Import Restriction and Liberalization
The "Protectionist," Export-Oriented Economy
Unless exorbitant costs will result from their adoption, economic
theory favors general taxes and subsidies over tariff protection. Whatever its objects,
tariff protection is bound to generate by-product distortions in factor intensity, in
consumption, and toward home-market bias (see Corden, 1971). Furthermore, quantitative
restrictions on imports are considered even more distorting than tariff protection. Despite this knowledge, however, many countries relying on export
promotion, such as Korea, have maintained fairly severe import-restraining systems in the
form of both tariff protection and quantitative restrictions, partly because of political
considerations of vested interest groups (as in the case of agricultural protection) and
partly because import restriction is believed by many policymakers regardless of trade
theorists' statements to the contrary to be the best available policy measure at an early
phase of economic development. Import restriction is thought to Pro-
mote infant industries (and rapidly convert them into exporters) and
also to maximize the foreign sales of currently exporting industries (at the expense of
domestic consumers' surplus).
Countries such as Hong Kong and Singapore have pursued export-oriented
growth strategies while maintaining free-trading regimes almost from the beginning.
Countries such as Korea, Taiwan, and Japan, on the other hand, maintained fairly
protectionist import regimes for long periods of time. It was not until the 1960s that
Japan eliminated the bulk of its formal quantitative restrictions: the nominal import
liberalization ratio (by items) expanded from less than 70 percent in 1960 to about 93
percent in 1964, and to 97 percent by 1976. Similarly, Taiwan did not eliminate the bulk
of its formal quantitative restrictions until the early 1970s: the nominal
import-liberalization ratio increased from 61.5 percent in 1970 to 96.5 percent in 1973. As a result, in both Japan and Taiwan, quantitative import
restrictions are now essentially limited to special laws and other invisible unofficial
means. Korea is scheduled to eliminate the bulk of its quantitative restrictions during
the period of 1984 88.
This chapter analyzes the efficiency and welfare implications of import
restriction and import liberalization in an export-oriented developing economy. In light
of the Korean experience, it addresses the
question of whether extensive import liberalization is always a
necessary condition for the successful growth performance of an export-oriented economy.
If not, it asks, when does it become a necessary condition?
In order to give the complete picture, section 2 discusses the unified
analytical framework. Section 3 examines the experience of Korea in its early phase of
export-oriented growth and analyzes the effect of its import policy on economic growth.
Section 4 examines the Korean experience in the later stage of growth, when Korea's
comparative advantage started to shift away from the simple labor-intensive consumption
goods toward more capital-intensive intermediate and investment goods. The effect of
sustained protectionist import policy and the need for more extensive import
liberalization are analyzed. Section 5 delineates the liberalization effort of the Korean
government during the period 1983 86. Emphasis is given to the politics of protection
versus liberalization. The chapter concludes that in order to initiate export-oriented
growth, a developing economy must undertake some minimum level of import liberalization,
because an extremely protectionist regime would simply frustrate any kind of incentives
given to the export sector. However, extensive import liberalization is not a necessary
condition for initiating and sustaining successful export-oriented growth. Only at a later
stage of development, when the economy starts shifting into the intermediate and
investment-goods sectors, might extensive import liberalization become a necessary
condition for maintaining production efficiency and maximizing consumer welfare.
Earning versus Saving Foreign Exchange:
Export Promotion versus Import Substitution
This section summarizes the analysis of Keesing (1967) and Bhagwati
and Krueger (1973). They argue for the promotion of exports (earning foreign exchange) and
against the substitution of imports (saving foreign exchange).
First of all, the argument is made that the most important source of
economic growth is the upgrading of human resources and production technology rather than
the simple accumulation of physical capital. It is
persuasively argued that under an export-promotion regime,
entrepreneurs are mainly concerned with cutting costs, keeping production facilities and
techniques up to date, and improving product quality and marketing to suit consumer taste
(both at home and abroad), whereas workers are subject to great pressure to perform and
train others. Under an import-substitution regime, on the other hand, entrepreneurs
presumably spend most of their energy manipulating government officials (who have mastered
the finer arts of lobbying, corruption, and graft), in order to improve their protection,
while workers learn lackadaisical ways, as they are not pressed to raise their quality and
productivity performances. A developing country should therefore gain higher-quality
industrial experience and undergo greater pressure for quality and efficiency performance
by selling the same value of output abroad under competitive conditions than at home with
protection. In short, an export-promotion regime is believed to create human resources
more suitable for sustained growth than is an import-substitution regime, which, by
encouraging the wrong skills and habits, casts a long shadow over the future of the
It follows, then, that one of the important gains to be made from trade
is rapid technical progress arising from innovative imitation. Adam Smith long ago
emphasized the "educative effect" of "mutual communication of knowledge of
all sorts of improvements which an extensive commerce to all countries naturally, or
rather necessarily, carries along with it" (Cannan ed., 1950, 125). Exporting firms
must face both price and quality competition in international markets, and consequently
the survival and success of each exporter depends on adaptive innovations and active
absorption of available production techniques. The
export-promotion strategy also enables an economy to take full advantage of economies of
scale. Even when the initial markets are found at home, the physical layout of
manufactures permits a ready exploitation of scale economies and an easy transition into
Both export-promotion and import-substitution regimes may be
characterized by a mistrust of laissez-faire and free trade. However,
foreign governments respond to the extreme abuse of export subsidies
not tolerated by international trade conventions. Hence the potential for arbitrary
government intervention is more restricted under an export-promotion regime than it is
under an import-substitution one. Furthermore, it is believed that in an effort to make
local prices and wages appear cheap, less inflationary policies are pursued under
export-promotion regimes. This, in turn, restricts the size of subsidies and tax
exemptions a country can afford, providing a built-in check on excessive intervention.
For a developing economy, foreign products may mostly reflect locally
unattainable natural resources, skills, and technology. Most likely there will be a lack
of substitutability between local resources and foreign-supplied resources. The ability to
pay for needed imports may, then, severely limit economic growth. An export-promotion
regime is believed to relieve the foreign-exchange constraint on growth more readily than
is an import-substitution regime.
