Structural Change in an Open Economy

Abstract

We study the importance of international trade in structural change. Our framework has both productivity and trade cost shocks, and allows for non-unitary income and substitution elasticities. We calibrate our model to investigate South Korea's structural change between 1971 and 2005. We find that the shock processes, propagated through the model's two main transmission mechanisms, non-homothetic preferences and the open economy, explain virtually all of the evolution of agriculture and services labor shares, and the rising part of the hump-shape in manufacturing. Counterfactual exercises show that the role of the open economy is quantitatively important for explaining South Korea's structural change. JEL: F20, F40, O13, O41

Trade, Reform, and Structural Transformation in South Korea

“…Nevertheless, the merit and novelty of our modeling of trade reform as a sequence of sector-specific tariffs, subsidies and associated government transfers, is that it permits independent analysis and quantification of how distortionary trade policies effect structural change. The closely related multi-sector open economy analyses of Sposi (2012), Teignier (2012), Ungor (2010), and Uy et al (2011) all corroborate our finding that trade is quantitatively important for explaining sectorial resource reallocations. However, our work is unique in separately identifying the role of trade policies from that of non-distortionary trade costs and in emphasizing the role of non-homothetic preferences for trade, specialization, and structural transformation in South Korea.…”

“…In his framework tariff changes are not quantitatively important in influencing structural change; by contrast we find that holding Korean tariffs at estimated pre-reform levels substantially diminishes the fit of our model. Uy et al (2011) emphasize the role of trade in generating the hump pattern seen in Korea's manufacturing sector employment and, like Sposi (2012), incorporate non-distortionary iceberg trade costs. However, they do not independently measure tariffs.…”

Structural Change and Global Trade

“…Matsuyama (2009) emphasized that trade can alter patterns of structural change and that using closed-economy models may be insufficient. Uy et al (2013) find that rapid productivity growth in South Korea's manufacturing sector contributed to the rise in its manufacturing employment share due to improved comparative advantage. In a closed economy, the same productivity growth would have produced a decline in the manufacturing share.…”

“…For this reason, we build a tractable general equilibrium model that allows for endogenous structural change and trade patterns, similar to Uy, Yi and Zhang (2013) and Sposi (2016). We set up the exercise as a multi-country Eaton-Kortum model.…”

Quality Upgrading and the Stages of Diversification

“…These papers include, among many others: Uy et al (2013) Bolatto (2016) that allow for differences in those elasticities. Like some of these papers, we allow for different trade elasticities across sectors.…”