Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

Industrial Policy and Export-led Industrializationin the Republic of Korea in 1975-1985:

An Input-Output Perspective
By
Se-Hark Park-

Abstract

The Republic of Korea is a well-known success story of export-led industrialization
steered by active state intervention which was manifested in a series of five-year economic
development programmes implemented since the early 1960s.

In general, the empiricalfindings of a decomposition analysis based on the constant price 1975-1980-1985 Korean
input-output tables seem to corroborate the successful outcomes of the industrial policy forexport-led industrialization as designed and implemented by policy-makers and planners in
the 1960s and 1970s.

1.

Overview

The Republic of Korea is a well-known success story of export-led industrialization steered by
active state intervention. Emerging from the initial period of easy import substitution whichlasted from the end of the Korean War to I960, the Republic of Korea reached a turning-point

in its industrialization drive in 1963 when the first five-year economic development programme(1962-1966) was launched with a clear shift to an export-oriented strategy. The first plan em
phasized the expansion of light manufactured goods and their exports. The second programme(1967-1971) was an extension of the first programme and stressed further consolidation of eco
nomic growth and export expansion achieved in the first period. It was in the third programme(1972-1976) that heavy and chemical industries were fostered in order to broaden the Korea's
industrial base and to upgrade its international competitiveness. The gains made in the third

programme was further consolidated in the fourth programme (1977-1981) as manifested in
the sophistication of industrial structure, expansion of capital and intermediate goods indus

tries, and institution-building for science and technology.

However, emphasis was shifted tomacroeconomic stabilization in the fifth programme (1982-1986) because of various macroeconomic disequilibria caused by rapid growth in the previous periods such as price instability andworsening income distribution.
A general picture emerging from a series of these five-year development programmes is a

shift in policy emphasis from exports of light manufacturing in the 1960s to the development ofheavy and chemical industries, and capital goods industries in the 1970s, and the consolidation ofexport capabilities of theses industries and upgrading of industrial structure along with economic

stabilization and trade liberalization in the 1980s1.

Manuscript received April 15, 1994.

* Global Studies Branch, United Nations Industrial Development Organization (UNIDO), Vienna, Austria. The
author is grateful to Bruno Dissmann for computational assistance. The views expressed in this paper are thoseof the author and do not necessarily reflect those of UNIDO.

1For a detailed account of industrial policy in the post-Korean War period, see K.S. Kim (1985) and S.J. Kim(1993).

Industrial Policy and Export-led Industrialization 17

Table 1: Structural Change in the Republic of Korea, 1975-1985(1985 constant prices)
1975

1980

1985

Annual growth rates

Production%(bil.won)production%(bil.won)%

Production(bil.won)

75-80

80-85

75-85

3.3

5.1

4.2

Agriculture,1.

forestry,and fisheries
Mining andquarrying
Manufacturing2.
3.

9702.013.6

11410.7

8.9

7.714643.3

938.5

1.3

1145.50.91353.5

0.7

14.3

11.8

11.5

31525.7

44.2

62089.848.595300.3

50.0

14.5

8.9

11.7

manufacturing*

14308.8

20.1

24261.8

19.031262.2

16.4

11.1

5.2

8.1

Industrial
materials**
Capital goods***

13119.5

18.427572.7

21.5

41243.2

21.6

16.0

8.4

12.1

4097.45.710255.3

8.022794.9

12.0

20.1

17.3

18.7

Light

Electricity,

4.

water and gas
Construction
Services
Total

5.
6.

1299.91.8

2559.92.04459.4

2.3

14.5

11.7

13.1

4237.25.9

9422.6

7.4

15462.5

8.1

17.4

10.4

13.8

23625.6

33.2

41374.9

32.359445.1

31.2

11.9

7.5

9.7

71328.9

100.0128023.4

100.0190664.2

100.0

12.4

8.3

10.3

Source: (Tables 1 to 8) Bank of Korea, 1975-1980-1985 Link Input-Output Tables, Seoul, Korea, 1989.
* Food, beverage and tobacco; textile and leather.
** Lumber and wood products; paper, printing and publishing; chemicals and chemical products; primary metals; nonmetallic minerals.
*** Fabricated metals; electrical and non-electrical machineries; transport equipment; scientific instruments.

Table 2: Structure of Imports, 1975-1985
1975

1980

1985

Annual growth rates

Import%Agriculture,
forestry,and fisheries

1022.02.

Mining andquarrying2884.93.

Manufacturing
Light7102.9manufacturing*1081.9%(bil.won)(bil.won)
1.

ImportImport%(bil.won)

75-80

80-85

75-85

8.6

12.7

6.1

9.3

1854.79.3

25.4

4863.324.4

6708.3

23.1

11.0

6.6

8.8

62.6

12098.0

60.7

17977.2

61.8

11.2

8.2

9.7

9.5

1539.27.7

2056.7

7.1

7.3

6.0

6.6

12.1

9.0

2489.2

Industrial

materials**
Capital goods***
4.

