Regions and Countries

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Republic of Korea

Economic performance

Economic growth: The economy rebounded in 1999 and 2000 after a deep recession in 1998 in the wake of the Asian financial crisis, with real GDP growth reaching 10.9 percent in 1999 and 8.8 percent in 2000. The recovery was most evident in manufacturing, which achieved nearly 20 percent growth each year in 1999–2000. The information and communication technology-related manufacturing subsector showed strong growth performance of more than 40 percent growth in 2000.

The economy began to slow in 2000; the quarterly growth rate dropped from 4.1 percent in the second quarter of 1999 to 1.2 percent in the second quarter of 2000, and fell further in the fourth quarter of 2000. Growth in private consumption also turned negative during the latter half of 2000. However, the slowdown was less evident in exports, with the quarterly growth rate of export volume remaining at about 5 percent in the third and fourth quarters of 2000, similar to the year-ago levels. The continued steady growth in export volume suggests that the recent overall economic slowdown stemmed mainly from depressed domestic demand.

Employment: The unemployment rate dropped to below 4 percent in 2000 from 6.3 percent in 1999. Given that the long-run average unemployment rate prior to the crisis was about 2.5 percent, unemployment remained relatively high. Two factors appear to have contributed to this. First, structural changes in the labor market following the 1997 crisis, such as greater flexibility in the labor market and extended unemployment benefits, may have increased the natural unemployment rate for the Republic of Korea. Second, the recent slowdown in growth may have kept the unemployment rate from falling further.

Inflation: The consumer price inflation rate, which was as low as 0.8 percent in 1999, reached 2.3 percent in 2000. The precrisis (1990–1997) average GDP growth rate was about 7.3 percent, with the average inflation rate at around 4.5 percent.

Fiscal balance: In 2000, the consolidated central government finance statistics recorded a surplus for the first time since 1996. This improvement in fiscal performance was achieved through a 23.7 percent increase in total revenue and a 5.8 percent reduction in expenditure and net lending. In particular, income, profit, and collection of capital gains taxes registered growth of 40.3 percent, with corporate income tax revenues increasing by more than 90.9 percent. The surge in corporate income tax resulted from the economic recovery, leading to an increase in corporate profits in 1999 and the first half of 2000. On the expenditure side, cuts in transfer payments and net lending contributed substantially to fiscal improvement. Total government expenditure as a percentage of GDP decreased from 25 percent in 1999 to about 24 percent in 2000.

External sector: Exports continued to expand, achieving a 21.1 percent rate of growth in 2000. Imports, however, grew even faster at 36.3 percent. This resulted in a decline in the current account surplus to 2.4 percent of GDP from 6.0 percent of GDP in 1999. As rapid economic growth and investor confidence were restored, the capital account turned into surplus in 1999, further improving to $11.5 billion in 2000. As a result, the Republic of Korea’s foreign exchange reserves increased further from $74 billion in 1999 to about $96 billion in 2000.

Overall, the performance of the external sector improved in 1999 and 2000. Reflecting this improvement, the average exchange rate of the won to the US dollar dropped from 1,399 in 1998 to 1,189 in 1999 and 1,121 in 2000. However, this increased to 1,265 at the end of 2000 because of the slowdown in growth, delayed structural reforms, and higher oil prices.

Domestic policies: The first phase of financial sector restructuring began immediately following the crisis. The second phase began in late 2000 and is expected to be completed during the first quarter of 2001. Although the first phase was largely successful, the Government decided that more public money and greater efficiency in using it were needed to carry out the second phase successfully. As a result, the Korea Deposit Insurance Corporation and the National Assembly agreed on 2 December 2000 to raise 40 trillion won in additional public money to complete financial and corporate restructuring. More than 100 trillion won of public money had already been used for restructuring. Of the additional public money, 4 trillion won has already been injected into six commercial banks. Also, to increase the efficiency in the use of public money, the National Assembly promulgated the Special Law on the Management of Public Money on 20 December 2000.

In addition to capital injections, the Government has established a financial holding company that will incorporate four financially weak banks. The holding company started operations during the first quarter of 2001. For the banks that did not receive injections of public money, the Government is encouraging mergers to increase the size of the banks and to strengthen their competitiveness.

Corporate restructuring continued in 2000. Regulatory changes aimed at improving corporate transparency and governance structures were introduced, followed by actions to resolve nonperforming loans. Chaebol (conglomerates) restructuring was emphasized and included simplifying and improving their financial structure by removing cross guarantees between chaebol affiliates. This resulted in improved transparency and accountability.

   

ADB operations

Project implementation: The Government did not withdraw the final tranche of the Financial Sector Program loan ($300 million). Accordingly, the technical assistance loan for institutional strengthening of the financial sector is the only loan being implemented. This loan was rated satisfactory in terms of implementation and development objectives.

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