Selected Issues

Abstract

Selected Issues

Industrial Structure and ITS Macroeconomic Implications in Korea1

A. Introduction

1. After a remarkable growth spurt over several decades averaging above 6 percent, Korea’s economic growth has been slowing significantly for the last two decades. The growth rate declined to 4.3 percent in 2000s, and to 2.8 percent in 2010s. The volatility of growth has also declined since the 2000s, which is commonly observed in the advanced countries with economic development, such as “Great Moderation” during the 2000s in the U.S. (e.g., Blanchard and Simon, 2001; Kim and Nelson, 1999; Stock and Watson, 2003). Although in the long run economic growth and stability can be determined by various structural factors including population aging and development stages, the development path of Korea’s industrial structure can also play an important role.

uA06fig01

GDP Growth and Volatility

(In percent; standard deviation of growth rate)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.

2. Korean economy has become more concentrated and interconnected through the 2000s. The economy has become more concentrated in a few manufacturing industries, while interconnectedness across industries has risen via vertical relationships. At the same time, the importance of international trade has increased with a growing participation in global value chains (GVCs). The rise of economic concentration and interconnectedness could become the sources of macroeconomic instability as macroeconomic fluctuations are primarily the results of many microeconomic shocks at the sectoral or firm-level (e.g., Gabaix, 2011; Carvalho and Gabaix, 2013; Foerster et al., 2011).2 In addition, Acemoglu et al. (2017) show how tail macroeconomic risks can be created from the propagation of microeconomic shocks through the input-output network. In this regard, the recent decline in GDP volatility does not necessarily secure the economic stability in the future. Against this background, this paper attempts to shed light on the role of industrial structure in determining Korea’s economic growth and stability.

3. The structure of this paper is as follows. In Section B, we present overall industrial structure of the Korean economy and its changes over time using the data at the sector-level and industry-level, while the macroeconomic developments in the sectoral and industrial levels will be described in the following Section C. Section D explores the implications of structural changes in industrial structure for economic growth and stability. Specifically, we empirically examine the role of vertical and trade linkages, through which the economic shocks can be propagated, in determining productivity growth. Section E concludes and discusses policy implications.

B. Industrial Structure: Concentration and Interconnectedness3

4. The manufacturing and service sectors account for most of GDP. The share of manufacturing in GDP has increased over the economic development from 12.7 percent in 1970s to 31.6 percent in 2010s. Meanwhile, the share of services has been stable around 60 percent while the other sectors (non-manufacturing and agriculture) have declined over time in the share of GDP.

uA06fig02

Sectoral Share in GDP

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.Notes: Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.

5. The manufacturing sector is highly concentrated in a few key industries while services are not much concentrated. Korea’s industrial structure has followed a U-shaped relationship between economic development and diversification in manufacturing, but this relationship is not found in services.4 As the economy develops, the manufacturing sector first diversifies and it starts specializing relatively late stages of economic development: that is, the share of the three largest industries has declined to 41.9 percent in 1990s, but it has increased to 57.6 percent in 2010s.5 However, in services the share of top three industries has declined over several decades, reaching at 39.5 percent in 2010s.6

Industrial Share in Manufacturing

uA06fig03
Sources: Bank of Korea; IMF staff calculations.
uA06fig04

Industrial Share in Services

(In percent of total services value added)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.

6. The industry has been highly interconnected with other industries through the input-output relationships. Overall domestic vertical linkages (the share of intermediate input in total output) have increased to 47.1 percent in 2009 from 44.3 percent in 2000, but they have remained stable afterwards. At the sectoral level, upstream and downstream linkages are high at above 50 percent in manufacturing while vertical linkages in services remained below 40 percent.7 Moreover, in manufacturing vertical linkages have increased until the global financial crisis (GFC) when they started to decline, while vertical linkages have remained stable in services.

uA06fig05

Upstream Linkage: Sector

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Upstream linkage denotes the ratio of intermediate input supply to other industries in sectoral output; Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.
uA06fig06

Downstream Linkage: Sector

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Downstream linkage denotes the ratio of intermediate input purchase from other industries in sectoral output; Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.