Services
Total

2402.821.2

4496.322.6

7530.8

25.9

13.4

10.9

3618.231.9

6062.530.4

8389.7

28.8

10.9

6.7

8.8

338.1

3.0

1112.7

5.0

1912.3

6.6

26.9

11.4

18.9

11347.9

100.019928.7

100.029087.1

100.0

11.9

7.9

9.9

* Food, beverage and tobacco; textile and leather.
** Lumber and wood products; paper, printing and publishing; chemicals and chemical products; primary metals; nonmetallic minerals.
*** Fabricated metals; electrical and non-electrical machineries; transport equipment; scientific instruments.

18

Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

During the period of 1975-1985, export-led growth had brought about a phenomenal structural change in the Republic of Korea. Real GDP grew 2.7 times between 1975 and 1985 at anannual growth rate of 10%. The share of agriculture in total output declined sharply from 13.6%
in 1975 to 7.7% in 1985, while the manufacturing share increased from 44% to 50% during thesame period. The service share was slightly down from 33% in 1975 to 31% in 1985. Particularly
notable is structural change within the manufacturing sector. The production of capital goods

increased rapidly at an annual rate of nearly 19% with its share of total output rising sharply
from 5.7% in 1975 to 12% in 1985.

By contrast, light manufacturing grew at an annual rateof around 8% and its share of total output dropped considerably from 20 to 16% between 1975
and 1985. The intermediate goods industry also grew fast at a rate of 12% per year with its
output share increasing from 18% to almost 22% during the same period (Table 1).
The salient feature of the export-led industrialization strategy pursued by the Republic ofKorea during the period is that the competitive export industry is built on foreign technology
with heavy reliance on imported intermediate inputs and capital goods. As the imports of intermediate and capital goods became essential to sustaining the export drive, the government
launched the second phase of import substitution commonly known as time-phased localization
programmes with a view to produce domestically an increasingly larger proportion of imported

inputs. The comparison of the structure of imports (Table 2) and that of exports (Table 3) pro
vides some partial evidence to the secondary import substitution linked to the export expansion.
Manufactured exports, whose share of total exports increased from 72% to 77.5% between 1975

and 1985, grew by about 13% per year during the period, while manufactured imports, whose
share of total imports remained constant at the level of around 62%, increased at a lower rateof 9.7% per year during the period of 1975-1985. Manufactured exports increased by almost
3.5 times from 6,245 billion won in 1975 to 21,481 billion won in 1985, while manufactured
imports increased by about 2.5 times from 7,103 billion won to 17,977 billion won during thesame period. The most striking change in trade occurred again in the capital goods industry.

Capital goods exports jumped six-fold from 1,364 billion won to 8,149 billion won between 1975

and 1985. This increase represents an impressive real annual growth rate of almost 20% with its

share of total exports rose steeply from 16% in 1975 to 30% in 1985. By sharp contrast, capital
goods imports slightly more than doubled from 3,618 billion won to 8,390 billion won at a muchslower annual growth rate of 8.8% with its percent of total imports declining from 32% to 29%
between 1975 and 1985 (Tables 2 and 3).
It is worth nothing that the nature of industrial production may determine the extent towhich the export-linked secondary import substitution, alternatively known as the localization
programme, is carried out. In general, such a secondary import substitution is relatively easierin industries where the production process could be broken down into many subprocesses - final
assembly, subassemblies, and numerous parts and components production in such industries as

motor vehicles, machinery and equipment, and consumer durable goods.

Import dependence

as shown by intermediate input imports as a percentage of total output by industry in Table 4
provides a partial measure of the extent of secondary import substitution. Import dependenceof the manufacturing sector as a whole declined slightly from 22.4% in 1975 to 20.6% in 1980,

but slightly up again to 21.7% in 1985. However, import dependence varied remarkably among
manufacturing industries. Many industries have seen their import dependence increased invarying degrees during the period of 1975 to 1985. They include food, beverage and tobacco;

textile and leather; lumber and wood products; and non-metallic minerals. On the other hand,
import dependence for other manufacturing industries decreased.

Particularly notable was asubstantial drop in primary metals from 31.3 to 18.2% and in metal fabrication and machineries

from 26.5% to 20.8% between 1975 and 1985. Theses two industries are where the verticaldisintegration of the production process can be easily achieved, for instance, import substitutionof parts and components in capital goods industry, to the extent that expanding exports permit
such a division of labour.

Industrial Policy and Export-led Industrialization

19

Table 3: Structure of Exports, 1975-1985
1985

1980

1975

Annual growth rates%

ExportExport%9f(bil.won)(bil.won)(bil.won)

Export

75-80

80-85

75-85

-0.3

-2.1

-1.2

Agriculture,

forestry,and fisheries
2.
3.

