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[2018-6] The Effects of Exports on Domestic Demand

Group : Macro Economy
Research department (02-759-4254) 2018.07.17 824

With the widening gap between exports and domestic demand
indicators since 2000, there have been continued discussions on the
spillover effects of exports on domestic demand. As the possibility has
been recently raised that strengthening US trade protectionism could slow
down global trade, there is growing interest in the effects of export on
economic growth. In this regard, this paper analyzes changes in the
spillover effects of exports and their causes, focusing on the effects of
exports on facilities investment and also on employment which are
relatively easily identifiable among the transmission channels of exports
to domestic demand.
First, in order to examine changes in exports’ facilities investment
inducement effects, this paper conducts a rolling regression analysis
utilizing a facilities investment function model based on the optimal
capital stock theory, as well as a VAR model-based analysis by period.
The results of the analyses show that the impacts of exports on facilities
investment have been gradually weakening since the global financial
crisis, and this proves to have been attributable mainly to increased
non-customs clearance trades in line with growing foreign direct
investment, the increasing share of imported capital goods, a declining
manufacturing capacity utilization ratio and growing external condition
Meanwhile, changes in exports’ job creation inducement effects are
analyzed based on the input-output table and through the
growth-accounting approach. According to the results of the analysis,
manufacturing exports’ job creation inducement effects had rapidly
weakened until the 1990s, and the pace of decline has moderately slowed
since the 2000s. This seems to have been resulted largely from structural
changes in export industries and improvement in labor productivity, and
factors such as increased foreign direct investment and heightened
dependence of exports on imports also seem to have worked to reduce
exports’ job creation capacity.

Exports have shown rapid growth and led domestic economic growth,
but their spillover effects on facilities investment and employment have
exhibited a slowing trend. Given that the weakening spillover effects of
exports on domestic demand were a result of the rearrangement of
Korea’s key export industries while they coped with changes in domestic
and external economic conditions, the following policy measures are
required: first, measures to strengthen the linkages between large and
small & medium-sized export firms and to localize imported facilities
through technical development are required to enhance indirect spillover
effects of exports. Furthermore, in addition to policy measures to facilitate
exports’ job creation inducement, efforts should also be made to create
more jobs at domestic demand-oriented firms for example by encouraging
SMEs to participate more in exports, and by discovering new growth