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COUNTRY PROFILE 2000

South Korea

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EIU Country Profile 2000 © The Economist Intelligence Unit Limited 2000

Comparative economic indicators, 1999

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© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000

Contents

South Korea

4 Basic data

5 Political background5 Historical background6 Constitution and institutions8 Political forces

11 International relations and defence

15 Resources and infrastructure15 Population16 Education16 Health17 Natural resources and the environment18 Transport and communications19 Energy provision

21 The economy21 Economic structure23 Economic policy27 Economic performance29 Regional trends

30 Economic sectors30 Agriculture, forestry and fishing31 Mining and semi-processing31 Manufacturing33 Construction34 Financial services36 Other services

37 The external sector37 Trade in goods39 Invisibles and the current account40 Capital flows and foreign debt41 Foreign reserves and the exchange rate

43 Appendices43 Sources of information44 Reference tables44 Population and labour44 Road transport indicators45 Rail transport indicators45 Marine freight

June 30th 2000

2


45 Civil aviation45 Telecommunications46 Primary energy consumption46 Electricity47 Energy statistics47 Gross domestic product by sector48 Gross domestic product48 Gross domestic product by expenditure49 Central government finances49 Money supply49 Construction statistics50 Price indices50 Average monthly earnings and productivity50 Agriculture51 Principal manufactured items51 Industrial production indices51 Interest rates52 Stockmarket indicators52 Tourism52 Main merchandise exports by value53 Main merchandise imports by value53 Trade volume indices53 Main trading partners54 Direction and composition of trade, 199855 Balance of payments, IMF estimates56 Balance of payments, national estimates57 Foreign investment approvals by country of origin57 External debt, World Bank estimates58 Foreign reserves58 Exchange rates

North Korea

59 Basic data

60 Political background60 Historical background62 Constitution and institutions62 Political forces63 International relations and defence

64 Resources and infrastructure64 Population65 Education and health67 Transport and communications68 Energy provision

3


69 The economy69 Economic structure71 Economic policy72 Economic performance

73 Economic sectors73 Agriculture, forestry and fishing74 Mining and semi-processing74 Manufacturing75 Construction75 Financial services76 Other services

77 The external sector77 Trade in goods77 Invisibles and the current account78 Capital flows and foreign debt79 Foreign reserves and the exchange rate

80 Appendices80 Sources of information81 Reference tables81 Defence spending81 Population81 Population trends82 Budget82 Estimated gross domestic product82 Gross domestic product by sector83 Minerals production83 Estimated production of main industrial minerals83 Merchandise trade84 External debt by maturity and source84 Exchange rates

4 South Korea


South Korea

Basic data

99,408 sq km

46.9m (1999)

Population in ’000 (1998, latest data)

Seoul (capital) 10,389Pusan 3,865Taegu 2,502Inchon 2,461Kwangju 1,326Taejon 1,323

Continental, with extremes of temperature

Hottest month, August, 22-31°C (average daily minimum and maximum);coldest month, January, minus 9-0°C; driest month, February, 20 mm averagerainfall; wettest month, July, 376 mm average rainfall

Korean

Metric system. Some local measures are:

1 chungbo=0.992 ha1 suk=100 dai=180.39 litres1 kwan=1,000 don=3.75 kg

Won (W). Average exchange rates in 1999: W1,188.8:US$1. Exchange rate onJune 30th 2000: W1,114.8:US$1; W1,692.8:£1

9 hours ahead of GMT

January 1st-3rd; March 1st, 10th; April 5th; May 5th; June 6th; July 17th;August 15th; October 1st, 3rd, 9th; December 25th; Buddha’s birthday (May);Chusok (Thanksgiving, September)

Land area

Population

Main towns

Climate

Weather in Seoul (altitude87 metres)

Language

Measures

Currency

Time

Public holidays

South Korea 5


Political background

South Korea is a constitutional democracy. The president is the head of stateand serves a five-year term by direct election. The president is also the chiefexecutive of the government and commander-in-chief of the armed forces. TheState Council, or cabinet, which includes the president and the prime minister,is responsible for formulating government policy. The prime minister isappointed by the president. The National Assembly, or parliament, has onechamber and is directly elected every four years.

Reflecting the past influence of the armed forces on South Korea’s political life,the constitution stipulates that the armed forces maintain “political neutrality”.The last presidential election was won in December 1997 by Kim Dae-jung, theleader of the left-leaning National Congress for New Politics (NCNP). Therenamed NCNP, the Millennium Democratic Party (MDP) is currently knownas the ruling party, although it does not command a majority in the NationalAssembly. Although the smaller, right-leaning United Liberal Democrats (ULD)left the government in January 2000, some ULD cabinet ministers remain intheir posts.

Historical background

An ancient civilisation, which had enjoyed many centuries of unity andpolitical independence, Korea was unable to preserve that independence in theera of colonialism, coming, in effect, under Japanese rule in 1905 and formallyin 1910. Japan’s colonial rule was harsh and culminated, in the decade to 1945,in an attempt by Japan to wipe out Korean identity by imposing Japanesereligion, language and names under the slogan Nissen Ittai (Japan and Korea asOne). The bitter memories of this colonial period continue to provoke hostilitytowards Japan among many South Koreans today.

At the end of the second world war a US proposal to use the 38th parallel as atemporary dividing line for accepting the surrender of Japanese forces in Koreawas accepted by the Soviet Union. In the event, this division hardened intotwo separate states. In 1948 the Republic of Korea (South Korea) wasproclaimed, and this was quickly followed by the formation of the DemocraticPeople’s Republic of Korea (North Korea) as a communist state on the Stalinistmodel. Both republics claimed sovereignty over the whole of the Koreanpeninsula, each claiming to be the sole legitimate national government.

In July 1950 North Korea, under Kim Il-sung, invaded South Korea with thebacking of the Soviet Union. North Korea had occupied virtually all SouthKorea when UN forces led by the US counterattacked. The UN then overranalmost all North Korea, which was in turn rescued by Chinese intervention.Stalemate resulted. The present border between North and South Korea, thedemilitarised zone (DMZ), is the line along which fighting stopped in 1953,and is not far removed from the 1950 line.

A constitutional democracy

Japan’s colonial rule

A divided peninsula

6 South Korea


For most of its history since the second world war, South Korea has been ruledby a succession of authoritarian regimes, civilian in the case of Syngman Rhee(who was president in 1948-60), and military in the cases of Park Chung-hee(1961-79) and Chun Doo-hwan (1980-88). Roh Tae-woo (1989-93) was themilitary nominee of his predecessor, but he was elected president in 1988 in arelatively fair and free election. South Korea passed a milestone in its politicalhistory when Roh Tae-woo handed over power in 1993 to an elected civiliansuccessor, Kim Young-sam, following an election in December 1992, which wasagain relatively clean.

A further milestone in South Korea’s democratic development came with theelection of Kim Dae-jung to the presidency in December 1997, in one of themost peaceful, most open and least expensive contests in South Korea’s history.Furthermore, Mr Kim’s inauguration in February 1998 marked the first transferof power by an elected president to a successful opposition candidate since thecountry’s founding. This peaceful transfer of power to Mr Kim also confirmedthe declining political influence of the military, which had long tended to viewopposition to the government as disloyalty to the regime.

Constitution and institutions

The present constitution was agreed between the government and oppositionparties in September 1987 and approved by the National Assembly (parliament)and by referendum in October of that year. The new document replaced ChunDoo-hwan’s 1980 constitution (which stipulated indirect presidential electionsand allowed the president a seven-year term) and provided for the president tobe directly elected in a first-past-the-post system to serve a single five-year term.The new constitution was the first of its kind in South Korea to be revised andadopted by both the ruling and the opposition parties.

As under the 1980 constitution, there is a single legislative chamber, theNational Assembly, the elected members of which serve a four-year term. Thusa presidential election can be as close as three months away from a legislativeelection once in a 20-year cycle, but it can also be as far away as 21 months.The system, therefore, makes it fairly likely that the presidency will be underdifferent political control from the legislature—so-called yoso yadae, or smallruling party and large opposition party. The National Assembly must have atleast 200 members and currently has 273. Of these, 227 are directly elected ona first-past-the-post system, the remaining 46 seats being distributed betweenparties in proportion to their share of the national vote.

The president selects a State Council, or cabinet, of up to 30 members. It isnominally headed by the prime minister. Cabinet members may, but need notbe members of the National Assembly. In either case, they are answerable to thepresident, rather than parliament; the cabinet need not command theconfidence of parliament. Under the 1987 constitution, members of the armedforces are not allowed to hold cabinet posts unless they are retired fromactive service.

A maturing democracy

The 1987 constitution

The National Assembly

The cabinet

Authoritarian regimes

South Korea 7


The first elections to fill the posts of governors of provinces and mayors oflarge cities took place in June 1995, replacing a system of appointment by thecentral government. This was followed in June 1996 by full local elections forcouncils at all levels, from province down to county and ward. The secondround of elections of governors and mayors took place in June 1998, producinga result that was favourable to the then NCNP-ULD government. Centralgovernment still controls most purse-strings and appointments and has foundways of undermining any local resistance to its plans—for example, throughallocation (or not) of construction projects.

Important recent events

January 1997: South Korea is gripped by nationwide strikes as unions protestthe unilateral passing of the new labour laws.

February 1997: Hanbo Steel, South Korea’s second largest steelmaker andcore company of the Hanbo group (the 14th largest chaebol, or conglomerate),goes bankrupt with debts of more than US$6bn. The Hanbo group collapses.

July 1997: Kim Young-sam’s son is put on trial for corruption. Kia Motors,South Korea’s third largest carmaker and the core company of the Kia group(the 8th largest chaebol), requests emergency loans to keep it afloat.

November 1997: The government announces that it will seek IMF bail-outfunds as the won falls sharply against the dollar. The Haitai group and the NewCore group (the 24th and 25th largest chaebol respectively) collapse.

December 1997: The Halla group (the 12th largest chaebol) collapses. A bail-out package of nearly US$60bn is negotiated with the IMF and other bilateraland multilateral lenders. Kim Dae-jung wins the presidential election.

February 1998: Kim Dae-jung takes office as president and announces his so-called sunshine policy of positive engagement towards North Korea. Kim Jong-pil’s United Liberal Democrats (ULD) joins Kim Dae-jung’s National Congressfor New Politics (NCNP) in government.

November 1998: The first tourist cruises operated by the Hyundai groupdepart for Mt Kumgang in North Korea.

December 1998: South Korea’s navy sinks a North Korean semi-submersible.

July 1999: South Korea’s and North Korea’s navies clash in disputed waters offthe west coast of the Korean peninsula. The Daewoo group (the second largestchaebol) nearly goes bankrupt.

January 2000: The ULD leaves the ruling coalition and Kim Jong-pil resignsas prime minister. He is succeeded by another senior figure in the ULD, ParkTae-joon.

April 2000: Kim Dae-jung announces the first-ever inter-Korean summit to beheld in June. The 16th National Assembly election is held. The MillenniumDemocratic Party (MDP) fails to win a majority but increases its representationin parliament.

Elected local government

8 South Korea


May 2000: Park Tae-joon resigns as prime minister after a scandal. He issucceeded by the ULD’s leader, Lee Han-dong.

June 2000: The first inter-Korean summit takes place in Pyongyang (see NorthKorea for further details of the summit and its implications).

Political forces

Between 1961, when Park Chung-hee seized power, and 1988, when ChunDoo-hwan relinquished it, the government party existed in the NationalAssembly and in the country to support the president, but the power base ofthe regime lay elsewhere—in the military. Moreover, opposition parties in theNational Assembly, although they might criticise government policies, couldnot safely challenge the constitutional basis on which the government wasestablished, at least not until the mid-1980s.

Opposition forces—centred on the New Democratic Party during Park Chung-hee’s incumbency, and the New Korea Democratic Party, formed with many ofthe same leaders in 1985, following Chun Doo-hwan’s political relaxation—tended to concentrate on narrowly political issues, such as the constitution,control of the media and trade-union rights. They had few reservations aboutthe government’s broad development strategy or its reliance onprivate enterprise.

The problem for South Korean opposition parties has been a tendency to splitover issues of personality rather than principle. Kim Dae-jung, the veteranopponent of military presidents, narrowly escaped execution on trumped-uptreason charges in 1980 and was released from prison only on condition thathe went abroad, ostensibly for medical treatment. In his absence, Kim Young-sam emerged as the leader of the extra-parliamentary opposition. When KimDae-jung returned from exile in 1985, he and Kim Young-sam were unable towork together. They both contested the December 1987 presidential election,splitting between them an opposition vote already reduced by disapproval oftheir inability to unite. The result was to allow the election of Chun Doo-hwan’s protégé, Roh Tae-woo, on a minority vote. Roh Tae-woo’s inaugurationas president in February 1998 marked the first peaceful transfer of presidentialpower in South Korea’s history.

Kim Young-sam’s frustration at this turn of events led to an unexpectedrealignment in 1990, when he agreed to cross the floor and merge his partywith the ruling Democratic Justice Party (DJP). This new right and centre-rightparty, called the Democratic Liberal Party (DLP), boosted further by other smallconservative parties, seemed set to emulate the grip on power exercised by theLiberal Democratic Party in Japan. Kim Dae-jung’s faction, now called theDemocratic Party, was left as the only, and heavily outnumbered, oppositionparty in the National Assembly.

This changed with the parliamentary election in April 1992. The new governingparty, which the merger had left with two-thirds of the seats in the National

The militarydominates politics

Personalitiesoutweigh principles

A stronger opposition

South Korea 9


Assembly, lost its majority and regained it only by winning the support of ahandful of independents. However, Kim Young-sam won the presidentialelection of December 1992, comfortably ahead of Kim Dae-jung, who thenannounced his political retirement, only to return to politics in September 1995with a new party, the National Congress for New Politics (NCNP).

After Kim Young-sam’s inauguration in February 1993, strains between thefactions making up the DLP became increasingly apparent. Tensions betweenthe old guard associated with the military regimes of the 1980s and thereformers around Kim Young-sam were endemic. The latter had the upper handduring Kim Young-sam’s first two years in office, thanks to popular reformssuch as “real names” (people were required to hold bank accounts under real,rather than assumed names, thus making corruption more risky).

National Assembly election results

1998 1992 1996 2000

Democratic Justice Partya 125 – – –

Party for Peace and Democracyb 70 – – –

Reunification Democratic Partyc 59 – – –

New Democratic Republican Partyd 35 – – –

Independents & others 10 21 16 6

Democratic Liberal Partye – 149 – –

Democratic Partyf – 97 15 –

Unification National Partyg – 31 – –

New Political Reform Party – 1 – –

New Korea Partyh – – 139 –

National Congress for New Politicsi – – 79 –

United Liberal Democratsj – – 50 17

Grand National Partyk – – – 133

Millennium Democratic Partyl – – – 115

Democratic People’s Partym – – – 2

Total 299 299 299 273

a Led by Roh Tae-woo. b Led by Kim Dae-jung. c Led by Kim Young-sam. d Led by Kim Jong-pil.e Formed in January 1990 from a merger of the Democratic Justice Party, the ReunificationDemocratic Party and the New Democratic Republican Party; led by Roh Tae-woo. f Formed inSeptember 1991; led by Kim Dae-jung. g Formed in January 1992; led by Chung Ju-yung. h Therenamed Democratic Liberal Party; formed in December 1995; led by Kim Young-sam. i Formed inSeptember 1995 mainly from members of the Democratic Party; led by Kim Dae-jung. j Formed inFebruary 1995 from members of the New Korea Party; led by Kim Jong-pil. k Formed in November1997 from a merger of the New Korea Party and the Democratic Party (unrelated to theDemocratic Party above). l Formed in January 2000 mainly from members of the National Congressfor New Politics; led by Kim Dae-jung. m Formed in March 2000 mainly from members of theGrand National Party.

Source: EIU.

During 1995, however, the reform drive ran out of steam and the DLP’s poorshowing in the June 1995 local elections strengthened Kim Young-sam’s needto mend relations with those on the right wing of the party. In the event,however, the fortuitous discovery that Roh Tae-woo had amassed a vast

The oppositionexacts revenge

10 South Korea


political slush fund while in office gave Kim Young-sam the opportunity toprosecute both Roh Tae-woo and Chun Doo-hwan, not only for corruption, butalso for the original military coup that brought Chun Doo-hwan to power.

This popular move also served finally to weaken the old guard in the DLP,which in December 1995 was renamed the New Korea Party (NKP). Inthe National Assembly election of April 1996 the NKP was able to secure amajority only after winning over independents and some minor oppositionfigures. The party was renamed the Grand National Party (GNP) in the run-upto the 1997 presidential election, following a merger with the much smallerDemocratic Party.

A new name and a merger were not, however, enough to shore up the party’spopularity, which was falling rapidly, owing to corruption scandals involvingKim Young-sam and the country’s growing economic problems. This, coupledwith the decision by the governor of Kyonggi province, Rhee In-je, to leave theruling party and run for president on his ownthus splitting the conservativevoteand Kim Dae-jung’s pre-election pact with Kim Jong-pil (under whichKim Jong-pil’s ULD would support Kim Dae-jung’s bid for president), was themain reason for the GNP’s defeat in the December 1997 election.

When he was sworn in as president in February 1998, Kim Dae-jung’s NCNPand its partner in government, the ULD, held a minority of seats in theNational Assembly. By September 1998, however, enough members of the GNPhad defected to the government to give the NCNP-ULD coalition a smallmajority. To date, however, Mr Kim’s attempts to trigger a major split in theGNP, from which he and his current party, the Millennium Democratic Party(MDP; launched in January 2000 and, in essence, the renamed NCNP), wouldbenefit, have failed.

To a large extent, the GNP’s resilience owes much to the regional antagonismthat disfigures South Korea’s politics. The GNP, which has its stronghold in thesouth-eastern Kyongsang provinces, has been largely successful in exploitingregional resentment at bearing the brunt of the 1998 recessiontwo of SouthKyongsang’s main cities, Pusan and Ulsan, are industrial centres and havetherefore suffered heavily from corporate restructuring and bankruptcies. TheGNP’s strength in the region was evident in the April 2000 National Assemblyelection, in which it took 64 of the 65 parliamentary seats in the region andremained the largest party in the assembly, although narrowly failing to securea majority.

Main political figures

Kim Dae-jung: The veteran opposition leader won the presidential electionin December 1997. This was his fourth bid to become president since 1971. Hispower base is in the Cholla region in the south-west, where he commandssome 90% of the vote. He is leader of the MDP.

Lee Han-dong: Prime minister and leader of the right-wing United LiberalDemocrats (ULD). He served in the governments of Chun Doo-hwan and RohTae-woo and was a member of the opposition Grand National Party (GNP)

The opposition wins the1997 presidential election

Regional antagonism

South Korea 11


until early 2000, when he defected to the ULD. He is said to have ambitions tobecome president.

Lee Hun-jai: Finance and economy minister and former head of the FinancialSupervisory Commission, where he won respect and popularity for his zeal inreforming South Korea’s financial sector.

Lee Hoi-chang: A former prime minister and head of the Board of Audit andInspection. He ran as GNP’s candidate in the 1997 presidential election. Hisreputation as a politician untouched by scandal was tarnished in the run-up tothe presidential election by allegations that his sons had evaded militaryservice. He now leads the GNP.

Rhee In-je: Former governor of Kyonggi province. He ran unsuccessfully forpresident in December 1997. His role in the April 2000 National Assemblyelection in helping the MDP pick up votes in the ULD’s Chungchong heartlandin the mid-west and his appeal to younger voters may secure him the MDP’snomination as its candidate in the December 2002 presidential election.

Kim Jong-pil: Prime minister during the first two years of Kim Dae-jung’spresidency. He was also the brains behind Park Chung-hee’s coup in 1961 andfounder of the feared Korean Central Intelligence Agency. He is honorarychairman of the ULD, which he also founded.

Presidential election results

1987 1992 1997 % share % share % share

Candidate of the vote Candidate of the vote Candidate of the vote

Roh Tae-woo 36.6 Kim Young-sam 41.4 Kim Dae-jung 40.3

Kim Young-sam 28.0 Kim Dae-jung 33.4 Lee Hoi-chang 38.7

Kim Dae-jung 27.0 Chung Ju-yung 16.1 Rhee In-je 19.2

Kim Jong-pil 8.1 Bak Ki-wan 6.3

Source: EIU, derived from press reports.

International relations and defence

Since its founding, South Korea’s overriding external preoccupation has beenwith North Korea, as the threat of renewed aggression from that quarter,whether in the form of its alleged nuclear programme, its stockpile of chemicalweapons or its nearly 1m-strong army, has never been wholly lifted. From timeto time this theoretical threat has also been reinforced by acts of terrorism byNorth Korea against South Korea, such as the assassination of four members ofSouth Korea’s cabinet by North Korean agents in Burma in 1983.

The threat from North Korea has determined that South Korea’s principalexternal tie should be a military alliance with the US, which still has troopsstationed between Seoul and the DMZ as a guarantee of US involvement fromthe first hours of a renewed inter-Korean conflict. Hostility between North andSouth Korea also determined throughout the cold war that South Korea should

Preoccupation withNorth Korea

A military alliancewith the US

12 South Korea


have no diplomatic relations with either China or the Soviet Union; NorthKorea played on the rivalry of these countries to keep both lined up behind itsdenial of South Korea’s political legitimacy.

As South Korea’s economy grew stronger, however, both China and the SovietUnion saw the advantage of economic links with South Korea and becameincreasingly unwilling to let ideological solidarity with North Korea stand inthe way. Diplomatic relations were established with the Soviet Union in 1990and with China in 1992, opening the way for a rapid increase in trade andinvestment flows. Both China and the Soviet Union also withdrew their long-standing veto on South Korea’s bid to join the UN, thus enabling both Koreanstates to become full members in 1991. In 1995 South Korea was elected to theUN Security Council, to North Korea’s discomfiture.

South Korea’s relations with Japan are prickly. Mainly as a result of lingeringbitterness over Japan’s 1910-45 harsh rule over the Korean peninsula, manySouth Koreans remain wary of Japan even today and ambivalent about closerrelations with the country. The two economies are closely linked, however, andJapan is the source both of a great deal of the machinery and technology usedby South Korea’s industry and of the largest national group of foreign tourists.

Official relations with Japan have improved markedly since Kim Dae-jungbecame president. Largely out of a need for Japanese economic aid in the wakeof the end-1997 financial crisis, Mr Kim has made considerable effort to ironout problems between the two countries. Not only did he visit Japan in late1998, but in mid-1999 he also lifted the long-standing ban on Japanesecultural imports and has even invited Japan’s emperor to visit South Korea inthe near future.

