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Research Monograph
Transformation of Korean Foreign Economic Policy for Innovation Growth: Manufacturing, Agriculture, and Agro-food Industry

December 31, 2019

  • Author SONG. Yeongkwan
  • Series No. Research Monograph 2019-05
  • Language Korean
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Research Monograph
Transformation of Korean Foreign Economic Policy for Innovation Growth: Manufacturing, Agriculture, and Agro-food Industry

December 31, 2019

PDF
Innovation growth is vital to the Korean economy. To achieve it, the government must overhaul its international economic policy, which mainly aims at promoting exports and protecting domestic industries, and set about shifting to a competition-friendly stance. Accordingly, this study reviews past accomplishments in manufacturing, agriculture, and food manufacturing; all of which should be considered important in international economic policy. It then looks further into the challenges and problems, and presents suggestions for the future policy direction.

Import barriers such as tariffs are main instruments of the manufacturing industry’s international economic policy, and with their dual aspect of ‘economies of scale’ and ‘strengthening market competition,’ they exert great influence on domestic market competition, which then affects the innovation environment. The increased export opportunities, made possible by trade liberalization, creates an advantageous environment for highly productive export companies. However, the rise in imports resulting from the opening of the domestic market can also bring more disadvantages to marginal firms in the domestic market, leading to corporate restructuring and the exit of low-productivity firms―which could, in fact, lead to an overall improvement in industrial productivity. This study focuses on the channel through which free trade measures, particularly those to ease import barriers, enhance overall industrial productivity by triggering the exit of low-productivity firms, and then examines the effects of the exits on Korea’s manufacturing productivity. The difference-in-differences methodology, proposed by Pavcnik (2002), was used to look into the relationship between trade liberalization and manufacturing productivity, considering that it is difficult to analyze the direct causal relationship between the two.

The analysis results reveal that, firstly, the TFP growth in the trade industry was positively affected by the exits, and in terms of the overall manufacturing industry, they were mainly observed among firms with low TFP. Secondly, since the 1990s, the TFP of the trade industry compared to the non-trade industry presented a statistically meaningful increase only in the 2000s. In order to invigorate the innovation in Korea's manufacturing industry, future international economic policies should accept the positive functions of the exits and minimize the negative through welfare policy. Korea's Trade Adjustment Assistance is a representative program of such a welfare policy. However, the majority of the funds is being used to finance FTA-affected companies, providing loans to cover equipment costs and delaying the exit of lowproductivity firms. It is undermining the aforementioned positive function, and the policy focus should be shifted towards retraining workers.

As proposed by R. Putnam (1988), who claims domestic and international policies are inseparable when in pursuit of innovation growth in agricultural and rural areas, Korea needs to develop domestic policies that contribute to enhancing international policies. Due to new phenomena such as aging farming communities, separation of agriculture and rural areas, public’s perception of the consumptive function of rural areas and limits of fiscal expenditure-driven improvements in agricultural competitiveness, the past policy stance, which emphasizes production in agricultural and rural area development, is causing a series of problems: biased government support; unbalanced supply and demand of agricultural products and; excessive concentration of agricultural production. To alleviate these obstacles, a ‘public-purpose direct payment system’ should be introduced. And to make this successful, the government should comply with the system principles, identify farmer’s cost in producing public goods, and establish specific standards for these goods.

The food manufacturing industry is becoming increasingly important in the Korean economy and is now recognized as a key growth engine. This study analyzes the innovation of the industry from three perspectives: export competitiveness of food manufacturing firms, small food manufacturer-driven cooperation with large retailers, and international policy centered on the tariff rate quota. Each perspective is accompanied by a separate analysis of domestic and international market policies for innovation growth in the industry. The result shows that the domestic market needs a strategy to revive the food tech industry which is attracting large investments in advanced economies and to adopt a ‘choose and focus’ strategy for the alternative food and materials industries. In addition, the groundwork must be laid down for innovative growth in the domestic food processing industry by seeking cooperative relationships between food processing companies and large retailers via the elimination of unfair trade practices. Given that food markets are relatively more open compared to the agriculture industry in overseas markets, this study analyzes export competitiveness and the tariff rate quota, a significant international policy instrument that can affect the competitiveness of the food industry. According to the decomposition analysis of the RCA index, key sub-items leading the global food industry are other food preparations e.g. coffee, ginseng, and dried laver and flour and preparations made from cereals e.g. ramyeon and bread. The analysis shows that the innovation growth of the food industry requires a ‘choose and focus’ stance for sub-items that can greatly contribute to export competitiveness, and this can be summarized into a strategy of processing exports which is based on a flexible operation of the tariff rate quota.
 
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The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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