Determinants of Korean Trade Flows and their Geographical Destination

Организация: International Monetary Fund (International Monetary Fund)
A distinguishing feature of the strong economic performance enjoyed by Korea and other newly industrializing Asian economies has been the rapid growth of export and import flows. In recent years, the growing weight of East Asian countries in the world economy and their increasing trade integration have been accompanied by a substantial change in the geographical destination of Korea's exports. While growth in Korean exports to member countries of the Organization for Economic Cooperation and Development (OECD) has slowed down considerably, exports to other East Asian countries have boomed. This paper examines the extent to which the Korean experience can be explained within traditional trade models. It provides evidence on how exports and imports react to changes in relative prices and in foreign and domestic demand, and investigates the determinants of the direction of Korean exports.

Two important issues are dealt with differently from previous studies. First, in light of the high weight of raw materials and capital goods in Korea's imports, the hypothesis that investment expenditure is the most important explanatory variable for import demand is examined. Second, export demand and supply elasticities are obtained by estimating a simultaneous structural model in which the long- and short-run dynamic properties of the data are fully specified.

Estimation results indicate that real consumption and investment are important determinants of aggregate imports in Korea and that a specification that employs aggregate expenditure implicitly underestimates the relative importance of investment. The demand for Korean exports exhibits high elasticity with respect to foreign income and relative export prices. The decline in the share of exports to industrial countries is linked not only to the decline in the relative importance of OECD countries in world trade, but also to the increased penetration of industrial countries. markets by other Asian developing countries.

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