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					                                                                                Dec. 28, 1999

                                                             Ministry of Finance and Economy

                                                    Foreign Press and Public Relations Division

                                                                             T:82-2-503-9245




                  KOREA ECONOMIC UPDATE

                                      < Highlights >


           Policy Measures to Improve Income Distribution

           Domestic Stock Issues Rapidly Increase This Year

           Moody's Upgrades Korea's Sovereign Credit Rating

           Aggravated Terms of Trade Causes Real GNI to Grow Less Than Real

            GDP

           Korean Government Plans to Bolster Overseas Securities Investment

            Funds

           Korea Records Highest Growth Rate Among OECD Countries

           NPLs on the Decrease




Policy Measures to Improve Income Distribution



1. The Current Income Distribution Situation



While recovering from the economic crisis, the nation's income distribution has been

aggravated. However, the government believes that this is a temporary phenomenon

caused by the sudden economic recession; therefore, the aggravated income distribution

is expected to improve as the economic recovery accelerates.



Some criticize that since the onset of the economic crisis, the nation's income distribution

structures have been dichotomized into two brackets - high and low - with the middle-

income bracket diminishing. However, the income ratio of the top 20 percent of the

population to the bottom 20 percent of the population has started falling since the second

quarter of this year, driving up the percentage of middle-income earners. Additionally, the
Gini coefficient, which indicates the degree of inequality in income distribution, began to

fall from the second quarter of this year, after continuously rising until the first quarter of

1999. (The coefficient ranges from 0, absolute equality, to one, absolute inequality)




                                                                           '99
                             '96         '97         '98
                                                               1st Q      2nd Q       3rd Q

  Income     Ratio    of

  Top20     Percent   to       4.63        4.49        5.41       5.85       5.24       5.29
  Bottom 20 Percent

  Gini Coefficient            0.291       0.283      0.316       0.333      0.311      0.310




The creation of more jobs and the rise in wages during the economic recovery can be

cited as main factors that have contributed to narrowing the income gap. The rise in both

income and consumption of middle-income earners, helped by the government's policies

to stabilize middle-and low-income earners, has also played a critical role in narrowing the

gap.



Another criticism is that the recent rise in the number of temporary workers wreaked
havoc on the employment structure, widening the income gap between high-and low-

income earners. However, this rise is caused by the increase in the number of voluntary,

irregular workers, and therefore, indicates that labor market has become more flexible

and diversified. In addition, the government expects the employment structure to improve

in the near future, with more people finding regular jobs as the economy regains its

strength.



The past trends of income distribution show that in the early 80's when the social safety

net was not fully established, income distribution was relatively unequal, largely due to

the high unemployment rate. However, with more jobs created in the middle 80's, the

income distribution between each bracket improved. In the early-to-mid 90's, the income

distribution further improved as the unemployment rate decreased and various types of

social safety nets began to appear.
Given these patterns, the causes for the recent widening of the income gap can be found

in the sudden economic contraction in 1998, rather than in the inherent structural

problems of income distribution. Moreover, as the government has committed itself to

aggressively pursuing a more comprehensive and productive welfare system, the gap is

expected to narrow and become even smaller than the pre-crisis period.



The nation's present Gini coefficient is almost the same as it was in the middle 80's, and is

not that high, compared to other Asian countries, such as Taiwan and Thailand.




2. The Percentage of Middle-Income Earners



A recent poll claims that of the entire population, the percentage of the nation's middle-

income earners decreased from the 60 percent level to the 30 percent level. However, the

percentage of middle-income earners can never fall so suddenly, even though the

percentage can fluctuate according to the economic situation. According to the OECD

standards, the percentage of the nation's middle-income earners recorded an average of

64.7 percent during the first three quarters of 1999, a 3.8 percentage point decrease from

1997's 68.5 percent. This 3.8 percentage point fall is not a drastic decrease.



Though the percentage of middle-income earners dwindled in 1998, the percentage began

to spike up in 1999. The fall in 1998 was due to the increasing number of borderline

middle-income earners who fell into the low-income bracket as the number of jobless

increased following the bankruptcies of a slew of companies. However, given that the

number of unemployed recently fell to one million, the number of those who return to the

middle-income bracket from the low-income bracket is expected to grow.




