Back Matter

Back Matter

Author(s):
Jorge Márquez-Ruarte, and Bijan Aghevli
Published Date:
August 1985
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    Appendix I Structure of the Public Sector

    In this paper, the public sector in Korea is defined to include the Central Government and five public enterprise funds—Railways, Communications, Supply Fund, Office of Monopoly, and the Grain Management Fund. These funds are organized along departmental lines and their operations are closely linked with those of the Central Government.

    The transactions of provincial and local governments are excluded because the appropriate data are not available on a timely basis. These levels of government have only limited authority to tax and to borrow, and generally run small surpluses. They receive about half of their revenue in the form of grants from the Central Government. Based on past patterns, consolidating these levels of governments into the public sector would increase both revenue and expenditures by about 6 percentage points of GNP and would leave the overall deficit slightly smaller.

    Owing to limited availability of data, 19 nonfinancial public enterprises in which government ownership exceeds 50 percent, and which are financially autonomous, also are omitted from this paper’s definition of the public sector. Total expenditure of the nonfinancial public enterprises was estimated at around 10 percent of GNP in 1984.

    The operations of the public sector are carried out through a complex funding structure comprising a general account, various special accounts, extrabudgetary funds, and other nonbudgetary transactions. The general account covers the activities of government ministries and agencies, and comprises about 80 percent of central government expenditure and net lending, as well as the bulk of central government revenues. Special accounts are established for specific projects and for those cases where revenues are earmarked for particular expenditures. Extrabudgetary funds are set up to support specific government objectives, primarily through net lending operations. The most important of these latter funds, the National Investment Fund and the National Housing Fund, are included in the Central Government, while the Grain Management Fund and the Supply Fund are included with the enterprise funds. Also included in the central government operations are two nonbudgetary items, consisting of foreign borrowing directly on-lent to the private sector and foreign military sales credits. Central government revenues are recorded when they are deposited with the Bank of Korea, and expenditures are recorded on the basis of checks issued.1 The fiscal year, which is the calendar year, includes a complementary period of 15 days in the following January.

    In January 1982, telecommunications was removed from the Communications Enterprise Special Account (one of the five enterprise funds), when the government-invested corporation, Korea Telecommunications Authority (KTA), was established. The management of KTA is independent of the Ministry of Communications, and it does not have access either to budgetary support or to financing by the Bank of Korea. Foreign borrowing on-lent to KTA by the Central Government is counted in net lending of the Government. Currently, the Communications Special Account includes only the relatively small postal service. In January 1983, the Civil Servants’ Pension Fund and the Special Account were removed from the Central Government and their functions shifted into the private sector with the establishment of the independent Civil Servants’ Pension Management Corporation. The fund is fully vested, and at the end of 1983 about 70 percent of its total invested assets (excluding cash and fixed assets) were held in private sector securities.

    Appendix II Structure of the Financial Sector

    The financial system in Korea consists of a highly regulated formal sector, composed of deposit money banks (DMBs) and nonbank financial institutions (NBFIs), and an unorganized sector commonly known as the “curb market.” This dualistic structure is an important characteristic of the Korean financial system. Credit demands that cannot be met in the formal sector, because of interest rate ceilings or credit allocation policy, are satisfied in the curb market. Consequently, pressures on the formal sector caused by excessive regulation are partly released through the curb market.

    The formal financial sector is highly segmented, with financial institutions specializing in particular segments of the market. The demarcation between financial institutions is effected by an extensive regulatory framework. Banking regulations focus on separating various financial functions, maintaining a fairly high degree of specialization, and reducing competition among financial institutions. Substantial barriers to entry and to branching exist, and the introduction of all new services or debt instruments requires prior approval.

    Formal Financial Sector

    Banking System

    The formal financial sector is dominated by the banking system (i.e., DMBs) which accounted for nearly 60 percent of total domestic liabilities in 1983. The banking system is composed of 7 nationwide commercial banks, 10 local banks, 7 specialized banks, and 48 domestic branches of foreign banks. The nationwide commercial banks have an extensive branch network (over 400 branches) throughout the country, while local banks’ branches are confined to the province in which their head office is located. Unlike the commercial banks, which were established under the General Banking Act, each specialized bank has been established under its own special law and has its own specifically defined purpose.1 The branches of foreign banks are all located in Seoul and Pusan. As a consequence, these banks do not have substantial domestic currency deposits and rely extensively on borrowings from their head offices, on foreign exchange swap transactions with the Bank of Korea and, since March 1985, on rediscount from the Bank of Korea.

