Measuring distortion in capital allocation - The case of heavy and chemical industries in Korea

This paper investigates whether or not capital allocation was distorted in favor of the heavy and chemical industries in the manufacturing sector in Korea during 1970-90. Expected marginal products of capital are compared by estimating production functions of each industry. According to the test results, there was overinvestment in basic metal industries and machinery industries in the 1970s, while there was underinvestment in chemical industries, at least in the 1970s. The result suggests that more capital was allocated toward industries whose TFP growth rates were high, and toward producer goods industry than consumer goods industry. Distortion in capital allocation became smaller in the 1980s, however.