December 8, 2021


Only The Finest Women

When industrial policy worked: The case of South Korea

Industrial plan is back again on the agenda in higher-income international locations. Certainly, the renewed desire in industrial policy seems across the political spectrum. On 30 September 2021, the Biden administration reaffirmed that it will proceed the Trump adminstration’s trade war guidelines with regard to China, as properly as its expectation that China will abide by its arrangement to purchase US merchandise (Swanson and Bradsher 2021). The Biden administration’s approach to shore up offer chains in vital industries next the pandemic shocks is also centered on industrial coverage-type initiatives (The White Property 2021). Of course, creating international locations have engaged in activist industrial procedures in the course of the post-war time period, with China getting only the most outstanding and modern example (Heilmann and Shih 2013). 

By distinction, mainstream growth and trade economists have for the most aspect been sceptical of activist industrial plan, for two mutually reinforcing motives. To start with, when it is attainable to generate down thoroughly articulated versions in which industrial guidelines are welfare-strengthening, this is only real beneath the situations that are rather special, these as productivity externalities or rents. And second, the existence of all those circumstances is incredibly hard to build empirically. Part of the obstacle is availability of systematic details on industrial plan actions. This scarcity is compounded by the simple fact that examining the lengthy-phrase effects of industrial plan needs facts for the more distant earlier, making data collection even much more hard. As a final result, notwithstanding a substantial system of narrative accounts, credible econometric proof on the extended-phrase results of industrial policies is continue to scarce.

In a the latest paper (Choi and Levchenko 2021), we use a novel dataset on company-level industrial plan actions in South Korea in the 1970s to study their effects on the South Korean economic climate. South Korea’s encounter with industrial policy is critical to understand, as it is 1 of the ‘growth miracle’ economies of the put up-war period, regarded for its swift transformation from a commodity and light production producer to a heavy manufacturing powerhouse. It has been argued that industrial coverage played a central position in this transformation. Even so, a more entire comprehending of how and how much industrial coverage contributed to South Korea’s enhancement stays elusive.1

Our concentrate is the Major and Chemical Marketplace (HCI) Drive amongst 1973 and 1979. The most important industrial policy software employed by the Korean govt for the duration of the HCI Travel was the allocation of foreign credit. Under the Overseas Cash Inducement Act, the Korean authorities strictly regulated domestic firms’ immediate monetary transactions with foreign corporations and only selectively allowed focused firms to borrow from abroad. Once domestic corporations received the acceptance to borrow internationally, the Korean govt certain the personal loan, so that the targeted corporations could borrow at extra favourable fascination prices than all those prevailing domestically.2

We compile data from various sources to build a dataset of overseas credit allocations and harmony sheets at the organization level. The ensuing data established is agent of the Korean economic system and addresses the universe of foreign credits allocated to every domestic firm. The moment domestic firms obtained acceptance from the governing administration, they had to report thorough details on the loan contracts and how they strategy to use the allotted credit score. The documented deal facts is our major info supply on sponsored credit. The information is hand-collected from the nationwide historical archives and digitised. 

Of system, allocation of subsidies is endogenous to equally company and macroeconomic disorders. Our identification tactic to create a causal effects of subsidies on firm outcomes employs two institutional options of the HCI Travel. 1st, the HCI Push was abruptly initiated in 1972 and terminated in 1979 by political shocks fairly than domestic economic ailments (Lane 2019). President Nixon declared the withdrawal of the US forces from South Korea, which closely relied on the US troops for its defence in opposition to North Korea. In reaction, President Park began endorsing hefty and chemical industries to modernize military services capabilities and turn into far more self-reliant in nationwide defence. The HCI Push ended immediately after the assassination of President Park in 1979. Next, the HCI Push experienced pronounced regional variation. It focused the southeastern element of the state and formulated industrial complexes in these regions. Most of the subsidies had been allocated to firms in these industrial complexes. Our analysis layout compares the distinction between corporations in the HCI and non-HCI sectors in the specific areas to the change in the non-focused locations.

To illustrate the sources of determining variation, Figure 1 plots the allocation of backed credit rating in HCI sectors (still left panel) and non-HCI sectors (suitable panel), splitting by focused and non-focused areas. The differential remedy is obvious: even though there was no recognizable subsidised credit rating in non-HCI sectors in any region, the HCI sector credit shows a apparent variance between targeted and non-specific areas. The determine also demonstrates the distinct timing of the two the onset and the termination of the subsidies, reliable with the historical narrative. 

