Industrialization and the Big Push: Theory and Evidence from South Korea

Industrialization andthe Big Push: Theoryand Evidence fromSouth Korea Jaedo Choi and Younghun Shim WP/24/259 IMF Working Papersdescribe research inprogress by the author(s) and are published toelicit comments and to encourage debate.The views expressed in IMF Working Papers arethose of the author(s) and do not necessarilyrepresent the views of the IMF, its Executive Board,or IMF management. DEC2024 IMF Working PaperResearchDepartment Industrialization and the Big Push: Theory and Evidence from South KoreaPrepared byJaedo Choi andYounghun Shim Authorized for distribution by Petia TopalovaDecember2024 IMF Working Papersdescribe research in progress by the author(s) and are published to elicitcomments and to encourage debate.The views expressed in IMF Working Papers are those of theauthor(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT:We study how one-time subsidies for adoption of modern technology drove Korea'sindustrialization in the 1970s. Leveraging unique historical data, we provide causal evidence consistent withcoordination failures: adoption improved adopters' performance and generated local spillovers, with firms morelikely to adopt when other local firms had already adopted. We incorporate these findings into a quantitativemodel, where the potential for multiple steady states depends on parameters mapped to the causal estimates.In our calibrated model, Korea's one-time subsidies shifted its economy to a more industrialized steady state,increasing heavy manufacturing's GDP share by 8.6% and export intensity by 16.2%. Larger market accessamplifies the effects of these subsidies, as the gains from adoption increase with firms' scale. RECOMMENDED CITATION:Jaedo Choi, and Younghun Shim. 2024 “Industrialization and the Big Push:Theory and Evidence from South Korea.” IMF Working Paper No. 2024/259. Industrialization and the Big Push:Theory and Evidence from SouthKorea Prepared byJaedo Choi and Younghun Shim1 1. Introduction Since Rosenstein-Rodan (1943) and Hirschman (1958), coordination failures in adoption of moderntechnology have been hypothesized as significant barriers for economic development. In the presenceof such failures, a one-time “big push” policy intervention could potentially resolve these failures,permanently shifting an economy to a fundamentally better steady state. Despite its theoretical appeal,the real-world relevance of the big push remains underexplored, with skepticism often arising froma lack of quantification grounded in credible evidence. This paper empirically and quantitatively examines the possibility of industrialization through abig push for technology adoption. Our analysis focuses on Korea’s large-scale policy, implementedbetween 1973 and 1979, that temporarily subsidized adoption of modern technology in heavy man-ufacturing sectors. This period is notable, because Korea began experiencing rapid industrializationduring this relatively short implementation window. Our main contributions are twofold. First, using novel historical microdata, we provide causalevidence on the firm-level effects of technology adoption, which align with coordination failuresand the big push hypothesis. We estimate direct effects of adoption on adopters and local spilloverson non-adopters. Additionally, we provide evidence of local complementarity: firms are more likelyto adopt when other local firms have already adopted. Second, we develop a quantitative model,in which key parameters—determining the presence of the multiplicity—are tightly pinned downby the empirical estimates. In this calibrated model, without Korea’s big push policy, the economywould have converged to an alternative, less-industrialized steady state. Moreover, larger internal andinternational market access played a significant role in amplifying the effects of the big push. Our dataset covers the universe of technology adoption contracts between Korean and foreignfirms from 1970 to 1982. Given Korea’s technological gap with respect to the global frontier, for-eign sources were the most important channel for acquiring modern technologies. The dataset wasmanually constructed by digitizing contract documents that firms were required to file with gov-ernment authorities. In our context, technology adoption refers to transfers of industrial know-how,defined as transfers of blueprints or provision of training services, aimed at facilitating mass industrialproduction. As shown in Figure 1, the dataset reveals a novel pattern consistent with the big push hypothesis.Only after the policy was implemented did the share of the heavy manufacturing sectors in GDPbegin to rise, increasing from 6% to 13% during the policy period. This was accompanied by asignificant influx of new technologies through adoption contracts with foreign firms, resulting infourfold increases in the number of new contracts in these sectors. Even after the policy ended, theeconomy continued