3. Policy Measures to Improve Income Distribution



The government has been criticized for not having shown sufficient effort to narrow the

widened income gap between rich and poor. However, this criticism is far from true. The

government has taken various steps not only to tackle the unemployment-related

problems, but also to support middle-and low-income earners who have suffered the most

since the nation slid into an economic crisis. Coinciding with these efforts, the government

has been pursuing the establishment of a more comprehensive and productive welfare
system.



(1) Creation of More Jobs and Pursuit of Unemployment Policies



The government believes that more jobs should be created to improve the aggravated

income distribution. To this end, the government allocated 10.7 trillion won in 1998 and

9.2 trillion won in 1999, respectively. The budget has been used to help people set-up

middle-and small-sized firms and venture companies as well as to nurture promising

future industries, such as culture, tourism, and telecommunications. In the meantime, in a

bid to prevent further unemployment and to protect those who have lost their jobs, the

government has implemented various types of policy measures, including the Public Work

Program and vocational training.



(2) Stabilization of Middle and Low-Income Earners



On the average, wage and salary income earners will see their tax burden reduced by 28

percent by January, 2000. Additionally, in order to help maintain a basic standard of

living, the ceiling on tax deductions for insurance, medical, and educational expenses will

be raised.



(3) Pursuit of a More Comprehensive and Productive Welfare System



Even though the government intends to raise the total budget of the next year by only

five percent, the budget to support low-income earners and the least fortunate will rise by

37.5 percent. With this increased budget, the middle-and long-run policy measures to

establish a more comprehensive and productive welfare system will be implemented as

follows:



First, a law that guarantees minimum standard of living will take effect in October, 2000.

Regardless of the ability to work, the government plans to provide living, education, and

housing expenses to the poorest households.



Second, the government will provide financial assistance to those who are willing to work,

but are currently unemployed, on the condition that they participate in the job searching

activities and vocational training.
Third, tax reform aimed at improving the income distribution structure will be

implemented. Inheritance and donation taxes will be more strictly imposed in order to

prevent the rich from illegally inheriting or donating their wealth to their children.



Fourth, unemployment, medical, and industrial accident insurance will be more effectively

operated. In this vein, unemployment insurance will be continuously expanded to

strengthen the unemployment safety net. Beginning July, 2000, industrial accident

compensation insurance will be applied to all companies regardless of size. Employment

stabilization policies will be prepared for temporary workers. In order to both manage the

medical insurance system more effectively and to ensure a more equitable distribution of

insurance premiums, the National Health Insurance Act, aimed at an integrated operation

of medical insurance funds for the self-employed and salaried workers, will take effect on

July 1, 2000. As a part of efforts to prevent the rich-poor gap from further widening, a

new system, such as a cyber university, will be set up in order for anyone to gain access

to knowledge and information at a low cost. Along these lines, life-long education and
vocational training programs will be further strengthened and expanded.




Domestic Stock Issues Rapidly Increase This Year



From January to November, Korea's domestic companies raised 60.3 trillion won through

direct financing, a 2.0% decrease compared to the same period of last year. Of the total,

Korea's companies raised 32.2 trillion won by issuing stocks and 28.1 trillion won by

issuing bonds. Spurred by the prosperity of both the Korea stock exchange and the

KOSDAQ markets, direct financing through stock issues soared by 189.6 percent from a

year-earlier. However direct financing through corporate bond issues decreased by 44.2

percent.



Direct financing through stock issues consisted of 1.5 trillion won of new listings and 30.7

trillion won of rights offerings. Of the rights offerings, large-scale companies raised 96.5

percent of the total. Approximately 79 percent of the stocks were raised through either

allocation to existing shareholders or public subscriptions -whereby priority was given to

existing shareholders.



Direct financing through bond issues decreased due to the relative ease of raising money

in the stock market. Large companies decreased their issues of bonds by 51.5 percent to
24.2 trillion won, while the small and medium companies increased their bond issues by

712.3 percent to 3.9 trillion won. Around 95 percent of the bonds were non-guaranteed

bonds. And, issuance of convertible bonds accounted for 8.3 percent of the bonds issued

this year, up 2.2 percent from last year.


                          Funds Raised through Direct Financing

                                                                       (Unit : Trillion Won)

                                      Jan.-Nov.'98                 Jan.-Nov.'99

  Stock Issues                              11.1                       32.2

  Corporate Bond Issues                     50.4                       28.1

  Total                                     61.5                       60.3




Moody's Upgrades Korea's Sovereign Credit Rating



On December 16, 1999, Moody's Investors Service raised Korea's sovereign credit rating

by one notch to Baa2 from Baa3. The new rating has a stable outlook.



