Republic ofKorea WT/TPR/S/19
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I. ECONOMIC GROWTH AND STRUCTURAL CHANGE
1. Rapid structural change hascontinued sinceKorea 'sinitial Trade Policy Review in1992. Core
manufacturing industries (motor vehicles, electronics, steelandshipbuilding) haveexpanded rapidly
andmodern services havesectors started toemerge, contrasting withstagnation orevendecline in
lightindustries andagriculture (Table I.1). Despite recent growth, however, Korea 'sservices sector
hasremained rather small and,according totheOECD, underdeveloped.1Significant impetus may
result from ongoing financial sector reforms, including interest ratederegulation andliberalization
ofcapital transfers, aswellasthereorganization ofthetaxsystem.2
Table I.1
Production structure, 1990-95
(Percentage ofGDP)a
1990 1992 1994 1995
Agriculture, forestry andfishing 8.7 7.4 7.0 6.6
Mining, quarrying andmanufacturing 29.7 28.1 27.2 27.2
Manufacturing 29.2 27.8 26.8 26.9
Heavy andchemical industry 19.2 19.3 19.5 20.5
Light industry 10.0 8.5 7.3 6.4
Electricity, gasandwater 2.2 2.2 2.3 2.2
Construction 11.5 13.7 13.5 14.1
Commercial services 38.2 38.2 39.4 39.4
Government services andprivate non-profit services 9.7 10.4 10.5 10.5
a Atcurrent prices.
Source: Government ofKorea.
(1) Domestic Economic Environment
2. Following amilddownturn in1992-93, theKorean economy hasexpanded strongly withreal
GDPgrowth exceeding 8.5percentinboth1994and1995(Table I.1).Percapita income nowexceeds
US$10,000.Whileindustrialproductionincreasedattwo-digitrates,inflationarypressureshaveremained
under control; consumer prices increased by6.2percentin1994 and4.5percentin1995.
Construction-related investment wassluggish in1994, butrecovered in1995 buoyed bypublic
infrastructural expenditures.
3. Labourshortages,especiallyinmanufacturingandconstruction,haveemergedasanincreasingly
serious constraint tofurther expansion. Seasonally adjusted unemployment fellfrom2.8percentin
1993to2.2percentinthefirstquarter of1996. This, inturn,hasencouraged additional wage claims.
Nominalwagesinmanufacturingincreasedbyover15percentin1994,followedbyafurther11percent
risein1995. In1996, wage increases moderated, reflecting sluggish growth inlightindustries and
therecruitment ofnew(lower-paid) labour.
1OECD (1996), p.11.
2Taxreorganization includes theintroduction ofaglobal income taxsystem in1996, under which income
from interest anddividends issubject toprogressive taxation. "Real name" systems forfinancial andrealestate
transactions hadalready beenintroduced in1993 and1995, respectively, toeliminate thepreviously widespread
useofaliases.WT/TPR/S/19
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Table I.2
Economic developments, 1992-96
(Annual percentage change)
1992 1993 1994 1995 1996a
GDP 5.1 5.8 8.6 9.3 7.5
GNP 5.0 5.6 8.0 8.7 7.7
Private consumption 6.6 5.7 7.4 7.9 6.6
(Durables) (4.8) (7.4) (12.3) (10.7) (...)
Industrial production 5.8 4.4 11.1 11.9 ...
Manufacturing 5.9 4.2 11.0 12.1 ...
Heavy industryb9.2 8.4 13.9 15.8 ...
Light industryc-0.9 -5.6 3.1 0.9 ...
Gross fixed capital formation -0.8 5.2 11.8 12.4 7.8
Equipment -1.1 -0.1 23.6 15.9 ...
Machinery -4.4 -1.1 23.3 30.6 ...
(Orders received) (-5.2) (15.7) (26.9) (15.8) (...)
Construction -0.6 8.9 4.5 9.9 ...
(Domestic orders received) (9.0) (19.3) (18.5) (21.2) (...)
Employment
Employment growth 1.9 1.5 3.0 2.7 ...
Unemployment rate(percent) 2.4 2.8 2.4 2.0 ...