Another advantage of export-promotion regimes is that they naturally
tend to rapidly expand the volume of exports and consequently also the volume of imports,
while import substitution regimes tend to reduce (or increase less rapidly) the volume of
a country's trade. According to Corden (1971), the opening up of an economy to trade
(which may be measured in terms of the export/GNP ratio) generates a "static"
efficiency gain that is very similar to a "once-and-for-all" technical advance
that raises the absorption-possibility frontier of a country at a given factor-supply
level. Furthermore, with a given constant propensity to save, the static efficiency gain
may itself induce the rate of capital accumulation to rise. Consequently, it will raise
the growth rate of the economy. This can be described as the "induced-growth
gain" from trade. If investment goods are mostly imported, then this induced-growth
gain will also include the effect of reduced prices of investment goods. Moreover, it is
possible that the opening up of trade (or the rising trade-volume/GNP ratio) will also
raise the rate of growth of an economy by directly increasing the country's propensity to
Protection, Offsetting Policy Measures, and Growth
In a typical developing economy, with typical political power
balances, import restrictions in the form of both tariffs and quotas have to be accepted
as a fact of life. However, as shown by Johnson (1967) and Bhagwati (1968), when
industrial promotion and growth are by and large biased in favor of the production of
commodities in which the country has a comparative advantage, the adverse efficiency and
welfare effects of the protection (which is attuned to the sectors with comparative
disadvantage) are alleviated as the economy grows and as policy measures promoting
industry are enforced.
Figure 7.1 illustrates such an economy. With free trade the country
produces x and y at f . In order to highlight only the aspect of
"protection-cum-second-best-policy," we now postulate a small open economy in
which all kinds of external economies are completely taken care of by a set of ideal taxes
and subsidies. Consequently, the production-possibility curves represent the
"true" ones and, in the absence of tariff protection, production and consumption
are determined at the welfare-maximizing optimal points.
With a tariff-distorted domestic price ratio p* , however, the
country finds itself producing outputs at q , adversely affecting the production of
the exportable, y . Consumption is at c where an international price line, p
, passing through q intersects the Engel line corresponding to the domestic price
ratio p* . Postulating a set of well-behaving homothetic social indifference
curves, we have drawn a linear Engel line that represents the income-consumption path
corresponding to the given commodity price ratio; bq of y is exported, and bc
of x is imported, but an amount equivalent to tc of x is taken away
as government tariff revenue. To avoid cluttering the geometry, the diagram omits the
social indifference curves, one of which passes through C with a slope equal to that of p*
. It is assumed that tariff revenue is not redistributed to the private sector as an
income subsidy, but instead is spent by the government.
When import restrictions are a fact of life, there are always
second-best policies to consider: in the presence of irremovable
import-substitution-biased commodity-market distortions, a country can adopt certain
offsetting policy measures to promote production and exports of the unprotected sector. At
the given factor-supply level, and holding
Tarriff Protection and Second-Best Policies
Tariff Revenue and Aggregate Consumption Pattern
represents national product at domestic market prices,
d*o national product
at factor cost, and dd
* the total revenue from tariffs. This represents the case of
balanced trade and no factor payments to other countries. National expenditure and
product are equal in size.
the distorted domestic price ratio unaltered at p* , the
government can try to shift the output pattern in the direction of f by introducing
a second-best policy measure such as subsidized credit rationing in favor of y .
This will necessarily result in by-product efficiency losses in production, and place the
economy inside the given production-possibility curve. In figure 7.1 such a policy leads
the output pattern to move alone a path like "Offsetting Distortion' (OD) line I (ODL
1). This implies that the stronger the offsetting factor-market
distortions, the larger the domestic production and exports of y at the expense of x
In a two-factor (capital and labor) framework, we may let y
represent the consumption good, which is capital-intensive, and x the agricultural
product, which is labor-intensive, completely ignoring the existence of| any other raw
materials and intermediate and capital goods. In figure 7.1, a shift in output pattern to
a point like q " along the OD line is equivalent (in terms of the increase in
output level of y ) to the capital accumulation and growth along the familiar
Rybczynski line up to the point q' . The Rybczynski line is the locus of tangencies
of the fixed (tariff-distorted) domestic price ratio with the (undrawn)
production-possibility curves resulting from successive accumulation of capital. Both
movements will imply an increase in real income and a rise in export/ GNP ratio.
As mentioned earlier, such second-best promotion policies will
inevitably create efficiency losses. These losses, if large enough, could cause real
national income to become smaller than it was in the absence of offsetting intervention
even though there may be substantial shifts in the output pattern and an increase in the
export/GNP ratio. Offsetting Distortion line 2 (ODL 2) in figure 7.1 shows the
immiserizing path of declining real national income.
In a dynamic context, there will be continual increases in factor
supplies and technical progress that shift out the production-possibility curve. In figure
7.1 growth (or capital accumulation) is biased in favor of the unprotected export industry
and hence is not immiserizing. So long as import-restriction-induced distortions in
commodity markets are maintained, the need for continuous policy-induced structural
adjustments through offsetting government policy measures,
though perhaps reduced with growth, will never disappear even in the
absence of external economies. The trade triangle may, for instance, shift along the
Rybczynski line from the one with the hypotenuse qc to the one with the hypotenuse q'c'
, or shift along the ODL 1 from the triangle with the hypotenuse qc to the one with the
hypotenuse q'c ". In a real economy, a combination of both movements will be
Protection, Reinforcing Distortion, and Growth
Just as policies favoring the comparatively advantaged (nonprotected)
industries can offset some of the adverse effects of protection, this section illustrates
how industrial promotion of the protected (comparatively disadvantaged) industries
aggravates, or reinforces, these effects.
In figure 7.3 y represents the intermediate and capital goods
sector, which is capital-intensive, and x represents the consumer goods sector,
which is labor-intensive. Output and consumption are at q and c ,
respectively, with tariff protection of the now import-competing y sector. Tariff
revenue is equivalent to ct of y . Since the international price line p has
been drawn steeper than the Rybczynski line, capital accumulation results in
immiserization. We further postulate that the government promotes the import-competing y
sector by, say, maintaining a creditrationing system. The capital-intensive sector is now
not only protected by tariffs, but is also promoted by other policy measures. Hence figure
7.3 presents the case in which the government nontariff policy measure induces the
immiserizing structural adjustments along RDL (the Reinforcing Distortion line). In the
growth process, the nontariff policy measures will reinforce the decline y imports and
also the immiserization. Evidence suggests that aspects of immiserizing growth did exist
in Korea, especially in the late 1970s, that were serious enough to substantially reduce
the allocative efficiency of the economy.
Protection of Monopolistic Export Industries
In figure 7.3 growth by capital accumulation will (with or without the
reinforcing distortions) eventually lead the output point to reach the Engel line, beyond
which y becomes exported. With a perfectly competitive market structure, protection
of the y sector beyond the Engel line is meaningless. However, Robinson (1969)
shows that when the export sector consists of a monopolistic producer, import restriction
of export goods can have the effect of expanding the proportion of export sales to total
sales (at the expense of consumers' surplus) without resulting in allocative inefficiency.
Monopolistic profit maximization through
price discrimination in the domestic market does not cause the total
output of the good to differ from that of free trade; it only expands the proportion of
the export sales out of a given quantity of total output. That is, protection of the
monopolistic export sector raises the export/ GNP ratio, results in a redistribution of
income in favor of the monopolist and against the domestic consumer, and may even cause a
premature exportation of the import good, but it does not affect allocative efficiency.
