KDI Korea Development Institute

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.

Summary

Research Monograph KOR Restructuring the Market for Higher Education

The declining number of students has placed many universities under intense pressure for restructuring. The Korean government has implemented a series of programs to facilitate their restructuring, mainly by evaluating their performance, assigning them targets for cuts in enrollment, and offering financial supports. The heavy government involvement, however, has had several drawbacks, including the efficiency principle compromised during the restructuring process, further encroachment on the autonomy of universities, their increased dependency on government, possible distortion in the sectoral supply of manpower, and the decreasing size of individual academic departments in many universities. The sources of the problem can be found, on the supply side, in the resistance from professors toward restructuring and weak governance within universities, and on the demand side, in the under-utilization of information (e.g., on job prospects upon graduation) by students when choosing universities and fields of study. This research monograph analyzes the data from the Education Statistics Service to study the behavior of suppliers and consumers in the market for higher education and proposes three ways to facilitate restructuring: (1) Scaling down the over-sized public universities and dismantling their soft-budget constraint; (2) eliminating the legal ceilings on the number of students in the capital area; and (3) providing better information on individual universities and academic departments. The aim of the latter two is to encourage students to pursue 'voting by feet' and let their selections, not the government's preference, decide which universities will survive and expand and which ones will exit.

Summary

Policy Study KOR The Impact of Increase in Pension Age on Employment, Income and Consumption

Due to population aging and a relatively low contribution rate relative to high pension payments, a pension fund in Korea is financially unstable. To improve financial stability, the Korean government passed a law in 1998 that gradually increased the pension age from age 60 to 65 between 2013 and 2033. The purpose of the reform was to prolong the retirement age and delay the pension payment among the elderly. However, as the statutory retirement age has remained at age 60 since 2016, the gap between the statutory retirement age and pension age has widened. This widening gap has brought the need to explore whether and how people have been supplementing their income and consumption in the time of income crevasse.

This paper uses cohort discontinuity regression to estimate the impact of the increase in the pension age on employment, income, and consumption in Korea by using a discontinuous jump in the pension age from 61 to 62 between the 1956 and 1957 cohorts. It finds that an increase in pension age from 61 to 62 leads to a rise in labor income and does not lead to a drop in disposable income and consumption at age 61, despite the decrease in pension amount. However, a heterogenous effect depends on the family characteristics, such as the rate of medical expense out of total consumption expenditure and the education level of the household head. In particular, the labor income of families with high rates of medical expense out of total consumption did not increase despite the decline in pension amount. Along with the decreased business and property income, they experience a drop in disposable income. Moreover, a family with a household head in high school but without a college degree does not increase the labor income. Along with the decline in business and property income, they experience a drop in disposable income and consumption.

These results suggest that the vulnerable group from the increase in pension age policy might be the family who can-not extends labor participation due to health problems or the care-giver burden of the family member with the health problem. Moreover, the vulnerable group from the increase in pension age in Korea might not be the lowest and highest education group but instead those in the middle.

This paper suggests the following policy implication. First, the government needs to provide an income supplement to those who can not extend their employment in the period of income crevasse due to health problems and provide care-giving service to those who can not participate in work due to the care-giving burden between the statutory and pension age. Secondly, the government might want to implement a partial pension system that allows receiving early pension partially, which gives more flexibility in combining work and pension. Thirdly, to reduce the gap between the statutory age and pension age, the government might want to gradually extend the re-employment system while transforming the seniority-based wage system into one that reflects the productivity and task of the person's job. Fourth, the government might want to enhance the job-training program for the elderly by evaluating the program's effectiveness and grasping the need of both the employer and employee's side.

Summary

Policy Study KOR The Impact of External Uncertainty Shocks in Korean Economy

This paper explores the effects of external uncertainty on South Korea’s real economy. By exploiting variations in geopolitical risks posed by Russia and the uncertainty surrounding US monetary policy ― both of which are plausibly exogenous to the Korean economy, the study reveals that such uncertainties negatively impact Korea’s key domestic macroeconomic variables. Notably, this adverse effect is distinctively evident in sectors like exports and manufacturing due to their high sensitivity to external demand dynamics. Using micro-data, the study further indicates that external uncertainty significantly reduces (i) exports to low-income countries and (ii) exports of capital goods. Additionally, the analysis confirms that financial constraints and the irreversibility of investment decisions play pivotal roles in amplifying the effects of external uncertainties.

This study enriches the existing literature by quantifying the impact of external uncertainty using novel instruments ― the geopolitical risk emanating from Russia and the uncertainty surrounding US monetary policy. These findings can offer insights that can guide the formation of resilient policy, aptly designed for a dynamic external landscape, while providing a comprehensive understanding of how external uncertainty influences real economy at both macro and mirco levels.