Wage rates
Manufacturing 15.7 10.9 15.5 9.9 ...
Allindustries 15.2 12.2 12.7 11.2 ...
Productivity (realGDP/employment) 10.7 8.0 10.5 11.7 ...
Realearnings 8.4 7.0 6.1 6.4 ...
Money supply ...
M1 32.3 22.1 11.9 11.6 ...
M2 18.4 18.6 15.6 15.5 ...
Interest rates(percent)
Callmarket rate 14.3 12.0 12.3 12.4 ...
Corporate bonds 16.2 12.6 12.9 13.8 ...
Inflation rates
Consumer prices (CPI) 6.2 4.8 6.2 4.5 4.0
Producer prices (PPI) 2.2 1.5 2.7 4.7 3.0
... Notavailable.
a Forecast.
b Includes textiles, apparel andfootwear.
c Includes chemicals, electronic components, electrical machinery andequipment, automobiles, steelproducts, ships andvessels.
Source: OECD; Government ofKorea.
4. CapitalisscarceandexpensiveinKorea,despitebudgetaryprudenceandstrongprivatesavings.3
Capital intensification hasthusproved anelusive strategy formostenterprises, inparticular small and
medium-sized enterprises (SMEs), relying exclusively ondomestic funding. Thecountry 'shighreal
interest ratesnotonlyreflect itsindustrial momentum, butarebuoyed byavariety ofrestrictions on
3Korea 'saverage household savings ratiooverthepastdecade, some 16percent, iscomparable toJapan 's
andfarhigher thantheOECD average (OECD, 1996).Republic ofKorea WT/TPR/S/19
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capital inflows. While therecent introduction ofemployment insurance, together withapension system
inthefarmandfisheries sectors, mayhelptomobilize additional funds, there remain uncertainties.4
5. Theauthorities arecommitted inprinciple tobudgetary balance andprudent monetary
management. Duetogreater thanexpected revenue growth, Korea 'sconsolidated government budget
hadasurplus ofW1.4trillion (US$1.72 billion), equivalent tosome 0.5percentofGDP.5For1995,
thesurplus declined to0.4percentofGDP, reflecting acontinued significant increase inconsolidated
expenditures (18.6 percent) andslightly weaker revenue growth. Nominal interest ratesfellfrom
apeakofover15percentinthefirstquarter of1995 tolessthan12percentinthefourth quarter
of1995. Thedecline isattributed bytheauthorities toareduction infunds reserved byenterprises
forequipment investment, animprovement inthecashposition oflarge export firms, andfavourable
expectations concerning future financial market conditions. Overall, itisfeltthattheprocess ofinterest
ratederegulation hasincreased relatively andnarrowed thedifferential between money market rates
andlending anddeposit rates.
6. Inorder toeaseinfrastructural bottlenecks, especially intheroadsystem, Korea hasexpanded
itssocial overhead capital (SOC) programme.6Total infrastructural investment between 1993and1997
isprojected tobeUS$90 billion.7According totheauthorities, most oftherequired financing will
becovered bypublic sources suchasexcise taxes ongasoline anddiesel (forautomobiles); borrowing
from pensions, savings andother public funds; andproceeds from privatization. Partly inviewof
financial constraints, butprimarily forefficiency reasons, private operators havebeendirectly involved
incertain infrastructure projects viaanumber ofbuild-operate-transfer (BOT) schemes.8Apart from
infrastructure investment, thegovernment budget forFY1996places particular emphasis oneducation,
research anddevelopment.9
4TheOECD partly attributes thegradual decline ofthepersonal savings ratio since 1988 tothephasing-in
ofaNational Pension Plan(OECD, 1996, p.28).
