Relationships between Polarization and Openness in Korean Economy

International trade usually changes the production patterns of an economy. The share of exporting industries tends to increase and that of importing industries tends to decrease. In the process of industrial restructuring, it is natural for the economy to experience a concentration toward exporting industries. At the same time, this concentration might also occur within separate industries; exporting firms tend to grow and the share of other firms tends to decrease. All these changes can result in a polarization of the economy. This paper investigates if this polarization trend occurred in the Korean economy by using industry and firm level data. In particular, we explore the question of whether there is any relationship between polarization and international trade, as there has been a lot of criticism focused on the idea that international trade has resulted in income inequality and polarization of the Korean economy. We calculated the GINI coefficient and other indices to measure the degree of polarization, and we performed regression analysis on the time series and panel data. This paper finds that there is a positive relationship between export ratio and polarization. Keyword: Korea, polarization, international trade, GINI


Introduction
It seems undeniable that the rapid growth of the Korean economy during the past 50 years was only possible because of the expansion of international trade, and exports were particularly important in this expansion.According to growth accounting, the economic growth is due to two factors: input growth and productivity growth.Trade with other countries was critical for both, and the Korean economy owes its success to international trade.But international trade has other economic side effects that are not as desirable.First, consider the income distribution problem.In particular, polarization in various areas can emerge in the context of international trade expansion.International trade gives rise to significant gains in the exporting industry, which can result in benefits for holders of capital resources, exporting companies and workers associated with these fields.The Heckscher Ohlin theory of international trade can give us some important ideas about who benefits and who loses in this situation.If the wealthy classes enjoy gains from international trade, undesirable income distribution effects will result.Second, the positive effects from exports have, of late, been decreasing in the Korean economy.It is unknown at present whether there is significant spillover from exports to other areas; for example, in 1990, exports of 1 billion KRW lead to the employment of 58.6 workers in 1990, but this had dropped to 12.6 workers by 2005, and further to 7.7 workers by 2012.(Institute for International Trade, 2014) This paper investigates the relationship between international trade and polarization.We will look at the relationship between international trade and industry using industry data from whole industries and individual firms.In particular, we calculate GINI-similar coefficients and other measures to obtain the polarization indices, and we perform regression analysis on the time series and panel data of these indices.This paper finds that there is a positive relationship between export and polarization.
There are several ways to define polarization; we consider it to be the gap in peoples' incomes, the gap between exporting industries and other industries, and the gap among firms in a particular industry.These gaps can be widened by international trade.First, the Heckscher-Ohlin theory of international trade states that, in the long run, free trade benefits the factors of production that are abundant and hurts factors of production that are scarce.Second, a gap between exporting industries and importing industries may exist in the short run.Third, within an industry, exporting companies will become larger while the other companies will become smaller.Fourth, if the exporting companies are large firms, the gap between large firms and small and medium sized firms will be larger.As a result, international trade will result in the polarization of the economy.
Even in many advanced countries, it has been reported that increased trade has negative income distribution effects.This paper uses trade data at the industry and firm levels, and investigates the effects of international trade on the polarization of the economy.This research is expected to determine whether the expansion of international trade in Korea widened the gap in the economy, and to identify the factors affecting polarization.