Mining andquarrying
ManufacturingLight
manufacturing*

615.7

7.2

625.3

2.0

554.3

3.6

69.5

0.8

51.3

0.3

27.7

0.1

-5.9

-11.6

-8.8

6244.871.912655.474.021480.7

77.5

15.2

11.2

13.1

2874.933.1

4668.827.3

6513.5

23.5

10.2

6.9

8.5

2006.323.1

4224.224.7

6818.4

24.6

16.1

10.0

13.0

1363.615.7

3762.422.0

8148.8

29.4

22.5

16.7

19.6

Industrial

materials**
Capital goods***
Electricity,water and gas,
construction

Services
Total

26.1

0.3

51.3

0.3

194.0

0.7

14.5

30.5

22.2

1719.719.8

3728.221.8

5432.5

19.6

16.7

7.8

12.2

8685.4100.0

17101.9

100.027717.0

100.0

14.5

10.1

12.3

* Food, beverage and tobacco; textile and leather.
** Lumber and wood products; paper, printing and publishing; chemicals and chemical products; primary metals; nonmetallic minerals.

*** Fabricated metals; electrical and non-electrical machineries; transport equipment; scientific instruments.

Table 4: Import Dependence*(Percentage)
1975

1980

Agriculture, forestry, and fisheries

1.6

1.8

1.8

Mining and quarrying

2.4

0.4

0.7
21.7

Manufacturing

1985

22.4

20.6

Food, beverage and tobacco

5.0

6.9

9.3

Textile and leather

15.8

13.3

16.6

Lumber and wood products

38.4

45.9

39.9

Paper, printing and publishing

18.0

12.3

13.5

6.1

5.7

10.7

Chemicals and chemical products

43.3

38.7

40.2

Primary metals

31.3

22.4

18.2

Metal fabrication and machineries

26.5

21.1

20.8

Non-metallic minerals

Miscellaneous manufacturing

12.2

11.2

9.1

Water, electricity, gas

3.2

5.2

8.8

Construction

5.2

4.2

3.2

Services

2.5

4.2

3.2

11.3

12.5

12.9

Industry Average* Intermediate input imports as a percentage of industry output.

20

Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

The percentage change in the composition of final demand during the period of 1975-1985 asshown in Table 5 may reflect the resource mobilization of the Korean government to accelerate
the export-led economic growth during the period.

Although both private and government

consumption doubled in absolute amount between 1975 and 1985, each respective share of total
final demand declined appreciably. Particularly notable was a considerable drop in the private

consumption share from 51% in 1975 to 44% in 1985, implying a significant accumulation ofprivate savings. The share of government expenditure increased slightly from 9.2% to 10.5% in
the period of 1975-1980, but subsequently reduced to 7.5% by 1985, reflecting tight monetaryand fiscal policy pursued by the government to achieve price stability during the first half of
1980s. By sharp contrast, both capital formation and exports nearly trebled between 1975 and1985. Gross capital formation as a percentage of total expenditure rose from 18% to 22% and theshare of private capital formation increased by 3.5 percentage points from 14.6% to 18% during

the period of 1975-1985.

This substantial increase in private investments was facilitated byaggressive government investment promotion measures such as investment tax credits and otherpreferential treatments, and expansion of investment capital earmarked for export promotion, as
well as the mobilization of domestic savings. However, most remarkable was a three-fold increasein exports with its share of total final demand also climbing steeply from 19% to almost 26%

between 1975 and 1985. In short, the data seem to depict a significant resource mobilization toaccelerate export-led economic growth during the period.

This study attempts to measure the relative importance of exports as opposed to other factors

in industrial growth in the Republic of Korea, using the 1975-1980-1985 linked constant priceinput-output tables constructed by the Bank of Korea. The original 390 sector input-output
tables are aggregated to 161, 65 and 22-sector summary tables. These tables are deflated by1985 price indices2.

2.

Methodology

The analytical framework used for the decomposition of the sources of growth is based on an
accounting identity of input-output material balance, namely each industry output is equal to its

various uses, that is intermediate use, final demand and exports. Then a change in the materialbalance between two periods was taken to match the change in industry output to changes
In short, it is a demand-side decomposition using a comparative statisticalin various uses.

framework3.
To describe the decomposition method used in this study, we define the following variables.
Unless specified otherwise, matrices are henceforce denoted by capital letters, and vectors are
written as lower-case letters.

A is a (n x n) total input coefficient matrix, that is, domestic plus imported
inputs divided by the total output of each industry (column sum).
M is a (n x n) imported input coefficient matrix.

Ad = A — M, a (n x n) domestic input coefficient matrix.
q is a (n x 1) output vector.
/ is a (n x 1) final demand vector.

fm is a (n x 1) import demand vector.

/d = /-/m,a(nxl) domestic demand vector.
x is a (n x 1) export vector.

2 For a detailed description of the methodology for the construction of Korean tables, see the Bank of Korea(1989), Chapter 1.

3 For a comprehensive discussion of the methodology of multisector comparative analysis including input-

output growth accounting, see Hollis Chenery et. al.(l986), Chapter 5. For empirical applications, for instance,
see Dewhurst (1993), Feldman, et al.(1987), Inagawa (1987), Kubo and Robinson (1984), Skolka (1989), Nishimizu(1978), Melo (1985), and UNIDO (1993).