Protection and Liberalization in the Early Phase of Korea's Growth
Import Liberalization and an Export-Promotion Regime
As a result of the heavy bias toward import substitution in the 1950s,
Korea's commodity markets were significantly distorted. As a result, the labor-abundant
Korean economy had not actively taken advantage of the gains to be made from trade a la
Hecksher-Ohlin, and maintained an only half-open economy. With the initiation of the
export-promotion strategy in 1961, the Korean government replaced its multiple
exchange-rate system with a unitary one, made a series of exchange-rate adjustments to
rectify the extremely overvalued domestic currency, and above all tried to prevent the
direct impact of its own extremely protectionist import-restriction regime from negating
the newly created incentives for export activities.
Four principal policy measures were adopted in Korea in order to pursue
this new export-oriented growth strategy: vigorous administrative support for export
promotion, a preferential tax system, a subsidy allocation for export activities, and,
finally, a reduction of the import-substitution biases of the economy. This last was
especially important, because extreme import restrictions may well more than offset any
kind of incentives given to export activities. For example, both tariffs and quotas are
equivalent to taxes on imports, which, in turn, can become taxes on exports. Also, when
direct import restraints are used as the instrument for correcting balance-of-payments
deficits, exports will suffer the exchange rate will be overvalued, and hence the
competitive power of the export industries will be reduced.
In other words, a country cannot launch an export-promotion strategy
while maintaining extreme forms of import restriction. Thus,
when it was decided that this was the policy to be followed, the
Korean government had to free export producers from the negative effects of tariff
protection and quantitative restraints at the outset, by allowing tariff-exempt imports of
the raw materials and investment goods that were directly used in the export-production
process. Furthermore, the government tried to reduce the general level of quantitative
import restrictions, culminating in the introduction of the negative list system in the
second half of 1967.
In the period 1961 63, the number of items positively listed as
importables (subject to government import licensing, quotas, foreign-exchange allocation
ceilings, linkages to exports, and other regulations) fluctuated in the range of 1,000 to
1,600. Feeling the pressure of balance-of-payments deficits, the government reduced the
number of importable items to fewer than 500 in late 1964, but then restored the 1961 63
level in 1965; the number of importable items was increased from 1,778 to 2,491 in 1966,
and 3,852 by July 1967, when the switch to the negative list system occurred. Now just the
"prohibited" or "restricted" import items were recorded.
Under the negative list system, only a handful of the manufactured goods
belonging to SITC (Standard International Trade Classification) code numbers 6 and 8, as
well as certain food products, got classified as "Automatic Approval" import
items. Most finished consumption goods were either classified as "Restricted
Import" items or as "Prohibited Import" items.
The government effectively controlled the import of these restricted items by imposing
annual import ceilings. Furthermore, there were numerous special laws for selected
industries that, purely incidentally or with expressly protectionist intentions,
restricted the import of related "automatically approved" commodities. In
principle, restricted imports that competed with domestic production were allowed only to
fill the estimated gap between domestic supply and demand. Quantitative import controls of
noncompetitive raw materials and intermediate and capital goods (which were classified as
restricted items and were not directly related to export activities) seem to have been
influenced entirely by the overall balance-of-payments situation.
Imports of raw materials and intermediate inputs and investment goods
for foreign exchange-earning activities, on the other hand, were approved automatically,
irrespective of their classification. Furthermore, imports
financed by government-contracted foreign loans were permitted after consultation with the
Trade Committee, irrespective of classification. All in all,
according to Frank, Kim, and Westphal (1975, 58), out of 30,000 SITC commodities, the
number of "automatic approval" items expanded from 2,760 in the first half of
1967 to 17,128 in the second half, while the number of "prohibited import" items
was reduced from 26,148 to 2,617.
Since the old system of commodity classification (used prior to the
second half of 1967) was significantly different from the more systematic classification
(into 30,000 items based on the UN's SITC manual), these numbers can only serve as a crude
first approximation of the degree of liberalization. Nonetheless, we still conclude that
the minimum requirements of import liberalization were satisfied in Korea, and that the
remaining import-substitution biases could have been more than offset in the 1960s and
1970s by various policy measures to promote exports of manufactures.
This section gives a rough description of Korea's protectionist regime
during the period 1967 78, and shows that little progress in import liberalization was
made after 1967.
Following the introduction of the negative list system, the average
basic legal tariff rate (weighted by import value of each commodity) was raised from about
17 percent in 1963 67 to about 26 percent in 1968 72. From 1964 to 1972 there was
also a special tariff law that empowered the Ministry of Finance to collect additional
special tariffs (up to 90 percent of the differential between the estimated wholesale
value and the import cost) on nonessential imports.
It was only after the 1973 tariff reform (which abolished the special
tariff system) that the tariff rate was reduced to a 20 percent level (the average legal
tariff rate for all commodities amounted to 20 percent in 1973 74 and 1976) and to 19
percent in 1978. However, because of the tariff exemptions or
reductions that were granted on the imports of raw materials directly used for export
production and on the capital goods imported for foreign direct investment projects,
export production, and other important industries, the actual tariff rate (the amount of
tariff revenue collected divided by the total c.i.f. value of imports) amounted to only
about 9 percent on average during 1962 71, and about 7 percent throughout the period 1972
83. The average tariff rate actually collected, then, does not
seem to have been extremely high in Korea but since those tariffs collected were mostly
from the commodities whose imports were "approved," they do not tell the
magnitude of the import premium, or the effective rates of protection, generated by the
quota system (see tables 7.1 and 7.2).
When the government changed from the positive list of quantitative
restrictions to the negative list system in 1967, the nominal import liberalization ratio
by item (on the basis of 1,312 SITC 5-digit classification) amounted to nearly 60 percent.
However, as mentioned above, there was no further movement toward liberalization after
1967, and in fact the import-liberalization ratio rather steadily declined thereafter to
become about 50 percent by the first half of 1978. According to table 7.3, the number of
restricted import items, as well as their share in total value of imports, was
substantially larger in 1978 than it had been in 1967. There were significant increases in
import restrictions (both in terms of number of items and value of imports) of machinery,
chemicals, and other manufactures (except textiles) during 1967 78. Even raw materials
were subject to increased import restrictions. It was only after the
second half of 1978 that the import-liberalization ratio (both by
items and by value) began to increase.
