Question

. Trade theories have evolved since the initial ideas that developed mercantilism in the 1500s. Use modern trade theory to explain the successful transformation of South Korea from a poor agrarian economy in the early 1960s to an OECD country by the mid-1990s.

Which of the modern trade theories best describes the transformation?   

Provide at least 5 specific actions in the 1960's and 1970's that led to South Korea's successful economic transformation.

Answer 1

Today, South Korea is one of the 31 members of the OECD countries. The various reasons and changes made in trade theories are discussed below:

SOUTH KOREA's approach is to engage in a quantitative exercise focused on a single country. KOREA build a model of trade and growth; KOREA calibrate and parameterize the model; and then it simulate the model’s response to Korea’s trade policy reforms to assess whether they can explain Korea’s sustained surge in growth that began in the early 1960s. A case study of Korea is interesting for three reasons. First, it is one of just a handful of countries that is considered to be a growth miracle country. Second, there is broad agreement that new and different policies and institutions played a crucial role in Korea’s growth surge. Third, data are relatively accessible. The Government have collected data on KOREA of the most important trade-oriented policy changes for exporters in Korea during the 1960s: Tariff reductions for imports of intermediate and capital goods, introduction of export subsidies, direct and indirect tax reductions, and introduction of low interest rate loans. Although KOREA has known surge in exports (and in investment and GDP per capita), Korea’s trade experience after these policy changes included a strong expansion of the range and quality of its export goods, a heavy reliance on imported inputs and imported capital in producing its exports, and possible learning-by-doing or learning-by-exporting effects. The policy changes and these three key features of Korea,s trade experience guide KOREA model. It is a dynamic two-country model (the second country is the rest-of-the-world) with a continuum of goods. Each good is produced in two sequential stages: comparative advantage will determine which stages of which goods Korea specializes in (vertical specialization). Additionally, there are fixed costs of exporting, which decline with cumulated exporting experience. The key channel in KOREA model is the one linking Korea’s trade policy reforms to increased imported inputs and capital, thereby leading Korea to produce an increased range of export goods. This model allows for Korea to both specialize, consistent with standard trade theory, and expand the range of goods it produces, consistent with a growing economy. The availability of imported capital and inputs improves growth for Korea. Learning-by-exporting further increases transitional growth rates, thereby enabling Korea’s per capita income to at least partially catch up to the rest of the world in steady-state.