The New York-based international credit rating agency contributed this upgrade to a

marked reduction in Korea's vulnerability to external shocks over the near-to medium-

term and the Korean government's policy commitment to defend the external liquidity

position from the pressures which could develop. Moody's said that these factors provided

time for a more effective restructuring of the financial system and the chaebol,
weaknesses which contributed to the economic and financial crisis in 1997.




    Aggravated Terms of Trade Causes Real GNI to Grow Less Than Real GDP



The nominal gross national income (nominal GNI) increased to 119.4 trillion won in the 3 rd

 quarter, a 10.6 percent increase from a year earlier. The GDP deflator decreased by 2.1

   percent compared to the same period last year. This decrease was due to the sharp

  decrease of export and manufactured product prices, in spite of the price increases in
  livestock and fishery products, as well as the increase of the unit cost of construction

                                           wages.



 The real gross national income - nominal GNI divided by the GDP deflator - increased by

9.4 percent in the 3rd quarter, lower than the 12.3 percent of real gross domestic product

  growth. The reason the real GNI growth rate is lower than the real GDP growth rate -

 despite the decrease of the GDP deflator - is that trade loss increased sharply due to the

   aggravated terms of trade. In the 3rd quarter, the terms of trade index - the export

     deflator to the import deflator of goods and services - decreased by 5.8 percent.



 The gross savings ratio in the 3rd quarter recorded 33.0 percent, a 1.6 percentage point

increase from a year earlier, as income surpassed consumption for the first time this year.

   The gross domestic investment ratio recorded 25.2 percent, a 5.7 percentage point

            increase from a year earlier due to an increase in facility investment.


                 Nominal GDI Growth Rate and Deflator Increase Rate Trends

                                                 (compared to the same period of last year, %)

                                                '98                           '99

                                1st Q   2nd Q         3rd Q   4th Q   1st Q   2nd Q     3rd Q

  Nominal GNI                    7.2     -1.9         -4.2     -6.4    -2.2     5.5     10.6

  Nominal GDP                    7.9     -1.0         -3.4     -5.2    -2.2     5.6     10.0

  GDP deflator                  11.9      6.7          3.9     0.1     -6.4    -3.9     -2.1

  Unit   Price     of   Goods
                                -18.2   -18.6     -18.9       -12.9   -10.7    -9.2     -5.7
  Exports




Korean Government Plans to Bolster Overseas Securities Investment Funds



In order to both diversify investment portfolios and stabilize the supply and demand of

foreign exchange, the Korean Government plans to bolster the establishment and

management of overseas securities investment funds. When a large number of overseas

securities investments are made through these funds, rapid exchange rate fluctuations

can be avoided. This type of foreign investment will also provide the nation with a second
line of foreign reserves.



A few measures will be taken to facilitate the overseas securities investment funds. First,

the government will not impose capital gains tax on the sales of overseas securities.

Currently, the Korean government does not tax the capital gains on domestic securities

investment funds. Second, government-run banks plan to invest directly into overseas

securities investment funds. Last, if necessary, the government will also deposit money

from its foreign exchange stabilization fund into privately operated overseas securities
investment funds.




Korea Records Highest Growth Rate Among OECD Countries



In the first half of 1999, Korea ranked 1st among the 29 member countries in the

Organization for Economic Cooperation and Development (OECD) in terms of its GDP

growth rate (7.3 percent), according to a recent analysis by the National Statistical Office.

During the same timeframe, Korea placed third in terms of its US$ 62.0 billion usable

foreign exchange reserves.



In 1998, the nation's current account balance of US$ 40.5 billion was the 2nd largest

surplus among the OECD member countries, with total exports (US$ 132.3 billion) and

imports (US$ 93.3 billion) ranking 10th and 12th, respectively. The consumer price index,

which rose 7.5 percent in 1998 from a year earlier, came in 6th.



Korea's estimated population in 1999 approximates 4.7 million, putting its rank at 9th

place among OECD member countries. The nation's GDP in 1998 stood at US$ 321.3

billion, and per capita GDP recorded US$ 6,920, taking 12th and 24th places, respectively



In the agricultural industry, Korea produced 679 tons of rice last year, making the nation

the 3rd highest rice producer among the OECD countries. In the manufacturing industry,

the nation ranked 8th, producing 9.5 million cars. In regard to electronic products,

including semiconductors, tools, and parts, the nation also placed 8th.



