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.) 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