(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000605760001-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: January 12, 2017
• Document Release Date: March 7, 2011
• Sequence Number: 1
• Publication Date: March 6, 1986
• Content Type: MEMO

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Central Intelligence Agency
DOC NOEA M %-;& 4!S DIRECTORATE OF INTELLIGENCE
OCR Z
6 March 1986
P&PD
South Korea: Economic Outlook
Summary
South Korea has been touted as the "next
Japan"--a reflection of both its economic success
over the past 25 years and its efforts to move into
knowledge- and technology-intensive industries. But
Seoul faces obstacles Tokyo never had to contend
with--such as a smaller domestic market, a heavy
defense burden, and much stiffer world competition.
Last year, the country experienced its most serious
economic slowdown since 1981, but Seoul has taken
pump-priming measures that are beginning to reverse
the decline. Despite South Korea's large foreign
debt and the likelihood that the economy will not
expand at the high rates South Koreans have become
accustomed to, future growth should be strong by
world standards. The level of demand for Korea's
exports, protectionism, and unpredictable oil and
foreign exchange markets, however, represent factors
This memorandum was prepared byl I Office of East
Asian Analysis. Information available as of 6 March 1986 was
used in its preparation. Comments and queries are welcome and
may be directed to the Chief, Korea Branch, Northeast Asia
Division, OEA,
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outside Seoul's control that will affect this
performance. Moreover, if growth continues to be
below par, it will contribute to domestic political
tensions, which in turn could sour the attitudes of
foreign lenders and investors and undermine their
confidence in South Korea's economy.
South Korea's Growing Industrial Strength
An aggressive private sector aided by government support and
a low-paid but productive work force have made South Korea the
world's 15th-largest exporter and perhaps its most advanced
LDC. An underdeveloped agrarian society 25 years ago, South
Korea has become competitive in several highly visible industries
important to the economies of the developed countries:
- Shipbuilding. South Korean shipbuilders captured 15
percent of worldwide orders in 1984--second only to
Japan. The outlook for shipbuilders is cloudy, but
South Korea's competitive advantages will keep its yards
well positioned to acquire a large share of new orders
when the world shipping slump ends.
-- Steel. South Korea has become the world's most
competitive steel producer by combining low wages with
technologically advanced plants. It plans to increase
capacity by 75 percent over the next decade.
Overseas construction. Orders grew an average of 28
percent annually between 1975 and 1983, but have
decreased as oil prices have declined. At their peak in
the early 1980s, South Korean firms accounted for over
half of the world's 25 largest general building
contractors.
Building on these successes, South Korean economic planners
have targeted rapid expansion into knowledge- and technology-
intensive industries:
Automobiles. Seoul plans to boost automobile exports
from 43,000 units in 1984 to 800,000 by 1991 using
efficient, up-to-date assembly lines now under
construction. Hyundai began selling cars in the United
States in February, and Daewoo, strengthened by a
technical and equity tieup with General Motors, is
tripling its capacity.
Semiconductors. Samsung and other leading electronics
firms--with technical assistance from the United States
and Japan--have begun producing 64K and 256K random-
access memory chips and are gearing up for the 1-
megabit-chip market. In addition, development of a 4-
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megabit-chip is under way. The South Koreans could
apply this technology to the production of other
advanced electronics.
Astute economic planning, aggressive business strategies,
and a well-disciplined and well-educated work force are pluses
for Seoul's ambitious industrial strategy. The many
underemployed college graduates and Koreans residing overseas
also are a potential pool of talent. Seoul will be better able
to encourage the inflow of new technology and to foster domestic
as well as foreign investment because of its ongoing
liberalization of foreign investment, technology transfer,
imports, and the financial system.
South Korea--Not Another Japan
Despite the comparisons made between Japanese and South
Korean economic successes, South Korea must cope with hurdles not
faced by Japan two decades ago:
Small domestic market. A population of only 40 million
and a $2,000 per capita income do not provide a South
Korean domestic market large enough to be a springboard
for many emerging industries, forcing reliance on
foreign markets.
