The Setting

South Korea's high GNP growth rate during the 1960s and 1970s was accompanied by growth in the labor supply and a rising share of national product going into capital formation--from 15 percent in the early 1960s to more than 30 percent in the late 1970s. In 1988 South Korean economic planners predicted that in the 1990s the share of the GNP devoted to capital formation would not continue to rise and, in fact, might fall slightly. Lower birthrates and an aging population would result in slow growth of the labor force.

In the late 1980s, South Korean economic planners expected growth to continue at somewhat reduced rates through 2000, a result of slower growth in inputs. Large increases in productivity, however, could be expected to push GNP growth beyond 1988 levels. The rapid growth of exports had enabled the country to specialize in the products it made best and to import those it produced less efficiently. No change in this balance was foreseen. However, domestic producers would have to rely more on the domestic market for growth than in the past. Protection of domestic producers might prompt less productivity but if competition against foreign products were allowed, a favorable impact on productivity might be expected.

The government borrowed heavily in the 1960s and 1970s to finance economic development. By the mid-1980s, South Korea was one of the world's major debtors. South Korea recorded a favorable balance of trade for the first time in 1986 there was an even more favorable balance in 1987. Funds generated from this trade surplus allowed South Korea to reduce its total foreign debt to US$35.6 billion by 1987 and were expected to allow a further reduction to US$23 billion by 1991. Since 1986 there had been a drastic change in domestic savings, with savings growing to 36 percent in 1987 as compared to 33 percent in 1986. The twin factors of increasing debt and low domestic savings that had threatened growth in the past had been mitigated to a considerable degree.

Data as of June 1990