Three Essays on Industrial Policy, Income Inequality and Economic Development – A Case Study of South Korea

Abstract

This thesis examines the relationship between the state’s intervention of a different nature – industrial policy and pro-competitive reforms – and income inequality dynamics, using the Korea’s heavy and chemical industry promotion during the 1970s and the pro-competitive reforms (1998-2000) as a case study. Chapter 2 focuses on the HCI promotion period (1973-1979) and investigates the impact of the state’s selective industrial policy on sectoral economy, income distribution, and sectoral capacity utilization. The study finds that while industrial policy has a positive effect on capacity utilization in both targeted and non-targeted sectors, increased market power of firms in targeted industries significantly reduces the effectiveness of the state’s intervention. The study also shows that the industrial policy regime is vulnerable to external shocks, such as an oil price shock. These negative effects can lead the economy to stagnation and thus excess capacity problems due to the reduced effective demand and over-investment in targeted sectors. Chapter 3 examines the association between heavy and chemical industry (HCI) promotion drive (1973-1979) and arguably the first income inequality hike in the history of Korea’s economic development. Using an agent-based model (ABM) in which aggregate events emerge from the rich interactions of heterogeneous agents in the markets, this chapter shows how industrial policy that favours particular firms or industry sectors generates income inequality as well as a highly skewed income distribution among different income groups. The study highlights income inequality dynamics with special reference to the effect of preferential interest rates and discriminated access to credit markets among firms. The simulation shows the preferential interest rates for large firms in terms of asset size give a major impetus to the dramatic income inequality spike, compared to that of baseline regime (in the absence of preferential rate). Chapter 4 focuses on the impact of pro-competitive reforms on the market power and labour share of firms’ value added during financial crises, using Korean firm-level data from 1990 to 2010 and difference-in-differences(DiD) estimation strategy. One of major findings is that surprisingly, the market power of top 30 chaebols was strengthened by pro-competitive reforms given that the reforms aimed to reduce excessive market power of high-ranking chaebols, and there was a significant decline in overall labour share of value added and an increase in the profit share of these large enterprises. The study argues that these outcomes are due to the pro-competitive reforms being primarily business-friendly and focused on chaebol restructuring, with relatively less attention devoted to labour-friendly policies. The study highlights the need for policymakers to consider the potential trade-offs between pro-competitive reforms and their impact on labour market outcomes.