7. Upstream and downstream linkages in the three major manufacturing industries (i.e., electronics, transportation, and chemicals) have declined slightly in the aftermath of GFC.8 Upstream linkages are highest in chemicals at almost twice higher than electronics and transportation. On the other hand, downstream linkages show similar levels in all three industries at around 60 percent.

uA06fig07

Upstream Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Upstream linkage denotes the ratio of intermediate input supply to other industries in industrial output.
uA06fig08

Downstream Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Downstream linkage denotes the ratio of intermediate input purchase from other industries in industrial output.

8. The Korean economy has become noticeably interconnected to the global economy through the trade relationships during the 2000s. The share of export and import in total output has increased by about 5 percentage point each in the aftermath of GFC. At the sectoral level, manufacturing is substantially higher in export and import linkages while it also has shown a sharp increase during the 2000s.9 In services, however, export and import linkages have remained stable at around 5 percent and 3 percent, respectively.

uA06fig09

Export Linkage: Sector

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations. Notes: Export linkage denotes the ratio of export to other countries in sectoral output; Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.
uA06fig10

Import Linkage: Sector

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations. Notes: Import linkage denotes the ratio of import from other countries in sectoral output; Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.

9. At the industry-level, major manufacturing industries have shown a sharp increase in export and import linkages after the GFC. Electronics and transportation show about twice higher export linkages than chemicals while import linkages are highest in electronics.

uA06fig11

Export Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Export linkage denotes the ratio of export to other countries in industrial output.
uA06fig12

Import Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Import linkage denotes the ratio of import from other countries in industrial output.

10. Looking at trade linkages by trading partners, export and import linkages to China have shown a drastic increase over the 2000s in major manufacturing industries. During the same periods, trade linkages to the U.S. and Japan have declined noticeably in major manufacturing industries. Especially, electronics shows the most drastic structural changes in trade linkages: that is, export and import linkages to China have increased significantly while the linkages to the U.S. have declined substantially over last 15 years. This represents that the Korean economy has been exposed to the recent drastic changes in GVCs—that is, the increasing presence of China in the global trade.10 It should also be noted that export and import exposures to the top three trading partners account for almost 50 percent of total trade linkages in major manufacturing industries, except for export linkages in transportation industry.

uA06fig13

Export Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Export linkage denotes the ratio of export to other countries in industrial output.
uA06fig14

Import Linkage: Manufacturing Industry

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: World Input-Output Database; IMF staff calculations.Notes: Import linkage denotes the ratio of import from other countries in industrial output.

C. Macroeconomic Development: Economic Growth and Volatility

11. Manufacturing and services have been key contributors to economic growth. The contribution of manufacturing and services to GDP growth has been declining while the contribution from these sectors still explain most of GDP growth. It is also notable that the decline in the contribution to growth is observed across all industry sectors.

12. Contribution to growth is highly concentrated in a few major manufacturing industries and it has become more concentrated over time. Electronics contributes almost half of the manufacturing growth since 2000s. Largest three industries’ growth contribution has been only 26.5 percent in 1980s, but it has been almost 70 percent since 2000s. The service sector has been less concentrated in growth contribution while the share of major three industries’ contribution has remained at around 30–40 percent since 1980s.

uA06fig15

Sectoral Contribution to GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.Notes: Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.
uA06fig16

Industrial Contribution to GDP Growth: Manufacturing

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.
uA06fig17

Industrial Contribution to GDP Growth: Services

(In percent)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.

13. Growth volatility has remained high until 1990s in all industry sectors, but it has declined afterwards. Although high volatility in 1990s partly reflects the Asian Financial Crisis, the standard deviation (volatility) of growth has declined substantially through the 2000s, consistent with overall GDP growth volatility. The level of growth volatility has been higher in manufacturing than in services and other sectors in 2000s, which may relate partly to higher concentration and interconnectedness in manufacturing and its rise in the recent period.

uA06fig18

Sectoral GDP Volatility

(In standard deviation)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.Notes: Agriculture includes Agriculture, Forestry, and Fishing; Non-manufacturing includes Mining/Quarrying, Electricity/Gas, Water Supply, and Construction.