The Korean peninsula is one of the most heavily militarised areas in the world.North Korea’s armed forces are deployed forward for a blitzkrieg attack on SouthKorea, the forces of which are deployed in order to repel them. As long as acommunist regime survives in North Korea this is likely to remain the case,although limited economic exchanges and continuing diplomatic coexistencecan be expected to reduce tension.

The situation would be radically altered were the Koreas to be reunitedpeacefully. While a peace dividend would undoubtedly be available, it ispossible that South Korea would remain a stronger military power than othercountries at a similar level of economic development. The balance within itsarmed forces might, however, shift away from the current bias to the army (inorder to counter a potential land offensive from North Korea) towards the navyand air force.

Although spending less than 5% of GNP on defence, South Korea has beenclosing the military gap with North Korea, which spends up to 25% of itsmuch smaller GNP on defence. Although North Korea’s quantitative lead innumbers of troops, tanks, submarines and aircraft remains a worry, this isbalanced now by South Korea’s qualitative lead. There is also concern,

Japan’s colonial rule washarsh

But commercial ties areimproving

Emphasis on the army

South Korea 13


however, over North Korea’s development of missiles and suspected chemical-weapons stockpiles, as well as lingering doubts about its nuclear programme.

Military forces in the region, 1999/2000

South Korea North Korea Japan China Russia

ArmyPersonnel 560,000 950,000 145,900 1,830,000 348,000Main battle tanks 800 3,500 1,080 8,300 15,500

NavyPersonnel 60,000 46,000 43,800 230,000 171,500Frigates 9 3 46 35 10Submarines 19 26 16 71 70

Air forcePersonnel 52,000 86,000 45,200 420,000 184,600Combat aircraft 488 593 330 3,520 1,800

Source: International Institute for Strategic Studies, The Military Balance 1999/2000..

The outlook for inter-Korean relations in 2000-01 looks better than for manyyears. There are two main reasons for this assumption. First, North Korea hasfinally agreed to talk directly to South Korea rather than through the US orother third parties as hitherto—witness the first-ever inter-Korean summit inmid-June. In so doing, North Korea’s leader, Kim Jong-il, is putting hisdomestic authority on the line: by talking directly to Kim Dae-jung, he isconferring on South Korea an unprecedented degree of legitimacy; previously,the North has de facto refused to recognise South Korea’s government,preferring to see it simply as a “puppet” state controlled by the US. Althoughunguarded optimism would be premature, particularly given the North’sunpredictability, further such meetings would go a long way to dispelling theatmosphere of distrust and hostility that have generally characterised inter-Korean relations.

Second, the summit may be part of a broader qualitative change in NorthKorea’s foreign and economic policy. This year, for example, North Korea hasbeen busy on the diplomatic front, establishing diplomatic relations with Italy(alone among the G7 members to date) and Australia and talking to the UKand some other countries with which it does not yet have diplomatic relationsabout deepening bilateral ties. It also wants to join the ASEAN Regional Forum(ARF, a forum for discussing security issues). If successful, this would provide avaluable arena for bringing North Korea’s military as well as its diplomats intocontact with their counterparts from other countries, again potentially addingto the channels of discourse and thereby alleviating mutual distrust.

Perhaps most important, however, at end-May Kim Jong-il made a secret visitto China in order to meet China’s president, Jiang Zemin. Although the visitwas ostensibly designed to secure further Chinese aid for North Korea and tosecure China’s support ahead of the mid-June summit, it may also have beensymbolic. Kim Jong-il may have wanted parallels to be drawn between this andDeng Xiaoping’s unannounced trip to China’s south-eastern provinces, whichushered in a new phase in Deng’s “open door” economic reform policy. This issuggested by his surprise descent on (and in-depth questioning about) China’s

Relations with North Korea

14 South Korea


largest computer maker, Legend Group, during the trip. If so, he may besignalling a shift towards a more open economic policy along the lines of theChina model, presumably enlisting South Korean capital and know-how inthe process.

All this would bring considerable benefits to North and South Korea alike. TheSouth Korean aid that would surely follow a continued warming of inter-Korean ties would give North Korea valuable tools with which to stabilise itsbankrupt economy. South Korea also stands to reap economic gains. Its chaebol(conglomerates) may, for example, gain further access to the North’s industrialraw materials (South Korea is poorly endowed with mineral resources) as wellas expanded direct investment opportunities. Although investing in NorthKorea is still risky, partly owing to the lack of legal infrastructure in thecountry, the prospect of greater access to North Korea’s cheap, well-educatedand disciplined workforce may come to outweigh the uncertainties for manychaebol; anecdotal evidence suggests that wages in North Korea are one-fifteenth those in the South and that the quality of Northern-produced goodsis no worse than that of goods produced in China.

A reunited Korea?

North Korea has never recognised the legitimacy of South Korea and stillclaims to be the rightful representative of all Koreans. It has never abandonedthe strategy of unification by force put into effect in 1950. South Korea, for itspart, proclaims the ideal of peaceful unification, and could not afford toabandon it, since there are still today millions of Koreans separated fromimmediate members of their families by the fortunes of war in 1950-53.

Although it could be argued that the narrowing of the military gap betweenthe two Koreas presents the North Korean proponents of blitzkrieg with a “nowor never” option, “never” has seemed the more likely outcome than “now”since the death of Kim Il-sung, North Korea’s supreme leader, in 1994—themore so if North Korea has in fact bartered away its rudimentary nuclearweapons programme for substantial economic aid.

However, the South Korean government undoubtedly fears what is probablythe most likely scenario for the unification of the peninsula: the implosion ofthe North Korean regime in circumstances that virtually compel South Korea toabsorb the north. North Korea is having great difficulty in feeding its people.Its international credit is exhausted, not least with its former mentors inRussia. Its industry is obsolete, its exports negligible and its economy crippledby a perceived need to outweigh South Korea militarily. The collapse of theregime is a real possibility.

This may force South Korea to take on burdens of reconstruction relativelygreater than those assumed by West Germany when it absorbed East Germanyfrom 1991. The cost to South Korea of such an absorption would be huge—ashigh as US$1.2trn, according to South Korea’s 21st Century Committee. TheSouth Korean government’s preferred option, therefore, seems to be to try toavert the collapse of North Korea politically by propping it up economically,while seeking military and diplomatic détente.

South Korea 15


Meanwhile, South Korea is quietly making contingency plans for unification,which, it is hoped, will avoid West Germany’s mistakes (immediate currencyunification and early wage-rate equalisation, leading to mass unemployment inthe east and huge budgetary problems in the west), while seizing the economicopportunity to establish low-cost, labour-intensive export industries in NorthKorea (rather than in China or Vietnam).

Resources and infrastructure

Population

South Korea is one of the most densely populated countries in the world. Thenumber of people per sq km rose from 349 in 1975 to 472 in 1999 as a result ofthe increase in population from 34.7m to 46.9m during the period. The crudebirth rate has, however, fallen steadily in line with the country’s risingeconomic prosperity, from 30 per 1,000 population in 1970 to 13.8 per 1,000 in1998. The death rate has also fallen, to 5.3 per 1,000 in 1998 from 10 per 1,000in 1970. As a result, the population is currently rising by only around 1% peryear; this compares with an average rate of increase among low- and middle-income countries in East Asia of around 1.5% and of 0.3% for Japan. Based oncurrent trends the government expects the country’s average age to rise to 42.1years by 2030, compared with 31.2 years in 1995 and just 23.1 years in 1960.

South Korea is also one of the most ethnically homogeneous countries in theworld. Many Koreans equate nationality with membership of the “Koreanrace”, which is itself defined by a shared language and culture. South Korea isalso a highly urbanised society. More than half of South Korea’s totalpopulation now lives in urban agglomerations of 1m people or more, andnearly one-quarter of the population lives in the capital, Seoul. Until relativelyrecently urban growth was particularly rapid in the Kyongsang provincesforexample, Pusan, Ulsan and Pohanglargely as a result of governmentdevelopment projects to promote regional urban centres outside Seoul. (SeeReference table 1 for data on population and labour.)

Population and labour force trends, 1999(m unless otherwise indicated)

Population 46.9 0-14 years 10.2 15-64 years 33.5 65+ years 3.2

Economically active population 21.6

Participation rate (%) 60.5

Employed 20.3

Unemployed 1.4

Sources: Bank of Korea, Monthly Statistical Bulletin; National Statistical Office, Monthly Statistics of Korea.

A densely populatedcountry

Ethnically homogeneousand highly urbanised

16 South Korea


Education

Along with land reform, education has been a priority since South Korea’sinception. This is reflected in the relatively high level of government spendingon education17.4% of total government spending in 1995-99, for example, ahigher level than in either the US or Japan over the same period. As regardsputting smallholders on terms of educational equality with the owners oflarger farms—which was an important aspect of avoiding polarisation in thecountryside and of enabling migrants from the countryside to adapt relativelyeasily to urban and industrial life—South Korea’s educational efforts must bejudged a success.

In purely numerical terms these efforts are impressive: nearly 100% primary-school enrolment was achieved by 1970. The proportion of the relevant agegroup enrolled in secondary schools was then only 42%, but had risen tonearly 100% by the late 1990s. At around 50%, the proportion of the relevantage group enrolled in tertiary education now exceeds that of Japan, the UK andGermany. The literacy rate, meanwhile, rose from only 22% in 1945 to 87.6%in 1970 and to 97.2% in 1997.

Notwithstanding South Korea’s achievements in the field of education, doubtsare being raised about the content of what is taught. It is argued that, as inJapan, South Korean education places far too much emphasis on rote learningand multiple-choice questions, to which the answers are either right or wrongand, as a consequence, fails to develop analytical skills and independence ofmind. The uniformity of the curriculum and the Ministry of Education’s near-monopoly in deciding its scope have also been criticised.

South Korea’s schools, 1999

No. of studentsNo. of institutions No. of teachers No. of students per class

Colleges & universities 169 41,934 1,606,980 181.2

Junior colleges 161 11,381 859,547 192.6

High schools 1,943 105,304 2,511,140 46.2

Junior high schools 2,741 93,244 1,896,956 38.9

Elementary schools 5,544 137,577 3,935,537 35.4

Kindergartens 8,790 26,164 534,166 26.8

Sources: National Statistical Office, Major Statistics of Korean Economy.

Health

Average life expectancy at birth in South Korea was nearly 75 years in 1998,better than the average of 67 years for low- and middle-income countries, butstill some way short of the average of 77 years of the high-income economiesand further still from Japan at 80 years, which may be a better yardstick in viewof similarities in diet. The other important comparison is with the situation in

Education is a priority

A high level of enrolment

High longevity

South Korea 17


1965, just after the industrialisation programme had started, when average lifeexpectancy at birth was 57 years.

Among the reasons why South Koreans now live 18 years longer on averagethan a generation ago are improvements in water supply and sanitation,housing, diet and medical services. The quality of housing has improvedmarkedly over the years. A high proportion of construction between 1972 and1990 was, for example, replacement building. Houses, particularly thoseconstructed in the late 1980s and the 1990s, has also become much bigger,although by US and western European standards, much of the housing stockremains cramped.

Improvements in the availability of medical care since the 1960s have alsobeen striking. In 1963, for example, there were only 10,477 hospital beds (38per 100,000 population); by 1998 this had risen to 236,187, or 509 per100,000. In 1963 there were 9,052 doctors, or one for every 2,981 people; by1998 this had risen to 65,431, or one per 710 people. The availability ofdentists, nurses and pharmacists has improved in a similar way. There has beena dramatic reduction in the incidence of some diseases, such as tuberculosisand typhoid, but the incidence of others, such as lung cancer, has risen.

A universal healthcare insurance system was introduced in 1989. Largely as aresult of this, private health insurance has remained marginal. Under thescheme patients are required to finance 20% of inpatient care and 30-55% ofoutpatient care themselves. In principle, treatment of an individual for thesame illness will not be covered by insurance for longer than six months.South Korea’s healthcare services are provided by a mix of public and privatefacilities. In 1990, the latest period for which data are available, just 20% ofhospital beds belonged to the public sector.

Natural resources and the environment

South Korea is poorly endowed with natural resources. It has no onshore oil ornatural gas, and none has been found offshore. The peninsula’s coal resourcesare in North Korea, except for a small quantity of anthracite, which makes anegligible contribution to energy supplies. The only metal once available incommercially significant amounts was tungsten, but extraction ceased in 1993.The declining amounts of lead, zinc and copper supply only a fraction of SouthKorea’s own needs.

Land is not plentiful either. The cultivated area, down to 20.7m ha by 1998(21% of the total) compared with 21.6m ha in 1978 (21.8% of the total), hasbeen increasingly lost to urbanisation and roadbuilding. South Korea is heavilyforested, but there has been little evidence of deforestation in recent years,largely because the topography of the country makes commercial exploitationunviable in many places. As a result, the country imports most of its timber,mainly from Indonesia and Malaysia. Forests covered 65.3m ha of South Koreain 1998 (65.7% of the total), compared with 65.7m ha in 1988 (66.2% ofthe total).

Wider availability ofmedical care

Few natural resources

Little cultivable land

18 South Korea


Land use(% of total)

Category 1988 1998

Crops 21.8 20.8

Forests 66.2 65.7

Orchard & pasture 0.8 1.1

Residential 1.9 2.3

Industrial 0.2 0.5

Schools 0.2 0.2

Roads 1.7 2.2

Rivers 2.9 2.8

Ponds & lakes 0.9 1.1

Parks 0.0 0.1

Other 3.4 3.2

Total 100.0 100.0

Source: National Statistical Office, Major Statistics of Korean Economy.

Use of fresh water is well within the limits imposed by total water resources,thanks to the continental climate and plenty of precipitation. In 1987-95annual fresh-water withdrawal ran at just above 40% of water resources peryear, higher than in most neighbouring countries over the same period, such asJapan (16.6%), Thailand (17.8%) and Malaysia (just 2.1%), but far from crisisproportions. Annual household consumption of water was 632 cu metres perhead in 1987-95, only slightly below that of Japan (735 cu metres per head),despite Japan’s higher consumption of consumer durables.

Reflecting rapid industrial growth and a rising number of vehicles on the road,emissions of carbon dioxide have risen from 3.3 tonnes per head in 1980 to 9tonnes per head in 1996. This is close to levels in Japan (9.3 tonnes per head),but relatively low compared with the US (19.7 tonnes per head). In addition,South Korea accounted for just 1.7% of the world’s total carbon-dioxideemissions in 1996, compared with 4.9% for Japan and 22.2% for the US.

Transport and communications

For decades successive governments kept private motoring an expensivetransport option. One reason for abandoning this policy was the need of themotor industry, which was initially intended to be export-oriented, for a strongdomestic base. As recently as the early 1980s the number of passenger carsremained well below 500,000. Then came an explosion in car ownership, thenumber of cars registered rising to 2.1m in 1990 and 7.8m by 1999. (SeeReference table 2 for data on road transport.)

This has not led, however, to the eclipse of public transport. Over the past fewyears the railways have regained the share of the commercial passengertransport market they lost in the mid-1980s, rising slightly above the 25% sharethey enjoyed in the late 1970s. In passenger-km terms, rail transport grew by anaverage of 2.4% per year in the ten years to 1998, although growth since 1990

Rising pollution

An explosion in carownership

South Korea 19


has been negligible. Bus rather than rail has been the main casualty of greaterownership of private cars and of the development of the Seoul subway system,which opened in 1974. (See Reference table 3 for data on rail transport.)

Total domestic freight transport grew briskly in the 1990s, reflecting thecountry’s rapid economic development. The share of the railways in freighttransport fell, however, from 17.2% of tonnage carried in 1990 to just 7.6% in1998, although there was only a slight reduction in the volume of freightcarried by the railways. The share of road transport in the commercial freightmarket, meanwhile, rose from 63.8% in 1990 to 72% in 1998, the risepresumably reflecting improvements in the country’s road network, such asconstruction of new expressways and increased road paving. (See Referencetable 4 for data on marine freight.)

Notwithstanding rapid development of the country’s road and rail system, airtransport has become increasingly popular within South Korea; in terms ofpassengers carried, domestic air travel grew by 76.3% between 1990 and 1998.The country’s two main airports are Kimpo airport, near Seoul, and Pusanairport in the south. Both airports also serve international routes. Plans are alsounder way to build a new airport at Inchon near Seoul, in order to cope withthe expected rapid increase in inter-Asian travel in the coming years. From itsfounding in 1962 until 1988, Korean Air was the country’s only airline. In1988, however, a second carrier, Asiana Airlines, was founded in order to servedomestic routes. Like Korean Air, Asiana Airlines now also serves internationalroutes. (See Reference table 5 for data on civil aviation.)

South Korea’s communications services improved rapidly in the 1980s and1990s, initially largely in collaboration with foreign investors. This is reflectedin data for growth in the telephone system. In 1973, for example, there wereonly 763,200 telephone subscribers, or 22 per 1,000 inhabitants. This had risento 20.6m by 1999, or 433 per 1,000. The numbers of mobile telephones andInternet users are also rising quickly, reflecting rapid development ininformation technology and the country’s growing strengths in this area.Between 1994 and 1998, for example, the number of mobile-telephonesubscribers rose by more than 500% to nearly 10m, while by 1999 around 25%of the population had Internet access. (See Reference table 6 for telecom-munications statistics.)

Energy provision

Despite government policies designed to lessen the economy’s dependence onimported petroleum, which proved costly between 1979—at the time of thesecond oil shock—and the late 1980s, dependence is greater today than in1973 (the time of the first oil shock). Three main contributing factors may beidentified. First, consumption of firewood and charcoal, which accounted for6.7% of total primary energy consumption in 1979, was responsible for only0.9% of that consumption in 1998. The main replacement for firewood and

Rapid growth offreight transport

Improvingtelecommunications

Heavy dependenceon oil imports

20 South Korea


charcoal was kerosene, the consumption of which increased at an annualaverage rate of 11.7% per year between 1979 and 1998.

Energy use per head(kg of oil equivalent)

South Korea China Japan US

Energy use 3,576 902 4,058 8,051

Source: World Bank, as cited in the National Statistical Office’s Social Indicators in Korea.

Second, in the wake of the two oil shocks, the government was concerned notonly to pass on to the consumer the full increase in price attributable to moreexpensive crude, but also to add a deterrent margin on top. This ended in thelate 1980s, with the result that oil prices tended to stagnate or fall in the 1990s.Third, there has been a huge increase in the number of cars and lorries on theroad. The number of passenger cars registered increased by 19% per year onaverage in the 20 years to 1999. The number of trucks registered rose by anaverage of 12.8% per year over this period and the number of buses by 17.8%.

South Korea’s interest in nuclear power generation began before the 1973 oilshock. Its implementation, however, became the government’s chief means,other than punitive pricing of petroleum products, of reducing vulnerability tointerruptions in, or sharp increases in prices for the supply of Middle Easterncrude. The first nuclear plant opened near Pusan in 1997 and was operationalthe year after. By 1987 this had risen to eight and by 1999 to 16, with fourmore under construction. In 1999, according to data from the InternationalAtomic Energy Agency, South Korea’s nuclear power stations supplied 42.8% ofits electricity, compared with 75% in France, 36% in Japan and 19.8% in theUS. According to data from the state electricity monopoly, Korea Electric Power(KEPCO), in 1999 nuclear power accounted for 29.2% of the country’sgenerating capacity.

There has also been a considerable expansion in hydroelectric capacity, whichnearly tripled in the 20 years to 1999. This was not enough, however, to stopits share of total generating capacity dropping from 12.3% in 1980 to 6.7% in1999, as the share of nuclear power rose. Similarly, the share of thermalcapacity declined from 68.3% in 1980 to 64.1% in 1999. According to KEPCOdata, hydroelectric power and thermal power accounted for 2.5% and 55.5% oftotal electricity generated in 1999.

South Korea is now the world’s second largest importer of liquefied natural gas(LNG), mostly from Indonesia and Malaysia. Between 1995 and 1998 importsof LNG rose by an annual average of 18.9% in value terms; consumptionvolume rose by an annual average of 17.2% over the same period. Demand forLNG is certain to increase over coming years, owing to its high calorific valueand its cleanness. The government is currently exploring the feasibility ofbuilding a gas pipeline from Siberia to South Korea that would supply bothSouth Korea and China. The pipeline is, however, not expected to come onstream until 2010 at the earliest. (See Reference tables 7, 8 and 9 forenergy data.)

Nuclear power is animportant source of energy

South Korea 21


Energy balance, 1999(m tonnes oil equivalent)

Oil Gas Coal Electricity Other Total

Primary supplyProduction 0.0 0.0 1.9 24.4a 1.8 28.1Imports 149.7 16.9 34.4 0.0 0.0 201.0Exports 42.1 0.0 0.0 0.0 0.0 42.1Stock change 0.0 0.0 1.8 0.0 0.0 1.8Total 107.6 16.9 38.1 24.4a 1.8 188.8

9.4b 173.8

Processing & transformationInput to refining 119.0 0.0 0.0 0.0 0.0 119.0Input to transformation 5.9 5.6 21.7 24.4a 0.0 57.6Refining/transformation output 119.0 0.3 0.0 22.1b 0.0 141.4Energy industry fuel/losses 3.0 0.5 0.0 2.3b 0.0 5.8

Final consumptionTransport fuels 35.7 0.0 0.0 0.1b 0.0 35.8Industrial fuels 15.2 2.5 15.7 11.8b 0.8 46.0Residential, etc 17.2 8.6 0.7 7.9b 1.0 35.4Non-energy uses 30.6 0.0 0.0 0.0 0.0 30.6Total 98.7 11.1 16.4 19.8b 1.8 147.8

a Expressed as input equivalents on an assumed generating efficiency of 38.5%. b Output basis.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1999

Real GDP growth (%) 10.7

Consumer price inflation (av; %) 0.8

Current-account balance (US$ bn; national estimate) 25.0

Foreign debt (US$ bn; national estimate; end-period) 136.4

Exchange rate (av; W:US$) 1,188.8

Population (‘000) 46,858

Source: National sources.

Until the late 1980s manufacturing industry accounted for a rising share ofGDP—nearly one-third in 1988, for example, compared with only one-quarterin 1973. The counterpart of this was a fall in the share of agriculture, forestryand fishing, from one-quarter to one-tenth. Since 1988, however, the share ofmanufacturing in GDP has remained more or less stable at around 30% whilethat of agriculture, forestry and fishing has continued to fall, reaching around5% in 1998-99.

