KDI Korea Development Institute

Summary

KDI FOCUS Assessing Old-Age Poverty with Income and Assets: Generational Insights and Policy Directions

Korea’s old-age poverty rate, based solely on income, ranks among the highest in the OECD. While the rate drops slightly when assets are considered, it remains persistently high. There are marked disparities in poverty rates across different elderly birth cohorts, with older groups facing higher rates. A greater share of the low-income, low-asset segment also marks the observed inequality. To effectively address poverty among the elderly, policy efforts should prioritize support for the oldest members of this vulnerable low-income, low-asset segment. Concurrently, financial assistance for seniors in the low-income, high-asset group should be scaled back. A practical move toward this direction would be revising the eligibility criteria for the Basic Pension to include asset-inclusive pensionable earnings.

- Korea’s old-age poverty rate was 43.4% in 2018, the highest among OECD countries (average 13.1%).

- The old-age poverty rate varies markedly across the five elderly generations, with those born in the 1940s or earlier having the highest rates.

- The recent decrease in the old-age poverty rate and the disparities seen across age cohorts can likely be attributed to the growing proportion of individuals born in the 1950s who tend to be less impoverished.

- Given the nascent state of public transfers in Korea, asset accumulation is the likely channel of retirement planning, meaning income alone does not provide a complete picture of old-age poverty.

- When incorporating both income and assets into the analysis, the old-age poverty rate determined by asset incomization is markedly lower than that derived from income alone but remains elevated.

- Korea’s old-age poverty rate, evaluated using both income and assets, still ranks among the highest in the world.

- When incorporating assets into the analysis, the share of the low-income, low-asset varies significantly across generations, particularly among those born in the 1940s and earlier.

- The difference in levels of old-age poverty across generations can be attributed to the intergenerational income disparity caused by rapid economic growth and the differing maturity levels of retirement security systems for each generation.

- To provide targeted assistance for the most vulnerable, the Basic Pension should be based on asset-adjusted pensionable earnings, reducing the support for seniors in the low-income, high-asset category.

Summary

KDI FOCUS Designing Social Protections for Platform Workers

In the expanding landscape of the platform economy, the rapid rise in the number of platform workers underscores a critical issue: the need for social protection for those not covered by conventional labor laws. Recognizing the transformative impact and significant societal value of the platform economy, it becomes essential to rethink the legal classification of platform workers, moving beyond the traditional "employee" versus "business owner" dichotomy. This paper argues that while platform workers might exhibit similar work patterns, the protection they receive should be proportionate to the labor monopsony power exerted by the platforms they associate with. A harmonized approach that aligns labor and competition policies is crucial to address these challenges.

- Today, platform labor is experiencing a swift expansion both in scope and magnitude.

- While the growth of platform workers presents numerous benefits, recent developments have spotlighted a few notable concerns.

- The discourse surrounding social protection for platform workers has been active, primarily revolving around the question of acknowledging their status as workers.

- The approach needs to be about reconciling the characteristics of the platform economy with genuinely effective protection for its workers.

- By focusing on the labor monopsony inherent to platforms, we can objectively assess the necessity of social protection for platform workers, incorporating discussions on both labor and fair trade policies.

- In this paper, ICT software developer platforms and delivery app platforms are investigated as representative examples of web-based freelance platforms and locally-based labor provision platforms, respectively.

- While the labor supply elasticity offers an empirical estimate of monopsony power, the platform economy necessitates a broader examination of additional factors.

- As for in-house contracts in the ICT developer platform, an empirical analysis shows that its labor monopsony power is on par with that of the typical labor market.

- In the delivery app market, it is imperative to examine the competitive dynamics among platforms from the standpoints of delivery app providers and consumers. Of particular interest is understanding the reasons and frequency of individuals using multiple apps at the same time (multihoming), along with the ease of switching between platforms.

- From the consumer perspective, the entry of newer players and heightened competition among delivery apps have increased multi-homing and reduced market dominance.

- Delivery app riders generally view themselves as wage workers. While they enjoy considerable flexibility in tasks and working hours, they are also subject to significant ex-post oversight through performance evaluations.

- To ensure the effective protection of platform workers while allowing platform-driven innovation, policies must be both flexible and unified under the goal of curbing platforms' monopsony power over labor demand and preventing potential abuses.

Summary

KDI FOCUS Approaches to Enhance the Market Functionality of the K-ETS

South Korea has set ambitious greenhouse gas (GHG) emission reduction targets. However, the country currently confronts a decline in the price of emission permits. This downward trend could obstruct the successful realization of GHG objectives through market mechanisms. The current emissions trading scheme (ETS) restricts banking of excess emission allowances, which has been identified as the main reason of the ongoing price decline. Consequently, this restriction hinders the adequate reflection of updated targets within the emissions trading market. To address this issue and avert potential shocks from a substantial reduction in emission allowance supply during Phase IV, it is necessary to relax the banking restrictions. At the same time, to proactively manage potential price escalations resulting from eased restrictions on permit banking, supplementary measures are required. These measures could include the introduction of explicit market stability mechanisms utilizing allowance reserves and the expansion of allowance supply channels.

