Republic of Korea WT/TPR/S/73
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. Since its previous Review in 1996, Korea has weathered well its worst recession of the
post-war era.  This recession, with the onset of the Asian financial crisis, exposed longstanding
structural weaknesses in the Korean economy.  With the delivery of substantive multilateral financial
support, Korea has undertaken wide-ranging reforms of the financial, corporate, and public sectors,and the labour market.  At the same time it has pursued radical regulatory reform, cutting by half the
number of economic and social regulations.  These reforms are aimed at reducing the Korean
economy's vulnerability to external shocks and paving the way for strong sustainable growth.
1  I n
addition, the Government has, by and large, resisted protectionist pressures, maintaining an
outward-oriented trade and investment strategy;  indeed, it further liberalized its foreign investmentregime in 1998, a move that bolstered the economy during the crisis, as foreign capital inflows
reinforced domestic sectors in difficulty.
2. The Government's successful management of the crisis, particularly its strong commitment to
both domestic structural reform and an open trade and investment regime, has contributed to a
remarkable recovery of the Korean economy, although GDP per capita and unemployment have yet toreturn to their pre-crisis levels.  Concerted, sustained effort to improve the economic environment,
access to export markets in the content of the rules-based multilateral trading system, and the
multilaterally supported replenishment of Korea's international reserves have been major factors in
restoring confidence in the economy.  Efforts are being made to contain budget deficits and restore
fiscal balance in the coming years.  The crisis has led to a considerable current account surplus as a
consequence of the sharp fall in imports, while external liabilities have been progressively reduced.
Foreign trade was temporarily affected by a crisis-related import compression and is still dominatedby certain manufacturing items;  the United States, Japan, and the EU have continued to be Korea's
major trading partners.  Whereas the crisis-indu ced liberalization of Korea's foreign investment
regime contributed to increased capital inflows, Korean overseas investment was curtailed by
domestic corporate restructuring.
(2) R
ECENT ECONOMIC DEVELOPMENTS
(i) Growth, incomes and employment
3. After growing more slowly in 1996 and 1997, owing to sluggish growth in exports and fixed
investment, GDP growth shrank by 6.7% in 1998 (Tab le I.1) as a result of the recession induced by
the financial crisis;  private consumption contracted by 8.2%, investment fell by 21.1%, and while
exports held up well in volume terms, their growth  in nominal (U.S. dollar) terms was sharply lower
reflecting the depreciation of the won.  In 1999 a faster-than-expected recovery allowed for
unexpectedly high growth, helped by largely expa nsionary financial policies;  consumption and
investment were sharply up and there was a surge in the stock market price index.  More moderate
growth of between 6% and 7% is expected in 2000 if expansionary macro policies are no longer
pursued and provided corporate and financial sector problems are resolved;  the strength, speed and
                                                     
1 In the case of recent regulatory reforms, (Box I.2 and Chapter II(5)) for example, whose full effects
have yet to be felt, reforms in five sectors (construction, distribution, electricity, road transportation and
telecommunications) would, according to the Korea Institute for Industrial Economics and Trade (KIET), raiseGDP by 2.1% at first and by 8.6% in the long run (ten years).  Such reforms would also reduce consumer prices;
in addition, they would raise employment in the long run, after contributing to a decline in the short- andmedium-terms (Korea Institute for Industrial Economics and Trade, 1999).WT/TPR/S/73 Trade Policy Review
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sustainability of growth depends on both domestic  confidence in the restructuring programmes
(Box I.1) and the international economic environment.2
Table I.1
Economic developments, 1993-99
1993 1994 1995 1996 1997 1998 1999a
Average annual growth rate (%)
Real GDP 5.5 8.3 8.9 6.8 5.0 -6.7 10.7
Consumption 5.4 7.1 8.2 7.2 3.2 -9.8 8.5
Gross domestic investment 6.3 10.7 11.9 7.3 -2.2 -21.1 4.1
Exports of goods and services 11.3 16.1 24.6 11.2 21.4 13.2 16.3
Imports of goods and services 6.2 21.6 22.4 14.2 3.2 -22.4 28.9
Inflation 4.8 6.2 4.5 4.9 4.5 7.5 0.8
Unemployment rate (%) 2.8 2.4 2.0 2.0 2.6 6.8 6.3
Memorandum:
Population ('000) 44,195.0 44,642.0 45,093.0 45,545.0 45,991.0 46,430.0 46,858.0
GDP/capita (US$ current prices) 7,822.2 9,013.9 10,853.1 11,417.3 10,362.9 6,842.6 8,679.4
Non-financial public sector finances
Overall balance (US$ million) 292.6 2,152.4 2,220.8 134.7 -73.2 -9,449.6 -13,039.6
Overall balance (% of GDP) 0.1 0.5 0.5 0.0 0.0 -2.9 -3.5
Public sector tax burden (% of GDP) 18.1 18.7 19.1 19.7 19.5 18.9 19.6
Public sector current expenditure
(% of GDP)13.6 13.4 13.2 13.6 14.0 14.1 16.8
Annual export volume growth rate
(1995=100)6.7 15.0 23.9 19.8 24.9 16.9 2.7
a Estimates.
Note: Average annual growth is calculated using 1995 constant prices.
Source: National Statistical Office, Monthly statistics of Korea 2000.5, Seoul;  and International Monetary Fund,
International Financial Statistics (various issues).
4. Since 1996, there have been no major changes in the sectoral pattern of Korea's GDP and
employment, which remains dominated by services and manufacturing (Table I.2).  The share of
agriculture, livestock, forestry and fishing in Korea's GDP has declined steadily from 5.8% (1 996) to
5% (1999) while that of manufacturing has increased slightly;  by 1998 the overall share of services
had dropped to its 1994 level although the share of certain subsectors grew.  Following the recession,
employment in agriculture rose temporarily as  a result of a slowdown and restructuring in
manufacturing.
