SOUTH KOREA: PROSPECTS FOR GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000202130001-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: January 7, 2010
• Sequence Number: 1
• Publication Date: November 19, 1985
• Content Type: REPORT

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Central intelligence Agency =
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
19 November 1985
South Korea: Prospects for Growth
Summary
South Korea has been touted as the "next Japan"--a
reflection of its economic success over the past 25
years and its efforts to move into knowledge- and
technology-intensive industries. But Seoul faces
obstacles Tokyo never had to contend with--such as a
smaller domestic market, a heavy defense burden, and
much stiffer world competition. The country is
currently experiencing its most serious economic
slowdown since 1981, and Seoul is experimenting with
pump-priming measures to get it moving again.
Despite South Korea's large foreign debt, we believe
the economy is basically sound and future growth
should be strong by world standards--albeit below
what South Koreans have become accustomed to.
Economic growth will be determined largely by
factors outside Seoul's control, however--such as
demand for Korea's exports and protectionist
This memorandum was prepared byl (Office of East 25X1
Asian Analysis. Information available as of 19 November 1985 was
used in its preparation. Comments and queries are welcome and
may be directed to the Chief, Korea Branch, Northeast Asia
Division, OEA, on 25X1
EA M 85-10208
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barriers. Moreover, continued subpar economic
performance would likely contribute to domestic
political tensions, which in turn may further
restrain future growth by undermining foreign
lenders' and inv rs' confidence in South Korea's
economy. ~ 7
South Korea's Growing Industrial Strength
An aggressive private sector aided by government support and
a low-paid but productive work force have made South Korea the
world's 15th-largest exporter and perhaps its most advanced
LDC. An underdeveloped agrarian society 25 years ago, South
Korea has become competitive in several highly visible industries
important to the economies of the developed countries. The
growth of South Korea's industrial strength is reflected in:
Shipbuilding. South Korean shipbuilders captured
15
percent of worldwide orders in 1984--second only
Japan.
to
Steel. South Korea has become the world's most
competitive steel producer by combining low wages with
technologically advanced plants. It plans to increase
capacity by 75 percent over the next decade.
Overseas construction. Orders grew an average of 28
percent annually between 1975 and 1983, but have
decreased as oil prices have declined. At their peak in
the early 1980s, South Korean firms accounted for over
half of the world's 25 largest general building
Building on these successes, South Korean economic planners
have targeted rapid expansion into knowledge- and technology-
intensive industries:
Automobiles. Seoul plans to boost automobile exports
from 43,000 units in 1984 to 800,000 by 1991 using
efficient, up-to-date assembly lines now being
constructed. Hyundai will begin selling cars in the
United States by early 1986, and Daewoo, strengthened by
a technical and equity tieup with General Motors, is
tripling its capacity.
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Semiconductors. Samsung and other leading electronic-
firms intend to begin producing 64K and 256K random-
firms
access memory chips and are eyeing the 1-megabit-chip
market. The South Koreans could apply this technology
to the production of other advanced electronics.
Astute economic planning, aggressive business strategies,
and a well-disciplined and -educated work force are pluses for
Seoul's ambitious industrial strategy. The many underemployed
college graduates and Koreans residing overseas also are an
untapped pool of talent. Seoul will be better able to encourage
the inflow of new technology and to foster domestic as well as
foreign investment because of its ongoing liberalization of
foreign investment technolo transfer, imports, and the
financial system.
South Korea--Not Another Japan
Despite the comparisons made between Japanese and South
Korean economic successes, however, South Korea must cope with
hurdles not faced by Japan two decades ago:
-- Small domestic market. A population of only 40 million
and a $2,000 per capita income do not provide a South
Korean domestic market large enough to be a springboard
for many emerging industries, forcing reliance on
foreign markets.
Dependence on foreign inputs. Lacking a mature R & D
infrastructure, South Korea depends upon foreign
technology and capital for even rudimentary development
of new industries.
Protectionism. Forays into technology-intensive exports
will result in head-to-head competition with developed
trading partners. Frictions will inevitably increase in
areas such as intellectual property rights, trade in
services, and strategic trade controls.
Security issues. A relatively heavy defense burden--
nearly 6 percent of GNP--acts as a brake on Korea's
economic growth and channels scarce technical expertise
from commercial endeavors, impeding South Korea's climb
up the technology ladder.
Foreign debt. South Korea must manage a $45.3 billion
debt--over half its GNP. Additional capital inflows
could be at risk if foreign bankers became more
concerned over South Korean political stability.
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South Korea's difficulty in negotiating these obstacles has
been evident in 1985, its worst year for economic performance in
four years.
Real GNP growth tumbled from a spectacular 12.6-percent
annual rate in the first quarter of 1984 to 2.7 percent
in the second quarter of 1985.
-- Negative export growth in the first half of 1985 pulled
growth down, while austere fiscal and monetary policies
stifled domestic demand and investment.
Seoul's foreign debt grew faster than planned, with its
$45.3 billion tally in July exceeding by $200 million
the overall target for 1985.
Seoul's economic technocrats have instituted--albeit
belatedly--a pump-priming package that includes:
Expanding the money supply at about 150 percent more
than the planned rate, increasing business loans, and
paying off the bad debts of the corporate sector.
Boosting government spending by $292 million in a
supplemental budget and proposing a 10.2-percent growth
in 1986 budget outlays.
