Koreas Experience on Linking Planning and Budgeting During

Korea’s Experience on Linking Planning and Budgeting During the Development Era and Recent Reform May 23, 2005 Byung-Seo Yoo Ministry of Planning and Budget Republic of Korea

Table of Contents Ⅰ. Korea’s Economic Miracle Ⅱ. Linking Planning and Budgeting Ⅲ. Public Expenditure in Development Era Ⅳ. Future Challenges 2

Ⅰ. Korea’s Economic Miracle q GDP/capita • US$79(1960) US$14, 162(2004) q Average Nominal Growth Rate v 1960 -2004 : 20% • 1960’s : 26% • 1970’s : 31% financial crisis • 1980’s : 17% • 1990’s : 13% 3

q Korea’s Economy Scale(1960 -2004) • • GDP : US$ 2 billion to US$ 680 billion GDP per capita : US$79 to US$14, 162 The World 11 th largest Economy 29 th OECD member since 1996 q Top 5 Exports (industrial Structure) • • 1960’s : Iron, Tungsten, Silk, Anthracite, Cuttlefish 1970’s : Textiles, Plywood, Wigs, Iron, Electronics 1980’-90’s : Electronics, Iron & Steel, Footwear, Ships, Textiles 2000’s : Semiconductor, Motor Cars, Computers, Ships, Petroleum Products 4

q Economic Development Process • 1960 s : Launch of Economic Development Plans & Industrialization • 1970 s : Promotion of Heavy and Chemical Industries • 1980 s : Strengthening of Economic Stabilization Efforts • 1990 s-Now : Transition into Knowledge Based Economy (1997 : Financial Crisis) 5

Ⅱ. Linking Planning and Budgeting for this Miracle q Linking System • Economic Planning Board (EPB), 1961 -1994: - planning and budgeting functions reside under one roof • Strong political support and leadership - monthly President’s visit to EPB - minister of EPB holds position of Deputy Prime Minister (influence over line ministries for coordination) 6

q Planning and Budgeting • Fiscal policies were implicitly linked to economic plans. - Plans had a medium-term (5 years) perspective. - Five-Year Economic Development Plan launched in 1962. (until 1996) • In retrospect, MTEF exercise without calling it MTEF (Medium-Term Expenditure Framework) 7

• Given limited resources, concentration was essential. • Budgeting concentrated on economic affairs according to med-term economic development plans. - Supplied infrastructure for economic development - Initiated structural changes by investing R&D - developed human resources 8

Ⅲ. Public Expenditure in Development Era Economic Affair Social Welfare & Quality of Life 9

q Composition of expenditure (by function) 2004 • Expenditure in economic development and education is very high compared with other countries. 10

q SOC investment • SOC stock has increased by 4 -15 times compared to the past. 1962(A) 1980(B) 2003(C) Ratio 27, 169 46, 951 97, 252 3. 6(C/A) - Airport (flight #) 140 1, 006 2, 149 15. 4(C/A) - harbor (million ton) - 82 487 5. 9(C/B) - subway (km) - 41 412 10. 0(C/B) - Road (km) 11

q Aggressive Investment in R&D and Education • R&D : 2. 9% of GDP, 4. 8% of central government budget < R&D investment ratio to GDP (IMD, 2003, %) > Korea USA Japan France UK 2. 92 2. 80 2. 98 2. 20 1. 85 • Education has been a stepping stone for Korea’s miracle < Education Expenditure ratio to the Integrated Public Finance (%) > USA(01) UK(99) Japan(recent) Korea(03) 1. 9 3. 7 6. 0 15. 1 12

Ⅳ. Future challenges q Changes in policy environment • Spending pressure will accelerate - health and welfare costs due to an aging population. - costs due to maturing social safety net. - uncertain cost of cooperation with North Korea. • Diversified demand political pressure. Complicated policy demands. 13

q Korea’s recent reforms (since 2004) • Clearly implement medium-term plans. • Improve budget formulation procedure with a top-down approach. • Strengthen performance management. • Improve transparency by simplifying budget structure. 14

Thank you “A budget is much more than a collection of numbers. A budget is a reflection of a nation’s priorities, its needs, and its promise. ” 15