                                                     
2 Ministry of Finance and Economy (1999a), Vol. 21 No. 10;  APEC online information.  Available
at:  http://www.apecsec.org.sg/member/koreec_report.html [15 December 1999];  and OECD (1999a).  InDecember 1999, the IMF Executive Directors noted  that the sustainability of strong growth was not yet assured,and encouraged Korea to maintain the momentum of refo rm and to tackle the remaining structural weaknesses
IMF (1999).Republic of Korea WT/TPR/S/73
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Box I.1 :  Crisis management and restructuring with multilateral adjustment support
The financial crisis that hit Korea in 1997 led to massive capital outflows, a sharp depreciation of the won,
and severe distress in the corporate and financial sectors.  To restore confidence and replenish reserves, inDecember 1997 Korea agreed to a three-year US$21 billion IMF Stand-By Arrangement with a view to
stabilizing the economy and restoring sustainable growth through fundamental restructuring.  Korea has also
benefited from World Bank financial support through a US$3 billion Economic Reconstruction Loan(December 1997), a US$2 billion Structural Adjustme nt Loan (March 1998), a two-tranche US$2 billion
Second Structural Adjustment Loan (October 1998), and a US$48 million Technical AssistanceLoan (August 1998) Structural Adjustment Loan;  in November 1999 the granting of a Corporate and
Financial Sector Restructuring Loan was being discussed with the World Bank.
Policies under these programmes have made Korea a more open, competitive, and market-driven economy,
and have contributed to significant improvements in confidence.  With the support of progressive lowering ofinterest rates and fiscal stimulus these policies have  allowed Korea to successfully meet its macroeconomic
objectives (including an unexpectedly prompt and sharp recovery), and initiate reform of the financial andcorporate sectors in order to promote transparency, efficiency and flexibility.  Its undertakings have also
related to monetary and exchange rate, fiscal policy and privatization (Box I.2) targets.
The financial crisis revealed major weaknesses in the banking sector, including unsound lending practices, a
highly leveraged corporate sector, unhedged foreign borrowing, weak liquidity positions, and an ineffectivesupervisory system.  Efforts have been made to co nsolidate and recapitalize the banking sector while the
integration and coordination of the supervision and prudential regulation of the financial sector have beenfurthered (Chapter IV(5)(iii)).  Despite major progress in structural reforms along market-oriented lines, by
December 1999 the IMF indicated that sustainable growth depended on a large unfinished agenda of financial
sector reforms, including the reduction of the currently high level of government ownership inbanks (Box I.2), reform of the investment trust industry, and the implementation of the regulatory frameworkin the insurance sector.
At the onset of the crisis, the corporate sector (m ainly chaebols (Box IV.1)) was faced with declining
profitability, sharp increases in debt service, and an inability to roll over maturing debt or raise additional
funds from traditional sources.  To facilitate restructuring, in addition to short-term bank relief and the
development of competitive market conditions, important reforms have been undertaken in corporategovernance areas such as auditing procedures, shareh older rights, the boards of (independent) directors,
access to corporate control (e.g. hostile take-overs) and insolvency procedures (Table AI.1).  Restructuringhas been promoted by prohibiting debt guarantees between chaebol affiliates and encouraging companies to
improve their financial structure by reducing debt.  Th e top five corporate conglomerates, chaebols, and their
creditor banks have formulated capital structure improvement plans focused on reducing debt-equity ratiosand the swaping of affiliates between groups under the so-called Big Deals in eight major industries,
including semiconductors, cars, aircraft, and railroad ve hicles;  certain elements of these deals, such as
increased market concentration, government liability, and excess capacity, have raised concerns.Nevertheless, progress in deleveraging and restructuring chaebols has been slow thus requiring the
Government to pursue more vigorous corporate restructuring by:  restructuring/dismantling the Daewoo
group (demonstrating that no company in Korea is "too big to fail");  enforcing capital structure improvementplans for the other top-five chaebols, and applying sanctions for non-compliance;  and restructuring the debtof another 58 chaebols (ranking from 6 to 64).  A debt workout framework has been established incollaboration with the World Bank.  Reportedly, there has been a shift in the behaviour of chaebol ownerstoward greater emphasis on profitability.
In the context of a Second Round of Reforms to be completed in the year 2000, Korea undertook to,
inter alia,  advance further the financial sector and corporate restructuring while achieving an enduring
reduction in unemployment over the medium term and ensuring that the social safety net is adequately
mitigating the hardship of the unemployed.  Emphasis is to be put on:  the reform of the financial marketinfrastructure;  the improvement of financial industry competitiveness and establishment of autonomous and
accountable management;  and the completion of financial restructuring.
Box I.1 (cont'd)WT/TPR/S/73 Trade Policy Review
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Efforts are to be made for the stabilization of the cor porate financial structure, improvement of the regulations
and laws in relation to troubled corporations' exit from the market, and reinforcement of market disciplines.Industrial competitiveness is to be reinforced through technology-oriented innovation, the establishment ofeffective national (R&D) innovation system, and developing the (e-commerce) foundation for globalization.Labour-related reforms are to include the establishment of a new labour-management culture (transparency inmanagement decisions, gain-sharing, stock-ownership by workers), the expansion of a more productive and
comprehensive welfare system, the improvement of living/working conditions of middle- and low-income
earners, and the furthering of flexibility in the labour market (e.g. manpower leasing).
Source :  IMF (1999);  APEC online information.  Available at:  http://www.apecsec.org.sg/member/
koreec_report.html [15 December 1999];  OECD (1999a);  Letter of Intent of the Government of Korea to the
IMF, 24 November 1999 [Online].  Available at:  http://www.imf.org/ external/np/loi/1999/112499.htm[13 March 2000];  The Republic of Korea and the World Bank (1999);  and Ministry of Finance andEconomy (2000).