Between 1970 and 1975, out of Korea's total commodity imports the share
of consumption goods amounted to only about 5 percent. The share of foodstuffs amounted to
about 16.6 percent in 1970 and 14.3 percent in 1975. Consequently, about 80 percent of
Korea's imports during this period consisted of raw materials, intermediate-input
materials, and capital goods. On the basis of this observed
composition of trade, Korea's protectionist regime may be characterized as follows:
imports of agricultural products were restrained to the minimum necessary levels, while
preferential treatment was given to the import of capital goods (in order to accelerate
investment activities) and to raw materials and intermediate goods (in order to raise the
utilization rate of existing production capacity). As a result, at least until the mid
1970s, the quantitative import restrictions were essentially set against agricultural
products and finished consumption goods. This is important; it means that the import
restrictions did not directly affect the production of other (export) goods.
Growth Performance of the Korean Economy
In the 1950s Korea's imports were mostly financed by foreign
grants-in-aid. The opening up of the Korean economy to trade (through the switch to an
export-oriented growth strategy) occurred over an extended period of time, spanning the
1960s and 1970s. The efficiency gains from this action materialized in the form of both
rapidly increasing real wage rates and rising rates of return on investment. The average
gross rates of return on investment in the Korean manufacturing sector increased from
about 12 percent in 1954 61 to about 23 percent in 1972 79 (see table 7.4). Over the
period 1962 79, there were also rapid increases in domestic savings, which, together with
the productivity gains from trade, allowed nearly 10 percent average annual growth rates
of GNP. The average annual growth rate of GNP rose from about 4 percent in 1953 61 to
about 8 percent in 1962 66 and to almost 10 percent in 1967 79 (see table 7.5).
|TABLE 7.1 Nominal and Effective Rates of
Protection by Sector in South Korea
||All Tradable Sectors
||Nominal Rates of Protection
||Effective Rates of Protection for Domestic
Sales (Corden Method)
|SOURCES: Kim and Hong 1982.
NOTES: Sectors that exported more than 10 percent of total output as of 1970 are
classified as Export Sectors, sectors in which imports took more than 10 percent of total
domestic supply are classified as Import-Competing Sectors, and sectors that exported and
imported more than 1(1 percent are classified as Export-Import Sectors. Others (not shown
in the table) are regarded as Noncompeting Sectors and are taken into account in the
estimation of the weighted average rate for total sectors.
Nominal rate of protection represents the percentage difference between domestic and
c.i.f. price of an equivalent item. Effective rate of protection refers to the protection
granted to domestic value-added activities in a particular production line. quantified by
the percentage difference between the value-added in domestic prices and that in world
|TABLE 7.2 Import Liberalization Ratios and Rates
of Protection in South Korea
Ratio in 1982
|| Nominal Rate
|Real Rate of Protection
|Agriculture and fisheries
|Mining and energy
|Durable consumption goods
|Nondurable consumption goods
|Intermediate goods I
|Intermediate goods II
|(Iron and steel)
|SOURCE: Young et al. 1982.
|TABLE 7.3 Shifts in Proportion of Restricted
Imports in South Korea by Sector
(value in millions of U.S. $)
|All commodities by item
|All manufactures by item
|0,1.a Foodstuffs, raw by item
|2,4. Raw materials by item
|3. Mineral fuels by item
|0,1. Food manufactures by item
|5. Chemicals by item
|65. Textiles by item
|67. Iron and steel by item
|6-. Other manufactures by item
|7. Machinery by item
|8,9. Misc. manufactures by item
|SOURCES: Korean Traders Association 1968;
Republic of Korea, Ministry of Trade and Industry, Semi-Annual Export-Import Notice
(first half of 1978 and of 1981), Yearbook of Foreign Trade Statistics , and Standard
Korean Trade Classification ; and United Nations 1963.
NOTE: Figures in parentheses are percentages.
a Standard International Trade Classification (SITC).
During the 1953 61 period of import substitution, Korea was
insignificant as an exporter of primary products, and the export/GNP ratio amounted to
only about 0.01. By pursuing the export-promotion strategy, Korea became an exporter of
manufactures, and the export/GNP ratio rose rapidly from about 0.04 in 1962 66 to about
0.26 in 1977 79. Commodity exports expanded from a mere $33 million in 1960 to about $15
billion in 1979, and the proportion of manufactures out of total commodity exports
increased from about 15 percent in 1960 to more than 90 percent by 1979.
As the case of Korea proves, an export-oriented economy can achieve both
high growth performance in output and export expansion with just a minimum (but necessary)
degree of import liberalization. Obviously, the fairly extensive quota and tariff systems
that Korea maintained throughout the period 1967 79 did not prevent it from achieving high
rates of growth in either of these areas. Hence it is fair to say that the
export-promotion policy measures more than offset any possible adverse effects from the
tariffs and quotas. In fact, the system of tariff protection may even have contributed
positively to Korea's growth. Real GNP grew about 9 percent per annum during 1962 84, and
domestic savings expanded from about 4 percent of GNP in 1953 61 to about 25 percent in
1976 85. Government saving was negative prior to 1964, and negligible in 1964 66. However,
it amounted to an average of about 5.5 percent of GNP during 1967 85, and about 40 percent
of this was financed by tariff revenue in spite of the fact that the actual rate of
tariffs was reduced from about 9.1 percent in 1967 71 to about 6.2 percent in 1980 85.
Because the Korean government has been directly involved in various productive investment
activities, the static negative effects of the tariff system have to be weighed against
its positive contributions of reducing consumption, enhancing domestic savings, and
increasing productive investment. (This possibility has been indicated in figure 7.2.)
Owing to the fact that prior to the mid 1970s imports of intermediate
and capital goods were subject to less severe quantitative controls than were consumption
goods, import substitution of these products had not been as profitable as it had been for
consumption goods, and hence was relatively slow. It might sound paradoxical, but Korea's
early failure to extensively promote the intermediate and capital-goods industries seems
to have contributed positively to rapid export expansion. That is, manufacturers of export
goods were relatively free to use low-cost imported intermediate and capital goods rather
than having to use high-cost domestic products even when these products were classified as
||Table 7.4 Gross Rates of Return on Investment in
Manufacturing in South Korea
||Estimated Rates of Return
|= (a x b)
||= e/(1 + c)
||= (f + d)
|Sources: Bank of Korea, Price Statistics
Summary, Financial Statement Analysis, National Income Accounts, and Input-Output
Tables of Korea (various issues).
a Gross incremental value-added/fixed capital ratios were computed allowing a
one-year time lag between the increase in value-added (at 1980 constant factor cost, which
does not include indirect taxes) and gross fixed-capital formation.
b Imputed wages for unpaid family workers were excluded from the share of
capital in value-added.
c In order to take account of the fact that average firms also use (net)
working capital in addition to fixed capital, the rates of return figures were deflated by
the amount of net working capital.
d Capital loss was approximated by the differences between the rates of
increase in average prices of capital goods and those of the wholesale price index for all
e These estimates differ from those of Hong (1979, 189): 12% in 1954 61.
