25,000

Sub-total 0.45

HpIAULIC IEVICES

Valves)Jacks Pumps Cylinders, etc. 1,170 1,540 1,900 2.25(For construction equipment and (sets)heavy trucks)

TRAiISSIONS

For Construction Equipment andsimilar purposes 2,700 1,540 1,900 5.19

(sets)FABRICATED PRODUCTS 2,000(Tons) 840 1,100 2.20

WunUJY 1¶ODUUCTS

Iron (bnti-ns lq.0O0(Tbnq) 227 2&8 ) .20

Steel Castings 4,000(Tons) 490 614 2.46

Total 46.44

/ Estimated by the Mission.

Sources Hankook Maohine Industrial Co., Ltd., and Korean Inetltute of Science and Technology.

- 133 -

JTIIT . TH17 PFTROP(IMTCAT.S T-'nTTqTRTE5

8.1 The complex of petrochemical plants planned for the Ulsanarea is one of L-IthLe maJor proJects included in thle J.LA. Fiv4-Y Plan. l- T

will help fulfill one of the principal objectives of the Plan, to supplyinterLLLediate ar.d se.,.i-finished prodAlucts to tlhe textiles, plasti, aund

other processing industries. In the past these products have been imported,so tLha wLtil thi'e com,pletion of£ the coumplex, '; is expected thlat fLoreLign

exchange will be saved. It is also hoped that there will be opportunitiesLor new exports from. thLe prouuctiLon. I'Ce Ueci'sLon to go aieadU wiLtLi tIe

complex is speculative because the domestic market apparently does notcom,lpletely Justify the size of plant that would yield products at worla-competitive costs. Naphtha crackers with less than 150,000 MT annual ethylenecapacity will not be competitive in exports. Substantial growth 'In dUoUiLest'Lcand export demand is necessary to justify the decision for a 100,000 MT peryear plant, expandabie to 150,000 MT per year. It is With ERiS expecLaLton

that the decision has been made. This chapter of the report presents ananalysis Df the choices and their likely consequence.

A. Early Development of the Plan

8.2 The First Five-Year Plan (1962-66) emphasized the necessityof expanding exports, as have also the successive Plans. The textile in-dustries, operating on imported raw materials, were successtul in doing so,and their exports increasecd ten times within the five-year period. Theseyears established the t-extile industries as one of the most important groupsin the economy. During this period the relative importance of syntheticraw materials (acrylonitrile, nylon) began to grow at the expense of cotton,though in absolute terms both continued to expand. Korea witnessed a boomin the construction of fiber plants and the consumption of fibers and resinsdoubled from 1963 to 1965.

8.3 In 1966 the plan was developed to replace the import of thesesynthetics by naptha cracking to make ethylene, propylene, and benzene.With the support of the U.S. Agency for International Development, a firststudy of the feasibility of a petrochemical industry in Korea was carriedout in 1966 in two parts: the market analysis by Arthur D. Little, Inc.,Boston, and the layout, design and profitability analyses by the FlourCorporation, Los Angeles. The analyses revealed that the market for thesynthetic textile products was too narrow to allow sufficiently large, and,thus, rational capacities of the petrochemical plants. The naphtha crackercapacity was set at 66,000 MT per year but then scaled up to 100,000 MT peryear of the main product ethylene. A 300,000 MT per year scale was deemedto be the minimum efficient size in Japan, the U.S. and Europe; the Koreandemand could support only a 100,000 MT per year plant and the downstreamplants we're even more below the usual international size. The severity ofthe "size problem" on profitability became obvious, and the execution of theplan was delayed.

- 134 -

8.4 During the period of the Second FYP (1967-71) the demand forsynthetic fibers and resins developed so favorably that a 150,000 MT peryear (of ethylene) plant was projected. This is now the official capacitygiven in the "Outline of Petrochemical Projects in Korea" by the PetrochemicalDivision of the Ministry of Commerce and Industry (February 1970) and in the"Petrochemical Project Plan," by the Korea Oil Corporation (January 1970).The firms for the production of the various petrochemical products wereidentified, and the execution of the plan was started. The desirability ofthis plan and the feasibility of its further extension are evaluated below.

Increase in Demand for Synthetics

(Metric Tons)

Rate of1965 1969 Increase

Synthetics for fibers 10,585 62,000 56%Synthetics for resins 12,548 33,050 27%

Total Synthetics 23,133 95,050 43%

B. Tne Naphtha Cracker and Cracker Products

8.5 The core of the petrochemical complex is the naphtha cracker.A plant of 300,000 MT per year of ethylene capacity would cost about $40million; the unit for 150,000 MT per year as planned for the Ulsan Petro-chemical Complex will cost $27 million. Maximum single train units of500,000 MT per year are now being built in other countries. In the crackertypical hydrocarbon yields are approximately:

Cracker Products from Naphtha

Ethylene about 30% - max. 33% (if ethane is recycled)Propylene about 16%Butadiene about 4%Pyrolysis gasoline 17-20%

Containing:Benzene)Toluene) 10%Xylenes)

These products are separated in a single common unit by fractional distilla-tion. In a number of subsidiary plants the butadiene is obtained byselective extraction of the C4 - fraction with acetonitrile. The aromaticsare selectively extracted from the pyrolysis gasoline by means of sulfolaneand then fractionated. The toluene is dealkylated into benzene, which is

- 135

hydrogenated into cyclohezane. The mixture of xylenes is separated bydistillation and crystallization for the production of p-xylene and o-xylene.These cracker products represent the feed stocks for chemical synthesis intoplastics for fibers and resins, and into other products of the organicchemical industry.

8.6 The cracker production capacities estimated in the project planof the Korea OLl Corporation of January 1970 are represented in Table 8.1.The right: column corresponds to the maximum ethylene yield obtained under"high sevrerity" cracking conditions. Under "low severity" conditions(left coLumn), the propylene and butadiene yields are higher so that higherdemands for them can be met, but all the yields per unit of feed are lower,and the total naphtha cracker feed required is correspondingly higher. Theplan is based on low severitv conditions, but they may not be the optimumfor the operation of the complex. The optimum has not been determined inthis evaluation.

C. The Downstream Plants

8.7 The synthptirc products plants planned for t-he Ulsan At-brnmbira1

complex by the Ministry of Commerce and Industry (MCI) in February 1970 areshown in Table R,29 Th!ey are grouped according to the typrne of cracker

products required as feed. The chemical processes to be applied (see secondrnliimn) are available frnm contractors or from lriensors. T. etimntsc of

investments for these plants are as follows:

The naptha cracking center 60 million $The synthetic plants of Ulsan Petrochemical

Complex 156 million $

216 million $Other petrochemical plans outside Ulsan

Petrochemical Complex 17 million $Fertilizer Plants /1 40 million $

Total 273 million $

/1 This is not based on firm contractor quotations.

8.8 The capacities of the individual synthetics plants had to bedesigned, to agree -wi th the caact -- f the napth crake tosupyhL.J WA. LII LAI= %-LPC&tL±LY UI. LAII LIdjL LidLL: L dCLP..t:L LU 6UjJj.Ly LIL1t-

feeds shown on Table 8.1. This has resulted in some juggling and some com-promises~ hadU LU be~ radU. ror .L StAnce, the totaL ethylene reuLreLIteLLts Lor

products 1-9 (summed up in the 4th column of Table 8.2) amount to 101,800 t/yr.But the total input requirermients for propylene, and benzene would inot fullybe met by the 100,000 MT per year cracker, even though the respectivesynthetic product plants are relatively smaii. Because or tne increaserequired for an additional 60,050 MT per year of ethylene, and the requiredincreases in propylene and other products, the naphtha cracker capacityrequired to meet fully all demands has to be raised to 150,000 MT per year.

- 136 -

Table 8 .1

The Tfn lar naphtha cra-ckne cen1r nl 1970

7wTstl+ ~ ~ %O IYtrc on pr a

Cracking conditions:Ra-w Me s T^Lw c'rrnv' +.-Ir- 4i g +ve v

NaphthLaL CracLke;rU feedA .41 0, W32 00

s o rs s e~o4 -v Ln nIr %n o t I.r% AArvom",-t U 1-on1Qenxlk o] MLCaLVo,Ma;> C/4VsC9 I -IVv

Cracker Product s rroce ss

1. Ethylene Keellogg 102,400 102,14v00

2. Propynl one :t,. 0) q h , 7L t u

3. Butadiene Acetonitrile 18,000 13,900

4. Aromatics (orig.cont') S<uJlfolane (about i70,000) (i70,800)*

5. Benzene about 32,000 46,700

6. Toal1ne " Dealky-) about 30,000 13,300(lation

7. Xylenes n about 70,000 76,400

8. p-;1lene (27,300)

9. o-.xylene (27,300)

10 . Cyclohexane 36t300 36 300

* Composed of 30,600 MT from the cracker and 140,200 tons fromplatforming unit.

- 137 -

Table 8.2

U dL: t ;itl;ric tons pear yea.r

Plar!ned ca,naci> t'. -i-''.... -;LW

2. vinycl.e'2 Ordcia -,%on. I:o.r PC.' 60o,mo 15,000!Z v Pi )-k7 nn I ni rv^. :, ,, 'r-+i r{ 9nC'] -i . Pnn

55AJ°C , {c+35)000 l

1,. C.,,.l o: Di-nct G.4l r ; 34 nnd5. Scy-er +. 6o. Bezr -ooJi of..2,rV cD

(+30O) (+-10,5 I 6. Acetalde'hyce Dehydrationl of 11iO3,0CD '

Ethanol (+2] ,fJQnO (+15,PDO t

7- Oct63.11eL Via foS;i tcelo,ooi 9 0()00 t

B. B.uitvrol Y'ia ae h-e3,000 2,8300

... . . _ _ ..........Ox...o n.. .. , . C, _i 2....... _. L. .

i i. ~~~~~~~~ta t,Y i 4;;. ene .... ... utr ; r. 7>C.<,

Tot:2l D.. F --c.e ie;! 4rn3 1n;<

_ . . - _ _ .% * '; I 1 . ' " ' . . t7\'uie~ ~~~~~~~~3 Jl ];.: rebLl,<.>+i.W>< e iFJs z .. .

18 Poy-ster Misin

_NhCI 7n,ls xrIteic Re t Outsdo tl-ejo.Ic:-is Uln,rn Potc,-:..o-0: o_,:J l:

jKOCO P.e int ryN20. Carbon -,T1aCk (Inc:hon) Oil Fvmace 7, J500

LICIT Fiortili^r 01,l.

22. Urea 2100Refincry-

JIL Requirement for naphtha depends on mix of other fls

N'OTE: Based on MCI plan

- 138

8., An iniportant consideration for the planning of the Koreanpetrochenical cotmplex is that the naphtha cracker main product ethylene canin g,eneral be produced profitably only if the co-products are also utilized.If they are not utilized, the costs of ethylene are higher. This is illus-trated in Figure 8.1 based on tne standard cracker capacity of 300,000 MlTper year of ethylene. Curve I shows all the products costs against theethylene alone (assumed to be 100%) and all by-products credited only withtheir fuel heating value. If propylene is produced (Curve II) the cost ofthe ethylene is reduced to 78%, if butadiene is included (Curve III) to 70%and if finally the aromatics are also included (Curve IV) to only 57%. Inthis example, the utilization of all these products spreads the costs andreduces them for the basic product ethylene, but it is then necessary toconsider the profitability of producing and using all the by-products. Facedwitrh the trade off between ethylene costs and the utilization of by-products

anc the need to balance these in plants without too small a scale, thedecision was made to lay out the separation part of the cracker, the butadieneextraction plant and the pyrolvsis plant at the higher basic capacity of 150,000MT per year of ethylene, but all other downstream plants are based on only100,000 MT per year which is below the worldwide efficient plant size. Thisrepresents an unavoidable compromise whose constraints and economic conse-quences are discussed below.

8.10 Figure 8.1 demonstrates the dependence ot the production costs onthe cracker capacity. At 100,000 MT per year (of ethylene) the costs are12% higher and at 150,000 MT per year 7% higher than at the standard capacityof 300,000 MT per year. At 500,000 MT per year they are about 4% lower thanat the standard capacity. A recently published calculation of high severitycracking, where the ethylene yield is relatively smaller and thus the influenceof the capacity stronger, fits well into this picture (Figure 8.2 dottedcurve).

D. Relationships between Naphtha Cracker and Oil Refinery

8.11 With the cracker output of 100,000 MT per year of ethylene as isexpected in the next few years, from the 312,000 MT per year of naphthaprocessed (see Table 8.1) about 30,600 MT per year of aromatics are obtained.Also, some 140,200 MT per year of aromatics are extracted from 223,000 MTper year of platformate produced in the refinery from another part of therefinery's naphtha yield; the difference of 83,000 MT per year of oildistillates, corresponding to about 50 m3/hr enters the cracker and itssubsidiary plants which are built closely adjacent to the big oil refineryof the Korea Oil Corporation (KOCO) at Ulsan. As the quantities of thecracker product will not always be equal to the feed requirements of thedownstream plants, because these latter depend on the differently growingsales of the end-products, the cracker and its subsidiary plants are united,for the sake of better adiustment. in an internal Nanhtha Cracker Centerunder a single owqner, the Korea Oil Corporation (50% Korean Government, 50%Gulf Oi.1 Corporation); which also owns the refinerv. Trhe consecutive down-strean plants, however, though also situated in the Ulsan Petrochemical

Figure o.l

DDoCr irTIrwkr COSTS Of rTWVI rk= HU T!RID* I 1%..I 'M %-%f% I %O %-I .I I I I I h. L.I I IL 111 I I 9%-IU

DEPENDENCE ON THE DEGREE OF UTILIZATONOF CO-PDUCTS AND CRACKER CAPACITY

I II1

LU |f ElE + LENEP + PROPYLENE

U- ~ ~ ~ ~ ~~~EH+PRp±BTAD.

3 0

Ln~~~~~RCE CAPACIY(NT10 /r

I- 60

I-i0 IV

o 40

100 150 200 300 400 500,flnA -L'"Il n ,-A r% A ~-IT%/ Il,I kIT 'I ^^Pf\ / \

IBRRD .- 4PR

- 140 -

Complex and cooperatively furnished with utilities and maintenance belong todifferent companies t'hat receive the cracker products at transfer pricesdecreed by the government.

8.12 The KOCO oil refinery is increasing its crude oil capacity in1970/71 from 5.8 to 8.8 million MT per year. Besides the Honan refinery(3.1 million MT per year) and the Kyon In refinery (2.5 million MT per year)KOCO has 62% of the country's refinery capacity. According to the yieldsobtained in 1969 it will then have the following yearly production:

The Production of KOCO Refinery in 1970/71 at a Naphtha Yield of13% by Volume

Value of Productl per year Percen r X.t, Mlior $s-

Liquified petroleum giasC - 1n 120,000 1.5% 3

T U,.l... i _.jn Ann 1 r-"L.. 1XL s LL Xai1g LrUll gaisoV J±.Lne "JJ V,UVV J I J

Naphtha (Cc - 340°F/171°Cend poinf) 810,000 10.1 29

Kerosene 900,000 11.4 29

Gasoil 1,400,000 17.3 41

ResiduaL fuel oil 4,400,000 54.6 57

Total 8,050,000 100.0% 174

8.13 During the six years 1970-76 the demand for motor fuel will alsogrow; the question then arises whether the conversion of such a large part ofthe refiLnery output for use in the petrochemicals complex does not disturbthe balance of the refinery products. Tnis has to be considered as the re-finery lnow has only a simple reforming unit, whose upgrading capability islimited; it does not have a catcracker which produces high octane gasolinefrom heavy oil, but to install one would require an increase in the refinery'spresent investment. 'ne country's gasoline demand is still low (1969 onlyabout 600,000 tons), and the main petroleum consumption is fuel oil. Buttogether with the many other uncertainties of the wnole petrochemical devel-opment plan, provision of both gasoline and naphtha will require carefulplanning of the refinery's production.