Table I.2
Structure of the economy, 1993-99(Per cent, in current prices)
1993 1994 1995 1996 1997 1998 1999a
Share of main sectors in GDP (%)
Agriculture, forestry and fishing 6.7 6.5 6.2 5.8 5.4 4.9 5.0
Mining and quarrying 0.5 0.5 0.5 0.4 0.4 0.4 0.4
Manufacturing 28.8 29.0 29.4 28.9 28.9 30.9 31.8
Services 64.0 63.9 64.0 64.9 65.3 63.9 62.8
Electricity, gas and water 2.2 2.2 2.1 2.1 2.1 2.4 2.6
Construction 12.0 11.2 11.3 11.6 11.6 10.1 8.8
Wholesale and retail trade, restaurants and hotels 12.6 12.6 12.5 12.0 11.4 10.3 10.9
Transport, storage and communication 6.6 6.6 6.6 6.6 6.6 7.1 7.0
Finance, insurance, real estate and business 17.1 17.7 18.1 18.6 19.1 19.5 19.7
Community, social and personal 4.4 4.5 4.6 4.8 5.0 5.0 4.9
Government services 7.7 7.6 7.4 7.6 7.6 8.1 7.4
Other 1.4 1.5 1.4 1.6 1.8 1.4 1.5
Share of sectors in total employment (%)
Agriculture, forestry and fishing 14.7 13.7 12.4 11.7 11.3 12.4 11.6
Mining 0.3 0.2 0.1 0.1 0.1 0.1 0.1
Manufacturing 24.2 23.7 23.5 22.5 21.2 19.5 19.8
Services 60.8 62.4 64.0 65.7 67.3 68.0 68.6
Construction 8.7 8.9 9.3 9.5 9.5 7.9 7.3
Wholesale and retail trade, restaurants and hotels 25.1 26.2 26.3 27.1 27.5 27.9 ..
Electricity, transport, storage and finance 8.9 8.9 9.1 9.3 9.5 10.0 ..
Business, personal, public and other 18.1 18.4 19.2 19.8 20.9 22.3 ..
.. Not available.
a Estimates.Note: Share of main sectors in GDP based on current prices.
Source: National Statistical Office, Monthly Statistics of Korea 2000.5,  Seoul.
5. As a consequence of the crisis, which led to the depreciation of the won and a sharp fall in
GDP, and with population growth of about 1% a year, Korea's GDP per capita has dropped by 39.3%Republic of Korea WT/TPR/S/73
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since 1996, to an estimated US$6,842 in 1998 (Table I.1);  by 1999 it had almost recovered to its
1994 level.
6. Since 1996, seasonally adjusted unemployment in Korea has more than tripled (to 8.6% in
February 1999) and persisted as a consequence of the economic recession and restructuring in the
public and private sectors that have had, until recently, a dampening on the hiring of new workers.
However, as a result of the fast recovery as from mid 1999 there has been a progressive decline inmonthly rates and the annual rate is expected to fall to around 4% during the year 2000.
3  In response
to the higher unemployment, as of 1998, the social safety net has been expanded through the
extension of employment insurance system coverage to more than two thirds of employees (i.e. all
enterprises with five or more employees), the establishment of large-scale public works programmes
(employment of unemployed poor) and increased opportunities for vocational training.  Labour
market flexibility has been further enhanced through tripartite (labour, business, government)
agreements on layoffs (legalized), payouts, reductions in overtime compensation and bonuses, thus
facilitating corporate restructuring considerably (Box I.1);  as from 2002, union pluralism at the
enterprise level will be allowed.4  In 1999, additional efforts were made to combat poverty by,
inter alia,  expanding temporarily the "means-tested livelihood protection" programme (covering
medical insurance, subsidies for school fees, limited cash transfers for the poor) to an additional
570,000 persons, and doubling the budget allocation for the social pension programme.  Efforts have
been made to improve the pension and health insurance system by increasing the role of private
management and focusing on improved  protection of poor beneficiaries.
(ii) Prices
7. Following the sharp increase, related to the won's depreciation induced by the crisis in early
1998, prices stabilized due to the partial recovery of the exchange rate (section (iv)), the sharpcontraction in domestic demand, and the decline in international raw material prices.  As a result of
the deflationary effects of recent domestic currency appreciation on import prices, consumer price
inflation stood at 0.8% in 1999, much lower than an initial 3% target;  consumer price inflation is
expected to rise slightly in 2000 as the lagged effect of economic recovery starts to have an impact on
the price level.
5
(iii) Fiscal developments
8. During the period under review, Korea shifted from gradually decreasing fiscal surpluses to
larger deficits;  the latter's shar e of GDP peaked in 1998, largely re flecting a combination of selective
increases in government expenditure in areas relating to loans to small and medium-sized
firms (SMEs), credit problems (due to non-performing loans and bank recapitalization(Chapter IV(5)(iii)(a)), assistance to unemployed (section (i)), and reduced tax revenues despite a rise
in some tax rates.
6  In 1999, as a result of a reoriented fiscal policy aimed at stimulating the real
economy and raising tax revenues (to reduce the budget deficit and support wage earners and the
                                                     
3 APEC online information.  Available at:  http://www.apecsec.org.sg/member/ koreec_report.html
[15 December 1999];  OECD (1999a);  and The Republic of Korea and the World Bank (1999).
4 Despite a high degree of wage flexibility, strict employment security provisions had impeded
downsizing by firms.  Since February  1998, layoffs for managerial reasons (including mergers and acquisitions)
and temporary worker agencies (26 occupations) have been allowed (OECD, 1999a).  Nevertheless, layoffs
were concentrated in SMEs rather than chaebols.
5 APEC online information.  Available at:  http://www.apecsec.org.sg/member/ koreec_report.html
[15 December 1999].
6 OECD (1999a).WT/TPR/S/73 Trade Policy Review
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poor), the fiscal deficit dropped from 3.2% to 2.9% of GDP (or US$12 billion).7  To achieve its
medium-term fiscal objectives, in the year 2000 the rise in spending is to be limited to two or three
percentage points below the estimated growth in nominal GDP;  spending restraints are to affect areas
where efficiency must be increased (i.e. agriculture and defence).  The deficit is estimated to be 2.6%
of GDP in 2000.8  Fiscal balance is expected to be achieved by the year 2003, but if the economy
continues along its path to recovery, the authorities consider that it may be achieved two to three yearsahead of schedule.
