.. lpful to understand how major governments policies on financial sector have been varied with given the world economic situations like oil crisis and its own economic recession. The First Five Year plan (1962 1966) The first plan was prepared in a hurry by the military government that took power in 1961. The major contents of fiscal and financial policies as stated in the plan document were largely about the tax, budget, and monetary system, financial market and foreign exchange system. During this period, its main purpose was, however, to expand exports as much as possible by providing export firm with cheap loans, tax benefits, export compensation schemes, and various administrative support.
Economic growth in this period was result by an increase in export and output and as well as price level (since output and price level are positively correlated), so there was inflationary pressure at the end of the first plan- actually the inflation rate exceeded 23 percent in 1964. The Second Five-Year Plan (1967 1971) During this period, the major reforms include a financial reform assuring positive interest rate in 1965, and exchange rate reform normalizing highly overvalued exchange rate, and trade reform allowing wide imports of parts and machinery used for the production of export goods. These reforms were reflected in the second plan and carried further throughout the second plan period. In addition, there was an increase in domestic savings and a decrease in foreign borrowing. The Third Five-Year Plan ( 1972 1976) The third five-year plan put its major emphasis on the promotion of heavy and chemical industries.
The government made great effort to raise domestic savings to finance the heavy and chemical industries, but the amount of domestic savings fell far short of investment requirement. As a result, foreign borrowing expanded enormously, and management of foreign borrowing and debt became a major policy issue. In addition, due to different emphasis on light and heavy industries, the growth gap increased substantially. Inflation caused by the first oil shock in 1973 also takes a part of unstable situation of economy. Inflation rate exceeded 40 percent in 1974. The Fourth Five-Year Plan (1977 1981) Because of high inflation cause by the first oil crisis, stability was given relatively high policy priority.
The government adopted monetary rule of fixing money supply growth at a prescribed constant rate of 20 percent per annual to stabilize price level and overall economy. He major change in trade policy during the fourth plan period included the expansion of imports related to exports, maintenance of effective exchange rate, expansion of export subsidies, tax benefits and foreign loans to export firms. In addition, the government improved the number of industrial estates for export firms by creating industrial export estates and free export zones. The fifth Five Year Plan (1982- 1986) In the early 1980s, the Korean economy was characterized by very slow growth rapidly expanding foreign debt, and high inflation. Consequently, export promotion was given the highest policy priority again, so the major change in trade policy included intensive promotion of export goods and market diversification, reform of the export support system, lowing tariff rates to expand importation of good used in manufacturing. The Sixth Five year Plan (1987 1991) As of 1986 the Korean economy realized high economic growth, stable price, and a trade surplus and thus faced a new phase of growth with enhancing the efficiency and strengthen the international competitiveness of the Korean economy in general by reforming the free enterprise market system.
Thus the major contents of policy reforms included the dramatic reduction of various government regulations constraining growth of enterprises plus extensive promotion of liberalization of finance, imports and foreign exchange. The Seventh Five Year Plan (1992 1996) This plan was formulated after Korea became a member of the United Nations and emphasized the role of private sector in preparation and implementation of the plan. The Eighth Five Year Plan (1993-1997) The preparation of this plan started with the beginning of the Seventh Republic and the plan emphasized that management of the economy will no longer be government led or government controlled, as in the past, but will be based on the participation and innovative spirit of the Korean people. It also stresses the importance of reform of finance, government administration, budgets, ethics, etc. Even though the government on each period recognized the problems it was facing and made five-year plans, they were not always successful. Throughout the plans above, we will be able to find a common policy used without difficulty. That is the governments massive supports toward export firms.
It must work during the early stage of development when the country had little capital accumulation. However, the governments unbalanced incentives on big businesses which are mostly in heavy and chemical industries, later known as chaebol, actually led them to depend too long on protection and debt financing. This policy wasnt a serious problem when the economy boomed, but when it slowed, most debt ridden firms fell back on the government for relief causing the issue whether the policy and the industry are efficient or not. (Haggrd, 24). For example, the combined sale of the five largest big companies, chaebol, take 37percent of Koreas gross out, and their exports were 44 percent of total exports in 1997. If there is a little slow down of the one of the largest business, then it is obvious the economy is not in quite safe situation.
Since chaebols share of Korean economy is already huge, if they are allowed to fail or banks are to write off their debt, then the whole banking system would be pushed into collapse. This is real problem, nor chaebol or their associated companies, be easily shut down (Economist). As a example, the price of a 16 MB dynamic random access memory (DRAM) chip fell from more than US $40 in January 1996 to less than US $10 by the end of 1997. The dollar export price index for Koreas electronic components fell by 50 percent over the same time period. Another example is current collapse of Daewoo, a second largest chaebol, which had huge debt to equity ratio (over 400 percent), went to a bankruptcy this year.
This company was well known with a very close relationship with the governments in the past. It was ironic to see that Daewoo was expanding its size when the country was in recession and other chaebols tried to reduce their size and increase efficiency. Actually, this is not the first time Daewoo asked for the governments help. Every time the company went into a trouble, the government didnt let the company to fail and put more capital available into the company. However, this time it doesnt seem happening that way.
Actually, the government is trying to solve the problem under the market operation, so this inefficient and insolvent chaebol can be sold. Chaebols may not be the only one to be blamed, even though they were blamed as a major cause of Asian financial crisis happened in Korea brining the country to the brink of insolvency, as well as weak banking system, in fact, they could be victims of misleading government policy. The long term close relationship between government and big business creating rent and using them with unbalanced support between industries had worked well in the early stage of development, but as stated early, rent can bring corruption of bureaucracy or industries also, since it is caused by inefficiency. Allocation of financial resources is not an easy job, but this would be best time for Korea to consider again about the efficiency of closed relationship between the government and businesses while the country is restructuring its economy system. Bibliography Blinder, Alan S.
The Economics of Finance. Washington D.C.: the Brooking institution, 1974. Haggard, Stephan, et al. The politics of Finance in Developing Countries. London: Cornell Univ.
P, 1993. Lau, Lawrence J. Models of Development. San Francisco: ICS Press, 1986.