Trade Policy and South Korea's Growth Miracle
AbstractWhat effects do more open trade policies have on transitional and long run growth rates? This is the central question in trade and growth. Yet, despite numerous empirical studies over the past twenty-five years there are almost no enduring, robust results on the importance of (openness to) trade in causing growth and on the mechanisms through which trade influences growth. Our approach is to engage in a quantitative exercise focused on a single country, South Korea (hereafter, Korea). We build a model of trade and growth; we calibrate and parameterize the model; and then we simulate the modelâ€™s response to Koreaâ€™s trade policy reforms to assess whether they can explain Koreaâ€™s sustained surge in growth that began in the early 1960s. A case study of Korea is interesting for three reasons. First, it is one of just a handful of countries that is considered to be a growth â€œmiracleâ€ country. Second, there is broad agreement that new and different policies and institutions played a crucial role in Koreaâ€™s growth surge. Third, data are relatively accessible. We have collected data on four of the most important trade-oriented policy changes for exporters in Korea during the 1960s: Tariff reductions for imports of intermediate and capital goods, introduction of export subsidies, direct and indirect tax reductions, and introduction of low interest rate loans. Beyond the well known surge in exports (and in investment and GDP per capita), Koreaâ€™s trade experience after these policy changes included a strong expansion of the range and quality of its export goods, a heavy reliance on imported inputs and imported capital in producing its exports, and possible learning-by-doing or learning-by-exporting effects. The policy changes and these three key features of Koreaâ€™s trade experience guide our model. It is a dynamic two-country model (the second country is the rest-of-the-world) with a continuum of goods. Each good is produced in two sequential stages: comparative advantage will determine which stages of which goods Korea specializes in (vertical specialization). Additionally, there are fixed costs of exporting, which decline with cumulated exporting experience. The key channel in our model is the one linking Koreaâ€™s trade policy reforms to increased imported inputs and capital, thereby leading Korea to produce an increased range of export goods. Our model allows for Korea to both specialize, consistent with standard trade theory, and expand the range of goods it produces, consistent with a growing economy. The availability of imported capital and inputs improves growth for Korea. Learning-by-exporting further increases transitional growth rates, thereby enabling Koreaâ€™s per capita income to at least partially catch up to the rest of the world in steady-state.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 744.
Date of creation: 2004
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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trade policy; long run growth; vertical specialization; calibration;
Find related papers by JEL classification:
- F1 - International Economics - - Trade
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
- O5 - Economic Development, Technological Change, and Growth - - Economywide Country Studies
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