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Macroeconomic and Industrial Development in Korea (Essays on the Korean Economy Vol.III)

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  • 저자 박종기, 편(朴宗淇, 編) , Roger D. Norton, 이승윤(李承潤) , 남상우(南相祐) , 사공일, 편(司空壹, 編) , 조성환(趙誠煥) , 김영봉(金榮奉) , 김적교, 편(金迪敎, 編) , 이철희(李徹熙) , 김인수(金仁秀) , 송병락(宋丙洛, 編)
  • 발행일 1980/10/01
  • 시리즈 번호 40
원문보기
요약 During its ten year existence, the Korea Development
Institute has published a large number of policy-oriented
research papers in English. These papers address a wide range
of economic problems and issues. While the demand for these
works has risen steadily as greater attention is focused on
Korea's development experience, many are out of print. To meet
this need we select some of these papers and publish them
together in a single volume at various intervals. This is the
third such volume, a companion volume to a fourth, Human
Resources and Social Development in Korea. The previous two
volumes. Planning Model and Macroeconomic Policy Issues and
Industrial and Social Development Issues, were published in 1977.

The eight papers brought together in this volume document
the studies undertaken since 1977 by economists and other social
scientists affiliated with the Korea Development Institute, either
as full-time research staff members or as visiting fellows.
Because these papers have been written at different times in the
past, some may be less relevant to Korea's current situation.
However, since all of works analyze aspects of the Korean
economy at various points in the growth process, they will help
readers to understand the nature of Korean development and the
issues facing the Korean economy. We hope that the studies
contained in this volume will also be useful in assessing
prospects and establishing strategies for other developing
countries.(※ 서문에서 발췌한 내용임)

The Dynamics of Inflation
Abstracts

This paper attempts to develop a simple model to explain
the dynamics of inflation in Korea. In spite of the very small
size of the model, comprising only three equations, and its
highly aggregate nature, the simulation closely approximated the
actual past rates of inflation and real GNP growth.

Since real GNP is an endogenous variable in this model, the
interaction between prices and real GNP is fully revealed. The
price level is depicted as being determined in the adjustment
process of both the money market and the product market. The
more money that is supplied per product available, and the
higher the speed of transactions, the more rapidly prices rise.
Meanwhile, given the supply capacity of the economy in the
short-run, prices should rise quickly as costs increase rapidly
and real GNP approaches the full-employment level. Among the
important cost elements, the wage rate has been selected as an
endogenous variable because of its highly endogenous nature.
This simultaneous system and the two-stage estimation of the
model are expected to eliminate a simultaneous equation bias
and the error arising from inaccurate specification.

Although we tried to analyze the money supply behavior of
the authorities by estimating money multiplier equations, it was
found that the money supply is basically exogenous in the sense
that it is not directly explainable by the endogenous variables of
the model. Furthermore, the monetary authorities in Korea,
despite evidence to the contrary, are confident that they can
keep the money supply under control. Thus this simple model
with an exogenous money supply in more suitably geared to
answer the question of the optimal money supply.

The estimation results of the price equations were
impressive in that the sign and the magnitude of the coefficients
for the major explanatory variables were largely consistent with
what is implied by the quantity theory of money and the share
of included cost factors in total manufacturing costs.

When static and dynamic simulations were carried out
within the sample period, the tracking ability of the model was
excellent for the rates of inflation and real GNP growth. We
also confirmed that the model is stable to an exogenous shock,
though the effects of a change in the money supply and imports
are rather long-lived. Furthermore, we found that the long-run
elasticities of price and real GNP with respect to the money
supply are roughly the same.

Direct Foreign Private Investment
Abstracts

At the end of 1976, the number of foreign-invested firms
operation in Korea was 865, and the total value of direct foreign
investment on the basis of approval amounted to $953.7 million.

The direction and pattern of direct foreign investment from
its commencement in 1962 to the end of 1974 exhibited a distinct
shift at the end of 1968 from import-substituting,
U.S.-domination investment to export-oriented investment in
which Japan's Share rapidly increased. During the period of
1962-68, the U.S. and Japan accounted for respective 81.7 and
7.9 percents, of the total value of direct foreign private
investments. And, during the period of 1969-74, the U.S.
contributed 21.2 percent, and Japan 72.3 percent, of the total
value of foreign private investment. This shift has been reflected
in the gradual shift in motives for foreign investment from the
penetration of the well-protected and growing local markets to
the attractiveness of cheap labor. By the end of 1974,
Export-oriented foreign firms accounted for more than on half of
the total value of direct foreign investment and 86 percent of the
total number of foreign firms. The shift has been also reflected
in the gradual decrease in the average size of foreign
investment. By the end of 1974, more than 98 percent of all
foreign firms had equity capital of less than $500,000.