- South Korea has ambitious GHG reduction targets, but the demand and prices for emission permits are lagging, both displaying a decline.

- The pricing mechanism of the K-ETS is currently underperforming, consequently compromising market efficiency.

- In its current framework, the K-ETS imposes restrictions on the banking of unused emission permit in order to stimulate the trading market.

- The banking restrictions impede the price function and overall efficiency of the scheme.

- To brace for potential reductions in allowance supply in the future, it is crucial to relax the banking restrictions.

- Relaxing the banking restrictions could result in a short-term surge in demand and prices for emission permits. Therefore, alongside a gradual relaxation of banking restrictions, complementary measures should be implemented.

- By implementing an explicit market stabilization scheme utilizing reserves, emissions prices can be stabilized and market efficiency can be enhanced.

- As for the price tiers in the market stabilization scheme, they should ideally consist of two straightforward tiers with a considerable disparity between them.

- Eligibility for participation in emissions auctions, currently confined to entities subject to auctioned allocation, must be expanded to secure a consistent supply of emission permits.

- Given the long-term nature of decisions to reduce GHG emissions, it’s crucial to improve the predictability of the emissions trading market.

Summary

KDI FOCUS Restructuring Higher Education: Toward a Student-led Model

A dwindling school-age population is expected to place many universities under greater financial distress in the coming decades. The Ministry of Education's strategy of assessing universities and coercing poorly performing ones to reduce enrollment has proved inadequate to speed up the restructuring process. A fundamental solution should be found in letting students, rather than the Ministry, lead this process by providing them with more and better information on individual universities and departments. For instance, the average salaries of graduates should be made public. It will facilitate ‘voting by feet’ by students and force universities to focus their efforts on enhancing their core competencies. It has additional advantages in protecting the restructuring process from political interference, enabling a better matching between supply and demand of skills, and promoting the autonomy in higher education.

- There has been a notable downturn in freshman enrollment rates in recent years, corresponding with the decline in the school-age population. If this trend continues, university enrollment figures could halve within the next two decades.

- The current methodology of the Ministry of Education, which compels universities to reduce enrollment quotas based on evaluation results to obtain financial support, remains vulnerable to political influences.

- This current approach has the potential risk of further eroding autonomy and stifling creativity within universities.

- Delegating the decision on the expansion of majors or courses to market forces, rather than to government entities, might prove more effective in addressing issues of labor oversupply or undersupply.

- Faced with declining enrollments, universities have largely opted for a uniform downsizing of department sizes rather than specializing their programs.

- From a supply-side perspective, the most significant hurdle to restructuring is perceived to be resistance from faculty members.

- Income mobility continues to decline, weakening the expectations for upward mobility

- The role and necessity of national universities warrant a fundamental review. Policies concerning university restructuring should be formulated in alignment with the outcomes of this reevaluation.

Summary

KDI FOCUS Addressing the Prolonged Pension Gap

As the age for National Pension eligibility rises, creating an income gap, many older people typically offset this by increasing their labor earnings, studies suggest. Those facing a pension gap tend to increase earnings without an accompanying rise in poverty or reduction in consumption. However, households with excessive medical expenses struggle to fully offset the reduced pension, as increased labor income doesn't completely make up for the pension shortfall. Given the ongoing upward trajectory of the pensionable age, meticulous monitoring of elderly employment trends and bolstering support for prolonged employment are of paramount importance. For immediate relief, older households, constricted by caregiving obligations and facing labor supply limitations, require further reinforcement through targeted support programs.

- Increasing the National Pension eligibility age can bolster the fund's financial viability. However, without adequate income supplementation during the pension gap, this change may potentially escalate poverty rates and diminish the quality of life among older individuals.

- The goal of raising the pensionable age is twofold: to reduce long-term pension benefit expenditures by postponing the commencement of pension benefits, and to encourage labor market participation among the elderly.

- In response to the extended pension gap, pensioners supplemented their income through work. Consequently, no significant changes were observed in either the average household income or poverty rates.

- The increase in pensionable age has not significantly impacted household consumption expenditures.

- Households with medical expenses exceeding the median level struggled to counterbalance the decline in public pension income. They faced constraints in amplifying their labor income during the pension gap period.

- Generations impacted by the elevated pensionable age have navigated the pension gap by boosting their labor earnings, compared to unaffected cohorts. Consequently, no alterations were observed in their poverty rate or consumption expenditures.