Industrial Policy and Export-led Industrialization 21

Table 5: The Structure of Final Demand(1985 constant prices)
1975

1980

1985

bil.won%bil.won%bil.won%27214.4

60.2

44086.8

57.7

55701.2

51.6

Private(23053.6)(51.0)(36063.9)(47.2)(47626.6)(44.1)

Government(4160.8)(9.2)(8022.9)(10.5)(8074.6)(7.5)

9294.020.615239.6

19.9

24516.8

22.7

Fixed Capital formation(8073.9)(17.9)(15448.1)(20.2)(23745.1)(22.0)

Private(6620.2)(14.6)(12287.3)(16.1)(19397.1)(18.0)

Government(1453.7)(3.2)(3160.8)(4.1)(4348.0)(4.0)

Inventory change(1220.1)(2.7)(-208.5)(-2.7)(771.7)(0.7)

8685.419.2

17101.9

22.427717.1

25.7

45193.8

100.076428.3

100.0107935.1

100.0

Consumption

Gross Investment

Exports
Total

Table 6: Decomposition of Sector Output(Absolute figures in millions of 1985 won)
1975-1980

Gross output

SectorAgriculture
MiningManufacturing
Utilities
Service
Dummy
Total

Decomposition(%)

Prod.

%

Final

Final

Technical

demandimportchange &import1975

1980

changeshare

demand

sub.

Exp.

sub.

970199711410657

1708660

3.01

199.39

16.46

98.10

-181.03-195.1993853711454892069520.37

185.84-38.2371.1331525740

62089827

30564087

53.91

52.29

2.54

31.32

18.93

12998592559865

1260006

2.22

57.79

1.37

21.92

21.66

22287506

39257947

16970441

29.93

79.55

1.07

19.40

2.11

13380772115990778913

1.37

102.55

4.69

30.61

-28.4771328888

128023381

56694493

100.00

70.07

2.14

26.91

5.17

1980-1985

Agriculture

MiningManufacturing
Utilities
Construction
Service
Dummy
Total

11410657

14643322

32326655.16

100.96

-1.58

46.82

-49.3711454891353537

2080480.33

170.37-26.4673.49-170.32

62089827

95300315

33210488

53.02

45.05

2.32

42.67

14.60

25598654459418

1899553

3.03

50.60

1.10

20.63

29.87

9442606

15462488

6019882

9.61

87.06

0.10

3.52

9.51

39257947

55991585

16733638

26.71

69.13

2.19

19.93

13.12

211699034535091336519

2.13

43.11

1.77

18.44

40.22

128023381

190664174

62640793

100.00

58.95

1.73

31.97

10.81

22 Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

Then, an input-output material balance equation isq=

Adq + fd + x=(I-Adyl(fd + x) = Rd(fd + x)

where

Rd = (I - Ad)~l(1)

Taking a difference of q between two periods and adding to and subtracting from the equation

the same term Rd(fd + #2) will yield

Aq

=

q2-qi

+*2)-Rial+*2)+Rial+x2)-Rl(f?+x1)
From the 3rd and 4th terms, we deriveRi(fl + x2) - Ri(ff + Xl)==

Ri(Af - Afm + Ax)(3)

and from 1st and 2nd term,

R2U2 + 22) - R{Ut + 22) = &Rd(f$ + *2)(4)

From equations (3) and (4), a change in output is decomposed as follows:

Aq =

RfAf
—RdAfm+R(Ax+ARd{f2 + X2)(final demand effect)(final demand import substitution effect)(export effect)(effects of technical change + input import substitution)(5)

In sum, the changes in the sectoral output between two periods were decomposed into the four

sources of growth, namely, (1) final demand, (2) final demand imports substitution, (3) exports,and (4) technical change and input import substitution.

It is mathematically intractable toseparate the effect of technical change from that of input import substitution in the last term4.

3.

Empirical Results

The purpose of this section is to estimate the relative contribution of various sources of growth
to sectoral output growth and particularly the effect of exports on the industrial output growth,using the methodology developed in the preceding section.

Table 6 summarizes the overall decomposition of the five sectoral output changes into four
effects-final demand, import substitution, exports, and technical change and input import sub

stitution combined in the two periods, between 1975 and 1980, and between 1980 and 1985.
Obviously, factors affecting the growth of manufacturing output are of crucial importanceto a study of industrialization. The manufacturing sector was the fastest growing sector during
4 It must be noted, however, that the effect of changes in input coefficients can be separated from that of importsubstitution of intermediate input by making a simplifying assumption that intermediate import coefficients, m,,
are the same for all sectors using commodity i as an input, where ra, is defined as total intermediate imports ofsector i as a percentage of total output of that sector (Chenery et al., 1986). It is obvious that such estimatedintermediate imports of commodity i by sector j may differ considerably from actual values of a full importmatrix detailing the sectoral use of intermediate imports of commodity i when available, and hence introduce anestimation error.

