OECD Economic Outlook 69 - Biblioteca Hegoa

Korea
Developments in individual OECD countries - 103
The economy slowed sharply to a virtual standstill in the fourth quarter of 2000, as a marked fall in export growth compounded
underlying weaknesses in domestic demand. Emerging signs of improving business and consumer confidence suggest
that the downturn may be short, with a recovery beginning in the second half of 2001. Output growth is projected to
reach 5½ per cent in 2002, while inflation could decelerate from its current rate of above 4 per cent to around 3½ per cent.
Achieving an early recovery requires effectively addressing the problems in the corporate and financial sectors, while limiting
direct government intervention and avoiding “moral hazard”. Although the effectiveness of monetary policy is limited by
financial-sector problems, letting the automatic stabilisers operate would allow fiscal policy to play a supportive role in 2001.
The strong expansion that began in mid-1998 came to an end in the fourth quarter
of 2000 as economic output fell 1.7 per cent (seasonally-adjusted annual rate)
while export growth decelerated sharply. The slowdown boosted the seasonallyadjusted
unemployment rate from 3.7 per cent in mid-2000 to over 4 per cent in
early 2001. Despite weak demand, inflation picked up to more than 4 per cent at the
beginning of this year owing to the lagged impact of higher oil prices and increases
in public fees. The rise in oil prices also contributed to the narrowing of the current
account surplus from 6 per cent of GDP in 1999 to around 2½ per cent in 2000.
In addition to falling overseas demand, the deterioration in the terms of trade
and problems in restructuring the corporate and financial sectors were the key factors
responsible for the downturn. The weak financial condition of many chaebol-affiliated
companies raised the threat of major bankruptcies. This undermined confidence, as
reflected in the index of business sentiment and the stock market, which fell 50 per
cent during 2000, resulting in a large negative wealth effect. Banks, burdened by
non-performing loans, became more cautious in their lending behaviour, while the
flight of money away from the capital market since 1999 limited the scope for indirect
financing by firms. This was a major concern, with 65 trillion won (12 per cent
of GDP) of corporate bonds maturing in 2001.
The government has responded to these challenges with a bond-recycling scheme
run by Korea Development Bank, a publicly-owned institution, which aims to help roll
Korea
The economy experienced a
sharp downturn at the end
of 2000…
… due, in part, to the terms of
trade loss and problems with
corporate and financial-sector
restructuring, which have
undermined confidence
The policy response has been
prompt
The economy has slowed sharply
Seasonally adjusted
Business and household confidence is recovering
Per cent Per cent Index
10
140
60
40
8
120
20
6
100
0
4
-20
Industrial production 2
80
-40
1997
98 99 2000 01
0
1999 2000 01
60
1 Business confidence
(left scale)
Unemployment rate (right scale)
2
Consumer confidence3 The economy has slowed sharply
Seasonally adjusted
Business and household confidence is recovering
Per cent Per cent Index
10
140
60
40
8
120
20
6
100
0
4
-20
Industrial production 2
80
-40
1997
98 99 2000 01
0
1999 2000 01
60
1 Business confidence
(left scale)
Unemployment rate (right scale)
2
Consumer confidence3 The economy has slowed sharply
Seasonally adjusted
Business and household confidence is recovering
Per cent Per cent Index
10
140
60
40
8
120
20
6
100
0
4
-20
Industrial production 2
80
-40
1997
98 99 2000 01
0
1999 2000 01
60
1 Business confidence
(left scale)
Unemployment rate (right scale)
2
Consumer confidence3 1. Percentage change over previous quarter, annual rates.
2. Seasonally adjusted. A score of 100 means that overall business conditions are expected to be the same as the previous month.
3. A score of 100 means that consumption is expected to be the same in six months as at present.
Sources: National Statistical Office and Federation of Korean Industries.
© OECD 2001