The predominant form of ownership of foreign-invested
firms in South Korea is the joint-venture type. 682 of 733
foreign firms operating at the end of 1974 were joint-venture
companies. Wholly owned subsidiaries were mostly concentrated
in the electronics industry

According to our estimate, the 새심 value of output of all
the foreign-invested firms in Korea at the end of 1974 amounted
to about $2,689 milling, about 42 percent of which was the
amount of their output of the mining and manufacturing sector
was about 10 percent at the end of 1974. Their output shares in
some key industries are quite large : 100 percent in petroleum,
44 percent in electronic products, 37 percent in metal products,
and 28 percent in clay products.

Total exports by foreign-invested firms amounted to $1.24
billion, accounting for about 28 percent of Korea's total
commodity exports and about 31 percent of 독 exports of
manufactures. Foreign invested firms in Korea are the major
exporters of machine parts(93 percent), electronic components(89
percent), and metal products(84 percent). More than one third of
the exports by foreign-invested firms were electronic products.
About 30 percent of the total output of foreign-invested firms in
all sectors, and about 40 percent of their output in the
manufacturing sector, was exported. Foreign firms' exports grew
twice as fast as Korea's total exports during the period 1970-74.

For the manufacturing sector as a whole, the machinery and
equipment per worker of foreign-invested firms was at least
twice as much as that of local firms, The all-all K/L ratio of
import substituting foreign-invested firms was 4.8 times that of
foreign export firms, Machinery and equipment per worker in
foreign export firms was not much different from that of local
export firms. The employment creating effect of export-oriented
firms is quite considerable in view of the low capital-labor ratio
and high output share(90 percent of the total output of foreign
firms at the end of 1974) of these foreign export firms. In
addition, Many cases of local adaptation of production techniques
by foreign firms in Korea have been reported in both the wxport
and import-substitution industries.

Our estimate of the number of jobs directly created by
foreign-invested firms at the end of 1974 was about 162
thousand local workers, about 11 percent of the total number of
those workers employed in the manufacturing sector.

Our input-output analysis of the indirect effect on
employment through purchases of locally-produced intermediate
inputs by foreign firms indicated that in additional 101 thousand
jobs, about 60 percent of the direct employment impact, may
have been created through the multiplier effects of foreign
investments. The total (direct and indirect) impact of foreign
firms on employment may have been as much as 20 percent of
the total employment in the mining and manufacturing sectors.

It was found that foreign-invested firms tended to import
much more than local firms, and that joint-venture firms tended
to import a substantial portion of intermediate inputs from their
foreign partner companies. Such high dependency of foreign
firms on their foreign parent companies for the supply of
intermediate inputs implies that foreign parent companies
effectively control the supply prices of raw materials imported
by their subsidiaries and joint-venture companies in Korea

Direct foreign private investment, particularly in the form of
joint-ventures, is one of the main forms in which technological
licensing arrangements have been made. Nearly one quarter of
all foreign-invested firms in Korea have made one of more
technological licensing agreements with their parent companies
and/or other foreign firms as of the end of 1975. The desire to
increase market shared through trade-mark arrangements, raw
material monopsony, and export marketing were pointed out as
the main motives for foreign-invested forms to enter licensing
arrangements with their foreign counterparts. The intensity of
technical assistance in terms of overseas and on-the-job training
programs and quality of local personnel was far greater in the
case of domestic-marker-oriented foreign-invested chemical and
pharmaceutical firms than in that of foreign electronics export
firms. There was little evidence of the spillover effects of
technology transfer through the mobility of production workers
and technical personnel between foreign and local firms.

Foreign firms tended to have higher profits than their local
counterparts in most manufacturing industries. Foreign firms as
a whole tended to payout a far greater proportion of their
surplus as dividends and to retain far less reserves relative to
their surplus than did local firms. The proportion of dividends to
net profit was nearly 90 percent in U.S. firms and 76 percent in
Japanese firms.

Direct foreign private investment as a source of foreign
capital inflow financed only a small portion(2.3 percent) of
domestic capital formation during the period 1989-74. It
accounted for about 9.5 percent of the total inflow of foreign
capital over the same period. It was heavily concentrated in the
manufacturing sector, contributing 9.4 percent on average to
fixed capital formation in that sector during the period 1962-74.