Industrial Policy and Export-led Industrialization23

the two periods, accounting for the largest share of total output changes; 54% in the period of

1975-1980 and 53% in the period of 1980-85. Among the four factors affecting the growth of
manufacturing output, final demand was the strongest, but its effect declined appreciably from

52% to 45% between the two periods. By contrast, the effect of exports, the second largest sourceof manufacturing output growth, was sharply up from 31% in the period of 1975-1980 to 43% in
the period of 1980-1985 and hence almost caught up with final demand. The empirical results
seem to confirm the crucial role of manufactured exports in accelerating industrialization of

the Republic of Korea during the periods, Moreover, the effect of final demand may have been
overestimated and that of manufactured exports underestimated, since the output multipliereffects of manufactured exports on final demand was not properly taken into account in the

numerical results.
The effect of import substitution of final manufactured products was positive but relatively

weak, accounting for around 2% of the manufacturing output growth in both periods. The lastsource of growth corresponds to the net effect of the two types of change, namely changes in thedomestic input-output coefficients and a change in the import matrix of intermediate goods. Thechange in the import matrix is brought about by the imports of new inputs as well as domestic
substitution of imported inputs as manifested in local contents programmes pursued vigorously
in the Republic of Korea. The changes in domestic input-output coefficients are basically causedby changes in production technology as well as by substitution among various inputs, often
induced by changes in relative prices.

Of course, the two effects are closely interrelated anddifficult to separate algebraically one from the other, as described earlier. The combined effects
of technical change and input import substitution are quite significant, explaining almost 20%of the manufacturing output growth in the first period and nearly 15% in the second period.
A substantial part of these effects may have resulted from local contents programmes within abroad strategy of export-linked secondary import substitution actively pursued by the Republicof Korea during the periods.

The service share of total output change ranked a distant second to that of the manufacturingsector, about 30% in the first period and 27% in the second period.

The growth of service

sector was predominantly influenced by the domestic market, but its effect declined appreciably

from 80% to 70% between the two periods, while the positive effect of technical change andintermediate import substitution increased sharply from 2% to 13% during the periods. The
effect of service exports was quite considerable, amounting to around 20% in both periods.

The share of construction in total output growth was slightly less than 10% in both periods.
Since construction is basically non-tradeable, the growth of construction is expected to be little

affected by exports, but predominantly determined by final demand. Empirical results confirmed
theoretical expectations.

The rest of the sectors are relatively insignificant in terms of theirrespective share of total output change. Agricultural share was less than 5%, mining less than

1%, and utilities around 3% in both periods. The source of growth in agriculture was dominatedby domestic markets, although the effect of agricultural exports was quite substantial; the same
holds for mining and utilities, although the relative importance of exports in utilities is rather
unexpected in view of the non-tradeable characteristics of its output.

All these three sectors

appear to be significantly affected by technical change and input import substitution during theperiods.

24

Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

Table 7: Decomposition of Manufacturing 1975-1980(Absolute figures in millions of 1985 won)
Decomposition(percentage)

Gross output

Prod.

%

Final

Final

Technical

demandchange &

1975

1980

changeshare

demandimportsub.

Light Mfg.

14308781

242618029953021

32.56

65.02

-0.57

28.51

5.91

Diry
Seafood
Pol Grain

8457701683475

837705

2.74

95.24

1.45

1.07

5.15

3763804162473

4866191112390.36

185.82-2.28-93.245.144867325704852

2.31

94.14

-12.83

3.61-10.58Flour

259802327136

67334

0.22

270.09

5.78

14.66

-178.97

Sugar

143573331357

187784

0.61

70.37

6.05

24.46

11.23

Bread etc.

4041751015172

610997

2.00

83.44

0.18

2.58

14.17

Other Food

7556861432431676745

2.21

52.49

-2.75

8.00

36.76

Beverages

8288851833982

10050973.29

117.604.56

5.44-18.48

Tobacco69762513283826307572.06

106.58

0.10

1.88

-8.36

Yarn

1447233

27226141275381

4.17

35.01

-0.38

57.06

7.54

Fibre Fabric

131902926773881358359

4.44

13.22

-2.29

56.31

28.18

TextilesWearing Apparel

1045356

1913836868480

2.84

65.22

2.99

32.81

4.96

160564926919471086298

3.55

41.49

-0.70

55.81

2.01

Leather

418145950138531993

1.74

23.79

-0.51

62.11

13.59

12424050

26315181

13891131

45.45

47.89

0.84

38.66

14.29

81706012238174067571.33

113.97

0.58

18.68

-32.07

21.18

SectorIntermediate Goods
Wood Products
Pulp and Paper
Printing Publishing
Basic Chemicals
Chemical Fiber

importExp.

sub.

4901481279456789308

2.58

57.24

3.52

25.10

318.681641563322882

1.06

84.78

2.17

9.09

8.30

99002722309141240887

4.06

2.09

-9.09

46.27

42.55

5419751065851523876

1.71

17.91

-0.51

43.74

37.84

Agrichemicals

6794289143752349470.77-80.38-27.82

90.16

62.40

Drugs
Other Chemicals

372754316937971754673651599000

1.96

93.50

3.09

3.29

6.30

356714

1.17

27.83

-7.10

27.83

7.89

Synthetic Resin

407133858588451455

1.48

49.03

-0.40

8.39

42.18

Petroleum Prod.
Coal Prod.
Rubber Prod.
Non-metal Prod.
Iron and SteelIS Primary Prod.
Non-ferrous Prod.