At the end of 1998, 23 percent of population owned cars and 30 percent mobile phones.

The former ranked 27th and the latter 10th. Additionally, 16 percent of the population

owned personal computers, putting the nation in the 21st place.
       Ranking of Korea's Major Indicators Among OECD Member Countries

      Major Indicators         Base Year           Unit       Total      Ranking

                                  99             thousand      46,858         9
Population
                                  98                 "         46,430         9

                                  98            US$ Billion     321.3        12
Gross Domestic Product
                                  97                 "          476.6         9

                                  98               US$          6,920        24
Per Capita GDP
                                  97               US$         10,363        24

                            1st Half of 1999        %             7.3         1
GDP Growth Rate
                                  98                 "            -5.8       29

                                  98            US$ Billion     132.3        10
Exports
                                  97                 "          136.2        10

                                  98            US$ Billion      93.3        12
Imports
                                  97                 "          144.6        10

                                  98            US$ Million    40,558         2
Current Account Balance
                                  97                 "         -8,167        26

                                June 99         US$ Million    61,987         2
Foreign Exchange Reserves
                                  98                 "         52,041         5

                                  98           Thousand Ton     6,790         3
Rice Production
                                  97                 "          7,315         3

                                  98           Thousand Ton    39,896         4
Steel Production
                                  97                 "         42,554         4

                                  98            Thousand        1,954         8
Car Production
                                  97            Thousand        2,818         4

                                  98           Thousand G/T     7,243         2
Ship Building
                                  97                 "          8,226         2

Electronic Products               98            US$ Million    47,594         4
                                         97                    "               49,500           4

  Number         of   Cell-Phone         98                Person                 30           10

  Owners Per 100 People                  97                    "                  15           15

  Number of PC Owners Per                98                                       16           21

  100 People                             97                                       15           20

                                       98/97                 %                    7.5           6
  CPI Increase Rate
                                       97/96                   "                  4.5           7




NPLs on the Decrease



The total value of non-performing loans (NPLs) that domestic financial institutions held

declined by 5.5 trillion won from 63.4 trillion won at the end of June to 57.9 trillion won at

the end of September.



During the same period, the total value of NPLs held by the domestic banks decreased by

7.0 trillion won from 37.1 trillion won to 30.1 trillion won, while those held by non-banking

financial institutions, i.e., securities and insurance firms, increased by 1.5 trillion won.


The fall in the total value of NPLs that domestic financial institutions held was largely due

to an 8.4 trillion won purchase made by the Korea Asset Management Corporation.



Given that the nation's economy continues to maintain its strong recovery, the value of

NPLs is not expected to rise suddenly during the fourth quarter of the year.


                          NPLs of Domestic Financial Institutions

                                                                           (Unit : Trillion Won)

                                                Total Credit
                                                                    NPLs (B)            B/A
                                                     (A)

                                     End-Jun            560.1             63.4                11.3
         Total
                                    End-Sept            574.1             57.9                10.1
                         Increase Rate(%)              2.5           -8.7            -1.2p

                                   End-Jun           439.2           37.1             8.4

         Banks                    End-Sept           455.9           30.1             6.6

                         Increase Rate(%)              3.8          -18.9            -1.8p

                                   End-Jun           120.9           26.3            21.8
       Non-Banking

        Financial                 End-Sept           118.2           27.8            23.5

       Institutions
                         Increase Rate(%)             -2.2            5.7            1.7p




Notable Quotes


Notable Quotes


        Bloomberg (Dec. 16, 1999 "Korea's Kang on Reforms, Growth Prospects, G20")


         "To resolve international economic problems it would be better to establish these

         kind of G20 meetings to include significant emerging market economies rather

         than G7 (countries). To prevent financial crises, the emerging markets should

         have reforms reflecting the principles of development, democracy and market

         economies." (comments from Korea's Finance and Economy Minister Kang Bong
         Kyun, ahead of the G20 meeting of finance ministers and central bankers.)


If you have any questions, suggestions, and/or comments, please feel free to call the

Foreign Press and Public Relations Division at (82-2) 503-9245, fax (82-2) 503-8653, or

e-mail us at fppr@mofe.go.kr.

				
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