Growth, Crisis and the Korean Economy

Dongchul Cho

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780815350699
• eBook ISBN: 9781317501619
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Since the 2008 global financial crisis, policymakers as well as academicians have been seeking to fathom why subsequent recoveries remain tenuous. Other outstanding issues that they have been trying to understand include: why do some economies grow faster than others? How should the exchange rate volatility be understood and what factors make an economy more likely to fall into an exchange rate crisis? What policies need to be taken during tranquil periods, and how should they be changed once the crisis is triggered? As a partial effort to meet such interests, this book provides insights into these issues.

This book examines growth and convergence (Part I), exchange rate volatility and the Asian crisis (Part II), and the global crisis (Part III). In addition, the book also draws lessons from South Korea's experiences - a country which has undergone three different crises and brisk recoveries (Part IV). The book also includes some practical and policy-oriented analysis. This is a truly comprehensive book bringing together varied topics and diversity under one common theme - economic growth and crisis.

Part I
Growth and convergence

1
Industrialization, convergence, and patterns of growth^*

1. Introduction

The long-run behavior of national growth rates has long been of great interest because it sheds light on future income disparities across countries as well as the prospective income of individual countries. Recently, the interest has been further stimulated, for the neoclassical growth model (Cass, 1965; Solow, 1956) and new endogenous growth models (Lucas, 1988; Romer, 1989) yield sharply different predictions: while the neoclassical growth model predicts that countries with similar preferences and technology will converge to similar levels of per capita income, endogenous growth models predict that there will be no such tendency.

In this regard, a substantial body of empirical study has examined whether the regression of the growth rate on the level of income per capita indeed produces a negative coefficient as predicted by the neoclassical model. Evidence is mixed, however. In particular, the regression results are very sensitive to the selection of countries: typically, the results for relatively developed countries (DCs) are consistent with the convergence hypothesis (Baumol, 1986; Dowrick and Nguyen, 1989), but the results for the samples including less developed countries (LDCs) are rather in conflict with the convergence argument (DeLong, 1988; Romer, 1988). The goals of this chapter are: (1) to document a stylized nonlinear (humped) pattern in growth; (2) to demonstrate how an explicit recognition of this pattern helps reconcile the conflicting results on convergence (and the conditional convergence result, below); and (3) to suggest a potential explanation for the humped pattern from a view of industrialization.

Section 2 shows that there exists an economically and statistically significant hump in the growth rate of postwar cross-country data: on average, middle-income countries grew the fastest, high-income countries the next, and low-income countries the slowest. Thus, a negative correlation between growth rates and income per capita is observed when low-income countries are excluded from the sample, but no such correlation is found for a larger class of countries.

To find the factors that can explain the fast growth of middle-income countries, this chapter first considers the most widely used three explanatory variables in growth regressions: the investment-to-GDP ratio, the percentage of age group enrolled in secondary education, and the rate of population growth. Both parametric and nonparametric analyses show that these variables cannot explain the humped pattern: middle-income countries grew far faster than could be explained by these variables. In addition, the failure of the regressions to capture the humped pattern results in the conditional convergence results (Barro, 1991; Mankiw et al., 1992): the regressions tend to under-predict the growth rates for middle-income countries and over-predict for high-income countries, and the resulting positive/negative residuals for middle/high-income countries generate negative correlations between the growth rate and income per capita.

Section 3, therefore, examines another factor of growth – industrialization. It has long been argued that economies can exhibit a spurt in growth during the course of industrialization. Rosenstein-Rodan (1943) notes that industrialization of some leading sectors, which needs a large initial set-up cost, can “big-push” the rest of the economy to industrialize. Rostow (1962) also argues that economies can “take-off” when some social/economic preconditions (e.g. infrastructure such as railroads) are met. These big-push and take-off ideas have been explored both empirically (Chenery et al., 1986; Denison, 1967) and theoretically (Azariadis and Drazen, 1990; Cho, 1993; Murphy et al., August 1989, Oct. 1989).

In spite of rigorous models on industrialization, there remains a fundamental difficulty in assessing the empirical plausibility of the models – how to measure “industrialization”? This section uses the increase in the portion of the labor force employed in manufacturing production as a proxy variable for industrialization, although this is admittedly not the perfect proxy. Along with the proxy variables for capital accumulation, this variable appears to explain the pattern in growth suitably: high-income countries grew faster than low-income countries because high-income countries accumulated (both physical and human) capital faster, but middle-income countries grew even faster because of drastic industrialization. When the explanatory variables appropriately describe the humped pattern, one can hardly find the conditional convergence result. Further examinations suggest that the result appears neither a sheer coincidence nor the result of the reversed causation between the growth rate and the proxy variable for industrialization.

Regarding the convergence vs. divergence debate, the observation in this section seems most relevant to the argument of Baumol and Wolff (1988, 1155): “The results indicate that smaller groups of countries began to converge as early as, perhaps, 1860; that the size of the convergence club has since risen”. That is, income per capita of a country...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• PART I Growth and convergence
• PART II Exchange rate and Asian crisis
• PART III Global crisis
• PART IV Crises and recoveries of the Korean economy
• Index