14. The potential factors of economic instability may be embedded in the Korean economy despite the recent decline of overall growth volatility. At the industry level, electronic and transportation—the two largest share manufacturing industries through the 2000s—have been relatively volatile compared to other manufacturing and service industries. Domestic or external shocks can be easily transmitted to the whole economy due to Korea’s industrial structure of high concentration and interconnectedness around a few major industries which are relatively volatile and also are dominated by a few large firms.11

uA06fig19

Industrial GDP Volatility: Manufacturing

(In standard deviation)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.
uA06fig20

Industrial GDP Volatility: Services

(In standard deviation)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Sources: Bank of Korea; IMF staff calculations.

D. Industrial Structure and Macroeconomic Implications

15. Economic shocks can be propagated to domestic industries via domestic upstream/downstream linkages to other industries or via export/import linkages to foreign countries. Input supply to other industries and input purchase (use) from other industries can act as a transmission channel of domestic shocks (Figure (a)). In addition, an industry can directly export/import products or services to/from foreign countries or it can be indirectly linked to foreign countries through upstream/downstream linkages to other industries which are involved in exports/imports with foreign countries (Figure (b)).12 Direct and indirect trade linkages to foreign countries can play a role in transmission of external shocks.

uA06fig21

Economic Shock Propagation Channel

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

16. The role of vertical and trade linkages in transmission of economic shocks can be empirically analyzed using the industry-level international input-output data of WIOD (2000–2014). Estimation specification extends Acemoglu et al. (2016) to be more applicable to the Korean economy. Acemoglu et al. (2016) studies the impacts of four different industry-level demand and supply shocks—that is, China import penetration, federal spending, TFP growth, and foreign-patenting growth shocks—on the US industry growth. Our model focuses on the role of network linkages in the transmission of economic shocks: (i) the role of domestic vertical linkages in transmission of supply shocks from domestic sources (domestic industry shocks); and (ii) the role of direct and indirect trade linkages in transmission of supply shocks from external sources (external country shocks). For external country shocks, our model focuses on the transmission of GDP growth shocks from Korea’s three largest trading partners, China, the U.S., and Japan.

17. Domestic industry shocks and external country shocks can be propagated through upstream/downstream linkages and export/import linkages. For external shocks, we focus on the transmission of GDP growth shocks from Korea’s three largest trading partners (China, the U.S., and Japan). We examine the transmission of domestic and external growth shocks on industry’s labor productivity growth which may have important implications for Korea’s long-term economic growth. The estimation equation is set up as:

ΔlnLPit=α0+α1lnLPit1+α2ΔlnKit+β1UPitDM+β2DNitDM+β3OWNitEX+β4OWNitIM+β5UPitEX+β6DNitIM+μi+δst+ϵit(1)

whereUPitDM=ΣjIOijt×ΔlnYjt;DNitDM=ΣjIOjit×ΔlnYjt;

OWNitEX=ΣCEXiCt×ΔlnYCt;OWNitIM=ΣCIMiCt×ΔlnYCt;
UPitEX=ΣCΣjIOijt×EXjCt×ΔlnYCt;DNiCtIM=ΣCΣjIOjit×IMiCt×ΔlnYCt

where LPit, Yit and Kit denote industry i’s labor productivity, real value added, and capital intensity (capital/labor ratio); IOijt and IOijt denotes industry i’s upstream and downstream linkages; EXict and IMict stand for export and import linkages (see Table A.1. in Appendix for detailed data descriptions and sources). μi, δst, and εit denote industry fixed effects, sector-year fixed effects, and error terms, respectively. The superscripts DM, EX, and IM denote domestic, export, and import, while the subscripts i, s, C, t denote industry, sector, country, and year, respectively.