360126361240422522779

8.25

77.91

0.92

36.39

-13.385325291137581605052

1.98

48.60

0.82

7.42

44.79

4770851224677747592

2.45

21.90

-0.71

69.51

7.87

9937422242189

1248447

4.08

77.20

1.42

17.61

6.61

58197620532191471243

4.81

29.49

5.20

611.0614.66

1088334

3019947

1931613

6.32

34.30

5.67

56.23

15.14

214978653557438579

1.43

38.45

9.65

47.93

23.27

Capital Goods

18.67

409739610255268

49.76

13.10

44.66

41276914413866157872
1028617

20.15

Metal Prod.

3.37

29.16

2.07

60.52

12.39

Machinery
Electrical Equip.

631471

17164661084995

3.55

140.03

88.63

19.16

29.44

4694241355818886394

2.90

70.29

20.39

29.95

20.15

121989629411141721218

5.63

34.43

11.42

49.74

27.25

120912423481171138993

3.73-22.36-60.55

60.31

1.50

Scientific Inst.

154712452367297655

0.97

95.38

45.70

37.49

12.83

Miscellaneous Mfg.

6955131257576

562063

1.84

34,77

3.69

50.92

18.00

31525740

62089827

30564087

100.00

53.60

2.90

36.79

12.51

Electronic Equip.
Transport Equip.

Total Mfg.

The sources of growth for 37 manufacturing industries for the two periods are summarizedin Tables 7 and 8. The most remarkable change occurred in the structure of output and exports

in the manufacturing sector during the periods in line with a policy shift from the promotion oflight manufactured exports in the 1960s to the emphasis on the development of intermediate andcapital goods industries in the 1970s. The share of light manufacturing in total manufacturing
output change declined sharply from 33% in 1975-1980 to 21% in 1980-1985, while the share ofintermediate goods was also slightly down from 45% to 39% during the two periods. By contrast,
the greater proportion of increasing manufactured goods was accounted for by the capital goods

sector with its share soaring from 20% in the first period to almost 38% in the second period.

Industrial Policy and Export-led Industrialization

25

Table 8: Decomposition of Manufacturing 1980-1985(Absolute figures in millions of 1985 won)
Decomposition (percent age)

Gross output

Final

Technical

demandchange &%Finalimportshare

demandsub.

Exp.

import
sub.

1980

1985

Prod.
changeLight Mfg.

24261802

31262802

7000389

21.08

28.01

-1.87

47.46

22.66

Diry
Seafood
Pol Grain

1683457

2909995

1225995

3.69

85.95

9.06

-0.36

23.47

486619842305355686

1.07

47.06

0.07

37.74

15.26

48673254801431-65894-0.20

544.28396.32-36.35-11.60Flour327136418938

91802

0.28

95.12

-

8.63

-3.75

Sugar

331357419125

87768

0.26

30.33

-17.06

-7.68

60.29

Bread etc.

10151721304448289276

0.87

79.80

1.52

10.20

11.51

Other Food

14234313143348

1710917

5.15

67.95

3.60

2.99

32.66
47.22

SectorBeverages

18339822107839273857

0.82

23.22

-3.33

26.23

TobaccoYarn
Fibre Fabric

13283821416166

87784

0.26

81.28

0.12

5.44

13.40

27226143277665555051

1.67

-6.75

1.10

120.93-13.08267738837567121079324

3.25

3.04

0.38

71.61

25.73

Textiles19138362606553

692717

2.09

-4.75

-6.01

86.94

11.79

Wearing Apparel

2691947

3090673398726

1.20-115.541.81

227.67-10.32
95.93

LeatherIntermediate Goods
Wood Products
Pulp and Paper
Printing Publishing

95013811675182173800.65-21.07

0.60

25.75

2631518139258578

12943397

38.97

57.20

3.54

46.75

-0.41

12238171392386

1685690.51

370.2911.66-127.18-131.45

12794562117763838307

2.52

21.84

16.22

61.62

6415631289055647492

1.95

51.24

2.46

9.23

41.99

Basic Chemicals

223091434100421179128

3.55

52.13

10.59

-0.32

64.70

Chemical Fiber
Agri chemicals

10659143640489574638

173

15.42

1.57

58.78

27.37

914375929467

10092

0.05

1057.17-167.55

98.21-1222.93

Drugs
Other Chemicals

97175420314821059728

3.19

74.20

-0.57

1.82

23.41

6736511281573607922

1.83

48.72

3.26

22.97

31.57

-6.24

Synthetic Resin

8585881873900

1015312

3.06

11.02

6.13

33.98

61.12

Petroleum Prod.
Coal Products

61240427098726

9746842.93

163.06

13.16

183.52-233.4111375811321040

1834590.55

152.37

3.59

52.29

-101.36

Rubber Prod.
Non-metal Prod.

