Korean Economy 1981-2006: A Growth Theory Perspective

Abstract

This paper develops a standard neoclassical growth framework to examine the recent history of economic growth in Korea. In our framework, TFP change is a key to understanding a countrys economic growth, and is assumed to reflect technological progress exogenously given to the country in the form of improving OECD best practices as well as the countrys changing capacity to absorb the prevailing best practice. First, we find evidence that Koreas extraordinary economic growth during the 1980s and early 1990s was achieved mainly through massive mobilizations of fixed capital investment. Our analytical framework clearly indicates that this type of economic growth is not sustainable due to diminishing marginal returns to capital. Nevertheless, Koreas economic growth has never wound down except for a brief depression in 1998 in the middle of the economic crisis, mainly thanks to the countrys TFP that appears to have begun to grow strongly from 1992. This robust TFP growth considerably above the OECD average is expected to have enabled the Korean economy to defy the gravity of diminishing marginal returns and sustain its growth by creating ample additional room for capital accumulation. From 2003, economic growth in Korea visibly slowed down, and we find that noticeably stagnant TFP growth was largely behind this persistent slowdown. In the governments efforts at fostering future economic growth, therefore, the fiscal measures targeted solely at the demand side would have only limited effects unless they are accompanied by other measures that would truly enhance the countrys level of TFP.