Transition of economic regime and shift in production function: Estimation and testing of alternative production function models on 9 subsectors of Korean manufacturing industries, 1971-1987

This study is an attempt to investigate the sources of industrial growth of Korea for the past two decades. For this purpose, three different but closely related researches were made: (i) a study of the Korean paradigm of industrial policy, (ii) production function estimation for the Korean manufacturing industries, and (iii) Denison type growth accounting for the non-residential Korean business. There exist many explanations for the nature and the sources of the Korean growth in the recent two decades. Economists with neoclassical leanings ascribed the export-oriented development strategy to the major reason for success. Development economists with the Keynesian precepts suggest that growth arose from capital accumulation. Both doctrines have their historical illustration in the developing countries. What is unique in the Korean experience is that the initiatives of government and the price signals of the market system worked together to facilitate economic growth. I have attempted to define this as a "Korean paradigm of industrial policy." With the backdrop of this model, I tried to compare the two radically different economic regimes in the recent Korean economic history: the 1970s and the 1980s, each of which are characterized as "Heavy and Chemical Industrialization Drive" and "Stabilization and Liberalization," respectively. In order to assess the performances of the two decades, aggregate production functions were estimated for the two-digit manufacturing sector in Korea. My findings on the characteristics of the Korean manufacturing industries in terms of the parameters of the production functions indicate that a major shift in the production technology has occurred between the two decades. There is no explicit way to attribute this shift to the changing focus of the industrial policy of the government. However, considering that the factor input trend has been greatly affected by the policy of government, the capital accumulation in the 1970s and the improvement of the factor productivity in the 1980s indicate the pivoting role of government in resource allocation. In spite of this, the factor intensity of trade hardly changed throughout the recent two decades, which support the market-augmenting aspect of the Korean paradigm of industrial policy.