Theory and Empirics of the Institutional Evolution of Economic Development: An Application to Korean Economy

Abstract

This study empirically applies the theory of institutional requirement for economic development to explain Koreas modern history of economic development. The study theoretically derives the argument that the economic discrimination (ED) policy regime rewarding high performance relative to low performance is the necessary condition for economic development, whereas the economic egalitarianism (EE) policy regime disregarding the differences of performances is the sufficient condition for economic stagnation. The paper then describes some details of the institutional evolution of Korean economy for the last 60 years and presents three testable hypotheses for Koreas development history. 1) Institution-led growth hypothesis: The rise and fall of Koreas economic growth was respectively led by the ED and EE policy regimes. 2) Corporate-led growth hypothesis: The rise and fall of Koreas economic growth was led by the rise and fall of the corporate sector growth instigated by the ED and EE policy regimes, respectively; and 3) Political cycle of economic growth: The rise and fall of Koreas economic growth was led by the political cycle of economization of politics and politicization of economy, respectively. These hypotheses are empirically verified by utilizing a new model of corporate production function. Policy implication is that Koreas current economic difficulties can only be cured by reversing the current anti-corporate EE policy regime to the corporate-friendly ED policy regime.