17% in 1962 66. 26% in 1967 71. and 27% in 1972 75. Estimates in this table
use income statistics of 1980 base year and incremental value-added/gross-investment
ratios while Hong's estimates use income statistics of 1970 base year and the inverse of
ICOR (incremental capital/output ratios) in computing output attributed to gross
investment. Further, estimates of this table exclude indirect taxes (subsidies) from total
value-added in computing the share of capital in value-added. For a more detailed
discussion of the estimation of rate of return on investment, see Hong 1979, 176 96.
|TABLE 7.5 Growth, Trade, Savings and Tariff in
||Growth Rate (%)
||Ratio to GNP
|SOURCES: Bank of Korea. National Income
Accounts and Economic Statistics Yearbook; Republic of Korea, National Tax
Administration, Statistical Yearbook of National Tax ; Republic of Korea, Ministry
of Trade and Industry, Semi-Annual Export-Import Notice . Various years.
a c.i.f. values.
b Figures in parentheses represent the proportion of government savings
financed by tariff revenue.
restricted import items. This factor, combined with the low cost of
labor, seems to have helped Korea achieve an extremely rapid export expansion.
Protectionist Policies in the Later Stages of Growth
The Mid 1970s:
Protection of Intermediate and Investment Goods Sectors
As noted, until the mid 1970s, both Korea's industrial production and
its exports were dominated by final-consumption goods, whose production was labor
intensive and depended heavily on imported intermediate and investment goods. Import
restrictions were mostly on consumption goods, at the expense of Korean consumers. This
apparently was not fatal to the growth performance of the economy. However, with the
beginning of the third five-year economic development plan (1972 76), the Korean
government began to promote "heavy and chemical" industries, and actually
implemented various tax-cum-financial incentives for these industries
(see Hong 1979, chap. 4). As a result, there was extensive domestic production of hitherto
imported intermediate and investment goods by the late 1970s. Unfortunatey, many of the
so-called heavy and chemical industries promoted by the government were excessively
capital-intensive, and Korea did not have the comparative advantage necessary to
successfully compete against foreign products. As a result, promotion came to imply
somewhat extensive import restrictions on these capital-intensive intermediate and
investment goods, and both the growth rate of exports and of GNP would be affected
As early as 1972 when the first petrochemical factories began operation,
MTI changed ten petrochemical products from "automatically approved" to
"restricted import" items. Such practices intensified and became more frequent
in the late 1970s. Since 1976 those wishing to import machinery worth more $1 million, and
financed either by foreign loans or foreign-currency loans from domestic banks have had to
report in advance to MTI (and after 1985 to the Korea Machine Industry Promotion
Association). As a condition for approving the import of the domestically unproducible
portion of the machinery, MTI specified
a certain portion that must be produced domestically. MTI also
specified the required domestic-content ratios for selected plant facilities that cost
more than $3 million and were financed by foreign loans or foreign-currency loans.
According to table 7.3, the proportion of restricted import items in the
machinery sector (in value terms) amounted to about 46 percent of total machinery imports
in 1967, rising to about 79 percent in 1978, and to 80 percent in 1981. In the chemicals
sector, the share of restricted items increased from about 23 percent in 1967 to about 60
percent in 1978, and was 58 percent in 1981. As shown in table 7.6 chemicals imports have
been restricted mostly by special laws rather than by MTI classification notices.
Impact on Export Production and Trade Pattern
The Korean government's decision to change its emphasis and promote
the "infant" intermediate and investment-goods industries was not simply for the
sake of self-sufficiency in these sectors, but also so that they would eventually become
the new generation of leading exports. The government believed that tariff protection and
quantitative restraints were indispensable policy measures for initiating the domestic
production of these products. Unfortunately, such policies could not help but generate the
familiar efficiency-reducing effects associated with import substitution, and they
immediately affected the production costs of related downstream domestic industries.
Eventually, the adverse effects were passed on to export-production activities. Unlike in
the earlier period, this time government promotion activities did not offset the
efficiency losses of protection, but rather encouraged them.
Until early 1971 any intermediate input that was needed for export
production could be freely imported, even if it were classified as a restricted import
item. However, in October 1971 MTI made 41 intermediate input materials for export
production (including even important textile fibers) subject to pre-import approval. In
1975, 12 more items were added to the list, and by 1982, 61 intermediate input items
(based on the 4-digit CCCN classification) were subject to the prior-to-import approval
system. Moreover, the import of selected plant facilities for eight industries was
completely prohibited, even when they were to be
|TABLE 7.6 Restricted Import Items and Their
Import Values in South Korea by Sector, 1984
||Number of Items Imported
||Value of Imports (Million U.S.$)
||Imports Restricted by
||Imports Restricted by
|0,1.a Foodstuffs, raw
|2,4. Raw materials
|3. Mineral fuels
|| ( )
|| ( )
|0,1. Food manufactures
|51. Organic chemicals
|58. Resins and plastic
|5-. Other chemicals
|667. Precious stones
|67. Iron and steel
|68. Nonferrous metal
|6- Other manufactures
|78. Road vehicles
|79. Other transport eq.
|7-. Other machinery
|895- 7. Jewelry, art work
|8,9. Other misc
|SOURCES: Republic of Korea, Ministry of Trade and
Industry, Yearbook of Foreign Trade Statistics (1984); Semi-Annual Export-Import
Notice (second half of 1984 and first half of 1985); Standard Korean Trade
NOTE: Figures in parentheses are percentages.
a Standard International Trade Classification (SITC).
used for export production. In 1985, 54 intermediate input materials
for export production were subject to the requirement of a prior recommendation. Among
them, about 20 items (mostly petrochemical products) could obtain the recommendation when
domestic supply prices exceeded c.i.f. import prices by more than 3 to 10 percent.
By 1974 the tariff exemption on capital equipment for export production
had also been changed to tariff "payments on an installment basis," and in 1975
the tariff exemption on raw material imports for export production was changed to a
"tariff drawback" or refund, after making initial payments to the government. In
late 1977 the Korean government introduced the "limited tariff drawback" system
on materials imported for export production. Out of the 117 items subject to this system,
87 were given zero percent drawback (no tariff exemption at all) and the other 30 were
allowed between 2 and 97 percent drawbacks of the tariffs that been paid at the time of
The number of items subject to the limited tariff drawback system was
reduced to 62 in early 1980, and then expanded to 128 by mid 1981, to 212 by early 1982,
and to 266 by mid 1983. By the end of 1984, 170 items were
subject to zero percent drawback, and 84 items were subject to between 2 and 90 percent
drawback. In principle, the tariff drawbacks on these items are allowed only on the
portion that cannot be satisfied by domestic supply, regardless of domestic price. This
has generated continuous conflicts between the users (export producers) and the suppliers
(domestic import-competing producers) of the specific intermediate inputs.
