By 1979, the government realized the dangers posed by these
structural imbalances. Accordingly, it initiated a comprehensive stabilization
program designed to control excess liquidity, realign credit priorities, eliminate
price distortions, and promote competition. However, external and internal circumstances
such as the second oil shock and the assassination of President Park Chung-hee
in 1979 pushed the Korean economy into turmoil. Korea's economic performance
in 1980 was the worst in more than 20 years as the economy contracted by 5.2%,
with the wholesale price soaring more than 38%, and the current account deficit
reaching US$5.3 billion.
To address the excess liquidity problem, the government forced firms suffering
from excess capacity, namely those involved in power-generation equipment industry
and automobile industry, to merge. The power-generation equipment manufacturing
industry was consolidated into the Korea Heavy Industrial Company in August
1980, the automobile industry was also ordered to specialize its production
of vehicles to attain economies of scale in production. Later that year, firms
producing diesel engines, heavy electrical equipment, electronic exchangers,
and copper smelting were also ordered to specialize according to particular
product lines, or to merge with others.
Between 1984-1987, further rationalization of industries took place in shipping
and overseas construction. The rationalization program entailed reducing the
number of firms through mergers, calling off deficit-ridden overseas construction
projects, and lowering tax and financial burdens in the process.
While these measures did, to some degree, reduce excess capacity in HCI, the
concentration of economic power increased, since many of the troubled firms
were taken over by the growing Korean conglomerates or chaebol. Moreover, the
restrictions on market entry and investment further deepened a monopolistic
hold on the markets for HCI products.
Such large-scale restructuring of industrial firms required continuous government
intervention in the credit markets. Due to the world recession following the
second oil shock, many debt-ridden firms became financially insolvent. The government's
concern over unemployment and financial instability led it to bail out these
firms for the sake of social stability. At the same time, the government attempted
to reduce the scope of intervention in the allocation of financial resources.
From 1981 to 1983, commercial banks underwent privatization. The interest rate
gap between policy loans and ordinary bank loans was almost completely eliminated
in 1982.
Furthermore, entry barriers into the financial industry were lowered and financial
services provided by different intermediaries were diversified and streamlined.
The government restrictions on foreign direct investment (FDI) were relaxed
substantially in recognition of the FDI's role in promoting competition and
transferring advanced foreign technologies. The revision of the Foreign Capital
Inducement Act in 1984 precipitated a shift to a negative system, abolishing
restrictions on the foreign ownership ratio and the repatriation of capital.
Real GNP growth from 1982 to 1988 averaged 10.5% annually, and inflation in both the wholesale and the consumer sectors was well below 5% annually after 1982. The trade surplus began in 1986 and the amount of current account surplus reached $14.2 billion in 1988. Throughout the decade, the economy generated about 2.8 million new jobs, and the unemployment rate sank to the unprecedented level of 2.5% in 1988. |