This paper documents the sources of Korea’s economic growth and the associated productivity growth and the efficiency dynamics during its process of structural transformation for the 1970-2016 period. We find that the input-driven growth and structural changes contributed to the early take-off stage of growth in 1970s. However, the growth regime switched to the productivity-driven one (mainly engineered by the industry sector) for the following three decades which was the reason behind Korea’s sustained growth and the escape from the middle-income trap.
The TFP growth and human capital accumulation in agricultural sector contributed to promoting structural transformation. The efficiency dynamics measured by the wedges suggest the biased allocation of labor and land toward agriculture relative to industry and the biased allocation of capital toward industry relative to agriculture. The former inefficiency worsened while the latter improved during our sample period. The intertemporal wedge indicates Korea’s status of overinvestment. The magnitude of the distortion of the inter-sectoral allocation is largest for land and it has increased fast. The degrees and directions of the inter-sectoral and intertemporal efficiency wedges change over time, seemingly in response to growth and regulation policies and also to the macroeconomic shocks.
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