Korea's growth‐driven trade policies: Inclusive or exclusive?

• Published date: 01 November 2017
• Author: Moonsung Kang,Innwon Park,Dong‐Eun Rhee
• DOI: http://doi.org/10.1111/twec.12556
• Date: 01 November 2017

SPECIAL ISSUE ARTICLE

Korea’s growth-driven trade policies: Inclusive or

exclusive?*

Moonsung Kang

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Innwon Park

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Dong-Eun Rhee

Division of International Studies, Korea University, Seoul, Korea

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INTRODUCTION

In 2017, Korea celebrates the 50th anniversary of General Agreement on Tariffs and Trade

(GATT)/WTO membership. Through active participation in trade liberalisation, the Korean econ-

omy has been recognised as one of the largest beneficiaries of the system. During Korea’s rapid

and remarkable industrialisation that began in the 1960s, the Korean government has maintained

growth-driven policy strategies both internally and externally. Until the East Asian financial crisis

in 1997, the Korean economy had been praised as a successful model for achieving rapid output

growth together with moderate income inequality. However, since that crisis, the Korean economy

experienced lower growth and worsening income inequality (Jones & Urasawa, 2012).

Believing the lack of regional cooperation could be a factor behind the crisis, the Korean gov-

ernment has shifted its trade policy stance from favouring unilateral and non-discriminatory multi-

lateral efforts for free trade to discriminatory regional efforts for freer trade.

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Discriminatory RTAs

incur more unbalanced distribution of gains from trade between exporting industries. In addition,

because the cost of verification of rules of origin is troublesome for small and medium-sized enter-

prises (SMEs), SMEs would rather give up the opportunity than take it. RTAs also cause unbal-

anced distribution of gains from freer trade between SMEs and big conglomerates.

Internally, to overcome the crisis and increase competitiveness, there was an unusual increase

in the number of temporary and daily employees, worsening income distribution. The ratio of tem-

porary and daily employees to total employees increased from 46.7% in 1997 to its highest level

of 52.1% in 2000. Although this has reversed to 49.5% in 2003 and 33.6% in 2016, the continu-

ously declining average monthly income for temporary and daily employees compared to regular

employees (56.5% in 2007 to 48.4% in 2015) created even more serious income inequality. The

sum of all temporary and daily employees’monthly income compared to that of regular employees

has been continuously deteriorating from 48.2% in 2007 to 36.4% in 2010 and 25.6% in 2015.

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*We would like to thank Professor Sir David Greenaway for giving us an opportunity to write this article. Any remaining

errors are our own.

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Before the financial crisis occurred, Korea was a member of only one ineffective regional trade agreement, the Asia–Pacific

Trade Agreement (Bangladesh, China, India, Korea, Lao PDR and Sri Lanka) implemented in 1976. However, as of August

2017, Korea has implemented 15 regional trade agreements (RTAs) and signed one additional RTA.

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Data from Korean Statistical Information Service (KOSIS: http://kosis.kr/index/index).

DOI: 10.1111/twec.12556

World Econ. 2017;40:2475–2490. wileyonlinelibrary.com/journal/twec ©2017 John Wiley & Sons Ltd

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This has triggered a strong socio-political demand for moving towards a welfare state (Kwon, 2007).

Thus, the Korean economy is now at a crossroads to transition from making a larger pizza for the whole

nation to sharing a bigger slice of the pizza with every person in the nation. As a result, traditional

growth-driven policy strategies have been replaced with inclusive growth-initiated policy strategies, which

should be carefully reviewed. Even though the summary of the latest WTO’s Trade Policy Review (TPR)

for Korea (WTO, 2016) recommends the Korean government implements structural reform policies to

narrow down the development gap between trade and non-trade sectors, export and import industries and

SMEs and big companies, it does not explicitly investigate recent efforts for inclusive growth objectives.

This study attempts to complement that report by qualitatively investigating whether the transition of Kor-

ea’s growth-driven trade policies during its industrialisation has been inclusive or not.

In addition to the qualitative analysis, we conduct a simple quantitative experiment. Due to lack

of economic inequality data for an individual country, there has been no serious empirical experi-

ment to find the relationship between international trade and inclusive growth for a specific nation.

We investigate this by applying simple regression analysis.

Section 2 briefly surveys existing debates on the relationship between trade and inclusive

growth and evaluates the 2016 TPR for Korea from the perspective of inclusive growth. In Sec-

tion 3, as a case study for Korea, we quantitatively estimate the relationship between trade growth

and Gini indices. Section 4 concludes.

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TRADE, GROWTH AND INCOME DISTRIBUTION

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Trade and inclusive growth: Debate in general

Can trade be an engine of economic growth? At the same time, can it be a pro-poor strategy by

reducing income inequality?

Both traditional and endogenous growth theories support the positive gains from trade gener-

ated by more efficient resource allocation, greater economies of scale and scope, enhanced trade

facilitation, more knowledge spillovers, stronger incentives for technological progress, stimulation

of capital mobility and initiation of reforms. Singh (2010) and Falvey, Foster, and Greenaway

(2012) survey the literature on the relationship between trade and growth and the GATT/WTO’s

efforts for promoting free trade. They find a significantly positive effect of trade on output growth,

but no strong evidence to support the GATT/WTO’s contribution. Salvatore (2011) provides suc-

cinct explanations and plentiful references for the positive linkage between international trade and

economic growth. He provides historical evidence of the regions settled during the nineteenth cen-

tury (the USA, Canada, Australia, New Zealand, Argentina, Uruguay and South Arica) and the

East Asian miracles of the twentieth century and strongly supports the positive contribution of

international trade to overall incomes in a country. Bernhofen, Falvey, Greenaway, and

Kreickemeier (2013) collect more updated and issue-specific research on theoretical models, empi r-

ical methodologies and policy issues to investigate the role of international trade on economic

development.

On inclusive growth driven by trade growth, Dollar and Kraay (2002) find openness to trade

raises overall incomes in a country and average incomes of the poorest fifth. The Commission on

Growth and Development (2008) reports strategies for sustained growth and inclusive develop-

ment, highlighting 13 successful developing countries, including Botswana, Brazil, China, Hong

Kong, China, Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taipei, China and Thai-

land. Aoyagi and Ganelli (2015) conduct another positive empirical experiment with panel regres-

sion covering 31 Asian countries, and their results support the significant contribution of trade

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KANG ET AL.