Research

Favoritism in the Fragmented Economy: When Political Incentive Meets Global Value Chains (Job Market Paper) [paper]

Abstract: I propose a novel favoritism index, which captures the distributional effects of trade policies within an economy. The favoritism index does not rely on direct measurements of trade policies, which are often implicit and difficult to observe. Instead, I extend the political economy model of protectionism (Grossman and Helpman 1994) into a multi-country multi-industry general equilibrium model. I recover the welfare weight that trade policies and barriers implicitly assign to each industry, which is revealed through current trade flows. By leveraging detailed international input-output data, I compute the favoritism index for 44 industries, including service industries, across 76 countries over 20 years along with a parameter that shows the incentive for protectionist policies. I establish a set of stylized facts regarding the systematic correlation between the index and country- and industry-specific characteristics. Applying the index to the U.S. economy, I find that counties with a high favoritism index tend to exhibit lower volatility in employment and average wage. Furthermore, I find that counties which experienced a negative change in their favoritism index tend to lean toward the Republican Party, particularly since the 2016 Presidential Election. Lastly, I evaluate the trade policies of the past five administrations by examining changes in favoritism during each tenure, and detect a trade policy reversal during the Trump administration.

The Market Potential and Optimality of Industrial Policy: Revisiting Korean Industrial Policy in the 1970s (With Seungjin Baek) [paper]

Abstract: We assess optimal industrial policy factoring in external economies of scale under changing global market conditions. Since policy effects naturally materialize with a time lag, policy assessment should compare the short-run distortion of the intervention to its long-run gain. In this context, we expand the small open economy model of Bartelme et al. (2021) into a two-period dynamic setting to figure out how important the dynamics of global market conditions are in determining optimal policy. Optimal industrial policy in our model depends not only on the scale elasticity, but also on a multiplier which is larger when more resources are re-allocated to the industry in the long-run based on export market penetration. This optimal policy implies that an industry with a growing future market should receive stronger support than earlier papers suggest. We quantitatively evaluate the industrial policy of South Korea in the 1970s. With the estimate of the scale elasticity of 29 manufacturing industries, our quantitative analysis presents two main results. First, even though the scale elasticity of targeted industries is virtually the same as that of non-targeted industries, the industrial policy increased the welfare of South Korea. Second, the suggested optimal subsidy rate for the targeted industries is even higher than the actual historical rate.