The developments in manufacturing do not, however, indicate that industryhas performed badly; on the contrary, real value added by manufacturing rose

The dominance ofmanufacturing

The rising share of theservices sector

22 South Korea


by an annual average of 7.4% in 1995-99, rather faster than the real averageannual growth rate of 4.7% for the economy as a whole. Rather, they reflectthe fact that other hitherto neglected areas of the services economy have beencatching up fast. In 1999, the services sector accounted for 41.7% of overallGDP, a level that is certain to rise as South Korea’s economy matures frombeing manufacturing-based to services-based. (See Reference table 10 for dataon GDP by sector.)

Gross fixed-investment formation accounts for an extremely high proportionof GDP (around 33% in 1995-99), mainly by the private sector and mainlythrough bank financing. The figure would doubtless have been even higher butfor the sharp fall-off in business investment in 1998 and the only modestrecovery in 1999, following the end-1997 financial crisis. Much of theinvestment growth in the past five years was undertaken by com-paniesespecially by semiconductor firmsin the export boom years of 1994-95. (See Reference tables 11 and 12 for data on GDP and GDP by expenditure.)

Another striking feature of South Korea’s economic structure is its increasingopenness to international trade. In 1999 exports of goods and non-factorservices (national accounts terms) represented a little more than 45% of GDP,compared with just 6% at the beginning of the 1970s, at the outset of theexport-oriented industrialisation drive. Imports of goods and non-factorservices, meanwhile, represented just over 30% of GDP in 1999, compared withslightly under 15% at the beginning of the 1970s. The export percentage in1999 compares with ratios of 14% for Japan, 18% for China , 49% for Taiwanand 12% for the US.

Also distinctive is the dominant position of the chaebol, or conglomerates, mostof which were established after the Korean war. In 1995 (latest available data),for example, the top 30 chaebol produced 16% of South Korea’s GDP andaccounted for 41% of manufacturing value added and 50% of exports. Of thetop 30 chaebol, the top four groups at the timeHyundai, Samsung, Daewooand LGclearly dominated, producing 9% of GDP in 1995. Notwithstandingtheir overwhelming presence in the domestic market, the largest chaebol aresmall by world standards. In terms of sales, for example, Samsung Electronics isonly about 14% of the size of Japan’s Matsushita, while Hyundai Motors is lessthan 10% of the size of General Motors of the US (see Economic policy).

South Korea’s chaebol have often been compared to Japan’s keiretsu businessgroupings, the successors to the pre-war zaibatsu. This is, however, misleading,and two main areas of difference between the two may be identified. First, thechaebol are still largely controlled by their founding families, unlike the keiretsu,which are run by professional corporate managers. Second, the governmentprevented the chaebol from owning private banks, partly in order to increase itsown leverage over the banks in areas such as credit allocation. The keiretsu, incontrast, usually worked with an affiliated bank, giving the affiliatedcompanies almost unlimited access to credit (see Economic policy).

High levels of investment

Rapid growth of trade

The chaebol

Chaebol vs keiretsu

South Korea 23


Comparative economic indicators, 1999

South HongKorea Singapore Kong Taiwan Japan US

GDP (US$ bn) 407 88 159 289 4,352 9,256

GDP per head (US$) 8,684 27,226 23,179 21,223 34,356 33,950

Consumer price inflation (av; %) 0.8 0.5 –3.3 0.2 –0.3 2.2

Current-account balance (US$ bn) 25.0 16.9 6.3a 5.9 105.9 339.0

Exports of goods (US$ bn) 145.5 114.5 175.7 121.1 401.4 685.0

Imports of goods (US$ bn) 116.8 110.9 178.7 105.8 279.1 1,030.2

Foreign trade (% of GDP)b 64.5 257.3 223.5 78.5 15.6 18.5

a Goods and services balance. b Merchandise exports plus imports.

Sources: National sources; EIU.

Economic policy

Fiscal policy has generally not been politicised. This is also largely true ofmonetary policy, although since the Bank of Korea (BOK, the central bank) wasmade formally independent from the Ministry of Finance and Economy(MOFE) in 1998, it has tended to take a more hawkish policy stance thanMOFE. During the 1980s and most of the 1990s, the overall governmentborrowing tended to fluctuate in line with cyclical economic conditions, butwas not large. (The notable exception to this came in 1998-99, when govern-ment borrowing rose sharply to meet the demands of financial-sector restruc-turing and social welfare improvements.) This ensured an overall surplus whenthe economy was near the top of the cycle, whereas the deficits near thebottom of the cycle were less than 3% of GDP. (See Reference table 13 for dataon central government finances and Reference table 14 for data on moneysupply.)

Summary of central government finances, 1999(W bn)

Revenue 97,251 of which: value-added tax 20,370 income tax 15,855 corporation tax 13,881 general customs 4,688

Expenditure 112,825 of which: defence 14,346 fixed-capital formation 7,222

Net lending –63

Balance –15,511

Source: Bank of Korea, Monthly Statistical Bulletin.

Government estimates put the overall tax burden at 17.9% of GDP in 1999,compared with 17.7% in 1990. Local taxes remained more or less steady as a

Macroeconomic policy

A low tax burden

24 South Korea


percentage of GDP over the period—3.7% in 1999, compared with 3.6% in1990. National taxes, meanwhile, fell from 15% of GDP in 1990 to 14.2% in1999, although this largely reflected falls in income tax and corporation taxtakes in the wake of the 1998 economic recession. The overall tax burdenshould increase over the coming years, as the government seeks to consolidateits finances, in order to prepare both for demographic changes, which willincrease the cost of public pensions and healthcare, and to meet the large costsof the eventual economic integration of North Korea. South Korea’s tax systemis also notable for its heavy reliance on indirect taxes, which account foraround 50% of total tax revenue, as opposed to around 25% in most otherOECD countries.

It was long the doctrine of South Korea’s governments that defence spendingshould not be less than 5% of GNP. Holding the proportion steady resulted inan average annual real increase of 7-8%. Whether or not by design, invitingNorth Korea to match this rate of growth in defence spending had the effect ofruining that country’s economy. Now that North Korea is required to pay hardcurrency, of which it has little, for its military equipment, South Korea’sdefence spending has been allowed to fall. The need to release funds to meetother spending requirements after the end-1997 financial crisis has givenfurther impetus to this trend. Indeed, the initial budget for 1999 proposed ayear-on-year cut of 0.4% in defence spending (to W13.8trn, or aboutUS$10bn), the first cut in real defence spending since South Koreawas founded.

Highlights of the 2000 initial budget

• Spending on financial-sector restructuring will rise by 20.5% on the 1999 level,to W8.3trn.

• Spending on unemployment programmes will rise by 13.1% to W5.7trn.

• Government bond issuance will be cut by 14.7% to W11trn.

• Tax revenue will rise by 10.3% to W68.8trn.

• A budget deficit equivalent to 3.5% of GDP is projected.

Such industry as existed in South Korea in 1963 to serve the domestic marketwas heavily protected by quotas and tariffs. In pursuit of its central objective ofexport-led industrialisation, the government of the then president, ParkChung-hee, could have removed the anti-export bias either by emulating HongKong and removing tariffs and quotas, or by subsidising exports. It chose thelatter path, its preferred method being to offer companies that served its exportobjectives preferential access to subsidised and rationed credit. Thus the entirefinancial system, from the BOK downwards, became a conveyor belt for acomprehensive industrial policy.

Large allocations fordefence spending

Export-ledindustrialisation

South Korea 25


As the economy grew and became increasingly complex, it became clear thatthis model would require reform. For one thing, South Korea’s greater inter-national visibility meant that it would not be allowed to continue subsidisingexports and taking advantage of others’ liberal trade regimes while continuingto protect its own domestic market. Most of the tariff barriers to trade havenow been removed and the rapid dismantling of the remaining non-tariffbarriers is proceeding as part of the terms of the end-1997 IMF-led economicrescue package. This notwithstanding, the issue of imports into South Korearemains sensitive, and politicians of all hues may call on voters to “buyKorean” or to avoid buying luxury foreign goodsso-called frugalitarianism.

The main issue of economic management since the end-1997 financial crisishas been reform of the financial and corporate sectors. The government hashad far greater success in financial-sector reform than seemed possible in theimmediate aftermath of the crisis, closing down numerous unviable banks andforcing many weaker banks to merge with stronger ones. In part this reflects itstight control over the financial sector, despite the fact that most banks wereprivatised in the 1980s. Slow yet important progress had also been made ondealing with the large stock of non-performing loans (NPLs) in the financialsystem. By end-September 1999, Financial Supervisory Service data show thatthe stock of NPLs at South Korea’s banks and non-banks had fallen toW57.9trn, down by 8.5% on the end-June 1999 level.

Important policy events

December 1997: The won is allowed to trade freely. The domestic bondmarket is opened fully to foreign investors. The government closes ninemerchant banks. South Korea negotiates a bail-out package of nearly US$60bnwith the IMF and other bilateral and multilateral lenders. As a condition ofreceiving the funds, the government has to agree to pursue tight fiscal andmonetary policies and undertake a programme of far-reaching economicliberalisation. The Bank of Korea (BOK) Law is revised, giving the central bankmore independence.

February 1998: The National Assembly (parliament) passes the revisedLabour Standard Law, which makes it easier to lay workers off. Bankruptcy lawsare revised to accelerate the exit of insolvent firms.

March 1998: International bankers agree to roll over US$18bn of short-termdebt owed by South Korean banks into medium- and long-term debt.

April 1998: The government issues its first sovereign bond worth US$4bn.Chaebol are forbidden to issue new guarantees of subsidiaries’ debts. TheFinancial Supervisory Commission (FSC) is launched. The revised BOK Lawbecomes effective.

May 1998: Restrictions on mergers and acquisitions by foreign investors areabolished. The ceiling on foreign ownership of most listed companies isabolished.

Lowering trade barriers

Financial-sector reform

26 South Korea


July 1998: Five non-viable banks are liquidated and their assets are transferredto five other healthy banks. International standards for defining non-performing loans are adopted.

September 1998: The government loosens fiscal and monetary policy in anattempt to stimulate domestic demand. This has the blessing of the IMF. TheBig Deal business swaps are announced.

November 1998: The Foreign Investment Promotion Act is enacted.Restrictions on foreign direct investment now remain on only 31 out of 1,148sectors.

January 1999: Consolidated financial statements become mandatory. TheFinancial Supervisory Service (FSS), the executive body of the FSC, is launched.The Medium-term Fiscal Plan, which aims to balance the budget by 2006, isannounced.

March 1999: The trading of government bonds starts on the Korea StockExchange.

April 1999: The first phase of the complete deregulation of foreign-exchangetransactions is implemented. The final stage will take place by end-2000. TheKorea Futures Exchange opens in Pusan.

May 1999: The government sells part of its stake in Korea Telecom to overseasinvestors forUS$2.5bn.

August 1999: The government places the Daewoo group under a debt-rescheduling accord and orders it to restructure.

February 2000: The BOK raises the overnight call rate by 25 basis points to5%, becoming the first country hit by the 1997 regional crisis to tightenmonetary policy.

April 2000: The creditors of Samsung Motors agree to let Renault of Francetake a 70% stake in the firm, allowing Renault to become the first foreigncompany to own a South Korean carmaker.

June 2000: The Ford Motor Company of the US is chosen as the preferredbidder for the bankrupt Daewoo car company.

The government has, however, had less success with corporate-sectorrestructuring, particularly with regard to the largest chaebol. Although thegovernment has instituted important changes in encouraging greater corporatetransparency and strengthening shareholder rightsfor example, by requiringchaebol to produce consolidated accounts from 1999 and lowering theshareholding threshold for certain initiativesthe centrepiece of its corporatereform programme, the so-called Big Deal business swaps, was less successful.The purpose of the Big Deals was to reduce excessive competition betweenchaebol and excess capacity in industry by encouraging the top five chaebol tomerge or dispose of what the government considered non-core business lines.To date, only one high-profile deal has been made, that between HyundaiElectronics and LG. How much remains to be done in chaebol reform wasillustrated in the Daewoo crisis of mid-1999, when Daewoo, the second largest

Corporate-sectorrestructuring

South Korea 27


chaebol, failed to honour its liabilities, thereby threatening major disruption ofthe country’s financial markets.

Economic performance

Gross domestic product(% real change)

Annual average1999 1995-99

GDP 10.7 4.7

Private household consumption 10.3 3.5

Government consumption –0.6 1.8

Gross fixed capital formation 4.1 –0.7

Exports of goods & services 16.3 17.3

Imports of goods & services 28.9 7.6


South Korea’s average annual rate of real GDP growth in 1993-97 of 6.9% wasclose to the long-term average growth rate it has sustained since the beginningof its industrial development programme in 1963. (The recession year of 1998and the rapid bounce-back of 1999 are excluded as not being representative oflong-term trends; see below for a discussion of these two years.) The drivingforce was the growth of exports of goods and non-factor services. This averaged16.8% per year between 1993 and 1997. (See Reference table 12 for historicaldata on GDP by expenditure.) At a time when import demand in the OECDcountries was relatively subdued, South Korea’s exporters have proved able tomaintain an extremely high rate of volume growth largely because ofthree factors:

• geographical diversification, particularly to the former Soviet Union andChina, but also to the developing countries of South-east Asia and LatinAmerica;

• a high degree of competitiveness with Japan in third markets, owing partlyto the depreciation of the won against the yen, although this began to go intoreverse in late 1995; and

• a steady extension of the range of manufactured products for export, withparticular strengths in memory chips and automobiles.

At the same time, with the won’s appreciation against the dollar and the sharprise in wages in 1987-89, South Korean producers of traditional staples such asclothing, footwear and toys became less competitive. In the 1990s SouthKorean manufacturers of labour-intensive goods have moved upmarket—clothes manufacturers have placed greater emphasis on quality and style, forexample—or shifted production to countries such as Thailand or, mostrecently, Vietnam (in the case of many of the footwear companies). Othershave gone out of business. The same applies to shipbuilding, where SouthKorean yards are trying, with considerable success, to position themselves

Rapid growth in the earlyand mid-1990s

Moving upmarket—successfully

28 South Korea


between Japan, with its high wages and capital-intensive industry, and China,with its low wages and highly labour-intensive operations.

Investment in machinery and equipment (other than transport equipment)rose at an average rate of 9.8% per year in real terms between 1992 and 1996,before falling in 1997 as the economy started a cyclical slowdown exacerbatedby the beginnings of the Asian crisis. Gross fixed capital formation grew by5.7% per year in 1993-97. Investment in construction also grew strongly in1992-96, albeit not as fast as spending on plant and equipment. Real fixedcapital formation in buildings and infrastructure grew by an annual average of5.3% between 1992 and 1996. Permits authorised for building constructionaveraged 137,573 per year in the same period, similar to the average of 139,450recorded between 1986 and 1990, although this latter average is inflated by anexceptionally high figure of nearly 189,000 in 1990. (See Reference table 15 forstatistics on construction.)

The end-1997 financial crisis had a profound effect on South Korea’s economicperformance in 1998. High interest rates and a tight monetary policy, bothmandated by the IMF as a condition of the bail-out of almost US$60bn,produced a steep decline in business investment. Restructuring in both thecorporate and the financial sectors helped push up recorded unemployment toan average of 6.8% for the year, an unprecedented level by South Korea’s recentstandards, helping further to depress consumer sentiment and produce acollapse in private consumption. The net result of these factors was a 6.7%contraction in GDP in 1998. As startling as the economic contraction in 1998,however, was the rapidity of the bounce-back in 1999. Thanks both tosupportive fiscal and monetary policies and to a favourable externalenvironment (growth in the US, South Korea’s largest export market, remainedrobust), real GDP grew by 10.7% in 1999, the fastest rate of growth since 1987.In absolute terms, growth in 1999 more than reversed the losses sustained in1998, pushing real GDP 3.3% higher than its 1997 level.

Although real average monthly earnings in manufacturing grew by an averageof 8.4% per year between 1970 (when the statistical series began) and 1990,South Korea’s labour costs remain competitive. In 1970 monthly earningsaveraged US$48. In 1997, before the 1998 recession, monthly earnings werethe equivalent of US$1,394 (at the 1997 average of W951.3:US$1). Althoughavailable measures of manufacturing productivity are incomplete, theexplanation is undoubtedly that there has been a striking improvement in realvalue added per man-hour. (See Reference tables 16 and 17 for data on prices,wages and productivity.)

Construction growsstrongly in the 1990s

Recession and bounce-backin 1998-99

Pre-crisis rapid growth inwages and productivity

South Korea 29


Inflation and wages(% change, year on year)

Annual average1999 1995-99

Consumer prices 0.8 4.4

Producer prices –2.1 4.3

Wages, all industriesa 8.2 7.0

Wages, manufacturinga 14.9 7.6

a Nominal.


Regional trends

An early priority of the government was to diversify economic activity awayfrom Seoul, the closeness of which to the demilitarised zone (DMZ) makes ithighly vulnerable to North Korean attack. Measures undertaken included theintroduction of a green-belt system around Seoul to limit its expansion and theformulation of a plan to move government offices south to Taejon. It is clear,however, that this strategy has had only limited success and Seoul and itssurrounding area have continued to expand. In 1997 (latest data), for example,metropolitan Seoul, Inchon and Kyonggi province, which surrounds bothcities, accounted for 21.7%, 4.7% and 17.4% of GDP, respectively.

From South Korea’s founding to Kim Dae-jung’s inauguration as president inDecember 1997, governments have been drawn principally from theKyongsang provinces in the south-east of the country. Both as a result of thisand of having several good natural harbours, Kyongsang has grown into thecountry’s second most important region in terms of industrial production. TheKyongsang provinces and Pusan accounted for 6.1% and 17.9% of GDP in1997, respectively.

Lacking good natural harbours that could be developed into internationaltrading ports, the Cholla provinces in the south-east are predominantlyagricultural. The weaker growth of this region has been aggravated by whatChollans perceive as neglect by the (usually Kyongsang-dominated) centralgovernment. As a result, Cholla has traditionally been a centre for anti-government protests. The Cholla provinces’ share of GDP in 1997 stood atjust 8.5%.

Concentration onSeoul-Inchon

Slow development in theCholla provinces

Importance of theKyongsang provinces

30 South Korea


Economic sectors

Agriculture, forestry and fishing

The basis of agriculture is owner-occupied smallholdings. In the early days ofthe land reform that followed the second world war, the US and South Koreanauthorities put strict limits on the amount of paddy that any one farmhousehold might own, to avoid polarisation and landlessness. The other pillarof agricultural policy has been the prohibition of rice imports in normalcircumstances and the achievement of self-sufficiency by paying farmers manytimes the world price for their rice, while also subsidising the consumer.

Agricultural productivity has risen steadily. This is not because farming’s realvalue added has been rising fast; on the contrary, the average increase in 1995-99 was only 2.4% per year, well below annual average GDP growth for theperiod. The explanation for the rise in farmers’ productivity is twofold: yieldshave been rising and farmers have been cultivating more land. Behind the risein yields lies an increase in fertiliser application (by 60.7% in 1969-98); andbehind the increase in average farm size (by 50.2%, from 0.9 ha in 1972 to 1.4ha in 1998) lies much mechanisation. This has enabled an ageing agriculturallabour force to work larger holdings. Farmers have also benefited in recentyears from the diversion of land from staple crops to more lucrative fruit andvegetable crops. In 1998 vegetables and fruit trees accounted for 21.3% of totalplanted area, up from 16.5% in 1989. (See Reference table 18 for data onagriculture.)

In 1998, 65.7%, or 6.4m ha, of South Korea was covered with forest, of which22.1% belonged to the government. To a large extent this high level of publicownership stemmed from government-sponsored reafforestation from the1950s, itself a response to the ravages of the second world war and the Koreanwar, which severely depleted the forest stock. This process gathered pace in the1970s, with the introduction by the then president, Park Chung-hee, of a ruraldevelopment programme, the Saemaul Movement. As a result of this, the totalvolume of timber increased from 30.8 cu metres in 1954 to 363.6 cu metres in1998 (of which 31.9% was publicly owned). Although the country’s forestssupply the fuel needs of many farmers and rural inhabitants, they cannot meetdomestic industrial demand for timber. Most timber is therefore now imported.

South Korea’s fishing industry has been in a state of decline for some yearsnow. Not only had the fishing population declined from around 750,000 in the1970s to around 315,000 by 1999 but the importance of fishery products inexports has also fallen sharply; thus by 1998 (latest data) fishery productsaccounted for just 1% of total merchandise exports, compared with levels ofaround 5% in the 1970s. Although catches have been rising in volume terms,from some 2.4m tonnes at the end of the 1970s to around 3m tonnes in thelate 1990s, South Korea’s fishing industry is unable to meet domestic demand.

Post-second world warland reform

Rising agriculturalproductivity

Successful reafforestation

A declining fishingindustry

South Korea 31


This is shown in the value of fishery product imports, which rose from lessthan US$20m in the mid-1970s to over US$1bn by 1996-97.

Mining and semi-processing

South Korea is now a significant consumer in world terms of the main non-ferrous metals, but is poorly endowed with the raw materials to produce them.In 1993, the latest period for which comparable data are available, it consumed403,000 tonnes of copper, almost as much as France, but mined none andsupplied its needs partly by producing some 220,000 tonnes of refined copperfrom imported concentrates and scrap and partly by importing refined copper.Much the same is true in the case of lead (consumption was 224,000 tonnes in1994, mine production 2,000 tonnes and refined production 119,000 tonnes)and zinc (319,000 tonnes, 7,000 tonnes and 272,000 tonnes, respectively).South Korea mines no tin or nickel. Owing to the ruinous prices that resultedwhen China flooded the world market, South Korea’s output of tungsten oredried up completely in 1993. However, the country used to be a significantexporter of tungsten concentrates and could be again.

Manufacturing

The manufacturing sector

% change % changeTotala since 1980 since 1970

No. of manufacturing companies (‘000) 79.5 158.1 229.9

No. of workers in manufacturing (‘000) 2,324 15.3 169.9

Output (W bn) 425,007.1 1,071.5 31,747.7

a 1998.


