South Korea, the Asian peninsula of Manchuria separating the Yellow Sea and the Sea of Japan, once known to be one of the world’s poorest agrarian societies, has undertaken economic development since 1962 what has become known as the “economic miracle on the Hangang River”. Nevertheless, Korea’s remarkable economic achievements were threatened by the Asian crisis beginning in late 1997 when the Asian tiger nations suffered from overvalued currencies and a lack of regulation in the financial system led to business incest, inflated asset values, high foreign debt and many other problems. But thanks to successful foreign debt restructuring with creditor banks, the nation is currently on track to resume economic growth. “Korea’s macroeconomic performance since the crisis has been impressive, with strong real growth, low inflation, and rapidly growing official foreign reserves.” Furthermore, since the onset of the crisis, Korea has been rapidly integrating itself into the world economy. To visualize this performance Figure 1 shows the impressive economic development of Korea since 1980 and displays the differences in growth to Taiwan and Austria. With this history as one of the fastest growing economies in the world, Korea is working to become the focal point of a powerful Asian economic bloc. As a result of this overwhelming development within the last two decades, the Korean economy, as well as many other representative developing countries, has experienced both a dramatic increase in oil consumption and an upward shift in wage rates. From a general scientific point of view the relationship between energy consumption and economic growth has been the subject of intense research over the past three decades. However, the empirical evidence is ambiguous. Although numerous studies including all different parts of the world into their analysis have investigated the causal relationship between economic development and energy consumption, it is still hard to say that findings from these studies have reached an overall consensus. However, following a recent study from Wankeun Oh from the Department of Economics at the Hankuk University of Foreign Studies in Seoul, “the empirical results for the case of Korea suggest the existence of a long run bidirectional causal relationship between energy and GDP”.
Table of Contents
1 Introduction
2 The model
2.1 The static model
2.2 The dynamic model
3 Estimation
3.1 Data description and estimation procedure
3.2 Interfactor model
3.3 Interfuel substitution
4 Sub-period analysis
5 Conclusion
Research Objectives and Themes
The primary objective of this work is to analyze the interdependencies between interfactor and interfuel substitution within the context of the South Korean economy, particularly in response to rapid economic growth and dramatic shifts in energy consumption. The research explores how price changes affect both factor and fuel demand and investigates whether current standard models—which often assume no correlation between these substitution effects—are sufficient for understanding developing economies.
- Economic development and its relationship with energy consumption in South Korea.
- Two-stage estimation methodology using translog cost functions to model substitution effects.
- Analysis of the feedback effect between interfactor and interfuel substitution.
- Impact of the 1989 economic shift on point elasticities and factor demand patterns.
- Evaluation of policy implications for energy stabilization and future economic growth.
Excerpt from the Book
1 Introduction
South Korea, the Asian peninsula of Manchuria separating the Yellow Sea and the Sea of Japan, once known to be one of the world’s poorest agrarian societies, has undertaken economic development since 1962 what has become known as the “economic miracle on the Hangang River”. Nevertheless, Korea’s remarkable economic achievements were threatened by the Asian crisis beginning in late 1997 when the Asian tiger nations suffered from overvalued currencies and a lack of regulation in the financial system led to business incest, inflated asset values, high foreign debt and many other problems. But thanks to successful foreign debt restructuring with creditor banks, the nation is currently on track to resume economic growth. “Korea’s macroeconomic performance since the crisis has been impressive, with strong real growth, low inflation, and rapidly growing official foreign reserves.” Furthermore, since the onset of the crisis, Korea has been rapidly integrating itself into the world economy.
As a result of this overwhelming development within the last two decades, the Korean economy, as well as many other representative developing countries, has experienced both a dramatic increase in oil consumption and an upward shift in wage rates. From a general scientific point of view the relationship between energy consumption and economic growth has been the subject of intense research over the past three decades. However, the empirical evidence is ambiguous. Although numerous studies including all different parts of the world into their analysis have investigated the causal relationship between economic development and energy consumption, it is still hard to say that findings from these studies have reached an overall consensus.
Chapter Summaries
1 Introduction: This chapter provides an overview of South Korea’s economic development and its historical energy consumption patterns, establishing the context for the study of interfactor and interfuel substitution.
2 The model: This section outlines the theoretical framework, detailing both the static and dynamic translog cost function models used to analyze substitution adjustments to price changes.
3 Estimation: This chapter covers the empirical implementation, describing the data sources and the two-stage estimation procedure used to calculate price elasticities for both factors and fuel sources.
4 Sub-period analysis: This part examines the structural changes in the Korean economy, focusing on the significant differences in elasticity patterns observed before and after 1989.
5 Conclusion: The final chapter summarizes the key empirical findings and discusses the implications for energy policy and future economic strategy in the context of global market challenges.
Keywords
South Korea, economic growth, energy consumption, interfactor substitution, interfuel substitution, translog cost function, price elasticity, bidirectional causality, industrial demand, dynamic adjustment, factor demand, energy policy, oil consumption, wage rates, market liberalization.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper examines the interrelationship between interfactor and interfuel substitution in the South Korean economy to understand how price changes affect energy and production factor demands.
What are the central themes discussed?
The study centers on economic growth, energy consumption dynamics, substitution elasticities, and the role of price mechanisms in industrial energy demand.
What is the core research objective?
The goal is to determine how interfactor and interfuel substitution interact, especially in a developing economy like Korea, where rapid growth and shifts in wage rates influence long-term energy planning.
Which scientific methodology is applied?
The author uses a two-stage estimation method involving homothetic and non-homothetic translog cost-share functions to model the feedback between energy and production factors.
What is covered in the main body of the work?
The main body develops the mathematical models, describes the data, presents empirical estimates of elasticities, and performs a sub-period analysis of the Korean economy.
Which keywords define this work?
Key terms include economic growth, interfactor/interfuel substitution, price elasticity, energy demand, Korea, and translog cost function.
Why was the year 1989 selected for the sub-period analysis?
The year 1989 was chosen because the Korean data shows distinct behavioral patterns before and after this period, largely due to significant shifts in energy consumption and wage rates.
What does the dynamic model reveal about labor and energy?
Unlike the static model which suggests complementarity, the dynamic model reveals that labor and energy are substitutable, reflecting the impact of the sharp increase in wages observed after 1989.
How does the author characterize the demand for oil in Korea?
The research concludes that oil demand in Korea is highly inelastic to price changes in the long run.
- Quote paper
- Stefan Georg Hunger (Author), 2005, Economic growth and interfactor / interfuel substitution in Korea, Munich, GRIN Verlag, https://www.grin.com/document/44828
