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6 May 2014

“ Mongolian Socio-economic Situation and Emerging Issues ” Commemoration International Conference for the 90th Anniversary of Institute of Finance and Economics, Ulaanbaatar Mongolia, 6-7 May, 2014.

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6 May 2014

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  1. “Mongolian Socio-economic Situation and Emerging Issues” Commemoration International Conference for the 90th Anniversary of Institute of Finance and Economics, Ulaanbaatar Mongolia, 6-7 May, 2014 Comparative Study of Economic Development of Korea and Mongolia for the Take Off of Mongolian Economy: focused on economic miracle and Dutch disease 6 May 2014 Shim UiSup Myongji University, Korea DelgersambuuMunkhtsetsegInstitute of Finance and Economics

  2. I. Initial conditions for economic development Korean tragedy of a nation • Demilitarised Zone (DMZ). • South Korea describes the war as a “tragedy of a nation”, but they are “Brothers.” • Koreans dream reunification with the belief of "dream comes true". • The fog of war is still exist, their desire to see a unified Korea is unmistakable. • Korea's development accomplished in hard way Economic conditions of the early 1960s • War-torn & divided with $89 in1961(101st out of 125 countries) • Vicious Cycle of low savings and low growth • Economic take-off with outward-looking development strategy(1960~80)

  3. I. Initial conditions for economic development • Korean society in pre-developmental stage

  4. I. Initial conditions for economic development Why Korea? • Transition very rare • Simultaneous economic and political development • Economists (EPB) • Technocrats (military service) • Shared growth (Labor and capital) • Catch up Japan(colonial experience) • Security(cold war front line with USA)

  5. I. Initial conditions for economic development Turning • Initiating the transition, the Start of Growth in the 1960s • Heavy and Chemical Industry Promotion in the 1970s • Rationalization and Liberalization in the 1980s • Democratization (1987) • Globalization in the 1990s • Financial crisis (1997) and post-crisis reform • Global Economic Crisis 2008 • New Challenges and Opportunities (rise or fall)

  6. I. Initial conditions for economic development Korea as a natural state • 1950s: Rhee regime not very different from most natural states throughout developing world. - Clientelism and personal exchange - Rents based on connections • Economic policy as an instrument of politics and coalitions - Foreign exchange - Import licenses - Grain • Heavy dependence on American aid • Yet unstable

  7. I. Initial conditions for economic development Initiating Korea’s transition, 1961-1979 • Park and military takeover, 1961 • Establishes the developmental state • Transformation of policy from personal to impersonal basis - Move toward economic independence based on export-led growth - Macroeconomic stability - Shared growth • Systematic and simultaneous transformation of polity and economy (doorstep) • New system of coordinated incentives

  8. I. Initial conditions for economic development

  9. II. Development strategy 1. Korea’s economic strategy as a developing country • unbalanced growth dual society, export oriented, Chaebol & SME, urban & rural, SOC investment, labor and business • outward or inward • economic development plan • Korea's outward mind • dispatched worker, Vietnam war, construction worker, sailor etc • proper investment in infrastructure development can lead to long-term growth.

  10. 2. Basic philosophy of the 5-year plan: five principles! • Korean economic development should be achieved through industrialization • Economic development should be achieved under government control and leadership. • Although firms should be owned and managed privately, the government could implement private decisions in the case of major investments (a variant of authoritarian capitalism) • To finance investments, foreign capital inflows should be induced • Growth should have a higher priority than redressing imbalances in income distribution and unevenness in industrial development across geographical regions

  11. 3. Strategic vision of the government for economic development • Poverty was regarded as the seed bed of social conflict & instability • Korean government faced challenging tasks of meeting BHN and maintaining national security

  12. 4. Outward-looking Development Strategy Policy shift from "Import Substitution" to "Export Promotion" in the early 1960s • Export-promotion policy focused on labor-intensive industries in view of abundant and well educated labor force • Strong export promotion led to rapid export growth of 40% per year between 1964-80 • In particular, focus on labor-intensive exports in the 1960s led to large employment opportunities • Unemployment rate continued to decline steadily as employment opportunities outgrew the labor force

  13. 5. Working mechanism of outward-looking development strategy

  14. 6. Korea’s comprehensive and concrete industrial development strategy since 1960s

  15. 7. Incentives for firms • Economic policy making in service of economic growth - Cooperation of business and government. • Exports - Loans, credit, licenses, refund import taxes - Profit opportunities - Tournaments - Impersonality • General trade company, Absence of SBC, 綜合商社, - Several restructurings