E. The Program for Governmental Support

8.14 The Government, conscious of the fact that the rise of productioncosts caused by the small capacities must be compensated by financial supportin order to make the plants competitive in the world market, planned to dothis by decreasing the price of the common raw material, naphtha. TheGovernment started from an estimated market price in Japan of $28 per MTand deemed a decrease to $21.60 per MT of naphtha to be adequate. Theimplications of this price reduction can be shown very roughly. If the

- 141 -

reductiorn of $6.40 per MT of naphtha (amounting to $2 mllion for the312,000 MT per year of naphtha processed) is transferred to the 189,000 MTper year of cracker products obtained from the n.aphtha plus the 140,200 MTper year of aromatics extracted from platformate ( a total of 329,000 MTper year) b,h uppoL dIrmount;s to 0.2616/lb. of' average cracking certerproducts. Compared to the average value of the products, estimated at about:4k/lb., this support appears low; the increased cap'tal cost per unit ofproduct caused by the small cracker capacity is higher and more than offsetsthe price reduction on naphtha. However, this comparison Ls rough and shouldbe carried out for products individually before a judgment is made finallyon tne impact of the price reduction.

8.1; Assuming that for the next few years the capacity of the crackerand the butadiene and the pyrolosis units, all of which are designed for150,000 MT per year ethylene capacity, can be supplied only at 100,000 IFTper year, the capital costs of the unutilized third of the capacity amountsto $739,000 per year (depreciation, interest and loan guarantee fee). Tnesecosts, applied to the above calculated 329,000 MT per year of total productsobtained, correspond to a cost rise of 0.10j/lb. of average crackingcenter product. Of even greater importance is the rise in capital costsdue to the small scale of the cracking center plants in comparison to theinternational standard capacity of 300,000 MT per year of ethylene. It isestimated by the mission thiat the small scale of the plants imposes acost penalty of .30 to .404/lb of average cracking products. From thisevidence it appears that the subsidy in the policy of setting the naphthaprice below world prices probably will not be sufficient to offset the costpenalties arising from the small scale of the plants.

F. Costs and Prices

8.16 This report cannot thoroughly review production costs estimatesat all stages or plants. Suitable information on production costs wasobtainable only for the raw materials produced in the cracking center asreported iLn the Korea Oil Corporation's Project Plan of January 1970, whichrests on t:he design of the Kellogg Company. This so-called "standardt"calculaticon was based on 100% operation rate of the 100,000 MT per yearethylene c:apacity and a complete utilization of all co-products. It wasbuilt up rightly according to the usual scheme, subdivided into the variouskinds of costs as of raw material, utilities, etc., including 10% depre-ciation and 8% interest on loan, and resulting in estimated production costsfor each of the cracker products. In this way, the different costs of thevarious products were considered. These "standard" Costs were adjusted toaccord with forecasts of rising demand and apparently further adjustments maybe made. The respective transfer prices have been negotiated with the custornercompanies of the petrochemical complex and were finally decreed by Governmentas shown in Table 3.3.

- 142 -

Table 8.3

- The decreed transfer nrices of the crack.nZ tr oducts

Production Yearly Production Valueat high at decreed at correcedcred Pr4w 5y Vr1ty prices pirices

Product f/init $/MT I7r. Jillion $ 1 vr iG:l S";-r

Ethylene 3.9 ft/b 86 102i,00 8.8 7.9

Propylene 3.2 " 71 45,.700 3.2 3.2

But.di ene 8.0 176 13,900 2.5 2.5

Benzene~ 30.0 i/ga1 90 1 o6.700 4.2

Toluene 280A " 85 13;300 1.1 0.8

p-AV-lene ('90)1 (2 40) n

o-xylene (10 w) (27,300) (2.)

- ~a .. -a i .. n - t * , _

Cyclohexane 2u.u o 2 3n

Total 29p,h00 29.9 2Z.9

- 143 -

8.17 The transfer price of ethylene, which constitutes nearly one-thirdof the whiole production value, was set at 3.9/lb. This is rather low fora 100,00t) MT per year capacity and was reached only by assuming the highestyield possible by high severity cracking and recyclinz the ethane. Further--more one must not forget that the cost of the plant is not yet fixed butestimatecl and it m2v be higher. The sensitivitv of costs or transfer pricesto the plant size is high; the 3.90/lb correspond to 3.5Wlb at 150,000 MTper year or 2.tQIIh ato3 oo000 MT nper year rpspert-ivpl. Prnnvlene mTightjustify t:he high price shown because of the increased demand for acrylonit-rile an pnlvnyrnnylenp. Butadi[ene,b hnene and cyclnhpe2np transfer nricescorrespornd to the general level of world market prices and are not adjusted.Tnluiene, most of whith isz dealkylated intot bnene, shnould be valued nohigher than $60 per MT since it has to bear the 20% material loss involvedandl the roperation costs. Theraw xylenes mixture hs hen eluated at thegasoline price of $35 per MT. The estimated value of the separated p- and

o-xylee yiel is not conside_e in the ___he -------------

8.18 The difference beteen the yearly production value at decreed andat corrected prices, amounting to about 20%, impairs the position of thecracking center, but higher transfer prices would adversely affect theposition of the dowTnstream plants. When one is trying to be in a competitiveposition in end-proAUct-s, the sett. + ofU 4- tr-anfer pric - at inte....ediatestages of production may result in certain anomalies in cost-price relation-sh 1p 4 ntos stgs 1h _ 0. 1 _- l- . - . v A4 kA

L1 j0 ML* t jOC & LVO . IIIl;CQi U LICAj)OL.Li6

±1 LL .LO L V JIIs LCf.

8.19 A__1 fo -le synthetic do-wnstrew, plar,ts, -'nforma<tion on poutoL. I t1. orU LILL yiL.IL~ L.L~ UUW LL OLL L.L L .L L.LU. !A±L±JL VI jL PLUUULLJAVLL

costs was obtainable only for the Government-influenced plants of polyethylene,pouLypropylene, anrd polyviiiylchl'oriue, -WL ich co-ver -about 30/ of thLe w`hole

production value of the petrochemical complex; the private companies wereunwilling to give cost data. In order to obtain a generai. iUea of thesituation to be expected in a few years when the 100,000 MT per year (ethylene)cracker wili be tolerably utilized, the end product capacities and theexpansions planned in MCI's "Outline 1970" as listed in Table 8.1 were correc-ted by the polyester and a:Lcohol demand of 1970 (not listed, but actuallyexisting) and then evaluated at the production cost figures given in Table8.4; these cost estimates were prepared by the mission. According to thiscalculation, the whole production value of the synthetic end-products plantsmight be expected to be about $100 million (with a margin of error probaDlyin the order of 15%). This figure has to be compared to the value of thecracker products consumed, which is caiculated in Tabie 8.3 at decreed pricesand assuming full utilization of co-products, to be $29.9 million, but dueto a lack or balance in operations might go up to some $40 million.

8.20 In order to evaluate the production cost-value estimate of $100million, one should compute not only the cost of cracker plant inputs butalso the estimated investment costs of each of the synthetics plants; however,these were not available in detail. Consequently it is not possible, evenin rather crude terms, to calculate an overall rate of return on the wholecomplex, if any.

- 144 -

o.21 ForLth Uols' -aret M'CI has g'vnp,e rcs-hc areC). i JoL Lt'e 'cULLLest±c marLkL iM- LLId L CLLV~ FaLILCtU _PL±Leb W[LLUnar

listed in Table 8.4. Posted prices are reliable only for petroleum,fertilizers ana Dasic chemcials, but not ffor resiLn and fiber synthlletics.For the latter, sales prices under free-trade conditions are not published.Due to heavy competition they are generally negotiated at levels far belowdomest:ic prices. In a few cases where individual product prices were knownfrom importing firms they are listed in the tabie. The tabie shows that asufficient margin for profit exists only in the domestic market where themargirns are shown below:

Margin in Percent of the Market Price

Polyethylene 25%Polypropylene 31%Polyvinylchloride 18%Caprolactam 10%Acrylonitrile 20%

But the export prices shown are below the production costs shown in thetable. Hence, practically no export of petrochemicals as such will bepossible; the only feasible outlet is the domestic market. This conclusionis substantiated for other countries. One writer has stated:

"Exports are always regarded as a possible means forbuilding larger, more economic units in a given country.However, since this has seldom been a successful strat-egy, exports should not normally be counted on to justifyearlier construction of large plants. Even Mexico withits advanced petrochemical industry has not been able tomake significant strides in exporting chemical intermediateand end products." 1/

it is well to bear this admonition in mind in planning on future markets.

G. Balancing Supplies and Demand

8.22 The economic feasibility of the complex depends in part on achievinga balance between the supply of cracker products and the demand for them forihe production of resins and fibers. To arrive at some evaluation of thisoroblem two characteristic years were compared, namely, 1970 when the actual

I/ Alan Benton, "Selection of Projects and Production Processes forBasic and Intermediate Petrochemicals in Developing Countries," UNIDO,Petrochemical Industry Series Monograph No. 2 (New York, 1969), pg. 2.

T ab-le u 4v__0s~~~~~- . = ____ 4 1,

,..44. .4 -A- --6. A-A WM WIn- II"^~4

Opc:iti* Val+ e*,andions _ _.M CDste iillinic Dometic E-port

Resins

1. Polyethylene LD 50,000 larp enough low, allright 238 u.8 320s/2/

w - - - _ 38together with

3. Polypropylene 15,000 No. 10 larg low, cllright 282 4|.2 4la/ 450;enoup 2604J

h . Polyvinylohloride 60,000 lowr limit fteaible. 1601/ 9.6 196,=2 160or big plants dopnd on

elorinG

5. Polaterene 50,000 large low, elUright 258 13.0 --

38.6

Fibers

6. Caprclactan 33,000 lowest limit given by h450! ..15S 500!!-J I4t>-un-gj, ap-

pears low

7. Acrylonitrile 26,400 larg enough given by 350 9.2 440- 3io3/(largest Chungju.70,000t) allright

B. Polt,sster 26,000 ma11 bnt Loo 10.1 = 3a3/feasible

9. P0o3ninlsrtate 2 ol!t -bh +-o 320 0.73 17

10. N I a l,F;y I an a le,' together -W' L 282 h.2No. 3 largeenough

Others 40 5

11. Synthetic rutber 30,000 appropriate 310 9.1site

12. Plasticizers OOP 13,000 rather asall, 320 4.2no oo Deocesspoasible

13. Alkylbenzene 10,000 larRe enouah 160 1.6

1..9

InternediateDPFcontainet in 1-13

1b. Olycol undecided

15. Ithanol 75,000 l1e enough 80 6.0

16. Aoetaldehyde (25,000)

17. Aeet.ic acid

18. cta-nol + Ent ol (13B000)

19. o-Phtalic anhydride (8,1400)

20. Dtm,thylterephtalate

6.0

Grand Total 99.0

1/ Given by Chungju.

2/ Given by EPB.

31 Given by import companies in Brasil (cif)

- 146 -

figures show how far the starting plan of 100,000 MT per year is justified,and 1976. the last year of the TFYP; for whirh dpmannd fnrercats made by theEconomic Planning Board are available. From the figures of Table 8.5, the1ncrrasn nf the cdemand fnr resin plus fiber synthetics from 1969 to 1970amounts to 19%; that rate of growth in demand is projected to continue upto. 19 ?6.

R - I Tn T:qhlp R f; t-Ho rAonitiro ont-c fnrr rnrrrosWc v oo. ts

for the actual production of synthetics in 1970. Actual synthetic fiber andresin production of 1970 could have ut1lized about one-half of the 100,000MT per year cracker capacity (see the line labeled "Total Demand"). If all*m.nprt eare. Aadde in, o fa i 10000 Mm' .peryar capacity-. aparntly*1s cou.ld have-,.

been utilized. In 1976 according to Table 8.7 the requirements for nearlyall cracker products would exceed even the 150,0 M e year cacty (alow severity) by 30-100%. This seems to justify consideration of the1A50,00 MT per year capacity. Of course this calculation hinges completelyI JU , ivJt 1:11 U I.L . L ~.JA C L1.L~ L a U LCLAL I1Lt LUI±LL

on the demand forecasts for fibers and resins.

8.24 Nevertheless, the demand for cracker products which depends onthe sales of synthlletiC enU-producsL w±il LIUL beWd)'Z LJC bal U)lance WitLi Lhe

cracker products supply. It will probably be necessary to install sufficienttankI capaciLty for1 pricLLLadlly ech11 L)L LLlo th LCrackL pLUUucts, so LtLaL LILhy m,aybe held in storage during times when sales of end-products are lagging. Theinvestment cost of storage tanks O0 aboUUL $4 luiLLULL 1o1 aboUUL Lten Lanlkb U1

5,000 - 10,000 tons each is small compared to investment costs of thecomplex.

It does appear from Table 8.7 thlat the plan considerea by MCIto export caprolactam to Taiwan and to import in exchange dimethylterephtalateDMTI) is not justified by the requirement figures. Tnere is no excess or

cyclohexane for caprolactam, neither at present (see Table 8.6) nor in 1976(see Table 8.7). A further consideration of this proposed arrangement maybe warranted. If the separation of xylenes is undertaken, there could bea sufficient supply of o-xylene for DMT.

H. Summary

8.26 From all of the evidence that has been presented it appears thatit is worthwhile to get somewhat better balance in demand and supply in thecomplex. It should be advantageous to adjust the capacities of all down-stream plants at once to the 150,000 MT per year cracker capacity. But toexpand beyond that to meet the demand in the forecast for 1976 involves toomany risks and uncertainties of the future market development. It is costlyto overbuild capacity in anticipation of a demand that may not materialize.In any case, a second cracker is not justified.

Table 8.5

- Imort, Production and Demand of lm_thetics in KoreaUnit: Metric Tons psr year

Resin Xyni,hetica F lber -thet4c^

1969 1970 1976 l1969 1970 :1976

Polye trlene NaLon

Demand 29,30( 30,C0O 35,000 31,631 40,000 72,600Produaction - - 3'5,000 11,756 23,j81L ?1,960Impo:rt 29,300 30,000 19,875 16,186 6t40

Polythylene LD kAcrylic Fibler

Dwmand - - 60,000 20,034 24,900 4.3,900Productior - - 60,000 10,476 17,133 42,175Import - - - 9,558 7,767 1,725

PoJlywrla,b1eride fil ter

De aLd 314,900 4Q,500 60,000 19,037 26,000 123,700Prodactioa 3J4,400 40,000 60,000 6,609 1-4,642 11,,336Import 500 ';00 - 12,428 11,358 5,364

Po Lrene F1iny1ace tate

Dmand 4,98( 8,100 38 ,400 2,100 2,100 5,000Produmctioa - - 32,600 2,100 2,100 5,000Import 4,900 8,100 5,800

Po jXprlpy1ene Do ropylene

Demand 5,000 5,000 43,000 3,300 3,300 10,000Produactioi - - 30,000 3,300 3,300 10,000Import 5,00o 5,000 13,1000

Total Resin Synthetics Total Fiber nthetics

Demand 71,1,80 83,600 236,is00 77,102 96,300 255,200Prodchction 34i,4h0 4o, o00 217,600 34,241 6a,989 247,471IMport 39,700 43,600 18,800 42,861 35,311 7,729

1S69 1970. 1976

Total Resin + Fiber, _%nthetics

Demand 151,282 179,90C) 191,6,00Pr;cuctic. 68 ,681 100,989 I,65,071lmp o-t K 71,8.911 26,529

-148

Table 8.6

Ihqdurements of Craker Products for Petrchemical' Actual Production and Substitution of Imports in 1970(thit: btric ToSne per Tear)

Production Pro- 'cClo- Bu- P- °-Resins (Imports subst.) lthylene pylene Benzene hexane tadiene Zylene Trlh-

1. Polyethylene LD (30,000) (31,000) (_) ()

2. F , M

3. Polypropylene Resin (5,000) (-) (5,850) (-) (-) (-) C-) (-)

L. Polyvinylchloride (40,000) (19,200) (-) (-) C-) C-) (-)

5. Polysterene (8,100) (2.900) (-)000)

(83,100) (53,100) (5,800) (8,000) (-) (-) (-) (-)Fibers

23,814 - - - 31,600 _ _6. Ccprolactan (16,186) (-) C-) (-) (20,000) (-) (-) (-)

17.133 - 25.400 - - _7. Acrylonitrile (7,767) (-) (11,500) (-) (-) (-) (-) ()

1lh.6 1 2 3.8hO - - - - 9,00 -8. Polyester (11,358) (3;000) (-) (-) (-) (-) (7,600) (-)

v 1 .^. . 1 c,^,^,-_

9. Polyvinylacetate (-) (-) (-) (_) (_) (-) C ) (A

3,30 -_ 3,860 - _ _ _10. Polypropylene fiber (-) (-) (-) (-) () (-) ) _

60,989 5,340 29,260 - 31,600 _ 9,800(35,311) (3,000) (11,500) (-) (20,000) (-) (7,6oo) (-)

Others

fi7 ereN 7er l i ( i (180 (- (6o9^^) (- (-)

13,000 12,400 - - - - . ___

12. Plasticizers COP (-j (-j (- j (-j (-) j-) (-) j -

13. Alkylbenzene (2,800) (-) (3,640) 1,200 (_) (-) (.)

13.000 12.1,00 - _ _ _(10;300) (660) (1,s640) (3,000 () (6,900) (- ()

Intermediates((-))-contained in 1-13

1. OGlycol ((3al40lN ( f2s30 ).n (t-) (-) (=) t_

50,000 32,000 - - -S5. Ethano' A f - ) (- ) (

16. DimethyltOrephtalate ((,6w)) (-)

50,0vw 32,000 - - _ _ .