18. Industry growth is estimated to be significantly affected by both downstream domestic industry shocks and own export shocks (Table 1). The estimation results on Equation (1) show that: (i) supply-side domestic industry shocks have larger downstream effects (due to supplier shocks) than upstream effects (due to customer shocks)—industries are more likely to be affected by seller’s growth shocks rather than buyer’s growth shocks; 13 and (ii) external country shocks are propagated to domestic industries mainly through its own (direct) export linkages—industries being highly involved in exports directly to foreign countries are significantly affected by the country’s growth shock.14 Separate estimation for manufacturing industries demonstrates that the propagation of domestic industry shocks via both upstream and downstream linkages is significant while the external shock propagation via direct export linkages is also effective. Other control variables have expected signs: that is, lower productivity industries have a higher growth (i.e., convergence or catch-up) while industries with higher capital intensity growth are growing faster.

Table 1.

Korea: Economic Shock Propagation: Baseline Result

article image
Notes: 1) Constant is included in all specifications.2) ***, **, * indicate levels of significance at 1%, 5%, 10%, respectively.

19. The estimated average productivity growth impacts from domestic industry shocks and external country shocks are non-negligible. First, the left panel chart shows the average impact of domestic and external shocks on productivity growth of total industry. For domestic industry shocks, growth shocks in chemicals (one standard deviation) are estimated to have the largest productivity impacts (0.52 percentage point) mainly due to its high vertical linkages to other industries and high volatility, while growth shocks in electronics and transportation are also expected to have substantial productivity impacts. For external country shocks, China’s growth shocks would have the largest productivity impacts for total industry (0.26 percentage point) as the Korean economy is most highly linked to China via trade linkages, while growth shocks in the U.S. and Japan would have smaller but substantial productivity impacts. Second, the right panel chart illustrates the average impact of domestic and external shocks on productivity growth of manufacturing industry. The relative size of productivity impact is consistent with the results for total industry, while the effects are expected to be larger than twice for manufacturing which is highly interconnected with other industries via vertical linkages and with foreign countries via trade linkages. Lastly, the overall impact of each one standard deviation domestic and external shocks is estimated to 1.4 percentage points for total industry and 3.2 percentage points for manufacturing. The estimates highlight that the economic shocks in the largest three industries and/or in the top three trading partners can lead to large swings in the overall economy by the transmission of shocks through vertical and trade linkages.

uA06fig22

Impact of Domestic and External Shock on Productivity: Total Industry

(In percentage point)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Source: IMF staff calculations.Note: The bars (left axis) denote the average impact on 1 standard deviation increase in each industry’s value added growth and each country’s GDP growth, computed using average upstream/downstream, export/import linkages for total industry in 2014 and the significant coefficients of shock variables from specification [3] for total industry of Table 1.
uA06fig23

Impact of Domestic and External Shock on Productivity: Manufacturing

(In percentage point)

Citation: IMF Staff Country Reports 2019, 133; 10.5089/9781498314824.002.A006

Source: IMF staff calculations.Note: The bars (left axis) denote the average impact on 1 standard deviation increase in each industry’s value added growth and each country’s GDP growth, computed using average upstream/downstream, export/import linkages for manufacturing in 2014 and the significant coefficients of shock variables from specification [3] for manufacturing of Table 1.

20. The growth shocks in the top five manufacturing industries are propagated to other Korean industries mainly through downstream effects (Table 2). However, the propagation via direct export linkages are estimated to be insignificant but the sign and magnitude are broadly consistent with the baseline results. The finding confirms that the French firm-level findings of di Giovanni et al. (2017) apply to the Korean economy at the industry-level: that is, the small number of large industries exhibit higher trade and vertical linkages and significantly contribute to the transmission of domestic and external shocks.

Table 2.

Korea: Economic Shock Propagation via Top 5 Manufacturing Industries

article image
Notes: 1) Constant is included in all specifications.2) ***, **, * indicate levels of significance at 1%, 5%, 10%, respectively.