9. In addition to providing an overall stimulus to the economy so as to mitigate the adverse
effects of the financial crisis, fiscal policy as of 1999 has been aimed, inter alia,  at encouraging
restructuring, attracting foreign direct investment (Chapter II(8)), supporting regionally balanced
development (Chapter III(4)(ii)), and fostering SMEs, often by means of tax incentives.  Fiscalmeasures to this end have included the introduction of corporate or capital gains tax deferrals
(restructuring-related);  the introduction or expansion of tax breaks/exemptions/credits (for FDI);  tax
reductions (automobiles, capital gains) and increases (cigarettes, alcohol, petroleum products, certain
luxury goods);  elimination of the VAT exemption for professional services;  the establishment of a
withholding tax on interest income;  an increase in personal income deductions and allowances;  theintroduction of a new deduction for credit card purchases;  and expansion in the eligibility for tax-free
savings.
10. For the year 2000, efforts to close loopholes, improve enforcement, and reduce tax evasion as
well as streamlining the tax system are envisaged, with a view to improving public finances (Box I.2).
Priorities of the budget for 2000 covered, inter alia,  investment in future-related activities
(
e.g. information technology, R&D) and infrastructure;  restructuring the financial sector;  achieving
regional balance;  and support in various forms to those in the lower social and economic layers.9  By
early 2000, plans included the simplification of the VAT system for small businesses;  the elimination
of the special excise tax for certain items;  the unification of the withholding rates on capital income,
at 20%;  and the introduction of a more progressive system of inheritance and gift taxation.
11. Over the longer term, in view of the aging of the population (and its impact on the cost of
providing public pensions), and the substantial costs of eventual economic integration withNorth Korea (Chapter IV(2)(ii)(b)), stabilization of government debt remains an important objective.
10
                                                     
7 Ministry of Finance and Economy (1999a), Vol. 21 No. 10;  and APEC online information.  Available
at:  http://www.apecsec.org.sg/member/koreec_report.html [15 December 1999].
8 Ministry of Finance and Economy (1999a), Vol. 21 No. 10.
9 Ministry of Finance and Economy (1999a), Vol. 21 No. 10.
10 OECD (1999a).Republic of Korea WT/TPR/S/73
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Box I.2 :  Public sector aid, regulatory reforms, and privatization
Korea has a long record of consider able state involvement in the economy, so as to implement industrial
policies.  By 1998, hundreds of partly or entirely public- or state-s upported enterprises or institutions
(Chapter III(2)(vi)) with or without monopoly rights in agriculture, livestock, steel, electricity,
telecommunication, gas, waterworks and sewerage, road construction, land development, railways, tourism,
port facilities and banking , provided at least 214,000 jobs and contributed to around 8%-9% of the GNP.  As
a result of crisis-related rescue operations, state involvement in the financial sector has expanded(Chapter IV(5)(iii));  by June 1999, state ownership ranged from 20% to 95% in more than half of domesticbanks.
In response to domestic opposition, a privatization programme in public utilities such as gas, electricity and
telecommunications was announced as an important element in the restructuring process in July 1998;18 firms, which in March 1998 accounted for about 75% of employment in public enterprises(Chapter III(2)(vi)) and about 75% of sales, are contained in the programme.  By the end of 1999, the sale ofall or part of state-owned stakes in 13 enterprises or subsidiaries (e.g. Namhae Chemical Corp., NationalTextbook Company, Pohang Iron & Steel Corp., Korea Technology Banking Corp., Korea Ginseng and
Tobacco Co., and Korea Gas Corp.) through the issues of depositary receipts or domestic public offerings
brought proceeds of over W 9.3 trillion (US$8.2 billion);  pending privatizations under the 1998 programme
involve Korea Heavy Industries (Hanjung), Korea Tele com, Korea Gas, Daehan Oil Pipeline, and Korea
District Heating.  Nevertheless, delayed or minimal-coverage privatization deprive Korea from revenue thatwould help in the fiscal consolidation process;  according to the authorities, these delays reflect, inter alia,
reluctance to privatize at a time when the stock market situation is unfavourable.  Furthermore, by 2000 the
downsizing of state-owned enterprises is expected to cut the number of their employees by 25%
(41,000 employees).
Public sector reform has been advanced by improving the efficiency and responsiveness of state-owned
enterprises to market signals as well as the reduction in number (from 22 to 17 ministries in 1998) and theprogressive downsizing of government bodies from about 162,000 (1997) to 127,000 employees by the endof 2001.  By January 1999, the regulatory framework had been reformed through amendments to the
Basic Law on Management of State-Capitalized Enterprises,  to enhance their autonomy and accountability;
amendments to the Law Regarding the Management Structure Enhancement and Privatization of Public
Enterprises (Special Privatization Law),  to facilitate the privatization of key enterprises;  amendments to the
Private Investment Act for Expansion of Social Overhead Capital,  to improve the environment for private
sector involvement in greenfield infrastructure projects;  the launching of studies or presentation of papers
on structural and regulatory reforms to facilitate the privatization of key infrastructure or utilities
enterprises.  Between 1997 and 1999, 5,430 of the 11,125 economic and social regulations had beenabolished (Chapter II(5)).
In 2000, public sector reforms are to be focused on strengthening cooperation between ministries (and thus
policy coordination), fostering the use of electronic data/communication devices, and improving budgetmanagement institutions.  State-owned entities and their affiliates are to undergo further reforms.
Source :  OECD (1999a);  APEC online information.  Available at:  http://www.apecsec.org.sg/member/
koreec_report.html [15 December 1999];  US Embassy (1999);  WTO document WT/WGTCP/W/91,31 August 1998;  The Republic of Korea and the World Bank (1999);  and Ministry of Finance andEconomy (2000).