( ) (-) (-) (-) (-) (-_) (C-) (-

Total demand for the actual rod. 1970 123Q98 49?740 29,260 - 31,600 =3,60i

(For the sb-titutio of te iort) (128,711) (56,760) (20,94s0) 11, ) (200) (6,900) (7,60w) -

…g t - 4-,7o 4-,700 36,30 13,900 27,300 27,300

(low severity) 1(2*.400 65,500 32,000 36,300 18,000 27,300 27,300

-149 -

Table 8.7

vbrfCsat of the reanirment of cracker produoto in 1976fUhit: CAtric Tons per year)

Production Pro- 0yolo- Eu- p-Product Pbreoat Ej.ezsne pyleone Benzne hexane tadiene Yylene Iylene

Readns

1. Polyethylene LD 60,000 62,000 - - - - = -

2. , n HD 35.000 41, o0 - - - - -

3. Polypropylene 30,000 - 36,000 -

4. Polyvinylchloridu 60,000 29,000 - - - - -

5. Polystyrene 32,600 11,600 - 32,000 -

217,600 143,600 36,300 32,000 - _ _ _

F bera-

6. Caprolactmn 71,960 - - - 95,000

7. Acrylonitrile h2,175 - 62,500 - -

8. Polyester 118,336 31,000 - - - - 79,0D00

9. Polyvinylacetate 5,000 3,600 - - - - =

10. Polypropylene 10,000 - 11,700 - - -

247,471 34,600 74,200 - 95,000 - 79,000 -

Other

11. Synthetic rubber 29,900 2,500 - 7,700 - 23,600 -

12. Plasticizers 20,600 19,800 - - - - - -

13. Alkylbenzene 15,500 - 20,200 6,800 -

Intermediates 66,000 22,300 20,200 14,500 - 23,600 - -

(-)-contained in 1-13

1h. olycol (41,500)15,000 11,200 -

15. Ethanol 83,750 53 r 7 _

16. Acetaldehydet (33,100) - - -

17. Acetic acid (10,200) ..

18. Octanol + Butanol (14,700) - _ _ _ _ _ _

19. o-Phtalic anhydride 9,1 - - - - - 10,000

20. D.methylterephtalate (126,600) -

111,450 6 4,900 - - - - - 10.000

(222,500)

Grand Total 631,121 264,500 130,700 46,500 95,000 23,600 79,00(0 0,000o

Cracking center capacity (high ueverity) 154,000 69,000 70,000 65,000 21,000 L1,00J0 L1,000

It n I (low severity) 154,0oo 98,000 48,000 65,000 27,000 38,000 38,000

8.27 The general scales of the Dlants in the complex are small bycomparison with other plants in the industry and are likely to operate at acost disadvnntage. This implies that s9mp Government subsiiesii and protectionof the domestic industry will be required. The cracker products in questionare manufactured in t-hpr niintries in nnormous quaintities andi at a very low

cost. The present ethylene capacity of the United States is about 10 millionMT per year. it is nroduedr nnrt1u from refni ner, fffancic panrtlyv in crackers

up to 500,000 MT per year ethylene capacity and the products can be deliveredin overseas markets at very lo prices. The same is true of other crudeoil producing countries with petrochemical facilities.

8.28 In general the mission believes that the domestic market needsmL.ay JutLA the petrochne-4.,.-al bu..ple, but quite a nwmber. of diff4culti4 es

remain, ranging from the purchase of the naphtha, the utilization of thecrackling capacity, the balance of the crackA.er productsa, the -cale polof the downstream production, to the probable inability to enter exportr,La rk-etL'sT. Its true LC-tha h ynhtc reuired Afor the laborinesvmaL e L . J. L L i L. Lil L.LLLV D LLLAIC LL%- CL-jL.L L. A LLA~. La,.1 . .L.L

textile industry can be imported at prices as low as production costs, butthiIen tLi'Le textile 'indUustLry remains deper,det.t o, anLy unfavorable. dU4.LopUleof the world market. Both alternatives involve a risk. The Governnent'sexpandUed .plan of Tanuary 197.0 is a reasonab-le alte-r.atie but emphasisshould be placed on the need to adhere to presently designed standards ofperforimanice andU cost so L hat hLLLe forr,er -w.11 not deteriorate and the lallerwill not escalate.

- 151 -

Tv fVMI'? ?tAXTYTrA,PTTIr T 1LTf ImTTTW?l T C

LA, VL11.\ rI iuEtabJ UD.I'b .LJsrLU. LL' ssL]osr

A. Textiles

Present Status

9.1 By several mEeasures, the textile industry is at present Korea'smost 'mportant single industry. It employs lmost LwentLy-five perLc,Lt ofthe total labor in manufacturing industries, contributes more than fifteenpercent o1I total value added in manufacturing actlvities, anu earns UVe 35percent of Korea's foreign exchange income from merchandise exports. Theextent of growth of th'is.industry througn the decade of the o0u's may uegauged from figures relating to employment and output. Employment increasedfrom 81,600 persons in 1960 :to 186,300 persons in 1968; gross value of outputrose from about 28,000 won to 128,000 million won, and value added increasedfrom 5,250 million won to 46,070 million won. Table 9.1 gives the summaryfigures for the Census Years 1960, 1963, 1966, and 1968.

9.2 Korea does not grow cotton to any significant extent. Almost allits requirement is imported, principally trom the U. S. A. under PL-480arrangements. Wool too is imported, as Korea does not breed sheep on anysubstantial scale. Of the natural fibers, only silk is produced in thecountry on a fairly large scale. Output of silk cocoons rose from about5,000 tons in 1960 to 21,000 tons in 1969. Rayon production started in 1962,and there are now two factories, producing about 9,000 tons per year. Thefirst synthetic fibers plant of any significant size was established in1963; and since then the industry has made rapid progress. It now hasinstalled capacity for about 45,000 tons per year which is expected to growto over 70,000 by the end of 1971. But Korea's domestic output of syntheticfibers meets only a part of the needs of its textile fabric and knittingindustries; and the country imports a considerable quantity of syntheticfibers. In 1969 domestic production amounted to about 29,000 tons, and53,000 tons were imported. For 1970, domestic production was expected toreach 40,000 tons; but imports were expected to decline very little, as thefibers consuming industries had expanded.

Cotton Spinning and Weaving

9.3 The cotton spinning industry has a fairly long history in Korea.The first modern mill was established in 1917; and in 1965 the country had629,000 spindles. As table 9.2 shows, the number rose to 856,000 by 1969;and production of yard (cotton and blends) increased from 66,000 tons in1965 to 90,000 tons in 1969.

9.4 There are 14 integrated spinning and weaving mills in Korea. Nineof these have more than 50,000 spindles each, and are considered economicallyviable units for international competition. Representatives of the industrywho met the mission expressed the opinion that 30,000 spindles should beconsidered an economic unit in Korea, and that no major change in thestructure of the industry was necessary in the near future. Not all thecompanies are engaged directly in export trade. Smaller mills can probably

- 152 -

achieve competitive economics by concentrating on a limited range of products.The industry has moved from pure cotton spinning to blended fibers spinningin response to market demand. This trend is likely to be accentuated in thefuture, and will increase the need for modernization of equipment in somemills.

9.5 Wages of labor in the industry have risen substantially in thepast 5 years. Productivity has also improved to some extent, and theindustry has been able to maintain its competitive position. (Table 9.3)Representatives of the industry appeared quite conscious of the problemposed by the increase in cost of labor at a rate faster than that experiencedin competing countries, e.g. Hong Kong, Singapore and Taiwan. The develop-ment nlan of the industry for the years 1972-76 indicates some effort forfurther improvement of labor productivity. If these efforts to raise produc-tivitv are not successful the rise in waee costs could imDair the exDortposition of the industry vis-a-vis its competitors.

9.6 During the years 1965-67 Korean cotton yarn prices rose considerably.The rate of nriep inrr- ere w2S siqnifirantlv fatqer than that for the generalprice index. Cotton yarn prices have a direct effect on the economy ofthe derepntr1iz7Pd wpavi-n and knittinc indutqtrv- Exnort earnin2s werp alsothreatened, as substantial percentage of Korea's yarn output is exported. Inthe face of market resistance on the one hand, and government pressurefollowed by controls, the industry took corrective action, and prices werereduced through 119668 an,d 19609. Thne ind,Qtry ex-pects- ton ben ablea teo manint-ainits costs within competitive limits in the TFYP period.

Wool Spinning

9.7 Like cotton, wool is not produced in Korea on any substantialscale qL.e count rjy importJs wool 'for the bu.lb- of its rqie.. The

table below indicates the production of wool and worsted (wool and mixed)yarCL LR.1L RreVLa, d.dU LtLh iLmUpor.t o.f wool, durn the jU.d 5 yr

(UUTn.it: Q uantit t- u-ri rc tors

Value - $ 000.)

1965 1966 1967 1968 1969

A: Yarns - Total 5,595 6,929 9,661 9,803 9,919Woollen 3,444 3,946 4,480 4,606 3,582Worsted 2,151 2,980 5,181 5,197 6,337

B: Imports

Quantity 2,147 3,075 4,919 6,089 7,200 /1Value 4,348 6,451 11 ,142 14,350 17,400

Notes; /1 Estimate from 10 months data.

Source: Korean Worsted Spinners and Weavers Association.

- 153 -

9.8 The wool spinning industry consists of 17 establishments, of which10 are quite small, and on1y 7 are full flee factories. Th.e seven largestmills have 88 percent of the labor employed, and produce 94 percent of theoutput. 'Te bulk of output from spinning -41s goes to the woollen endworsted fabrics industry, which consists of 59 establishments, employingover 1.4,000 workers. 'h..is section of 4indutr1 too 4S domn.,.ated 1y larg

LJV~L S t,SJU~J W LNC O. LSO O LLJI U USLML ~ Lt O LAfLlLa~~ b. B.. a gscale plants which employ 80% of the labor and produce 87% of the output...le -table belowq indi3-cates th1e structure of$ the inAut-ry by e-.,, 'Ioyment andJ1.A L-au *C J .U W L . ,U,L.aC L**C I Ut, UL . L.I. .L UU'AUO U ~ L' /.L- * LU.- A

value of output. The future prospects of this industry are closely linkedtU L.1h LLIL.L.LU U L.uL.LL. U L ,L0e .,ynthetic fibers an' fabrics industry, isn her countrles. L.

is like:Ly that pressure of competition will lead to further consolidation ofth,e structure of th irdsty spcal ir the- sp,,n --- ection. -&ULLL L. U.L.UL. A.. "IC~ %LLUUOULY.', Z$=;La.L .LLL ULLI- -I.L~LLLL.LLL6 MM-.L.LULL.

,Un.L L . ILA-L.L.LULL b¶ULIIiJ

140.~ ~~~~~vL L1. r40 hA. UlWU^

LIo . of 'L No4. ofL Gross Va'lueEstablishments Workers % Output % Added %

Woollen and WorstedrFDLrcsi I I , L1 lUU 1l,4 404 IUU J]001 IUU

5-49 workers 14 469 2.6 248 1.71 156 2.750-200 " 30 2,977 16.6 1,635 11.28 601 10.2200+ " 15 14,483 80.8 12,601 86.99 5,124 87.1

Source: Census of Manufacturing Industries. 1968.

Synthetic Fibers and Textiles

9.9 The development of this part of the textile industries in Korea hasbeen cha:racterized by gradual backward integration. The country firstimported synthetic fibers and filaments, for spinning and weaving; thenit developed domestic capacity for production of fibers and filaments, forwhich resins and intermediates had to be imported. Now it is on the vergeof domestic production of the basic petrochemical intermediates and resinsfor its principal synthetic fibers, - i.e., nylon, polyester, acrylics andpolypropylene.

9.10 In 1965 Korea imported about 14,000 tons of synthetic fiber andyarns, artd produced about 1,700 tons domestically. The table below indicatesthe growth of imports and domestic production since then:

- 154 -

Synthetic Fibres in Korea

(Unit: Metric Tons)

1965 1966 1967 1968 1969

1. Import 13,700 21,400 32,400 55,400 53,0002. Domestic

capacity 1,740 6,450 11,400 21,450 44,6003. Domestic

production 1,660 1,987 8,182 18,500 28,6004. Total Supply 15,360 23,387 40,582 73,900 81,600

(1 + 3)

Source: Ministry of Finance.

The record of production during the first half of 1970 indicated thatoutput for the full year would exceed 40,000 tons. However, imports arelikely to be maintained at the previous year's level, as total demand isexpected to amount to more than 90,000 tons.

9.11 The industry is at present composed of 15 plants which are officiallyrecognized and a similar number of very small plants which have no officialstatus. Of the 15 recognized plants, 10 are major units, and five are small.Table 9.4 indicates their individual capacities and expansion plans in hand.By 1972 they will have a total capacity for production of about 72,500 tonsper year. Of the 15 umrecognized units, some have equipment only for process-ing yarn, e.g. crimping, stretching, etc., and some have equipment forextrusion/sninning also. As they have no official existence. they deDendupon unofficial sources for import of raw materials. The mission did not getdetailed information regarding their eauiDment and canital investment, butunderstood from the MCI that several of these plants would probably growand obtain offiri1l recognition during the TFYP.

9.12 Even thp largest of the ediqtina nlents in Korea are auite smallin comparison with synthetic plants in other countries. For a variety ofreasons, of which small size is one, they have not been ahle to partiripatein export markets directly. Only one plant manufacturing acrylic fiberappears to have succeeded in exportIng some quandiies, in cllabhoration.

with its Japanese technical partner. Recently in recognition of the problemsOfL small s1ze, t4Wo out of the thL e nylon fiber. coa4,nies l 40lir.ned hands

in order to strengthen their competitive position. Other small plants maynreed u foLUlosUW i I.. L. AMthle context oJf Lthe I4.j4-LA- -p s--.7t

it would be advantageous for both the industry and the country to consolidatephysical, financial and entreprerIeur'LauL capacL.ty-, anu aci.eve inte..a.lonalyviable size for some of the companies. Government policies may need to besuitably modified in order to Uiscourage thle emergence of new *economicplants, and to encourage consolidation of existing small plants into largerunits.

