According to the Korea Trade Promotion Corporation in 1990, the average total exports volume during 1986-89 was equal to 33.7 per cent of GNP, while the average trade volume (export and import) during the same period was equal to 64.3 per cent of GNP. These figures show the dependence of the South Korean economy on foreign trade, but while export-oriented development has continued to be pursued, the economy has experienced three major transformations from 1986.
Firstly, the economy suffered both internal and external problems which eroded the competitiveness of some of the industries after 1986. Internally, real wages in the manufacturing sector have increased sharply. Before 1987, the average wage level of South Korean workers was relatively lower than those of Asian NICs. In South Korea, the average monthly wage in the manufacturing industry was U.S. $334 in 1986, while those in the U.S., Japan and Singapore were U.S. $1557, U.S. $1812 and U.S. $448, respectively (ILO, 1993). However, over the next two years, 1988 and 1989, there was about a 20 per cent nominal wage increase in South Korean manufacturing industry due to the shortage of labour availability (see Figure 4.1).
Figure 4.1 Average Real Wages in South Korea, 1973-92 (won) 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 Year
Sources: Korean Autom obile M anufacturers Association (K A M A ) and Kia Econom ic R esearch Institute, 1995.
Externally, due to the result o f the Plaza A ccord o f S e p tem b e r 1985, which sought an orderly appreciation of the m ajor non-dollar currencies, the currencies o f the N e w Taiw an dollar and the South Korean won continuously appreciated. The official foreign exchange rates against the U.S. dollar in 1986, 1987 and 1988 were 861.1 won, 792.3 won, and 684.1 won, respectively (National Statistical Office, 1993, p. 327). These e ndogenous and exogenous difficulties reduced the export com petitiveness of South Korean com panies which depended on the old products.
Secondly, the capital-intensive products have increased due to exports of machinery and transport equipm ent because the com parative advantage of the South Korean products changed as income rose. As shown in Figure 4.2, the grow th o f the South K orean exports has shifted from dependence on labour-intensive to capital- intensive industries, and by 1994 the proportion o f capital-intensive products in total exports was 49 per cent. The ‘Three L ow P e rio d ’, when interest rates o f major foreign banks dropped, the exchange rate o f the U.S. dollar against the Japanese yen fell, and
the price o f crude oil fell from 1986, allowed South Korean com panies to u p g ra d e their products and gain m arket strength.
Figure 4.2 The E xports of M achinery and T ra n sp o rt E qu ip m en t, 1991-94
100001
2oooor
Note: M achinery & T ransport Equipment (M & T) includes cars, ships, pow er-generating equipm ent, office m achinery, radio & television receivers, sound & video recorders, telecom m unications equipment, and electronic components.
Source: E IU country report 3rd quarter, 1995, p. 56
In addition to this shift, the e xport m arket for South Korean p ro d u c ts has diversified in contrast to the 1970s and the early 1980s (see Figure 4.3). E c o n o m ic ties with the E uropean Union (EU), Asia-Pacific countries, China and the fo rm e r Soviet Union have been expanded. T he volume of exports to the E u ro p e an m arke t has increased remarkably by 321 per cent from 1980 to 1993, and by 863 p e r ce n t to Asian m arkets over the same time period (Bank o f Korea, 1989 and 1994, pp. 20 8 -2 2 1 ). This diversification of export m arkets diminished a source o f vulnerability from the dependence on a few concentrated export m arkets as well as the small dom estic market.
Figure 4.3 Diversification of Export Markets, 1980-93 $m 7000C 6000C 5000C 4000C 2000C 3000C 1000C 0 ■ O thers □ Ja p a n □ America ■ Asia □ Europe 80 81 82 83 84 85 86 87 88 89 90 91 92 93 Year
Notes: Asia includes Taiwan, H ong Kong, India, Indonesia, Malaysia, Singapore, and Thailand. E urope includes the U.K ., Sw eden, N orw ay, Italy, Germ any, France, and Belgium. Others include Australia, Canada, N ew Zealand, Panam a, and M iddle East countries.
Source: Bank o f Korea, 1989; 1994.
Finally, since South K orea started to experience a balance o f payments surplus in 1986. o u tw a rd foreign direct investment (FDI) has been grow ing rapidly. A ccording to Bank o f K orea (1987-94), the average annual grow th rate betw een 1987 and 1990 for the am ount involved in actual investment was 80.3 per cent. T he increase in actual FDI in 1994 was almost 20 times that of 1987. Recent outgoing FDI is dom inated by the manufacturing sector, with 55.1 per cent of the approved FDI and 65.9 per cent of total cases o f FD I in 1994 (see Table 4.6).
Table 4.6 FDI of South Korean Industry in 1994 (U.S.$,000)
Area M anufacturing industry % M /T Total
Asia C ase 2,845 78.4 3,631 A m ount 3,261,228 70.7 4,615,745 Europe C ase 94 32.2 292 Am ount 820,092 61.1 1,342,510 North C ase 201 28.7 707 A m erica Amount 1,247,239 40.2 3,104,986 South Case 131 55.5 236 A m erica Amount 168,820 54.2 311,376 A frica C ase 23 46.0 50 Am ount 86,431 28.7 301,024 Others Case 49 31.6 155 Am ount 71,915 12.2 589,919 Total Case 3,343 65.9 5,071 .. Amount 5,655,725 55.1 10,265,160
Notes: Others include the M iddle East and Oceanic countries. % M /T: % Investm ent o f Manufacturing industry / Total Investm ent.
Source: Bank o f Korea. 1994.
T he interesting features are that (1) FDI has taken place in almost all industries simultaneously, although FDI by the companies in capital- and technology-intensive industries has been m ore intensive after the 1990s, and (2) FD I by different industry has con c en tra te d on particular regions only. F o r example, labour-intensive industries, affected by rising production costs, are being relocated to China and the Association of S outh East Asian N ations (A S E A N ) am ong others, while firms producing capital- and technology-intensive goods such, as electronics, vehicles, and steel, invested in m ajor ex p o rt partners in Asia, North America, and E urope an countries (including Eastern E urope).
As such, the South K orean industry is currently undergoing industrial restructuring, with com prehensive advances being m ade in o u tw a rd oriented industrialisation (both exports and FDI). The g overnm ent also fostered FD I by abolishing nearly all regulations on the introduction o f foreign commercial loans in 1997
investment projects. Overall, this FDI trend is expected to continue over the coming years.
Having explained the macro economic issues in South Korea, and the transformation of the country’s economy, the discussion will now focus on the kernel of the research, which is the South Korean car industry.