Chapter 4

of

The Escape from Oppression and Poverty: A Developmental History of Korea

---

Leaving behind the secular decline in living standards, Korea embarked on modern economic growth around 1900, which developed into a growth miracle in South Korea, but degenerated into a growth disaster in North Korea. This chapter performs three different types of calculations to show that the long swing in the Korean living standards were driven primarily by technological change, although it depended importantly on capital accumulation. We then explore why productivity improved more rapidly in South than in colonial Korea to suggest that the rate of technological progress depended on the research activities in the private sector, rather than state intervention to foster learning by doing.

We begin by estimating the parameters of the neoclassical growth model in colonial and South Korea, which suggests that faster technological progress accounts for nearly half of the post-colonial growth acceleration. This result is confirmed by the primal and dual estimates of factor productivity growth for pre-colonial, colonial, and North and South Korea. More than two thirds of the aggregate growth from 1960-90 came from the increase in capital input justifying the fundamentalist (known also as accumulationist) perspective. The absorptionist (known also as assimilationist) view is supported by productivity advancing faster in South Korea than in the rest of the world to account for nearly half of the South Korean per capita output growth during the growth miracle.

To identify the causes driving the “productivity miracle”, we begin with growth accounting by sector to generate evidence having mixed implications on the growth effect of the South Korean industrial policy, which includes the reduced importance of the efficiency gains from intersectoral reallocation of resources after 1945 and faster productivity improvement in manufacturing than in nontradable sectors.

An analysis of a panel dataset comprising thirty-six manufacturing sectors during the high growth era reveals that learning by doing can account for a tiny fraction of total factor productivity improvement. Given the implausibility of production experience being accumulated entirely by the South Korean industrial policy, the dynamic efficiency gains attributable to the intervention has to be smaller than the tiny fraction. This conclusion is consistent with the substantial growth-retarding effect of the South Korean financial repression as implied by the small deadweight loss, which has been isolated by simulating a computable general equilibrium model.

Finally, we estimate the parameters of a knowledge accumulation equation to conclude that the post-1945 acceleration of productivity growth resulted from an increase in the number of and the improvement in the quality of research workers, which took place against the background of the rapid human capital accumulation after the de-colonization.

to read on click here