The Plant-Level View of an Industrial Policy: The Korean Heavy Industry Drive of 1973. Minho Kim, Munseob Lee & Yongseok Shin. NBER Working Paper 29252, September 2021. https://www.nber.org/papers/w29252
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.
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Summary in Other Countries’ Industrial Policies Don’t Justify Our Own. Scott Lincicome. Cato, Sep 2021. https://www.cato.org/blog/other-countries-industrial-policies-dont-justify-our-own
First, labor productivity and output did indeed rise faster in the Korean factories targeted by the HCI policies, but total factor productivity (i.e., how efficiently and intensely all inputs are utilized in production) in those industries actually declined during the HCI period. In particular, Korean government policies led to a severe misallocation of resources in targeted industries, thus negating any plant‐level gains. As the authors put it, “resource allocation across plants within the targeted industries/regions worsened substantially, to the point where the gains in plant‐level productivity are completely undone by the worsened misallocation.” This misallocation was most severe among new establishments that had sprung up during the HCI period, suggesting that the government subsidies buoyed big, new, inefficient firms, not particularly nimble or productive ones. And even though Korea’s industrial policies ended in 1979, productivity in the targeted industries continued to decline through the 1980s.
Second, the same misallocation of resources did not occur in non‐targeted industries in the 1970s. Thus, the authors conclude, productivity at targeted Korean industries would have been 40 percent higher in 1980 had no industrial policies been implemented. “In other words, the exacerbated misallocation within the targeted industries/regions relative to the non‐targeted ones had the effect amounting to a 2.8-percent-per-year loss in total factor productivity during this period.”
Third, Korean industrial policies increased business concentration in targeted industries, with potentially damaging implications. For example, the average size of a targeted firm more than quadrupled between 1967–1980, while the average size of a non‐targeted firm increased to a much lesser degree over the same period (see Figure 1). Many of the ballooning establishments in the targeted industries were new entrants with the greatest misallocation of resources.
The authors speculate that Korea’s HCI drive may therefore have been instrumental in empowering the large family‐run conglomerates, known as Chaebols, whose outsized political and economic influence has for decades been a big problem for South Korea. (Many new HCI establishments with the highest misallocation of resources were in fact owned by these Chaebols.)
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