Dependence on foreign inputs. Lacking a mature R & D
infrastructure, South Korea depends upon foreign
technology and capital for even rudimentary development
of new industries.
Protectionism. Forays into technology-intensive exports
will result in head-to-head competition with developed
trading partners. US-South Korean economic relations
are strained by disputes over intellectual property
protection, and frictions over trade in services and
strategic trade controls will inevitably increase.
Security issues. A relatively heavy defense burden--
nearly 6 percent of GNP--acts as a brake on Korea's
economic growth and channels scarce technical expertise
from commercial endeavors, impeding South Korea's climb
up the technology ladder.
-- Foreign debt. South Korea must manage a $46.7 billion
debt--over half its GNP. Additional capital inflows
could be at risk if foreign bankers became more
concerned over South Korean political stability. 25X1
South Korea's difficulty in managing these obstacles was
evident in 1985, its worst economic performance in four years.
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Real GNP growth tumbled from a spectacular 12.6-percent
annual rate in the first quarter of 1984 to 2.7 percent
in the second quarter of 1985; it did begin to trend
upward in the third quarter, however.
Sluggish export growth in 1985--about 3 percent--pulled
growth down, while austere fiscal and monetary policies
stifled domestic demand and investment.
-- Seoul's foreign debt grew faster than planned, with its
$46.3 billion tally in July exceeding by $1.2 billion
the overall target for 1985. (See the appendix for
further discussion of the debt issue.)
Seoul's economic technocrats have instituted--albeit
belatedly--a pump-priming package that includes:
-- Expanding the money supply at about 150 percent more
than the planned rate, increasing business loans, and
paying off the bad debts of the corporate sector.
Boosting 1986 budget outlays by 10.2 percent following a
$292 million supplemental budget in 1985.
- Aggressively devaluing the won to bolster export
Prospects
These measures signal that Seoul can respond to economic
problems flexibly without panic or hasty policy shifts. Economic
planners continue to favor programs that position South Korea for
future growth by augmenting domestic investment and promoting
exports, rather than "quick fix" solutions. We believe final
figures will show real GNP gains of 4.5 to 5 percent for 1985,
On balance, our cautious optimism about South Korea's near-
term growth prospects is tempered by a recognition that future
performance is largely outside Seoul's control. Slow economic
growth and protectionist barriers in developed countries could
cloud the economy's prospects beyond 1986, stifling exports and
damaging Korea's international credit rating; bankers' confidence
in South Korea is largely predicated on a rate of export growth
that reduces Seoul's debt burden. South Korea's economy will be
bolstered by favorable trends in exchange rate movements--
primarily from a weakening dollar to which the won is closely
tied--and declining oil prices. However, these markets are
volatile and unexpected price movements could significantly alter
the growth path of South Korea's economy.
4
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Appendix: Managing a Large Foreign Debt
South Korea's $46.7 billion foreign debt, the fourth-largest
among LDCs, is a major determinant of Seoul's economic management
strategy--South Korea's economic policy makers must balance
economic growth against rapidly accumulating foreign debts.
During 1985, for instance, Seoul overshot its $45.1 billion debt
target by far, because it was caught offguard by sluggish export
growth, instituted pump-priming programs to revive the economy,
and paid some of the bad debts of the corporate sector. To its
credit, Seoul surpassed a major economic policy objective by
reducing reliance on short-term obligations to 21 percent of the
total--the lowest since the early 1970s. Although this debt is
large compared to South Korea's GNP, healthy export earnings mean
Seoul can service the debt payments. South Korea will, in our
judgment, improve its ability to service its debt over the rest
of this decade despite a deterioration in 1985 (see graphic on
debt). We believe international lenders will continue to reward
South Korea's creditworthiness by eagerly participating in future
loan syndications at favorable rates--if the economy stays on
track and domestic political problems remain manageable.
