Transition to Sustainable Growth in South Korea: Investment and Trade under Uncertainty

Abstract

This study examines major challenges for the Korean economy since East Asia has undergone significant transitions with the emergence of China in the 2000s. Because the transition has created uncertainties in the economy, South Korea has been exposed to a high degree of international competition in the turbulence of regional integration. We first employed structural vector autoregression to provide the impulse response of investment to various economic shocks, revealing the effects of structural changes and competition on industry. Furthermore, we identified the reasons behind low investment in South Korea over the past two decades. Second, as a proxy for structural change in the economy, we addressed the effects of extraneous shocks on the Korean economy by considering industry competitiveness. The results indicate that heightened uncertainty and export demands have shaped the dynamics of the Korean economy. In particular, the overall competitiveness of South Korea’s merchant trade in major products such as mobile phones, automobiles, ships and optics has weakened due to intensifying competition and increasing overseas production. These changes suggest that South Korea needs to revise its economic development strategy, which has been largely driven by exports. To address the diverse challenges faced by the Korean economy, we highlighted the importance of indigenous dynamism for sustainable growth.