New and Noteworthy: Can Trade Policy Drive Economic Development?

03 November 2015 3:09PM

Not too long ago, a post-war South Korea was struggling. The economy was in shambles and the country was largely dependent upon foreign aid, first from the United States, then Japan. Six decades have since passed, and South Korea now offers a standard of living close to that of the advanced nations, has high marks for political freedom, and relatively low income inequality.

There is “circumstantial evidence” that trade played a large role in what is called the “Korean growth miracle.” In “How Much of South Korea’s Growth Miracle Can Be Explained by Trade Policy?,” Professor Michelle Connolly and Kei-Mu Yi (Federal Reserve Bank of Minneapolis) focus on three key changes in trade policy during the 1960s through 1990s that may have played a significant role in the country’s development.

Their research was recently published in the October 2015 issue of the American Economic Journal: Macroeconomics and was featured as a “Research Highlight” on the American Economic Association (AEA) website. According to AEA web content editor Tim Hyde, the study “is one of only a few to model an actual historical growth episode and is able to describe a more nuanced relationship between trade and growth than the typical cross-country analysis can offer.”

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