South Korean industrialisation began, in effect, in 1962 with the inaugurationof the first Five-Year Plan by the then president, Park Chung-hee. Before that,industry had accounted for only a small share of GDP. Although thegovernment was the driving force behind the process of industrialisation,when manufacturing’s real value added rose at an average rate of 16.9% peryear between 1963 and 1978, the process was quite different from “command”economies in other developing countries. While these economies were seekingindustrialisation through import substitution, South Korea, along with Taiwan,Singapore and Hong Kong, believed that the developed markets of westernEurope and North America were open enough to absorb labour-intensivemanufactures in large quantities.

Production of fabrics made from man-made fibre, negligible in 1962, reached1bn sq metres for the first time in 1978 and 3bn sq metres in 1990. Productionof clothing for export rose rapidly at the same time. A slightly later

Dependence on foreignraw materials

Labour-intensivemanufactures

Rising importance ofmanufacturing

32 South Korea


development was the use of still-cheap South Korean labour in assemblyoperations. Production of radios jumped from 158,000 in 1963 to 6.7m in 1976and 9m in 1986. Production of colour-television receivers began in 1975(output of black-and-white receivers had begun six years earlier) and rosequickly to 10m in 1988, then peaked at 21.5m in 1996. Electronic-calculatorproduction also began in 1975. South Korea has been making refrigeratorssince 1968, cameras since 1980 and videocassette recorders and microwaveovens since 1982.

An important development in the early 1970s was the emergence of a steelindustry. (Before that, output of steel ingots was simply re-rolling.) South Koreawas strongly advised, by the World Bank among others, not to create a steelindustry. Had it heeded this advice it would not have, in Pohang Iron and Steel(POSCO), one of the world’s largest and most efficient steel producers. Much ofthe funding for POSCO’s initial plant came from Japan, partly reflecting Japan’sconcern to enhance its own security by strengthening South Korea’s industrialbase and thereby stabilising its economy. The company also received technicalassistance from, among others, Japan’s Nippon Steel. POSCO’s production issupplemented by the output of mini-mills and South Korea now ranksalongside Japan, China and the US as one of the world’s largest steel producers.

Unlike most new motor-vehicle industries, South Korea’s started largely as anexport operation, with the North American market as its primary target. Likeother industries in South Korea, however, it was subject to a range ofgovernment controls designed to promote growth in the industry and preventexcess competition. As a result, Hyundai was the only company allowed tomake cars for most of the 1980s. Kia Motors and Daewoo were allowed to enterthe sector in the late 1980s. With the exception of the recession year of 1998,growing success in export markets has generally been complemented by stronggrowth in domestic sales. In 1999 the country produced 2.2m passenger cars,256,467 trucks and 426,935 buses; this compares with figures of 935,271 cars,225,328 trucks and 92,995 buses, respectively, in 1990.

Since the 1998 economic crisis, however, South Korea’s car industry hasundergone dramatic change, with the number of independent makers fallingand a growing foreign presence in the sector. In late 1998, for example,Hyundai Motor won control of the bankrupt Kia Motors and its affiliate, AsiaMotors. In early 2000 Renault of France agreed to buy the bankrupt SamsungMotor, marking the first foreign takeover of a South Korean carmaker, and inJune 2000 the Ford Motor Company of the US entered into exclusivenegotiations to buy the bankrupt Daewoo motors after a fierce bidding contestwith Daimler Chrysler (in conjunction with Hyundai) and General Motors ofthe US (in conjunction with Fiat of Italy).

Notwithstanding Hyundai Motor’s recent development of a domesticallyproduced engine for its cars, South Korea is still heavily dependent on importsof capital goods, which, in turn, makes its export performance heavilydependent on international prices for these products. Thus, while SamsungElectronics and others have steadily narrowed and now virtually eliminated

The steel industry

Change in the car industry

Reliance on importedcapital goods

The car industry

South Korea 33


the lead of Japanese and US companies in marketing memory chips of ever-greater capacity, they are still unable to make their own chip-manufacturingmachinery. In 1999, for example, capital goods accounted for 40.5% of thecountry’s total imports in value terms, a level almost unchanged from 1995.

South Korea’s labour has grown more expensive, especially since 1987. Wagesare much lower in Indonesia, the Philippines, Malaysia and Thailand, to saynothing of Vietnam and China and even some east European countries. Mostof the footwear industry has moved operations to one or other of theselocations, and the future of the clothing industry, if it is to remain in SouthKorea, depends on a rapid move upmarket in terms of quality and design. Thistrend is confirmed by industrial production indices for these products, whichhave been on a declining trend since the mid-1990s. Similarly, it is no longereconomic to undertake simple assembly jobs in South Korea. (See Referencetables 19 and 20 for data on manufacturing and industrial production.)

Construction

The early emphasis fell on infrastructure and actory building, with residentialconstruction lagging behind. This changed in the late 1980s, however, asgovernment policies and accelerating economic growth helped lift wages andstir up demand for homes. Thus, after averaging 196,000 per year in 1973-82and 240,000 per year in 1983-87, the number of dwellings completed shot upto an annual average of 576,000 in 1988-94, with a peak annual completionrate of 750,000 in 1990. By 1990 nearly 70% of completions were apartmentblocks and just 14% were detached dwellings; this is in contrast to the mid-1970s, when roughly two-thirds of completions were accounted for bydetached dwellings and just one-quarter were in apartment blocks.

The boom in the construction industry was fuelled further in the 1990s by thegovernment’s decision to relax controls on permit issuance for new companieshoping to enter the sector; hitherto these had been frozen in order to protectexisting companies from “excess” competition. In 1989 the governmentdecided to issue permits to new companies every three years and in 1994 itscrapped the limit altogether. The result of this was a rapid increase in thenumber of construction companies, from 468 in 1988 to 2,651 in 1994,together with growing shortages of materials and labour, which in turnencouraged inflationary pressures. Inevitably, this left the constructionindustry and other related industries—particularly the steelmakers, which hadexpanded facility investment on the strength of the boom—vulnerable toeconomic slowdown. This duly came towards the end of 1996 and thebeginning of 1997, with dire consequences for several large South Koreansteelmakers (including the country’s second largest steelmaker, Hanbo Steel),among others.

Shifting manufacturingbases overseas

A housing boom in thelate 1980s

Government deregulationand economic slowdown

34 South Korea


Housing statistics(‘000 units unless otherwise indicated)

1988 1998

Housing units 6,670 10,867

Housing units constructed 317 306 Public 115 131 Private 202 175

Housing investment/GNP (%) 4.7 6.4

Source: National Statistical Office, Major Statistics of Korean Economy; Social Indicators in Korea.

South Korea’s construction industry expanded overseas in the 1970s when itswage rates enabled it to win labour-intensive contracts, such as roadbuilding,in the newly enriched oil-exporting countries of the Middle East. In the late1970s and early 1980s profits on construction contracts and remittances bySouth Korean construction workers abroad made an important contribution tothe balance of payments. The collapse of oil prices, however, made suchcontracts scarcer, and South Korean labour was no longer so cheap. The valueof contracts has fallen, and such as there are tend to come more from South-east Asia and less from the Middle East and to be less labour-intensive. (SeeReference table 15 for data on construction.)

Financial services

In 1999 financial and business services accounted for 19.7% of GDP, twopercentage points higher than in 1994 and 5.7 percentage points higher thanin 1989. Although this sector has been growing faster than GDP as a whole inrecent years, the process has further to go, because of the relativeunderdevelopment of the financial sector, itself largely a result of decades oftight government control. Control of the banking system, through publicownership and detailed guidance from the finance ministry, via the Bank ofKorea (BOK, the central bank), was the means by which successive regimesrewarded companies that fell in with their development strategy and punishedthose that did not.

Companies could also qualify for so-called policy loans at still lower rates ofinterest if the government wished to give a special incentive to thedevelopment of their industry. Commercial banks were little more than atransmission belt for decisions taken elsewhere on grounds other than soundbanking criteria. This was generally the case even after the governmentprivatised commercial banks in the 1980s, and is one important reason whythe banks are now burdened with such a large stock of non-performing loans(NPLs). As of the end of September 1999, the stock of NPLs held by domesticbanks stood at W57.9trn (just over 12% of GDP), a total that may well rise if, asexpected, the restructuring of the defunct Daewoo group uncovers furtherswathes of bad debt. (See Reference table 21 for data on interest rates.)

South Korea’s financial sector has, however, undergone profound change sincethe end-1997 financial crisis. Not only has the government acted to improve

Building overseas

Government control overbank loans

Weak commercial bankindependence

Changes in thebanking sector

South Korea 35


bank governancepartly by creating a single financial sector watchdog, theFinancial Supervisory Commission, and its executive arm, the FinancialSupervisory Servicebut it is also attempting to improve risk management by,for example, bringing South Korea’s prudential regulations into line withinternational standards. It has also been aggressive in rationalising thedomestic banking sector by shutting down non-viable banks and promotingbank mergers. Although, at the time of writing, the government had concludedonly one of two attempted sales to foreign financial institutions, the increasingpresence of foreign investors in the domestic financial sector is likely to be animportant force for change in the coming years.

With the sixth largest life insurance market in the world in terms of premiumincome, the health of the domestic insurance sector is clearly vital to thehealth of the financial sector as a whole. As with the banks, South Korea’sinsurance companies also carry a large stock of NPLs, largely owing to attemptsby many of them in the recent past to increase profitabilitypremiums wereheavily regulatedby offering loans in competition with the banks. They werealso not publicly listed, which meant that they did not have to meet publicdisclosure requirements. As part of the government’s drive to restructure thesector, a number of insurance companies have been closed, while others arebeing closely monitored. In an attempt to enlist foreign help in cleaning up thesector, foreign participation is now freely allowed and a total of seveninstitutions have been put up for sale to date. Deregulation of premiums is alsonow well under way.

While reform of the banking sector and to a lesser extent the insurance sectorhas gone relatively smoothly, the same cannot be said for the country’sinvestment trust companies (ITCs, similar to mutual funds). Although the ITCsto a large extent shared the same problems as the banks and insurancecompanies in terms of poor transparency and asset management, theirsituation worsened dramatically in mid-1999 with the collapse of the Daewoogroup. Daewoo had issued large amounts of bonds in late 1998 and early 1999,many of which had been bought by the ITCs. With the Daewoo group in effectbankrupt and its bonds worthless, the financial situation of the ITCs worsenedsharply, threatening South Korea’s financial markets with renewed instability.Between June 1999 and May 2000, for example, some W100trn flowed out ofthe ITCs, mainly into commercial bank deposits, which were seen as safer. Asof May 2000 the government had injected W3trn of public funds into the twoworst hit-ITCs, Korea Investment Trust and Daehan Investment Trust, andpromised to make a further W4.9trn available by September 2000. As of April2000 the Financial Supervisory Commission (FSC) estimated that someW15.4trn in trust funds held by the ITCs would have to be restructured.

After years of relative neglect, development of South Korea’s capital marketshas become an important tool for modernising the country’s financial system.In particular, the government wants the local capital markets to play a largerrole in financing, both to reduce the importance of the banks in lending andto improve the efficiency of fund allocation. Steps taken in this directioninclude opening the local stockmarket more or less completely to foreign

Problems in theinsurance sector

Investment trustcompanies

Reform of thecapital markets

36 South Korea


investors in early 1998 and encouraging the development of a governmentbond market by, for example, promoting the three-year government bond asthe benchmark issue and issuing government bonds with maturities longerthan the hitherto traditional three years. A further important development wasthe opening in April 1998 of the country’s first futures exchange in Pusan,which allows investors to hedge currency risk in South Korea itself. The lack ofhedging facilities within the country before the advent of the futures exchangehas been cited as one of the reasons why the chaebol were so exposed to thedramatic fluctuations in the won:dollar rate at the end of 1997. (See Referencetable 22 for stockmarket data.)

Other services

Tapping the country’s tourism potential is an important goal for thegovernment. The number of visitors to South Korea increased by 7.2% per yearbetween 1995 and 1999, rising to 3.9m in that year. Visitors from neighbouringJapan remain the largest single group, followed by nationals resident abroadreturning for visits and visitors from the US. Receipts from tourism,meanwhile, have been rising much faster, by an average of 14.6% between1994 and 1998 (the latest period for which full-year data are available).

South Korea had 446 hotels and 46,360 hotel rooms in 1998 (latest availabledata), 38.9% and 28% more than in 1989, respectively. In 1998, 47.4% of thehotel rooms were in five-star hotels, a level only slightly higher than in 1989.The number of hotels rose rapidly in the 1980s, particularly around the time ofthe 1986 Asian Games and the 1988 summer Olympics, which were held inSeoul. The country’s tourist industry is certain to get another boost in 2002,when it and Japan are to co-host the football World Cup. (See Referencetable 23 for data on tourism.)

Tourism statistics, 1999

Foreign-exchange receipts (US$ m) 4,615a

Visitor arrivals (‘000) 3,921 of which from: Japan 2,174 US 473 Taiwan 146

a January-September.

Source: National Statistical Office, Monthly Statistics of Korea.

Tourism is gainingimportance

A rising number ofhotel rooms

South Korea 37


The external sector

Trade in goods

Between 1990 and 1999 there was a merchandise trade surplus on a customs-cleared basis in only two years—1998 (US$39bn) and 1999 (US$23.9), largely asa result of the sharp decline in imports in 1998 following the end-1997financial crisis. The largest of the trade deficits occurred in 1996, when importsexceeded exports by US$20.6bn. To a large extent this reflects the highimported content of South Korea’s exports and the need to import capitalgoods for investment. Thus strong merchandise exports and businessinvestment have tended to be accompanied by a rapid rise in merchandiseimport growth, as in 1995-96, for example. This has also been one of thereasons for the persistent merchandise trade deficits with the US (again withthe exception of 1998-99)a rare phenomenon among north-east Asiancountries, but one that has not stopped the US berating South Korea for itsclosed markets.

Foreign trade, 1999(US$ bn)

Exports fob 143.7

Imports cif –119.8

Trade balance fob-cif 23.9

Balances with selected partnersBalance with the US 4.6Balance with Japan –8.3Balance with China 4.8Balance with Germany 0.4


The composition of South Korea’s exports has changed radically over the last25 years. Exports of labour-intensive goods such as clothing, footwear and toys,which sustained the early assault on the markets of the developed world, arenow either stagnant or in decline—precipitously in the case of footwear. This isbecause wages, especially since 1988, have been high enough in dollar terms torender South Korea uncompetitive as a base for labour-intensive, export-oriented manufacture. In many cases local firms themselves have shifted theiroperations to South-east Asia.

At the same time the capital intensity and sophistication of South Korea’sengineering exports have been growing. Samsung Electronics, for example, is aworld leader in the export of memory chips, having closed the gap thatseparated it from Japanese and US firms in this specialised field in a remarkablyshort time. The motor industry too has been evolving rapidly, having movedbeyond the utility or “cheap and nasty” stage to one in which, withoutcompeting head-on with Japanese technological excellence, it provides goodvalue for money in the niche it has established.

Merchandise trade deficitsin the 1990s

The decline of labour-intensive exports

More sophisticatedproducts

38 South Korea


In the shipbuilding industry, where the parameters are the high-wage, capital-intensive Japanese industry and the low-wage, labour-intensive industry ofChina, South Korea has repositioned itself between these extremes withcontinuing success, of which the sale of vessels to Japan is a striking example.A final illustration of the changing pattern of exports is that the country hasfor some years been a net exporter of telecommunications equipment. Indeed,South Korea’s exports are increasingly those of an industrial economyapproaching maturity.

Dependence on imported energy is a notable feature of the economy. Energyimports in 1999 represented 97.1% of primary energy consumption, up from85.5% in 1989 and 73.4% in 1979. It is true that imports of crude petroleum,valued at US$14.8bn in 1999, represented only 10.3% of total export revenuein 1999, compared with 30% in 1981, but oil prices more than halved over thesame period. Furthermore, South Korea now diversifies its energy supplies withimports of liquefied natural gas (LNG) and steam coal and buys in refinedpetroleum products on a significant scale.

Main commodities traded, 1999(US$ bn)

Exports fob Imports cif

Electrical & electronic products 45.8 Electrical & electronic machinery 31.7

Machinery 11.6 Mineral fuels 22.7

Metal goods 10.3 Machinery 13.5

Passenger cars 9.4 Chemicals 9.8

Chemicals 9.4 Consumer durables 6.4


The direction of merchandise trade has changed—most notably in recent yearsbecause of the expansion of markets in the developing world and in thecommunist and former communist countries. Trade with China, for example,has risen from nowhere to rank third, after the US and Japan. Markets inmember countries of the Association of South-East Asian Nations (ASEAN) arealso becoming more important. This change has been condemned by some,who believe that South Korea is shirking the challenge of raising its share of thedeveloped-country markets. This criticism would be valid if the growth inexports to the developing world was indeed taking place at the expense ofefforts in OECD markets, but there is every indication that these are beingmade at the same time.

South Korea’s exports (in dollar terms) to the US and Japan did not rise between1989 and 1994. This can be attributed to the decline in traditional labour-intensive export lines, rather than to failure to compete in technologicallymore advanced product markets. In 1995-99 solid export growth was recordedto the US, and the healthy growth in South Korean exports to Germany andother EU countries over the same period refutes any suggestion that SouthKorea cannot expand sales in OECD markets. Merchandise exports to Japan fellby 17.2% year on year in 1998, but this reflected the economic problems inJapan rather than difficulties in meeting the demands of the Japanese market

Selling ships to Japan

Dependence onfuel imports

Growing markets in thedeveloping world

Robust exports to the OECD

South Korea 39


per se. (See Reference tables 24-27 for various data on South Korea’smerchandise trade.)

Main trading partners, 1999

% of % ofMerchandise exports fob to: total Merchandise imports cif from: total

US 20.5 US 20.8

Japan 11.0 Japan 20.2

China 9.5 China 7.4

Hong Kong 6.3 Saudi Arabia 4.7

Taiwan 4.4 Australia 3.9


Invisibles and the current account

South Korea’s current-account balance, which achieved a surplus of US$990m(national estimate) in 1993, moved back into deficit in 1994 to the tune ofUS$3.9bn. This deficit widened further in both 1995 and 1996, reachingUS$23bn in the latter year, the highest level ever recorded in South Korea. Theworsening of the current-account deficit in 1996 largely reflected thedeterioration in the country’s terms of trade caused by the cyclical decline inthe prices of South Korea’s main export products, notably semiconductors.Slower merchandise import growth in 1997 and import compression in 1998sharply reduced the current-account deficit in 1997 and helped swing thecurrent account into a surplus of US$40bn in 1998. Although imports grewrapidly in 1999 in both volume and value terms, this was not enough to makeup for the ground lost in 1998, with the result that another large current-account surplus was recorded during the year. (See Reference table 29 for anIMF breakdown of balance-of-payments data and Reference table 30 fornational data.)

Current account, 1999(US$ bn)

Merchandise exports 145.5

Merchandise imports –116.8

Trade balance 28.7

Services balance –1.0

Income balance –4.7

Current transfers balance 2.0

Current-account balance 25.0


For most of the 1990s, again with the notable exception of 1998, the deficit onthe invisibles balance tended to worsen. An important factor in thisdeterioration was the steady worsening of the services balance, mainly owingto a widening of travel-balance deficit from US$357.9m in 1991 to US$2.3bn in1997, as South Koreans took advantage of their relatively recent freedom to

A volatile current account

Deficit on invisibles

40 South Korea


travel abroad. In 1998 the travel account recorded a surplus of US$3bn, as therecession cut outward tourism sharply, which helped produce a small servicessurplus of US$628.3m for the year. With the rapid acceleration of growth in1999 bringing with it a resumption of growth in outward tourism, the travel-account surplus narrowed to just US$1.7bn, which in turn helped return theservices balance to deficit. The country also runs persistent deficits on itsincome balance, largely reflecting outflows of interest payments on its largestock of foreign debt. The income-balance deficit rose from US$163.8m in 1991to US$2.4bn in 1997 and to US$2.5bn in 1997 and remained steady at aroundUS$5bn in 1998-99.

Capital flows and foreign debt

Transactions on the capital account of the balance of payments have beenconstrained historically by government controls on the flow of capital in bothdirections. Capital-account deregulation received a boost in the run-up toOECD membership in 1996 and accelerated following the IMF-led bail-out atthe end of 1997; as a result limits have now mostly been lifted. Foreignownership of companies in most sectors, even through hostile takeover bids, isnow permitted, with the result that inward foreign direct investment (FDI—approvals and actual) is now rising rapidly. Foreign participation in thedomestic debt and equity markets is now also actively encouraged and foreign-exchange transaction restrictions have been almost completely removed. (SeeReference table 31 for data on inward FDI on an approvals basis.)

Until the latter part of 1997 South Korea had never had significant problemswith foreign indebtedness. It exported its way out of the 1973-74 oil-priceshock with such success that it moved into current-account surplus as early as1977. The second oil-price shock in 1979-81 could not be neutralised in thesame way, as on this occasion the OECD countries did not countenance higherinflation as a way out of their difficulties as they had the first time, and SouthKorea was consequently denied export market growth. Although seriouscurrent-account deficits emerged, which had to be financed by foreignborrowing, the situation never reached the point where the overall debt-serviceratio was a cause for concern.

In the 1990s, however, the stock of foreign debt began to rise more quickly, asthe government encouraged the country’s banks and chaebol to borrow heavilyabroad in order to finance rapid industrial expansion. The distortions on thedomestic market, where long-term finance was comparatively difficult toraise—and where interest rates were kept higher than market-clearing levels—together with the remaining controls on capital flows, encouraged SouthKorean companies and banks to borrow short-term abroad, to fund long-terminvestment. By end-1996, for example, according to World Bank data, SouthKorea’s total external liabilities (including external debt and debt contractedby overseas branches of domestic financial institutions) had risen toUS$163.5bn, nearly four times the level at end-1993 and more than five timesthe end-1990 level.

An open capital account

No debt problemsuntil 1997

Rising external debt levelsin the 1990s

South Korea 41


More worrying even than the absolute figure, however, was the rapid build-upof short-term debt—by the end of 1996 short-term debt accounted for 40.7% ofthe total, again according to World Bank data. (To a large extent thisdevelopment was a direct result of government policy, which in 1993 allowedcompanies to borrow short-term abroad to finance capital-goods imports.)This, together with the fact that much of this debt was borrowed by private-sector institutions on floating global rates, made South Korea vulnerable to asudden credit crunch, which duly came in the latter part of 1997. South Korea’sworst ever current-account deficit in 1996, a series of high-profile chaebolbankruptcies and contagion from the financial crises elsewhere in the regionall undermined the creditworthiness of South Korea’s private-sector borrowers,making it difficult for them to service their foreign loans.