    The importance of the banking system in the formal financial system has declined steadily since the early 1970s. The ratio of bank deposits to total deposits of the financial system fell from 85 percent in the early 1970s to less than 60 percent in 1984. Within the banking system, the seven nationwide commercial banks held about half of total bank deposits at the end of 1983, while specialized banks held about 40 percent, and local banks held 10 percent. Foreign branches held only 2 percent of total bank deposits.

    Nonbank Financial Institutions

    NBFIs can be classified into four categories according to their principal activities: (1) savings institutions, including mutual savings and finance companies, trust companies, and credit unions; (2) investment companies, including investment and finance companies, merchant banks, and investment trust corporations; (3) development institutions, including the Korea Development Bank, the Export-Import Bank, the Korea Land Development Corporation, and the Korea Long-Term Credit Bank; and (4) life insurance companies. NBFIs have been the most dynamic element of the financial system in recent years. Deposits with these institutions rose by 45 percent a year during 1975–84, compared with 25 percent a year for the banking system. The rapid growth of NBFIs has been due to the emergence of new financial instruments issued exclusively by these institutions; yields on these instruments are significantly higher than banks’ deposit rates.

    The fastest growing segment of the NBFIs has been the savings and investment institutions, particularly mutual savings and finance companies, investment trust corporations, and investment and finance companies. These savings and investment institutions were created in the early 1970s to attract funds from the unorganized money market and to develop financial markets without directly competing with the banking system. Domestic liabilities of mutual savings and finance companies (MSFCs), have increased by over 50 percent a year during 1975–84; their share of the nonbank market has risen from 6 percent in 1975 to over 10 percent in 1984. MSFCs make unsecured loans to holders of their installment savings accounts. These institutions determine their own interest rates within a ceiling which is considerably higher than the ceilings on bank rates. For example, interest rates on one-year deposits at MSFCs were 13 percent in 1984, compared to 9–10 percent for commercial banks.

    Investment trust corporations (ITCs) have increased their deposits by an average of 80 percent a year since 1975. Their share of NBFI deposits has risen from 2 percent in 1975 to over 20 percent in 1984. These companies acquire funds for investing in securities by issuing certificates to each investor. The growth in investment trusts has been closely linked to the expansion of the bond and equity markets. Yields of ITCs are very close to those in the bond and equity markets, exceeding those offered by the banking system.

    Investment and finance companies (IFCs) have also expanded rapidly (by almost 50 percent a year during 1975–84), although less rapidly than ITCs. IFCs deal in commercial paper with a maturity of six months or less. They also underwrite, buy and sell securities, or act as brokers in the sale and purchase of securities. In recent years, the Government’s ceiling on interest rates for commercial paper has been about 4 percentage points above banks’ lending rates. Consequently, IFCs have been able to attract substantial deposits by offering higher deposit rates than banks. IFCs have also been allowed more flexibility than banks in their allocation of assets and marketing of services. Development institutions have not played a major role in generating domestic savings and have relied mainly on foreign borrowing and government deposits to fund their domestic loans.

    Securities Market

    Private sector debt instruments—bonds and commercial paper—have increased dramatically from virtually nothing at the end of 1975 to over W 8 trillion (12 percent of GNP) at the end of 1984. During this period, private debt rose much faster than government debt. The share of private debt in the bond market rose from around one-third in 1975 to two-thirds in 1984. Rapid growth of private debt was spurred by relatively high yields and moderate risk. Yields on corporate bonds averaged about 5 percentage points above interest rates on time deposits during the period 1975–84. Almost all corporate debt carries a guarantee by a financial institution, primarily a commercial bank.2

    The secondary market for corporate bonds has been active, reducing the risk and increasing the liquidity associated with holding debt. However, unlike bond markets in developed countries wherein most trades represent outright sales or purchases, the secondary market in Korea consists almost entirely of sales under repurchase agreement. On average, bonds are repurchased by the seller in about four months. This transaction is therefore similar to a short-term loan in which the bond serves as collateral.