According to Young et al. (1982, 49), in 1978 the average effective rate
of protection for heavy and chemical industries amounted to 71.2 percent, while that for
light industries amounted to - 2.3 percent. According to the input-output table data, the
share of raw materials (excluding crude oil) in Korea's total commodity imports increased
from 9.4 percent in 1975 to 11.3 percent in 1980, but the share of intermediate-input
materials decreased from about 32 percent in 1975 to about 29 percent in 1980. Presumably,
the protection and promotion of heavy and chemical industries was responsible for the
declining share of intermediate-input materials in Korea's total commodity imports.
The labor-intensive consumption-goods sector had dominated Korea's
commodity exports in the early phase of export-oriented growth. By the late 1970s,
however, a new group of leading exports (including machinery, transport equipment, and
iron and steel products) had emerged. These belonged to relatively capital-intensive
sectors, making Korea's overall commodity composition of exports shift toward a more
capital-intensive one. Hong (1987) shows that the value of capital per worker directly and
indirectly employed in the Korean manufacturing sector for the production of commodity
exports rose from $3,000 in 1966 to $8,900 in 1980 (in constant 1980 dollar prices). At
the same time, owing to the promotion of capital-intensive import-substituting sectors
(that included various petrochemical products), the value of capital per worker that was
employed in replacing competitive imports rose from $4,800 in 1966 to $12,200 in 1980. The
average capital intensity of Korea's manufacturing sector itself rose from $3,800 in 1966
to $10, 400 in 1980.
With capital accumulation in a country, one naturally expects to observe
a rising wage/rental ratio, and a rising capital/labor ratio in both production and
exports. Unfortunately in Korea many of those intermediate and investment-goods sectors
promoted by the government in the 1970s turned out to be excessively capital-intensive
(for that particular stage of growth), and these sectors ended up having to be protected
by tariff and quotas, which in turn raised the production costs of downstream industries.
During the period 1965 76, Korea had maintained an average annual growth
rate of real exports as high as about 34 percent. However, the growth rate of real exports
started to decline in 1977, making the average growth rate of real exports only 12 percent
per annum for the period 1977 85. Furthermore, Korea's
performance in GNP growth began to look less impressive after 1980. The growth rate of GNP
fell from nearly 10 percent per annum on average in 1967 79 to around 7.5 percent in 1981
85. The significantly reduced rates of export expansion and GNP growth may at least partly
be related to tariff protection and quantitative restrictions. Consequently pressure arose
for the government to search for more efficient policy measures with which to promote the
intermediate and investment-goods sectors.
The Late 1970s:
Abortive Import-Liberalization Attempts
In an early stage of export-promotion-based development, complete
import liberalization is obviously not a necessary condition for successful growth
performance. In the later stages of export-oriented development, however, an extensive
import liberalization may become a necessary condition, not only for maximization of
hitherto much neglected consumer welfare, but also for
efficiency maximization. Efficient domestic production is clearly important if exports are
to be internationally competitive. Indeed, in Korea, by the end of 1970s nationwide
pressure to initiate further import liberalization seems to have appeared.
In 1977 Korea's current account of the balance of payments registered a
small surplus for the first time since 1966. This was followed by an import-liberalization
effort. In February 1978 the Korean government established the Committee for Import
Liberalization to formulate the direction of liberalization and then to determine the
items to be liberalized. The import-liberalization ratio by item jumped from about 54
percent in the first half of 1978 to about 65 percent in the second half.
However, MTI seems to have assumed the task of import liberalization in 1978 with
reluctance and skepticism.
According to MTI, the items to be liberalized were those that did not
compete with domestic production, those for which there were no plans for domestic
production, and those that already enjoyed strong international competitive power. The
items not to be liberalized were those produced by heavy and chemical industries
and other strategically promoted industries, those produced by small- and medium-sized
industries, those produced by infant industries that still had to expand further in order
to enjoy scale economies, those produced by industries that had substantial forward and
backward linkage effects, those produced by industries that supplied necessary
intermediate inputs and basic materials to the heavy and chemical industries, agricultural
luxury goods. In other words, MTI wanted to
liberalize the import of only those items that would have minimal impact on the domestic
economy. The number of restricted import items did substantially decrease in the second
half of 1978, but most of the newly import-liberalized items were either economically
unimportant ones or were classified as "import surveillance" items that could be
reclassified as "restricted" should a surge of imports follow.
When the balance on the current account deteriorated seriously in 1979, the halfhearted
liberalization movement was brought to a halt in 1980.
Import Liberalization in the 1980s
The Protectionist Regime as of the Early 1980s
During the second half of 1981 and the first half of 1982, the
import-liberalization ratio by item (or the share of automatically approved items in the
7,915 8-digit level CCCN classification) amounted to about 75 percent. However, if those
items whose imports were subject to special laws are excluded, then the
import-liberalization ratio amounted to only about 55 percent (see table 7.2). In value
terms, as estimated by Luedde-Neurath (1984, chap. 8), the import-liberalization ratio for
the first half of 1982 amounted to 58.7 percent (not taking into account the special
laws), and to only about 22.7 percent if imports subject to special laws are excluded.
Since many of the special laws controlled imports of related commodities purely
incidentally, and since many of the import items that were only partly controlled were
counted as full "restricted import" items, these figures may represent a
significant underestimation of the actual degree of import liberalization in Korea in the
A study by Kim and Hong (1982) shows that there were steady decreases in
the effective rate of protection for the manufacturing sector as a whole throughout 1963
78. During the first half of the period (1963 70), the decreases in the effective rates of
protection occurred most drastically in the export sectors, while the rates of protection
for import-competing sectors rather significantly increased. During the period 1970 78,
however, the drastic decreases in effective rates of protection occurred in
import-competing sectors and in sectors that both ex-
ported and imported, while there was a significant increase in
nominal, as well as effective, rates of protection for export (manufacturing) sectors (see
table 7.1). The implications of this somewhat paradoxical phenomenon were examined in
section 2. As of 1983 only 38.9 percent of Korea's major export commodities were
classified as "automatic approval" items, but the average liberalization ratio
by item reached 80.4 percent.
Impart Liberalization as a Long-Term Policy Goal
The liberalization movement that was halted in 1980 was resumed in
1981 despite the enormous current account deficit, but was again halted in 1982. The
current account situation substantially improved in 1983, and a renewed movement toward
import liberalization followed. This time, however, it was approached as a long-term
policy goal with a definite annual liberalization timetable. According to the schedule,
Korea will reach the OECD level of import liberalization by 1988.
