Working Paper: NBER ID: w29252
Authors: Minho Kim; Munseob Lee; Yongseok Shin
Abstract: Does industrial policy work? This is a subject of long-standing debates among economists and policymakers. Using newly digitized microdata, we evaluate the Korean government's policy that promoted heavy and chemical industries between 1973 and 1979 by cutting taxes and building new industrial complexes for them. We show that output, input use, and labor productivity of the targeted industries and regions grew significantly faster than those of non-targeted ones. While the plant-level total factor productivity also grew faster in targeted industries and regions, the misallocation of resources within them got significantly worse, especially among the entrants, so that the total factor productivity at the industry-region level did not increase relative to the non-targeted industries and regions. In addition, we provide new evidence on how industrial policy reshapes the economy: (i) The establishment size distribution of targeted industries and regions shifted to the right with thicker tails due to the entry of large establishments and (ii) the targeted industries became more important in the economy's input-output structure in the sense that their output multipliers increased significantly more.
Keywords: industrial policy; heavy industry; Korea
JEL Codes: E24; O14; O25; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| if misallocation had remained constant (D61) | TFP could have been 40% higher by 1980 (F16) |
| Korean government's heavy and chemical industry policy (1973-1979) (L78) | output, input use, and labor productivity of targeted industries and regions (J24) |
| output, input use, and labor productivity of targeted industries and regions (J24) | growth rates compared to non-targeted ones (O40) |
| resource misallocation worsened (D61) | overall TFP at the industry-region level (L69) |
| entry of significant plants during the policy period (Q28) | shift in establishment size distribution to the right (D39) |
| targeted industries (L65) | significant increase in output multipliers (E23) |
| significant increase in output multipliers (E23) | reshaping of the economy's input-output structure (D57) |
| reshaping of the economy's input-output structure (D57) | indirect benefits to non-targeted industries (L59) |