5OECD (1966), p.84.Korea 'sconsolidated budget iscomposed ofthecentral government budget andthe
budgetfornon-financialprivateenterprises.Thecentralgovernmentbudgetincludesthegeneralaccount,19special
accounts (including foragricultural structural adjustment) and35government management funds (including the
Agricultural Land Management Fund andtheGrain Bond Disposal Fund). Thebudget fornon-financial private
enterprises includes fourenterprise special accounts (forgrain management, thenational railroad, communication
services andgovernment supply). Except forthegovernment management funds, allelements oftheconsolidated
budget aresubmitted totheNational Assembly forapproval. In1995, spending under special accounts amounted
toW40,415 billion, ofwhich W11,050 billion hadanagricultural background; W35,111 billion were spent
bygovernment management funds.
6Otherinfrastructuralprioritiesincludeharbourdevelopment,airportconstructionandcreationofahigh-speed
railway network (Economic Bulletin, January 1996, pp.15-16).
7OECD (1996), p.88.
8Authority forBOT schemes isgiven under thePrivate Capital Inducement Actof1994. Tohelpensure
profitability, theGovernment isproviding taxandother financial incentives toinvestors under theBOTschemes.
Theincentives mayinclude theright tooperate aprofitable "subsidiary business" inaddition totheprimary
undertaking.
9Economic Bulletin, December 1995, p.17.WT/TPR/S/19
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(2) External Economic Links
(i) Balance ofpayments andexchange ratedevelopments
7. Trade isthedriving force oftheKorean economy, withimports andexports normally reaching
two-digit growth rates(Table I.3). However, contrary tosome popular perceptions, strong industrial
expansion andinternational competitiveness donotnecessarily translate intoexternal surpluses. While
Korea 'sdomestic capital shortage hasgiven risetopersistent current account deficits, given the
underlying strength oftheeconomy, these arenotaserious economic policy concern.10
8. Asnoted inthe1992TPRreport, Korea 'smainexports contain ahighproportion ofimported
inputs, consumed directly orindirectly (intheformofimported equipment) intheproduction process.
Buoyant exports of"heavy" industrial products, asin1994 and1995, thustendtobeassociated with
increases inthebilateral deficit withJapan. TheImport Diversification andCapital Goods Localization
Programmes wereinitiated inthe1980'sinanattempt toreduce these deficits. However, theyseem
tohaveleftlittletrace inoverall trade flows.11
9. Despite rapid Yenappreciation untilmid-1995, followed sincebyapartial reversal, theWon's
realeffectiveexchangerate(REER)hasremainedrelativelystable.Theauthoritiesseetherisk,however,
thataprolonged weakness oftheYen,together withWonappreciation inthewake ofcapital account
liberalization, mayrestrict exports.12While endorsing thisview, theOECD Secretariat alsoindicates
amoderating impact ofcurrency appreciation onwages and,thus,inflation andtherealexchange rate.13
RecentmovementsoftheWonagainstthecurrenciesofmajortradingpartnersarepresentedinChartI.1.
10. Thebasic Won/dollar exchange rateisdetermined under aso-called market average (MAR)
system. Thesystem limits dailychanges toabandaround theweighted average interbank rateonthe
previous day.Since 1992, thepermissible leveloffluctuation hasbeenwidened instages tothecurrent
level of2.25percent; ithasnotbeenfully usedsince itsintroduction inDecember 1995. The
Government plans tofurther widen theband, eventually moving towards afreely floating system in
thecontext ofcurrent foreign exchange market reforms (Annex I.1).
10Forthefirstfourmonths of1996, thecurrent account deficit rosetoUS$6.5 billion from US$4.2 billion
duringthesameperiodoneyearbefore.Thiswasattributedprimarilytoweakeningexportpricesofsemiconductors
andchemical products.
11Theshare ofimports from Japan intotalimports hasnotchanged significantly between theearly 1980s
andmid-1990s, norhasthemagnitude ofthebilateral trade deficit. Although there areconsiderable annual
variations, Japan continues tosupply about onequarter ofKorea 'stotalmerchandise imports andKorea 'sdeficit
withJapan amounts toslightly lessthanonethird oftotalbilateral trade. Atemporary decline ofthelaterratio
towards thelate1980s, toslightly lessthan15percent, maybeattributed predominantly tothestructural factors
indicated above.