    The stock market enjoyed a period of rapid growth from 1975 to 1978 but, since then, has languished. The real value of listed stocks (deflated by the consumer price index) more than doubled between 1975 and 1978, but fell by 40 percent during 1979–83; in 1984 it recovered to 85 percent of its 1978 level. In addition, during 1978–84, the number of listed companies and shareholders declined; there was also a concentration of ownership in the hands of large shareholders. The decline in the stock market, combined with the rapid growth of the bond market, has reversed the relative size of these markets. Beginning in 1981, the outstanding value of corporate debt exceeded the market value (or par value) of stocks. Thin markets, high transaction costs, and complicated trading procedures have also made the stock market an unattractive vehicle for investors. In addition, the risk associated with investing in stocks (as measured by the variance in the rate of return), has been substantially higher than the risk in bonds, although the rates of return have been similar.

    Informal Financial Sector

    Loans from the banking system are extended primarily to larger firms for financing fixed capital formation. Consequently, smaller firms, particularly those in need of working capital, are compelled to seek loans in the curb market. This market has several attractions for borrowers, including confidentiality, quick loan approval, and risk assessment based on creditworthiness analysis, rather than collateral. Large savers, who are attracted by the relatively high rate of return, are the principal suppliers of funds.

    The curb market is intertwined closely with the banking system, as funds raised by dealers in the curb market often pass through the banking system. Typically, a potential borrower contacts a broker, who in turn raises funds in the curb market. These funds are deposited in a commercial bank and then used to finance a bank loan to the borrower designated by the broker. The depositor collects the bank deposit rate plus a premium paid by the broker, while the borrower pays the official interest on the bank loan plus a premium to the broker. Alternatively, the potential borrower could issue commercial paper or other debt instrument—often guaranteed by a commercial bank—that would be accepted by a short-term finance company at the official interest rate. This debt instrument would be rediscounted in the curb market with the borrower paying the additional interest rate.

    The curb market has blunted the adverse effects of widespread regulation of the formal financial system, but at a certain cost. The quasi-legal status of the curb market has created problems for both lenders and depositors. Enforcement of loan contracts by the courts is difficult, particularly when the interest rate charged exceeds those permitted under usury laws. Depositors face a similar problem. Absence of regulation has also made this market susceptible to disruptions stemming from fraud and other illegal activities such as those that occurred in 1982 and in 1983. The repercussions of these scandals in the formal financial sector have placed an added burden on monetary management. Secrecy has increased information costs and has made it more difficult for depositors and lenders to evaluate creditworthiness. Finally, fragmentation of the curb market has limited its ability to exploit economies of scale. For these reasons, the transaction costs and the risk premium in interest rates are high.

    The Government has made two major attempts to absorb the curb market into the formal financial system—first in the early 1960s and again in the early 1970s. In both instances, new NBFIs were created to compete with the curb market. Notwithstanding these efforts, the curb market has continued to be a significant element of the financial system. Although NBFIs have provided an important link between the banking system and the curb market, they have not been able to replace the curb market because regulations imposed on these new institutions have limited their ability to compete with the curb market.

    No accurate estimates of the size of the curb market exist. The most reliable estimates were those made in 1972, when the authorities attempted to absorb the curb market into the formal financial sector.3 Data obtained at that time indicated that the size of the curb market (in terms of its liabilities) ranged from about one quarter to one third of broad money. This estimate, however, may understate the actual size of the curb market because many participants are anonymous.

    Appendix III Statistical Tables and Charts
    Table 7.Korea: Operations of the Central Government and the Consolidated Public Sector, 1979–841
    197919801981198219831984
    (In billions of won)
    Central Government
    Revenue5,4456,8338,6059,98311,53712,603
    Expenditure5,9907,68210,19011,63912,20013,446
    Deficit5458491,5851,656663843
    Public Sector
    Revenue5,7707,2819,24710,07411,59513,040
    Expenditure6,2108,45511,35812,29612,54613,963
    Deficit4401,1742,1112,222951923
    Financing4401,1742,1112,222951923
    Domestic1748561,5781,546552613
    Bank2–129366911316–245–40
    Nonbank3034906671,230797653
    Foreign266318533676399310
    (In percent of GNP)
    Central Government
    Revenue17.418.418.819.319.719.3
    Expenditure19.220.622.322.520.920.6
    Deficit1.72.23.53.21.21.3
    Public Sector
    Revenue18.519.620.219.419.920.0
    Expenditure19.922.824.823.721.521.4
    Deficit1.43.24.64.31.61.4
    Financing1.43.24.64.31.61.4
    Domestic0.62.33.43.00.90.9
    Bank2–0.41.02.00.6–0.4–0.1
    Nonbank1.01.31.42.41.31.0
    Foreign0.80.91.21.30.70.5
    Sources: Korean Ministry of Finance; and Fund staff estimates.

    The figures for the public sector are not corrected for changes in definition. The removal of the Korea Telecommunications Authority from the accounts in 1982 reduced revenue and expenditure by more than 1 percent of GNP, and the overall deficit, by 0.2 percentage point of GNP. The removal of the Civil Servants Pension Fund and Special Account in 1983 reduced both revenue and expenditure by almost 1 percent of GNP and the overall deficit by 0.1 percentage point of GNP.

    Bank financing as defined in the monetary survey; domestic nonbank financing includes small discrepancies between cash and accrual accounting in the fiscal presentation.

    Table 8.Korea: Cyclically Neutral Balance and the Fiscal Impulse of the Public Sector, 1979–84(Percent of GNP)
    197919801981198219831984
    Actual balance–1.4–3.2–4.6–4.3–1.6–1.4
    Cyclically neutral balance–2.5–5.0–4.9–4.9–4.2–3.8
    Cyclical effect–1.1–1.8–0.3–0.6–2.5–2.4
    Fiscal impulse1–1.1–0.71.5–0.4–1.90.1
    Sources: Korean authorities; and Fund staff estimates.

    Defined as the change (from previous year) in the difference between the cyclically neutral balance and the actual balance. The cyclically neutral balance is defined as the difference between cyclically neutral expenditure, which grows in proportion to potential GNP at current prices, and cyclically neutral revenue, which grows in proportion to actual GNP, using 1978 as the base year. For the methodology used in this analysis, see International Monetary Fund, World Economic Outlook, April 1985: A Survey by the Staff of the International Monetary Fund (Washington: International Monetary Fund, April 1985), pp. 108–110.

    Table 9.Korea: Monetary Survey, 1979–84
    End of period197919801981198219831984
    (In billions of won)
    Net foreign assets236–582–2,264–4,340–5,009–6,095
    Assets2,9004,8065,4095,8616,4617,471
    Liabilities2,6645,3887,67310,20111,47013,566
    Swaps with nondeposit money banks–97–307–116–863–1,234
    Net domestic assets9,73813,11718,24224,36028,81032,706
    Domestic credit11,82616,77822,01627,52931,84736,059
    Public sector (net)3357311,7422,1582,0131,973
    Private sector11,49116,04720,27425,37129,83434,086
    Net other items–2,088–3,661–3,774–3,169–3,037–3,353
    Broad money9,87812,53515,67119,90422,93825,377
    Narrow money3,2753,8073,9825,7996,7836,821
    Quasi-money6,6038,72811,68914,10516,155185,561
    (Percentage change)2
    Net foreign assets–6.1–8.3–13.4–13.2–3.4–4.7
    Swaps with nondeposit money banks–1.21.0–2.51.2–3.8–1.6
    Net domestic assets31.934.240.939.022.417.0
    Domestic credit39.150.141.835.221.718.4
    Public sector (net)–1.74.08.12.7–0.7–0.2
    Private sector40.846.133.732.522.418.6
    Net other items–7.2–15.9–0.93.80.7–1.4
    Broad money24.626.925.027.015.210.6
    Source: Korean authorities.

    Includes certificates of deposit issued by commercial banks.

    Change as a percentage of the stock of broad money at the beginning of the year.

    Table 10.Korea: Exchange Rates and Competitiveness, 1978–85

    (Indices 1980 = 100)1

    Year and

    Quarter
    U.S. Dollar

    per Won
    Effective Exchange Rates2
    NominalReal3
    1978:IV125.1117.794.8
    1979:I125.1120.299.6
    II125.1123.8107.1
    III125.1123.4107.2
    IV125.1127.5112.2
    1980:I106.2110.4103.7
    II102.0102.8100.6
    III98.897.198.1
    IV93.190.696.5
    1981:I93.188.396.0
    I I90.890.0100.1
    III89.092.2105.8
    V I88.389.9102.3
    1982:I85.389.2102.0
    II83.288.9101.9
    III81.789.9103.1
    V I81.489.8102.5
    1983:I80.485.599.4
    II78.784.397.2
    III77.283.896.1
    IV76.281.993.0
    1984:I76.281.593.2
    II75.981.392.5
    III74.882.794.0
    IV73.982.793.4
    1985:I72.283.294.2
    Sources: Korean authorities; and Fund staff estimates.

    An increase indicates appreciation.

    Trade-weighted.

    Adjusted by relative movements in consumer prices.

    Table 11.Korea: Expenditure on GNP in Constant 1980 Prices, 1979–84
    1979 Shares (Percent of GNP)197919801981198219831984
    (Contributions to growth)1
    Total domestic demand112.812.4–9.13.24.88.97.5
    Final domestic demand107.88.4–3.41.47.19.95.6
    Private consumption expenditure63.85.6–0.52.33.04.23.6
    General government consumption expenditure10.10.70.30.20.50.1
    Gross domestic fixed capital formation33.82.9–3.6–1.13.85.21.9
    Increase in stocks5.04.0–5.61.8–2.3–1.12.0
    Less: Imports of goods and nonfactor services–42.3–3.63.1–2.2–1.0–4.4–2.7
    Total domestic demand for domestic products70.58.8–6.01.03.84.54.8
    Exports of goods and nonfactor services29.1–1.22.85.82.35.23.1
    Statistical discrepancy–0.2–0.40.20.2–0.50.10.2
    Gross domestic product99.37.2–2.97.05.69.78.1
    Net factor income from abroad0.7–0.7–2.3–0.9–0.2–0.5
    Gross national product100.06.5–5.26.25.69.57.6
    (Percentage change)
    Total domestic demand11.5–8.02.94.58.47.2
    Final domestic demand7.9–3.21.36.79.45.3
    Private consumption expenditure8.9–0.83.44.66.65.8
    General government consumption expenditure0.16.82.22.24.70.8
    Gross fixed capital formation8.6–10.6–3.313.116.65.7
    Imports of goods and nonfactor services8.6–7.35.32.311.16.7
    Total domestic demand for domestic products13.3–8.51.55.96.87.6
    Exports of goods and nonfactor services–3.89.717.36.213.87.9
    Gross domestic product7.3–3.06.95.59.57.9
    Gross national product6.5–5.26.25.69.57.6
    Sources: Korean authorities; and Fund staff estimates.

    As percent of GNP in the previous year.

    Table 12.Korea: Industrial Origin of GNP in Constant 1980 Prices, 1979–84
    1979 Shares (Percent of GNP)197919801981198219831984
    (Contributions to growth)1
    Agriculture, forestry, and fishing17.51.2–3.83.50.71.00.1
    Nonagricultural value-added81.86.10.93.54.88.68.0
    Mining and quarrying1.4–0.1–0.10.2–0.10.10.1
    Manufacturing27.62.7–0.32.11.13.14.2
    Construction8.10.2–0.1–0.51.51.8
    Other44.73.21.41.72.33.63.7
    Gross domestic product99.37.2–2.97.05.69.78.1
    Net factor income from abroad0.7–0.7–2.3–0.8–0.2–0.5
    Gross national product100.06.5–5.26.25.69.57.6
    (Percentage change)
    Agriculture, forestry, and fishing6.7–21.724.54.16.30.4
    Nonagricultural value-added7.51.14.05.810.19.3
    Mining and quarrying–7.0–8.516.1–3.89.29.1
    Manufacturing10.3–1.17.24.010.914.6
    Construction3.0–1.4–5.42021.2–0.1
    Other7.23.13.45.07.67.9
    Gross domestic product7.3–3.06.95.59.57.9
    Gross national product6.5–5.26.25.69.57.6
    Sources: Korean authorities; and Fund staff estimates.

    As percent of GNP in the previous year.