(iv) Exchange rate and monetary developments
12. As from 16 December 1997, Korea shifted from a managed to a free floating system allowing
the exchange rate of the won to be determined by supply and demand;  the system is operated by theWT/TPR/S/73 Trade Policy Review
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Ministry of Finance and Economy (MOFE) and the Bank of Korea (BOK).11  In the context of a plan
to liberalize all foreign exchange transactions in two stages, as from April 1999 a new Foreign
Exchange Transaction Act (FETA), inter alia,  streamlined procedures for current account transactions
by corporations and financial institutions, and changed the system regulating capital account
transactions from a Positive List to a Negative List System.  By the beginning of 2001, the remaining
restrictions on foreign exchange transactions are to be eliminated (except for those related to national
security and crime prevention).  The importation and exportation of Korean currency in excess of
W 11 million (US$10,000) is restricted;  export proceeds exceeding US$50,000 must be repatriated
except in specific cases ( e.g. general trading companies (Chapter IV(4)), proceeds from construction
and service businesses abroad).
13. Following considerable depreciation in late 1997 (by 15.4%) and early 1998 (by 32%)12, the
won recovered rapidly and continued to slowly a ppreciate (by 17.6% in 1999, Chart I.1) mainly due to
a robust current account surplus and increased inflows of foreign direct investment (section (v)).
Monetary conditions also helped the won's recovery.  After peaking at 30% at the end of 1997, the
short-term interest rate was kept above 20% through April 1998 in an effort to stabilize the exchange
rate;  with the recovery of the won to 1,400 per US dollar, reducing the short-term interest rate
became the priority of the Bank of Korea (Chapter IV(5)(iii)(a)).13  The recovery of the won occurred
despite a strong US dollar and weaker yen.14  While the net depreciation of the won raised the costs of
imported inputs, it improved Korea's export competitiveness, and is thought by the authorities to have
been a factor in triggering contingency actions against major Korean exports in several
markets (Chapter IV(4)).15  The won has remained significantly below its pre-crisis level.
                                                     
11 Until then it was determined on the basis of interbank rates of the won-US dollar spot transactions of
the previous day;  the exchange rate was allowed to fluctuate within a margin of plus or minus 2.25% against themarket average rate of the previous day (IMF, 1998, p. 491);  and The Bank of Korea online information.Available at:  http://www.bok.or.kr/index_e.html [16 March 2000].
12 Depreciation and appreciation rates reflect changes to the annual average exchange rates of the won
to the US dollar (Bank of Korea [Online].  Available at:  www.bok.or.kr/ [13 March 2000]).
13 OECD (1999a).  In December 1999, the IMF Executive Board noted that the trend toward
strengthening of the won was appropriate but intervention in the foreign exchange market and the accumulationof reserves must observe the principle that the exchange rate should be determined by market forces(IMF, 1999).
14 APEC online information.  Available at:  http://www.apecsec.org.sg/member/koreec_report.html
[15 December 1999].
15 According to multilateral financial observers, depreciation-related competitiveness gains were
hampered by weak world demand, collapse in trade financing, declining export prices and the high importcontent of Korean exports.Republic of Korea WT/TPR/S/73
Page 9
4006008001,0001,2001,4001,600
1994 1995 1996 1997 1998 199960708090100110120Chart I.1                             
Exchange rate developments, 1994-99
W per unit of forei gn currenc y, end period
National Statistical Office (1999), Major Statistics of Korean Economy: 1999.9, Seoul;  National Statistical Office 
(2000), Monthly Statistics of Korea: 2000.5, Seoul ;and International Monetary Fund.Source :100 Yen (left-hand scale)
DM (left-hand scale)US$ (left-hand scale) Nominal effective exchange rate to 
US$ (1995=100)
(right-hand scale)Inflation (1995=100)
(right-hand scale)
1999 nominal effective exchange rate is not available. Note:
(v) Balance of payments
14. In the aftermath of the crisis, Korea's current account balance shifted from a deficit to a
considerable surplus (12.6% of GDP, 1998) largely due to a sharp improvement in the trade account;
a similar trend was recorded in current transfers because of increased remittances by Koreans livingoverseas (Table I.3);  in 1999 a reduced surplus (6.1% of GDP) resulted from  the recovery of the
domestic economy leading to an increase in imports, travel and freight.
16  The current account surplus
is expected to shrink further in 2000.17  However, the recent rise in global oil prices may have an
adverse impact on the trade account.18
15. As a result of the 1998 liberalization measures, and the strengthening of the current and
capital accounts (owing to inflows of portfolio and foreign direct investment) aided by disbursements
from the Asian Development Bank, the IMF and the World Bank (Box I.1), Korea has been able to
promptly rebuild its international reserves that had been heavily depleted by the crisis.  By
February 2000, Korea's reserves had risen to US$79.7 billion, a level equivalent to about eight months
of merchandise imports or more than half of its external liabilities (section (vi));  this build-up
                                                     
16 APEC online information.  Available at:  http://www.apecsec.org.sg/member/ koreec_report.html
[15 December 1999].
17 Ministry of Finance and Economy (1999a), Vol. 21 No. 10.
18 Far Eastern Economic Review , 16 March 2000.WT/TPR/S/73 Trade Policy Review
Page 10
includes proceeds from BOK intervention aimed at smoothing the impact of large capital inflows and
thereby slowing the pace of the won's appreciation.
