The Performance of Industrial Policy: Evidence from Korea

This paper first shows that Korea implemented industrial policy properly, promoting infant industries rather than mature ones. The paper then shows that infant industries promoted by industrial policy have matured over time, as well as grown faster than mature industries not promoted by industrial policy. However, this happened as industrial policy was being lifted, rather than as it was being implemented. The paper also shows that, although industrial policy may pay off more easily than previously thought, Korean industrial policy fails to pay off because it distorted the price mechanism too severely and for too long. The analysis of the paper suggests that industrial policy in latecomer countries, when implemented to address market failure, should be much more moderate than what Korea implemented.