Interdependency in East Asia and the Post-Crisis Macroeconomic Adjustment in Korea. Hak K. Pyo Seoul National University

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1 Interdependency in East Asia and the PostCrisis Macroeconomic Adjustment in Korea Hak K. Pyo Seoul National University

2 Contents 1. Introduction 2. International Linkage and Interdependecy of the Korean Economy 3. The 1997 Financial Crisis in Korea : A Retroactive Assessment 4. Macroeconomic Adjustment in the Postcrisis Recovery in Korea 5. The Postcrisis Structural Reforms in Korea 6. Conclusion

3 1. Introduction Asian Crisis Recovery Resolution Strategy Korean model of economic development Government Role Sustainability of Korean type

4 2. International Linkage and Interdependency of the Korean Economy Volatility of investment and net exports Structure of interdepedency Nam and Pyo(1997) Lee and Okamoto(2002) HEM

5 Table 1 Volatility Persistence, and Cyclicality of Major Macroeconomic Indicators : Korea, US and Japan(1970 I 1991 II) Volatility of Real Macroeconomic Indicators σ(y) σ(c) σ(i) σ(nx/y) Korea US Japan σ(c)/σ(y) σ(i)/σ(y) σ(nx/y)/σ(y) Korea US Japan

6 Table 1 Continued First Order Correlation Coefficients ρ(y) ρ(c) ρ(i) ρ(nx/y) Korea US Japan Coefficients of Correlation with GDP ρ(c,y) ρ(i,y) ρ(nx/y,y) Korea US Japan

7 Table 2 Changes in Trade Linkage Effects in East Asia Extracted Country China Japan Korea China 41% 24% 1% 1985 Japan Korea 59% 0% 63% 12% 69% 31% Trade Linkage 100% 100% 100% China 60% 25% 0% 1990 Japan Korea 36% 4% 56% 19% 66% 33% Trade Linkage 100% 100% 100% China 47% 25% 15% 1995 Japan Korea 39% 14% 60% 15% 48% 37% Trade Linkage 100% 100% 100%

8 3. The 1997 Financial Crisis in Korea : A Retroactive Assessment Necessity of Crisis prediction framework Model Moral Hazard Excess Competition

9 4. Macroeconomic adjustment in the Postcrisis Recovery in Korea Vshaped Recovery Massive injection of public funds Depreciation of Won Structural Break

10 <Figure 1> Gross Rates of Return on Capital in G7 Countries and Korea K O R U S A C A N JPN D E U FRA IT A G B R

11 <Figure 2> Reserve Money: Growth Rate (1992.1~ ) 40.0 Reserve Money Growth Rate (% in Current Prices)

12 Table 3 Summary Macroeconomic Indicators, Korea: Real GDP(percent change) Final domestic demand Consumption Gross fixed investment Saving and Investment(in percent of GDP) Gross national saving Gross domestic investment Prices(percent change) Consumer prices(average) Consumer price(endperiod) GDP deflator Employment and wages Unemployment rate Wages, manufacturing (annual percent change)

13 Consolidated central government(in percent of GDP) Revenues Expenditure Balance Money and credit(end of period) M Yield on corporate bonds Trade(percent change) Export volume Import volume Terms of trade Balance of payments(in billions of U.S. dollars) Exports, fob Imports, fob Current account balance Current account balance (in percent of GDP)

14 Usable gross reserves In billions of U.S. dollars (end of period) In months of imports of goods and services External debt In billions of U.S. dollars In percent of GDP Exchange rate(period average) Won per U.S. dollar Nominal effective exchange rate (1995=100, W/$) n.a. Real effective exchange rate (1995=100, W/$) n.a.

15 5. The Postcrisis Structural Reforms in Korea 1) Financial Restructuring Reforms Korean Public Fund Oversight Committee(KPFOC) Korea Deposit Insurance Corporation (KDIC) Korea Asset Management Corporation (KAMCO)

16 P & H Method NPL ROA, ROE BIS

17 Figure 3. Labor Productivity Year YO/L Y/L %

18 Figure 4. CapitalOutput Coefficient / CapitalLabor Ratio Year % K/YO K/Y K/L

19 Table 4 Gross Output Growth Accounting for Korea( ) Gross Output (YO) GDP (Y) Capital Input (K) Labor Input (L) Energy Input (E) Intermediate Input (M) TFP 1 Agriculture Coal Mining Metal and NonMetal Oil and gas Construction Food Textile Apparels Lumber and Wood Furniture Paper Allied Printing,Publishing,Allied Chemicals Petroleum Products Leather Stone,Clay,Glass Primary Metal

20 Total Public Service Ether Private Service Finance and Real Estate Trade Gas and Water Utility Electric Utility Communication Transportation Miscellaneous Manufacturing Rubber Instrument Transportation Equipment Motor Electrical Machinery Machinery Fabricated Metal 18

21 1, ,101 Total LC 1, ,666 CU MS ITC IC SC MB 1, ,068 NonBanks Banks No. of Inst. New Entry (B/A) (%) Total (B) Dissolutions Mergers Licenses Revoked Restructuring No. of Inst. ( ) Classification Table 5 Restructuring of Financial Institutions

22 Table 6 Uses and Sources of Public Funds Total Foreign Banks NonBanks Savings Bank CU IC SC, ITC MB Banks Classification Total Otherwise Public Money Recovered Bonds Total NPL Purchase Asset Purchase Deposit Payoffs Capital Contribution Equity Participation Use Source

23 2)Corporate Reforms Promoting greater competition Improving corporate governance Improving capital structure and profitability

24 Table 7 Selective Indicators of Commercial Banks Year No. of Employees No. of Branches NPLs NPL Ratio Operating Income ROA ROE BIS Ratio ,913 5, , ,994 5, , ,677 5, , ,744 4, , ,559 4, , , ,

25 Table 8 30 Large Chaebols High Debtequity Ratios and Accounting Profitability Average debt/equity ratio Groups with debt/equity 1000% Groups with negative equity Groups with loss n.a. n.a. n.a. Table 9 Manufacturing Sector Performance: Avg Debtequity ratio Operating income to sales ratio Financial expenses to sales ratio Ordinary income to sales ratio

26 3) Reforms in Labor Relations Labor market reform Honorary Retirement Unemployment Policy Subsidy for Job sharing Reemployment

27 Table 10 Statistics of Union Activity and Employment in Sectors with Strong Unions (A) Strikes by Issue in the 1990s Wage increases Unpaid wages/layoffs (B) Union Activity, Number of Unions Union Membership Strikes Strike Participants Workdays Lost (C) Employment in Sectors with Strong Unions (1,000 persons) 4 30 Largest Chaebols Public Enterprises Financial Sector Collective agreements (Employment Issues)

28 Table 11 Size of the Middle Class (Unit: %) Definition 1 Definition 2 Definition 3 Definition 4 Year Lower Class Middle Class Upper Class Lower Class Middle Class Upper Class Lower Class Middle Class Upper Class Lower Class Middle Class Upper Class

29 Table 12 Inequality of Wealth Distribution (Gini coefficient) Including Insurance Policy Holdings Excluding Insurance Policy Holdings Year Net Wealth Total Wealth Real Wealth Financial Wealth Total Worth Financial Assets

Revised October 17, 2016

Revised October 17, 2016 60 ISM Manufacturing Purchasing Managers Index (September 2015 September 2016) 58 56 54 52 50 48 46 44 42 Sept-15 Oct Nov Dec Jan-16 Feb Mar Apr May Jun Jul Aug Sept Purchasing