This, in turn, forced the government to approach the IMF and othermultilateral and bilateral lenders for emergency funds of almost US$60bn. Theestablishment of the bail-out fund and the swift introduction of an IMF stand-by loan and funds from the Asian Development Bank and the World Bank inDecember 1997, together with debt-rescheduling agreements between theSouth Korean government and foreign banks in January 1998, helped torestore currency stability and avert the danger of large-scale default by SouthKorean companies. This was followed in March 1998 by a successful agreementbetween South Korean banks and their creditors to restructure nearly US$24bnof short-term debt. Since the crisis, South Korean borrowers have beenreducing their short-term borrowings; this, together with increased borrowingby the public sector, had dramatically improved South Korea’s debt profile bymid-2000. (See Reference table 32 for data from the World Bank on SouthKorea’s external debt.)

Foreign reserves and the exchange rate

Foreign-exchange reserves, although lower than in many of South Korea’sAsian competitors, were large in 1996, at US$33.2bn. The BOK’s vain attemptto bolster the won towards the end of 1997 as South Korea was sucked into theregional financial crisis, however, depleted them to the point where usablereserves, of US$8.9bn, were equivalent to less than one-fifth of short-termliabilities. Since then, large current-account surpluses and steady inflows offunds from multilateral lenders and the IMF have boosted reservesconsiderably. At end-1999 foreign reserves stood at US$74bn, the fourthhighest level in the world. (See reference table 33 for data on South Korea’sforeign reserves.)

A growing proportion ofshort-term debt

The IMF leads a bail-out

Rising foreign reserves

42 South Korea


Foreign reserves, end-1999a

Total (US$ m) Per head (US$)

South Korea 73,987 1,579

Singapore 76,843 23,864

Taiwan 106,200 4,838

China 157,728 126

Japan 286,916 2,265

US 60,500 222

Germany 51,039 619

a Excluding gold.

Sources: IMF, International Financial Statistics; Central Bank of China, Financial Statistics.

In response to the downward pressures on the won in late 1997, the BOKwidened the currency’s daily trading band from 2.25% to 10% in November ofthat year and then scrapped the limit altogether in December. The movereflected the government’s recognition of its own inability to dictate themovements of the won, after it had spent most of the country’s foreign-exchange reserves trying to defend the currency as the financial crisisworsened. Since falling to nearly W2,000:US$1 at the beginning of 1998, thewon has steadily appreciated against the dollar, reaching around W1,100:US$1by mid-2000. The main reasons have been steadily rising foreign-exchangereserves, inflows of foreign direct and portfolio investment and a collapse inforeign borrowing by South Korean corporate. The government no longerintervenes directly in foreign-exchange markets to maintain a target for thewon exchange rate, although it may intervene directly by, for example, issuingcurrency-stabilisation bonds. (See Reference table 34 for data on exchangerates.)

The won trades freely

South Korea 43


Appendices

Sources of information

Bank of Korea, Economic Statistics Yearbook, Seoul Bank of Korea, MonthlyStatistical Bulletin, Seoul

Ministry of Construction and Transportation, Statistical Yearbook of Constructionand Transportation, Seoul

Ministry of Trade, Industry and Energy, Yearbook of Energy Statistics, Seoul

National Statistical Office, Korea Statistical Yearbook, Seoul

National Statistical Office, Major Statistics of Korean Economy (bi-annual), Seoul

National Statistical Office, Monthly Statistics of Korea, Seoul

National Statistical Office, Social Indicators in Korea (annual), Seoul

Bank of Korea: http://www.bok.or.kr

Board of Audit and Inspection: http://www.bai.go.kr

Financial Supervisory Commission: http://www.fsc.go.kr

Ministry of Commerce, Industry and Energy: http://www.mocie.go.kr

Ministry of Construction and Transportation: http://www.moct.go.kr

Ministry of Finance and Economy: http://www.mofe.go.kr

Ministry of Foreign Affairs and Trade: http://www.mofat.go.kr

Ministry of Information and Communication: http://www.mic.go.kr

Ministry of Labour: http://www.molab.go.kr

National Statistical Office: http://www.nso.go.kr

President’s office: http://www.cwd.go.kr

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex, HA5 5PJ

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Economic Survey: Korea (annual)

United Nations Development Programme, Human Development Report (annual)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

National statistical sources

Select websites

International sources

44 South Korea


Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialisation,Oxford University Press, Oxford and New York, 1989

Robert E. Bedeski, The Transformation of South Korea: Reform and Reconstructionin the Sixth Republic under Roh Tae-woo 1987-1992, Routledge, London and NewYork, 1994

John Kie-Chiang Oh, Korean Politics: The Quest for Democratization andDevelopment, Cornell University Press, Ithaca and London, 1999

Eun-me Kim, Big Business, Strong State: Collusion and Conflict in South KoreanDevelopment, 1960-1990, State University of New York Press, Albany, 1997

Byung-nak Song, The Rise of the Korean Economy, Oxford and New York, 1990

Ludwig H. Shätzl and others, Regional Development and Decentralization Policy inSouth Korea, Institute of Southeast Asian Studies, Singapore, 1997

Reference tables

Reference table 1

Population and labour(‘000 unless otherwise indicated)

1995 1996 1997 1998 1999

Population 45,093 45,545 45,991 46,430 46,858 % change 1.0 1.0 1.0 1.0 0.9

Aged 15 & over 33,664 34,285 34,842 35,362 35,765 % change 2.2 1.8 1.6 1.5 1.1

Economically active population 20,853 21,243 21,662 21,456 21,634 % change 2.6 1.9 2.0 –1.0 0.8

Participation rate (%) 61.9 62.0 62.2 60.7 60.5

Employed 20,432 20,817 21,106 19,994 20,281 % change 3.0 1.9 1.4 –5.3 1.4 In agriculture, forestry & fishing 2,534 2,429 2,385 2,480 2,349 In manufacturing 4,797 4,692 4,482 3,898 4,006 In mining 27 23 26 21 20 In social overhead capital & services 13,074 13,673 14,213 13,595 13,906

Unemployed 420 426 556 1,461 1,353 % of economically active 2.0 2.0 2.6 6.8 6.3


Reference table 2

Road transport indicators

1994 1995 1996 1997 1998

Paved roads (km) 57,421 56,387 59,840 62,868 64,780

Passenger cars (‘000) 5,149 6,006 6,894 7,856 7,581

Trucks (‘000) 1,645 1,817 1,963 2,072 2,105

Buses (‘000) 582 613 663 719 749

Commercial road transport Passenger-km (m) 74,167 72,324 72,871 68,737 66,853 Freight-km (m tonnes) 15,446 18,213 19,114 22,219 9,387

Sources: National Statistical Office, Korea Statistical Yearbook; Monthly Statistics of Korea; Major Statistics of Korean Economy.

Select bibliography

South Korea 45


Reference table 3

Rail transport indicators

1994 1995 1996 1997 1998

Track length (km) 3,101 3,101 3,120 3,118 3,125

Passenger-km carried (m) 31,912 29,292 29,580 30,073 32,976 % market share 25.3 23.7 23.8 25.0 27.9

Freight-km (m tonnes) 14,070 13,838 12,947 12,710 10,372 % market share 21.8 18.2 16.5 15.8 19.4

Source: National Statistical Office, Korea Statistical Yearbook.

Reference table 4

Marine freight(‘000 tonnes unless otherwise indicated)

1994 1995 1996 1997 1998

Total arrivals 393.8 443.6 481.0 514.8 488.4

Coastal freight (arrivals) 116.3 127.6 138.8 144.6 113.5

International freight loaded 76.1 88.4 98.9 114.8 142.4 % of national vessels 23.1 20.1 19.6 17.9 19.8

International freight landed 277.3 316 342.2 370.2 335.0 % of national vessels 27.5 24.5 23.0 18.4 22.6

Source: National Statistical Office, Korea Statistical Yearbook.

Reference table 5

Civil aviation

1994 1995 1996 1997 1998

Passenger-km carried (m)International 54,155 61,613 70,490 74,375 55,736Domestic 6,481 7,406 8,288 9,052 6,877

Freight-km (m tonnes)International 6,992 8,096 9,043 10,552 9,260Domestic 116 123 134 149 140


Reference table 6

Telecommunications

1995 1996 1997 1998 1999a

Telephone subscribers (‘000) 18,600 19,601 20,422 20,089 20,963 per 100 people 41.5 43.0 44.4 43.2 45.1

Cellular-telephone subscribers (‘000) 1,641 3,181 5,696 8,103 12,019

Public telephones (no.) 327,839 339,240 423,502 504,771 598,000

a 3rd quarter 1999.


46 South Korea


Reference table 7

Primary energy consumption(input basis; ‘000 tonnes oil equivalent unless otherwise indicated)

1995 1996 1997 1998 1999

Coal 28,092 32,200 34,799 36,039 38,139 % change 5.3 14.6 8.1 3.6 5.8 % of total 18.7 19.5 19.3 21.7 21.0

Petroleum 93,955 99,898 109,080 90,582 97,481 % change 8.8 6.3 9.2 –17.0 7.6 % of total 62.5 60.5 60.4 54.6 53.7

LNG 9,213 12,172 14,792 13,838 16,851 % change 20.9 32.1 21.5 –6.4 21.8 % of total 6.1 7.4 8.2 8.3 9.3

Hydroelectricity 1,369 1,300 1,351 1,525 1,517 % change 33.6 –5.0 3.5 3.5 4.5 % of total 0.9 0.8 0.7 0.9 0.8

Nuclear 16,757 18,481 19,272 22,422 25,766 % change 14.3 10.3 4.3 16.3 14.9 % of total 11.1 11.2 10.7 13.5 14.2

Firewood & others 1,051 1,161 1,344 1,526 1,806 % change 16.0 10.5 15.8 13.5 18.3 % of total 0.7 0.7 0.7 0.9 1.0

Total 150,437 165,212 180,638 165,932 181,560 % change 9.6 9.8 9.3 –8.1 9.4

Source: National Statistical Office, Monthly Statistics of Korea

Reference table 8

Electricity

1995 1996 1997 1998 1999

Capacity (mw)Thermal 20,475 23,005 27,612 28,259 30,115Hydro 3,093 3,094 3,115 3,131 3,148Nuclear 8,616 9,616 10,316 12,016 13,716Total 32,184 35,715 41,042 43,406 46,978

Generation (gwh)Thermal 112,154 126,368 141,955 119,512 130,194Hydro 5,478 5,201 5,403 6,100 6,066Nuclear 67,029 73,924 77,086 89,689 103,064Total 184,660 205,494 224,445 215,301 239,325

Consumption (gwh)Manufacturing 91,990 101,831 111,207 103,831 115,335Public & services 38,531 45,091 51,886 51,730 58,775Residential 28,303 30,220 32,515 32,913 34,581Total incl others 163,270 182,048 200,784 193,470 214,215 % change 11.4 11.5 10.3 -3.6 10.7


South Korea 47


Reference table 9

Energy statistics

1995 1996 1997 1998 1999

PetroleumCrude oil imports (‘000 barrels) 624,945 721,927 873,415 819,094 874,090Petroleum product imports (‘000 barrels) 205,428 215,124 185,811 175,895 184,449

Production of selected refined products (’000 barrels)Diesel oil 180,908 216,446 264,173 232,500 218,755Naphtha 88,317 103,128 157,121 153,832 164,447Petrol 60,459 70,935 78,648 76,026 75,166

Consumption of selected refined products (’000 barrels)Diesel oil 163,113 172,406 166,790 120,372 126,116Naphtha 131,474 141,273 194,918 213,860 220,376Petrol 59,382 67,971 71,358 61,089 63,985

Coal & anthracite (’000 tonnes)Imports 39,406 46,818 49,819 51,335 52,293Consumption 42,660 50,277 53,942 55,892 59,093

Natural gas (’000 tonnes)Imports 7,060 9,595 11,629 10,600 23,973Consumption 7,087 9,361 11,379 10,646 12,961

Sources: National Statistical Office, Korea Statistical Yearbook; Monthly Statistics of Korea.

Reference table 10

Gross domestic product by sector(W bn unless otherwise indicated; current prices)

1995 1996 1997 1998 1999

Agriculture, forestry & fishing 23,354 24,438 24,258 21,978 24,178 % change 10.7 4.6 –0.7 –9.4 10.0 % of total 6.2 5.8 5.4 4.9 5.0

Mining & quarrying 1,776 1,783 1,909 1,675 1,726 % change 1.7 0.4 7.1 –12.2 3.0 % of total 0.5 0.4 0.4 0.4 0.4

Manufacturing 110,827 120,760 130,968 137,153 153,855 % change 18.1 9.0 8.5 4.7 12.2 % of total 29.4 28.9 28.9 30.9 31.8

Construction 42,564 48,555 52,796 44,993 42,393 % change 17.2 14.1 8.7 –14.8 –5.8 % of total 11.3 11.6 11.6 10.1 8.8

Electricity, gas & water 7,856 8,678 9,604 10,868 12,706 % change 11.7 10.5 10.7 13.2 16.9 % of total 2.1 2.1 2.1 2.4 2.6

Wholesale & retail trade, hotels & restaurants 47,173 50,300 51,788 45,661 52,546 % change 15.7 6.6 3.0 –11.8 15.1 % of total 12.5 12.0 11.4 10.3 10.9

Transport, storage & communications 24,821 27,477 29,731 31,330 33,922 % change 16.5 10.7 8.2 5.4 8.3 % of total 6.6 6.6 6.6 7.1 7.0

continued

48 South Korea


1995 1996 1997 1998 1999

Financial & business services 68,235 77,912 86,689 86,466 95,218 % change 18.9 14.2 11.3 –0.3 10.1 % of total 18.1 18.6 19.1 19.5 19.7

Government services 27,986 31,817 34,654 35,827 35,864 % change 14.2 13.7 8.9 3.4 0.1 % of total 7.4 7.6 7.6 8.1 7.4

Total incl others 377,350 418,479 453,276 444,367 483,778 % change 16.7 10.9 8.3 –2.0 8.9 % of total 100.0 100.0 100.0 100.0 100.0


Reference table 11

Gross domestic product(W bn)

1995 1996 1997 1998 1999

At current prices 377,350 418,479 453,276 449,509 483,778 % change 16.7 10.9 8.3 –0.8 7.6

At constant (1995) prices 377,350 402,821 423,007 394,710 436,799 % change 8.9 6.8 5.0 –6.7 10.7

Per head (W ’000)At current prices 8,368 9,188 9,856 9,681 10,324At constant (1995) prices 8,368 8,845 9,198 8,501 9,322


Reference table 12

Gross domestic product by expenditure(W bn unless otherwise indicated; constant 1995 prices)

1995 1996 1997 1998 1999

Private consumption 206,407 221,006 228,738 202,587 223,496 % change 9.6 7.1 3.5 –11.4 10.3 % of total 54.7 54.9 54.1 51.3 51.2

Government consumption 36,434 39,412 39,984 39,819 39,582 % change 0.8 8.2 1.5 –0.4 –0.6 % of total 9.7 9.8 9.5 10.1 9.1

Gross fixed-capital formation 138,439 148,580 145,295 114,537 119,273 % change 11.9 7.3 –2.2 –21.2 4.1 % of total 36.7 36.9 34.3 29.0 27.3

Change in stocks 1,826 3,914 –4,218 –27,626 –5,906 % of total 0.5 1.0 –1.0 –7.0 –1.4

Exports of goods & non–factor services 113,972 126,750 153,931 174,321 202,818 % change 24.6 11.2 21.4 13.2 16.3 % of total 30.2 31.5 36.4 44.2 46.4

Imports of goods & non–factor services –119,534 –136,562 –140,905 –109,347 –140,989 % change 22.4 14.2 3.2 –22.4 28.9 % of total –31.7 –33.9 –33.3 –27.7 –32.3

Statistical discrepancy –192 –279 182 393 –1,475 % of total –0.1 –0.1 0.0 0.1 –0.3

GDP 377,350 402,821 423,007 394,710 436,799 % change 8.9 6.8 5.0 –6.7 10.7 % of total 100.0 100.0 100.0 100.0 100.0

continued

South Korea 49


1995 1996 1997 1998 1999

Net factor income from abroad –1,033 –1,303 –2,175 –5,551 –4,646 % of total –0.3 –0.3 –0.5 –1.5 –1.2

GNP 376,316 394,199 402,655 367,372 400,196 % change 8.1 4.8 2.1 –8.8 8.9 % of total 99.7 97.9 95.2 93.1 91.6


Reference table 13

Central government finances(W bn)

1995 1996 1997 1998 1999

Revenue 76,917 88,732 95,512 94,277 97,251 of which: value-added tax 14,637 16,771 19,488 15,709 20,370 income tax 13,618 14,767 14,868 17,194 15,855 corporation tax 8,663 9,356 9,425 10,776 13,881 customs revenue 4,633 5,317 5,798 3,842 4,688 non-tax revenue 22,029 26,347 28,974 29,657 24,728

Expenditure 75,247 88,544 95,579 107,496 112,825 of which: general expenses 38,292 43,458 43,358 56,389 60,670 defence 11,051 13,217 14,161 13,964 14,346 fixed-capital formation 4,045 5,007 5,734 8,274 7,222

Net lending –42 79 2 1 –63

Balancea 1,712 108 –70 –13,218 –15,511

a Subject to rounding.


Reference table 14

Money supply(W bn; end-period)

1995 1996 1997 1998 1999

Notes & coins issued 17,324 17,907 17,786 15,934 22,573

M1 38,873 39,542 35,036 35,583 44,375

M2 153,945 178,312 203,531 258,538 329,317

M3 527,017 614,962 700,285 787,627 850,828


Reference table 15

Construction statistics

1995 1996 1997 1998 1999

Domestic construction orders (W bn) 49,025 59,535 62,722 36,036 36,299 of which: dwellings 18,396 21,033 20,187 10,902 17,402 offices & stores 6,121 7,168 7,101 2,362 1,648 factories 4,902 3,246 3,505 491 716

Floor area of construction permits (‘000 sq metres) 117,327 113,820 113,374 50,965 72,534


50 South Korea


Reference table 16

Price indices(1995=100 unless otherwise indicated)

1995 1996 1997 1998 1999

Producer price index 100.0 103.2 107.2 120.3 117.8 % change 4.7 3.2 3.9 12.2 –2.1

Consumer price index 100.0 104.9 109.6 117.8 118.8 % change 4.5 4.9 4.5 7.5 0.8

Export price index (won basis) 100.0 95.8 102.1 134.1 108.8 % change 1.3 –4.2 6.6 31.3 –18.9

Import price index (won basis) 100.0 100.7 110.3 141.4 124.3 % change 5.7 0.7 9.5 28.2 –12.1


Reference table 17

Average monthly earnings and productivity(W ‘000 unless otherwise indicated)

1995 1996 1997 1998 1999

All industries 1,222 1,368 1,463 1,427 1,544 % change 11.2 11.9 7.0 –2.5 8.2

Manufacturing 1,124 1,261 1,326 1,284 1,476 % change 10.0 12.2 5.2 –3.1 14.9

Construction 1,384 1,501 1,623 1,502 1,576 % change 9.0 8.5 8.1 –7.4 4.9

Labour productivity index, all industries (1995=100) 100.0 112.8 130.4 143.2 161.4 % change 10.5 12.8 15.6 9.8 12.7

Labour productivity index, manufacturing (1995=100) 100.0 112.8 130.5 143.2 161.6 % change 10.7 12.8 15.7 9.7 12.8


Reference table 18

Agriculture

1994 1995 1996 1997 1998

No. of farm households (‘000) 1,558 1,501 1,480 1,440 1,413

Cultivated land (‘000 ha) 2,033 1,985 1,945 1,924 1,910

Rice production (‘000 tonnes) 5,060 4,695 5,323 5,450 5,975

Barley & wheat production (‘000 tonnes) 234 292 299 195 189

Soybean production (‘000 tonnes) 154 160 160 156 140

Pigs (‘000) 5,958 6,412 6,516 7,096 7,544

Source: Bank of Korea, Korea Statistical Yearbook.

South Korea 51


Reference table 19

Principal manufactured items

1995 1996 1997 1998 1999

Woollen fabrics (‘000 sq metres) 17,775 17,220 13,981 7,307 6,105

Newsprint (‘000 tonnes) 956.9 1,300.9 1,583.3 1,699.7 1,737.8

Polyethylene (‘000 tonnes) 2,340.6 2,596.7 2,943.0 3,132.9 3,398.7

Vehicle tyres (m) 53.5 57.7 59.3 60.1 67.1

Plate glass (m cases) 21.6 24.0 26.5 19.2 19.7

Cement (m tonnes) 56.1 58.4 60.3 46.8 48.6

Hot rolled strip steel (m tonnes) 10.2 11.3 11.7 10.4 10.2

Air-conditioners (‘000) 1,487 1,929 1,855 2,237 3,839

Household washing machines (‘000) 2,827 2,878 2,967 2,643 2,822

Microwave ovens (‘000) 10,487 10,100 10,990 9,586 9,762

Colour-TV receivers (‘000) 18,555 21,469 16,428 12,763 15,556

VCRs (‘000) 11,792 11,560 9,781 7,070 10,804

Passenger cars (‘000) 1,875 2,256 2,313 1,577 2,158

Steel cargo ships (‘000 gt) 3,571 5,665 5,510 4,183 4,242


Reference table 20

Industrial production indices1995 1996 1997 1998 1999

Food products & beverages 100.0 104.8 103.6 93.8 102.6

Textiles 100.0 93.1 86.3 77.9 82.9

Clothing 100.0 100.8 79.7 56.7 62.6

Chemicals 100.0 111.9 125.8 121.6 134.2

Basic metals 100.0 106.1 112.2 98.7 112.7

Motor vehicles 100.0 112.6 111.9 73.9 113.3

Manufacturing 100.0 108.3 113.2 105.7 132.1


Reference table 21

Interest rates(%; end-period)

1995 1996 1997 1998 1999

Bank of Korea discount rate 5.0 5.0 5.0 5.0 5.0

Commercial banks’ time deposit ratea 7.5 9.8 12.6 9.1 8.0

Commercial banks’ loan rateb 12.5 11.1 15.3 11.1 8.5

Yield on corporate bonds OTCc 11.7 12.6 24.3 8.3 9.9

a Rate on three-month time deposits at deposit money banks. b Rate on loans of general funds ofup to one year for general enterprises. c Guaranteed corporate bonds with a maturity of three years.


