Trade, Reform and Structural Change in South Korea

Betts, Caroline and Giri, Rahul and Verma, Rubina (2017): Trade, Reform and Structural Change in South Korea. Published in: IMF Economic Review No. forthcoming

Abstract

We develop a two country, three-sector model to quantify the effects of Korean trade policies for structural change from 1963 through 2000. The model features non-homothetic preferences, Armington trade, proportional import tariffs and export subsidies, and is calibrated to match sectoral value added data on Korean production and trade. Korea’s tariff liberalization increased imports and trade, especially agricultural imports, accelerating de-agriculturalization and intensifying industrialization. Korean subsidy liberalization lowered exports and trade, especially industrial exports, attenuating industrialization. Thus, while individually powerful agents for structural change, Korea’s tariff and subsidy reforms offset each other. Subsidy reform dominated quantitatively; lower trade, higher agricultural and lower industrial employment shares, and slower industrialization were observed than in a counterfactual economy with no post-1963 policy reform.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade policy, comparative advantage, industrialization, structural change.
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization ; Manufacturing and Service Industries ; Choice of Technology; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

References

Anderson, J. E. and Wincoop, E. v. (2003), ‘Gravity with Gravitas: A Solution to the Border Puzzle’, American Economic Review 93(1), 170–192.

Backus, D. K., Kehoe, P. J. and Kydland, F. E. (1992), ‘International Real Business Cycles’, Journal of Political Economy 100(4), 745–75.

Backus, D. K., Kehoe, P. J. and Kydland, F. E. (1994), ‘Dynamics pf the Trade Balance and the Terms of Trade:The J-Curve?’, American Economic Review 84(1), 84–103.

Collins, S. M. and Park, W.-A. (1989a), ‘Developing Country Debt and Economic Performance,39 Volume 3: Country Studies - Indonesia, Korea, Philippines, Turkey’, ed. Jeffrey D. Sachs and Susan M. Collins, University of Chicago Press pp. 121–140.

Collins, S. M. and Park, W.-A. (1989b), External Debt and Macroeconomic Performance in South Korea.

Connolly, M. and Yi, K.-M. (2015), ‘How Much of South Korea’s Growth Miracle Can Be Explained by Trade Policy?’, American Economic Journal: Macroeconomics 7(4), 188–221.

Duarte, M. and Restuccia, D. (2010), ‘The Role of the Structural Transformation in Aggregate Productivity’, The Quarterly Journal of Economics 125 (1), 129–173.

Eaton, J. and Kortum, S. S. (2002), ‘Technology, Geography, and Trade’, Econometrica 70(5), 1741–1779.

Giri, R. (2012), ‘Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price’, Journal of International Economics 86(1), 82–100.

Herrendorf, B., Rogerson, R. and Valentinyi, A. (2013), ‘Two Perspectives on Preferences and Structural Transformation’, American Economic Review 103.

Herrendorf, B., Rogerson, R. and Valentinyi, A. (2014), ‘Growth and Structural Transformation’, Handbook of Economic Growth .

Johnson, R. C. and Noguera, G. (2014), ‘A Portrait of Trade in Value Added over Four Decades’, Working Paper .

Kim, N. (1996), Measuring the costs of visible protection in Korea, Peterson Institute for International Economics.

Lee, J.-W. (1995), ‘Government Intervention and Productivity Growth in Korean Manufacturing’, NBER Working Paper Series (5060).

Nam, C. H. (1980), Trade and Industrial Policies, and the Structure of Protection in Korea, Korea Development Institute.

Nam, C. H. (1995), The Role of Trade and Exchange Rate Policy in Koreas Growth, in T. Ito and A. O. Krueger, eds, ‘Growth Theories in Light of the East Asian Experience. NBER East Asian Seminar on Economics, Series 4’, University of Chicago Press.

Ruhl, K. (2008), ‘The International Elasticity Puzzle’, Working Paper .

Simonovska, I. and Waugh, M. E. (2014), ‘The Elasticity of Trade: Estimates and Evidence’,mJournal of International Economics 92(1), 34–50.

Sposi, M. (2014), ‘Evolving Comparative Advantage, Structural Change, and the Composition of Trade’, Working Paper .

Teignier, M. (2014), ‘The Role of Trade in Structural Transformation’, Working Paper .

Uy, T., Yi, K.-M. and Zhang, J. (2013), ‘Structural Change in an Open Economy’, Journal of Monetary Economics 60(6), 667–682.

Verma, R. (2012), ‘Can Total Factor Productivity Explain Value Added Growth in Services?’, Journal of Development Economics 99(1), 163–177.

Waugh, M. (2010), ‘International Trade and Income Differences’, American Economic Review, 100(5), 2093–2124.

Yi, K.-M. (2003), ‘Can Vertical Specialization Explain the Growth of World Trade?’, Journal of Political Economy 111(1), 52–102.

Zimmermann, C. (1997), ‘International Real Business Cycles among Heterogeneous Countries’, European Economic Review 41(1), 349–5.