Exports, capital inflows, relative prices, and income growth in South Korea: An application of the balance of payments constraint growth model

• Published date: 01 January 2019
• DOI: http://doi.org/10.1002/ijfe.1662
• Author: Alexander Bilson Darku
• Date: 01 January 2019

RESEARCH ARTICLE

Exports, capital inflows, relative prices, and income growth

in South Korea: An application of the balance of payments

constraint growth model

Alexander Bilson Darku

Prentice Institute for Global Population

and Economy, Economics Department,

University of Lethbridge, Lethbridge,

Alberta, Canada

Correspondence

Alexander Bilson Darku, Prentice Institute

for Global Population and Economy

Associate Professor, Economics

Department, University of Lethbridge,

4401 University Drive W. Lethbridge,

Alberta T1K 3M4, Canada.

Email: alexander.darku@uleth.ca

JEL Classification: F14; F32; F43

Abstract

The main objective of this paper is to use the balance of payment constraint

growth model to examine the major determinants of income growth in South

Korea, emphasizing the importance of exports, capital inflows, and relative

prices. The autoregressive distributed lag approach to cointegration is

employed to specify the short‐and long‐run determinants of income growth.

The main empirical results suggest that beside the growth in exports, which

is the emphasis of the export‐led growth models, growth in capital inflows

and relative prices have also played important roles in the growth process in

South Korea. A formal test of the model confirmed the validity of the results.

We also found that growth in capital inflows has the greatest effect on income

growth in South Korea.

KEYWORDS

ARDL model, balance of payments constraint growth model, capital flows, cointegration analysis,

open economy growth, South Korea

1|INTRODUCTION

This paper uses an open economy model to examine the

importance of growth in exports, capital inflows, and

relative prices (real exchange rate) in the income growth

performance of South Korea over the 1960–2016 period.

The primary argument is that capital inflows and relative

prices have played important roles in the growth perfor-

mance of the South Korean economy; hence, the export‐

led growth (ELG) literature on South Korea may be

missing some important components in the growth pro-

cess of the economy. South Korea's growth performance

has been phenomenon and often referred to in the

growth and development literature as an economic mira-

cle. The economy has carefully gone through various

stages of development. Like many developing countries,

the country started with the import substitution industri-

alization strategy in the 1950s, then to export orientation,

first in light industries and later to heavy and chemical

industries in the 1960s and 1970s. Finally, the economy

implemented more open economy trade policies in the

early 1980s with the view to enhancing the income

growth performance of the export‐oriented growth

strategy of the previous decades. Most commentators on

the Korean economy have indicated the importance of

exports growth in the Korean income growth experience.

A growing empirical literature has attempted to study

the relationship between exports and economic growth.

Abal‐Foul (2004), Alam (1991), Awokuse (2006), Balassa

(1985), Bhagwatti (1988), Dawson and Hubbard (2004),

Mah (2005), Salvatore and Hatcher (1992), and Zestos

and Tao (2002) have used ELG models to establish a posi-

tive relationship between exports and economic growth.

For South Korea, Awokuse (2005), Dhananjayan and Devi

(1997), and Holman and Grave (1995), found evidence in

support of the ELG hypothesis, but Ghatak (1998) found

Received: 30 March 2018 Revised: 8 August 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1662

288 © 2018 John Wiley & Sons, Ltd. Int J Fin Econ. 2019;24:288–295.wileyonlinelibrary.com/journal/ijfe