-1 55 -

9.13 Prices of synthetic fibers and filaments in the Korean domesticmarket are very considerably higher than the import prices of equivalentqualities. A typical case is that of nylon; the domestic product (70 denier)sells at about U. S. $1.20 per lb. while similar filament of Japanese originis imported for export-oriented firms at about $0.52 per lb. The widemargin is accounted for by many factors. The domestic product is expensiveto produce in a relatively small high cost plant; it is also subject toexcise taxes, and the industry has a high margin of profit. The importedproduct, being intended for an export industry, is not subject to taxes;and it is sold on the international market at a price substantially lower thanthe domestic price in the exporting country. These facts highlight thenature of problems that Korea's synthetic fiber industry will face when itexpands further to meet the requirements of the export sector. There willbe need for maximum attention to costs. The price structure will have totake account of the realities of the international market, so that a two--partprice system is almost certain to emerge in the industry.

Future Prospects

9.14 The MCI and EPB have made forecasts of demand in the home andexport markets for the period 1972-76 on a fairly liberal basis. For thedomestic market, it has been assumed that (i) per capita consumption oftextiles will grow from 4.6 Kg in 1969 to 7.6 Kg in 1976; and (ii) thatthe share of svnthetic textiles in total textiles consumption will increasefrom 27x% in 1969 to 45.5% in 1976, while the share of natural fibers willdecline frnm 61 to 4(%_. Tn order to esftlmate -the groewth of demand forindividual varieties of fibers, a set of equations has been developed, whichtake int-n arnitnt- t-heir cnpr'inl - ctitawhi1it-v fnr .cnprifir IIRo.C andl likelvprice ranges. With the help of these assumptions and equations, it hasbeen est-imated that domes-fti, demnnd for nll types of yarns will riste from150,000 tons in 1970 to about 225,000 tons in 1976; and that the share ofsynthetic yarns will grow from 47,700 tons in 1970 to 93,600 tons in 1976.The following table indicates the projected figures.

Domestic Demand Forecast

(Unit: Metric Tons)

1970 1976

Cotton 78,840 105,110Wool 6,900 10,580Silk 650 1,420

Subtotal 86,390 117,110Rayons 16,070 14,050Nylon 13,780 19,060Acrylic 14,920 27,860Polyester 14,940 38,090Other Chemical 4,050 8,600

Subtotal 47,690 93,610Total 150,150 224,770

- 156 -

9.15 For export markets it is much more difficult to forecast demand.The MCI and EPB have made very optimistic estimates, in the context ofKorea's experience in the past five years, and in anticipations of rapidgrowth of world trade in textiles. They are counting on Korea's advantagesin respect of labor cost, which are significant for knitted wear and garments,and hope that the country will be able to increase its share in world tradesignificantly. In value terms, it is estimated that Korea's export ofclothing will increase from about $200 million in 1969 to $700 million in,976; and in quantitative terms, this would imply growth of fibers demandfrom 32,000 tons to 145,000 tons, as indicated in the table below. Thegrowth rate of 28% 41S high compared to the growth of textile trade of about15% and implies that Korea expects to replace other producers in major exportmarkets in the coming years.

1969 1976

Nylon 15,440 40,400Acrylic 12,710 24,100Polyester 3,320 78,500Other Synthetics 900 2,000

Total 32,370 1452000

9.'i6 The two estimates, for domestic and export demand taken together,i,Lrly a t4otal de,Land of over 24;0, n tons of synthetic fiber in 1976, d

the EPB has provided for expansion of Korea's synthetic fibers industryto thi,s extent. It+ envi1sages productior. of 72,00 of ny'lon, -4L.2,000L J . LA. L1. V z.'n tonsL.f ac'Ylic f-Jber, 112,000 tons of polyester, and about 12-14,000 tons of

.__t ~1 _J % _ 4 A n. 1-7KPo ypr'py±.Len ani'AL o t L Le "L'Uers U)'Y 57 5J.

LLLt' JJdcLIL. i L. ieLU C L U D Lt A v t V

i,1; ie B=lks E-ono,uic Mission revie weU the& =e-.Fort projectionsL inL

some detail and concluded that actual performance may range somewhere between$400-600 -1LllJon by 1976, JnLL teau 01 $6900 WU..L±L0LI e5simraLted by the I/EPB.

In quantitative terms, this would mean an export demand for about 85,000-7.S vu tons, instead 01 tlf.UUU cons in ' As Lne eCLntre aevelopment

piarL is indicative in nature, and would rely on the individual investmentdecisions or entrepreneurs in tnis fieid or manuracture ror impiementation,tle differences between the two estimates need not cause too much controversyat present, This mission was giv2n to understand that the Government wouldlike to provide facilities and incentives to the extent of its plan estimates,.. nd even tar more, but actual investment deicisons have to be made at enter-prise level and Government does not contemplate any investment in this indus-t-r7y. It would be fair to assume that the industry would not expand too farbeyond effective demand. If it fails to expand to the full extent ofdemarnd, the shortfall would be made up by imports, as at present. But it isnecessary to reiterate that expansion as contemplated would be realisticonly if the Korean manufacturers can, in the process of expansion, reducecosts sufficiently to be able to compete internationally. The weaving andknitting industries would not be able to pay higher than international pricesfor the yarn and filament which would ultimately go to export markets, evenif they can Day more for a protected domestic market.

- 157 -

Knitting Industry

9.18 The knitting industry has made very rapid progress during thelast five years. In 1966 the industry employed 24.500 workers, and producedgoods worth 10,500 million won. Two years later it employed over 45,000workers cmd nroduced goods worth 16;000 million won. Forty-nine largeestablishments (over 200 employees) employed 46.8% of the total labor forcein the industryj and acroniintpd for 4S% of the valiup added; and 592 smallunits (uider 50 employees) employed 20.5% of the labor force and contributed241a nf trtal value added. There was thus no siganifirnnt ditfferpenrp in theper capita output in different size groups. This is not really surprising,in view of the nrature of operations involved, and the inherently 1nhnrintensive nature of the industry. Indeed, it is the high labor content oftotal value that has enabled this industry to grow so rapidly throughexports. The table below indicates the growth of exports of knitted goodsin 1965-fi9. Exports of knitted goods rose from $10.4 million in 1965 to$102.7 million in 1969. This rapid growth, supported by competitive manu-facture and agOressiye .marketIng, is one of the most conspicuous examplesof success in the Korean economy.

9.19 Up to 1965, cotton yarn constituted over 65% of the weight ofraw ma terials used4 by tLhe- =. knit.tlna. indu.st.Ur;, -- 12,70 tons out of 18,180.In subseq[uent years, there has been a rapid shift to synthetic yarns; ande *- * J .'J ;V LWUL 7 >L .LLL IID a V LA.I L ULA D U L ILLL1 9'Ji, UV LLS U L.I C L UU W V IU*

materials, 21,000 tons out of 53,000, while synthetic yarns had gained thebulk of the d .ifferen.ce. IaL terms ofL va'Lue ofL exports, the sLlare of synth&e-tic goods exceeded 75% of the total in 1969. Production facilities ink%nitting mr,v;l1s hILL_ Lave been Uevelope rapiduly Ln the past 5 years, - thefastest growth being in respect of flat knitting machines, followed bycircular andul warp 'lk%J1' tting machines , processing equipr,ment, anu stLtchingand finishing machinery. The industry does not appear to have any specialtechnical proble-s, and would be capable o' further expa-on`Vh ir. responseto market: demand.

D. rl±adstlcs

9.20 The plastics industry in Korea has made very rapid progress duringthe past 5 years. In 1965 the country had only a few small scale plants forthermo-setting plastics based on phenol and urea. It imported about 11,600tons of thermo-plastics, principally Polyethylene and Polyvinylchloride(PVC) for its domestic requirements. Five years later, in 1969, total con-sumption exceeded 80.000 tons, of which about 44,000 tons were domesticallyproduced and about 36,000 tons were imported. It is anticipated that by1976 the Korean demand for Dlastics will range between 125,000 and 175.000tons, to be supplied entirely by domestic producers.

- 158 -

Table 9.1

Structure of the Textiles Industries

1960 1963 1966 1968

1. No. of Establishments:

(a) All manufacturing 15,204 18,310 22,718 24,109

(b) Textiles (Code 23) 2,493 2,344 2,459 2,721

(c) (b) as % of (a) 16.4 12.8 10.8 11.3

II. No. of Workers

(a) All manufacturing 275,259 401,981 566s665 748,307

(b) Textiles (Code 23) 81,649 109o456 134,063 186,352

(c) (b) as % of (a) 29.6 27.2 23.6 24.9

III. Value Added, in million won:

(a) All manufacturing 21,865 61,533 1562174 3015445

(b) Textiles (Code 23) 5,251 10,667 23,917 46,o69

(c) (b) as % of (a) 24.0 17.3 15.3 15.3

IV. Export Index ila 1966 1968 1969

a) All manufacturing 100 100 100 100

b) Textiles* 39.9 46.7 51.7 48.7

*>/ Includes §ynthetic fibres and garments.

Source: Report on Mining and Manufactu±ing Census. 1968.(E.P.B. and K.D.B.)

- 159 -

Table 9.2

Installed Spindleage, Production and Use

DemandYear Spindles Production Domesticxpot

1965 629,000 66,ooo 50,700 15,300

1966 677,000 69,800 55,500 14,300

1967 727,000 79,000 63,400 15,600

1968 760,000 84,500 69,100 15,400

1969 856,ooo 90,000 68,400 21,600

Table 9.3

Productivity Measures

Per 1/ Per- 2/ImaC Worker- Spindle-

1965 8.76 1.65

1966 8.53 lz68

1967 8'35 1.73

1968 8.08 1.77

1969 7.71 1.77

Notes: 1/ Measured in No. of workers required to spin a bale of 20's

count yarn per 8-hour shift.

2/ Measured by production of 20's count per spindle per 8-hour

shift.

- 160 -

Table 9. 4

(Unit: Metric Tons)

Existinz-/ PlannedProduct Name of Company Capacity Exansion

(1969 end) 1971-72

Nylon Korea Nylon Co. 6,h00Hanil Nylon Co. 14,800Tong Yang Nylon Co. 5,800

Slb-Total- 17,000 1 7 ,000

Acrylic Hanil Synthetic Fioer Go. 9,75 +7,50WOriental Synthetic Fiber Co. 1,800 +7,800

Sub-Total 11,550 26,850

Polyester Daehan Synthetic Fiber Co. 3,600Samyang Co. 3,900 +7,350Sunkyong Synthetic Fiber Co. 2,100Taihan Industrial Co. 150Hankuk Polyester Co. 750 +5,250Chosun Textile Co. 150

Sub-Total 10,650 24,250

Polypropylene Koryo Synthetic Fiber Co. 1,500SamLLyang hlermical w. 1400Korea Vinylon Go.* 200Jeil SytILhetc rFber CO. 1,200 _____

Sub - Total 3,300 3,300 )

PUA fiber Korea Vinylon Co.* 2.100 2.100

A1l Fibers Total 44,600 72,500

Notes: * 1/ Based on 300 days output at daily full capacity in the year.

3ources: M Iu, EPB, and pUu .Lshe r data.

- 161 -

Polyvinylchloride (PVC)

9.21 PVC is the most important plastic material produced in Korea atpresent. The first plant was established in Korea in 1966, for the DaehanPlastic Co. In the next three years, four more plants were installed. TheofficiaLly rated total capacity of the industry is recorded as 44,200 tonsper year. However, discussions with representatives of the industry andthe PVC manufacturers association revealed that the actual capability offactories is much greal-er. The table below indicates the position of indivii-dual plants.

(Unit: Metric Tons)

Maximum MaximumName of I'lant Official Annual Possible Daily Possible Annual

Rated Capacity Output* Output**

1. Daehan 6.600 71 21,3002. Kong Young 6,000 47 14,1003. Hanguk 15.000 132 39,0004. Tong Yang 6,600 50 15,0005. Woonhoni 10;000 114 34,200

Total 447200 414 124.200

* 3 Shkifts** 300 days per year

The Daehan and Tong Yang factories are based on the calcium carbide-acetylene process. They have their own calcium carbide plants. The KongYoung plant was originaLlly designed for the same process, but it did notinstall aE calcium carbide plant of its own. Since 1968, it has been usingimported vinychloride monomer (VCM) for polymerization. The other two plants,Hanguk and Woophonj have been using imported VCM from their inception. Itis excpected that when domestic VCM becomes available from the Ulsan petro-chemicals complex, all PVC manufacturers may use it, reserving their calciumcarbide capacity for marginal or peak requirements. On the other hand, themanagement of Daehan Plastic Co. expressed the opinion that after writing offthe capital investment in the calcium carbide plant they would probably beable to afford to use their own carbide in competition with VCM from Ulsanfor several years to come. The following table indicates the production ofPVC in Korea in 1965-70.

- 162 -

(Unit: Metric Tons)

Year Production

1965 -1966 2111967 6,8071968 161 R21969 34,353197n 40n000 (estimated)

Source: PVC Association.

The current domestic price of PVC (November 1970) is about 120,000 Won perton (US$400). This includes a tax element of about 10%. Korea exportedsmall quantities of PVC in 1970 at prices around $200 per ton.

Polystyrene

9.22 The only plant for production of Polystrene in Korea was com-missioned in 1968 for the Miwon Co. It had a nominal capacity of 3,000 tonsper year, which has been expanded to about 8,300 tons. Actual productionamounted to 1,600 tons in 1968 and 3,400 tons in 1969; and in 1970, the first6 months output reported was about 3,000 tons. (MCI Monthly Review)

Other Plastics

9.23 While Korea does not yet produce other thermo-plastics, eg. poly-ethylene and polypropylene, it imports a considerable quantity of these fordomestic use. The table below indicates the import of plastics during thepast five years:

Import(MT)

Year Polyethylene Polypropylene Polystyrene PVC Total

1965 4,193 441 617 6,349 11,6001966 5,676 780 1,423 6,240 14.1191967 11,300 2,936 2,545 4,538 21,2191968 24,111 4,266 1,724 837 30,9381969 29,300 5,000 1,500 448 36,248

Source: Import Statistics

It will be noticed that total imports have been increasing farily rapidlyeach year in spite of the rapid growth in output of PVC and polystyrene inthe past three years. This is a measure of the rapid grawth of plasticusing end-product industries in Korea. It is estimated that in 1970 the

- 163 -

country used about 80,000 tons of thermo-plastic resins and about 10,000tons of thermo-setting plastics, as against a total consumption of lessthan 2,000 tons in 1965.

Future Prospects

9.24 It is planned that polyethlene production capacity for 50,000 tons,and polypropylene production capacity for 20,000 tons per year will beestablished by the Hanyang and Kooktai chemical companies respectively inthe near future. PVC capacity is already substantially in excess of re-quiremene*, and can be made effective to the extent of demand in domesticand export markets. Overall, the effective capacity for production ofthermo-pLastics in Korea by 1976 would probably be as indicated below:

PVC 45-60,000 tonsPoLystyrene 15-25,000 tonsPo:Lyethylene 35-50,000 tonsPoly-propylene 30-40,000 tons

Total 125-175,000 tons

The impl;Lcations of these developments for the petro-chemicals industry,in terms of requirements for basic materials and intermediates, have beentaken into account for determination of capacities for output of intermediates.

C. Plywood

Present Status

9.25 The first plywood plant in Korea was established over 50 yearsago; but up to 1957 the industry consisted of a few small plants cateringto a modest domestic market. The requirements of U.N. Forces in Koreaprovided the first strong incentive for expansion to the industry. Thenexports to the USA were developed. Between 1963 and 1965, the installedcapacity of the industry doubled, and it started on a course of furtherrapid expansion. In 1970 the plywood industry consisted of 10 major companies,each employing over 500 workers, and the largest with 5,000 workers. Theyhave a total rated capacity for production of about 3,670 million sq. ft.,and in 19,69 exported over 1,500 million sq. ft. for $80 million. The tablebelow indlicates the industry's performance since 1965.