Table I.3
Balance of payments, 1993-99
(US$ million)
1993 1994 1995 1996 1997 1998 1999
Current account 989.5 -3,866.9 -8,507.7 -23,004.7 -8,166.7 40,558.4 25,000.4
Merchandise trade balance 2,318.5 -2,859.9 -4,444.2 -14,964.7 -3,179.1 41,626.8 28,716.3
Exports 82,089.4 94,964.3 124,632.2 129,968.0 138,619.1 132,121.6 145,494.0
Imports 79,770.9 97824.2 129,076.4 144,932.7 141,798.2 90,494.8 116,778.0
Services balance -2,126.2 -1,800.6 -2,978.8 -6,179.4 -3,200.3 628.3 -1,006.3
Exports 12,949.9 16,805.4 22,827.3 23,412.3 26,301.3 24,579.7 25,582.3
Freight and transportation 5,444.0 7,361.5 9,272.1 8,765.0 11,005.1 10,204.0 11,217.7
Travel 2,964.4 3,339.6 5,150.4 4,879.7 4,731.1 5,933.2 5,656.5
Imports 15,076.1 18,606.0 25,806.1 29,591.7 29,501.6 23,951.4 26,588.6
Freight and transportation 6,258.8 7,114.1 9,645.0 10,229.5 10,310.0 8,982.9 10,058.3
Travel 3,533.3 4,512.5 6,340.7 7,482.3 6,987.5 2,898.2 3,959.2
Income -391.2 -486.8 -1,302.8 -1,814.5 -2,454.3 -5,049.0 -4,660.3
Credit 2,508.8 2,834.8 3,485.6 3,665.4 3,878.4 3,270.5 3,828.3
Debit 2,900.0 3,321.6 4,788.4 5,479.9 6,332.7 8,319.5 8,488.6
Current transfers 1,188.4 1,280.4 218.1 -46.1 667.0 3,352.3 1,950.7
Credit 3,382.1 3,672.3 4,104.0 4,279.0 5,287.9 6,736.6 6,415.7
Debit 2,193.7 2,391.9 3,885.9 4,325.1 4,620.9 3,384.3 4,465.0
Capital and financial account 2,740.7 10,295.1 16,785.6 23,326.8 1,314.4 -3,253.3 577.9
Capital account -475.1 -436.5 -487.6 -597.6 -607.6 171.1 -308.5
Financial account 3,215.8 10,731.6 17,273.2 23,924.4 1,922.0 -3,424.4 886.4
Direct investment -751.9 -1,652.1 -1,776.2 -2,344.7 -1,605.2 616.2 4,754.3
Outflows -1,340.0 -2,461.1 -3,552.0 -4,670.1 -4,449.4 -4,799.4 ..
Inflows 588.1 809.0 1,775.8 2,325.4 2,844.2 5,415.6 ..
Portfolio investment 10,014.4 6,120.1 11,590.7 15,184.6 14,295.3 -1,878.2 8,825.2
Other investment -6,046.7 6,263.6 7,458.7 11,084.5 -10,768.1 -2,162.4 -12,693.1
Changes in reserve assetsa-3,007.7 -4,646.2 -7,044.9 -1,388.6 11,921.7 -30,975.0 -22,966.8
Errors and omissions -722.5 -1,782.0 -1,233.0 1,066.5 -5,069.4 -6,330.1 -2611.5
.. Not available
a Negative value means an increase in reserves.
Source: National Statistical Office, Monthly Statistics of Korea 2000.5,  Seoul .
(vi) External liabilities
16. Following a progressive rise until 1996 (a peak year), the level of total external liabilities has
gradually dropped (Table I.4) although its share to GDP has remained virtually stable (within 30%).
Its structure has also changed as a result of a rise in long-term versus decline in short-term liabilities.
Since 1996, public long-term liabilities have registered a six-fold increase due to structural adjustment
lending.  Short-term financing and resulting liabilities began to recover as from mid 1998 due toimproved credit ratings of Korean firms and increased availability of trade financing (Chapter IV(4)).Republic of Korea WT/TPR/S/73
Page 11
Table I.4
External liabilities structure, 1994-99
(US$ million and per cent)
1994 1995 1996 1997 1998 1999a
Total external liabilities 97,437 127,491 163,489 159,237 148,705 136,446
Short-term external liabilities 53,933 71,894 93,319 63,559 30,697 38,112
Per cent of GDP 15.6 17.9 19.1 12.2 6.4  12.0
Per cent of total external liabilities 55.4 56.4 57.1 39.9 20.6 27.9
Financial institutions 44,641 58,661 73,009 42,367 18,938 ..
Domestic financial institutions  ..  ..  ..  ..  ..
Resident domestic financial institutions  ..  ..  ..  ..  .. ..
Off-shore banking of domestic financial institutions  ..  ..  ..  ..  .. ..
Foreign branches of domestic financial institutions 22,041 25,002 26,401 9,426 3,029 3,369
Branches of foreign banks  ..  ..  ..  ..  .. ..
Domestic corporation 9,292 13,233 20,310 21,192 11,759 15,446
Medium- and long-term external liabilities 43,504 55,597 70,170 95,678 118,008 98,335
Per cent of GDP 12.6 13.8 14.3 18.4 24.8 31.0
Per cent of total external liabilities 44.6 43.6 42.9 60.1 79.4 72.1
Financial institutions 20,444 30,981 43,523 47,536 52,041 38,185
Domestic financial institutions .. .. .. .. .. ..
Resident domestic financial institutions .. .. .. .. .. ..
Off-shore banking of domestic financial institutions .. .. .. .. .. ..
Foreign branches of domestic financial institutions 2,410 3,681 5,300 5,256 7,765 3,977
Branches of foreign banks .. .. .. .. .. ..
Domestic corporation 15,855 17,962 20,540 25,878 29,419 30,661
Public sector 7,205 6,654 6,107 22,264 36,548 29,488
I M F . .. .. .. . . . . .
World Bank .. .. .. .. .. ..
Asian Development Bank .. .. .. .. .. ..
M a r k e t  f i n a n c i n g . .. .. .. . . . . .
O t h e r . .. .. .. . . . . .
.. Not available.
a Estimates.
Source: Data provided by the authorities of the Republic of Korea.
(3) DEVELOPMENTS IN MERCHANDISE TRADE
17. As a result of the increased openness of the Korean economy to international trade, and its
integration into the world economy, the ratio to GDP of Korea's trade (exports plus imports) in goods
and non-factor services increased steadily from 54.9% in 1993 to 84.4% in 1998 before dropping back
to 77.3% in 1999.  This reflected the impact of the crisis on trade and particularly the sharp fall in
GDP in 1998 and its strong recovery in 1999 (Chart I.2).  The outcome was that in 1998, Korea was
the world's seventh largest exporter (counting the EU as one) and tenth largest importer of goods,
despite a sharp fall in imports owing the crisis.19  However, imports and exports rebounded in 1999.