21. The propagation of external country shocks through downstream and direct external linkages are robust to individual country shocks (Table 3). The results highlight the significant role of downstream linkages and direct export linkages in the transmission of domestic industry shocks and external country shocks for growth shocks in China and Japan, which is consistent with specification [3] in the baseline results from Table 1. However, for the U.S. growth shocks, domestic downstream effects are significant while direct export effects are estimated to be negative but without significance for total industry. In addition, for manufacturing industries, domestic upstream effects are also estimated to be significant for the U.S. and Japan.

Table 3.

Korea: Economic Shock Propagation: Individual Country Shock

article image
Notes: 1) Constant is included in all specifications.2) ***, **, * indicate levels of significance at 1%, 5%, 10%, respectively.

E. Concluding Remarks

22. Specialization in a few key industries has increased the exposure of the economy to domestic and external shocks in Korea. The electrical and electronic equipment industry has contributed almost half of the growth in the manufacturing sector since early 2000s. The dominant industries are highly interconnected with other domestic industries via upstream/downstream linkages and with foreign markets via export/import linkages. Moreover, these industries are dominated by a few large firms.

23. The empirical analysis suggests that tighter vertical and trade linkages have increased the vulnerability of the economy to domestic and external shocks. The estimation results show that: (i) domestic industry shocks have larger downstream effects than upstream effects; and (ii) external country shocks are propagated to Korean industries mainly through direct export linkages. Moreover, the overall impact of each one standard deviation shocks in the largest three industries and/or in the top three trading partners is estimated to be 1.4 percentage points for total industry and 3.2 percentage points for manufacturing. This highlights that the economic shocks in a few large manufacturing industries and/or in major trading partners can lead to large swings in the overall economy by the transmission of shocks through vertical and trade linkages. The findings imply that diversification of industrial structure would help mitigate the macroeconomic instability from the propagation of economic shocks.

24. Moreover, high trade linkages to China and the U.S. may lead to the Korean economy to be vulnerable to the unfavorable economic episodes in these countries. For instance, given high trade linkages to these countries, the recent trade tensions between China and the U.S. are expected to have significant impacts on the economic growth and stability in Korea. Therefore, further efforts are needed to mitigate a concentrated economic structure, which may include promoting fair competition between large corporations and smaller firms, fostering innovation especially in SMEs, and reducing the regulatory burden on firms, especially in the service sector.

Appendix I. Data

Table A.1.

Korea: Data Description and Source

article image
Table A.2.

Korea: List of Industries

article image

References

  • Acemoglu, D., Akcigit, U. and Kerr, W., 2016, Networks and the macroeconomy: An empirical exploration. NBER Macroeconomics Annual, 30(1), pp. 273335.

    • Search Google Scholar
    • Export Citation
  • Acemoglu, D., Carvalho, V. M., Ozdaglar, A., and Tahbaz-Salehi, A., 2012, The network origins of aggregate fluctuations. Econometrica, 80(5), pp. 19772016.

    • Search Google Scholar
    • Export Citation
  • Acemoglu, D., Ozdaglar, A. and Tahbaz-Salehi, A., 2017, Microeconomic origins of macroeconomic tail risks. American Economic Review, 107(1), pp. 54108.

    • Search Google Scholar
    • Export Citation
  • Ando, S., 2014. Measuring U.S. Sectoral Shocks in the World Input–Output Network. Economics Letters, 125(2), pp. 204207.

  • Blanchard, O. and Simon, J., 2001, The Long and Large Decline in U.S. Output Volatility. Brookings Papers on Economic Activity, 2001(1), pp. 135164.

    • Search Google Scholar
    • Export Citation
  • Cadot, O., Carrère, C. and Strauss-Kahn, V., 2011, Export Diversification: What’s Behind the Hump?. Review of Economics and Statistics, 93(2), pp. 590605.

