SOUTH KOREA: STATUS OF THE ECONOMY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000020018-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 16, 2016
• Document Release Date: October 5, 2004
• Sequence Number: 18
• Publication Date: December 23, 1974
• Content Type: MF

 PNTRAL INTELLIGENCE AGENCY
WASFUNGTON, U.C. 20505
2.3 December 1974
MEMORANDUM FOR:
Mr. Michael Armacost
Policy Planning Staff
Department of State
South Korea: Status of the
Economy
In response to your request we are forwarding the
attached report on South Korea: Status of the Economy.
for use in preparing a policy planning paper on South
Korea. South Korea's economic slowdown, already the
most serious in years, is likely to extend well into
1975. The downturn largely reflects sagging foreign
demand for South Korean exports. If there are any
further information on this or related matters we would
be happy to oblige.
(24 Doc 1974)
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Attachment:
As stated
Distribution:
(5-6700)
Orig &
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- Addressee
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SOUTH KOREA: STATUS OF THE ECONOMY
KEY CONCLUSIONS
? South Korea faces its steepest economic slump
in years with the downturn likely to last well
into 1975.
? The chief cause of the slump will'be slackening
foreign demand for South Korean goods in the
United States and Japan which take nearly 70%
of exports.
? With unemployment on the.rise and inflation
still a problem the economic situation will
exacerbate the government's already growing
political difficulties.
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'1. South Korea is well into its most pronounced
econo:'in slump in, a decade. Although real growth this
year will average at most 8%, all the gains have come in
the first half. The downturn will extend well into 1975
when real growth will probably register only slight gains.
Growth prospects have declined essentially because of the
economic downturn in major industrial countries which
account fcr the bulk of Korea's exports and supply a large
share of investment funds. Problems stemming from slow
growth will add to Seoul's already growing political
. problems .
The Emerging Slump
2. The economy expanded rapidly during the first half
of 1974 compared with the first.
of 1974 but the pace slowed sharply after mid-year. Real
gross national product during the first half was 15% above
the same 1973 period while industrial output was 27% above
last year's average. In recent months, however, industrial
output has declined because of weak foreign demand for South
Korean goods. With no turnaround expected in the months
.ahead, real GNP will register no gain during the second half
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CONNI=IOENTLAL
3. The downturn has been concentrated in a relatively
few industries. The hardest hit include textiles, plywood,
electronics and other light consumer manufacturers that export
the bulk of their output. Output in the important textile
industry, for example, is down over 10% from the early 1974
peak, the sharpest decline in years. Although heavy industry
continues to do relatively well, output gains there also
have slowed in recent months.
4. Unemployment, is already on the rise. Layoffs so
far this year have totaled some 100,000 factory workers,
roughly 2% of the labor force.
Several major US
and Japanese firms in. Korea are planning substantial layoffs.
Most foreign and locally owned firms, however, are maintaining
their labor force, preferring instead to reduce work hours
when nece6sary. Nonetheless, employer groups and the
government are concerned over the, likelihood of increased
labor unrest, particularly in urban areas.
Government Policies
5. Seoul's primarly economic objective has shifted
from controlling inflation to maintaining employment and
output. To accomplish this the government has reversed
its fiscal policy. The budget -- in surplus during the
-first nine months' of 1974 -- is now running a sizeable
deficit. Seoul is increasing spending on public works,
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welfare, defense and government industrial projects. The
public works program is essentially aimed at offsetting the
decline in private sector employment. Seoul is also providing
special loans from budgeted funds and government-owned banks to
private businessmen to help avoid a rash of bankruptcies.
6. Seoul also announced an 18% devaluation of the won
on 7 December to stimulate exports and dampen imports. To
help offset the inflationary impact of devaluation, Seoul has
tightened its monetary policy somewhat by raising reserve
requirements and interest rates. The government also plans
to control price increases on 58 key commodities, although
it has adjusted petroleum products prices and electricity rates
by 31% and 42%,respectively, to reflect increased oil prices
and the won devaluation.
7. Despite monetary tightening, inflation shows no signs
of easing. Consumer prices in November were 27% above fast
year's level, while wholesale prices were up 44%. The won
devaluation and energy-related price adjustments are likely
to boost wholesale prices nearly 10% in December alone. Never-
theless, :eoul hopes to hold inflation next year to around
15% -- half this year's expected rate. This may prove difficult,
however, because of pressures for large catch-up wage hikes
and only small productivity gains.
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Trade and Payments
8. Higher oil and other commodity prices have boosted
Korea's trade deficit sharply. For the year as a whole, it
will'reach $1.5 billion. Although export value has risen
40%, imports are up 60%, largely because of higher oil prices.
Higher prices account for most of the export gains; sales
volume this year will be up about 15% compared with 60% in
9. This year's current account deficit will approach
$1.5 billion compared with $300 million in 1973. Most of
the deficit is being offset by long-term capital inflows
stemming in part from investment commitments made last year.
Some slowdown in direct investment inflows, particularly
from Japan, appears evident, however. The Japanese have cut
back their investment plans because of political problems
between the two countries as wel4,. as for economic reasons.
US investment commitments have also slowed.
10. The Koreans have substantially increased their
short-term borrowing abroad. This borrowing reached an
estimated $400 million during the first half of 1974. Korea's
good international credit rating and low debt service payment --
11% of exports in 1973 compared with 20% the previous year
has made it relatively easy to obtain these funds. Depsite
increased borrowing, however, foreign reserves have declined sharpll
in recent months, falling from $1,015 million at the end of
September to $931 million by late November.
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The 1975 Outlook
11. Slow growth and balance of payments stringencies
will likely persist through 1975. Real growth next year
may well be only half Seoul's recent 7% forecast. The chief
problem will be continued weak Japanese and US demand for
South Korean goods. Japanese imports from South Korea have
declined r?articularly fast in recent months, with no improvement
in sight, and South Korean exporters are beginning to have
problems boosting sales to other markets. Australia and
Canada, for example, recently placed new controls on textile
imports from Korea.
12. Because weak demand is the chief factor curtailing
export growth, the recent won devaluation will not boost
overseas sales very quickly. Even if export volume fails to
increase significantly, however, overseas sale:; value will
grow by 20-25% because of higher,r prices. Import costs will
be up somewhat because of higher food and oil costs. Under
these circumstances, we expect the trade balance to improve little,
if at all, and the current account- deficit will probably approa0h
the 1974 level of $1.5 billion.
13. To avoid any further drawdown of foreign exc..iange,
Seoul hopes to increase its lo,zg-term foreign borrowing.
Negotiations have been underway to borrow $600 million from
Middle Eastern oil exporting countries. Another $1.5 billion
is being sought from the World Bank, the Asian Development
Bank, as well as the US, Can.ada, Japan and West European
countries. Seoul feels that it will be able to obtain enough
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funds from these sources to avoid any further worsening of
b,~:lance payments position.
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