The simple arithmetic average tariff rate was reduced from about 36
percent in 1977 78 to about 25 percent in 1979 81. The weighted average tariff rate also
fell steadily from about 19 percent in 1978 to about 12 percent in 1981. In early 1983 the
Ministry of Finance (MOF) took decisive initiative in the import-liberalization movement
and presented a long-term (1983 88) tariff reduction scheme: the simple arithmetic average
tariff rate was scheduled to fall from 23.7 percent in 1982 to 20.6 in 1984 and to 16.9
percent in 1988.
Following the MOF initiative, MTI presented its own schedule of import
liberalization: the share of "automatic approval" items was to increase from
76.6 percent in 1982 to 80.4 percent in 1983, to 91.6 percent in 1986 and 95.2 percent in
1988. MTI also presented a list of the "restricted import" items that would be
liberalized during 1984 86.
Theory suggests that it is desirable to eliminate quantitative
restrictions first, even if this means raising the rate of tariff protection. Since MOF
took the initiative, MTI had to follow, and faced the difficult task of selecting a large
number of new automatically approved items all at once. Many of the items produced by
politically influential monopolistic firms escaped the early round of liberalization, and
most of the items scheduled to be liberalized first were produced bv less influential
small firms. The former included many heavy industrial and chemical products, and the
latter included many finished consumption goods. Owing to the existing political power
balances, the consumers' surplus problem
was, quite unintentionally, significantly taken care of in the early
phase of import liberalization. Furthermore, the government
officials seem to have pursued import liberalization indiscriminately, with no clear idea
of priority between consumers' surplus and efficiency enhancement at the beginning stage.
Progress in Import Liberalization
In accordance with MTI's long-term import liberalization schedule, out
of the total importable items the proportion of restricted imports declined from about 25
percent to about 12 percent during 1981 85, and the proportion of "special law"
items declined from about 19 percent to about 16.6 percent. According to the 1982
Luedde-Neurath data and the table 7.6 data of 1984, the import-liberalization ratio by
value (the share of commodities imported as "automatic approval" items out of
the total value of commodity imports) increased from about 59 percent to 78 percent during
1982 84 without taking into account special laws, and increased from about 23 percent to
about 40 percent excluding the special law items.
Among primary products, imports of raw foodstuffs and mineral fuels were
mostly subject to special laws. Among manufactures, the import of chemicals was largely
subject to special laws. Not only did the absolute number of restricted items in the
chemicals sector decrease in 1981 85, but the proportion of chemical imports subject 10
special laws also declined (from about 60 percent to 47 percent of total importable
items). In the case of machinery and other manufactures (SITC 6, 7, and 8, excluding
textiles and electronics products), the number of restricted import items has
substantially decreased, but the proportion of imports subject to special laws has
significantly increased. Apparently, in cer-
tain sectors there has been a tendency to replace a
"restricted" classification with special laws. On the
whole, however, not only did the number of restricted import items decline significantly
during 1981 85, but the proportion of items subject to special laws did too (see table
As of 1984, imports of electronics and telecommunication equipment, road
vehicles, ships, and other machinery and equipment were heavily restricted. In value
terms, nonferrous metal products were also significantly restricted (see table 7.6).
However, if we examine table 7.3, we can see that imports of textiles have been steadily
liberalized since 1967. Import restrictions on raw materials and iron and steel products
very much expanded during 1967 78, but then were substantially liberalized after 1978.
About 46.5 percent of raw materials were classified as restricted import items in 1978,
but this has been reduced to about 10.4 percent by 1984. As of 1978, about 75 percent of
iron and steel products were subject to import restriction in the form of a
restricted-import classification, and more than 90 percent of total iron and steel imports
were imported subject to some restriction. By 1984, however, less than 10 percent of iron
and steel product imports (either by item or by value) were subject to restriction either
in the form of restricted-import classification or special laws. Furthermore, as the
growth rate of commodity exports slowed down in 1985, the government reduced the number of
items subject to the limited tariff drawback system from 254 to 79.
In 1983 the simple arithmetic average tariff rates for raw materials,
intermediate inputs, and finished goods were 11.9 percent, 21.5 percent, and 26.4 percent
respectively. By this time, increasingly fierce resistance to
import liberalization by the big monopolistic business groups could be detected. The
following guiding principles on import liberalization set out by MTI in 1984 reflect this
[Monopolistically produced] commodities will be subject to early
liberalization in principle. Although import liberalization should lead to increased
competition among firms, it should not be pursued to such an extent as to bankrupt firms.
The import liberalization program should also allow for preservation of basic material
industries even if they are not
|TABLE 7.7 Reductions in Number of Restricted
Import (RI) and Special Law Items in South Korea, 1981 85
||RI Items (% Share)
||Special Law Items (% Share)
||- 1,035 (- 13.2)
||- 178 (- 2.3)
||- 926 (- 14.0)
||- 144 (- 2.2)
|0,1.a Foodstuffs, raw
||- 65 (- 12.6)
||- 18 (- 3.5)
|2,4. Raw materials
||- 44 (- 6.5)
||- 33 (- 4.9)
|3. Mineral fuels
||0 ( )
||0 ( )
||+ 17 (+ 13.6)
|0,1. Food manufactures
||- 39 (- 22.7)
||- 3 (- 1.7)
|51. Organic chemicals
||- 13 (- 2.3)
||- 73 (- 13.1)
|58. Resins and plastics
||- 19 (- 13.8)
||- 17 (- 12.3)
|5-. Other chemicals
||10 (- 1.1)
||- 130 (- 13.8)
||- 96 (- 16.6)
||- 7 (- 28.0)
|667. Precious stones
||- 3 (- 13.0)
|67. Iron and steel
||- 15 (- 6.0)
|68. Nonferrous metal
||- 21 (- 14.1)
||+ 1 (+ 0.7)
|6-. Other manufactures
||- 38 (- 4.2)
||+ 22 (+ 2.4)
||- 59 (- 48.4)
|78. Road vehicles
||43 (- 44.3)
|79. Other transport eq.
||- 13 (- 10.0)
|7-. Other machinery
||- 251 (- 21.1)
||+ 29 (+ 2.4)
|895- 7. Jewelry, art
|| 46 (63.6)
||- 12 (- 15.6)
||+ 1 (+ 1.3)
|8. Misc manufactures
||- 290 (- 24.5)
||+ 24 (+ 2.2)
||+ 3 (+ 6.5)
||+ 2 (+ 4.4)
|SOURCES: Republic of Korea, Ministry of Trade and
Industry, Semi-Annual Export-Import Notice (second half of 1981 and first half of
1982, second half of 1985 and first half of 1986); Korean Traders Association, Export-Import
Procedures by Item (second half of 1982 and first half of 1983, second half of 1985
and first half of 1986).
a Standard International Trade Classification (SITC).
internationally competitive and also for the need to protect economies
of scale industries and those industries in which we are still acquiring technology. Thus,
while the petrochemical, steel and metal products, automobile, and electronic product
industries are oligopolistic, they are also the basic materials and strategic industries.