    • Search Google Scholar
    • Export Citation
  • Cadot, O., Carrere, C. and Strauss-Kahn, V., 2013, Trade Diversification, Income, and Growth: What do We Know?. Journal of Economic Surveys, 27(4), pp. 790812.

    • Search Google Scholar
    • Export Citation
  • Carvalho, V., 2010, Aggregate fluctuations and the network structure of intersectoral trade, Working Paper No. 1206, Universitat Pompeu Fabra.

    • Search Google Scholar
    • Export Citation
  • Carvalho, V., 2014, From Micro to Macro Via Production Networks. Journal of Economic Perspectives, 28(4), pp. 2348.

  • Carvalho, V. and Gabaix, X., 2013, The Great Diversification and its Undoing. The American Economic Review, 103(5), pp. 16971727.

  • di Giovanni, J. & Levchenko, A. A., 2010, Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement. American Economic Journal: Macroeconomics, 2(2), pp.95124.

    • Search Google Scholar
    • Export Citation
  • di Giovanni, J., Levchenko, A. A. and Mejean, I., 2017, Large Firms and International Business Cycle Comovement. American Economic Review, 107(5), pp. 598602.

    • Search Google Scholar
    • Export Citation
  • di Giovanni, J., Levchenko, A. A., and Mejean, I. 2018, The micro origins of international business-Cycle Comovement. American Economic Review, 108(1), pp. 82108.

    • Search Google Scholar
    • Export Citation
  • Foerster, A. T., Sarte, P.D.G. and Watson, M. W., 2011, Sectoral Versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production. Journal of Political Economy, 119(1), pp. 138.

    • Search Google Scholar
    • Export Citation
  • Foster-McGregor, N. and Stehrer, R., 2013, Value Added Content of Trade: A Comprehensive Approach. Economics Letters, 120(2), pp. 354357.

    • Search Google Scholar
    • Export Citation
  • Gabaix, X., 2011, The Granular Origins of Aggregate Fluctuations. Econometrica, 79(3), pp. 733772.

  • Horvath, M., 1998, Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks. Review of Economic Dynamics, 1(4), pp. 781808.

    • Search Google Scholar
    • Export Citation
  • Imbs, J. and Wacziarg, R., 2003, Stages of Diversification. The American Economic Review, 93(1), pp. 6386.

  • Johnson, R. C., 2014, Trade in Intermediate Inputs and Business Cycle Comovement. American Economic Journal: Macroeconomics, 6(4), pp. 3983.

    • Search Google Scholar
    • Export Citation
  • Kasahara, H. and Rodrigue, J., 2008, Does the Use of Imported Intermediates Increase Productivity? Plant-Level Evidence. Journal of Development Economics, 87(1), pp. 106118.

    • Search Google Scholar
    • Export Citation
  • Keller, W., 2002, Trade and the Transmission of Technology. Journal of Economic Growth, 7(1), pp. 524.

  • Kim, C. J. and Nelson, C. R., 1999, Has the U.S. Economy become More Stable? A Bayesian Approach based on a Markov-Switching Model of the Business Cycle. Review of Economics and Statistics, 81(4), pp. 608616.

    • Search Google Scholar
    • Export Citation
  • Koopman, R., Wang, Z. and Wei, S. J., 2014, Tracing Value-Added and Double Counting in Gross Exports. American Economic Review, 104(2), pp. 45994.

    • Search Google Scholar
    • Export Citation
  • Koren, M. and Tenreyro, S., 2007, Volatility and Development. The Quarterly Journal of Economics, 122(1), pp. 243287.

  • Lee, D., 2019. The Role of R&D and Input Trade in Productivity Growth: Innovation and Technology Spillovers. The Journal of Technology Transfer, forthcoming.

    • Search Google Scholar
    • Export Citation
  • Mau, K., 2016, Export Diversification and Income Differences Reconsidered: The Extensive Product Margin in Theory and Application. Review of World Economics, 152(2), pp. 351381.

