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Working Paper

Relative Price Change and Industrial Growth Patterns in Korea

페이스북
커버이미지
  • 저자 김광석(金光錫)
  • 발행일 1981/02/01
  • 시리즈 번호 8101
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요약 Korean economic growth, spurred on by industrialization
since the mid-fifties, has been accompanied by chronic inflation,
high by any standards. This inflation has resulted in a
substantial change in the structure of relative prices by
industrial sector. The average domestic producer's price index
for all tradable sectors increased by and average annual rate of
13.5 percent during the period 1955-75. However, there were also
significant variations in the rates of the producer's price
increases in each of the major sectors. In particular, the
domestic producer's index for the primary sector marked a
considerably higher rate of increase than that for manufacturing,
thus giving the impression that the former led the increase in
national price levels.

In contrast to the rapid increase in the average domestic
producer's prices, the average foreign producer's price index,
which has been weighted by the among of domestic production
less exports, shows a relatively low 3 percent increase
throughout the entire period (1955-75). In addition, the rate of
increase in world market prices for the primary sector was
relatively lower than that for manufactured goods, in contrast th
the case of the average domestic producer's prices. In particular,
the agriculture, forestry and fishery sectors, which posted the
most rapid rate of increase in domestic prices, showed the
lowest rate of increase in world market prices.

Despite the rapid increase in the domestic producer's prices,
which exceeded the increase in world market prices, the nominal
rates of protection by sector that measure the excess of a
domestic producer's unit price over the world market unit price,
generally declined during the whole period. The reason for this
is that Korea's foreign exchange rate index increased more
rapidly than the rise in the domestic producer's prices. The
average nominal rates of protection for all major sectors except
the primary sector, i.e. the agriculture, forestry and fishery
sectors, therefore, continuously declined during the twenty year
period. By 1975, the average rate for all tradable sectors was as
low as 4 percent. This indicates that the international
competitiveness of Korean industry has, on the average,
continuously improved.

In the basis of the relative contributions of export expansion,
import substitution and domestic demand expansion to sectoral
output growth, manufacturing and all tradable sectors are
classified into three industrial groups : export industry, import
substitution, and other domestic demand-oriented industry. By
tabulating and comparing the changes in domestic and foreign
prices and nominal rates of protection by these three industrial
groups, attempts have been made to explore the relationship
between the changes in relative prices and the sources of
industrial growth and growth patterns by sector.

The results of these preliminary attempts indicate that the
industrial development patterns in Korea cannot be explained
solely by the sectoral price competitiveness in domestic and
foreign markets nor by the degree of trade protection found in
each sector. In manufacturing, for instance, the increasing rate of
the domestic producer's prices in the export industry was not
necessarily lower than that of other industries. Consequently, the
average nominal rate of protection for the export industry was
relatively high, contrary to our expectation.

This conclusion is also supported by the result of correlation
analyses between the changes in domestic and foreign prices and
nominal rates of protection on one hand, and certain indicators of
industrial growth patterns on the other hand. Normally it would
e expected that the growth contributions of export expansion are
negatively correlated with the sectoral nominal rates of
protection, while the IS contributions are expected to e positively
correlated with those nominal rates. During all periods under
observation, however, no statistically significant relation could be
found between the said variables.

The result of rank correlation coefficients estimated between
the related variables the nominal rates of protection and the
sectoral ratios of import to domestic demand. However, the same
result reveals that the correlations between the nominal rates of
protection and the sectoral ratios of export to domestic
production are either statistically insignificant or yield an
unexpected positive sign when they are statistically significant.

These results seem to reflect the fact that Korean exports
are not determined simply by the factor or price competitiveness
alone, since there is a complicated system of industrial incentives
used in Korea which includes many indirect export subsidy
scheme. In other words, we suggest that in Korea the direct and
indirect supports of the government including some non-price
measures may be more important determinants of industrial
growth patterns than the changes in the relative price structure
and nominal protection rate.

In order to undertake an empirical analysis of the factors
affecting industrial growth patterns for Korea, therefore, it may
not be sufficient to include only the changes in the relative price
structure and nominal protection rates as the major factors
determining the growth patterns. It is important ti try and
estimate the effective protection or subsidy rates that ca
consolidate the effects of all direct and indirect government
subsidies by sector, as was attempted by Westphal and
Kim(1977), and examine the relationship between these rates and
the growth patterns.

One thing that has become clear in our analysis is that, as
expected, a significant proportion of the variations in the
increasing rates of domestic producer's prices by sub-sector can
be explained by changes in international price (positive effects)
and increases in domestic productivities (negative effects). The
changes in international prices can be taken as an exogenous
factor in the case of Korea. In order to increase the price
competitiveness of domestic industries, therefore, emphasis must
be placed on what is domestically possible, i.e. the increase of
industrial productivities by sector.

Finally, there is a question as to whether our attempt to
study the causal relationship between the change in the relative
price structure and the industrial growth patterns has been too
ambitious. Even if there is no government intervention in the
market mechanism through non-price measures, it is difficult to
say conclusively whether or not resource allocations and
industrial growth patterns are influenced only by change in the
relative price structure. It might be correctly said that the
resource allocations and growth patterns in a country are usually
influenced by such factors as national resource endowment,
demand conditions related to consumer preferences, and
conditions on the supply side including the different levels of
technology, in addition ti changes in the relative price structure.
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