12246772153509928832

2.80

25.85

0.44

75.06

-0.48

224218933763531134164

3.42

85.81

3.34

8.19

9.33

Iron and Steel

20532193011233

958014

2.88

7.09

0.94

34.70

59.15

IS Primary Prod.
Non-ferrous Prod.

3019947

5120399

2100452

6.32

36.81

0.41

56.17

7.43

6535571211161557614

1.68

50.93

8.28

47.10

10.26

Capital Goods

10255268

22794922

12539654

37.76

42.18

4.01

42.98

18.85

Metal Products

1441386

3240901

1763515

5.30

20.11

2.06

45.59

36.36

Machinery

17164664354592

2638126

7.94

46.38

-0.30

7.64

45.67

Electrical Equip.
Electronic Equip.
Transport Equip.
Scientific Inst.

135581828384031482585

4.46

56.72

-0.12

32.34

10.82

294111451616702675556

8.06

42.18

14.92

78.46

-5.71

243811760411923693075

11.12

37.35

-5.45

45.96

11.24

Miscellaneous Mfg.
Total Mfg.

4523677391642867970.86

126.31

97.01

37.75

32.95

1257576

1984624

727048

2.19

38.86

3.63

82.82

-18.0562089827

95300315

33210488

100.00

44.97

2.58

46.27

11.34

The relative importance of domestic demand versus exports changed and varied considerablyacross industry groups during the periods. The major source of growth in light manufacturing

shifted clearly from domestic markets to exports. The domestic market dominated as a major

source of growth, accounting for 65% of the output growth in light manufacturing in 1975-1980,
while exports contributed to its output growth by 28% during the period. But in the second
period of 1980-1985, the opposite happened, and the light manufacturing sector owed 47% of its

growth to exports, and only 28% to domestic markets. Of course, not all light manufacturingindustries are export-oriented.

Exports dominated domestic demand as a source of output

growth only in the textile products, wearing apparels, and leather and fur products, and theireffects on output became even more pronounced in the second period. The rest of food, beverageand tobacco industries remained basically domestic market-oriented (Tables 7 and 8).
In the intermediate sector, both final demand and exports effects increased between two

periods, with the former effect rising from 48% to 57% and the latter from 39% to 47%. This

26

Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

may imply that the growth of output was stimulated by both the increasing domestic demandfor intermediate inputs and expanding exports.

At more disaggregated industry levels, thedominance of exports effect over domestic demand was led by the chemical products group andthe metal products group, the industry groups along with the capital goods targeted by theGovernment of the Republic of Korea as priority industries for development in the 1970s. The

former includes industrial basic chemicals, chemical fibres, chemical fertilizers and agriculturalchemicals, excluding drugs and cosmetics, and other chemical products.

The latter includes,

iron and steel manufacturing, primary iron and steel products, and nonferrous metal products,
excluding non-metallic products. The rest of intermediate goods industries, lumber and wood
products, pulp and paper, and petroleum and coal products with a major exception of rubber

products grew primarily on the strength of domestic markets (Tables 7 and 8).

In the capital goods sector, where a phenomenal annual growth rate of 19% was recorded
during the period of 1975-1985, the output growth was stimulated by both domestic markets
and exports almost to an equal extent. The effects of both domestic markets and exports wereslightly down from 50% to 42%, and from 45% to 43%, respectively, between the two periods.
As before, not all capital goods industries are export-oriented. Major exporters are fabricatedmetal products, electronic and communication equipment, and transport equipment as expected.
The domestic market for import substitution was much important than exports in the rest ofcapital goods industries such as industrial machinery and equipment, electrical equipment, andscientific instruments (Tables 7 and 8).
Turning to the import substitution of final demand, the negative sign for this variable may

imply importing final products more than being substituted by domestic production, for instance, due to import liberalization, thus offsetting partially the expansionary output effectsof domestic demand and exports described above. In general, the import substitution effects
are relatively weak for light manufacturing and intermediate goods with a minor exception ofpolished grains and agriculture chemicals. On the other hand, the import substitution effect wasquite substantial for certain capital goods industries, and particularly machinery and equipment,
electrical equipment, and scientific instruments for positive import substitution, and transport
equipment for negative import substitution in the first period; and electronic and communica

tion equipment, and scientific instruments for positive import substitution in the second period.
The empirical result may partly reflect the consequences of Korea's industrial policy to expand
the capital goods sector to broaden an industrial base and strengthen the export capacity. The
last source of growth is the combined effects of technical change and input import substitu
tion. They varied in signs and magnitude across industries and their effects were significant ingeneral. It is worth noting that the combined effects on output are consistently positive in all
capital goods industries in both periods, while the results are mixed in light manufacturing andintermediate goods sectors. The positive output effect in the capital goods sector may reflect
partly the results of aggressive localization programmes for the domestic production of a wide
range of parts and components, and machinery and equipment.

4.

