External debt and policy controversy in Korea.

Summary

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South Korea

The South Korean economy experienced a rapid boom during the mid-1980s due mainly to increased exports. To maintain the country's optimal economic growth, the government needs to implement economic adjustment policies aimed at stabilizing its trade surplus and external debts. Moreover, it needs to promote globalization to sustain its export expansion. In addition, the government should promote increased domestic spending to reduce the export component's dependence on the international trade performance.

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Extract

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External debt and policy controversy in Korea.

I. Introduction

Korea has a reputation for being one of the fastest developing countries in the world, experiencing rapid growth since 1963. Real GNP grew at an average annual rate of 9.0 percent between 1963-93. As a result, Korea's status changed from an underdeveloped country in the 1960s to an upper mid-level developing country in the 1990s. It is well known that foreign debt and the government's active economic policy played an important role in her economic growth.

In addition, the country has a dramatic history of external debt problems. In the early 1980s, Korea was one of the largest debtor nations in the world. Today many economists have come to the consensus that Korea's external debt is no longer a major problem because during the late 1980s the country experienced current account surpluses.

In 1987, in the period of current account surplus, the Korean government revised a schedule for repaying existing debt, and started to repay the debt intensively. At the time, there were different opinions about dealing with the existing current account surpluses. Balassa and Williamson [1] argued that the Korean government should implement an adjustment policy by reducing the current account surpluses. On the other hand, Dombusch and Park [4] did not consider an adjustment policy to be necessary.

In the mid 1990s, the favorable external conditions including a strong yen continue, and the Korean government is demanding a set of structural reforms prior to the establishment of the WTO (World Trade Organization). This paper discusses in detail the policy controversy developed in 1987. With the lesson from the controversy we could get a useful policy direction for the Korean economy in the period of the WTO. This paper also provides the policy implication proposed by the Korean government for those who want to understand the Korean economy and for the policy makers who want to influence it.

This paper consists of four sections. Section II reviews the effect of favorable conditions on the Korean economy in the period of...

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