Figure 1 International credit allocation by sector and region


Our main empirical acquiring is that short term subsidies had a substantial and statistically significant effect on business sales as a lot as 30 many years right after subsidies ended. Determine 2 displays the estimate of the causal influence of credit rating subsidies from 1 to 28 years following they ended. The cure result of the subsidy is evident, and in truth the coefficient appears to increase for a couple of decades soon after the subsidies them selves were being terminated. The influence is economically huge. A company obtaining the common subsidy between 1973 and 1979 had a 919% bigger sales progress involving 1982 and 2009, amounting to a 8.6% increased annual development price around this period.3

Figure 2 The extensive-operate effects of short term credit history subsidies on company sales 

As a result, our econometric effects recommend that short-term subsidies had long term (or at least incredibly long-term) positive outcomes on the taken care of companies. This is indicative of some route dependence in business outcomes. The final training of the paper quantifies the extended-expression welfare affect of the HCI Generate. We established up a basic equilibrium heterogeneous agency design and discipline it utilizing the organization-amount details and econometric estimates. The design rationalises the lessened-variety evidence on persistent effects of industrial policy as a result of a mix of discovering by undertaking (LBD) and fiscal constraints. There are two periods in the product. A firm’s second-time period productiveness raises in its initial-time period amount made. On the other hand, in the initial period of time corporations are borrowing-constrained. Thus, they can not broaden to the ideal scale to internalize the dynamic outcomes of LBD. Governing administration subsidies in the to start with period of time chill out these constraints, enabling firms to enhance initial period output, which in switch will increase productiveness in the 2nd period of time by way of LBD. The model is tightly related to the facts. The crucial parameters of the design are pinned down by the diminished-kind empirical estimates. The quantitative final results indicate that if the governing administration had not done industrial coverage, the welfare would have been 22-31% decrease, relying on no matter if we suppose that LBD-driven productivity rewards are long lasting or short-term. Most of the total welfare result (in between a person 50 % and two-thirds) is owing to the very long-run affect of subsidies on efficiency through LBD.


South Korea’s weighty and producing industries is an occasion in which activist industrial policy appears to have succeeded, even using into account its fiscal fees and common equilibrium consequences. Whilst this is likely encouraging, today’s policymakers facial area the exact same problem as policymakers in the earlier: to determine conditions – this sort of as dynamic productiveness outcomes or externalities – less than which activist industrial plan is welfare-bettering. 


Amsden, A H (1989), Asia’s Up coming Large: South Korea and Late Industrialization, Oxford University Push.

Baldwin, R E (1969), “The circumstance in opposition to infant-market tariff protection”, Journal of Political Financial state, 77(3): 295–305.

Choi, J and A A Levchenko (2021), “The prolonged-expression outcomes of industrial policy”, CEPR Discussion Paper 16534, September.

Heilmann, S and L Shih (2013), “The increase of industrial plan in China, 1978-2012”, China Analysis 100.

Lane, N (2019), “Manufacturing revolutions industrial plan and networks in South Korea”, Mimeo.

Lederman, D and W F Maloney (2012), “Does what you export make any difference? In search of empirical advice for industrial policies”, Washington, DC: The World Financial institution.

Lee, J W (1996), “Government Interventions and Productivity Growth”, Journal of Economic Growth 1(3): 391–414.

Rodrik, D (1995), “Getting interventions ideal: How South Korea and Taiwan grew rich”, Financial Policy, 20: 53–107.

Swanson, A and K Bradsher (2021), “U.S. indicators no thaw in trade relations with China”, The New York Times, 4 Oct.

The White House (2021), “Building resilient offer chains, revitalizing American manufacturing, and fostering wide-based growth”, 100-working day critiques below govt buy 14017.

Wade, R (1990), Governing the market place: Economic principle and the purpose of government in East Asian industrialization, Princeton University Press.

Westphal, L E (1990), “Industrial coverage in an export-propelled economic system: Lessons from South Korea’s experience”, Journal of Economic Perspectives, 4(3): 41–59.


1 Wade (1990), Westphal (1990), Amsden (1989), and Rodrik (1995) argue that industrial plan played a considerable function in shaping South Korea’s improvement. Nonetheless, several economists have been skeptical of the performance of industrial coverage (e.g. Baldwin 1969, Lederman and Maloney 2012). Lee (1996) did not locate a constructive correlation between sectoral TFP growth and tariff costs in South Korea in the course of the 1970s and interpreted the correlation as the ineffectiveness of industrial policy.

2 Certainly, Korean corporations that borrowed from from overseas compensated negative real fascination prices. The domestic authentic interest fees were being pretty superior because of to the underdevelopment of the financial method during the 1970s.

3 Between 1982 and 2009, the actual GDP of South Korea grew by 578%.