- Continual monitoring of employment trends among the elderly, alongside the enhancement of employment extension support and reemployment services for middle-aged and senior populations, is crucial given the anticipated future extension of the pension gap.

- The promotion of a phased retirement system, linked to a partial pension scheme, is essential for encouraging long-term employment.

- Efforts must be made to address deficiencies in the disability pension system in order to strengthen income supplementation for individuals unable to work due to injury or illness.

- Appropriate care services should be provided for elderly households facing significant caregiving burdens for sick household members.

Summary

KDI FOCUS Restructuring Platform Merger Review

Platform mergers differ significantly from traditional mergers. In platform mergers, foreclosure issues, which are crucial in traditional vertical mergers, carry less significance but may still arise indirectly. Platforms, moreover, can favor their own businesses potentially disadvantaging competitors, and leverage their market power to new businesses. Lastly, entry barriers could increase as a result of platforms’ multi-service provisions. Nevertheless, platforms can enhance consumer welfare, especially through product (service) bundling. Thus, we need to overhaul the merger review system to incorporate the aforementioned characteristics of platform mergers.

- Amidst the escalating debate on platform regulation, there has been a surge in platform mergers, leading to a corresponding increase in the need for platform merger reviews.

- There is a need for new guidelines for platform merger review to reflect the unique characteristics of such mergers. These guidelines should outline the review methodology and the assessment of potential competitive constraints.

- Indirect network externality plays a crucial role in locking in users to specific platforms.

- Platform firms provide a diverse range of services, offering multiple ancillary service platforms that revolve around a few core platforms or other businesses associated with the platforms.

- Platform firms often pursue mergers to expand into new revenue-creating areas or to strengthen their competitiveness in core services.

- One significant concern regarding anticompetitive practices in platform mergers is the potential for excluding competitors via selfpreferencing in the new markets.

- The addition of new ancillary services through a merger can potentially raise entry barriers in both the platform’s core service areas and the overall platform ecosystem.

- If a vertical merger leads to the foreclosure of purchasing or sales channels, it can seriously harm market competition.

- In mixed mergers, leveraging market power from one market to another can occur through tying.

- The determination of whether a merger is vertical or mixed is bound to be confusing when a platform, acting as an intermediary between consumers and small and medium-sized vendors, seeks to merge in order to add an auxiliary service for these vendors.

- Platform operators have the ability to foreclose competitors in other sectors but only indirectly, using accessibility to users.

- Without tying, platform operators can leverage market power from their core business area to ancillary service areas by raising rival’s costs.

- Platform mergers can raise barriers to entry not only in new markets but also in existing core service areas and the overall platform ecosystem. In some cases, the creation and reinforcement of entry barriers may be a deliberate objective of the merging parties.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Policy Study KOR The Contingent Effects of Anti-Corruption Agencies on the Right to Prosecute

The efforts of international organizations such as the UN and EU are prompting anti-corruption agencies to spring up across multiple countries as a useful tool to curb corruption. The success of the Corrupt Practices Investigation Bureau of Singapore and the Independent Commission Against Corruption of Hong Kong broadened the horizon for the fight against corruption and built momentum for this movement.

The aims of this study are two-fold: (1) clarification of the conditions of an anti-corruption agency that increase the possibility of investigation and punishment of corruption crimes and (2) identification of policy implications for strengthening Korea’s anti-corruption capacity.

More specifically, this study analyzes how the presence or absence of the right to prosecute in an anti-corruption agency affects its effectiveness. An analysis of dynamic panel data demonstrates that corruption is exacerbated with the power to prosecute given to anti-corruption authorities. The data also show that the lack of such a prosecutorial power reduces corruption, increases prosecutions for office abuse, and strengthens the rule of law.

With the right to prosecute, an anti-corruption agency will weaken its anti-corruption capacity due to collusion or obstruction, and without the power, it will strengthen its function to combat corruption through competition with the prosecutor’s office or police.

Per “double jeopardy,” with the right to prosecute on top of the right to investigate, an anti-corruption body has no choice but to have jurisdiction strictly separate from the prosecutor’s office, so there is no effect of reducing moral hazard through competition. Instead, collusion between authorities with the right to prosecute or obstruction of one another’s investigations may weaken the anti-corruption capacity.

Accordingly, the criminal justice system should be designed based on the principle of checks and balances, taking into account the possibility of conflicts of interest between investigator, prosecutor, potential criminals, or their guardians. The most important thing is that an objective and strict investigation by those who have no interest in the case should always be premised.

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The 2023 APN Conference successfully ended

Assessing Old-Age Poverty with Income and Assets: Generational Insights and Policy Directions

KOR North Korean Economy, October 2023

KDI Monthly Economic Trends 2023. 10

KDI President discussed with Nobel Prize Winner Paul Romer

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[MOU & Expert Seminar] CIER from Taiwan

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