Foreign reserve crisis and the Korean industrial structure – A computable general equilibrium (CGE) approach

A dynamic CGE model is used to investigate the major characteristics of the evolution of Korea's industrial structure up to the breakout of the foreign reserve crisis, and to make forecasts for the coming adjustment of the Korean economy. The basic framework used in the model is ORANI-F. The main modification made is the specification of supply functions in which domestic and export goods are differentiated. The modified specification is pursued to reflect features of the Korean economy that has been heavily export-oriented in its development path. The model is calibrated to Korea input–output (I–O) data for 1990, and the base year I–O data are updated by historical simulation in order to be utilized as a basis for forecasting. Historical simulation shows a fundamental weakness in Korea's industrial structure, which might have contributed significantly to the financial crisis. The forecasts are based on different scenarios regarding the exchange rate, interest rate, unempolyment level, investment level, and productivity. Our study shows that an increase in productivity growth will be essential in order to achieve a recovery in growth and an improved current account position.