(translated from the Korean by Young [1984, 79])
Nevertheless, import liberalization did progress more or less on
schedule in 1983 85. The import liberalization ratio by item increased from 76.6 percent
in 1982 to 87.7 percent in 1985, and is scheduled to reach 95.4 percent by 1988. The
government also reduced the number of so-called "automatic approval" items whose
imports were subject to special laws, and intends to keep reducing it in the future.
Moreover, the simple arithmetic average of legal tariff rates for all commodities, which
amounted to 22.6 percent in 1983, kept falling. It reached 16.9 percent by 1988. It is
true that most of the important agricultural products were not included in the 1984 88
import-liberalization scheme, but as far as manufactures are concerned, if everything goes
as presently scheduled, Korea will have the most liberal import regime of all the Third
World countries in its income class.
The Political Economy of Import Liberalization
It is also important to consider the political economy of import
liberalization in an export-oriented economy. It is well known that consumers are one of
the least organized groups in any economy. Hence, they cannot exert concentrated pressure
against the protection accorded to the domestic producers of final-consumption goods.
Therefore, in the early phase of growth, when domestic outputs as well as exports are
dominated by labor-intensive consumption goods, there is usually little pressure for the
government to undertake extensive import liberalization. Only a certain minimum level of
import liberalization, enough to facilitate industrial growth and export expansion, has to
In a later phase of growth, however, a large number of intermediate and
investment-goods producers emerge. They sell substantial portions of their products to
domestic industries. These buyers, or so-called
end-users, are better organized than consumers in general to mobilize
a concerted effort against the protection accorded to the producers of intermediate and
investment goods. Sellers' domination and uncontested protection rents tend to disappear
in these sectors since there finally exists an equally powerful group who stand to benefit
by eliminating import restrictions. Often, end-users are themselves producers of other
intermediate and investment goods. When this happens, their stance on import
liberalization becomes very complicated.
Since it sounds more noble for end-users to insist on import
liberalization in general, rather than for just those intermediate and investment goods
that are directly related to their produclion activities, it sometimes happens that
imports of consumption goods also tend to be liberalized. This may, however, be regarded
as rather unintended. The government is under pressure to liberalize imports, but it is
also subject to opposing pressure from the strong vested interest group of intermediate
and investment-goods producers. Consumption-goods producers are comparatively weaker in
political influence. What happens, then, is that the preannounced target of import
liberalization is partly met by liberalizing the import of some final-consumption goods
The purpose is not to enhance consumers' surpluses per se, but simply to give the
impression that the government is liberalizing imports on schedule.
The question faced by the protected industries in Korea, however, was
simply whether they were to be liberalized during 1984 86 or during 1987 88. Imports of
almost all manufactured products, regardless of whether they are consumption goods,
intermediate goods, or investment goods, had been liberalized by the end of 1988.
Under the import-liberalization schedule for 1987 88 that was announced
on October 30, 1985, a 100 percent import liberalization was achieved for metals and iron
and steel products by 1987, and for electronics goods and both electrical and
nonelectrical machinery by 1988. The imports of pulp and paper, ceramics, and chemicals
were liberalized up to 99.6 percent, and textiles imports up to 97.8 percent, by 1988.
Among textile products, only those related to sericulture (such as raw silk, silk yarn,
and silk fabrics) will continue to be subject to import control. Among chemicals, only
ethyl alcohol and some toxic insecticides (8 items altogether) will continue to be subject
to import controls.
As of 1986, 56 monopolistically produced manufactured commodities (out
of 254) were subject to import restrictions. However, by 1988, only 3 monopolistically
produced commodities (milk powder, fruit juice, and fermented lactic bacteria) continued
to be subject to import controls.
Out of 7,915 importable items, 369 remained "restricted" in
1989, and of those, only 32 were manufactured products. The other 337 items consisted
almost entirely of agricultural products and certain special items, such as precious
Summary and Conclusions
When the "growth" or "promoted" industries are
mostly in the export sector, the harmful effects of protecting other import-competing
sectors are alleviated as time passes. However, if the growth or promoted industries are
in the major import-substituting sectors, then the harmful effects of protecting these
industries can be very much exaggerated as capital is accumulated and sector-specific
industrial promotion policies are enforced.
In Korea the consumption-goods sector was promoted as the leading export
sector in the 1960s and early 1970s, and it also constituted the major growth sector (as
compared to agriculture or intermediate and investment goods). Until the mid 1970s,
therefore, capital accumulation and export promotion in Korea did not seem to seriously
aggravate the harmful effects of protecting the import-substituting sectors. Even the
severe restriction of imports of consumption goods did not by itself seriously reduce
allocative efficiency, though there apparently were substantial losses of consumers'
Since the mid 1970s, though, a host of highly capital-intensive heavy
and chemical industries began, as a promising new generation of infant industries, to be
protected by severe import restrictions and, at the same time, were promoted as export
industries. These newly promoted industries began supplying increasing amounts of
intermediate and investment goods to domestic producers, but in many cases at excessively
high costs, because Korea still did not have comparative advantages in many of these
products. The adverse efficiency effects of both tariff and quantitative protection of
capital-intensive heavy and chemical industries were then inevitably amplified as capital
was accumulated and sector-specific promotion policies were enforced. Since Korea was not
expected to gain a comparative advantage in the production of many of these intermediate
and investment goods for a long time, pressure arose for import liberalization not so much
to enhance consumer welfare as to enhance the production efficiency and the international
competitive power of Korean industries in general. That is, by the beginning of the 1980s,
pressure arose for the Korean government to search for better
measures than tariff protection and quotas to promote infant
(intermediate and investment-goods) industries. At this same time, by pure coincidence,
the United States also dramatically increased pressure for import liberalization, which
could by no means be ignored by the Korean government.
On the basis of the Korean experience, we can conclude that, in the
initial phase of export-oriented growth, extensive import liberalization does not
constitute a necessary condition for high growth performance. In a later phase, however,
it is more likely to become a necessary condition for maintaining the competitive power of
domestic industries in the international market and the high growth performance of the
domestic economy. Infant intermediate and investment-goods industries with reasonable
chances of becoming internationally competitive have to be promoted, but by more efficient
means than tariff protection and quantitative restrictions.
The evolution of Korea's import-restriction policy suggests that an
export-promotion regime is much more conducive to early import liberalization than is an
import-substitution regime. Owing to enhanced ability to earn foreign exchange, once low
domestic saving ceases to constrain growth, an export-promotion regime can afford to
reduce or eliminate its import-restriction system much more rapidly than could an
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