Industrial policy in the Republic of Korea : an assessment using cost-benefit methods
The identification of the appropriate role for government is a crucial element in the formulation of economic policy for developing countries. During the 1940s and 1950s the balance of opinion rested firmly in favour of substantial intervention, but over the 1960s and 1970s the balance shifted in what Little describes as the "neoclassical resurgence". In the important debate between the proponents of free markets and the supporters of government intervention, South Korea has been a major battle ground. The neoclassical view, which is currently enjoying some prominance, is that the Korean economic miracle happened because government intervention was in some sense 'neutral' and so something approximating free markets was allowed to prevail. In this thesis, we argue that policy incentives in Korea were not 'self-neutralising' and were contributory to Korean economic growth and development. First, we show that government intervention during the 1960s and 1970s was greater and more distortionary that some participants in the "neoclassical resurgence" might allow. Second, we show that government intervention was 'well-directed' in the sense that policy incentives were provided to those sectors with the greatest potential for economic development. One way in which we assess industrial policy involves the use of shadow prices and the concept of social profitability. If shadow prices are defined as the social opportunity cost of goods, then a change in the allocation of resources can only be socially beneficial if profits calculated using shadow prices are positive. We capture an emphasis on growth through a social welfare function with appropriate weights on certain incomes. We also assess whether the promotion of heavy and chemical industries was justified on infant industry grounds using productivity-related tests and revealed comparative advantage. Lastly, the method based on shadow prices and social profitability is adapted to study the current policy problem of trade imbalances with the US and Japan. We show that the imbalances are mainly by-products of export-led growth and that some 'selectivity' in the policies of export restraints vis-a-vis the US and localisation vis-a-vis Japan may be necessary to minimise the social cost of reducing the trade imbalances.