Aggressively devaluing the-won to bolster export
competitiveness. 25X1
Prospects
These measures signal Seoul's willingness to respond to
economic problems with flexibility, but we see no signs of panic
or hasty policy shifts. Economic planners continue to favor
programs that position South Korea for future growth by
augmenting domestic investment and promoting exports, rather than
"quick fix" solutions. We believe Korea probably will post real
GNP gains of 3.5 to 4 percent this year, and nearly 6 percent in
1986.
On balance, then, we are cautiously optimistic about South
Korea's near-term growth prospects, but future economic
performance is largely outside Seoul's control. Prospects for
the economy in 1986 and beyond could be clouded by slow economic
growth and protectionist barriers in developed countries that
could stifle export growth and damage Korea's international
credit rating; bankers' confidence in South Korea is largely
predicated on a rate of export growth that reduces Seoul's debt
burden.
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Domestic political tensions will also influence the course
of economic progress through the rest of this decade. Recent
student protests and ongoing confrontation between government and
opposition politicians underscore the high potential for
political turbulence and the volatility of the Korean scene. In
our judgment, the economy has not yet suffered from the effects
of perceived or real political instability. Foreign and domestic
businessmen have maintained confidence in Korea's long-term
international competitiveness and ability to manage the economy,
but episodes of political tension over the next year or so could
erode their faith in the economy and prompt a slowdown in capital
and technology inflows that are essential for future growth and
enhanced competitiveness.
Moreover, continued subpar economic performance would likely
fuel rising domestic political tensions, in turn prompting an
erosion of confidence in the South Korean economy by both
domestic and foreign interests. In the longer run, the
uncertainty about an anticipated leadership transition in 1988,
when President Chun Doo Hwan has promised to step down, also
causes some concern. Accumulating political strains or worries
about an aborted succession could prompt foreign lenders and
investors to view Korea as too risky.
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GROW-1-H OF SUU I H KURLA'S UNP'
1980-91
10-7
-6
-6
-10
Legend
J REAL GNP GROWTH
? PROJECTED GNP GROWTH
cgb io"A .00
\c~ N!~"' h06 \c~ 0 4 1 \c
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SOUTH KOREA: SHARE OF GNP FOR DEFENSE SPENDING
1980-85
1980 1981 1982 1983 1984 1985
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OUTLOOK FOR MAJOR SOUTH KOREAN INDUSTRIES
1985 TO 1995
Steel 1985 1986-1988
A turnaround in shipbuilding, coupled with strong growth in automobile
manufacturing, will ensure strong domestic demand for steel...continued
steel export restraints and excess world steelmaking capacity cloud
the export outlook.
Shipbuilding
? ?
Overseas Construction
0
Demand forecast to pickup in late 1980s...Korean yards will
be in good position to secure a big share of new orders.
N'tge advantage eroding fast.. .lack technical expertise for complicated
contracts... may bouncg back if developing countries undertake large
infrastruCttire projects-
Strong growth assured as Korea expands its role as an offshore
production base for primarily US auto firms.. ,state-of-the-art
factories, coupled with wages one-tenth those in the United States,
augur well for competitiveness and profitability.
Lack of technical expertise and a strategy to leap-frog technology
? into 64K, 256K and 1-megabit chips will pose difficult challenges
as the industry gears up.
LEGEND ? Poor Performance ratings are based on CIA projections of industry growth prospects, international
competitiveness, and profitability. Greatest weight given to growth and competitive factors.
Fair
Good
? Excellent
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 Computers
Heavy Machinery
Textiles and Apparel
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?
Capable of indigenous production of all but most sophisticated
components...high value added and wages in electronics industry
among lowest in Korea... dependent on US-Japanese-European
technology.
Near lowest wages for all manufacturing... highly skilled,
disciplined work force well suited to detail work ...large,
recent investment in modern plants.
Sinking along with overseas construction.,.poor export outlook.
Growing in sophistication,, .Japan moving into higher end of machine
tools and robotics... leaves possible niche for Korea.
? Intense price competition from Asian LDCs"wall erode Korea's
advantage in long run.. .recent investment will benefit producers
in the medium term... protectionist moves could cripple industry
..successful move up market will forestall decline.
? .
Intense price competition from Asian LDCs will erode Korea's
advantage in long run...protectionist moves could hasten decline.
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SUBJECT: South Korea: Prospects for Growth
Distribution:
Original - Author
1 - Harriet Isom, State/EAP/Korea
1 - Rear Admiral James Cossey, DOD/ISA
1 - NIO/EA (7E-62)
1 - NIO Economics
1 - C/PPS/DO (D-O1)
1 - C/EAD (5E-18)
1 - OGI/IIC/PI
1 - OEA/NEA/Korea Branch
1 - OEA/NEA/Japan Branch
1 - OEA/NEA/STI Branch
1 - OEA/NEA Division
1 - OEA/China Division
1 - OEA/SEA Division
1 - D/OEA (4F-18)
1 - C/Research/OEA
1 - FBIS Analysis Group
1-DDI
1 - Senior Review Panel.
1 - PDB Staff (7F-30)
5 - CPAS/IMC/CG (7G-07)
1 - CPAS/ILS (7G-50)
1 - C/PES (7F-24)
1 - NIC/AG (7E-47)
1 - DDO/EA Division (5D-00)
1 - DDO/EAfl (5C-19)
OEA/NA/KOREA/ I (19 November 1985)
25X1
25X1
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