The Political Economy of Exchange Rates and Export-Led Industrialization in South Korea*

South Korea's economic trajectory has been one of the most successful stories of post-war catch-up industrialization. The Korean developmental state has used various tools, including the exchange rate, to become an export powerhouse in the twenty-first century. However, the export-led growth strategy has had a distributive conflict with Korea's working class. Based on post-Keynesian and structuralist economics, this paper assesses the political economy of exchange rate depreciation and export-led industrialization in South Korea. I show that exports as a share of GDP have constantly risen to become the most important growth engine in the Korean economy. This long-term trend, however, has coincided with a decline in the labor income share in South Korea. I formulate the structuralist macroeconomic model to explain dynamics of real wages, real exchange rates, exports, and output. I finally use a vector autoregression (VAR) analysis to show that exchange rate depreciations during modern South Korea (1989Q1–2023Q1) are inflationary and contractionary in the short run. Currency depreciations have ambiguous effects on exports, but they clearly reduce output gaps. On the other hand, an increase in nominal wages is expansionary or varies positively with output gaps.