Effects of Economic Policy Change and Global Shocks on Korea's Trade and Growth

In pursuing policies of trade liberalisation and growth promotion within the framework of regional economic integration, WTO membership and globalisation, major Asian economies had achieved economic ‘miracles’ in the past decades. Recently however, they face many challenges, economically and politically (Tran Van Hoa, 2002), compounded by a global (especially the US) economic slowdown (IMF, 2005), terrorist attacks, the SARS and avian flu outbreaks, unprecedented Indian Ocean tsunami devastation affecting millions in Asia, and other domestic or international (eg, the current China/Korea-Japan tension) uncertainty ahead. What are the development and growth prospects then for these economies or especially Korea in the medium and long term? The paper introduces the generalised gravity theory (Tran Van Hoa, 2004) to construct a simple flexible simultaneous-equation econometric model of growth and trade of Korea with its 6 major trading countries or blocs (China, Japan, ASEAN-6, the European Union, the US, and Australia). The model incorporates explicitly major temporary and persistent structural change in the form of reforms and shocks. Using latest ICSEAD, OECD and WBWT data, the paper reports efficient empirical results on trade-growth causality, trade determination and effects of policy reforms and shocks on Korea’s trade and growth with these economies over the past two decades. Based on these findings, current trade policy and economic relations developments, economic policy challenges are then targeted for discussion and resolution.