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Email this citationCIAO DATE: 10/04
Selective Intervention and Growth: The Case of Korea
Marcus Noland
July 2004
Abstract
Few issues in development economics have been as controversial as the importance of industrial policy in Korea's development. This is a topic of growing importance as economists attempt to distill the "lessons" of the Korean experience for other countries (e.g., Noland and Pack 2003). For industrial policies to be successful, the market equilibrium must be suboptimal. Governments must be able to identify these opportunities for welfare-enhancing interventions, formulate and implement the appropriate policies, and prevent political market failures from leading the policies astray. In the case of Korea, most conventional static neoclassical analyses have concluded that these conditions were not met, at least in the most interventionist period, that is, the heavy and chemical industry (HCI) drive of 1973-79.
One can think of the evidence brought to bear as falling into two broad categories. The first of these are studies that document the actual interventions undertaken by the Korean government and assess those interventions according to a variety of static welfare criteria. So, for example, Kim (1990) surveys the fiscal, credit, tax, and trade policies undertaken during this period and concludes that the policy was unsuccessful: It had the predictable result of generating excess capacity in favored sectors while starving nonfavored sectors of resources, as well as contributing to inflation and the accumulation of foreign debt. Moreover, "the government [was] reckless in its selection of launch enterprises and in its almost haphazard provision of generous incentives…[its] direct, unlimited role in industrial promotion placed it in the position of an implicit, de facto risk partner, thus complicating efforts at market-determined adjustment" (p. 44).
Yoo (1990) covers similar terrain, distinguishing between the less selective efforts at export promotion in the 1960s and the more aggressive industrial promotion efforts of the 1970s. Yoo also directly confronts the argument that the HCI policy was a success inasmuch as the industries favored by the HCI policy became major exporters in the 1980s. He addresses this argument by posing two counterfactuals: What would the Korean economy have looked like in the absence of the policy, and how would the Korean trade structure have looked?
Using reasoning similar to Kim's, Yoo concludes that in macroeconomic terms the Korean economy would have been better off without the HCI policy. But what about industrial upgrading? Yoo compares the Korean experience with other, similarly endowed economies (particularly Taiwan) and concludes that on the basis of upgrading or trade performance the HCI policy was not a success. Indeed, given the high rates of return on capital, the opportunity costs of prematurely promoting a sector could have been enormous. In a subsequent paper (Yoo 1993), he argues that political influences dominate efficiency considerations as an explanation of the actual pattern of selective intervention.
