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Overview of Korea’s development experience

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Development Overview
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Macroeconomics

Exchange rate

Throughout the 1950s, the Korean government maintained a complicated multiple exchange rate system (Frank, Kim and Westphal, 1975). In addition to the official rate, there were separate rates applied to the counterpart fund 1) and to military payments certificates (MPCs). 2) The overvaluation of the Korean won under these rates either reduced the government’s burden (as in the case of the counterpart fund rate) or increased its revenues (as in the case of the MPC rate). The government reluctantly adjusted exchange rates from time to time when it could no longer withstand pressure from America.

An overvalued exchange rate discouraged imports. Imports were further discouraged by quantitative restrictions that the Korean government employed to promote import-substitution industrialization. Trade Programs, which were published semi-annually by the Ministry of Commerce and Industry, listed three types of goods: (1) freely-imported items, (2) restricted items whose import required prior approval from relevant ministries, and (3) banned items (Sang-cheol Lee, 2001, p.459). Banned items referred to those that were produced domestically in sufficient quantity to meet all domestic demand. Restricted items were those whose domestic production could not meet all demand.

The tariff system was also geared to protecting domestic industry. From 1945 to 1949, asingle tariff rate of 10 percent was levied on all items except for foreign aid goods. In 1950, the government enacted the Tariff Act that imposed different rates depending on whether the item was produced domestically or not, and whether the item was a finished good or not. Tariff rates were generally high, ranging between 27.4 and 66.5 percent in the latter half of the 1950s.

Export promotion was also pursued, but the focus was not on actively promoting exports but on mitigating the impediments to exports. An example is the Foreign Exchange Deposit System, which allowed exporters to deposit foreign currencies earned from exports at the Bank of Korea (BOK) and to use them to pay for imports or sell the foreign currencies to other importers at market rates. However, direct subsidies for exports were minimal.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

NOTE


1)The foreign aid often took the form of the right to import from America or other countries a certain amount of goods in dollar terms. A private importer or a government agency that was allocated these rights had to deposit Korean currencies in the counterpart fund held by the Bank of Korea. The low won/dollar value of the counterpart fund rate meant a smaller burden for the importer or the government agency (Younghoon Rhee, 2007, pp.302-303).
2)During the war, American and other military forces needed a means of payment for local goods and services they purchased. To facilitate this, the Korean government turned over to the United Nations Command a large amount of won in advance with the understanding that the terms of repayment in dollars would be negotiated later. In the negotiations, the Korean government tried to keep the won/dollar exchange rate at low levels to maximize its dollar receipts (Krueger, 1977).

References


· Frank, Jr., Charles R., Kwang Suk Kim and Larry E. Westphal, Foreign Trade Regimes and Economic Development: South Korea, Columbia University Press, 1975.
· Lee, Sang-cheol, “Import-substitution Industrialization, 1953-1961,”in Byeong-jik Ahn (ed.), The Korean Economic History: A Preliminary Study, Seoul National University Press, 2001, pp.449-482 (in Korean).
· Rhee, Younghoon, A Story of the Republic of Korea:Reunderstanding the Post-Liberation Period, Ki-pa-rang, 2007 (in Korean).
· Krueger, Anne O.,“ The Role of Foreign Sector and Aid in Korea’s Development,”Working Paper 7708, Korea Modernization Series (5), Korea Development Institute, 1977.

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