World Bank Document

arounds among developing countries for many 1973-74, the Korean government decided not to
years.
slow economic growth. Instead, it devalued the
currency and borrowed heavily to expand export
BORROWING AND RESTRUCTURING. Structural capacity (see Box 4.9).
adjustment is seldom ensured merely by "getting In recent years, the World Bank has increased its
prices right," essential though that is. Unless a lending in support of trade liberalization and
country is able to expand imports, its farmers and export expansion, though its role is largely catabusinessmen
may lack the basic ingredients-fuel, lytic. For example, Brazil has borrowed to finance
fertilizer, components, machinery-needed to the liberalization of its import duty drawback sysexpand
exports and revive economic growth. They tem, which will reduce the costs of producing for
will not be able to take advantage of the right export. Mexico and Egypt have borrowed to
prices. In these circumstances, foreign borrowving increase the reserves available through their export
makes an essential contribution, as Korea has development banks and other intermediaries to
demonstrated. Faced with the oil price increase in finance export-oriented industries. Ghana has an
Box 4.9
Borrowing for adjustment: the case of Korea
Until 1960, Korea emphasized import-substituting in terms of trade and interest rate losses equivalent to 8
industrialization. It then switched to promoting exports. percent of GDP. But the world outlook was less accom-
Since 1960, GDP growth has averaged more than 9 per- modating than in the mid-1970s. Extemal finance was no
cent a year, per capita incomes have more than tripled, longer available on the easy terms of previous years.
and the number of people with incomes below the pov- Exports were unlikely to grow as fast as they had in the
erty line has fallen from 40 percent of the population to mid-1970s because of rising international protectionism
15 percent. Domestic saving has risen steadily since the and the deepening world recession. Nor were Korea's
mid-1960s to about 27 percent of GDP in 1984. Invest- internal conditions as favorable. The problems of inflament's
share grew even faster, to 29 percent of GDP. tion, exchange rate overvaluation, and investment misal-
To achieve this rapid increase in investment, policyma- location were compounded in 1979 by a disastrous harkers
encouraged foreign borrowing. The country's exter- vest and by political turmoil following the assassination
nal commercial debt (including short-term debt) grew of the country's president.
from $22 million in 1960 (1 percent of GDP) to over $33 The government therefore opted for a different adjustbillion
in 1983 (44 percent of GDP). Korean and foreign ment path. As in 1974-75, it increased its foreign borrowstudies
have estimated that inflows of foreign capital ing (by 25 percent a year during 1978-81) and devalued
added about four percentage points to Korea's annual the exchange rate. But, unlike the 1974-75 experience,
growth rate during the 1960s, and nearly two percentage investment and growth were sharply curtailed by tightpoints
a year in 1972-82. These inflows, mainly in the ening credit to nonexport sectors, reducing real wages,
form of commercial credits, were channeled almost cutting public investment, and rapidly increasing
entirely into productive investments. For the most part, domestic energy prices.
capital was used efficiently. The incremental capital out- The medicine was strong. The economy stagnated in
put ratio-which measures the extra investment needed 1979-80. After rapid export growth resumed in 1981,
to produce an extra unit of output-averaged about 3, credit policies were relaxed, but fiscal and wage restraint
one of the lowest in the developing world. was continued. Korea's GDP grew by 6 percent in 1981-
Korea was among the developing countries hardest hit 82, and then, with the help of economic recovery in the
by external shocks. When oil prices rose in 1973-74, the United States and Japan, by 9 percent in 1983-84. Infladeterioration
in its terms of trade generated a loss equiv- tion declined from nearly 40 percent in 1980 to 3 percent
alent to about 10 percent of GDP. To cushion the shock, in 1983; real export growth accelerated to over 10 perthe
country borrowed from abroad; it also devalued its cent; the current account deficit was cut by two-thirds;
currency by 22 percent. This devaluation, together with and growth in external debt slowed from $5 billion to $2
long-established policies of export promotion, helped set billion yearly. The debt service ratio (including amortizathe
stage for a spectacular increase in manufactured tion of short-term debt) now stands at a modest 20 perexports.
Korean firms were also successful at winning cent of export eamings, and access to foreign financial
overseas construction contracts totaling more than $15 markets is normal. However, to reduce the growth of
billion by 1978. However, the investment boom did lead debt still further, the government is attempting to raise
to overexpansion of heavy industry, high inflation, and a domestic savings by 4 percent of GDP over the next sevrising
real exchange rate during the late 1970s, blunting eral years through financial reform and greater promothe
export drive.
tion of exports.
The shocks of 1979-80 were similarly costly, resulting
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