- 164 -

(Unit: Qty - Million sq. ft.Value - 000 $ )

1965 1966 - 1967 1968 1969 1970 /1

No. of establishments 8 8 8 9 10 10

No. of workers - 9,551 - 15,753 - 17,740

Installed capacity:Quantity 850 1,220 1,500 2,520 /2 3,005 3,673

Actual production:Quantity 729 1,198 1,490 2,384 2,209 2,700

Exports: Quantity 575 931 1,131 1,762 1,537 2,250

Value 19,054 30,688 41,450 67,832 81,587 100,000

Source: Korea Plywood Industries Association.

Notes: 1/ Estimates for 1970 are based on figures for first six months.

/2 Quantity figures upto and including 1968 calculated on basisof standard 1/8" thickness. 1969 and 1970 figures are foractual panel surface.

9.26 It will be noticed that up to 1968 actual production approachedthe limit of rated capacity, and over 75% of production was exported. In1969 and 1970, however, rated capacity grew much faster than actual nroduc-tion, reflecting the emergence of a new phase of growth, in which actualDerformance is related more closely to market forces - both of demand forthe products, and of supply of raw materials. Domestic demand for plywoodgrpw from about 180 million so. ft. in 196S to over 5S0 million so. ft. in

1970 - at an average rate of about 70 million sq. ft. annually. Exportdemand, on the other handj grew from S57 million sno ft- in 196S to about2,250 million sq. ft. in 1970, or at a rate in excess of 31 percent per year.Tho TTCA and T:nan are the nrincinpl marleptc fnr Knrpnn nlwnnod Tn 1IQQ~^^^^ ~ -*r -*__-- - - ~-~- I-- ----- r- 7these two countries took about 99% of Korean exports of plywood (US$ 93%and Japan 6%) and in 1970 they have taken about 97% (US$ 80% and Japnn 17/).In 1970, Korean exporters established some new export outlets in Europe.

Future

9.27 Future prospects of the Korean plywood industry depend directlyon export markets; an.d t -h, e TTCA 4is ove-helm the mt imprtant ,m.on

these. The consumption of plywood in the USA may not grow at a rate fasterthiian 3% annually; butA it. h.as been aestimated th1-at th1is. w-1d resul i. n a grLIthof imports by about 7% annually. Korea supplied about 45% of US imports oflipn 4zhogar.y" pl ood i 1969--70, -an hopes to i-prove its m*arket

- 165 -

share. P'lywood consumption in Canada and Europe is also expanding fairlyrapidly. Korea is already straining to establish its products in thesemarkets.

9.28 The TFYP projections anticipate growth of plywood exports from alevel of $100 million in 1970 (estimated) to about $159 million in 1976.Assuming constant unit prices, this would imply export of about 3,300 millionsq. ft. of plywood in 1976. In that year Korea's domestic demand may be about1,000 million sq. ft.; and the industry may hope to have installed capacityfor about; 4,500 milliorn sq. ft. per year, to meet both home and exportrequirements. The implications of such growth, in terms of investment andplant andl machinery, should not present any maior Droblems. Existing fac-tories possess modern facilities for economic mass production. Skilled laborcould be trained for this relativelv modest further growthi and reauisitefinance, both domestic and foreign may perhaps be presumed to be forthcomingat the appronriate time- if there is reasnnable nrosnert of adequate returns.The quest-ions that needi consideration relate to raw materials, profitability,and foreign exchange earnings.

9 VQ Knrp- hAc nr-rtinllv …nn r…n…IatAn tJmhar for it- J nlvwnrl indivqt-v:its imports of logs for- plywood manufacture have grown from 510,000 cu. m.in 1965 t:o 2j.383,000 o u m. in 1969. The bulk of the supply (ahout 90%)came from the Philippines and Malaysia. Small quantities came from Indones-iaand Borneo -n Since 1Q96( the Philippines have restricte-f tOd e-nrt of 1los undera quota system. This is part of a policy to retain increasing value perimi t of expoi--rts~ wit-h-in t-he u , . VKoran hlas tn bhni hmlf-nrocssed Inog

instead of peeled logs, and will probably have to pay increasing prices forthe raw materIal, as the plywood Ind4sAtr develops i. the Philipnpres.Malaysia too has imposed restrictions on export of logs, partly to conservei-tsa. forest resources, and& allso to encourage AomCest.c manufacture of ploodand other wood products. Korea is, therefore, having to develop new sourcesof raw material itn BornLeo and Indonesia. It is also going further afielA i-*~~ ~~ LI UUIL> 41U .LLUUIL~ ±4* L. L~ ~LU UL6UL LLIcJ ~~ -.

its search, to Australia and New Zealand, Sarawak and New Guinea. It islikel- tha-t thle cost o'r i.mported timber will increase- to some extent, ir.the face of growing restrictions in established sources, and the risingdemand from, Korea a mad nary o-.her counLtrie.

9.30 Pi.Lr'ces ofI plywOodU hLave remair,ed re'lat,ve'Ly stable ln the pastseveral years. The Korean price index for plywood (average of many gradesan.d varietiJes) rose f'rom, its base ofe 100 ir, 196-5 to 1104.3 i n 1966; and thenat a slower rate to 108.6 in 1969. Unfortunately, the pattern of costs ofprLUUdLuctII ILas IoUL Deenl as stabUle, ndlU tleCrc LIa sCCII d aIcnIequenU ecLL'Lne

in profits. In 1966, operating profit and net profit as percentages of netsales, adnounted to 9.4 and 9.1% respectively, for the industry as a whole.In 1968 these had declined to 5.9 and 3.9 respectively. Comparable figuresfor 1969 were not available, but the mission was led to believe thiat thlerehad been a further decline.

- 166 -

9.31 As tne industry depenus on imports Zor its entire requirement ottimber and a large part of its requirements of chemicals and machinery,its net foreign exchange earnings are but a small part of its gross exportearnings. According to one estimate, the net foreign exchange earned bythe industry amounted to 28% of gross earnings in 1967, and this declined to20% in 1968. Comparable figures for later years were not readily available;but it was understood that there was a further decline in 1969 and 1970.While the mission did not have sufficient detailed data for a judgmentregarding the reliability of the calculations of net foreign exchangeearnings, the apparent downward trend is cause for concern. The Koreangovernment has a liberal policy of providing facilities and incentives forexport-oriented industries. The plywood industry has access to lairge amountsof credit at a concessional rate of 6% interest, compared with cormercialrates ranging from 18-36%. It also enjoys considerable tax concessions andprivileges for free import of requirements even beyond those directly cor-'nected with exports. The wastage allowances are widely recognized as asubstantial benefit. Hence further development of the plywood industrymay well be attractive for private investors, even in the face of relativelysmall net profitability, because of the high level of leverage enjoyed byprivate funds in this industry. But if the pursuit of higher targets ofproduction and exports are to be accompanied by declining net foreign exchlangeearnings, the whole effort would become self defeating to some ex--ent.

D. Cement

Recent History

9.32 The past decade has witnessed very rapid expansion of the cementindustry in Korea. In 1961 there were only 2 cement factories, with a totalcapacity of 560,000 tons per year. During the first five-year plan period(1962-66) four new factories were established, and total installed capacitywas raised to 2,220,000 tons. The table below indicates the development ofcapacity thereafter, by companies:

(Unit: 000 MT)

Year 1966 1967 1968 1969 1970

Name of Company

Tong Yang 360 950 950 950 950Korea 360 360 500 500 500Ssang Yong (2 Plants) 400 700 2- 4 00 2 400 2r400Hanil 400 500 500 1,000 1 000Hyun Dai 200 200 450 450 450Chung Buk 500 500 500 500 500SC-.g Shin - - - -

Total 2,220 3,210 5,340 5,800 6,800

(White Cement) 15 15 15 15 15

Source: Korea Cement Industrial Association and M. C. I.

- 167 -

9.33 Rapid as the development of the industry has been, it barelykept pace with the growth of domestic consumption up to 1969. In 1970domestic production was 5.7 million tons of which 5.0 million tons wereused domiestically and 500,000 tons were exported, much of it in a specialexport to Vietnam. Imports were high in 1967 but have since dwindled to anominal amount in 1969. As of 1970 the industry was Droducing at about 85%of capac:Lty. In the context of the targets for the Second Five Year Plan,and the actual growth of Droduction and consumption of cement during theyears 1965-69, the Government of Korea approved the expansion plans ofthree exiLstinr companies and one nPw olant. for a total canacitv of 4.5million t:ons per year. It is thus expected that by mid-1972, the totalcapacity of the industry will hp 11t. million tons per year=

Future Prosnpects

9A34 Tho RPR hc mnAlo r,m,i projeteons fror tho npriond 172-76, whichenvisage a need for over 15 million tons output in 1976; and it, therefore,eXnprtsn tthoqt i 17411 s tn ancti-4on further n n f the,a irn.,dctr ,'s

capacity for about 5 million tons. Of the total demand, exports are projectedat 1.1 miion tons by176. cver.et U0 Of sucha figure is critically

dependent: on special ccnditions that are discussed below.

IFYP Projections of Demand

% increase % increase % increaseover over over

Domestic previous Export previous Total previous_eruan__u year UmanLLU yearL UdILLLIU year

107A4 ~~~~ a,n C C rA0J,OVU 33 Jv 081 6,3,J .JJ

1971 6,800 18 700 27 7,500 181072 7,900 16 800 14 8,700 171973 9,300 17 900 13 10,200 16107A I0, 00AA I 90 10A 11 790 16

I I - I J,ouIJ I u I'./I I I .

1975 12,400 15 1,067 8 13,467 1410'976 1 4,000 13 1, -I27 6 7 12

I-' ~~~ I't,UvJLJ 1 I, ItI U IJ~ If-/I'

* Note: Estimate by EPB.

Source: Economic Planning Board.

The projected investment figures peak in 1971-72 and again in 1974-75 at12.5 to 13.0 billion won in each of these years. It is estimated that 55to 60% of investment needs must be in foreign exchange.

9.35 The growth of domestic consumption during the past five years hasindeed been dramatic. from less than 1.5 million tons in 1965 to over 4million tons in 1969. There are several important reasons for this, dominantamong themn being the Cnovernment'q construction nrogram. The EPB projectionfor the TFYP recognizes that there will be a slowing down of the rate of

- 168 -

growth of demand; and provides for deceleration from 17% to 129 in ;-he S-yearperiod. However, the base figure for 1970 is substantially higher thanthe mnqt r rent eqtimate- of onnsmnntion thuring this. year Tn oveWnibh•.- 1970,

the industry representatives complained of heavy build up of stocks atfnrtoriPs, transporth tnlnev and duction of cor.trt aWr-t4

Theq did not feel too lhopeful of achieving actual consumption beyond .5m.ill 1 on tone. ; end export orders, wThich the- hoped would meAt te tar,et.were not likely to 'e shipped out in entirety this year. The grorwsth ofdemand in 1g70 has be lcs than 2 ove rthe 1969 figure; atnd this h.s th obe taken into account for the TFYP period. It is also necessary to makiaprovision for the market consequences of the restrai nt expecte I.aexpenditures on construction projects during the TFYP. It is quite likelythat do-etirl dem,and for - 4l a substLantilly .a we-- ae

than has been forecast. A clearer estimate will be available somptime -n1971. when t1-e Ml4St4-~ A~~~4l , 1197i whe tl I.iist of Cor.struction wil" be able to ee3 c,;sLdata; a UNDP consultant is currently working with the Ministry on jhisques-L o L-L.

9.3 ItI q.e pro'jectiLons of exports -duri'rgI Lthe TILJY.P p'lan are high f3r a-7. .30 &Li jJU LJJa1L jU b U.LaLI J j±i L~IL L~I LJf j:.

heavy product like cement. Transport costs usually limit the geo,grtphiicalextent of markets in whichL e*UTorted ^2ement c-an co.mpete with ll .- ±S Uteb

There is one special condition that may make it possible for Korea to meea-the export tcaFrgetS= Iron ore (poss'blUy Australian) wLll be :.upULf.e supply the steel industry. Rather than have the ships return empty, theyMigLL L Ci 1y CemeCItL dL d traLispoLJ L tUb L X Lrebpres1ent Ulngion.y mUrginl cus ts

to the carrier. This would enable Korean cement to compete in miarketsat many porLs on Lhe retuIrn vo-yage. I' LLis type oL ariaUge!ueI1L IS floC

feasible for a substantial voltnne of shipments, it seems unlikely that theprojected export targets can he iraet

Recommendacions

9.31 As expansion plans are already in hand for raising the capacityof the industry to 11.3 ml.flion tons by mid-1972, and since this capacityis not likely to be used fully betore the end ot 1973 (according to TT-YPprojections), the country need not invest any further scarce foreignexchange resources for this industry until sometime in 1972. if demanddoes in fact grow as anticipated, then expansion beyond 11. 3 million tonscould be sanctioned in the latter part of 1972, and would be in commissionin 1974. On the other hands if capacity utilization remains unde:- 90% in1972, then further expansion could be deferred for sometime. 'Ihc countryhas good quality and cornvenIently located raw material for cement manufac-ture,.'and there does not appear to be any physical limitation to furtherexpansion. Cement companies might, for planning future exnansions, investi-gate specific sources of raw materials for expansion of output to 20 milliontons. Such investigations would allow good economic choices to be miadiewhen necessarv.

9.38 The domestic price of cement is 269 won per bag (about $21.75per ton). Export prices were quoted at $10-11 per ton FOB for cement and

- 169 -

$7.8 per. ton ruB for cIinker. Tnese are reasonably competitive international-ly. The industry has to bear fairly high cost of electric power or importedoil, and as most of the equipment is new, depreciation charges are verysubstantial.

- 170 -

y. MITNING NDUSTTTTRIES

10.1 The mining industries are a small part of the economy of Korea.TI,ey cotiuute vLeLr L.LY UVL I percent LoLf e G,.1L .d eLupL%Jy aouL. I Je -

cent of the labor force. The projected plans for the development of theseirn,'ustries dUuriLng the 'Tr'lP are moduest and' are rour',"ly)F aLt Lthe average levelof growth projected for the whole economy. In the input-output model twomiLning ind-ustries are idUerntiL d: ( e a) coal UUnirg, dau I(Ub all o,LhL,^r LL.L1i8I.Their outputs are projected to grow at 9.8 percent and 11.9 percentrespectLvely, or UabOut Llt avCLrt gLUwLI uo outpuUL InI agLgLre . CapiaL.formation in coal mining during the TFYP will be very low, increasing atonly 2 percent a year. It w'll be 10 percent a year 'ir other mining, -wherepossible development of minor metals seems promising. These industriesexport only a small percent oV output, and the unly change -foreseen is arather large growth in imports of the non-coal mining group. Unless,through more intensive geological1 surveys, new mlneral deposilLtS are Cdis-

covered, the mining industries will not play a very large role in the devel-opment of the country.

A. Coal

10.2 Tne output of coal mines in Korea increased from 5.3 million tonsin 1960 to 12.4 million tons In 1967. Thereafter, it declined to 10.3 mil-lion tons for 1968 as well as 1969. About 40% of production came from 8large mines owned by the Dai Han Coal Corporation, which belongs to theGovernment; and the rest from a large number of private mines. Only 5private mines are sizable; the rest, numbering about 175, are quite smalland primitive.

10.3 Unfortunately the quality of coal in Korea is not suitablefor use in the steel industry. It is a relatively low quality of anthracite.The bulk of coal produced is for home heating. Korea does not import anysubstantial quantities of coal. Domestic production meets domestic demand.The remaining demand of the country for fuel and energy is met by import ofoil, which is more economical for power generation and industry. The patternof consumption of coal during the past five years is indicated below:

Range of ConsumptionConsumers, Quality Percentage ofBy Category Million Tons Annual Consum pon

Households 6.3 - 9.2 70 - 82Power Generation 1.3 - 0.9 15 - 10Industry 0.6 - 1.0 5-- 8Railroads 0.05 - 0.4 0.4 - 3Govt. & Military 0.3 - 0.6 3 6

Total 9.2 -11.8 100

- 171 -

Cuoal co[Lsumption of ail categoriea except households Lhas been on ote declinesince 1967. Oil has progressively replaced coal in power generation railways9and indus try.

10.4 The total reserves of coal in Korea have been estimated at about1,500 million tons; but only about 157 million tons are deemed 'positive'.

About 240 million tons are estimated as 'possible,' and about i,1uO milliontons are 'further possible'. About 70 percent of the positive reserves aredeemed economically mineable; and 42% of the 'possible' and 28% of the'further possible' reserves may be found economically mineable. At thecurrent rate of extraction, the country has about 10 years reserves in hand;and considerable detailed exploration and proving must be undertaken for theres t.

10.5 Coal prices have been rising faster than the general price indexas well as the price index for power and other fuels. Coal prices rosefrom the base index of 100 for 1965 to 169.8 for 1969, while the generalprice index and power price index rose to 133.7 and 147 respectively. Itis generally recognized that the coal mining industry faces a sharply risingcost curve. This trend is likely to continue, in the context of the qualityand conditions of the coal reserves.

10.6 The demand for coal is expected to rise gradually, to about 16million tons by 1976. Almost all the growth is expected to arise fromhouseholds. The domestic mining industry will have to incur considerableexpenditure on detailed surveys and mine development in order to extendannual output. The government in 1969 imposed a 10% tax on Bunker C oil inorder to raise revenues which will be used to subsidize coal. It is ex-pected that a sum of 50 billion won will be made available during thedecade of the 70's, for mines development and coal transport subsidies.This is the cost that will have to be incurred for keeping about 50,000persons employed in coal mining, and average annual gross domestic outputworth about 40,000 million won at current prices, during the decade. Thisseems a rather large price to pay for sustaining an uneconomic use ofresources.

B. Iron Ore

10.7 Korea's iron ore deposits are located in the eastern region. In1968 there were 68 mines, located in 5 distinct areas, employing about 3,500workers, and producing about 0.7 million tons of ore. Four large minesaccounted for over 60% of the output; and the other 64 mines produced theremaining volume. The table below indicates the production and exportperformance of iron ore mines since 1965.

1965 '1966 1967 1968 1969

Output ('000 tons) 735 789 698 830 710

Exports ('000 tons3) 709 641 668 795 687

Source: MCI

- 172 -

It will be noticed that the bulk of iron ore output is exported. Only asmall quantity is used domestically for iron making. But this position isdue to change shortly. The Pohang Iron and Steel Company (POSCO) which isunder construction, will need about 1.4 million tons of iron ore from 1973;and a newf pig iron plant will need about 325,000 tons annually. The totaldomestic demand for pig iron in 1973 would thus be about 1.75 million tons.

10.8 The National Geological Survey estimated iron ore reserves TnKorea in 1966 to be about 112 million tons. Only about 18 million tons arelikely to have a grade above 40 percent iron, with tlhe balance containringbetween 25 and 40 percent iron. In general, Korean iron ore contains arelatively high proportion of silica, which makes it necessary to i-ttx -hisore with low silica ore for use in the blast furnace. Accordingly POSCOis planning to use only 0.3 million tons of domestic iron ore per annum a.idimport the remaining 1.1 million tons of its ore requirements. The ROKGovernment plans to induce new capital investment in iron ore mining coraise outnut to about 1.6 million tons by 1972/73, at least 1.0 million to,sof which would be exported. This appears to be a very ambitious target.Korea will undoubtedly be a net imnorter of iron ore for at leasg snomeyears after the commissioning of the Pohang mill. The POSCO management hasbegun to look for economic sources of imoorted iron ore in Australia. India,Chile and other iron ore producing countries.

C. Tungsten

10.9 Korea is considered the third ranking source of tungsten in theworld, after mainland China an-d the U.S.A. The history of tungsten miTningin Korea goes back to 1910. There are now about 20 operating mines; butone single m*ine at San Don-, belonging to the State-owned Korea TugstenMining Company, produces about 85% of the country's total output at present.This is believed t-o be the third largest mine in the world. Tun-ste. arereserves are widely distributed in Korea, and are estimated at about 30,000

tonsVVV3=,F /., of wiL&L nwro=whirds would be econ.om4cally mineable. Probablereserves may be three times as large.

10.10 Tungsten mines employ about 2,400 workers for an annual output of.less thilan 4,000 tolns. LL e taLbLle below indicates -th&e production, expurts

and export earnings of the tungsten mines since 1965.

173 -

U"A.LLt . Mi. I.-Its

Value: U.S.$'000.

Production Export ExportYear Quantity Quantity Value

19 65 3,837 4,106 6,760

196i6 3,704 3,760 9,536

1967 3,648 3,990 11,027

1968 3,769 3,619 11,115

19t69 3,470 3,630 11,890

NOTE: Excess of exports over production in any years is from stocks.

Source: MCI.

Exports are directed to Japan and Europe. The U.S.A. used to be the principalexport market for Korean tungsten in the 1950's, but now takes only a smallpart of the total export. Tungsten mining appears to have a reasonablybright future for many years to come, but its prosperity depends on worldforces completely beyond Korea's control. Mainly China's dominant position.in the field increases the uncertainty regarding prices.

10.11 Tungsten mining is a fairly capital intensive industry. Theore is deep mined, requiring heavy equipment and external material inputs.Only about 16% of the cost of production is on account of labor; about 67%is on account of materials and equipment. Hence, further development ofoutput should be undertaken somewhat cautiously.

D. Other Minerals

10.12 Apart from coal, iron ore and tungsten, Korea produces gold andsilver, copper, zinc and lead, graphite, flourite, kaoline, talc and someother minor minerals. The table below indicates the production of thevarious minerals from 1965 onwards.

- 174 -

Production Trends 1965-70

Concentra-Mineral tion Unit 1965 1966 1967 1968 1969 1970(1,

Gold 99.9% Kg 1,954 1,891 1.970 1.940 1-578 863Silver 99.9% Kg 13,499 15,530 18,287 19,814 28,182 19,104Copper 6% M.T. 22.184 21,073 15.561 19.044 22167 12,235Zinc 50% M.T. 14,232 23,286 27,299 38,679 41,163 22,975Lead 50% M.T. 8,849 13.890 17,607 31;390 32j953 14,090Graphite,amorpehns 75% M.T. 254,125 128,890 61,455 127-942 73,414 17,797

Graphitecrvstiline 75% M.T. 2,768 2,161 2,426 1-78R 920 49

Flourite 80% M.T. 39,167 32,008 56,968 46,604 39,173 20,791-aoline #34 M.T. 72,244 112,234 102,676 120-626 135,623 103,734Talc - M.T. 35,732 53,609 56,280 71,643 84,346 51,520

Source: MCI. Production Statistics.

The census data for 1968 indicate that the number of persons employed inmining all ores other than coal, iron and tungsten was ahout 33,300.

G.old and Silver

10.13 Citnut of gold in Korea has been dtelining since the early60's. It increased a little in 1967 and 1968, in response to price in-creasec- hitr icz dpelininca nacin. Thp rnimtrv has. verv limjted -rese othese two metals, and faces steadily increasing costs which make anysubstantial effnrt fnr intrwoasing output imneconomic. Production may in-crease, a little during the TFYP period, in keeping with Government

4-f4- - 1,vt- Vhn- a irnnv?TThri W.ngul A h'a ama l -1 na,-,.,.- t- , ~ ~ b--e buetheimprovementwouldbesmallir.percentag r ca

value terms.

Lead and Zinc

10.14 The output of these metal concentrates has grown from a verysma'll' base i-n thte ear.ly '6 9s 4n resor to Gove...uentL poA_lcy aL.d

incentives, to a sizable level. The bulk of production is exported,pr'Lncipa.lly to JapanU. 8S-UbStantial reserves are 'kn-own to exlist, ar,du steadyexpansion of output is envisaged. Lead and zinc ores have been refinedin korea sLnce 1966/67.

Copper

10.15 Tne production ofl copper conceltrate bhas rema-ned stagnant since1965. There are a number of small copper mines in the south of Korea andthe possibility of rinding aUiLtiLonal disseminated copper and molybdenumdeposits is regarded as good. Most of the copper concentrate is refinedat the Cnanghang Smelting Works, on the west coast.

- 175 -

Graphite

10.16 Graphite is ud.ned principally for export to Japan. In recentyears the industry has faced competition from artificial graphite and thefuture of this mineral in world markets is somewhat uncertain.

E. Minerals Exploration

10.17 The Office of the Geological Survey (OGS) is responsible forthe production of geological maps of Korea. About 70 percent of thecountry has been mapped at a scale of 1:250,000, while 46 percent hasbeen mapped at a scale of 1:50,000. Each year about six sheets of the1:50,000 scale map are published. OGS works on a very tight budget. Itconsiders about 20 percent of Korea to be mineralized and claims thatmore economically exploitable deposits could be discovered, if its drillingbudget were raised from about W 100 million to W 300 million per annum.

10.18 The findings of a report prepared by International MineralsEngineers on the mineral resources of Korea were generally disappointing.They should be discounted, however, as the experience of the geologicalteam whichi IME put in the field, was too limited for this task. OGS iscurrently seeking assistanc:e from experts from Britain, France and Germanyand it is believed that, with their help, ne-w economically exploitablereserves are likely to be discovered.

APPENDIX A I

List of Standard Statistical References

The following is a selected list of standard statistical andtextual reference works on the mining and manufacturing industries in Korea.They are readily available to the analyst who wants greater background detailsthan are supplied in the report.

1. 1963 Census of Manufacturers, (Three volumes) (a) "Summary and SubjectStatistics", (b) "Industry Statistics, Part 1, Major Groups 20-28"(c) "Industry Statistics Part 2, Major Groups 20-39 and 19", U.S.Department of Commerce.

2. The Korea Development Bank, Economic Planning Board, "Report onMining and Manufacturing Census", 1968.

3. The Bank of Korea, "Economic Statistics Yearbook", 1970.

4. The Bank of Korea, "Review of Korean Economy", 1969.

5. Korea Bureau of Custom, "Foreign Trade of Korea", 1969.

6. The Bank of Korea, "Price Statistics Summary", 1968.

7. Ministry of Commerce & Industry, "Commerce and Industry StatisticsMonthly Review", 1970.

8. The Korea Development Bank, "Monthly Economic Review, No. 173", 1970.

9. National Textile Council, "Statistics of Textile Industry", No. 3.

10. Ministry of Finance. "Items Restricted for Export/Import", Seoul, 1970.

11. Ministry of Finance, Tax System Bureau, "An Outline of Korean TaxSystem", 1970.

12. Mirnistry of Finance, "Domestic Wholesale Prices of Imported Commoditiesand Foreign Currency Prices", (Monthly), 1970.

13. Faculty members at Seoul National University. "Analysis of Korea'sImport Substitution Industries".

14. Korean Traders Association, "A Study of International Competitivenessof Knrean Export Tndustris"- 1969.

15. Korean Trade Research Center, "Measures to increase Net Foreign Ex-change Earnings from Exports", 1970.

.- el 6 onT. cnr%lT nTndV"n tYT5n1P1JC UTJLOi II r - .--- -

axni,jn. seaguI Jo lua DIo;JuTa8d ql pue sa1.1JsnpuI liodxa Jo uoT,ez-jvaQlOvd lnjoraS,, 'a;n;;suj lava-Vs,-, -udo,a,- ar -TlisnulIT vaiom 0

L'- L U L r r L 1. 74

- 7-

AOT)V1MTh%TV f

Lz±L s L to LrgLaLrL.iLULLo ardIU eLrrULL ctLLacLteU Uy LLIt i7"sLion

Note: All names are listed with the family name first and given namesLouJlowing.

1. Economic Planning Board:

Mr. Kim, Hak Yul, Deputy Prime Minister & Minister for Planning& Finance

Mr. Kim. Choo Nam. Assistant Minister - EPB

Mr. Hwang; Bvung Tai. Assistant Minister - EPB

Mr. Lee, 14e Tlj Dirertor- Bureau of Econnmir Planning

Mr. Chn Silnm Nak- rhipf- TT Tnveqtment Proc:rnm fl1visinn - EPB

Mr. Choi, Chang Nak, nirprtnrj RBureu nf ERnnomir Gooperation - EPB

Mr. Kim Mqhn JeT Gonsnuilt2nt (Sogang College, Seoul)

2. Ministry of Commerce & Industry:

Mr. Kim, Oo Kenn,, Vice Minister, MCI

Mr. 0, Wonchol, Assistant Minister, MCI

Mr. Mun, Byung Ha, Director, Second Industry Bureau, MCI

Mr. Paik, Sang Uk, Director, Light Industry Bureau, MCI

Mr. Bae, Sang Wook, Director, First Industry Bureau

Mr. Yoon, Suk Koo, Chief, Bureau of Mines

Mr. Moon, Doh Chung, Director, MASAN Free Trade Zone

3. u iiotry of Firnance.1 LLL.4.LOL.L)' IL E.L .L4I

M7Ir. LhILng, Dong "ooU, DiUrt.LL rL , LrLteLLCLa.Lona-L Lax dAffLa4irs UVL.Lsjon

Mr .... C l.. Yu, D aff' of Price m TariffLrir. 'u, Detck HnWau, UL.L.Lce of. rriLee cM iar'iLrS

-2-

4. Bank of Korea

Mr. Chuh, E.S., Director Research Department

Mr. Ahn, Sang Guk, Deputy Director, Research Department

Mr. Wooh, Jae Ku, Economist

Mr. Kim, Hak Su, Economist

Mr. Aim Seung Chul, Chief, Balance of Payments Division

Mr. Rah, Young Doo, Chief, International Finance Division

Mr. Lee, Han Sung, Chief, Industrial Statistics

5. Korea Development Bank

Mr. Shim, Won Taek, Director

Mr. Lee, Hong Yul, Manager, Technical Operations

Mr. Choi, Dongik, Chief, Economic Cooperation

Mr. Oh, Chung Whan, Chief, Shareholdings Administration

Mr. Lee, Byong Soon, Chief, Special Administration

Mr. Kim, Hak Kyoon, Chief, Economic Research

.Korea Developm t Finance Cor2orat…on

Mr. K4m, C.Y.., PresidentMr. errel r.L. îo

Mr. P-yn, Gong Soo, Manager, Planning & Researrh

Mlr. Ka IJ.1 "u Senior Economist

7. Medium Industry Bank

Mr. Chung, Oo Chang, President

Mr. Lee, Pau Young, Chief, Economics Section

8. Korea Investment Development Corporation

Mr. Shim, Sang Myun, Manager, Research Department

-3-

a vorea Institut-- of cr4.ce &. Technol

Dr. Chtoi, y.-ung Sup, Pres4ident

Dlr. HLauLI, SaLng 1JoonAj, V.Lce %reLsdL.U

m_ II LI,_ T_ - --- j -- ----

.Ur. K , nune Quanl, Chieaf, KShipmem. drng.an*rine Engg.*ir N.LLU , nul 1%,IU., uEI, aLI.LVUiU.LL.LLr, Of UUIL ±Ule F

Mr. NamI, Joon Woo

Mr. Kim, Jae Kwan

Mr. Lee, Bong Suh

10. Korea Productivity Center

Mr. Rhee, Eun Bok, President

Mr. Lee, Byung Wook, Mg. Dir.

11. Korea Ind. Dev. Research Institute

Dr. Paik, Young Hoon, Director

12. Korea Trade Promotion Corporation

Mr. Ahn, Kwang Ho, President

13. OffiLce of Forestry, Forest Products Utilization

Mr. Kang, Ki Bong, Chief

14. Federation of Korean Industries (FKI)

Mr. Kim, Ip Sam, Director General

15. Korea Machine Industries Promotion Association

Mr. Kim, Yeun Kyn, President

16. Spinning & Weavers Association of Korea

Mr. Kim, Yong Joo, President

Mr. Kim, Hyung Duk, Manager Director

Mr. Shin, Ha-Shik, Vice President:

Mr. Kimn, Kee Hwa, Vice President

- 4 -

17. Korea Chemical Fibers Association

Mr. Lvu, Heung Soo, Executive Director

18. Korea Plastics Association (PVC)

Mr. Jung. Yone Tak. Director

19. Korea Flur Mills Industrial Association

Mr. Choi, S. M., Chairman

20. City of Wulsan

Mr. Chae, Jehyun, Vice-Major

List of Companies Visited

21. Pohang Iron & Steel Co., Ltd.

Mr. Koh, Joon Shik, Executive Vice President

Dr. Yun, Tong Suk, Executive Adviser

Mr. Park, Jong Tae, General Superintendent

Mr. Kim, W. J., Manager Construction & Planning

22. Korea Shipbuilding & Engineering Corporation (KSEC)

Mr. Oh, Seh Yun, Director

Capt. Chong, Chu W., Manager

Mr. Lee, Sang Bong, Assistant Manager Equipment

23. Korea Heavy Machinery Industrial Co.

Mr. Kim, Yun Kyu, President

24. Hankook Machine Industrial Co.

Mr. Lee, Kyn Dong, Manager Director

Mr. Lee, K. C., Chief, P]g. & Mgt.

25. Hankook Machine Tool Co., Ltd.

Mr. Murahashi, N., Vice President

2.O. Dae DOLIg TindCUS;rLa.L, %IV.

rlr. NJirt S Clung Mmi, riag .I.LrCtor

27 DL"lIjinl Mwtor iCo.

Mr. Park, Hong Kyu, Director

28. nyundai notor Company

Mr. Kim, Dong Joo, Manager Director

29. Lee Chun Electric Manufacturing Co., Ltd.

Mr. Byung, Chan Chang, Chairman

30. Gold Star Co. Ltd.

Mr. Hong, Sung Eun, Senior Manager Director

Mr. Koo, Yoon Suh

31. Ssangyong Cement Co., Ltd.

Mr. Lee, Sungwqon, Controller

32. Gulf Oil Corporation/Korea Oil Corporation

Mr. Ward, J.V., Coordinator, Petrochemical Operations

Mr. Lee, Sun Jong, General Manager

33. Korea Fertilizer Co.

Dr. Mar, Director

Mr. Chung, Chan Kwan, Section Manager

34. Korea Nylon Co., Ltd.

Mr. Park, Chan Suk, Manager Director

Mr. Cho, Bong Shik, Executive Vice President

35. Hanil Synthetic Fiber Co., Ltd.

Mr. Ra, Gu Soung, Manager Director

36. Daehan Synthetic Fiber Co., Ltd.

Mr. 'Yoon, Tai Joon, Manager

- 6 -

37. Daehan Plastics Co./Kong-Young Chemical Ind., Co.

Mr. Choi, S. M. President

Mr. Kim, In Kwon, Vice President

Mr. Kim, Suk Bum, Chief & Management

38. Chase Manhattan Bank, Seoul

Mr. Barr, Albert, Manager

39. Peat. Marwick, Mitchell & Co.

Mr. Lee, C. K.. Manager

Foreign Missions

40. UNDP

Miss Nash, Deputy-Rep.

Mr. Carim, Tarik, Project Manager, Regional Physical Plan. Project

Mr. Lamoitier, Arnold, Team Leader

Mr. Martin, Jean-Claude, Industry Expert

Mr. Fayette, Jacques T., Economist

41. AID (U.S.)

Mr. Olmstead, Thomas, Assistant Director, Policy Planning

Mr. Sedjo Roger, Economist

Mr. Weigle, L.H., Industrial Adviser

42. U. S. Embassy

Mr. Heaney, William D., Second Secretary

TNDTUSTRTAT. PRO-TFrT5, TWEPAPRTMNT

June 1, 1971

APPDIXIr C

TABLE 0-1 -EMPLOY?E 4 2t2OUTT AND PRODUCTIVITY IN MANUF'ACTURINGO INDUSTRIES

9 9 M PL 0Y E E 3

V. Added _ V. AddedEsi. inpi. Output V, Added Output Emp Loyee PERCENT 01' TOTAL ___

(Eunber) (Number) (Thousands W) (Thousands W) (Percent) 30 24) Sp.OtptVTtAdded -

Sic I US TRY (1) (2) (3) ((4 (5) =j4/3 (6) - /'w... (7). - ..Al ._ 2__ 2__ _____ -_3___3_____ __ =_____

23 Textiles 2,(405 61,957 33,870,807 11,687,683 3(4.6 188.6 88.4 33.3 26.5 25.4

231 Spinning Mill Products 159 3,398 1,685,979 585 519 3(4.7 172.-3 71.3 7.2 3.5 3.5232 Weaving Mill Products 1,271 35,961 19,990,(463 6,261?,696 31.6 L7(4.3 92.8 46.3 38.~7 36.92 36 Knitting Mill Products 670 15,130 7,254,611 2,723,152 37.5 1 7 9.9 85.6 33.0 (45.6 38.2

2(4 Footwear and Wearing Apparel 3,528 3(4,186 20,7?02,135 8,510,834 (41.1 2(49.0 98.6 6(4.9 56.8 65.6

2(41 Footwear Except Reubber 382 3,603 1,830,032 933, 758 51.0 259.2 98.2 63.7 5(4-7 67.2263 Wearing Apparel 3,051 29,388 18,602,312 7,363,12(4 60.0 250.6 98.5 65.2 57.7 67.125 Wood and Cork Products 1,099 12,1.73 12,630,075 6,o61L,632 32.2 '334.2 98.6 38.8 31.8 33.6

2510C Sawmill Products 835 8,5(42 11207,356 3,6182,76 30.5 (400.7, 99.6 86.0 77.2 82.2

2520 Plywood end Veneers 25 765 3-85,665 15-5.065 60.2 202 .7 73.5 (4.9 1.6 2.1

26 Threi-ture ewd Fixtures 970 10,618 ..,801,213 2,202, 778 (45.9 307.5 99.4 90. 6 87.1 88.3

27 Paper- and Paper Products 589 9,315 5,1.57,1(4 1,90o0.531 3(4.8 :206.0 93.1 50.3 22.6 21.9

28 Printing and. Publishing 973 13,238 8_321,180 L4,12,3,7(8 69.6 311.5 95.6 50.8 U(.8 (43.929 Leathier and Leather Products 76 1,299 1,186,977 (451L,07 38.0 357.2 93.7 51.8 56.3 51.7

30 Rubber Prodt.cts 108 2,05(4 1,278,266 692.3l 39.2 239.7 80.0 7.9 6.3 7.531 Cheimicals ard Chest Products 572 12,135 11,3852,235~ 5,635,999 39.1 382.0 87.3 26.1 154.6 12.2

,312 Fert:.lizers 6 252 53,196 23,760 (4(.7 95.3 37.5 (4.0 0.2 0.2

3L70 SyntheLtic fibre 2 106 16b5,300 715,766 52.1 '716 .8 33.3 1.3 1.6 1.2

319 Other- Chemilcal. Products 203 3,639 3,6~53,890 1,183 ,200c 34.3 :323,.8 91 .0 38.4 78.9 28.0

32 Petro,leums and Coal Products 83(4 10,390 15,016,633 3,583,255 23.2 .335.7 98.0 69.2 26.9 20.1

33 Stone Clay and Glens Products 2,556 76,985 10,166,0)65 5,1535,679 50.7 L77.9 97.5 57.3 25.8 27.5

331 Structured Clay Prcducts 339 5,526 1,3668,051 773,553 56.5 iJ.o.o 96.3 60.3 (48.2 52.2

332 Glass 71 2,568 900,030 6064,770 65.9 157.5 8i.6 3(4.6 15.8 18.3

3.360 Cemenit 6 199 867,838 4661,599 53.9 2,3(9.7 28.5 2.9 4.6 (4.9

3(4 Basic Meta]l Industries 758 6,351 6,S558,79(4 1,883,158 28.7 296.5 86.8 22.0 15.8 16.2

3(41 Iron and Steel 153 6.220 (4,596,939 1,31?,06,6 28.7 312.6 80.9 16.9 13.0 13.1

3(42 Non-Ferrous Metals 105 2,131 1,961,855 56,4,112 28.7 :26(4.7 97.2 5(4.3 31.8 37.535 Metal. Products 1,166 1865 10,290,918 2,,33&,1II(62.1 735.-1 96.2 66.6 59.8 59.536 Ron-Electrical Machinery 1,065 16,398 8,829,893 (4,222,376 (4.8 257.5 97.1 67.8 6o.o 62.5

36io rnr Movers 83 1,622 3265,323 333, 709 39.1 738.7 95.6 59.8 57.2 55.6

32 Fanr. Machinery i6o 182778.665 353, 901 (45.1 19. 82 18(5.8 61,636530 Construction & Honing Machinery (46 702 5;72.266 309,709 53.1 .139.-8 57.8 75.8 62.8 6(4.7

3660G Metal WorkinLg Machiinery 123 2,147 1,093,070 525,232 68.1 24(4.6 58.4 87.0 92.0 93.1

36550 Text:.lc Machinery 176 3,0572 1,562,779 760,175 (,9 .9 :253.1 5~7.2 68.2 60.9 63.8

37 Electrical Machinery 3155 9,662 5,6,0,962 2,52 7,81-5 3(4.6 298.7 28.5 30.4 21.5 2(4.13710 Elec. M.ach. & Cud. Apparatus 97 !,,21 2 ,357.15( 77.7,2I1 35.5 378.7 96.2 27.8 22.1 27.1

3730 Communmicat.ion & Related Equipment 62 2,0085 1,622,995 597,225 2.2.0 286.o E80.5 23.5 16.3 20.7

38 Transportation Equipmient 852 16,259 7,`13,920 (4,171,251 52.7 256.6 595.2 U,.2 17.1 28.6

3311 Marinie E.ngicnes 189 2,503 1,330,767 62c,L86 57.3 751.5 59.5 88.g 79.0 89.33312 Steel. Ships 29 72(4 622,350 628,333 52.1 5191.6 82.9 15.6 27.1, 3(4.33331 Muter Vehicles 3 1 71,951 106,312 61.6 577.8 D 3-3 3.6 0.,7 i.6

APPENDIX C CZ

TABLE '--I. - EMTWLYMNT, OUTPUT AND PRODUCTIVITY IN MAN1IFAOTURI43G INDUSTRIESby size - 16

200 - 1 99 isM PLO0Y EE S

V. Added V. AddedEs t. Empl. output V. Added Th~tput E-plo y e e PERCENT OF TJOTAL(Number) (Bunber) (Thousanlds W4) (Thousands W) (Percent) (ODO W) Est. - Empil. Ou~P.tputV. Added

sic ]INDUSTRY 11i 1 24)..Ih ____fU..___ 14) l 4 /l (6 k1 (171 - 11/b) Jjff- 2 2/42 J19% = 13/2. (20) - 14/44k_23 Tetls12 2,2W 1,.3712,0,3l 38.2 187.2 6.o 12.7 9.096231 S,pinning Mill P'roducts 12. 2,102 1,879,4.07 505,5962 26.9 22.0.7 6.3 4..b 3.9 3.0232 Weaving Mill Pr-oducts 58 8,720 5,129,b36 1,885,879 36.8 216.3 42.. 11.2 9.9 10.5234 Knitting Mill P'roducts 62. 9,212 2,076,162 1,200,226 57.8 130.3 8.2 20.1 13.0 16.822. Footwear, and Wearing Apparel 21 3,131 2,232,613 760,913 3b.0 2b2.9 0.6 5.9 6.i 5.822.1 Footwear Except. Ribber 3 3912 235,39b 152,110 64.6 388.0 o.8 6.9 7.0 11.024.3 Wearing Apparel. 16 2,447? 1,903,526 562,251 29.6 229.8 0.5 5.b 6.o 5.125 W4ood andi Cork P'roducts 2. 588, 1,086,867 l8o,2.65 16.6 306.9 O.k 1.9, 2.7 1.5

2510 Sawmill Products .3 2.7b4 1,067,057 172,605 16.2 36b.2 O.k k.-7 7.b 4..22520 Plywood and Verieers -- - -26 FVrniture and F'ixtures 3 398 312,712 111, 772 35.7 280.8 0.3 3.2. 5.7 4..527 Plaper and Paper, Products 15 2,117 4.,151,988 1,218,197 29.3 575.b 2.9 11.2. 17.2 14.1l28 Printing and PLblishing 21 2,72.0 1,778,762. 780,068; 43.9 282.7? 2.1 10.5 9.6 8.329 Leather aLnd leather Products 3 b26 220,968 89,263 39.9 2 07. 0 3.8 17.0C 10.5 10.130 Ribber Plro-ductsi 1L 1,527 1,379,122. 565,823 4.1.0 370.5 8.2 5.9, 7.b 6.631 Chemicalsa and Chem. Products 32 2.,391 5,82.2,069 2,321,650 39.7 528.8 b.9 9.2. 7.2 6.1

312 Fertilicers 1 115 16,650 10),9500 65.5 96.8 6.3 1.8 0.1 0.13170 Synthethic fibr-e L 157 253,079 4b,515 17.6 2A3.5 16.7 2.0 2.5 0.7319 Otter Chaemical Products ~ 7 909 1,2.71,795 2.26,582 30.3 1i9l.3 3.1 9.6 12.3 10.532 Petroleum and Coal Prcducts 1L 1,59,9 3,556,792. 1,190,332 33.5 74L.h. 1.3 10.7 6.2. 6.833 Stone

0lay and Glass Products 26 3,655 1,4.58,377 12.0,256 50.8 210.9 1.0 7.3 3.7 3.9

331 StructUr-ed Clay, Products 56716 221,708 153,2.50 69.2 227.0 1.4. 7.2. 7.8 10.2.332 Glass 6 902. 532.,853 186,819 34.9 2C6.7 6.9 12.2 9.2. 8.4.

332.0 Ceewnt 1 177 - --7.1 2.6 - -32. Basic Metal Industries 13 1,859 3,138,372 975 ,002 31.1 522..5 k.4 6.5 7.6 8.2.32.1 [ron andi Steel 12 1,692. 2,920,32.6 82.3,897 28.7 2.98.2 6.2. 6.8 8.2. 8.4.32.2 Non-Ferrous Metals 1L 165 198,026 131,205 66.2 79L.6 0.9 4.2 3.2 8.735 M'etal Pr-oducts 31 2.,63 4.,2ok, 595 1,815,0)33 14.9 390.9 2.6 16.3 23.5 24..936 Ion-Electrical Machinery 2.1 2,973 1,918,22. 881,2.99 26.o 296.5 1.9 12.13131

3610 PrIme Movers ~ ~ ~ ~~~~ ~ ~~~~~~~.3 Leg9 275,981 12.,021 51.5 290).2 3.5 20.6 18.3 23.2.3620 Pane Machinery 2252 129,04.0 b5,175 35.0 179.3 1.2 8.5 7.6 7.93630 Construction & Mining Machinery *-- -364.0 Metal Working Machinery 2319 92.,195 38,52L. 21.2 121.7 i.6 12.9 7.9 6.83650) Textile Machinery 2 328 22.4,323 70,712 28.8 21h..i 1.1 7.3 9.5 5.837 Electrical Machinery 22 3,037 3,2.52,921 1,138,750 37.0 375.0 5.9 10.9 11.6 10.9

3710 E'lec. Mach. & Ind. APParatus 2 g26 211,200 58, 620 227.8 198.0 1.9 2.3 2.3 2.23730 Coemmunication & Related Equipment 6 771 950,54.2 233,225 22..5 3C2.5 7.8 8.7 10. 9 8.1

38 Transportation Equipment 21L 2,977 1,925,015 839,639 2.2.6 252.1 2.2. 8.1 2..2 5.63811 Marine Engines - -3812 Steel Shkips 3 2.13 213,379 79,200) 37.1 191.9 8.6 8.9 7.1 6.33831 llotor Vehiclees 272 159,985 66,223 2.1.2 22.3.5 22.2 5.3 0.7 1.0

APP,2410X C

T'ABLE C-:L - ENPLG0YSNTJ9OUTT AND P9POUCTIW.-TY lIN MANUFACTUJRINO INDUSTRIESysize -. 1968

2 00 4JLZ..M. P LMPL Y TEE S

V. Added V. AddedEast. F.-PI. Output V. Added Output Employee PERCISNT OF TOTAL(Number (4tsber) (Thousads W) ( Thousa-as Wi) (Percent) (000 W) Eat. Fispi. Out ut V. Adbded

sic INDUS TRY (!f _ __(2) (23) (24) (25)- 25/23 (26f_ 25/22 (27) 21A 4 21(?ft=-22/2 (?7-23/43 .3.2). - 24/14423 Textilest ~10&) 313557 -22.72F81i7 8,671,-781 ------- 3779.9 7 -83.9 16.9 17L.5IT -r231 Spinning Mill Products 26 8,611 9,753,802 3,890,989 35.9 455.9 11-7 18.2 20.0 23.1232 Weaving Mill Products 25 8,108 5,4,97,702 1,93h,882 35.2 238.6 2.8 lo.5 lo.6 io.8235 Knitting; Mill Pre,ducts 52 11,597 3,952,732 1,936,957 459.1 L67.0 5.5 25.3 25.8 27.121 Fsotwear sad Wearing Apparel 28 8,064 5,806,566 2,116,531 36.5 262.5 o. 8 15.3 15.9 16.3

251 Footwear Except Rubber 3 794 531,767 205,,975 38.6 358.2 0i.8 15.0 15.9 14.8253 Wearing Appearl 23 6,795 5,655,928 1,510,670 32.5 322.3 O.7 45.1 15.6 13.8

25 Wood and Cork Products 3 951 1,493,1916 558,332 3l. 7 5487.1 0.3 3.0 3.8 3.82512 Sawill Products I 306 775,578 136,952 17.7 557.5 0. 1 3.0 5.3 3.32520 Plywood and Veneers 2 635 718,718 321,390 55.7 :,,6.± . ,. (. 3.0 4.4

26 Fuarniture sad Fixtures 3 708 50o,693 178,530 55.6 352.2 0.3 6.0 7.3 7.127 Paper ard Paper Products 17 5,678 9.035,107 3,529,931 35.-8 733.2 ]'225.3 37.4 39.628 Printing and Publishing 16 5,907 3,593,933 2,247,782 65. -5 5,57.1 .618.9 19.5 23.929 Leather an Leather Products 2 783 698,581 753,616 3h. 9 311.1 25 31.2 33.2 27.930 Rubher Products 5 1,352 1,810,597 751,037 52.0 '5581 -,O5.2 9.7 11.331 Chscclca]n and Ct-e. Produots 36 11,525 20,298,060 8,376,789 52.3 733.3 5 5 25.6 25.0 22.0312 Fentili-ers I 85i 2,516,501 1,031,303 52.0 1,711.9 15. c 13.5 9.6 8.o

3170 Syothethic fibre 2 847 7,207,333 9-35,959 52.5 1,103.8 3 -3 10.5 21.6 15.3319 Otlnr Chemical Products 12 3,760 5,355,505 1,987,587 37. 1 528.6 5h 39.7 55.9 47.132 Petrole-asend Coal Products 5 1,538 5,952,908 1,2754,359 25.8 1386.2 0) 6 9.6 8.9 7.633 Stone Cla.y and Glans Products 27 8,876 12,908,079 5,008,222 38.8 565. 2 .117.6 32.9 26.8

331 Structur-ed Clay Products 7 2,237 855,528 381,006 U5.0 170.3 2502.5 30.5 25.7332 Glans a 2,502 1,832,151 735,520 50.1 293.6 91.2 33.8 32.3 33.33350 Ce,mnt 5 1,922 8,525,801 3,255,553 39.2 1,693.8 35. 7 28.6 55.2 35.835 Banjo Metal Industries 16 5,880 9,733,529 3,058,352 31.5 626.7 5.5L 16.9 23.5 26.4

341 Iron act Steel 16 5,880 9,733,529 3,058,340 31.5 626.7 8~.5 19.6 27.7 30.5352 Nsa-Ferrous Metals - - - - - - - - -35 Metal Products 12 3,528 1,972,532 859,352 43.1I 257.8 1. 0 12.0 11.5 fl.736 Nun-Electrical Machinery 8 2,532 2,161,390 875,Sfl 52.1 360.0 0.7 10.1 15.2 13.0

3610 Prime Mc,ers 1 589 275,980 152,025 51-5 ~ 290.4 1.2 19.5 25.5 20.83620 Pans Machinery - - - - - .. - -3630 C-sotruction & Mining Machinery 1 223 341,321 168,315 LI5.3 754.8 71.1 25.1 37.1 35.33650 Metal Working Machincay - - - - - - -. - -3650 Textile Machinery 3 0,10? 759,951 371,136 56.8 335.3 1.7 25.5 29.6 30.537 Electrical MadInery 154 5,195 5l,199,317 2,028,800 56. -3 3836 .5 25 .1 15L.2 19.4

3710 Elec Mach. & Lid. Apparatus . - - - - - - -3730 Cosauication & Related Eq,ipecnt 5 1,328 750,375 366,855 55.6 076.2 6.5 15.9 8.5 12.7

38 Tranpurtation 3quipeast 10 387 20163915,057 5.o98.9 ]. . . .3811 MarIne Engines 1 300 353,033 75,829 21.2 251.5 0.5 11.0 21.0 10.63812 Steel Ships 1 308 56,306 29,285 52.2 95.1 296.6 1.9 2.33831 Motor Vehicles - - - -

TABEE C-1i - DOWSflET,E O9flflT AND PHIODUCTTI`71T IN MAIIUYACIURING INIDUSTRIES

OV ER 5 00 EMKP LOYTE ES

V. Added V. AddedEst. Empl. Ou tput V. Added 61utput Employee PERESINT OF TOTAL(lbunk-) (Nojeber) (Thouands W) (Thousands QJ (P.eret; (ODD W) Lt ip.Otu

SIC INDUSTRY ~~~~~~~~~~~~~~~~~(31.) ___ (32) (133) (31.) (35)3 - 4/33 (3(38)U-4L.2L3223..(M LjyAC2311 Spinning Kill Products 21. 33,333 35.1.Th .31 11,665,031, 33.5 355.0, io.8 70.3 72.7 70.42312 Weaving Mill Products 1-5 24.,86t, :1,108,1.73 7.865,06.' 37.3 316.3 1.1 32.0 1.0.8 U.NA231L Knitting Mii Prdoduts 7 9,831 2,61.5,389 1,275,3153 1.8.2 129.6 0.9 21.5 16.6 :17 .921. Footwear and Weari-ng Apparel 9 7,2921 7,711,163 1,636,675; 21.2 224.1. 0.3 131.9 21.2 12 .6

21. Footwear lacept Rilker 1 665 750,956 98,35) 13.1 113.7 0.3 15.3 22.4. 7.0213' Wearing Apparl 8 6,~2E 6,960,207 1,538,352 22.1 239.3 0.3 114. 3 21.9 :34..025 Wood and Cork Products 9 17,671 71.951.7,989 7,382,5D5 30.1 4.17.8 o.8 56.3 61.7 6i1.i

2510 Sawmill Products 1 950l 1,L.66,268 1.31,331. 29.1. 507.5 0.1 8.1. 10.1 10.1.2520 Plywoo d and Veneers 7 11.353 72,931,,210 6,689,275 30.0 1.8D.0 20.6 91.1 95S.& 93.5

26 Furoitur and Fixturs ,--.- 27 Papr and Paper Products 1. 2,39t. 5.51,2,21.6 2,117,1.61. 39.2 88.4.5 o.a 12,. 9 22.9 24..128 Printing and Publishing 8 5,18) 1,868,023 2,216,581 1.6.1 1.2.8 i.B 19;.9 26.2 23.929 Leather and Loather Products - - - - - . - -10 Riber Products 12 21,020 IL,30.,663 L,776.5Hi 33.3 227.2 8.9 61L.0 76.7 '72.6.31 Chseicais -id Chee. Products 15 l0,5(0 .43,125,061 22,811,6L! 52.9 1,226.9 2.3 39 .9 53.2 59.8

312 F.ert 1l1inerm" 6 5,'121, 73,731 .293 i11.,goo, 65' 50.2 2,322.5 37.5 8o.8 90.2 !91.83170 Sy.th.ethic fibre 1 6,939, 7,606,126 5,.91,72.3 792.5 16.7 86.2 74.5 833.9

319 Other ChesJca Prodocts 1 1,163 1,61.6,759 603,21' 36.6 515.7 0.5 12.3 13.8 :14 .3~32 Potrsie1, and Coal Products, 1 1,5671 32,111,357 11,372,107 35.1. 7,257.2 0.1 10.5 57.7 65.633 Stcne Clay aid Gla- Products 10 9,023 11,732,797 7,802,1.63 53.0 86,.7? 0.1. 17.8 37.5 Iia.7

33-1 Strutured Clay Prod-cts 1 733' 380,971 17L,801. 1.5.q 236.5 0.3 81.0 13.L 1. a.3.32 Glass 2 1,1.0 2,1.13,61.0 88o,21is 36.5 6115.5 2.3 191.3 42.25 39.9

331.0 Cesent 1. ,4 1,12 0,161,826 5,61.,5,ts 59.7 1,275.2 28.6 65-.8 50.2 650.331, Baic Meta lnduotries I0 15,727 21,922,578 5;,648,8991 25.8 359. 2 3.1 51.6 53.018.

311 Iron sod Steel 8 I1,10:i 17,927,915 1,,811,167 27.0 31.3 4..2 56.7 50.9 1.8.131,2 Non-Ferros Metals 2 1,62L, 3,991,663 807,73 L 2o.2 4.97.4. 1.9 41.41 61.9 53.7

:35 Metal Products, 3 2,089, 988,262 271,,535 31.9 131.1 0.3 7. 3 5.2 3.8316 Rs-letloa ahin-y 3 2,379 1,866,512 7 76,1. 76 1.6 3265.1 0.3 90.8 12.7 11.5

36:.0 Primer KoMes - - - ..- - -. - -362 Far MachiLnery 1 876, 791,957 173,21' 21.9 197.7 0.6 29.7 4.6.6 30.1.3630o Co...troction & Mining Machinery I - -- 361.0 Metal Working MachInery -365c Textile Mach,inery - -

37 Electrical Machine,7 10 12,080 15,611,196 1.,771%,131. 30.6 395.3 2.5 1.3.5 52.6 145.63710 Elec. Mach. & Ind. Apparatis 1,,687~ 6,980,956 *1,906.321, 27.2 1.01.6 3.9 67.19 75.6 70.7737310 CommuLnication & Re:lated Equipmet . 1, 7171 5,606,51.8 1,692,85-7 30.2 3583.9 5.2 53.0c 61.3 5;8.6

318 Traneportatisn Equlp-mt .2 13j,330 31,198,355 i!,685,011. 25.1. 605.1 1.3 39.-0 71.2 59.1.3811 Marine Engines - - - ..- - -381.2 Steel Ships 2 3, 2 0 1,905,756 712,336 37.4. 222.2 5.7 681.9 63.6 5.3831 Motor Vehiles. 1. L,611 2,370,572 6 ,1. 3 5,096 28.8 1,38.6 14.1. 91.1 98.5 97.1.

A,P?ENDDL C

TAEIIE C-i -EMP]OYMENTL OUTPUTr AND PR3DUCTIvITY IN MANIUACTURING INDUSTRIES

by size - 1968

I ND U S TRY TO0T AL

V. Added V. AddedEst>. BEnpl. Dutput V. Added ut-p-uit Employee(Number) (Number) (rhousanis W2) (Thousands W) (Percent) (OO00 12)

sic I TR _____l (12) 143) _________(h5) - 44/1, (16) - 141/1223 TextiLles T,721 19,36 ]273 =37j L609.W 3T 2147.2

231 Spinn'ing Mill Produxcts 223 O ,1JR 18,793,619 16,817,506 31.5 :155.1232 Weaving Mill Products 1,369 77,653 51,726,091 17,955,525 31.7 231.2234 Knitting Mill Products 783 15,777 15,918,891 7,135,773 14.8 1L55.9

24 Footwiear andt Wearinig Apparel 3,586 526,671 36,152,987 13,021,553 35.7 217.3211 Footwtear Except RubDber 389 5,6 51 3,318,119 1,389,365 11.5 245.7213 WeariLng Apparel 3,098 b5,058 31,901,973 10,971,397 3h.0 213.625 Wood and Coirk Produacts 1,115 31,373 39,758,127 12,088,935 30.1, 385.3

2510 SwilPout8.010,172 11,515,159 1,3159,130 28.7 1408.92520 PlyTwood and Veneer:; 31 15,753 21,033,382 7,365,710 30.6 1467.6

26 PurnLture and Fixtuires 976 11,724 5,511,618 2,bg2,0.80 15.2 :212.627 Papeir and Paper Products 525 18,531 21,186,188 8,666,123 35.8 468.328 PrintLing andl Publishing 1,018a 26,075 18,561,900 9,398,186 50.6 .360.1b29 Leathier and Leather Products 79 2,508 2,106,526 872,803 -1.4 .318.0o30 Rubbear Produicts 135 25,953 18,716,518 6,575,781 35.1 253.1431 Chemicals and Chem, Products 655 16,511 81,117,121 38,116,279 47.0 820.1312 FertiLli zers 16 6,3i42 26,317,510 12,966,622 19.3 2,0111,.6

3170 Synthiethic f~ibre 6 8,049 10,211,838 6,551,339 64.2 8114.3319 Other- Chemical Prtoducts 223 9,171 11,921,918 1,219,186 35.1 .445.532 Petroleum anid Coal Products 851 11,991 55,625,692 17,325,C33 31.2 1,155.533 Stone Clay aind Glass Products 2,519 50,5659 39,265,318 18,7o6,605 17.6 369.9331 Structured Clay Products 352 9,172 2,836,261 1,1,82,822 52.3 161.6332 Glass 87 7,301, 5,680,671 2,205,621, 38.8 297.9

33110 Cemenit 14 6,725 18,8L5,165 9,368,601l 19.7 1,393.131 Basic Metal Industiries 297 28,817 1,1,353,173 11,565,298 28.0 101.3

311 Iron and Steel 189 21i,897 35,198,629 10,062,L50 28.6 .601. 2312 Non-]Ferrous Metals 108 3,920 6,151,511 1,502,918 21.1 383.1

35 Metal. Products 1,212 28,575 17,196,207 7, 269,0C20 12.3 188.136 Non-l-lectrical Madtiinery 1,097 21,182 14,696,07 6,755,760 16.0 279.1

3610 Prime Movers 87 2,375 1,512,102 6o6,8;37 10.1 :255.53620 Farns Machinery 163 2,950 1,699,162 569,293 33.5 :L93.03630 Cons truct.i on & Mining Machinery 17 925 919,387 177,021 51.9 .515.7:3610 Metal Workioig Machinery 125 2,666 1,187,265 561,0)56 17.5 228.73650 TextiLle Machiinery 181 1,517 2,567,053 1,221,623 17.6 :270.537 Electircal M'achinery 101 27,771 29,675,106 10,172,799 35.3 377.1

-3710 Elec. Mach. & Ind. Apparatus 703 6,931, 9,239,130 2,682,`;55 29.0 388.5:1730 Commnunication & ReLated Equipment 77 8,933, 8,720,109 2,890,162 33.1 329.638 Transportati.on EquiLpment 895 36,753 3,6,1l8,656 ih, 61.' , i6i 31.7 397.6

31811 Marinie Enginies 190 2,813 1,683,800 701,,715 11.8 250.1:1812 Stee-l Ships 35 3,651 2,997,791 1,219,153 11.7 268.6:131 Motor Vehicles 9 5,097 22,652,518 6,607,631 29.7 1,296.1

Documents

REPUBLIC OF KOREA - World Bank · A key fture Vf the Plan is the target for exports which is set at $3.5 billion for 1976 (in 1969 prices). *Thle maLnufacturing sector 'Ls expected