52 South Korea


Reference table 22

Stockmarket indicators

1995 1996 1997 1998 1999

Volume of shares traded (m) 7,656 7,785 12,125 28,533 69,359

Value of shares traded (W bn) 142,914 142,642 162,281 192,845 866,924

Stock price index (year-end; 1980=100) 882.9 651.2 376.3 562.5 1,028.1

Price/earnings ratio 16.4 17.8 17.0 10.8 13.5

Average dividend yield (%) 1.1 1.5 1.9 1.7 0.7


Reference table 23

Tourism

1995 1996 1997 1998 1999

Foreign-exchange receipts (US$ m) 5,677 5,455 5,804 6,924 4,615a

Visitor arrivals (‘000) 2,294 2,880 3,089 3,506 3,921 of which from: Japan 1,652 1,517 1,668 1,948 2,174 US 408 460 483 471 473 Taiwan 167 160 146 146 149

a January-September.


Reference table 24

Main merchandise exports by value(US$ bn; fob)

1995 1996 1997 1998 1999

Food & goods for direct consumption 3.0 3.1 3.0 2.7 3.0

Crude materials & fuels 4.6 6.1 7.7 7.4 7.8 of which: petroleum 2.4 3.9 5.3 4.6 5.8

Light industry products 30.4 32.7 33.8 32.5 29.7 of which: clothing 5.0 4.2 4.2 4.7 4.9 fabric 9.2 9.3 9.6 7.9 8.0 tyres & tubes 1.3 1.5 1.5 1.5 1.5

Heavy industry products 87.0 87.8 91.7 89.7 103.2 of which: chemicals & chemical compounds 8.0 7.9 9.3 9.0 9.4 metal goods 10.0 8.5 9.9 11.1 10.3 electronic products 35.0 34.0 36.7 34.3 45.8 of which: semiconductors 17.7 15.2 17.4 17.0 18.9 machinery & equipment 8.7 9.4 10.2 10.1 11.6 motor vehicles 6.6 8.3 8.6 8.2 9.4 ships 5.5 7.1 6.5 8.0 7.5

Total incl others 125.1 129.7 136.2 132.3 143.7


South Korea 53


Reference table 25

Main merchandise imports by value(US$ bn; cif)

1995 1996 1977 1998 1999

Food & consumer goods 15.6 21.3 20.9 12.7 14.0 of which: consumer durables 6.9 10.4 10.9 6.6 6.4 consumer non-durables 2.1 2.9 2.7 1.1 1.6

Industrial materials & fuels 64.6 68.6 69.4 45.6 57.3 of which: crude petroleum 10.8 14.4 17.8 11.2 14.8 light industry inputs 7.0 6.4 5.7 3.7 4.2 chemicals & chemical products 11.8 11.5 11.4 8.0 9.8 iron & steel products 7.1 7.2 6.3 3.3 4.8 non-ferrous metals 4.8 4.3 4.7 3.3 4.0

Capital goods 54.9 60.4 54.3 35.0 48.5 of which: machinery & equipment 24.6 26.0 20.4 10.5 13.5 electrical & electronic machinery 23.3 26.5 28.6 21.6 31.7 of which: semiconductors 9.0 10.5 12.9 12.2 16.1 information equipment 5.5 6.5 6.3 3.5 7.0 transport equipment 6.0 6.7 4.0 2.1 2.4

Total incl others 133.8 150.3 144.6 93.3 119.8

For domestic use 90.4 101.5 93.9 48.1 63.8

For export 44.4 48.8 50.8 45.2 56.0


Reference table 26

Trade volume indices(1995=100)

1995 1996 1997 1998 1999

Exports 100.0 117.5 134.7 160.5 179.8

Imports 100.0 115.6 117.8 88.3 114.0


Reference table 27

Main trading partners(% of total)

1995 1996 1997 1998 1999

Exports fob to:US 19.3 16.7 15.9 17.2 20.5Japan 13.6 12.2 10.8 9.2 11.0China 7.3 8.8 10.0 9.0 9.5Hong Kong 8.5 8.6 8.6 7.0 6.3Singapore 5.3 5.0 4.3 3.1 3.4Germany 4.8 3.6 3.5 3.0 2.9

continued

54 South Korea


1995 1996 1997 1998 1999

Imports cif from:US 22.5 22.2 20.8 21.9 20.8Japan 24.1 20.9 19.3 18.1 20.2China 5.5 5.7 7.0 7.0 7.4Saudi Arabia 2.8 4.4 4.1 4.7 4.7Australia 2.8 4.2 4.9 5.0 3.9Germany 4.9 4.8 4.0 3.6 3.2


Reference table 28

Direction and composition of trade, 1998(US$ m)

Exports fob US Japan China Hong Kong Total

Food 144 1,456 117 124 2,428 of which: fish 19 677 92 16 941Mineral fuels 222 1,189 1,150 677 4,595Chemicalsa 808 939 2,833 930 10,853Hides & skins, leather & manufactures 221 169 624 277 1,724Rubber & manufactures 377 42 73 52 2,004Paper & manufactures 227 60 508 356 1,726Textile fibres, yarn, cloth & manufactures 964 336 1,922 1,752 12,062Iron & steel & manufacturesb 1,760 1,325 1,116 719 8,790Other metals & manufacturesb 411 580 381 465 3,094Machinery & transport equipment 14,187 3,825 2,597 3,054 65,585 of which: electrical & electronic equipment 8,264 2,818 1,420 2,465 31,820 road vehicles & tractors 2,051 91 110 63 11,434 other transport equipment 544 222 56 147 9,446Clothing 2,021 924 90 85 4,478Footwear 175 176 149 29 810Scientific instruments etc 533 364 71 149 2,931Non-monetary gold 1 88 5 392 6,695Total incl others 22,987 12,237 11,944 9,261 132,302

continued

South Korea 55


Imports cif US Japan China Australia Total

Food 1,430 65 758 485 4,597 of which: cereals & preparations 988 1 388 150 1,716Hides, skins, leather & manufactures 515 21 63 6 1,014Rubber & manufactures 56 120 7 1 577Wood & manufactures 118 9 87 21 912Pulp 403 28 0 2 974Ores, slag & ash 26 2 45 648 1,712Mineral fuels 403 148 728 1,310 18,196Chemicalsa 2,219 2,973 509 62 9,447Textile fibres, yarns, cloth & manufactures 452 362 856 169 3,016Iron & steel & manufacturesb 515 1,658 460 117 4,164Other metals & manufacturesb 430 601 330 406 3,796Machinery & transport equipment 10,624 8,443 1,575 198 31,505 of which: electrical & electronic equipment 7,047 5,329 1,034 22 19,425 road vehicles & tractors 200 335 7 10 814 other transport equipment 748 95 235 4 1,454Clothing 11 16 264 1 484Scientific instruments etc 1,013 1,521 115 30 4,060Non-monetary gold 753 35 0 1,032 4,512Total incl others 20,274 16,631 6,300 4,611 93,281

a Including crude fertilisers and manufactures of plastics. b Including scrap.

Source: UN, External Trade Statistics, series D.

Reference table 29

Balance of payments, IMF estimates(US$ bn)

1994 1995 1996 1997 1998

Goods: exports fob 95.0 124.6 130.0 138.6 132.1

Goods: imports fob –97.8 –129.1 –144.9 –141.8 –90.5

Trade balance –2.9 –4.4 –15.0 –3.2 41.6

Services: credit 16.8 22.8 23.4 26.3 24.6

Services: debit –18.6 –25.8 –29.6 –29.5 –24.0

Income: credit 2.4 3.5 3.7 3.9 3.3

Income: debit –3.3 –4.8 –5.5 –6.3 –8.3

Current transfers: credit 3.7 4.1 4.3 5.3 6.7

Current transfers: debit –2.4 –3.9 –4.3 –4.6 –3.4

Current-account balance –4.3 –8.5 –23.0 –8.2 40.6

Direct investment abroad –2.5 –3.6 –4.7 –4.4 –4.8

Direct investment in South Korea 0.8 1.8 2.3 2.8 5.4

Portfolio investment assets –2.0 –2.3 –6.0 –2.0 –1.6

Portfolio investment liabilities 8.1 13.9 21.2 12.3 –0.3

Other investment assets –7.4 –14.0 –13.5 –13.6 6.7

Other investment liabilities 13.6 21.5 24.6 –8.3 –13.9

Financial balance 10.7 17.3 23.9 –9.2 –8.4

Capital-account nie balance –0.4 –0.5 –0.6 –0.6 0.2

Net errors & omissions –1.8 –1.2 1.1 –5.0 –6.4

Overall balance 4.6 7.0 1.4 –23.0 25.9

continued

56 South Korea


1994 1995 1996 1997 1998

Financing (– indicates inflow)Movement of reserves –4.6 –7.0 –1.4 11.9 –31.0Use of IMF credit & loans 0.0 0.0 0.0 11.1 5.0Liabilities constituting foreign authorities’ reserves 0.0 0.0 0.0 0.0 0.0Exceptional financing 0.0 0.0 0.0 0.0 0.0

Source: IMF, International Financial Statistics

Reference table 30

Balance of payments, national estimatesa

(US$ bn)

1995 1996 1997 1998 1999

Merchandise exports fob 124.6 130.0 138.6 132.1 145.5

Merchandise imports fob –129.1 –144.9 –141.8 –90.5 –116.8

Trade balance –4.4 –15.0 –3.2 41.6 28.7

Services: credit 22.8 23.4 26.3 24.6 25.6

Services: debit –25.8 –29.6 –29.5 –24.0 –26.6

Income: credit 3.5 3.7 3.9 3.3 3.8

Income: debit –4.8 –5.5 –6.3 –8.3 –8.5

Current transfers: credit 4.1 4.3 5.3 6.7 6.4

Current transfers debit –3.9 –4.3 –4.6 –3.4 –4.5

Current-account balance –8.5 –23.0 –8.2 40.6 25.0

Direct investment abroad –3.6 –4.7 –4.4 –4.8 –4.0

Direct investment in South Korea 1.8 2.3 2.8 5.4 8.8

Portfolio investment assets –2.3 –6.0 2.0 –1.6 2.0

Portfolio investment liabilities 13.9 21.2 12.3 –0.3 6.9

Other investment assets –14.0 –13.5 –13.6 6.7 –2.4

Other investment liabilities 21.4 24.6 2.8 –8.9 –10.3

Financial-account balance 17.3 23.9 1.9 –3.4 0.9

Capital-account balance –0.5 –0.6 –0.6 0.2 –0.3

Net errors & omissions –1.2 1.1 –5.1 –6.3 –2.6

Overall balance 7.0 1.4 –11.9 31.0 23.0

Memorandum itemTotal change in reserve assets (– indicates inflow) –7.0 –1.4 11.9 –31.0 –23.0

a From the beginning of 1998 South Korea compiles balance-of-payments data using IMFmethodology.


South Korea 57


Reference table 31

Foreign investment approvals by country of origin(US$ m)

1995 1996 1997 1998 1999

US 644.9 876.1 3,189.5 2,972.9 3,738.3

Japan 418.3 254.6 265.8 504.2 1,749.7

Hong Kong 58.0 228.5 84.6 38.4 461.0

Germany 44.7 94.9 398.1 785.2 959.5

UK 86.7 79.0 258.6 60.7 479.5

France 35.2 90.3 410.7 368.9 760.1

Netherlands 170.1 204.8 830.8 1,323.2 3,321.6

Switzerland 9.8 162.0 103.0 76.4 140.3

Others 473.7 1,212.0 1,429.9 2,722.4 3,931.2

Total 1,941.4 3,203.0 6,971.0 8,852.4 15,541.3


Reference table 32

External debt, World Bank estimates(US$ m unless otherwise indicated)

1994 1995 1996 1997 1998

Public medium- & long-term 19,253 22,123 25,423 33,852 57,956

Private medium- & long-term 21,550 17,074 23,798 38,276 36,106

Total medium- & long-term debt 40,802 39,197 49,221 72,128 94,062 Official creditors 5,863 5,350 4,563 8,867 12,750 Multilateral 3,100 2,844 2,363 6,923 11,595 Bilateral 2,763 2,505 2,200 1,944 1,155 Private creditors 13,390 16,774 20,860 24,985 45,206

Short-term debt 31,612 46,613 66,582 53,792 28,139 of which: interest arrears 0 0 0 0 0

Use of IMF credit 0 0 0 11,064 16,896

Total external debt stock 34,940 33,848 44,658 63,261 81,312

Total liabilitiesa 97,400 127,500 163,500 159,200 148,700

Principal repayments 5,222 5,905 6,802 6,781 12,412

Interest repayments 3,109 5,966 6,760 6,997 8,212 of which: short-term debt 848 3,035 3,923 2,887 2,294

Total debt service paid 8,331 11,871 13,562 13,778 20,624

Ratios (%)Total external debt/GNP 18.0 17.6 22.3 28.9 44.0Debt-service ratio, paidb 7.2 7.8 8.6 8.2 12.9Short-term debt/total external debt 43.7 54.3 57.5 39.3 20.2

a Total external liabilities include external debt and debt contracted by overseas branches of domestic financial institutions. b Debt service as apercentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

58 South Korea


Reference table 33

Foreign reserves(US$ m; end-period)

1995 1996 1997 1998 1999

Foreign exchange 31,928 33,237 19,710 51,963 73,700

SDRs 98 118 59 11 1

Reserve position in the IMF 652 682 599 0 286

Total reserves incl gold 32,678 34,037 20,368 51,975 73,987

Source: IMF, International Financial Statistics.

Reference table 34

Exchange rates(W per unit of currency; period averages)

1995 1996 1997 1998 1999

US$ 771.3 804.5 951.3 1,401.4 1,188.8

¥100 870 740 786 1,071 1,044

DM 538.2 534.6 548.6 711.7 1,266.6

£ 1,217.5 1,256.4 1,557.9 2,321.3 1,923.7

SDR 1,170 1,168 1,309 1,901 1,625

NT$ 29.1 29.3 33.1 41.9 36.8

S$ 544.2 570.4 640.7 837.4 701.4

HK$ 104.8 104.0 122.9 180.9 153.2

Sources: IMF, International Financial Statistics; Central Bank of China, Financial Statistics.

North Korea 59


North Korea

Basic data

122,762 sq km (official figure)

22.1m (1999 estimate from South Korea’s National Statistical Office); NorthKorea’s current population is unclear, given widely discrepant estimates—from500,000 to 3m—of the number of deaths resulting from famine since 1995

Population in ’000, 1987 (official sources; later data are not available)

Pyongyang (capital) 2,355Hamhung 701Chongjin 520Nampo 370Sinuiju 289Wonsan 274

Continental, with extremes of temperature

Hottest month, August, 20-27°C (average daily minimum and maximum);coldest month, January, minus 8-1°C; driest month, January, 30 mm averagerainfall; wettest month, August, 317 mm average rainfall

Korean

Metric system; also Korean measures

1 North Korean won (Won)=100 chon. Non-convertible currency. The multipleexchange rates of earlier years seem in practice to have coalesced into a singlerate, currently Won2.20:US$1. Black-market rates are much higher, as is thefloating rate in the Rajin-Sonbong free economic and trade zone

9 hours ahead of GMT

January 1st; February 16th; April 15th, 25th; May 1st; July 27th; August 15th;September 9th; October 10th

Land area

Population

Main towns

Weather in Wonsan(altitude 37 metres)

Language

Measures

Currency

Time

Public holidays

Climate

60 North Korea


Political background

North Korea is the world’s last remaining unreformed Stalinist state. It is ruledby the communist party, the Korean Workers’ Party (KWP), whose institutionsshadow and control those of the state at all levels. Kim Il-sung ruled NorthKorea from its foundation until his death in 1994. After a hiatus of three years,his son and heir, Kim Jong-il, was proclaimed as KWP general secretary in 1997,and in 1998 was reconfirmed as chairman of the National Defence Commission(NDC)—now the highest state position. Despite being isolated, bankrupt andfamine-ridden, North Korea has so far shown remarkable staying power. KimJong-il’s summit meeting with South Korea’s president Kim Dae-jung in June2000 will give his regime a further lease of life, but is not yet a guarantee ofsubstantive change.

Historical background

The ancient land of Korea, unified since 668 AD and with at least 2,000 yearsof continuous cultural history, had a tough and tragic passage to modernity.Less than a century ago the peninsula was still ruled by a feeble and faction-ridden feudal monarchy, whose retreat into a “hermit kingdom” and failureto modernise led to Korea’s harsh colonisation from 1905 by its risingneighbour, Japan.

Japan’s surrender after the two atom bombs of August 1945 prompted the USto propose to the Soviet Union a “temporary” division of the peninsula at the38th parallel, for the limited purpose of accepting Japan’s surrender. Thatdivision hardened into two separate states, which were declared in 1948: theRepublic of Korea in the south and the Democratic People’s Republic of Koreain the north. The latter was led by Kim Il-sung, a young (born 1912) formeranti-Japanese partisan in Manchuria, who had retreated to the Soviet Union,impressed the Russians and come home in Soviet uniform.

In June 1950 North Korea invaded South Korea and nearly overran it before amassive US-led UN intervention force turned the tide. This in turn would havewiped out North Korea had China not entered the war. The 1953 armistice(there is still no peace treaty) left Korea divided, as it remains today, by ademilitarised zone (DMZ) near the 38th parallel. Up to 4m people died duringthe war and the whole peninsula was devastated, especially the north, wherecities, industries and dams were flattened by US saturation bombing.

From this holocaust both the young Korean states made astonishingrecoveries—with aid from their allies, but driven mainly by implacable mutualhatred. Kim Il-sung blamed others for the defeat in the war and by 1956 hadunchallenged control of the KWP. North Korea thereafter built a monumentalpersonality cult around Kim, extreme even by the standards of Stalin and Mao.This turned into de facto hereditary monarchy from 1980, when Kim’s son, KimJong-il, was revealed as his father’s chosen successor.

Unreformed Stalinist state

Japanese colonisation

Division of the peninsula

The Korean war

A personality cult

North Korea 61


Externally, Kim Il-sung played the nationalist card to keep his distance from hisformer sponsors in the Soviet Union, who nevertheless went on bankrollinghim until as late as 1990. Ideologically, Kim Il-sung’s own doctrine of juche(self-reliance) increasingly supplanted Marxism-Leninism. North Korea’s finesthour was in the early 1970s, when its rapid early industrialisation not only putit ahead of South Korea but also impressed other developing countries, withwhich North Korea increasingly identified.

North Korea was, however, ill-equipped to adapt to a changing world. The endof the cold war and the collapse of the Soviet Union undermined itdiplomatically and devastated it economically. Both the Soviet Union in 1990and China in 1992 opened relations with South Korea; North Korea has as yetno equivalent formal ties with the US or Japan. With South Korea relations hadmostly been bad or non-existent, despite intermittent talks since the 1970s andeven the signing in 1991 of wide-ranging agreements on co-operation, whichwere not implemented. Since 1998, however, the so-called sunshine policy ofSouth Korea’s president, Kim Dae-jung, has led to growing business co-operation with private companies from South Korea and a remarkably cordialfirst ever inter-Korean summit meeting in Pyongyang in June 2000, whichproduced a joint declaration. Although the latter is vague and skirtscontentious security issues, there are hopes of real progress this time. Thecoming months will show if such hopes are well founded.

Concern that North Korea’s nuclear programme had a military dimensioncame to a head in 1993, when North Korea threatened to withdraw from theNuclear Non-proliferation Treaty. Tensions were defused by a frameworkagreement with the US, signed in Geneva in October 1994, to provide newlight-water reactors worth US$5bn as a reward for shutting down the old onesat Yongbyon. This is managed by a consortium, the Korean Peninsula EnergyDevelopment Organisation (KEDO), which is funded mainly by South Koreaand Japan.

Important recent events

July 1994: Kim Il-sung dies.

October 1994: A nuclear framework agreement with the US is signed in Geneva.

October 1997: Kim Jong-il becomes general secretary of the ruling Korean Workers’Party (KWP).

September 1998: The constitution is amended. Vacancies are filled in the upperechelons of government.

June 2000: The first ever inter-Korean summit is held in Pyongyang. Kim Jong-il andKim Dae-jung sign a joint declaration.

The end of the cold war

The nuclear issue: 1993-94

Juche ideology

62 North Korea


On July 8th 1994 Kim Il-sung died of a heart attack, aged 82. Thereafter NorthKorea officially had no head of state for four years, until in September 1998this role was split into three. The late Kim Il-sung was declared president foreternity; Kim Jong-il was reconfirmed as chairman of the NDC, which becamethe highest executive post; and Kim Yong-nam, hitherto foreign minister,became president of a new Presidium of the Supreme People’s Assembly (SPA,parliament) and ceremonial head of state.

Overall, the parallels between North Korea in the 1990s and the old Korea inthe 1890s are striking. In both cases, the attempt to retreat into a “hermitkingdom” produced not strength but weakness in a changing and encroachingworld. The difference is North Korea’s formidable military capacity, which ituses to extract aid by a strategy of militant mendicancy. Whether the Junesummit with South Korea is just a new twist in this process or the start of agenuine effort to reform remains to be seen.

Constitution and institutions

Formally, North Korea is governed by the constitution of December 1972, asrevised in 1992 and 1998. In some ways this is typically communist. TheDemocratic People’s Republic of Korea is defined as socialist, revolutionary andanti-imperialist, and organised on the basis of “democratic centralism”. Theleadership of the KWP is explicitly recognised. The SPA, described in theconstitution as “the highest organ of power”, is in fact merely a rubber stamp.It did not meet for four years after the death of Kim Il-sung.

Other aspects are peculiar to North Korea. Marxism-Leninism disappeared in1992; juche is now the sole ideology. The 1972 constitution created the CentralPeople’s Committee (CPC) as a kind of super-cabinet. This was abolished in1998, while the formerly more junior and over-large State AdministrationCouncil (SAC) was renamed simply as the cabinet and streamlined to comprisea premier, two vice-premiers and 27 ministers. The CPC’s loss was, however, theNational Defence Commission’s gain. The NDC began life in 1972 as asubcommittee of the CPC, but by 1992 it outranked it and has now displaced itas the highest executive organ of the state.

Political forces

Real politics in North Korea goes on behind the mask of yuilsasang (ideologicalmonolithism). Kim Il-sung long ago eliminated both non-communistopponents and communist rivals. Despite the country’s dire economic straitsand rumoured coup attempts, Kim Jong-il has so far kept control with no overtsign of elite or popular dissent (other than from some of the estimated 100,000refugees who have fled to China to find food). If the recent summit leads toreform and opening, order and unity may, however, be harder to maintain.