    • Search Google Scholar
    • Export Citation
  • Samaniego, R.M. and Sun, J. Y., 2016, Productivity Growth and Structural Transformation. Review of Economic Dynamics, 21, pp. 266285.

  • Shea, J., 2002. Complementarities and Comovements. Journal of Money, Credit, and Banking, 34(2), pp. 412433.

  • Stock, J.H. and Watson, M. W., 2003, Has the Business Cycle Changed? Evidence and Explanations. Monetary Policy and Uncertainty: Adapting to a Changing Economy, pp.956.

    • Search Google Scholar
    • Export Citation
  • Timmer, M. P., Dietzenbacher, E., Los, B., Stehrer, R. and Vries, G. J., 2015, An Illustrated User Guide to the World Input–Output Database: The Case of Global Automotive Production. Review of International Economics, 23(3), pp. 575605.

    • Search Google Scholar
    • Export Citation
1

Prepared by Dongyeol Lee (APD). The author is particularly grateful to Tarhan Feyzioglu (APD) and Johanna Schauer (SPR) for their invaluable discussions and comments.

2

It should be noted that specialization may also generate higher productivity through economies of scale and selection leading to the growth of productive firms/industries, which has arguably been at play in Korea over several decades.

3

In this section, we use both sector-level and industry-level data from national accounts (1970–2017), and World Input-Output Database (WIOD) (2000–2014) to study the overall industrial structure of the Korean economy and its changes over time.

4

The hump or U-shaped relationship of economic development and diversification (or specialization) is generally observed in many advanced economies (e.g., Imbs and Wacziarg, 2003; Cadot et al., 2011).

5

Food, textiles, chemicals, and basic metals have been the three largest share manufacturing industries in 1970s and 1980s, while electronics, transportation, and chemicals have been the main manufacturing industries since 2000s.

6

Wholesale and retail trade, real estate, public administration and defense, and education have been the three largest share industries in services.

7

Upstream (downstream) linkage is defined as the share of intermediate input supply (use) in sectoral or industrial output, which measures the intensity of connectedness to other industries as upstream sellers (downstream buyers).

8

The three largest industries are determined based on the share of GDP in 2014: (i) Electronics includes “Computer, electronic and optical products” and “Electrical equipment”; (ii) Chemicals includes “Chemical and chemical products” and “Basic pharmaceutical products and preparations”; (iii) Transportation includes “Motor vehicles, trailers and semi-trailers”, and “Other transport equipment” (see Table A.2 in Appendix for detailed list of industries).

9

Export (import) linkage is measured as the share of gross export (import) to (from) other countries in sectoral or industrial output.

10

The substantial increase in trade linkages to China over the 2000s may relate to the growing emergence of China’s presence in the global economy, especially after China joined the World Trade Organization (WTO) in 2001.

11

The industry concentration indices (the top three firms’ market share or Herfindahl-Hirschman index)—computed using the “Mining and Manufacturing Survey” by Korea Fair Trade Commission—for the top 3 industries (i.e., electronics, transportation, and chemicals) are also highly concentrated by the small number of firms.

12

This paper considers only direct (first-order) trade and vertical linkages between Korea and other countries as well as between two industries, as in the existing literature (e.g., di Giovanni and Levchenko 2010; di Giovanni et al. 2018). For simplicity and empirical identification purposes, we assume indirect (higher-order) effects are not likely to be large empirically, although Acemoglu et al. (2016a) and other network literature introduce both direct and indirect trade and/or vertical linkages using a Leontief inverse matrix.

13

The result is consistent with Acemoglu et al.’s (2016) theoretical and empirical findings. Theory predicts that supply-side shocks propagate more strongly to downstream customers than to upstream suppliers because supply-side shocks affect the prices faced by customer industries, creating powerful downstream propagation.

14

This result may relate to the important role of intermediate input export in productivity growth (e.g., Kasahara and Rodrigue, 2008; Keller, 2002; Lee, 2019).

Republic of Korea: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept