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Structural Shift and Increasing Variety of Korea, 1960-2010

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Structural Shift and Increasing Variety of Korea, 1960-2010 Structural shift and increasing variety of Korea, 1960-2010 : Empirical verification of the economic development model by the creation of new sectors Jung-In Yeon1, Andreas Pyka2, and Tai-Yoo Kim1 1Technology Management, Economics and Policy Program (TEMEP), Seoul National University, Seoul 151-742, South Korea 2Economic Institute, University of Hohenheim, Wollgrasweg 23, D-70599 Stuttgart, Germany Abstract In this paper, we examine the experiences of Korean economy to verify the theoretical knowledge of economic development and structural change. To demonstrate the generalized hypotheses in structural changes, input-output tables of Korea, from 1960 to 2010, are analyzed. Our interest in taking a time series form of Input-output tables originates from the following two questions. Firstly, we inquire whether the change of Korean industrial structure has been followed a certain pattern of structural shift as well as increasing variety. Secondly, if so, it is questioned how the meso-level conditions for the economic development could be explained out of such a pattern. To complete the set of answers, we start from adopting a model of the economic development by the creation of new sectors, TEVECON model, as our theoretical framework. Using this growth model, it is preliminarily experimented how the structural change could impact on the economic development, and then, we figured out how the empirical analysis of Korean economy verifies and more deepens our understandings of the structural change and development. Therefore, this paper contributes to empirically identify the theoretical knowledge of economic development by the emerging of key sectors as well as the creation of new sectors. Keywords Structural change, Increasing variety, Unrelated variety, Input-output table, Korean economy, TEVECON model, Economic development, Economic growth 1. Introduction Invariantly, the utmost importance of economics is to elucidate the natures and causes of economic growth and development. The theory associated with such issues, thereby, has been constantly modified and evolved into more explanatory forms, following the critical moments in economic history. For instance, the moment when the existing production structure was dramatically switched due to the industrialization or when the world-wide economy was in deep recession due to Great Depression should be clarified by theoretical frameworks. And, now we are in a new era of so-called knowledge- based society, meaning the emergence of new products and new industries becomes natural and ordinary as a result of innovation. Therefore, this moment plays a role of the momentum again to make an advancement in the field of growth theories. In this paper, accordingly, we interpret such an emergence phenomenon of new industries as the compositional change of economic systems, and then revisit the studies on structural changes and economic development. In order to verify and complement the theoretical discussion so far, this study more focuses on the relationship between 'increasing variety' at the industrial-level and economic development on the empirical analysis. In fact, since the Classical economics is the beginning to discuss the wealth of nations together with structural changes, the long history of this study is nothing compared to any other research topics. However, in the wake of the marginal revolution, the focus of the economic theory changed from the national level of production and distribution to the micro level of market balance and pricing mechanism, thereby some tricky factors related to the structural issue tended to be assumed away(Harris 1982). As the world economy experienced various events into the twentieth century, scholars deliberated again on economic growth and structural development in the theoretical perspective. Meanwhile, in this line of modern economics, three different perspectives on economic growth have been developed into three branches of the growth and development theory: the first branch is the new growth theory(Lucas 1988; Romer 1990; Grossman and Helpman 1991; Aghion and Howitt 1992), and the second branch is the innovation-driven growth theory on the evolutionary perspective(Dosi and Nelson 1994; Saviotti and Pyka 2004; Metcalfe, Foster, and Ramlogan 2006), and the third branch is the field of development economics and others(Lewis 1954; Rostow 1959; Chenery 1960). In this study, we cover the first and second strands of growth theories in accordance with how they incorporate structural changes into their frameworks. Among other theories, a model of economic development by the creation of new sectors, TEVECON model(Saviotti and Pyka 2004, 2008), is specified in details as the theoretical background of this study. From the literature review, three hypotheses on structural changes and economic growth are formulated, and we test the hypotheses by empirical analysis on the Korean economy, 1960-2010. We use input-output tables of Korea for the analysis, published from the Bank of Korea on the quinquennial-base. As pointed out by (S. Kuznets 1973) and Chenery (1960), Gross-Output(GO), extracted from input-output tables, is the more suitable data for observing overall structural changes because it captures intermediates as well as final goods transactions. Thus, this study shows a distinct merit of the comprehensive analysis on structural changes, in comparison to a myriad of previous literatures using GDP data only. So as to systematically analyze structural changes on the view of economic development, this study starts from redefining that the structural change is the combination of structural shift phenomena and increasing variety phenomena, and we decompose the overall structural change into the three component structural changes. By doing this, we can probe into the relationship between changes in the total industrial structure and economic growth. This paper is organized as follows. In section 2, we review previous literatures on two aspects respectively, structural shift and the increasing variety as following the definition of the structural change here. In addition to this, we narratively describe the key mechanism of TEVECON model in order to specify the theoretical background of this research design. In section 3, details of the research design including the subject of analysis, the data treatment, and the method are presented, and we discuss the result in section 4. Finally, in section 5, we conclude with the contribution of this study and implication. 2. Literature Review The interest of economists in structural change and economic progress of nations has a long tradition, from the beginning of classical economic growth theory(Harris 1982). Meantime, the scope of ‘structure’ and definition of 'structural change’ has been treated a bit differently depending on the historical and academic background. Before going into any further, in this study, we redefine that the structural change is the phenomenon combining structural shift between sectors and increasing variety of the economic structure, and confine the scope of ‘structure’ to the industrial structure constituting total economic production of the country. By comparison with the general definition of the structural change, e.g. ‘the long-term persistent changes in the composition of an aggregate (Syrquin 2010)’, the new definition in this study is suggested with intent to emphasize the two different aspects out of vagueness in the term ‘changes in the composition’. In details, although the two aspects, structural shift and increasing variety, reveals their features both through the process of compositional changes, the messages from the two aspects are significantly different. For the first aspect, the structural change in the terms of structural shift, we focus on the average impact on the aggregate productivity of nations. Therefore, the discussion of the structural shift tends to be which sector or cluster holds the largest majority in the ‘constant set’ of the industrial structure. In this context, so-called ‘structural bonus hypothesis’, meaning the average productivity increase via structural changes leads to the economic growth, has been verified empirically(Fagerberg 2000; Timmer and Szirmai 2000; Peneder 2003). They mostly apply the shift-share analysis using value-added data and labor productivities for each sector. On the second aspect, the structural change in the terms of increasing variety, we concentrate on the emergence of a new sector and thereby the increase of the number of total industries. In this regard, the creation of new products, new demands, and new industries has been incorporated as a determinant role for the economic growth into the analytic framework(Kim and Heshmati 2014) and into the explicit growth models(Saviotti and Pyka 2004; Montobbio 2002). In particular, Saviotti and Pyka (2004) and Montobbio (2002) tried to capture the importance of the economic variety at the industrial-level as a formal theory of economic growth. In other words, this is to highlight the procedural aspect of the structural change by filling a gap by the consideration of ‘meso-level’1 stages into the mico-macro model of economic growth. In short, the two aspects reflect two different points: One is on the specific role of certain industries for economic growth, and the other is on the overall picture composed by emerging and declining industries. Therefore, we firstly review on literatures more related to the structural shift phenomenon in section 2.1, and then review on studies about
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