    Table 13.Korea: Balance of Payments, 1979–84(In millions of U.S. dollars)
    197919801981198219831984
    Current account–4,151–5,321–4,646–2,650–1,606–1,371
    Trade balance, f.o.b.–4,395–4,384–3,628–2,594–1,763–1,036
    Exports14,70517,21420,67120,87923,20426,335
    Imports19,10021,59824,29923,47324,96727,371
    Services–195–1,386–1,519–555–435–876
    Credit4,8255,3636,5987,4777,1797,316
    Debit5,0206,7498,1178,0327,6148,192
    Transfers, net439449501499592541
    Private399399422447566516
    Official405079522625
    Capital account5,3535,9704,7273,9562,3152,810
    Direct and portfolio investment2433120–61131260
    Other medium- and long-term capital3,0471,9543,5171,8581,6602,517
    Short-term capital2,2823,9831,0902,159524–113
    Net errors and omissions– 328–338–410–1,301–945–976
    Counterpart to SDR allocation and valuation changes223885686564
    Monetary movements– 896–350244–74171–527
    Source: International Monetary Fund, International Financial Statistics.
    Table 14.Korea: External Debt, 1979–841
    197919801981198219831984
    (In millions of U.S. dollars)
    Total external debt (end period)20,41027,31532,48037,12040,21542,559
    Medium- and long-term14,95417,93922,25324,69328,10031,134
    Of which: use of Fund credit1387131,2461,2591,3541,570
    Short-term5,4569,37610,22712,42712,11511,425
    Of which: trade-related23,8396,5737,7178,8249,4388,273
    Debt service payments3,2714,4495,4755,8215,7206,757
    Principal, on medium- and long-term debt31,9171,8401,9992,2012,5333,013
    Interest, including on short-term debt1,3542,6093,4763,6203,1873,744
    (In percent)
    Growth rate of external debt37.633.818.914.38.35.8
    External debt (in percent of GNP)32.744.648.452.453.652.5
    Debt service ratio (in percent of exports of goods and services)316.919.720.120.618.820.1
    Share of short-term in total debt26.734.331.533.530.026.5
    Ratio of gross international reserves to short-term debt108.573.270.457.961.872.0
    Ratio of trade-related debt to imports20.130.531.837.640.930.2
    Sources: Korean authorities; and Fund staff estimates.

    Incorporates merchant banks and reclassification of interoffice accounts of branches of foreign banks. Excludes foreign borrowings of Korean branches and subsidiaries residing abroad; such borrowing amounted to $6 billion at the end of 1984.

    Trade credits, oil bill, and refinance.

    Excludes rollover on interoffice bank accounts.

    Chart 1.Korea: Selected Economic Indicators, 1979–84

    (In percent)

    Sources: Korean authorities; and Fund staff estimates.

    1Change in consumer price index for year to December.

    Chart 2.Korea: Financial Position of the Public Sector, 1979–84

    (As percent of GNP)

    Sources: Korean authorities; and Fund staff estimates.

    lA positive magnitude indicates stimulus; a negative one indicates withdrawal.

    2 Defined as the change (from previous year) in the difference between the cyclically neutral balance and the actual balance. The cyclically neutral balance is defined as the difference between cyclically neutral expenditure, which grows in proportion to potential GNP at current prices, and cyclically neutral revenue, which grows in proportion to actual GNP using 1978 as the base year. For methodology used in the analysis, see World Economic Outlook, April 1985: A Survey by the Staff of the International Monetary Fund (Washington: International Monetary Fund, 1985), pp. 108–110.

    Chart 3.Korea: Monetary Developments, 1979–841

    (Quarterly Data)

    Sources: Korean authorities; and Fund staff estimates.

    1 Percentage change over preceding four quarters.

    Chart 4.Korea: Interest Rates and Velocity, 1979–84

    (Quarterly Data)

    Sources: Korean authorities; and Fund staff estimates.

    1 Increase in the consumer price index over preceding four quarters.

    2 Ratio of quarterly gross national product to quarter-end stock of broad money; seasonally adjusted.

    Chart 5.Korea: Monthly Exchange Rate Developments, 1979–84

    (Indices, 1980 = 100)

    Sources: Korean authorities; and Fund staff estimates.

    1 Increase indicates appreciation.

    2 Trade weighted.

    3 Effective exchange rate adjusted by relative movements in consumer prices.

    Chart 6.Korea: External Developments, 1979–84

    Sources: Korean authorities; and Fund staff estimates.

    Chart 7.Korea: External Debt Indicators, 1979–84

    Sources: Korean authorities; and Fund staff estimates.