                                                     
19 WTO (1999), Table I.5.WT/TPR/S/73 Trade Policy Review
Page 12
0102030405060708090100
1993 1994 1995 1996 1997 1998 1999
National Statistical Office (1999), Major Statistics of Korean Economy: 1999.9, Seoul;  and National Statistical Office (2000), Monthly Statistics of Korea: 2000.5, Seoul.Chart I.2                                           
Trade in goods and non-factor services, 1993-99
Per cent
Source :(XGS)/GDP
(MGS)/GDP(XGS+MGS)/GDP
(i) Composition of trade
18. Since 1995, Korea's merchandise trade structure has changed slightly.  Mining and fuels,
chemicals, iron and steel, automotive and other transport equipment have increased their share in total
exports (Chart I.3);  in 1998, gold exports increased, inter alia,  as a result of operations of financial
institutions, which collected gold products ( e.g. jewellery, coins), and refined and exported them so as
to obtain foreign exchange.  In the same period, the shares of textiles and clothing, transport
equipment, non-electrical machinery, semi-manufact ures and consumer goods in total imports have
fallen, as a consequence of a slowdown in overal l economic activity, the drawing down of inventories,
and the won depreciation (section (iv)).Republic of Korea WT/TPR/S/73
Page 13
Chart I.3
Product composition of merchandise trade, 1995 and 1998
1995 1998
(a)    Ex ports (f.o.b. )
Total: US$125.1 billion
(b) Imports (c.i.f.)
Total: US$135.1 billion Total: US$93.3 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Chemicals
7.2%
Agriculture
10.9%
Other mining
6.2%
Non-electrical machinery
15.0%Other semi-manufactures
4.3%Other consumer goods 
             6.9%
Iron & steel
4.4%Fuels
14.1%
Chemicals
8.8%Total: US$132.3 billionIron & steel  4.3%Mining & fuels   3.0%Agriculture
3.6%
Other consumer goods
           5.8%Mining  & fuels  5.1%Agriculture
3.0%
Other electrical 
machines
3.8%Non-
electrical 
machinery
5.3%Other 
transport 
equip.  7.5%
Automotive products
8.6%
Agriculture 
10.0%Other consumer goods  
          4.8%
Fuels
19.5%
Mining
26.2%
Iron & steel
3.0%Other 
mining
6.7%
Other semi-
manufactures
3.2%Chemicals
9.9%Iron & steel
5.4%
Manufactures
66.5%Mining
20.3%Other semi-
manufactures
7.0%
Non-electrical 
machinery
5.6%Other 
transport 
equip. 5.8%Textile & 
clothing
13.8%
Automotive 
products
7.3%
Other electrical 
machines
7.2%Office machines & telecommunication 
equipment
26.6%Gold
 1.9% Other consumer goods
                   6.7%
Manufactures
91.5%Manufactures
86.3%Chemicals
7.7%
Other semi-
manuf.  6.1%
Office machines & telecommunication 
equipment
24.1%Textile & 
clothing
12.0%Gold
 5.4%
Other elec. 
machines
3.3%Transport equip. 
5.5%
Non-electrical machinery
8.6%Other electrical 
machines
4.0%
Office 
machines & 
telecom. 
equipment  
12.6%Gold
3.7%
Textile & clothing
3.6%Other
0.3%
Office machines 
& telecom. equip. 
 17.8%Transport equip. 3.2%Textile & clothing  2.9%Other
0.5%Gold
4.8%
Manufactures
58.4%WT/TPR/S/73 Trade Policy Review
Page 14
(ii) Direction of trade
19. Reflecting the disparity in economic conditions between regions, the share of total exports
destined for virtually all Asian markets (except for the Middle East) and the United States fell, while
the share destined for most of Europe (in particular European Free Trade Area countries) increased
considerably (Chart I.4);  in 1998, much of the decline in exports of industrial products toJapan (mainly electronic and metal goods) was being apparently re-directed to the EU and U.S.
markets.  As a result of the crisis, the share of goods supplied by Asia, Africa and Oceania increased.
Between 1995 and 1998 Asia-Pacific Economic Cooperation (APEC)
20 partners' share of trade
(Chapter II(6)(ii)(b)), which is dominated by mach inery and transport equipment, declined faster in
the case of exports (from 71% to 63.9%) than in the case of imports (from 70.9% to 68.1%)(Chart I.5).  During the same period, the Association of Southeast Asian Nations' (ASEAN)
21 share of
total imports rose from 7.5% to 9.7% (largely due to fuels, and machinery and transport equipment),
while that of exports (dominated by machinery and equipment) shrank from 14.3% to 11.5%
(Chart I.6).
                                                     
20 In addition to Korea, APEC's members are:  Australia;  Brunei Darussalam;  Canada;  Chile;
Hong Kong, China;  China (PRC);  Chinese Taipei;  Indonesia;  Japan;  Malaysia;  Mexico;  New Zealand;
Papua New Guinea;  Peru;  the Philippines;  the Russian Federation;  Singapore;  Thailand;  the United States;and Viet Nam.
21 ASEAN membership consists of Brunei Darussalam, Indonesia, Laos, Malaysia, Myanmar,
the Philippines, Singapore, Thailand and Viet Nam.Republic of Korea WT/TPR/S/73
Page 15
Chart I.4
Merchandise trade by main origin and destination, 1995 and 1998
1995 1998
(a)    Ex ports (f.o.b. )
Total: US$125.1 billion
(b) Imports (c.i.f.)