12Economic Bulletin, June1996, p.35.Onthecapital account, Korea 'sforeign exchange holdings rose
toUS$35.9 billion atend-April 1996, increasing byUS$2.5 billion inApril alone asaresult ofcapital inflows
inconnection withanincreased equity ceiling forforeign stock holdings (Chapter IV(4)).
13OECD (1996), p.38.Republic ofKorea WT/TPR/S/19
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Table I.3
Foreign trade andbalance ofpayments, 1992-96
1992 1993 1994 1995 1996a
Foreign trade (annual percentage change)
Total exports ofgoods andservices 6.2 7.33 16.8 30.3 14.0
Light industry -1.9 -3.0 6.9 14.0 ...
Heavy industry 11.5 13.2 22.0 37.5 ...
Total imports ofgoods andservices 0.3 2.5 22.1 32.0 10.9
Consumer goods 6.2 2.4 24.6 27.8 ...
Rawmaterials -1.7 4.2 14.8 32.6 ...
Capital goods 1.6 -0.1 32.1 32.5 ...
Unitprice ofexports -1.6 0.4 1.7 5.0 ...
Unitprice ofimports -1.6 -3.8 0.5 8.9 ...
Balance ofpayments (US$ billion)
Current account -4.5 0.4 -4.5 -8.8 -6.5
Merchandise trade balanceb-2.1 1.9 -3.1 -4.7 -1.3
Goods exportsc75.2 80.9 93.7 123.2 140.9
(percentage change) (8.0) (7.7) (15.7) (31.5) (14.3)
Goods importsc77.3 79.1 96.8 128.0 142.2
(percentage change) (1.0) (2.3) (22.3) (32.2) (11.1)
Non-factor services, credits 16.0 18.3 22.6 29.9 ...
(percentage change) (3.2) (14.3) (23.4) (32.3) (...)
Freight, freight insurance 3.1 3.7 5.1 0.4 ...
Other transportationd2.0 2.5 3.1 4.3 ...
Travel 2.7 3.0 3.3 5.2 ...
Other 8.2 9.1 14.1 14.0 ...
Non-factor services, debits 18.6 20.2 24.5 33.5 ...
(percentage change) (8.8) (8.6) (21.3) (36.7) (...)
Freight, freight insurance 1.3 1.4 1.6 2.3 ...
Other transportationd4.8 5.5 6.3 8.4 ...
Travel 3.2 3.5 4.5 6.3 ...
Other 5.6 6.5 8.3 11.1 ...
Investment income balance -1.1 -1.3 -1.7 -2.4 ...
Transfer (net) 0.2 0.5 0.6 -0.6 ...
Capital account 8.3 6.9 9.0 13.4 ...
Direct investment -0.4 -0.5 -1.3 1.9 ...
Outward -1.0 -1.1 -2.1 -3.1 ...
Inward -0.6 0.5 0.8 1.2 ...
Portfolio investment 5.8 11.0 7.3 8.9 ...
Other long-term 1.5 0.9 1.4 3.2 ...
Short-term -1.1 -0.8 -1.4 -1.8 ...
Errors andomissions 1.1 -0.7 -1.7 -1.4 ...
Monetary account -4.9 -6.5 -2.8 -3.0 ...
Total reserves minus gold 17.1 20.2 25.6 32.7 ...
... Notavailable.
a Forecast.
b Customs clearance basis.
c F.o.b.
d Primarily airpassenger services.
Source: OECD; Government ofKorea.WT/TPR/S/19
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(ii) Commodity andcountry patterns oftrade
11. Since 1992, theshiftinmerchandise exports from lighttoheavy industries hascontinued.
Since 1994, theshare ofheavy industrial products hasbeenhigher inexports todeveloped countries
thantodeveloping countries. Overtime,Uruguay Round tariffreductions arelikely tofurther accelerate
exports ofsuchgoods (e.g. electronic products andcomponents, automobiles, petrochemicals and
machinery), while agricultural andlightindustrial products maygainontheimport side.