Concluding Remarks

The period of Korea's export-led industrialization, 1975-1985, which we have examined was
distinguished by the nearly trebling of real GDP and the rapid growth of real manufacturing

output at an annual rate of almost 12% and particularly the phenomenal growth of capital

goods at a rate of 19% as described at the outset (Table 1). Moreover, the empirical results ofdecomposition analysis point to the manufactured exports as one the most significant factors
contributing to the economic growth and structural change during the period. It seems evident

that the cumulative effects of active policy interventions for export promotion since the 1960s
as manifested in a series of five-year programmes were reflected in the rapid economic growthIndustrial Policy and Export-led Industrialization27

and structural transformation of Korea's economy. Such export-led transformation was possible
due to the existence of skilled labour force and rapid capital accumulation embodying the world
frontier technology, and most important of all, the political commitment to development coupledwith the capacity of the state to discipline and lead the private sector toward export promotion.
The Korean experience may not provide a good model for other developing countries, if thecompetent stewardship of the government over the private sector does not exist.

However, it

underscores among other factors the crucial importance of the dedication and commitment of thestate to economic development and its bureaucratic capacity to guide structural transformationfrom protected import substitution strategy to more open export-oriented strategy at the initialstages of industrialization.

"Getting the prices right" is clearly the slogan of the day.

Market reforms based on freemarket principles have been the heart of stabilization and adjustment programmes supported

by IMF and World Bank in developing countries.

The Korean case is a counter-example ofgetting the fundamentals right. At the early stages of industrialization in the 1960s and 1970s,
the Republic of Korea heavily supported the export industries through export subsidies and otherfinancial incentives, while shielding these industries from foreign competition in the domestic
markets where their products were allowed to be sold at prices higher than the world market
prices. In fact, Amsden (1989) argues that the relative prices were deliberately manipulated toshift resources to the key targeted sectors.
Perhaps the Korean export success story based on the selective interventionist approach may

be historically a unique country experience, and hence may not be replicable in other developing

countries. The central question is not whether the state intervention per se is good or bad, butwhat matters most is the nature and quality of intervention. The outcome of intervention will
not only depend on the objective of intervention, for instance, inward or outward-oriented indus
trialization, but also the capability of the state to initiate and guide structural transformation

leading to the functioning of free markets. The state could play an important role in such an
economic transformation. After all, it takes an efficient and competent bureaucratic machineryto get certain basic things right in the early stages of industrialization such as price stability, atransparent legal framework, promoting domestic and international competition, investment ineducation, etc.

It must be noted, however, that the scope for intervention seems to depend on the stagesof industrialization at which a given economy finds itself.

Based on his study of European

industrialization, Gerschenkron (1962) argued long ago that the nature and extent of stateintervention would change at different stages of industrialization.

At the initial stage, where

there are no functioning markets, the state has to engage in pump-priming to mobilize resources
to create an environment conducive to the smooth functioning of market systems.

On theother hand, as the economy advances along the trajectory of industrialization, and its structure

becomes more complex and sophisticated, the task of selective policy intervention aimed at
specific sectors becomes increasingly difficult to implement without unforeseen distortions inother sectors. In the advanced stages of industrialization, the role of the state will be highly
restricted to establishing and maintaining a competitive environment for private enterprise, andthe resource allocation will be primarily guided by price signals and market incentives. Today,
there are already visible signs of a policy shift towards the diminished role of the state and thegreater reliance on market mechanisms in the Korean economy. For instance, the next Five-Yearplan for the "the New Economy" (1993-1998), which was launched on July 2, 1993 was designed
to deregulate fiscal, financial and administrative systems and accelerate the liberalization of

trade and investment5. Evidently, the Korean economy has outgrown the nurture by the state.

5 For further details on the new Five-Year plan of the Republic of Korea, see Yi (1993).

28

Journal of Applied Input-Output Analysis, Vol.2, No.l, 1994

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University Press.

[2] The bank of Korea (1989), 1975-1980-1985 Link-Input Output Tables, Seoul, Korea.

[3] Chenery, H., S. Robinson and M. Syrquin (1986), Industrialization and Growth: A Comparative
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[4] Dewhurst, J.H.L. (1993), "Decomposition of Changes in Input-Output Tables," Economic Systems
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[5] Feldman, S.J., D. McLain, and K. Palmer (1987), "Sources of Structural Change in the UnitedStates,1963-78:

An Input-Output Perspective,"

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No.3,pp.503-510.

[6] Gerschenkron, A. (1962), "Economic Backwardness in Historical Perspective," Cambridge, Massachusetts, Harvard Universitiy Press.

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[8] Kim, K.S. (1985), "Lessons From South Korea's Experience with Industrialization," in ExportOriented Development Strategies, V. Corbo, et al. (eds.), Boulder, Colorado, Westview Press.

[9] Kim, S.J. (1993), "Structural Changes in Korean Industry and Economic Interdependency be
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International Industrial Linkages and Economic Interdependency in Asia-Pacific Region - Interna

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[10] Kubo, Y. and S. Robinson (1984), "Sources of Industrial Growth and Structural Change: A Com
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[11] Melo, J.de. (1985), "Sources of Growth and Structural Change in the Republic of Korea and Taiwan:
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