Historical parallels

“Democratic centralism”

Juche replaces Marxism-Leninism

“Ideological monolithism”

Government re-organisation in 1998

North Korea 63


Institutionally, the three main hierarchies of power, namely state, party andarmy, do not always see eye to eye. Government officials resent the party’sperks and the technocrats among them bridle at the KWP’s resistance toreform. Yet both must now defer to the military, which not only runs its ownseparate economy but also seems to have at least veto power over policygenerally. Probably the most powerful body is one of the least known—theCentral Military Commission of the KWP.

Also important are generations, dynasties and cliques. Kim Il-sung’s guerrillacomrades are being displaced by his son’s younger men: two-thirds of the newSPA elected in 1998 and most of the cabinet are fresh faces. Many decisions arereportedly made by an unofficial kitchen cabinet of those close to Kim Jong-il.

Main political figures

Kim Jong-il: Kim Il-sung’s son and heir, the general secretary of the KoreanWorkers’ Party (KWP), chairman of the National Defence Commission (NDC)and commander-in-chief.

Kim Yong-nam: As president of the Supreme People’s Assembly (SPA)Presidium, he performs the formal duties of a head of state vis-à-vis foreignvisitors. Former foreign minister.

Cho Myong-rok: Vice-marshal, army political director, first vice-chairman ofNDC; now the most powerful military man.

Chang Song-taek: Kim Jong-il’s brother-in-law and principal confidant.

Yon Hyong-muk: Governor of Chagang province; ex-prime minister;possible reformer. A rare civilian on the NDC.

Hong Song-nam: Prime minister. Czech-trained technocrat.

Kim Yong-sun: Party international secretary. Has handled relations with theUS, Japan and now South Korea.

International relations and defence

North Korea’s foreign relations have changed markedly over the past decade.The collapse of the Soviet Union left China as its main patron, even as Chinaforged a thriving relationship with South Korea. Kim Jong-il’s visit to China inMay 2000—his first for 17 years—underscores China’s continuing importance.Equally, the planned visit to Pyongyang in July 2000 by Russia’s president,Vladimir Putin—the first by any Russian or Soviet top leader—is a consciouseffort to regain influence lost during the 1990s.

North Korea has also made efforts to cultivate old foes. There have long beende facto contacts with Japan, but sporadic talks towards diplomatic ties havefoundered on rocks ranging from unpaid debts to allegations of kidnapping. Afresh round of dialogue opened in April 2000, but with agendas proving widelydivergent the follow-up in May was cancelled and it is not clear when talks willresume. With the US, the 1994 nuclear accord has led to bilateral contact in

Deference to the military

Generations, dynastiesand cliques

Russia and China

Japan, the US and others

64 North Korea


several fields, including large-scale food aid. In June 2000 the US ended most ofits longstanding economic sanctions against North Korea. In the past year alsoKorea mounted a wide diplomatic offensive, including new formal relationswith Italy, a resumption of ties with Australia, talks with several other Westerncountries and expected accession to the ASEAN Regional Forum (ARF) in July2000.

The world’s main worry has been that North Korea is an astonishinglymilitarised society, with no fewer than 1.2m men under arms out of a totalpopulation of some 22m. Its development of weapons of mass destruction(WMD) almost led to war in 1994 over nuclear concerns, while its missileprogramme alarms Japan (which is within range) and is the main impetus forthe US’s move towards national missile defence (NMD). Chemical andbiological stockpiles are also alleged. Since September 1999 North Korea haskept a moratorium on testing longer-range missiles, but talks with the US onother aspects continue, such as proliferation to Pakistan, Iran and others.While the inter-Korean summit raised hopes for peace, it did not formallytackle security issues, and the US and Japan doubt that South Korea sharestheir missile concerns. How to handle North Korea and who should do itremain contentious questions. (For data on defence spending see Referencetable 1.)

Resources and infrastructure

Population

There are some official data (with gaps) to 1993, including North Korea’s onlycensus in January 1994. Since then famine has taken an unknown toll, whichsome analysts put as high as 3m, or around 13% of the population.

Population data, 1993

Sex ratio (males per 100 females) 94.9

Population density (people per sq km) 173

Age profile (% of population) 0-14 years 27.915-64 years 66.665+ years 5.5

Crude birth rate (births per 1,000 people) 19.9

Crude death rate (deaths per 1,000 people) 4.9

Average household size 4.7

Total population (m) 21.1

Source: Hyundai Research Institute, The Economics of Korean Reunification, vol 4, no. 1, Spring 1999.

Although 20% larger in area, North Korea has only half the population ofSouth Korea: about 22m in 1999 (South Korean government data), comparedwith 47m in South Korea in the same year. As in South Korea, everyone is

A military threat

The unknown tollof famine

A smaller population thanSouth Korea

North Korea 65


ethnic Korean except a tiny Chinese minority. After 1945 North Korea’spopulation at first fell owing to southward flight and the Korean war, from9.3m in 1946 to 8.5m in 1953. It then grew quickly as death rates fell, whilebirth rates remained high. By 1970 most people lived in cities. The labour forceshifted accordingly, although in 1993 one-third of workers (3.6m out of 11m)were still farmers. The participation rate, 76% in 1993, is extremely high, eventhough official data appear to exclude the 950,000-strong army, which is activein construction.

North Korea now faces demographic disaster. The population must be falling,the birth rate having declined to very low levels (both by choice and owing tomalnutrition), on top of deaths of 1m-3m since 1995. In addition, up to100,000 North Koreans are estimated to have fled to China to seek food. Furthereconomic collapse could trigger millions of migrations, mostly to South Korea.(See Reference tables 2 and 3 for more detailed data on population.)

Labour force, 1993

No. of workers (m) % of labour force

Manufacturing 4.1 37.4

Farming 3.4 30.7

Construction 0.5 4.2

Transport & communications 0.4 3.7

State farms 0.3 2.3

Commerce 0.5 4.6

Education, culture & health 0.8 7.7

Others 1.3 9.4

Total 11.0a 100.0

a Total does not add, owing to rounding.

Source: Hyundai Research Institute, The Economics of Korean Reunification, vol 4, no. 1, Spring 1999.

Education and health

Education has been one of North Korea’s success stories. As in South Korea,literacy and primary education for all were early goals and quickly attained.Free universal secondary schooling followed by 1975. Over 200 higher collegestrain specialists, mainly in science and technology. It all starts with what maybe the world’s most comprehensive crèche and kindergarten system, the twinaim of which is to free women for the formal labour force and to beginideological indoctrination young.

This system produces world-class weaponry and an educated and disciplinedlabour force, if narrow in what it knows. Social science barely exists; artglorifies the regime. Crèche and school attendance rates are thought to havedropped since 1995, owing to famine, as schools are unable to feed pupils.

Demographic disaster

A comprehensivekindergarten system

Falling attendance rates

66 North Korea


Education statistics, 1988(‘000 unless otherwise indicated)

University graduates 592 Male 421 Female 171

Specialised college graduates 761 Male 455 Female 306

University & specialised college graduates as % of adult population North Korea 13.7 South Koreaa 9.2 Japana 18.5 Chinab 0.9 USc 36.0

a 1980. b 1982. c 1987.

Source: Nicholas Eberstadt, Population and Labour Force in North Korea.

Like education, health was once a relative success story. North Koreaproclaimed the start of a free health service in 1953, during the Korean war.The official figures in 1986 (latest available data) for hospitals (2,401), clinics(5,644), hospital beds per 10,000 population (135.9), doctors per 10,000population (27) and much else were high by most world standards and ingeneral well ahead of South Korea. It was, however, not clear how North Koreadefined all these, and quality varied sharply by locality.

Since 1995 famine has stretched this system to breaking point. Foreign aidworkers describe hospitals staffed by skilled professionals but almost devoid ofmedicines and other resources. Child malnutrition has taken hold: anutritional survey in 1998 by the UN World Food Programme found 16% ofchildren acutely malnourished and another 62% chronically so. Small childrenand the old are most vulnerable, including to related illnesses such asdiarrhoea—although large epidemics seem to have been avoided so far.

Healthcare statistics, 1986

North Korea South Korea

Hospitals 2,401 511

Clinics 5,644 8,570

Doctorsa 27.0 8.6

Nurses & paramedicsa 43.2 41.4

Hospital bedsa 135.9 19.2

Healthcare spending (% of GDP) 2.0b 2.6

a Per 10,000 population. b 1987.


Free healthcare from 1953

Lack of medicines

North Korea 67


Natural resources and the environment

North Korea occupies the northern half (55%) of the Korean peninsula. Thereis a 1,041-km border with China and a 16-km border with Russia across theYalu and Tumen rivers to the north, and a border with South Korea across theimpassable demilitarised zone (DMZ). Mountains, uplands and forests cover75-80% of the total area, leaving barely 20% for cultivable plains and lowlands,mostly in the west, plus a strip along the east coast. Bitterly cold winters andhot humid summers vary by latitude, with rice grown mainly in the south andmaize in the north. Unlike South Korea, North Korea is well endowed with arange of minerals. The environmental abuses of Stalinist policy include air andwater pollution, deforestation and soil exhaustion.

Transport and communications

An extensive rail network (about 5,000 km), originally built by the Japanese,hauls 70% of passenger and 90% of freight traffic. An electrification rate of90% is claimed, but much is single-track and in need of upgrading. Ports alsoneed modernisation: few can handle large ships or even containers. All are ice-free, which gives potential (little exploited as yet) access to Rajin and Chongjinin the north-east as trade conduits for Siberia and north-east China.

Road traffic is startlingly scarce, even in large cities. A partial network ofmotorways built since 1980 is all but empty, since there are few private cars orintercity buses; even lorries are a rarity. Most of the 20,000 km of roads areunsurfaced; many are mere tracks. From Pyongyang’s Sunan airport fewer than20 flights a week take off for just six foreign destinations; there is no regularinternal air service. Rajin-Sonbong in the north-east, the sole special economiczone to date, is readily accessible internally only by helicopter: it has betterconnections by rail to Russia and by road to China.

Telecoms too remain mostly primitive. International direct dialling is availableto Pyongyang (getting through remains difficult), and a few firms publishtelephone, telex and even fax numbers. E-mail has yet to arrive. No phonebookis published and the telephone numbers and addresses of ministries are secret.Foreigners mostly use their own satellite networks.

All this may change in the near future. The offer by South Korea’s president,Kim Dae-jung, in March 2000 of substantial South Korean aid to renew theNorth’s infrastructure is what prompted Kim Jong-il to agree to their summitmeeting. In principle the south’s construction firms could rapidly upgradenorthern roads, railways, ports, and telecoms. But it is not clear whethersouthern private or public money would pay for this, and as of June 2000 therewere as yet no firm plans in any field.

Little cultivable land

An extensive rail network

Underdeveloped roads

Telecommunicationsare primitive

Seoul to the rescue

68 North Korea


Energy provision

North Korea has found no oil or gas and lacks coking coal. What it does haveare reserves of brown coal and hydroelectric power (HEP) resources. Oil onceflowed at “friendship prices” from the Soviet Union and China, but since 1990flows have been fitful. Despite attempts at substitution (for example, runningtractors on methane), there has been a crisis in industry, much of which hasclosed down or operates at very low levels of capacity.

The fate of the power sector is emblematic. In 1980 North Korea had one ofAsia’s largest electricity networks, with capacity of 5.4m kw generating some25bn kwh annually (over 1,300 mw per head). A decade later, with capacity ofmore than 7m kw, it was producing hardly any extra power and barely half ofthat needed to meet demand. Most equipment is obsolete or worn-out andtransmission losses are around 30%.

Policy changes—between hydro or coal generation, or large versus smallplants—are no substitute for large investments, which North Korea cannotafford. A further twist, if it ever happens, will be the coming on stream inaround 2005 of two light-water nuclear reactors built by the Korean PeninsulaEnergy Development Organisation (KEDO), which will produce 2m kw,increasing total capacity by over one-quarter. It is not clear if the existing gridcan handle this. KEDO currently provides 500,000 tonnes of fuel oil each year.South Korea has offered to supply power from its own grid if South Korea’sHyundai group goes ahead with building a large export factory near Haeju.

Energy balance, 1999(m tonnes oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 0.0 0.0 17.5 5.5a 1.0 24.0

Imports 1.3 0.0 1.3 0.0 0.0 2.6

Exports 0.0 0.0 0.3 0.0 0.0 0.3

Stock change 0.0 0.0 0.0 0.0 0.0 0.0

Primary supply 1.3 0.0 18.5 5.5a 1.0 26.3

Losses & transfers 0.2 0.0 4.0 6.0 0.0 10.2

Transformation output 0.0 0.0 0.0 2.9b 0.0 2.9

Final consumption 1.1 0.0 14.5 2.4b 1.0 19.0

a Expressed as input equivalents on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

Brown coal andhydroelectric power

resources

Two light-water nuclearreactors to come on stream

North Korea 69


The economy

Economic structure

Main economic indicators, 1999

GDP (US$ bn) 15.8

Real GDP growth (%) 6.2

GDP per head (US$) 714

Population (m) 22.1

Exports (US$ m) 597

Imports (US$ m) 1,212

Trade balance (US$ m) –615

Sources: Bank of Korea; National Statistical Office, Seoul; Japan External Trade Organisation, Tokyo.

North Korea’s economic structure resembles that of former communist easternEurope; because of this and a severe lack of published figures, the usualcategories do not apply—see notes in the Appendices. Overall, rapid growthand industrialisation until 1970 created a mainly urban industrial society, butgave way to three decades of stagnation and now decline. Typically, there is anexaggerated emphasis on heavy industry, partly for military reasons. Themilitary runs its own extensive secret economy, taking the bulk ofscarce resources.

Industry is mostly the old Stalinist stalwarts: coal, steel, chemicals and machinetools. Much is on the east coast, owing to the proximity of minerals, which arealso exported. Light industry is mainly around Pyongyang, although eachprovince is meant to be self-sufficient, which creates severe inequalities.

Farming has become a disaster. Only a few plains in the south and west arereally suited to agriculture. The drive for food self-sufficiency in hilly terrain ledto undue emphasis on rice and maize (Kim Jong-il now urges potatoes), unwiseterracing and soil exhaustion. Floods in 1995 and 1996, then drought in 1997,plunged North Korea into a famine of unknown scale. The country nowsurvives on food aid.

Economic policy

North Korea’s economic plight is unique. The old planned economy has all butcollapsed, with de facto markets springing up to replace it. These are tolerated,but so far the regime has refused to embrace market reforms—despite China’surging this for 20 years.

The current crisis is the final act in a long and predictable decline. After rapidearly growth, North Korean economists warned as early as the 1960s that thiswas not sustainable, but were silenced by Kim Il-sung. Since then growth ratessteadily declined and in the 1990s they went into reverse.

The planned economyhas collapsed

Economic decline

70 North Korea


There has been a classic malfunctioning of a centrally planned economy, inwhich price signals still play almost no part in official resource allocation, theresult being inefficiency and shortages. North Korea overdosed on heavyindustry, while neglecting consumer goods and farming. Its technology isantiquated and worn out—including turnkey factories bought in the 1970sfrom the West, with loans on which Pyongyang defaulted at once: a folly thathas ruled out access to credit or foreign investment.

That cavalier attitude to partners is North Korea’s other economic weakness.Juche was a fraud: North Korea depended all along on Soviet aid and sufferedaccordingly (like Cuba) when Moscow finally turned off the tap in 1991.Further peculiarities of the North Korean way include the refusal, even now, toadmit that party and leader were anything but infallible. Kim Il-sung wascapricious and unpredictable, even ordering machines already installed in onefactory to be ripped out and shifted to his pet projects.

In principle, the obvious potential investors in North Korea are South Koreans,on the precedent of China and Taiwan. Since 1998 South Korean companieshave been allowed to set up in the North under President Kim Dae-jung’s so-called sunshine policy. The Hyundai group, the largest of South Korea’s chaebol(conglomerates), is the pioneer, running tour boats for South Koreans to MtKumgang in North Korea. Hyundai’s future ambitions include a massive exportzone near Haeju (to produce US$20bn in annual exports), but Kim Jong-ilwants this sited at Sinuiju on the Chinese border, which would greatly increasecosts. The cordial inter-Korean summit in June 2000 may herald a majorincrease in South Korean investment in the North, which has been small so far.

Kim Jong-il’s reported praise in Beijing in May for China’s economic policiesraises hopes that North Korea may at long last reform. For now, it remainsnominally committed to planning. In 1993 the government for the first timeadmitted that a seven-year plan had missed its target. There followed a vaguethree-year “adjustment period” (1994-96), with priority given to light industry,farming and foreign trade—in theory. In practice, Kim Il-sung’s death in 1994froze all policy initiatives. No new plan has been announced since.

In September 1998 the revised constitution gave slightly more space to privateenterprise and the use of price and profit. North Korea has also invitedmissions from the World Bank and the IMF, who are helping to train itseconomists in market principles and the global economy. However, theemphasis on planning continues, enhanced with the passing of a planning lawin April 1999. This was one of several new economic laws: others cover farmingand even fish-breeding.

The price of refusal to change was starkly revealed in April 1999, when theSupreme People’s Assembly (SPA) met to consider the budget after a hiatus offive years following Kim Il-sung’s death. Astonishingly, the levels of projectedrevenue and expenditure in 1999 were less than half those reported for 1994:Won20bn (US$9bn at the official exchange rate of Won2.20:US$1), comparedwith W41bn. Previously the budget had risen steadily since the end of theKorean war. The 1999 figures take the country back to below where it was in

South Korean investment

Mixed signals on reform

A budget is announced—the first since 1994

Production of consumergoods is neglected

North Korea 71


1981. Yet the latest budget report in April 2000 shows that even this low-leveltarget has proved hard to attain. (See Reference table 4 for budget data.)

Government revenue, 1996(Won bn)

Direct taxes Profits from state enterprises 6.3 User fees for working capital 2.3 Profits from co-operative farms 0.2

Indirect taxes Turnover taxes 8.1 Other revenue 3.5

Total revenuea 20.3

a Total does not add, owing to rounding.

Source: North Korea’s submission to the IMF, as cited in Marcus Noland’s Rigorous Speculation: the Collapse and Revival of the NorthKorean Economy, available on http://www.iie.com.

Main policy decisions

1993: The non-fulfilment of a development plan (1987-93) is admitted for the firsttime.

1994-96: This period is declared a “period of adjustment”, priority being given toagriculture, light industry and foreign trade.

1995-98: The government fails to announce the usual budget report.

September 1998: A new premier and cabinet are appointed.

April 1999: The first budget for five years is announced.

Economic performance

As already discussed, North Korea’s economic performance over time is like thetrajectory of one of its own missiles. Western studies of the early years (whenthere were figures) confirm fast growth, especially in industry: admittedly froma low baseline and including post-Korean war reconstruction. Unthinkable as itnow sounds, until about 1970 the North led the South in income per head anddegree of industrialisation.

This has been definitively and massively reversed. By 1999 North Korea’snational income of around US$16bn (or just over US$700 per head and falling)was dwarfed by South Korea’s US$407bn (nearly US$9,000 per head). It is nowimpossible to fit the two Korean economies on the same graph—a fact notnegated by the temporary setback of South Korea’s financial crisis andrecession in 1997-98. (See Reference tables 5, 6 and 7 for GDP data.)

Strong growth inthe 1970s—

—is followed byeconomic decline

72 North Korea


In 1998 the UN Development Programme (UNDP) published rare official NorthKorean GDP figures for 1992-96. These show agricultural output plunging bymore than half in 1994-96 and income per head halving in 1992-96 to US$481,one of the world’s lowest figures. This is even worse than outside estimates,raising suspicions that North Korea may be exaggerating its plight in order toencourage more aid.

What is not in doubt is that living standards are low and have been gettingworse. Nominal wages were always low, at Won100-200 (some US$50-100 atthe official exchange rate) per month, but were egalitarian and supplementedby perks such as heavily subsidised housing and food rations—which, however,varied much in quantity and quality. A rare official figure in May 1996 claimedthat annual average subsidies for a family of four totalled Won2,289 ($1,040 atthe official exchange rate; much less if converted at the black-market rate). By1997, however, food rationing had broken down in many areas, after threeyears of natural disasters in agriculture. Rising inequality may increaseresentment of the privileged few.

Some sources in Seoul suggest that decline may at last have been reversed. TheBank of Korea (BOK, South Korea’s central bank) claims that in 1999 NorthKorea’s economy grew by 6.2% and expects growth to continue. The BOKestimated Northern GNP for 1999 at US$15.8bn (still only 75% of its 1989level) and income per head at US$714. Yet this is hard to square with falls ofover 10% in trade with both main trading partners (see below).

Gross national product(% change; annual averages)

1957-61 20.9

1961-65 9.8

1966-70 5.5

1971-75 10.4

1976-80 4.1

1981-85 3.7

1986-90 1.4

1991-94 –4.5

Source: Research Institute for National Unification, Seoul.

Falling living standards

North Korea 73


Gross domestic product by sector, 1995(% of total)

Agriculture, forestry & fishing 27.6

Mining 8.0

Manufacturing 22.5 Heavy industry 15.7 Light industry 6.8

Electricity, gas & water 4.8

Construction 6.7

Services 30.3 Government 20.7 Others 9.6

Total 100.0a

a Total does not add in source.

Source: Bank of Korea, Seoul, cited in Vantage Point, Naewoe Press, Seoul, July 1996.

Economic sectors

Agriculture, forestry and fishing

Despite North Korea’s poor terrain and push to industrialise, agriculture stillemployed one-third of the workforce in 1993. In the same year it contributed39.3% of output, according to data given to the IMF, almost twice as much asindustry (22.4%): for South Korea, the figures were 7% and 29%, respectively.

North Korea’s agriculture was at first relatively successful. Collectivisation in themid-1950s met little resistance, and the appliance of modern technology—mechanisation, chemicals, electricity and, above all, a nationwide irrigationnetwork—doubled harvests from 3.5m tonnes in 1966 to 7.7m tonnes in 1984.Yields have since fallen, owing to overuse of chemicals and a growing shortageof industrial inputs. Flood and drought in 1995-97 were the final blow, leadingto famine as the state’s rationing systems broke down.

