Market Distortions and Trade Patterns of Korea : 1960-85 - KDI 한국개발연구원 - 연구 - 보고서
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KDI 한국개발연구원

KDI 한국개발연구원


Working Paper Market Distortions and Trade Patterns of Korea : 1960-85 1988.09.01


Series No. 8807

Working Paper Market Distortions and Trade Patterns of Korea : 1960-85 #무역구조 및 정책 #무역


  • KDI
We observed during 1966-85 a substantial capital
accumulation in the Korean manufacturing sector. We also
observed that, in the 1970s, the Korean economy maintained
significant distortions in commodity and factor markets in favor
of the capital-intensive manufacturing sectors. Capital
accumulation is expected to raise both the wage rate and the
capital intensity of the production processes of the manufacturing
sectors in general, and at the same time it is expected to
expand the output and the employment of capital-intensive
sectors more rapidly than those of the labor-intensive sectors.
Commodity and capital market distortions in favor of the
capital-intensive sectors should accelerate the speed of capital
deepening and the speed of the expansion of the
capital-intensive manufacturing sectors. The real wage rate
increased by about 10 percent per annum on average during
1966-83 in both labor-intensive and capital-intensive sectors.

And yet, the physical-capital intensity of capital-intensive
sectors increased ar more than twice the rate of the
labor-intensive sectors, Such a difference may partly be
explained by the credit rationing and interest cost differentials in
favor of capital-intensive manufacturing sectors, What we habe
observed in this paper is consistent with the capital
accumulation and the commodity and factor-market distortion in
favor of the capital-intensive sectors.

We laos observed fairly rapid rates of expansion in the
output and exports of some extremely labor-intensive sectors
such as wearing apparel and electronics & telecommunication
equipment. These sectors also showed very low rates of capital
deepening during the period 1966-83. That is, we could observe
increasing disparities in the physical-capital intensities of
manufacturing sectors and of manufactured exports in Korea.
This polarization phenomenon is consistent not only with the
commodity-market distortions but also with the
double-factor-market-distortion model, i.e., relatively low wage
rates paid in the labor-intensive sectors together with a
subsidized credit rationing in favor of the capital-intensive
sectors. We observed that in Korea the higher the capital
intensity of a sector, the higher the sectoral average wage rate
was. Furthermore, we observed a significant positive relation
between the capital intensity of a sector and the rate of effective
protection accorded to the sector.

One may content that the increased polarization of Korea's
export pattern must be, at least partly, explained by the
"protection" of Korea's established export markets of
labor-intensive commodities by the established quota system of
advanced countries that discriminates against the later
comers(such as China) which have even lower wage cost than
Korea. One may also content that the rapid expansion of some
labor-intensive manufactures exports does represent the growing
diversification of Korea's exports into the high-quality,
skill-intensive commodities instead of an increasing polarization
in terms of capital-intensive commodities vs. simple unskilled
labor-intensive commodities.

We could not determine to what extent the higher real wage
rates paid in capital-intensive sectors reflected the return on
human capital(such as higher education and higher on-the -job
skill training). Furthermore, we only examined the factor market
distortions in Korea and did not attempt to examine whether
Korea's factor markets were more or less distorted in
comparison with its major competing countries such as Taiwan.
Perhaps one may argue that Korea's labor market has operated
efficiently on the basis of supply and demand and has not been
any more dualistic than the labor markets of Taiwan. One may,
however, still argue that Korea's capital market has been more
distorted in favor of capital-intensive sectors than that of
Taiwan, and consequently that a more amplified Krueger
mechanism has operated in Korea polarizing its export pattern
more conspicuously than in Taiwan.

Unless one can substantiate the merit of polarized growth
pattern, however, we should expect that the reduction in market
distortions would enhance the allocative efficiency of the Korean
Ⅰ. Introduction
Ⅱ.Commodity Market Distortion in Two-Factor, Multicommodity
Ⅲ. Market Distortion in 2×3 Trade Model
1. Basic Framework
2. Capital Market Distortion with a Perfect Labor Market
3. Dual Labor Markets
4. Capital Market Distortions together with a Dual Labor
Ⅳ. Production and Trade Data for 1960, 1966, 1978 and 1985
1. Factor Coefficients
2. Trade Statistics
3. Sectoral Reclassification of the Effective Rates of
4. Induced Imports
Ⅴ. Capital Accumulation and the Changes in Patterns of
Production and Trade
1. Factor Intensities of Production and Trade in 1985
2. Shifting Factor Intensities
3. Import Dependency of Korean Economy
4. Discrepancies between Estimated and Census Data
Ⅵ. Commodity Market Distortions and Uneven Sectoral Growth
1. Uneven Expansion in the Sectoral Share of Exports and
2. Uneven Effective Rates of Protection
3. Different Sets of ERP Estimation Data
Ⅶ. Factor Market Distortions and Trade Pattern
1. Credit Rationing and Capital Market Distortions
2. Labor Market Distortions
3. Increasing Disparities in Capital Intensities of Production
and Exports : Polarization
Ⅷ. Concluding Remarks
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