This study seeks to identify the reasons and impact of the high levels of inflation in Korea, which lasted from 1945 to the early 1970s; and thereby devise measures on developing a steady policy on price stabilization.
Since its continuous rise in prices after independence in 1945, Seoul’s wholesale price index surged from 25% to as high as 531% between 1945 and 1953, mainly due to the lack of supplies and a surplus of currency. Korea’s GNP between 1954 and 1960 marked an average annual increase of 20%, which even increased by 32% in 1964. From the late 1960s to 1972, the average annual inflation rose from 8% to as high as 15%. As the rate continuously increased from 1954 until 1972, inflation factors, which surpass the real demand for currency, increased in accordance with the rise in the domestic interest rate and the expected rate of inflation. Furthermore, as the official exchange rate and real wages did not show any statistical relationship with the rate of inflation, the two indexes are not factors that reflect long-term inflation in Korea.
Based on an analysis of the increase in corporate costs by category from 1966 to 1971, the main factor behind the increase in the sales price of mining/manufacturing industries products and the entire domestic market was the wage increase exceeding the increase in labor productivity. However, evidences pointing out wage increase as a factor of inflation are actually unclear. Instead, the sudden increase in the GNP of the non-agricultural fishery industry and its consequent decrease in unemployment rate were seen as the actual factors that brought an increase in wages. Wage increase, a reflection of the labor demand following the sudden economic growth, is a factor of long-term inflation.
There are a number of effects of inflation, including the decrease in demand for currency, an unstable condition of domestic saving, and the chronically excessive demand of bank loans. In 1965, the effects of inflation on finance and real savings were alleviated through high interest-rate policies, but also led to the increase of foreign loans as it increased the gap between domestic and foreign interest rates.
Short-term projects due to inflation of the past and housing/land real-estate speculating environments have also been alleviated with the government’s active promotion of policies attracting long-term investments and controlling real-estate speculation. In general, inflation led to a decrease in exports, increase in imports, increase in domestic trade deficit, and an increase in the demand for foreign loans. While the share of wage income according to national income was low, the impact of inflation was negative across the international payments.
Except for the period between 1961 and 1962, Korea continuously implemented an inflation-regulating policy. But the average rate of increase on the yearly currency showed some serious fluctuations. The increase in the yearly currency brought about ‘economic recession’ on the GNP growth of the agricultural industry.
In order to stabilize prices and achieve high growth, various policy instruments must be utilized aside from the price-stabilization policies. For this, various economic attempts are deemed necessary, which includes: a stable annual currency, an austere expenditure policy, a stable grain price, and stable public utility charges. Efforts for cost reduction must also be exerted by increasing productivity. At the same time, private investment must be actively attracted while tariffs and tax rates modified. Finally, a comprehensive analysis on farmhouses and the agricultural industry is also essential.
한국 인플레이션의 원인과 그 영향(Study of the reasons and impact of inflation in Korea)
|Series Title; No||연구총서|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Macroeconomics|
|Holding||KDI; KDI School|