North Korea receives the UNDP’s largest ever aid budget, mainly for US maize.In 1998 the UNDP launched an initiative for Agricultural Recovery andEnvironmental Protection (AREP), aiming to rebuild sustainable farming. Thislacks funding, however, and relies on a technical fix—restoring inorganicfertiliser plants—within the existing collective farm framework. Innovationssuch as double-cropping exist, but the future of agriculture is highly uncertain.

Both forestry and fishing are significant, although quantitative data arelacking. North Korea has carried out less reafforestation than South Korea, butlumber from Northern forests is both used at home and exported. There arealso long-standing forestry joint ventures around Khabarovsk in Siberia, usingNorth Korean labour. Fishing provides much-needed protein, export earnings

Agriculture continues todominate the economy

Food aid from the UNDP

Scarce data on forestryand fishing

74 North Korea


and income from rights leased to Japanese boats. In recent years, however, fuelshortages have grounded much of North Korea’s fleet.

Mining and semi-processing

North Korea has the larger share of the peninsula’s minerals, scatteredthroughout its territory. They include coal (brown and lignite, but not coking),iron ore, cement, non-ferrous metals (copper, lead, zinc) and precious metals(gold and silver). None is globally significant, except for the world’s largestdeposits of magnesite (10bn tonnes). North Korea has always exportedminerals and metals—especially precious and non-ferrous—to earn foreigncurrency, as well as using them for its own industrialisation and militarypurposes (they include uranium). As in other sectors, output has fallen inrecent years, owing to aged and worn-out plant, as well as flooding. Freshinvestment is urgently needed. Foreign creditors report having been offeredmines in lieu of repayment, but have declined to take the risk. (See Referencetable 8 for data on minerals production.)

Raw material reserves, 1991(bn tonnes unless otherwise indicated)

Lignite & anthracite 10

Iron ore 4.0-4.7

Zinc (m tonnes) 4.0-4.5

Lead ore (m tonnes) 3.0

Copper (m tonnes) 0.8

Gold (tonnes) 1,000

Silver (tonnes) 5,000

Magnesite ore 10

Hydro resources (m kw) 10

Tidal energy (m kw) 4.6

Source: M Trigubenko, Industry of the DPRK, paper presented at Korea Development Institute symposium, Seoul, October 1991.

Manufacturing

Under Japanese colonial rule (1905-45), mining and heavy industry weredeveloped in northern Korea, while the south had most light industry andagriculture. North Korea continued this bias, in accordance with Stalinistdoctrine as well as military needs. Figures are lacking, but the usual sectors—coal and steel, metals and chemicals, power and machine-tools—received byfar the most investment, at the expense of farming and light industry.Significantly, although heavy industry is centrally owned and planned, theproduction of consumer goods is left to provinces and localities to manage asbest they can.

This model once produced rapid growth, but it is now moribund. Despiteboasts of self-reliance, North Korea’s technology and finance were mostly

Large deposits of magnesite

Japan’s colonial influence

The end of Soviet aid

North Korea 75


Soviet, thus not world-class even when new. The abrupt end of aid fromMoscow in 1991, including vital oil supplies, plunged the whole of industryinto crisis; much now runs at a fraction of capacity, if at all. This, together withthe refusal to introduce market reforms, caused North Korea’s GDP to shrinkthroughout the 1990s.

Light industry includes a textiles sector supplying the home and some overseasmarkets, for example, cheap men’s suits to Japan. This is an obvious wayforward, given North Korea’s comparative advantage, but progress thus far hasbeen fitful. The first inter-Korean joint venture, a Daewoo textile factory atNampo, lost money and has closed. A form of processing on commission(POC) takes place, in which South Korean companies send materials andsometimes machinery for manufacturing in the North. Samsung and LG areselling Northern-made television sets on this basis. (See Reference table 9 fordata on estimated production of main industrial materials.)

Construction

Construction was once a powerful sector in North Korea. On the positive side,a large housing programme delivered a massive improvement in the country’shousing stock—most visible in Pyongyang’s modern suburbs of high-riseapartment blocks, but also in the smaller complexes of flats widespread even inthe countryside. These are, however, dwarfed in every sense by grandmonumental edifices, especially in Pyongyang, on which untold amounts ofmoney and concrete have been wasted. The same may apply even toapparently economic projects such as the Nampo lock barrage, whichreportedly cost US$4bn.

Economic decline has slowed this sector like others; witness the shell of the105-storey Ryugyong Hotel, which has towered unfinished on Pyongyang’sskyline for over a decade. South Korean sources claim that construction’s shareof GDP fell by almost one-third in 1992-94, from 9.1% to 6.3%. This accordswith a rare official figure of 6% for 1993, when the sector was said to employ4.2% of the labour force. However, this excludes the army, who visibly domuch, if not most, of all construction.

Financial services

As a communist command economy, North Korea still lacks a financial sectorin the capitalist sense. Most funding for industry comes from the state, whichalso earns revenue by taking a percentage on transactions among enterprises.The Central Bank of North Korea, under the Ministry of Finance, has a networkof 227 local branches. Changgwang Credit Bank is a newer state bank with 172branches. It was founded in 1983 and has even published figures. As ofDecember 1991, it had capital of Won442m (around US$200m at the officialexchange rate), reserves of Won885m, and deposits totalling Won6.9bn. Tworeportedly unpopular changes of currency in recent years suggest that some

A large housingprogramme

State funding for industry

Economic co-operationwith South Korea

76 North Korea


citizens are inclined to hoard rather than bank such savings as they make ontheir meagre incomes.

Despite economic crisis and the precipitous fall in state revenue, there is noclear sign of progress. Most foreign banks will not touch North Korea becauseof debts dating back to the 1970s. Two banks, too young to have been burnedthen, Peregrine and ING, began joint venture banks in 1995, but in 1998 theformer’s parent went bankrupt and in 1999 the latter withdrew, citing lack ofbusiness. The new Hong Kong-owned hotel and casino in Rajin-Sonbongreportedly includes a bank. Since the June 2000 summit South Korean bankshave been considering possible investment in the North, but so far there is nosystem for direct settlement of payments.

Trade with the outside world is mainly handled by the Foreign Trade Bank,whose relation to newer entities such as Daesong Bank is unclear. Insurance ismonopolised by the State Insurance Bureau and the Korea Foreign InsuranceCompany. Unexpectedly, North Korean offshore activity includes playing theLondon currency markets—as was revealed when one such trader defectedto Seoul.

Other services

The official retail sector is mainly state-controlled, under the People’s ServicesCommittee. Consumer goods are few and of poor quality, with some providedon a ration basis. There are state-run stores and direct factory outlets for themasses, and special shops with luxuries for the elite—plus a chain of hard-currency stores (a joint venture with the association of pro-Pyongyang Koreanresidents in Japan, Chongryun), with branches in large cities.

This picture is changing, as de facto private enterprise emerges to complementor supplant the failing formal economy. Constitutional revisions in 1998 gavemore scope both to co-operatives and private property. Farmers’ markets, neverabolished, have expanded, as has private crossborder trade with China.The authorities are trying to check, control or at least tax all this, withmixed success.

Tourism has considerable potential, ranging from scenic mountains and skiing,to retro-Stalinist monumental kitsch, of which North Korea is the last livingexample. North Korea has built more hotels in recent years than currentdemand warrants, although small groups of Western tourists have been visitingfor a decade. A big breakthrough was the start of cruises to Mt Kumgang inNovember 1998, run by Hyundai, which as of June 2000 had given over250,000 Southern tourists a glimpse of the North. Hyundai plans to developthe Kumgang area further, but how soon other regions will be opened up toSouth Koreans is not clear.

Two foreign bankswithdraw

The state controls theretail sector

Private enterprise supportsthe formal economy

Tourism is a potentialgrowth area

Foreign trade andinsurance

North Korea 77


The external sector

Trade in goods

In 1945 half of an export economy geared to the Japanese colonial power wasabruptly reoriented—to face Moscow instead of Tokyo. Although no lessdistorting, Soviet hegemony was more generous, including financing chronicmerchandise trade deficits. North Korea’s trade in goods rose steadily to peak atUS$5.2bn in 1988, including a deficit of US$1.2bn, mostly with the SovietUnion, which funded the gap by default. The typical pattern was exports ofminerals, metals and some manufactures, and imports of capital goods andfuels. China and Japan were North Korea’s other main partners, bar a briefattempt to increase trade with western European countries (scotched by thefailure of the North Koreans to pay debts) in the mid-1970s.

However, Moscow cut off credit in 1991 with devastating results. Since thenNorth Korean trade has declined sharply. The Japan External TradeOrganisation (JETRO) estimates the total for 1999 at US$1.8bn, comprisingimports of US$1.2bn and exports of US$597m: respectively up 3.6% and down7.3% compared with 1998, producing a deficit of US$615m. Even in nominaldollars, North Korea traded less in 1999 than it did in 1973.

Russia, once North Koreas principal trade partner, has been replaced by China.China at first tried to establish proper settlement at world prices, but now itbankrolls North Korea to stave off its complete collapse, fearing that this wouldtrigger a massive inflow of refugees into China. In 1999 trade with China fellby 10.3% to US$370.3m, of which only US$41.7m (down by 27.2%) wereexports as against imports of US$328.6m (down by 7.6%). With Japan trade fellby 11.6% to US$350.4m, comprising exports of US$202.6m (down by 7.7%)compared with imports of US$147.8m (down by 15.6%).

Until 1988 the two Korean states conducted no trade with one another, at leastnot openly. Since then a trickle has begun, rising from US$200m to US$333min 1999: insignificant for South Korea, but enough to make it North Korea’sthird largest partner. It would only take a few chaebol joint-venture exportfactories—let alone the massive US$20bn in exports planned by Hyundai—forSouth Korea to become North Korea’s main partner and indeed the dominantforce in the Northern economy. (See Reference table 10 for data on NorthKorea’s merchandise trade.)

Invisibles and the current account

Data gaps and structural peculiarities make it impossible to discuss this area innormal terms. As a still mainly closed state-run economy, North Korea lacksmuch of the usual trade in services. However, the travel account must be well

Japanese, then Soviethegemony

Bankrolling by China

Inter-Korean trade

A likely surplus on thetravel account

Declining trade inthe 1990s

78 North Korea


in surplus, given Hyundai’s payments (which will total US$936m over sixyears) and the fact that North Koreans are not permitted to travel.

As well as legitimate activities such as shipping, North Korea is believed to earnforeign exchange by various shady activities, ranging from smuggling usedJapanese cars into China to passing forged US$100 notes in Macau andtrafficking heroin in Russia. Counterfeit currency alone may earn US$100mper year.

More legitimate is a large item under net unrequited transfers, namelyremittances from the pro-Pyongyang ethnic Koreans in Japan. Estimates of thesize of this flow have run as high as US$2bn annually, which seems incredible,as the loyalists number 200,000 at most; but it could be some hundreds ofmillions of dollars.

Capital flows and foreign debt

North Korea has the dubious distinction of being first in and last out of thedebt crisis of the developing world, which it initiated in the 1970s and where itis still mired today. South Korea’s National Intelligence Service (NIS) estimatestotal debt of US$11.9bn at end-1997. Of this, US$4.6bn is owed to Westernnations (including Japan, and comprising debts to both governments andbanks). However, the greatest share, US$7.4bn, is owed to Russia and China.North Korea got into the habit of not paying back the Soviet Union, China andother communist allies long before it started doing the same with the West.

External debt by creditor(US$ m; end-1989)

Amount Date incurred

Western bloc 2,742 n/a

Morgan Grenfell (lead manager) 240 1973 ANZ Bank (lead manager) 643 1973-74 Japan 530 1972-75 France 227 1970-74 West Germany 350 1973-77 Sweden 146 1970-74 Austria 102 1971-75 Others 504 n/a

Communist countries 4,036 n/a Soviet Union 3,133 1971-89 China 903 1971-89

Total 6,778 n/a

Source: South Korea’s National Unification Board.

Not even legal action by a consortium of over 100 banks from 17 countries andjudgments by the International Court of Arbitration have prompted NorthKorea to pay up. (It is now unable to do so—but even when it could, it rarelydid.) Unsurprisingly, this has affected the country’s ability to attract foreigninvestment, which the NIS totals at US$200m, almost all derived from China

Foreign exchange fromsmuggling

Remittances from Japan

Unpaid debts

Stock of foreign directinvestment is very low

North Korea 79


or Chongryun. Some North Korean debt is traded on secondary markets: itsvalue rises when the two Koreas seem to be getting along. (See Reference table11 for data on debt.)

This dire debt record has not stopped North Korea from seeking new foreigninvestment, mainly for the Rajin-Sonbong zone. Detailed legislation suggestsseriousness of intent. Taken at face value, many of the new provisions areliberal and attractive, with low tax rates aimed at undercutting China. Themain concern, apart from trust, is high wage rates (of which the state takes asubstantial cut), although the drastic devaluation of the won in Rajin-Sonbongin 1997 could transform the picture. However little investment has beenforthcoming. This may change rapidly if the post-summit climate produceslarge investment by South Korean firms.

Foreign reserves and the exchange rate

North Korea’s foreign reserves are unknown, but must be very low—unlessfunds have been diverted into foreign bank accounts. Indeed, this is quitelikely. Defectors have alleged that Room 39 of the Korean Workers’ Partyheadquarters manages many trading enterprises on behalf of Kim Jong-il andthat Mr Kim has billions of dollars in Swiss bank accounts.

North Korea used to operate multiple exchange rates, which furthercomplicated such tasks as computing national income. Until the late 1980s theofficial exchange rate of the won was close to parity with the dollar, while thereal rate used in trade was about half of that. The latter has now beenenshrined as the official rate, which currently stands at Won2.20:US$1 (seeReference table 12). Reported black-market rates are much less favourable, andin the Rajin-Sonbong free economic and trade zone the rate floats at aroundWon200:US$1.

Tiny reserves

Attempts to attract foreigninvestment have increased

Multiple exchange rates

80 North Korea


Appendices

Sources of information

North Korea publishes no systematic official statistics, nor has it done so forover 30 years. This is the more frustrating since, unlike in some developingcountries, the difficulty is not that data do not exist. On the contrary: as atotalitarian state and a planned economy, the regime collects thoroughstatistics and in great numbers. The few published data, such as the annualbudget, are so vague as to be of little use.

There are occasional shafts of light, such as demographic data released to theUN Population Fund in 1989, which were worked on by a US researcher,Nicholas Eberstadt (see Select bibliography). Thanks to his efforts, we nowhave good data to 1987 on such areas as births and deaths, urbanisation, thelabour force, education and health. North Korea also published part of its firstever census, carried out in 1994. A few patchy macroeconomic figures havebeen supplied to the UN Development Programme, the IMF and others inrecent years.

Inevitably, North Korea’s secrecy with statistics hampers the efforts ofinternational organisations to collect them. Nor can exceptions always betrusted. Inflated figures for farm output published by the UN Food andAgriculture Organisation (FAO) over many years are now undermined by thefar lower magnitudes admitted to the UN’s Department of HumanitarianAffairs after the floods of 1995. (The unprecedented numbers of UN and otheraid workers allowed to roam around in the wake of the floods have addedconsiderably to both quantitative and qualitative knowledge of North Korea.)

Organisations that make a serious effort to collect and estimate North Koreandata include the Japan External Trade Organisation (JETRO) and, in recentyears, a number of official and private bodies in South Korea, including theNational Unification Board, the Korean Institute for National Unification, theKorean Overseas Trade Association (KOTRA) and the Bank of Korea (BOK,South Korea’s central bank). The BOK goes furthest in its efforts to imputemagnitudes for specific sectors of the economy, but not all experts accept itsmethodology. In the case of trade, which in principle is easier, if laborious,since data can be collected from North Korea’s partners, one pitfall to note isthat South Korean sources do not count inter-Korean trade as international.

Nicholas Eberstadt and Judith Banister, The Population of North Korea, BerkeleyCenter for Korean Studies, University of California, 1992

Eui-Gak Hwang, The Korean Economies: A Comparison of North and South, OxfordUniversity Press, 1993

Naewoe Press, Vantage Point (monthly), Seoul

Marcus Noland (ed), Economic Integration of the Korean Peninsula, Institute forInternational Economics, Washington, DC, 1998

National statistical sources

International sources

Select bibliography andwebsites

North Korea 81


Marcus Noland, The North Korean Economy, Institute for InternationalEconomics, Washington, DC, 1995

Don Oberdorfer, The Two Koreas: A Contemporary History, Addison-Wesley, TheSchool of Advanced International Studies, Washington DC, 1997

Andrea Matles Savada (ed), North Korea: a country study, Federal ResearchDivision, Library of Congress, for US Department of the Army, Washington,DC, 1993

Hazel Smith et al (ed), North Korea in the New World Order, Macmillan, London,1996

Dae-Sook Suh and Chae-Jin Lee (eds), North Korea after Kim Il Sung, LynneRiener, Boulder, 1998

Korean Central News Agency: http://www.kcna.co.jp

The People’s Korea: http://www.korea-np.co.jp

Reference tables

Reference table 1

Defence spending

1992 1993 1994 1999 2000a

% of government budgetb 11.5 11.4 11.6 14.7 14.5

a Planned. b It is thought that much defence spending is concealed under other items.

Source: Bank of Korea, Seoul.

Reference table 2

Population

1995 1996 1997 1998 1999

Total population (m) 21.5 21.7 21.8 21.9 22.1

Annual growth (%) 0.9 0.7 0.6 0.6 0.6

Source: National Statistical Office, Seoul.

Reference table 3

Population trendsa

(‘000 unless otherwise indicated; mid-year estimates)

1970 1975 1980 1985 1990

Male 7,012 8,070 8,838 9,650 10,568

Female 7,376 8,410 9,161 9,952 10,844

Population sex ratiob 95.1 95.9 96.5 97.0 97.5

Annual average population growth (%) 3.4 2.8 1.8 1.7 1.8

Total population 14,388 16,480 17,999 19,602 21,412

a Includes the military population. b The number of males per 100 females in the total population.


82 North Korea


Reference table 4

Budgeta

(Won bn)

1996 1997 1998 1999 2000b

Revenue 24.3 19.7 19.8 19.8 20.4

Expenditure 24.2 – 20.0 20.0 20.4

Economic development 12.4 – – – –

Social welfare 5.0 – – – –

Military 3.0 – 2.9 3.0 3.0

Administration 0.2 – – – –

a Items marked “–” are unavailable. b Planned.

Sources: EIU; BBC, Summary of World Broadcasts; North Korea’s submission to the IMF, as cited in Marcus Noland’s Rigorous Speculation:the Collapse and Revival of the North Korean Economy, available on http://www.iie.com.

Reference table 5

Estimated gross domestic product

1995 1996 1997 1998 1999

% real change –4.6 –3.7 –6.8 –1.1 6.2

Sources: Bank of Korea, Seoul; The Asian Wall Street Journal Weekly, June 19th-25th 2000, citing various South Korean governmentagencies.

Reference table 6

Estimated gross domestic product

1992 1993 1994 1995 1996

Total (US$ bn) 21.1 20.5 21.2 22.3 21.4 % of South Korea 6.9 6.2 5.6 4.9 4.4

Per head (US$) 943 904 923 957 910 % of South Korea 13.5 12.1 10.8 9.6 8.4

Source: Bank of Korea, Seoul.

Reference table 7

Gross domestic product by sector(% real change)

1991 1992 1993 1994 1995

Agriculture, forestry & fishing 2.8 –2.7 –7.6 2.7 –10.5

Mining & manufacturing n/a –15.0 –3.2 –4.2 –4.6 Mining –6.8 –6.1 –7.2 –5.5 –2.3 Manufacturing –13.4 –17.8 –1.9 –3.8 –5.3 Light industry n/a –7.3 5.0 –0.1 –4.0 Heavy industry n/a –21.0 –4.2 –5.2 –5.9

Electricity, gas & water –4.5 –5.7 –8.7 4.2 0.1

Construction –3.4 –2.1 –9.7 –26.9 –3.2Services 2.5 0.8 1.2 2.2 1.5 Government n/a 2.4 2.3 3.3 2.8 Others n/a –1.7 –0.5 0.4 –0.7

Sources: Bank of Korea, Seoul; cited in Vantage Point, Naewoe Press, Seoul, July 1995.

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Reference table 8

Minerals production(tonnes unless otherwise indicated)

1991 1992 1993 1994 1995

Cadmium 200 200 200 200 202

Coppera (‘000 tonnes) 0.0 0.5 n/a n/a n/a

Gold 5.0 6.0 0.5 0.5 0.5

Lead (‘000 tonnes) 80 70 70 55 55

Silver 300 280 250 200 200

Tungsten 1,000 400 n/a n/a n/a

Zinc (‘000 tonnes) 120 120 120 90 90

a Exports to the West of refined copper.

Source: World Bureau of Metal Statistics, World Metal Statistics Yearbook.

Reference table 9

Estimated production of main industrial minerals(m tonnes unless otherwise indicated)

1986 1987 1988 1989 1990

Cement 8 9 10 n/a n/a

Coal 70 70 48-70 n/a 49

Iron ore 8.0 8.5 8.5 n/a n/a

Steel 4.7 4.8 5.1 n/a n/a

Non-ferrous metals (‘000 tonnes) 50 700 800 n/a n/a

Source: Mining Journal, Mining Annual Review.

Reference table 10

Merchandise tradea

(US$ m)

1995 1996 1997 1998 1999

Exports 840 848 1,025 644 597

Imports –1,270 –1,423 –1,473 –1,170 –1,212

Balance –430 –575 –448 –526 –615

a Figures up to 1995 exclude inter-Korean trade.

Sources: Bank of Korea, Seoul; Japan External Trade Organisation, Tokyo.

84 North Korea


Reference table 11

External debt by maturity and source(US$ m)

1986 1987 1988 1989 1990

Gross external liabilities 3,643 4,232 4,080 4,456 4,717 Long-term debt 3,041 3,581 3,437 3,716 3,775 OECD 376 371 286 187 185 CEECa 2,666 3,210 3,150 3,529 3,589 Short-term debt 602 651 643 739 943

Banks 196 259 215 331 451

Export credits 406 392 428 408 492

Total service payments 76 117 82 109 303 Amortisation, long-term debt 19 74 30 54 175 Interest, long-term debt 38 26 33 30 95 Interest, short-term debt 19 17 19 25 33

a Central and east European countries.

Source: OECD, Financing and External Debt of Developing Countries.

Reference table 12

Exchange rates(annual averages)

1995 1996 1997 1998 1999

Won:US$ 2.17 2.20 2.20 2.20 2.20

Source: Financial Times.

Editors: Simon Tilford; Robert WardAll queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023

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