Total: US$135.1 billion Total: US$93.3 billion
Source:   UNSD, Comtrade database (SITC Rev.3).Other East Asia
17.6%
Other Europe
3.3%
Japan
24.1%
Oceania
4.5%
Other East Asia
10.0%Middle East
8.5%
China
5.5%Total: US$132.3 billionMiddle East
3.4%Other Europe
3.8%
Africa 2.4%Other America
7.7%EFTA
4.2%
Africa  3.0%
Other East Asia
15.6%China
9.0%Oceania  2.4%
South Asia
 2.2%
Other Europe
3.8% Other America
4.5%
Middle East
11.9%
Africa  2.4%Japan
17.8%
Other East Asia
12.0%China
6.8%Other Europe
3.8%
East Asia
39.6%Japan
13.6%
China
7.3%United States
19.5%
Oceania 1.5%
South Asia
1.9%Hong Kong, China
8.5%EU15
13.0%Other America
7.1%
East Asia
47.0%East Asia
40.8%Middle East
4.5%
Japan
9.2%
Hong Kong, China
7.0%United States
17.4%EU15
13.8%
United States
22.5%Other America
4.9%
Oceania
5.7%United States
21.7%
Africa  1.7%EU15
13.5%
Other 1.5%
Other  1.8%EU15
11.6%
East Asia
36.6%Other 0.3%WT/TPR/S/73 Trade Policy Review
Page 16
020406080100
1995 1996 1997 1998
020406080100
1995 1996 1997 1998Chart I.5
Korea's trade with APEC countries by sector, 1995-98
(a)  Exports
Exports to APEC countries as share of total exports (per cent)
(b) Imports 
Source :   UNSD, Comtrade database (SITC Rev.3).Imports from APEC countries as share of total imports (per cent)
Agriculture
Iron and steel Machiner y and trans port e quipmentMining Other semi-manufacturesChemicals Textiles & clothing
Other (mainly gold)Misc. manufacturesRepublic of Korea WT/TPR/S/73
Page 17
0246810121416
1995 1996 1997 1998
0246810
1995 1996 1997 1998Chart I.6
Korea's trade with ASEAN by sector, 1995-98
(a)  Exports
Exports to ASEAN as share of total exports (per cent)
(b) Imports 
Source :   UNSD, Comtrade database (SITC Rev.3).Imports from ASEAN as share of total imports (per cent)
Agriculture
Iron & steel Mining Machiner y & trans port e quipmentOther semi-manufactures
Chemicals Textiles & clothingOther Misc. manufactures Other mining
FuelsWT/TPR/S/73 Trade Policy Review
Page 18
(4) TRENDS AND PATTERNS IN FOREIGN INVESTMENT
20. Under the progressive sectoral opening to foreign direct investment (Chapters II(8)
and IV(5)), Korea moved from the eighth (1995) to the fourth largest recipient of FDI inflows in Asia.
By 1999, cumulative FDI inflows (1962-99) stood at US$49 billion, of which US$27.9 billion(57% of total) entered Korea between 1995 and 1999.
22  During the period, FDI inflows expanded
more than eightfold from US$1.9 billion to US$15.5 billion (Chart I.7);  and their share to GDP grew
from 0.4% to 3.8%.  The pattern of the FDI infl ows has changed markedly;  whereas in 1995 they
were concentrated in service activities, by 1999 they had expanded in manufacturing (mainly
electricity equipment, electronics, machinery, chemicals, and petrochemical industries).  Investmenthas originated largely from the EU, the United States, Japan, and Malaysia.  This appraisal of recent
trends in FDI inflows does not take fully into account additional openness and incentives introduced
to the FDI regime as from 1998, nor the restructuring and privatization-related opportunities (Box I.2
and Chapter IV).  As a consequence of the ongoing structural reforms, FDI inflows may well grow
further.
21. Since mid 1998 Korean overseas investment has declined due to tighter divestment operations
(at home and abroad), financing constraints, and the need to reduce debt-equity ratios.  A large part ofthis investment has been used to help affiliates and subsidiaries to meet debt service obligations.
Overseas FDI stock in South East Asia (38% of total, 1998) has gradually declined while that in
Europe (27%) has grown (Chart I.8);  North Ameri ca (24%) remained the third largest destination of
K o r e a n  F D I .   E f f o r t s  h a v e  b e e n  m a d e  t o  m a i n t a in core international operations for longer-term
strategic considerations.  Between 1998 and the first quarter of 1999, 68 overseas investment projectsinvolving US$336 million were liquidated.  However, in 1997 Korea's top five chaebols (Daewoo,
LG Electronics, Sunkyong Group, Hyundai Engineering & Construction Co., Samsung Electronics
Co. Limited, and Dong-Ah Construction Ind. Co. Li mited) ranked among the top 50 transnational
corporations from developing countries.  Overseas direct investment is expected to increase from
2.8% of GDP in 1996 to 7%-10% by 2010 when Korean enterprises form a global business network.
23
                                                     
22 UN (1999), Table III.8 and Annex Table B.1.
23 Korea Institute for International Economic Policy (KIEP) forecasts published in The Korea Herald
[Online], 27 November 1999.  Available at:  http://www.koreaherald.co.kr/ [10 January 2000].Republic of Korea WT/TPR/S/73
Page 19
02,0004,0006,0008,00010,00012,00014,00016,000
1995 1996 1997 1998 1999
02,0004,0006,0008,00010,00012,00014,00016,000
1995 1996 1997 1998 1999Chart I.7
Inflows of foreign direct investment, 1995-99
(a)  By origin
US$ million
(b) By sector
Information provided by the authorities of the Republic of Korea. Source :US$ million
Chemicals
Wholesale & retailElectricity & electronics
Paper, lumber
BankingOther manufacturing
Hotels
Other servicesFood
Other United States EU(15)
OtherOther Asia SingaporeJapan MalaysiaWT/TPR/S/73 Trade Policy Review
Page 20
02004006008001,0001,2001,4001,6001,800
1995 1996 1997 1998 1999
For 1999 it includes all Asia.
National Statistical Office (1999), Korea Statistical Yearbook: 1999.9, Seoul; and the Korean authorities.Chart I.8                                
Stock of Korean overseas investment by destination, 1995-99
US$ million
a
Source :South-East Asiaa
Other North America Euro pe Latin America