  16. 8. Incentives for Bureaucrats • Meritocratic/impersonal vs natural states/personal • But not independent of politics • Rewards for performance – Minister shuffling – Monthly meetings • Relative absence of bureaucratic corruption? – Most natural states, such as India, Mexico • EPB polices budgets • Pensions • Deliberative councils

  17. 10. Citizen Incentives • Repressive regime – Absence of political rights (e.g. association) – No democracy • Yet a range of impersonal benefits – Education – Infrastructure (e.g., rural roads to markets) – Security. • Shared growth – Open access to jobs in an expanding economy and the bureaucracy. – Rising wages (8%/year from 1970-1988) • Contrast with natural state

  18. 11. Government / coalition incentives • To make this system work, government (and coalition leaders) had to have incentives to support system of impersonal exchange. – What prevented reneging, especially in crises (e.g., early modern Europe, Latin America, Africa)? • The security dilemma: threat of communism. – Perceptions in 1950s and 60s – On-going threat from North Korea and China. • Credible commitment: [Differentiates from other natural states] – Reneging would destroy system creating independence and security – Maintain incentives for firms, meritocractic bureaucracy, and citizens.

  19. 12 Changing industrial structure: from agriculture to manufacturing / from light industry to heavy and chemical industry Changes in Export Commodity Profile

  20. III. Economic miracle and its result Korea’s Economy 1. Economic miracle A period of rapid economic growth that exceeds expectations. Economic miracles 2. Positive effects South Korea; transformed from an aid recipient into a donor country within the span of a single generation. National growth rates, East Asia, 1960~2002

  21. III. Economic miracle and its result • Growth trend

  22. III. Economic miracle and its result (2) Economic performance in Korea

  23. III. Economic miracle and its result (3) Macroeconomic and structural patterns of Korea 1963-86

  24. III. Economic miracle and its result (4) Gross domestic product by industrial origin (factor cost, 1970 prices)

  25. III. Economic miracle and its result (5) Export and import trend in Korea

  26. III. Economic miracle and its result (6) Reducing poverty Absolute poverty declined steeply from 48% in 1961 to less than 10% entering 1980s. <Absolute Poverty(%) : 1965-1993 >

  27. III. Economic miracle and its result 3. Swift crisis resolution and economic recovery

  28. III. Economic miracle and its result 4. Negative effects 1) Pitfalls of the Government-led Economic Development

  29. III. Economic miracle and its result 2) Economic Reform and Financial Crisis of 1997 • ★ Isn’ it a miracle?

  30. III. Economic miracle and its result 3) Side effects of economic growth ① Happiness index • According to UN's the world happiness report 2013, • Korea's happiness index rated number 41 in the world. • Received low score in social unification like fairness, social solidarity. ② Suicide rate • It's the Korea that records suicide rate number one position among • the OECD members. • Our nation's suicide rate is 33.3 people per 100 thousand people. • Mental problems, physical problems and economic issues are • main causes of suicide ③ Estimated population • Our nation's birthrate is 1.3 children per woman. • It ranked 225th in the world which is very low level. • (In Korea, it spends 262 million and 44 thousand Won to raise one kid.) • Also, entering an aging society makes rapid progress. • In 2026, it's going to enter super high aged society. • As a result, potential of growth is getting lower because of • decreasing the number of economically active people.

  31. III. Economic miracle and its result ④ Social inequality • Korea has been cited as one of successful countries with relatively low income inequality and rapid growth • It seems that all people are wealthy as the economy develops, • but the most wealth is biased to the super rich. • But the concentration of wealth in several levels of society. • The income gap has further widened. • Bipolarization; present ‘Occupy Wall Street ‘ 1 : 99 past golden rule/Pareto Distribution 78:22≒ 8 : 2 ⑤ The degree of dependence upon foreign trade • Korea's degree of dependence upon foreign trade is very high. • If the degree of dependence upon foreign trade is extremely high, • it's impacted easily to the international economy. • Korea's degree of dependence upon foreign trade is 94.5%, • ranked 36th in the world. • when the world economy crisis occurs, contagion effect blows Korea easily.

  32. III. Economic miracle and its result • ⑥ income differential • Korea is the country which exacerbated income bipolarization. • Working poor, housepoor, land poor, • ⑦ Consequentialism, Mammonism, Lookism, Workholics • Concentrationism, Balibalism, I-can-do-ism • * It appears several side effects by rapid economic development. • * The number of plastic surgery ranked number one in the world. . .