12. Current exports focus onelectrical andelectronic products (over 20percentin1995), motor
vehicles, textiles, andtelecommunications equipment. While electrical machinery andmotor vehicles
haveincreasedtheirsharessharplysince1990,clothingandfootwearhaveslumped.Electricalmachinery
wasalsothemainmerchandise import in1995, accounting forabout 10percentofthetotal, followed
bynon-electrical machinery andcrude petroleum. Petroleum hasslipped from firstplace in1990
(Chart I.2).14Imports ofproduction equipment andtechnically advanced products, including inthe
electrical, electronic andmachinery segments, arecentred around theUnited States andJapan.15
14Theshare ofimports intended forre-exportation remained steady atabout 30percentbetween 1991 and
1995.
15KIEP (1993b), p.16.Republic ofKorea WT/TPR/S/19
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13. Contrasting withimports, thepattern ofexport destinations haschanged strongly since 1990.
Inparticular, theshare of"other EastAsia" (excluding Japan) hasmore thandoubled toexceed one
thirdin1995 (Chart I.3). Exports toChina alone grew from about 2percenttoover7percentof
thetotal, corresponding toasixfold increase invalue, while exports toJapan fellfrom over19per
centtolessthan14percent. Although declining inimportance, theUnited States hasremained Korea 's
single largest market, taking onequarter ofallmerchandise exports in1995, followed byJapan and
theEuropean Union.
14. Intra-industry trade, asmeasured byconventional indicators, intensified significantly between
1990and1994(themostrecent yearforwhich dataareavailable), following aslight decline between
1985and1990(Chart I.4).16Thiscorroborates more general observations that,witheconomic growth
andindustrial specialization, acountry 'strade links tendtogrow more rapidly within, rather than
between, individual product groups. However, while intra-industry tradeisparticularly intensive with
Asiaasawhole, trade withJapan alone hasremained more inter-industrial innature.
15. Throughoutmostofthe1990s,Koreahasrunasurplusinfreight(andfreightinsurance)services,
counterbalancedbysomewhatlargerdeficitsinairpassengerandothertransportationandtravelservices.
Theoverall trade deficit fornon-factor services declined sharply after1992, from US$1.5 billion to
US$0.6 billion in1993, before climbing toUS$1.1 billion for1995(Table I.3). Thefluctuations are
16Intra-industrytrade(theexchangeofgoodswithinthesameindustry)reflectsthelevelofproductspecialization
andachievement ofscale economies, andistypical ofcapital-intensive andscience-based productions. Alevel
of100percentindicates thatimports within asector equal exports; alevel ofzeroindicates thattrade isentirely
one-way (GATT, 1994, p.16).WT/TPR/S/19
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duemainly tochanges inthedeficit fortravel services; itdoubled from US$0.6 billion in1993 to
US$1.2billion in1994. Bothimports andexports showed double-digit increases in1994 and1995
forallmain services categories.
(iii) Trends inforeign direct investment (FDI)
16. Thelevelofforeign direct investment (FDI) inKorea hastraditionally beenquitelow,reflecting
agenerally reluctant orevenrestrictive policy stance.17However, cross-border investment flows have
picked uprecently (Chart I.5),attributed bytheauthorities toachange inpolicy focus. Outward
investment expanded particularly quickly, bysome 90percentin1994 and37percentin1995.18
Themomentum ofoutflows mirrors efforts toovercome foreign tradebarriers, modify brand identities
andsupply baskets, orescape domestic costpressure.19Total accumulated investment byend-April
1996 reached US$11.7 billion, including US$2.2 billion bysmall andmedium-sized companies, and
involved over5,700 projects. They areconcentrated inmanufacturing, especially since 1994, and
destined mainly fortheUnited States andChina (Tables AI.2andAI.3).20
17. Inward FDI(onanapproval basis) hasgrown atanaccelerating pacesince 1992, rising by
47percentin1995.TotalaccumulatedinvestmentinKoreareachedUS$19.4billionin1995,accounted
forby3,400 firms fromover60countries, butremains farbelow thelevelofmany other nations in
theregion. Thefivelargest sources between 1989 and1995 were Japan, theUnited States, the
Netherlands, Germany andtheUnited Kingdom. Thefocus hasbeenonservices, notably thefinancial,
hotelandtrading sectors, withthelevelofinflows exceeding those formanufacturing forthefirsttime
in1994 (Tables AI.4andAI.5).21
17Theliberalization ofbothinward andoutward foreign direct investment (FDI) isamain element ofthe
Government 'sForeign Exchange Reform Plan (Annex I.1).
