The primary role of the monetary authorities during the government-led growth period lay in supplying “growth money,” and price stabilization received a far lower priority.
Banks never had enough money to satisfy the voracious demand for credit from businesses, and had to rely on central bank lending (Pyung-joo Kim, 1995, p.219; Joon-kyung Kim, 1993, p.138). In 1968, the government abolished the ceiling on the central bank rediscount facility and entitled banks to an automatic rediscount of a fixed proportion of their directed credits. Consequently, the share of central bank lending in total deposit money bank (DMB) credits reached 10-20 percent in 1965-1993, and its share in total directed credits 30-40 percent (Table 2-6). The share was especially high in the case of export credits; banks relied for 89 percent of their export credits on central bank lending in 1973-1981.
Table 2-6. Central bank lending to deposit money banks
Central bank lending was the major source of reserve base growth (Table 2-7). In 1973-1981, the reserve base grew by 25.1 percent annually, of which 20.2 percent came from lending to DMBs. Such a rapid growth in the reserve base inevitably led to high inflation. Consumer price inflation soared to 10-20 percent in the 1960s and 1970s, far higher than in Japan, Taiwan or Singapore (Table 2-8).
In the 1960s and 1970s, the government tried to contract the money supply from time to time to contain inflation. Except for a few years (1963-1964, 1970-1971), however, money supply continued to grow rapidly and the budget deficit remained large due to the “growth-first” policy at the time (Tae-seong Jeong, 1986, p.969).
Table 2-7. Contributions to the reserve base growth
Table 2-8. International comparison of consumer price inflation
Instead of macroeconomic tools, the government relied heavily on price controls. Price controls had been imposed intermittently in the 1940s and 1950s without much success. In November 1961, a legal basis for price controls was prepared with the introduction of the Act on Temporary Measures for Price Controls. Price controls in accordance with the Act continued until 1971 (Jae Hyung Lee, 2005, p.439; Seong-sang Park, 1986, p.939; Economic Planning Board, 1982, pp.52-53).
The government considerably strengthened price controls in the 1970s. In March 1973, amid escalating inflation fueled by devaluation and sky-rocketing international commodity prices, it put in place the Price Stabilization Act to replace the previous Act on Temporary Measures. The new Act extended the coverage of regulation from the price of goods to the price of services, including rent, fees and user charges. Inflation came down temporarily, but intensified again in 1974 due to rising oil prices.
The government continued price controls but had to allow occasional upward adjustments in prices. It also revised the Price Stabilization Act into the Act on Price Stabilization and Fair Trade in 1975. The new Act brought in wide-ranging regulations, including those on monopolistic and oligopolistic pricing. In addition, competition policy (i.e., regulations on anti-competitive behavior and unfair trading) was included in the Act in the belief that a fundamental cure for inflation lay in installing acompetitive market structure. But the Act served mainly to implement price controls and did not play a significant role in promoting competition (Jae Hyung Lee, 2005, pp.439-440). The Act enabled the government to intervene directly in the entire process of production, distribution and consumption, to set “standard prices,” and to influence the pricing in monopolistic and oligopolistic markets.
Not supported by monetary and fiscal adjustments, however, price controls failed to stabilize inflation. They delayed but could not prevent eventual price increases, generating public distrust of government policies and boosting inflationary expectations. Producers diverted their sales to overseas markets to avoid the price controls, which amplified domestic inflationary pressure and enlarged the black market. In return, the government had to intervene further in the market by imposing production quotas and export caps on enterprises (Tae-seong Jeong, 1986, p.970).
The government began to reduce price controls in the 1980s. The Monopoly Regulation and Fair Trade Act was introduced in 1980 as the first fully-fledged competition law. Competition policy was transferred to the new Act from the Act on Price Stabilization and Fair Trade. Some price regulations remained, but were finally abolished in February 1994.1)
Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.
NOTE
1) This means that general price controls were discontinued. There still exist price controls on certain items (such as mobile phone charges) based on sector-specific laws.
References
· Kim, Pyung-joo, “Financial Institutions and Economic Policies,”in Dong-Se Cha and Kwang Suk Kim (eds.), The Korean Economy 1945-1995: Performance and Korea Development Institute, 1995, pp.179-254 (in Korean).Vision for the 21st Century,
· “Improving the Funding of Policy Loans,”in Daehee Song (ed), National Budget and Policy Objectives, Research Monograph 93-03, Korea Development Institute, 1993, pp.114-176 (in Korean).
· Jeong, Tae-seong, “Imported International Price Inflation and Expanded Price Controls (1975-1979),”in Forty-year History of the Korean Economic Policy, The Federation of Korean Industries, 1986, pp. 967-976 (in Korean).
· Lee, Jae Hyung, “Regulation on Transactions: Regulatory Reform and Competition Policy,”in MoonJoong Tcha (ed.), A Study on Regulatory Reform to Improve the Business Environment, Research Monograph 2005-08, Korea Development Institute, 2005, pp.429-479 (in Korean).
· Park, Seong-sang, “Moderate Stability of the Aid dependent Economy (1954-60),”in Forty-year History of the Korean Economic Policy, The Federation of Korean Industries, 1986, pp.935-944 (in Korean).
· Thirty-year History of the Economic Planning Board Ⅱ (1981-1992): Economic Policies in the Liberalization Era, 1994 (in Korean).
· Lee, Jae Hyung, “Regulation on Transactions: Regulatory Reform and Competition Policy,”in MoonJoong Tcha (ed.), A Study on Regulatory Reform to Improve the Business Environment, Research Monograph 2005-08, Korea Development Institute, 2005, pp.429-479 (in Korean).
· Jeong, Tae-seong, “Imported International Price Inflation and Expanded Price Controls (1975-1979),”in Forty-year History of the Korean Economic Policy, The Federation of Korean Industries, 1986, pp. 967-976 (in Korean).
