Mr. Kanesa-Thasan, Assistant Chief of the Far Eastern Division, Asian Department, is a graduate of the University of Ceylon. He has had several papers published in Staff Papers and other economic journals. He was the resident representative of the International Monetary Fund in Korea in 1966-67.
Per capita income in the farm sector, which advanced more rapidly than nonfarm income between 1959 and 1964, has been rising less rapidly since 1965. Between 1959 and 1967 per capita farm income (at market prices) increased nearly fivefold, while nonfarm income rose nearly fourfold.
The large magnitude of the “curb market” operations was referred to by John G. Gurley, Hugh T. Patrick, and E. S. Shaw in their report, The Financial Structure of Korea (Preliminary Draft), United States Operations Mission to Korea, July 24, 1965, p. 81. They stated that “the best estimates available suggest that outstanding assets and liabilities in unorganized markets are on the order of 40-45 billion won, all within the private sector. This figure represents close to one-quarter of private-sector liabilities in primary securities and one-third of the private sector’s portfolio of assets in primary securities. It is almost double the outstanding amount of commercial bank loans.” A comparable estimate is not available for any period after the interest rate reform.
Kwang Suk Kim, An Appraisal of the High Interest Rate Strategy of Korea (unpublished, Center for Development Economics, Williams College, Massachusetts, May 1968). Mr. Kim has included “change in inventories” as an explanatory variable because he holds that it affects gross domestic savings independently of current income, in view of the wide variability of inventories of agricultural products in line with agricultural production. The flow-of-funds data prepared by the Bank of Korea also show that time and savings deposits of the private noncorporate sector accounted for about 85 per cent of the total increase in such deposits in 1966 and in the first three quarters of 1967.
A survey by the Korean Economic Development Institute of the capital cost of 15 selected industrial establishments in 1965 produced the following results: (1) The average debt/equity ratio was 57:43; (2) nearly 80 per cent of the total debt was from banks and approximately 20 per cent from “usurious sources"; and (3) the average cost of bank loans was 10 per cent and of all borrowed funds, 19 per cent. The higher interest rates applied only for the last three months of 1965. The relatively low ratio of usurious debt was attributed to the fact that the enterprises surveyed were much larger than the average manufacturing enterprises and therefore had less difficulty in obtaining bank loans. In 1965, private borrowings from foreign sources were quite small. The report remarked that the high cost of domestically borrowed funds, particularly after the interest rate reform, “gave rise to an almost frantic urge for borrowing from abroad” and listed some industrial projects approved or pending approval in February 1966 in which the average domestic/foreign capital ratio was 26:74. (The Korean Economic Development Institute, Analyses of Capital Cost, Selected Industrial Establishments, 1967.)
With the continuing pressure of demand for funds in the economy, the curb market rates of interest have remained at about the same levels as before the interest rate reform. It is not possible to evaluate the scale of curb market operations from the flow-of-funds data prepared by the Bank of Korea.
The real rate of return on capital in Korea has been estimated by Edward S. Shaw in Financial Patterns and Policies in Korea (United States Operations Mission to Korea, April 1967) as being about 15 per cent. According to the Bank of Korea’s Monthly Statistical Review, the ratio of net profits to total capital in manufacturing industry was about 8 per cent in 1965 and remained stable in 1966.
As is to be expected in a country that has experienced prolonged inflation, the amount of outstanding income-yielding financial assets (e.g., government bonds, bank debentures) is quite small, and trading in such securities is even more limited. Thus, the interest rate reform did not create problems of effective capital loss to holders of such assets. In countries where ownership of financial assets is more developed, a sharp increase in interest rates would create problems, at least in the short run, of adjustments in the capital value of financial assets and of shifts from one type of financial asset to another. However, even in developing countries where a considerable volume of transferable and income-yielding financial assets (other than bank deposits) is outstanding, the major part of it is held by financial intermediaries, often until maturity. Moveover, because these countries are not likely to have undergone serious price inflation, the extent of upward adjustment in domestic interest rates that is needed to provide an attractive real rate of interest to savers will be substantially less than in Korea. An integral part of the Korean experience with the interest rate reform was also the enforcement of over-all balance in the government budget, which eliminated the need for the Government to borrow domestically, except temporarily from the central bank. Thus, the authorities did not face the commonly experienced pressures to keep down the cost of government borrowing.
Total foreign exchange earnings from Viet-Nam in 1967 were about $130 million, including remittances of Korean soldiers and technicians and U.S. offshore procurements connected with Viet-Nam.
According to the Bank of Korea’s Monthly Statistical Review, Korea’s index of terms of trade has, in fact, improved from 100 in 1963 to 115 in 1967 with the structural change in foreign trade.
Export-import linking in the form of marketable rights to import specified commodities was eliminated. An indirect “linking” of imports and exports continued through the preferential treatment of exporters in the issue of import licenses (which were, of course, not transferable), as referred to in a subsequent paragraph on export incentives.
Korean data on inventory investment (at 1965 prices) show that inventories of imported raw materials were reduced by W 4.6 billion in 1964, following an increase of W 10.3 billion in 1962 and 1963,
The total of committed medium-term and long-term private loans outstanding increased from $129 million at the end of 1963 to $458 million at the end of 1967; by the end of 1967, total import arrivals against such committed loans amounted to $304 million. The total amount of committed short-term private import credits outstanding increased from $58 million at the end of 1966 to $240 million at the end of 1967; on the basis of import arrivals the amount outstanding at the end of 1967 was $148 million. The total of committed official loans outstanding at the end of 1967 was $430 million, and the total of import arrivals was $246 million.
Some of the environmental factors referred to in this section did exist prior to 1963. However, their beneficial effects on the country’s economic development were stifled by the absence of some of the crucial ones. Reference may be made in this context to “Performance Criteria for Evaluating Economic Development Potential: An Operational Approach,” by Irma Adelman and Cynthia Taft Morris, in The Quarterly Journal of Economics, Vol. LXXXII (1968), pp. 260-80. Based on the growth experience between 1950 and 1962 of 73 developing countries (which were classified in three groups—high, intermediate, and low), the authors found that out of 29 economic, sociocultural, and political indicators used, a discriminant function of four variables accounted for 97 per cent of the variance among the three groups. The four variables, listed in order of their importance, were (1) the degree of improvement in financial institutions (measured by “the success of the economy in increasing the flow of domestic savings through financial institutions and the extent to which these institutions provide medium and long term credit for investment”); (2) the degree of modernization of outlook; (3) the extent of leadership commitment to economic development; and (4) the degree of improvement in physical overhead capital (such as power and transport). A slightly different ranking of the countries into the three growth categories also resulted in a discriminant function of four variables that explained 97 per cent of the variance among the groups; however, “the rate of improvement of agricultural productivity” became the fourth variable in order of importance, and positions of the first and second variables were reversed.
It is perhaps not without significance that most senior officials of the rank of Bureau Directors in the economic ministries are in their thirties. Also, the range of offices available to career officials has been widened, giving more stability to the bureaucratic system.
An institutional factor that made this possible was the land reform implemented in 1946.