18Therateofexpansion appeared tobeslowing, however, bythefirstquarter of1996 asaresult oflessrapid
growth ofthedomestic economy (Economic Bulletin, June 1996, p.6).
19Therelocation ofsome electronics companies totheUnited Kingdom hasreportedly beeninspired bysuch
costconsiderations.
20Korea issaidtobethesixth-largest investor inChina (Economic Bulletin, June 1996, p.5).
21Economic Bulletin, June 1996, p.4.Republic ofKorea WT/TPR/S/19
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(3) Outlook
18. According toapolicy statement bytheMinister ofFinance andEconomy, theprimary economic
goalfor1996 istosuccessfully engineer a"softlanding" oftheeconomy andareturn tosustainable
growth fromtheprevious highlevels.22For1996 asawhole, theeconomy wasforecast togrow by
some 7to7.6percent, withaninflation rate(CPI) of4.5percent. Capital account liberalization
wasexpected toresult incurrency appreciation, thereby slowing export expansion andcontaining
inflation.Thus,despiteagenerallybuoyantworldeconomy,domesticdemandislikelytoplayastronger
rôleintheexpansion process. While theauthorities arecommitted toprudent monetary expansion
in1996, theyareready torespond flexibly tochanges inmaineconomic parameters. Indirect monetary
management through openmarket operations istobecome themain adjustment mechanism.23
22Economic Bulletin, February 1996, p.51.
23Economic Bulletin, March 1996, p.36.WT/TPR/S/19
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Annex I.1
Capital Account andForeign Exchange Liberalization Measures
1. TheGovernment's1993-1997programmeforfinancialsectorreformandcapitalaccountopening
includes general measures tofacilitate foreign direct investment, andeaserestrictions onportfolio
investmentandothercapitaltransactions(ChapterIV(4)).24Asupplementary(andmoredetailed)Foreign
Exchange Reform Planfortheperiod until1999 waspresented inDecember 1994. Itincludes the
revision ofdocumentation requirements, easing ofrestrictions ontheforeign exchange positions of
banks, andphasing outofthemargins fordailyexchange ratefluctuations. Main provisions governing
current account transactions, capital account transactions andtheforeign exchange market arepresented
inAnnex Table I.1.
Annex Table I.1
Foreign exchange reform plan, 1995-99
A.Current Account Transactions
Category Situation through
19941995 1996-97 1998-99
Management of
external paymentsSubject tovalidation Notification for
statistical purposes
(1996)
Documention
exemptionsRemittances to
relatives under $5,000Allcurrent remittances
under $5,000Threshold raised Threshold raised
Overseas travel
expenses
(under 1year)$5,000 plus
$3,000/month$10,000 plus
$10,000/monthThreshold raised Liberalized
Overseas emigration
expenses$250,000 perfour-
person family$500,000 perfour-
person family$1million perfour-
person family (1996)Threshold raised
Overseas donations:
International
institutions$10,000 Liberalized
Other institutions $5,000 $50,000 Ceiling raised Liberalized
Deferred payment
periodImports forre-export:
150daysImports forre-export:
180days
Imports fordomestic
use: 60daysImports fordomestic
use: 90days(SMEs:
120days)Deferred payment
period extendedDeferred payment
period extended
Export advances Restrictions Ceiling raised (SMEs:
liberalized)Ceiling raised Liberalized
Export down-payment Restrictions (80%) Liberalized
Intermediary trade Advance receipt no
allowedAdvance receipt
period: 30daysAdvance receipt
period: extendedAdvamce receipt
period: extended
Annex Table I.1(cont'd)
24The1993-1997 Financial Sector Reform Planisacomponent ofthe1993 "Five-year PlanfortheNew
Economy" (Chapter II).Intheearly 1980s, selective liberalization measures focused oncapital inflows inorder
tofacilitate current account (deficit) financing. InSeptember 1992, anewForeign Exchange Management Act
(FEMA) wasadopted, effectively switching theprevious "positive" system toa"negative" onerequiring explicit
