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These reforms were reflected in
the second plan and carried further throughout the second plan period. In
addition, there was an increase in domestic savings and a decrease in foreign
borrowing. The Third Five-Year Plan ( 1972 –1976) The third five-year plan put
its major emphasis on the promotion of heavy and chemical industries. The
government made great effort to raise domestic savings to finance the heavy and
chemical industries, but the amount of domestic savings fell far short of
investment requirement. As a result, foreign borrowing expanded enormously, and
management of foreign borrowing and debt became a major policy issue. In
addition, due to different emphasis on light and heavy industries, the growth
gap increased substantially. Inflation caused by the first oil shock in 1973
also takes a part of unstable situation of economy. Inflation rate exceeded 40
percent in 1974. The Fourth Five-Year Plan (1977 – 1981) Because of high
inflation cause by the first oil crisis, stability was given relatively high
policy priority. The government adopted monetary rule of fixing money supply
growth at a prescribed constant rate of 20 percent per annual to stabilize price
level and overall economy.
He major change in trade policy during the fourth
plan period included the expansion of imports related to exports, maintenance of
effective exchange rate, expansion of export subsidies, tax benefits and foreign
loans to export firms. In addition, the government improved the number of
industrial estates for export firms by creating industrial export estates and
free export zones. The fifth Five – Year Plan (1982- 1986) In the early 1980s,
the Korean economy was characterized by very slow growth rapidly expanding
foreign debt, and high inflation. Consequently, export promotion was given the
highest policy priority again, so the major change in trade policy included
intensive promotion of export goods and market diversification, reform of the
export support system, lowing tariff rates to expand importation of good used in
manufacturing. The Sixth Five year Plan (1987 – 1991) As of 1986 the Korean
economy realized high economic growth, stable price, and a trade surplus and
thus faced a new phase of growth with enhancing the efficiency and strengthen
the international competitiveness of the Korean economy in general by reforming
the free enterprise market system. Thus the major contents of policy reforms
included the dramatic reduction of various government regulations constraining
growth of enterprises plus extensive promotion of liberalization of finance,
imports and foreign exchange.
The Seventh Five – Year Plan (1992
– 1996) This plan was formulated after Korea became a member of the United
Nations and emphasized the role of private sector in preparation and
implementation of the plan. The Eighth Five – Year Plan (1993-1997) The
preparation of this plan started with the beginning of the Seventh Republic and
the plan emphasized that management of the economy will no longer be government
led or government controlled, as in the past, but will be based on the
participation and innovative spirit of the Korean people. It also stresses the
importance of reform of finance, government administration, budgets, ethics,
etc. Even though the government on each period recognized the problems it was
facing and made five-year plans, they were not always successful. Throughout the
plans above, we will be able to find a common policy used without difficulty.
That is the government’s massive supports toward export firms. It must work
during the early stage of development when the country had little capital
accumulation.
However, the government’s unbalanced incentives on big businesses
which are mostly in heavy and chemical industries, later known as chaebol,
actually led them to depend too long on protection and debt financing. This
policy wasn’t a serious problem when the economy boomed, but when it slowed,
most debt ridden firms fell back on the government for relief causing the issue
whether the policy and the industry are efficient or not. (Haggrd, 24). For
example, the combined sale of the five largest big companies, chaebol, take
37percent of Korea’s gross out, and their exports were 44 percent of total
exports in 1997. If there is a little slow down of the one of the largest
business, then it is obvious the economy is not in quite safe situation. Since
chaebol’s share of Korean economy is already huge, if they are allowed to fail
or banks are to write off their debt, then the whole banking system would be
pushed into collapse. This is real problem, nor chaebol or their associated
companies, be easily shut down (Economist). As a example, the price of a 16 MB
dynamic random access memory (DRAM) chip fell from more than US $40 in January
1996 to less than US $10 by the end of 1997. The dollar export price index for
Korea’s electronic components fell by 50 percent over the same time period.
Another example is current collapse of Daewoo, a second largest chaebol, which
had huge debt to equity ratio (over 400 percent), went to a bankruptcy this
year. This company was well known with a very close relationship with the
governments in the past. It was ironic to see that Daewoo was expanding its size
when the country was in recession and other chaebols tried to reduce their size
and increase efficiency.
Actually, this is not the first
time Daewoo asked for the government’s help. Every time the company went into a
trouble, the government didn’t let the company to fail and put more capital
available into the company. However, this time it doesn’t seem happening that
way. Actually, the government is trying to solve the problem under the market
operation, so this inefficient and insolvent chaebol can be sold. Chaebols may
not be the only one to be blamed, even though they were blamed as a major cause
of Asian financial crisis happened in Korea brining the country to the brink of
insolvency, as well as weak banking system, in fact, they could be victims of
misleading government policy.
The long term close relationship between
government and big business creating rent and using them with unbalanced support
between industries had worked well in the early stage of development, but as
stated early, rent can bring corruption of bureaucracy or industries also, since
it is caused by inefficiency. Allocation of financial resources is not an easy
job, but this would be best time for Korea to consider again about the
efficiency of closed relationship between the government and businesses while
the country is restructuring its economy system.
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