Until recently, Korea has pursued an export-led growth strategy in which manufacturing exports have played a leading role in the economic growth of the country. There is no question that this strategy has been successful, as Korea joined the ranks of the OECD in a comparatively short period of time.Figure 1 illustrates the growth cycle in the export-led strategy, in which export performance of the manufacturing sector (A), mediated by investment (B) and employment (C) triggers overall economic growth. The initial impetus from exports also generates household income (D) and consumption (E). This virtuous circle was reinforced by favorable external conditions for Korean exports such as the expansion of international trade after globalization, and the rapid growth of the Chinese economy and other emerging markets.However, with the recent global economic recession, an emergent new protectionism and oversaturation in some export markets, a once-favorable external situation has become unfavorable. For instance, the growth rate of global imports, which normally is twice the average global GDP growth, fell 100%, matching global GDP growth rather than beating it. As a consequence, exports have slowed and with them, the Korean economy as a whole. At the same time, it seems that the aforementioned virtuous circle sustained by an export-led growth strategy is not working properly anymore.The impact of exports on the domestic economy can be examined using the “export multiplier” concept, which is the chain of reactions in the virtuous circle as depicted in Figure 1, driven by changes in export volume. Denoting k and k△EX as export multipliers and change in exports, respectively, the ultimate impact of a change in exports on domestic GDP is k△EX.Typically, the relationship between exports and GDP growth is analyzed through export contributions to percentage change in GDP, which can be calculated directly from the change in GDP and−as its component−the change in exports. As to recent trends in the contributions to percentage change in GDP, domestic demand has contributed less and less since 1991, whereas exports’ contributions fell off markedly after 2011.However, exports’ contribution to percentage change in GDP underestimates the ultimate impact of the change in exports, since it only considers export’s composition effect as a component of GDP. But the export multiplier can detect the true effect of exports on the domestic economy by incorporating other elements of the virtuous circle that are also components of GDP, such as consumption, investments, and imports.In this study we attempt to quantify the export multiplier to definitively show how exports have undergirded the Korean economy and doing so we will describe how the export multiplier effect has diminished since the global financial crisis in 2008. We will also argue in this study that a trend of disinclination in the marginal propensity to consume, one of the determinants of the multiplier, has played an important role in its contraction.This study is organized as follows. In Section 2, we introduce the theoretical framework of the export multiplier. In Section 3, we describe structural changes in the Korean economy and how they influence the export multiplier. In section 4, we estimate export multipliers using the structural vector autoregression (SVAR) model. Finally, in section 5 we discuss policy implications