    Occasional Papers of the International Monetary Fund

    *1. International Capital Markets: Recent Developments and Short-Term Prospects, by a Staff Team Headed by R.C. Williams, Exchange and Trade Relations Department. 1980.

    2. Economic Stabilization and Growth in Portugal, by Hans O. Schmitt, 1981.

    *3. External Indebtedness of Developing Countries, by a Staff Team Headed by Bahram Nowzad and Richard C. Williams. 1981.

    *4. World Economic Outlook: A Survey by the Staff of the International Monetary Fund, 1981.

    5. Trade Policy Developments in Industrial Countries, by S.J. Anjaria, Z. Iqbal, L.L. Perez, and W.S. Tseng, 1981.

    6. The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, by Joseph Gold. 1981.

    7. International Capital Markets: Recent Developments and Short-Term Prospects, 1981, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson, 1981.

    8. Taxation in Sub-Saharan Africa. Part I: Tax Policy and Administration in Sub-Saharan Africa, by Carlos A. Aguirre, Peter S. Griffith, and M. Zuhtu Yiicelik. Part II: A Statistical Evaluation of Taxation in Sub-Saharan Africa, by Vito Tanzi. 1981.

    9. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1982.

    10. International Comparisons of Government Expenditure, by Alan A. Tait and Peter S. Heller. 1982.

    11. Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa, by Shailendra J. Anjaria, Sena Eken, and John F. Laker. 1982.

    12. Effects of Slowdown in Industrial Countries on Growth in Non-Oil Developing Countries, by Morris Goldstein and Mohsin S. Khan. 1982.

    13. Currency Convertibility in the Economic Community of West African States, by John B. McLenaghan, Saleh M. Nsouli, and Klaus-Walter Riechel. 1982.

    14. International Capital Markets: Developments and Prospects, 1982, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1982.

    15. Hungary: An Economic Survey, by a Staff Team Headed by Patrick de Fontenay, 1982.

    16. Developments in International Trade Policy, by S.J. Anjaria, Z. Iqbal, N. Kirmani, and L.L. Perez. 1982.

    17. Aspects of the International Banking Safety Net, by G.G. Johnson, with Richard K. Abrams. 1983.

    18. Oil Exporters’ Economic Development in an Interdependent World, by Jahangir Amuzegar. 1983.

    19. The European Monetary System: The Experience, 1979–82, by Horst Ungerer, with Owen Evans and Peter Nyberg. 1983.

    20. Alternatives to the Central Bank in the Developing World, by Charles Collyns. 1983.

    21. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1983.

    22. Interest Rate Policies in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1983.

    23. International Capital Markets: Developments and Prospects, 1983, by Richard Williams, Peter Keller, John Lipsky, and Donald Mathieson. 1983.

    24. Government Employment and Pay: Some International Comparisons, by Peter S. Heller and Alan A. Tait. 1983. Revised 1984.

    25. Recent Multilateral Debt Restructurings with Official and Bank Creditors, by a Staff Team Headed by E. Brau and R.C. Williams, with P.M. Keller and M. Nowak. 1983.

    26. The Fund, Commercial Banks, and Member Countries, by Paul Mentre. 1984.

    27. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1984.

    28. Exchange Rate Volatility and World Trade: A Study by the Research Department of the International Monetary Fund. 1984.

    29. Issues in the Assessment of the Exchange Rates of Industrial Countries: A Study by the Research Department of the International Monetary Fund. 1984

    30. The Exchange Rate System—Lessons of the Past and Options for the Future: A Study by the Research Department of the International Monetary Fund. 1984

    31. International Capital Markets: Developments and Prospects, 1984, by Maxwell Watson, Peter Keller, and Donald Mathieson. 1984.

    32. World Economic Outlook, September 1984: Revised Projections by the Staff of the International Monetary Fund. 1984.

    33. Foreign Private Investment in Developing Countries: A Study by the Research Department of the International Monetary Fund. 1985.

    34. Adjustment Programs in Africa: The Recent Experience, by Justin B. Zulu and Saleh M. Nsouli. 1985.

    35. The West African Monetary Union: An Analytical Review, by Rattan J. Bhatia. 1985.

    36. Formulation of Exchange Rate Policies in Adjustment Programs, by a Staff Team Headed by G.G. Johnson. 1985. 37. Export Credit Cover Policies and Payments Difficulties, by Eduard H. Brau and Chanpen Puckahtikom. 1985.