disapproval.Republic ofKorea WT/TPR/S/19
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B.Capital Account Transactions
Category Situation through
19941995 1996-97 1998-99
Overseas direct
investmentSubject toapproval Partially liberalized Liberalized
Stock investment by
non-residents12%peritem 15%peritem 18%peritem(1996),
ceiling raisedCeiling raised
Overseas portfolio
investment byfirms
(byindividuals)W300million
(W100million)W1billion
(W500million)Liberalized (1996)
Liberalized (1996)
Overseas deposit by
firms
(byindividuals)Partially allowed
(notallowed)$1million
($30,000)$3million (1996)
($30,000 (1996))Liberalized (1996-98)
(Liberalized
(1996-98))
Overseas realestate Restricted Restrictions eased Restrictions eased Liberalized
Domestic issuance by
non-residentsNotallowed Issuance ofWon-
denominated bonds by
international financial
institutions allowedWon-denominated
bonds allowedForeign-currency
denominated securities
liberalized
Overseas issuance by
residentsPartially allowed Restrictions eased Ceilings onequity-
linked bonds willbe
abolishedCeilings onsecurities
willbeabolished
Commercial loans Notallowed SMEs, SOC-related
firms forfacilities
importLiberalized forSMEs
andpartially allowed to
allother firms for
facilities importLiberalized forall
firms
Spotfinancing for
overseas useRestrictions applied to
usageLiberalized (negative
system)
C.Foreign exchange market
Category Situation through
19941995 1996-97 1998-99
Exchange ratesystem Plusorminus
1.5percent
(MARS)Plusorminus
2.25percent
(MARS)Review plantotransit
intoafreely floating
ratesystem
Position system Restrictions Ceiling onoverall O/S,
O/B, andspotO/S
raisedFurther raised or
reviewed forabolition
Foreign exchange
concentration systemLiberalized
(registration
requirement for
amounts exceeding
$50,000)Liberalized
(registration
requirement abolished)
External credit
collection requirement$20,000 $30,000 $50,000 Further raised
Internationalization of
Won (useofFree
Won account)Export andimport
transactions upto
$300,000Current transactions up
to$300,000Current transactions
without ceiling (1996)
Source: Government ofKorea.WT/TPR/S/19
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2. TheForeign Exchange Reform Planissubject toannual revision andexamination. Itrelies
onrapidliberalization ofcurrent transactions inthefirststage(1995), withamore"deliberate approach"
insubsequent stages. While theinitial reforms arepresented indetail, latermeasures areoutlined
inmore general terms. Capital outflows (including portfolio capital) arebeing liberalized atafaster
paceandonabroader scale thaninflows. Foreign investors willbepermitted onlylimited access to
theKorean bondmarket, andforeign borrowing byKorean firms willremain tiedtoimports ofcapital
goods.25Theauthorities 'cautious approach isintended toprevent macroeconomic disturbances, in
particular through large-scale capital inflows which might betriggered byKorea 'scomparatively high
interest rates.
3. Inaccordance withtheReform Plan, Korea 'sforeign exchange concentration system wasde
factoabolishedin1994(i.e.residentsarenowallowedtoretainforeignexchangeproceedsfromexports),
andtherequirement toregister foreign exchange holdings above acertain levelwaslifted in1995.26
Portions oftheReform Planwere accelerated inDecember 1995 byoneortwoyears, affecting for
example securities investment, overseas deposits, andtheextension ofcredit tonon-residents.
25External observers feelthattheKorean régime willremain relatively restrictive evenaftertheprogramme
isfullyimplemented in1999. Forexample, restrictions areduetopersist onforeign bond investments andbond
market access bynon-residents (OECD, 1996, p.57).
26Foreign exchange banks, however, continue tofaceceilings onnetforeign asset andliabilities positions,
although theceilings were increased inrecent years.