Advanced industrialization and acceleration of foreign borrowing, 1973 to 1978

Advanced Industrialization and Acceleration of Foreign Borrowing, 1973 to 1978

To implement the third Five Yea Economic Development Plan which aimed at developing the heavy and chemical industries and expanding the strategic exporting-industries, and to compensate for the huge current account deficit resulting from the oil crisis of the early 1970s, foreign capital was actively sought during this period. Industry’s strong dependency on imported oil also contributed to an upsurge in foreign borrowing.

Together with the government actively seeking foreign loans, a program to encourage domestic savings was introduced. The citizens responded favorably and the domestic savings rate soared to almost 20 percent by the mid -70s. A rearrangement of the curb market and establishment of non-banking financial institutions absorbed these increased domestic savings and played a critical role in the enhancement of Korea’s industrial structure during this period of prosperity and economic growth.

The government recognized that current regulations were hampering the acquisition of needed foreign capital. It, therefore, not only integrated similar regulations and eliminated overlap, but also made foreign borrowing more effective by improving loan procedures. Also, the government intended to diversify its loan sources. Thus, foreign borrowing was expanded from heavy dependence on the U.S. and Japan to European countries.

In 1973, the “Public Loan Inducement and Supervision Law” was introduced and the “Foreign Capital Inducement Law” was amended in order to provide for more effective management of foreign capital inflows. For example, with regard to equipment loans, if there was a delay in the delivery of equipment and thus a contract violation, the foreign loan would be cancelled by the government.

As huge oil dollars were channeled into the international financial markets after the oil crisis, the financial institutions’ loan activities were greatly expanded. During this period, foreign borrowing reached $ 11.2 billion and bank loans amounted to 1.0 billion, 9 percent of total foreign borrowing. Commercial loans had decreased subsequent to the enforcement of the selective foreign capital inducement policies in the mid -60s. However, they increased sharply, to 5.9 billion, well over 50 percent of the total foreign debt.

Public loans from international organizations like the IBRD and the ADB steadily increased, reaching $3.4 billion, 30.6% of total foreign debt by 1978. This growth in public loans was due to changes in government loan regulations, as well as an increase in Korea’s bargaining power with its lenders.
From 1973 to 1978, foreign borrowing through bond issues was $219 million, while FDI was $704 million, although it decreased after 1975.

During this period, most foreign loans came from the United States and Japan. A large portion of public loans came from the IBRD, while commercial loans were mostly from the U.S. However, total commercial loans from European sources were well over that from the U.S. and Japan, while a large part of FDI and technology transfer came from Japan.

[Table 1-1] Foreign Borrowing, 1973 to 1978

	1966~72		1973	1974	1975	1976	1977	1978	1973~78
	Amount	Share							Amount	Share
Public loans	1,130	32.1	403	385	477	713	636	817	3,431	30.6
Commercial Loans	1,950	55.5	461	603	801	839	1,241	1,913	5,858	52.2
Fin. Institutions’ Loans	205	5.8	49	218	200	131	300	328	1,226	10.9
(Bank Loans)	205	5.8	49	199	200	57	230	272	1,007	9.0
(Foreign Bonds)	-	-	-	19	-	74	70	56	219	1.9
FDI	227	6.5	191	163	62	85	102	101	704	6.3
TOTAL	3,512	100.0	1,104	1,369	1,540	1,768	2,279	3,159	11,219	100.0

	1966~72		1973	1974	1975	1976	1977	1978	1973~78
	Amount	Share							Amount	Share
Long Term Repayments	959	100.0	516	546	655	853	1,183	1,779	5,532	100.0
Public Loans Commercial Loans Bank Loans	150 732 77	15.6 76.3 8.0	84 335 97	90 401 55	138 417 99	206 542 101	284 702 190	384 1,060 331	1,186 3,457 873	21.4 62.5 15.8
DSR (%) Foreign Debt/GNP (%) Total Foreign Debt	- -   -	- -   -	14.2 32.5   4,260	11.2 32.8   5,937	12.0 41.8   8,456	10.6 38.4   10,533	10.2 35.9   12,648	12.1 30.3   14,871	- -   -	- -   -

Sources: MOF, EPB, BOK

The rapid increase in short–term and high-interest rate commercial loans was further accelerated by taking out additional commercial loans to repay earlier loans (See Table7).
Korea’s increasing foreign debt was a matter of serious concern, and the Korean Government was requested to more strictly limit its foreign borrowing, particularly short-term commercial loans. While Korea’s foreign debt substantially increased in a very short time, the country never had trouble servicing the debt. Due to its high economic growth rate and increase in exports, Korea’s debt service ratio (DSR) did not deteriorate.

In fact, a recovery in the world economy and the Middle East construction boom contributed to a decrease of the DSR to 10 to 12 percent from 14.2 percent in 1973. At the same time, the ratio of debt to GNP decreased to 30.3 percent in 1978 from 41.8 percent in 1975.

Source: Ministry of Strategy and Finance. Republic of Korea and The Korea Development Bank. 1993. Foreign capital and the Korean economic development. Seoul.