  33. III. Economic miracle and its result • 5. Korea’s DDof overseas construction in the Middle East Effects of overseas construction on national economy Boom period (1978∼82), Before boom(1975∼77) post boom(1983∼86) 1) Positive effects : Balance of payments, national income, employment

  34. III. Economic miracle and its result 2) Negative effects • de-industrialization effect • Price and wage effect 주:(1) 제조업생산지수 대 전년증가율. 기간중 분석은 제조업생산지수의 3개년 이동평균증가율; (2) 수입단가 지수/수출단가 지수, 1980=100; (3)수입 재 물가지수/ 수출 재 물가 지수, 1980=100; (2),(3),(4),(5)의 아래 부분은 기간중 년 평균 증가율임; (6) 해외건설근로자 월급 여 액/국내건설근로자 월 급여액; * 1983∼85년간 평균치임 자료: 심의섭, 한국의 해외건설, 명지대학교 출판부, 2007. 8.20: 158.

  35. III. Economic miracle and its result • Mongolia economy, Bogdkgairkhan economicmiracle 1. Growth of Mongolia: mid-term projection 2011 Mongolia can do, building on reform steps it has already taken, to avoid a “resource trap”. It argues that • cash transfers to the general population should be linked directly to the performance of • the underlying mining assets to create a domestic constituency for good governance in the mining sector; (ii) social spending should be de-linked from resource revenues, better targeted and fully incorporated into the budget; (iii) macroeconomic volatility could be reduced by operationalising the fiscal stabilisation fund, issuing GDP-indexed debt instruments, and through financial sector reforms; and (iv) major infrastructure and industrial development projects should seek private sector co- investments to ensure that public money is well spent.

  36. III. Economic miracle and its result 2. Features of “Dutch disease” . Large real appreciation in the currency, . an increase in spending, . an increase in the price of non-traded goods, relative to traded goods, such as services and real estate . a resulting shift of labor and other resources out of non-export sector . a decrease in the non-mining export industry

  37. III. Economic miracle and its result Part III quoted largely from Ch. Khashchuluun, The Challenge of Dutch Disease, Structural Change, and Economic Diversification National Development and innovation committee Government Agency of Mongolia, 2011.10.21

  38. III. Economic miracle and its result

  39. III. Economic miracle and its result

  40. III. Economic miracle and its result Policies and actions for economic diversification Good practices of mining revenue management and successful economic diversification Success countries - Chile, Finland, Australia, Canada and others Actions for economic diversification - Creating resources revenue funds, - Financing education, - Innovation, R&D, - Industry, Agriculture.

  41. III. Economic miracle and its result International practice: Desired outcomes (developed resource-producing countries as an example) • Transparency, advanced institution development, • High level of human development, • Strong linkages between the resource sector and the rest of the economy, • Property rights are well defined, the rule of law prevails, and the judiciary system is independent, • Policies are usually underpinned by a broad social consensus, long-term perspectives, and prudent economic management

  42. III. Economic miracle and its result Policies and actions for economic diversification Strengths and Weakness of Mongolia Strengths • Proper age structure of the population; • Abundant mineral resources; • Rich historical heritage and traditional; • Unique natural ecosystems and vast lands; • Unique nomadic lifestyle , Weakness • Small population, limited labor forces, particularly shortage of highly • qualified engineers, technical workers, • Low level of scientific and technological development, • Limited and unreliable energy supply, poor development of infrastructure, • Land locked location, • Limited financial resources, • Lower index of business environment and institution

  43. III. Economic miracle and its result Macroeconomic stability . Managing the revenue: Stabilization fund . Controlling inflation and improving productivity . Fight property boom through expansion of housing (particularly affordable housing) . Reduction of government budget deficit, balanced budget policy . Political stability Human development . Training of young professionals: engineers, skilled labor . Reform of education (pre-school, school, vocational training, higher education) . Improving national healthcare system, services and supply of services

  44. III. Economic miracle and its result Policies for diversification. • Heavy and chemical industry: . industry for basic metal and non-ferrous metals, . Industry for coal, chemical and oil • Competitive light industry: . Industry for meat, sea buckthorn, wheat . Industry for wool, cashmere, and leather products, • Tourism, crop, small and medium sized enterprises etc. • Infrastructure to support those industries

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