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SUBJECT: South Korea: Prospects for Growth
Distribution:
Original - Author
1 - James A. Kelly, DOD/ISA
1 - NIO/EA (7E-62)
1 - NIO Economics
1 - C DO (D-01)
1 - C/EA (5E-18)
1 - OGI/IIC/PI
1 - OEA/NEA/Korea Branch
1 - OEA/NEA/Japan Branch
1 - OEA/NEA/STI Branch
1 - OEA/NEA Division
1 - OEA/China Division
1 - OEA/SEA Division
1 - D/OEA (4F-18)
1 - C/Research/OEA
1 - FBIS Analysis Group
1 - DDI
1 - Senior Review Panel
1 - PDB Staff (7F-30)
5 - CPAS/IMC/CG (7G-07)
1 - CPAS/ILS (7G-50)
1 - C/PES (7F-24)
1 - NIC/AG (7E-47)
1 - DDO/EA Division (5D-00)
1 - DDO/EA/n(5C-19)
OEA/NA/KOREA/I I (4 March 1986)
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South Korea's Foreign Debt
1980 - 1990
,a, rho
I- 50
r 40
20
x-10
*Total debt service -- repayment of principle and interest on long
and medium term debt plus interest on short term obligations -- divided
by exports of aoods and services.
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0
Legend
i? IMF Projection
- Short Term
i? Med./Long Term
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SOUTH KOREA: SHARE OF GNP FOR DEFENSE SPENDING
1980-85
1980 1981 1982 1983 1984 1985
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GROWTH OF SOUTH KOREA'S GNP
1980-91
-2 -
-10
Legend
REAL GNP GROWTH
? PROJECTED GNP GROWTH
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OUTLOOK FOR MAJOR SOUTH KOREAN INDUSTRIES
1985 TO 1995
INDUSTRY PERFORMANCE RATING
Steel 1985 1986-1988 1989-1995 A turnaround in shipbuilding, coupled with strong growth in automobile
manufacturing, will ensure strong domestic demand for steel... continued
? ? steel export restraints and excess world steelmaking capacity cloud
the export outlook.
Shipbuilding
. . .
Demand forecast to pickup in late 1980s...Korean yards will
be in good position to secure a big share of new orders.
Overseas Construction
Automobiles
Semiconductors
. . .
? . ?
Wage advantage eroding fast. ..lack technical expertise for complicated
contracts...may bounce back if developing countries undertake large
infrastructure projects.
Strong growth assured as Korea expands its role as an offshore
production base for primarily US auto firms...state-of-the-art
factories, coupled with wages one-tenth those in the United States,
augur well for competitiveness and profitability.
Lack of technical expertise and a strategy to leap-frog technology
into 64K, 256K and 1-megabit chips will pose difficult challenges
as the industry gears up.
LEGEND ? Poor Performance ratings are based on CIA projections of industry growth prospects, international
competitiveness, and profitability. Greatest weight given to growth and competitive factors.
Fair
? Good
? Excellent
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Computers
Heavy Machinery
Textiles and Apparel
? ? ?
? ? ?
?
Capable of indigenous production of all but most sophisticated
components...high value added and wages in electronics industry
among lowest in Korea... dependent on US-Japanese-European
technology.
Near lowest wages for all manufacturing... highly skilled,
disciplined work force well suited to detail work.. .large,
recent investment in modern plants.
Sinking along with overseas construction,. .poor export outlook.
Growing in sophistication...Japan moving into higher end of machine
tools and robotics... leaves possible niche for Korea.
Intense price competition from Asian LDCs will erode Korea's
advantage in long run.. .recent investment will benefit producers
in the medium term... protectionist moves could cripple industry
...successful move up market will forestall decline.
? Intense price competition from Asian LDCs will erode Korea's
advantage in long run... protectionist moves could hasten decline.
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