Determinants of Korean Trade Flows and their Geographical Destination

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.Determinants of Korean Trade Flows and their Geographical Destination.
by Lorenzo Giorgianni and Gian Maria Milesi-Ferretti

A distinguishing feature of the strong economic performance enjoyed by Korea
and other newly industrializing Asian economies has been the rapid growth of
export and import flows. In recent years, the growing weight of East Asian
countries in the world economy and their increasing trade integration have been
accompanied by a substantial change in the geographical destination of Korea.s
exports. While growth in Korean exports to member countries of the Organization
for Economic Cooperation and Development (OECD) has slowed down considerably,
exports to other East Asian countries have boomed. This paper examines the
extent to which the Korean experience can be explained within traditional trade
models. It provides evidence on how exports and imports react to changes in
relative prices and in foreign and domestic demand, and investigates the
determinants of the direction of Korean exports.

Two important issues are dealt with differently from previous studies. First,
in light of

the high weight of raw materials and capital goods in Korea.s imports, the
hypothesis that investment expenditure is the most important explanatory
variable for import demand is examined. Second, export demand and supply
elasticities are obtained by estimating a simultaneous structural model in
which the long- and short-run dynamic properties of the

data are fully specified.

Estimation results indicate that real consumption and investment are important
determinants of aggregate imports in Korea and that a specification that
employs aggregate expenditure implicitly underestimates the relative importance
of investment. The demand for Korean exports exhibits high elasticity with
respect to foreign income and relative export prices. The decline in the share
of exports to industrial countries is linked not only to the decline in the
relative importance of OECD countries in world trade, but also to the increased
penetration of industrial countries. markets by other Asian developing