Foreign Capital and Economic Growth in East Asia: The Case of Korea

초록

The role of foreign capital for Korea's economic growth in the past generally follows that of other East Asian countries. That is, these countries pursued outward looking development strategy, that was based on expanding exports and encouraging foreign capital inflows. This pattern of growth is often described by the "flying geese" hypothesis that explains the spread of industrialization and the "self-circulation" hypothesis that explains a growing interdependence among East Asian economies in both trade and investment above. However, the composition of foreign capital in Korea was different from that in other East Asian countries. That is, whereas FDI used to be the dominant form of foreign capital in many East Asian countries, foreign loan was the most important form of foreign capital in Korea, at least until late 1980s. Then, during the process of capital market liberalization in the 1990s, foreign portfolio investment (FPI) became the dominating form of foreign capital. However, like in some of other Asian economies, Korea encountered a situation of severe shortage of foreign exchanges and had to rely on IMF's standby loans to bail itself out from a near moratorium at the end of 1997. Since then, Korea has begun launching large-scale reform and restructuring measures in a significant way, in the process of which foreign capital, particularly FDI, may work again as an important means for strengthening the structure of Korean economy. The Korean experience thus provides a deep implication for other countries, which share a similar pattern of development in many ways. Again, these other countries have something to learn not only from Korea's success in the past but more importantly from Korean mistakes in recent years.