In line with the shift in the direction of foreign investment
from domestic-market-oriented ti export-oriented investment
around the end if 1968, there was a parallel change in the
Korean Government's policy toward direct foreign private
investment. The main policy emphasis during the period 1962-68
concerned the physical-capital and financial aspects of direct
foreign private investment, specifically, the creation of production
capacity in the manufacturing sector (contribution by foreign
investors to domestic capital formation) in one hand, and the
inflow of foreign exchange funds (contribution to
balance-of-payments improvement) on the other. The incentives
to foreign investors during this period were well-protected local
markets, guaranteed profit rates, tax concessions, and growth
potential of local markets.

Policy orientation and business thinking in Korea shifted
from the 'foreign capital' concept ti 'foreign know-how' concept
of direct foreign private investment from the end of 1968.
Aspects of technology, managerial know-how, overseas
marketing, and brand names have been stressed. The
predominant majority of foreign invested firms in Korea are now
export-oriented and are motivated by the existence of cheap
manpower in their pursuit of international comparative
advantage. Cheap manpower, growing overseas export markets,
and favorable government attitudes are now the major incentives
to foreign investors.

While any attempt at a benefit-cost analysis is beyond the
scope of this study, the costs in terms of potential losses in
employment, foregone profits of local entrepreneurs, tax
concessions and public expenditure for the benefits of foreign
investors, high import dependency, and high technology
dependency must be weighed against the benefits from direct
foreign private investment, i.e.. technological know-how,
export-marketing know-how, and other business knowledge and
information. Alternative methods of securing the same kinds of
benefits, for example, outfight technology imports in the forms of
licensing agreements, turnkey contracts, and managerial contracts
must be taken into account. The increasing trend of Korea's
technological and other licensing agreements with foreign firms
in recent years has implicity pointed towards the natural
direction of shift in emphasis from joint-ventures to direct
technology imports in obtaining what the Korean economy needs
most : technological and managerial know-how.

The Growth and Structural Change of Textile Industry
Abstracts

This study has examined the patterns and factors of growth
in the Korean textile industry. The importance of the textile
industry as the representative of the Korean manufacturing
industry over the last 60 years has been illustrated. It is cleat
that the economic conditions have suited development of this
industry, allowing it ti become Korea's most important industry.
Also the policies for this industry have generally reflected the
industrial, trade, and employment policies of Korea. As a result,
the textile industry became one of the first modern industries to
be established in Korea, and has been a forerunner among
Korean industries in completing import substitution and
transformation into an export industry. Because of its rapid
expansion, the industry is now comprised of many variations in
the size of firms, production techniques, and input composition.

The development of the Korean Textile industry is distinctly
divided into three periods; the pre-liberation period, the period of
reorganization and expansion for import substitution until 1961,
and the period of export-oriented growth after 1962. The growth
during the first two periods was primarily a quantitative
expansion of production and facilities. More vigorous growth of
output as well as structural changed were seen after 1962, when
rapid increases of export demand and chemical fiver production
changed the demand structure

The textile industry led the emergence and development of
Korean manufacturing industries during the pre-liberation period.
The industry during this period concentrated mainly on
production of cotton textiles, raw silk and rayon cloth, and
knitted wear. The modern textile plants, which had been
established for the most part with Japanese capital, coexisted
with cottage-type home industries. During the period from 1922
to 1940, textiles accounted for 12 to 16 percent of the value of
manufacturing output, and the real growth of output averaged 10
percent a year, which was about the same as the growth rate of
manufacturing output. Overall however, textile production was
not sufficient to meet domestic requirements during the period.
However, domestically produced textiles were increasingly
exported to Japan because of the imbalance in the expansion of
production facilities among the sectors producing raw materials,
intermediate goods, and final goods.

The modernization of the textile industry in this period was
attributable to the relatively favorable industrial location,
geographical advantages and abundant labor forces of Korea, as
well as to the japanese industrial and colonial policies. The latter
factor was especially important because it provided a direct
incentive for textile industries to operate in Korea : Korean
industries were not subject to the laws regulating production,
marketing, and employment conditions in Japan, this induced an
inflow of Japanese industrial capital into Korea. During the later
period, more Japanese textile facilities were transplanted to
Korea in order to avoid damage from air raids.