    38. Trade Policy Issues and Developments, by Shailendra J. Anjaria, Naheed Kirmani, and Arne B. Petersen. 1985.

    39. A Case of Successful Adjustment: Korea’s Experience During 1980–84, by Bijan B. Aghevli and Jorge Marquez-Ruarte. 1985.

    International Monetary Fund, Washington, D.C. 20431, U.S.A.

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    See Sang Mok Suh, “The Pattern of Poverty,” in Chong Kee Park, Human Resources and Social Development in Korea, Korea Development Institute, Seoul, 1980.

    Charts 1–7 are in Appendix III.

    Tables 7–14 are in Appendix III.

    The public sector in Korea is defined to include the Central Government and the five public enterprise funds that are organized along departmental lines. These enterprise funds include Railways, Communications, Supply Fund, Office of Monopoly, and the Grain Management Fund. Excluded from the public sector definition are 19 nonfinancial parastatal enterprises which operate with considerable autonomy from the Government, and in which government ownership exceeds 50 percent. For a detailed description of the composition of the public sector, see Appendix I.

    The stance and impulse of fiscal policy have been measured on the basis of public sector revenues and expenditures, but very similar qualitative results are obtained on the basis of central government expenditures and revenues.

    The removal of the Korea Telecommunications Authority (KTA) from the public sector accounts in January 1982 also contributed to the improvement in the public sector position. In 1981, telecommunications operations accounted for 0.6 percentage point of the public sector deficit of 5 percent of GNP. The 1982 public sector deficit was 4.6 percent of GNP, of which 0.5 percentage point represented net lending to the KTA. Therefore, of the 0.4 percentage point reduction in the public sector deficit to GNP in 1982, only 0.1 percentage point was due to telecommunications operations (i.e., the deficit without telecommunications was reduced from 4.4 percent of GNP in 1981 to 4.1 percent in 1982).

    An econometric analysis indicates that there was an upward shift in the demand for broad money following the curb market incident. Aside from this shift, the demand function remained a stable function of real income, interest rates, and expected inflation.

    A stand-by arrangement in an amount of SDR 576 million was approved on July 9, 1983 for the period through March 31, 1985. The structural elements of the program also were supported by a second structural adjustment loan from the World Bank in the amount of $300 million.

    A comparison of the fiscal outcome for 1982 and 1983 must take into account the removal of the Civil Servants’ Pension Fund and Special Account in 1983, which lowered both revenues and expenditures by close to 1 percent of GNP, without altering the deficit.

    These schemes include a savings deposit with an annual yield of 12 percent for six-month deposits of less than W 30 million and a household installment account for three-year deposits of less than W 10 million (approximately $11,500).

    Government lending funds are treated as net lending in the fiscal accounts at the time these funds are placed in deposit money banks, whereas the monetary data include these funds as government deposits until they are drawn down. As a consequence, fiscal and monetary accounts have different public sector use of net credit from the banking system. In addition, bank borrowing by the Fertilizer Fund, a government-directed agency, is included in the monetary accounts under the public sector.

    The Korea Exchange Bank was established in 1969 to handle all foreign exchange and international trade transactions formerly conducted by the Bank of Korea. Its paid-in capital is almost entirely owned by the Bank of Korea. The Medium Industry Bank was created in 1961 to foster development of small- and medium-sized firms because such firms had less access to loans from commercial banks. The Citizens National Bank was set up in 1963 to compete with dealers in the curb market by specializing in small loans to households, wage earners, and small firms. The Korean Housing Bank was founded in 1967 to finance the construction of houses for low-income families; it also manages the operations of the National Housing Fund. Three separate cooperatives—Agricultural, Fisheries, and National Livestock—were established in 1961 to satisfy the special requirements of these sectors.

    Bank guarantees are often offered in lieu of loans when banks are unable to extend credit because of an inadequate deposit base.

    All licensed businesses were required to report their “informal” debts. For greater details see David C. Cole and Yung Chul Park, “The Unregulated Financial Institution and Markets,” Chapter 4 in Financial Development in Korea, 1945–78 (Cambridge, Massachusetts: Harvard University Press, 1983).

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