Literature
When we consider the relationship between economic growth and income inequality in developing countries, the effects of economy globalization should be investigated.Many empirical studies including Feenstra and Hanson (1997) have addressed this topic.Most of them have pointed to the increases in income differences caused by economic globalization (Sato & Fukushige, 2007).An important study comes from Feenstra and Hanson (1997); they investigated the effects of Foreign Direct Investment (FDI) on the skilled labor share of wages in Mexico from [1975][1976][1977][1978][1979][1980][1981][1982][1983][1984][1985][1986][1987][1988].FDI was found to increase the demand for, and the wages of, skilled labor, and this effect was particularly large in FDI concentrated regions.Another example relates to U.S industry.Borjas and Ramsey (1995) argued that employment changes in trade concentrated industries can explain the inequality in the U.S. Hanson and Harrison (1999) analyzed the relationship between trade reform and rising wage inequality, focusing on the 1985 Mexican trade reform.Wage inequality in Mexico rose after the reform, which is puzzling in a Heckscher-Ohlin context if we assume that Mexico has a comparative advantage in producing low skill-intensive goods.
More recently, Lim and McNelis (2014) examined the relationship between the Gini coefficient, trade-openness, aid, and FDI flows.Panel data estimates are provided for the overall data set (42 low to middle income countries).It finds empirically that trade openness is more able to change income inequality than either FDI or foreign aid, but that its effectiveness depends on the stage of development.The countries with high labor intensity in production and greater openness generate lower inequality in response to favorable shocks to export demand and trade.
Many papers have attempted to address this question by using data for the Korean economy, but the results are not consistent.For example, even within a single paper we find mixed results.Mah (2002Mah ( , 2003) ) studied the impact of changes in trade values and FDI inflows on the Gini coefficients for Korea.Mah (2002) found that Gini coefficients tend to increase with trade liberalization measures and FDI inflows, and concluded that the progress of globalization caused income inequality to deteriorate in Korea, which supports the Feenstra-Hanson (1997) hypothesis.On the other hand, Mah's regression results indicated that neither changes in the openness ratios, regardless of the measures, nor those in the FDI inflows were significant in influencing the Gini coefficients.Sato and Fukushige (2009) analyzed the determinants of the Gini coefficient for income and expenditure for the Korean economy.Their results suggest that the effect of economic globalization has two routes, and two different speeds, in affecting income inequality.Recently, Kang (2014) examined the relationship between globalization and income distribution in Korea (Note 1).
The study investigates the effects of trade openness, inward and outward FDI flows, and per capita GDP on income distribution from 1992 to 2011.It found that, as trade openness and per capita GDP increased, income inequality was reduced.Meanwhile, income equality deteriorates as inward and outward FDI flows increase.The negative effect of inward FDI flows on income inequality is greater than that of outward FDI flows.This paper differs from those mentioned above in the sense that we do not focus on the relationship between international trade and income inequality, but on the relationship between polarization and international trade.Here, we use concentration as a proxy for polarization; namely, the concentration of industries and the concentration of firms.Thus, we will use concentration indices like HH (Hirschman-Herfindahl) and Gini coefficients.The Gini coefficients used in this paper are not used to indicate income distribution.We report how much concentration occurs among industries and firms, and we explore the effects of international trade on this concentration or polarization.This research, therefore, uses production data instead of wage data or per capita income data, making it relatively unique.

Changes in Industry Structure
The industry structure of the Korean economy has changed from primary industries such as agriculture and fisheries, to secondary industries such as automobiles and semi-conductors over the past few decades.By using OECD STAN data (rev.3)we obtained the following results (Note 2).These numbers are shown in Table 1.In Korea, primary industry (agriculture and fishery)has been reduced to less than 3%, from 30% during the last four decades, while secondary industry (mining and manufacturing) grew from 20% to 30%.The service sector is almost 70%, and has increased from 50% in 1970.

Industry Structure Change in Manufacturing
Even within manufacturing, the Korean economy has experienced dynamic changes in industry structure (Table 2).From the table, we see a reduction in food products, beverages and tobacco, textiles, textile products, leather and footwear, wood and products of wood, and cork, while basic metals and fabricated metal products, machinery and equipment, and transport equipment have been steadily increasing.

Industry Change in Terms of Technology Level
It is generally acknowledged that the Korean economy has moved toward capital and technology intensive industries.In particular, we can observe that, as the Korean Economy has grown, it has moved toward high tech industries, from low tech industries.According to the classification by OECD, we can confirm the trend change.
Table 3 shows those findings.

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Conclusion
International trade usually changes the production patterns of an economy; the share of exporting industries tends to increase while the share of importing industries tends to decrease.Thus, it is natural for an economy to experience concentration in export-centric industries.This concentration might also occur within individual industries; the exporting firms tend to grow, and the share of other firms tends to decrease.All these changes can result in polarization of the economy.This paper investigates if a polarization trend exists in the Korean economy by industry level and firm level data.
In addition, we explore the relationship between polarization and international trade.Since much criticism has been focused on the idea that international trade has resulted in polarization and income inequality in the Korean economy, this paper tries to determine the effects of international trade on polarization.We borrowed an index that is similar to the GINI coefficient and other indices to measure the degree of polarization, and performed regression analysis with this index, and the export ratio.Time series and panel data were used.We find that there is a positive relationship between export ratio and polarization, which indicates that international trade or openness may lead to polarization in the Korean economy.

Appendix
Figure 4 s partners.E which mea found from

Table 1 .
Industry shares

Table 3
* H, M, LO stand for High, Middle, Low technology, respectively.In the case of 2009, OECD did not provide for the HI and MH separately.

Table 5 .
Exports and Polarization in panel data (Note 6)

Table 1 .
Industry classification in Korea

Table 3 .
Share of top five or ten trade partners EX indicates that Korea exports to these countries and IM means Korea's import from these countries. *