The industry had experienced two expansions and two
recessions during the period from 1945 to 1961. They were 1)the
reorganization and expansion of the disorganized industry after
the liberation from Japan, 2)the destruction of production
facilities during the Korean War years, 3) the restoration and
expansion of the War-damaged industry during 1953-1957, and
4) the stagnation of the industry after 1958. Of all the Korean
manufacturing industries, the textile industry reacted most
flexibly to the changing economic conditions. Therefore, despite
the fact that the textile industry was more seriously damaged
than other industries during the period from the liberation to the
Korean War, its recovery and expansion was also faster than
the others. The real average annual growth rate of value added
in the textile industry was 24.6 percent during 1953-57,
exceeding that of the manufacturing industry by 5.6 percent. The
stage of import substitution in most textiles was completed by
1957, and the problems of idle facilities set in during t도
remainder of this period.

The development in this period was based on expanding
demand in the domestic market. Accordingly, more remarkable
development was seen in the wool textile industries, which had
made little progress during the Japanese colonial period in spite
of increasing demand, and in the knitting industry which was
largely concentrated in the northern part of Korea. Except for
synthetic textiles, the Korean textile industry was able to
produce a sufficient quantity of textile goods to replace imported
goods by 1957, which necessitated a government ban on imports
of most yarns and fabrics during 1957-58. After 1957, the
industry began to search for new markets because of the decline
in domestic demand. Therefore, there was a concentrated effort
to improve textile facilities and the quality of products, as well
as import chemical facilities during the late 1950s.

Aside from the general characteristics of the textile industry,
which facilitate import substitution on developing countries with
abundant labor and little technology and capital, its development
in this period was assisted by foreign aid and favorable
government policies. Most of the requisite facilities and raw
materials were supplied through foreign aid programs. The
industry, in the meantime, effectively persuaded the government
to secure adequate financial support, and was able to accumulate
profits through a favorable foreign exchange policy.

In the period of the first three five-year economic
development plans, the textile industry was transformed form a
domestic to an export industry. Growth was especially
accelerated in the newly developing chemical fiber industry by
promoting import substitution and exports simultaneously. The
real growth rate of the textile industry value added averaged
16.3 percent annually during 1962-75. It averaged 10.6 percent
per annum during the First Five-Year Plan(1962-66) when the
share of textile production for export use was small. The growth
accelerated to 21.2 percent per annum during the Second
Five-Year Plan(1967-71) as the share of exports rose
substantially.

The growth of the textile industry in this period relied
increasingly on new factors such as export demand, production
of chemical fibers, and the growth of textile enterprises. These
factors have brought considerable changed in the demand and
supply structures of textile goods. The share of export use in
the production of cotton yarns rose from 4 percent in 1962 to 64
percent in 1975, and that of worsted yarns from 10 percent in
1963to 68 percent in 1975. Although production of chemical fibers
only began in the late 1960s, its share for export use was 70
percent by 1975. The relatively capita-intensive industries, in the
meantime, expanded more rapidly than the other textile
industries, also changing the supply structure of textile goods.
During this period, the spinning and chemical fiber processing
industries, in general, were growing faster than the rest of
Korea's textile industries. The development of the chemical fiver
industry, especially, increased the share of chemical fiber yarns
in total yarn production from 4 percent in 1962 to 54 percent in
1975.

The textile industry consists of various industries which
produce raw materials, intermediate goods, and finished textiles.
The common characteristic of Korea's textile industry is a high
dependency of its production level on international trade. Imports
accounted for 47 percent of the net supply of textile goods, and
exports were 57 percent of the final demand in 1975. However,
the import items were fibers and intermediate goods while
exports mainly included finished goods, revealing the relatively
high inter-dependency of the domestic textile manufacturing
sectors.

Korea's textile industry, as a whole, continues to be
labor-intensive despite many changes in its product composition.
Accordingly, the average elasticity of output for capital input
appears to be smaller than for labor input. At the same time
economies of scale appear to be present in Korea's textile
production process. The output elasticity of capital input and
elasticity of scale were higher in the relatively modern textile
sectors such as chemical fiber processing and yarn production
than in other areas. Also, factor substitution seemed to be more
active in the modern sectors.

The relative importance of the textile industry in the Korean
economy has been declining recently. In addition, conditions do
not look too favorable for the future and the expansion of the
industry is countered in overseas markets which will limit
quantitative expansion of Korean textile exports. Moreover
national economic efforts are being shifted to the promotion of
heavy and chemical industries. In view of these prospects, the
future growth of the textile industry appears to be dependent
upon increases in productivity and in its ratio of value added.
The fact that output elasticity of capital input and elasticity of
scale are higher in the modern sectors and intermediate goods
producing sectors implies a relatively faster expansion for these
sectors in the future.
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