Summary

Policy Study KOR Study on Bottom-up Investment Appraisal Methodology under Uncertainty of Costs and Benefits: Focusing on Economic Feasibility Analysis of Preliminary Feasibility Study for Road Sector

Transportation investment projects rely on accurate predictions of benefits and costs as fundamental data to determine the feasibility of the project. These predictions also serve as important information to evaluate the investment's effectiveness and the level of fees. However, the predicted values of benefits and costs have become increasingly uncertain due to various factors, such as changes in population demographics, the emergence of new transportation modes, and changes in travel behavior. Despite this growing uncertainty, the current feasibility evaluation methods fail to reflect this uncertainty in predicted benefits and costs.

The purpose of this study is to empirically analyze the uncertainty of predicted traffic volume, costs, and benefits in the preliminary feasibility study of Korean roads, and to propose the need for a new economic feasibility evaluation method that can explore various alternatives for proceeding with the project in the face of such uncertainty, not only for determining whether or not to proceed with the project.

The uncertainty of future predicted traffic volume was characterized using a Geometric Brownian Motion (GBM) model composed of the growth rate( ) and volatility() of traffic volume changes for road projects that underwent preliminary feasibility studies. For the uncertainty of predicted traffic volume during the first year after the project's opening, a Gaussian mixture model probability distribution was considered. The uncertainty of cost predictions was characterized using a Frechet probability distribution, and the uncertainty of benefit predictions was characterized using a regression model using traffic volume and total project costs.

An analysis of the uncertainty of the economic feasibility results in preliminary feasibility studies of road projects revealed that the probability of predicted benefits presented in the preliminary feasibility report being larger than the benefits predicted through simulations was only 0.195, indicating that the benefits presented in the report were likely to be overestimated. In terms of costs, the probability of predicted costs through simulations being higher than the predicted costs presented in the preliminary feasibility report was as high as 0.588.

In summary, the economic feasibility results presented in the preliminary feasibility study were found to be vulnerable to the uncertainty of benefit realization and the possibility of cost increases, indicating that they are not robust. Although the BCR 1.0, which is the feasibility evaluation index for the target project, was provided in the preliminary feasibility study, the simulation analysis showed that the probability of the BCR being equal to or greater than 1 was only 0.048. In particular, the median and mean of the target project's BCR analyzed through simulation were 0.632 and 0.627, respectively.

Therefore, it is deemed necessary to introduce a bottom-up approach to economic feasibility analysis that can identify the factors that influence the economic feasibility results under the uncertainty of traffic volume, cost, and benefit predictions, in addition to the traditional economic feasibility analysis method that uses specific predicted values for traffic volume, cost, and benefit. This bottom-up approach can propose alternative business plans to achieve the investment goal set by the transportation project and assess the probability of achieving the goal with the current business plan, as well as suggest alternative business plans that can secure the investment goal set by the transportation project.

The introduction of a bottom-up approach to economic feasibility analysis proposed in this study is expected to enhance the primary function of feasibility analysis, which emphasizes efficient investment in the future. Through the introduction of the bottom-up approach, it is expected that project plans and contents can be prepared in advance to respond to the risks and negative effects that the investment may bring. In addition, it is anticipated that preparing alternatives for the risks and negative effects of the project in advance can also serve as a means to encourage the opinions and participation of not only feasibility analysis experts, but also the general public.

Summary

Research Monograph KOR Providing Social Protection for Self-Employed Workers

This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Summary

Policy Study KOR On General Equilibrium Effects of Increase in Korean Sovereign Debt

Conventional fiscal forecasting techniques, which expect that the Korean sovereign debt-to-GDP ratio could rise from about 36% in 2018 to 158.7% in 2060 depending on the choice of a forecasting method, presume fixed levels of macro forecasts, such as growth and interest rates, and ignore endogenous fiscal impacts on these macro presumptions. This study uses a heterogeneous household model with an effective borrowing constraint to explore the endogenous crowding-out effects of the published debt-to-GDP ratios. Under the scenario [G], in which rising sovereign debt attributed to increasing government expenditure, the effects of government spending and capital market crowding out simultaneously occurred, changing the debt-to-GDP ratio by +12.14%, real interest rate by +44bps, and output by -3.56%, compared to 2060 forecasts by Kim (2021). Under the scenario [T], in which rising sovereign debt attributed to more income transfers, the effects of precautionary saving and capital market crowding out concurred, changing the debt-to-GDP ratio by +7.64%, real interest rate by +22bps, and output by -1.84%.

Summary

Research Monograph KOR Housing Market Regulations and Housing Supply: Focusing on LTV, DSR, Property Tax, and the Improvement of Pre-Sale Housing

The Korean government often implements financial regulations, such as the Loan-to-Value (LTV) and Debt-Service-Ratio (DSR), ratios, to stabilize the housing market. This study investigates the effectiveness of these policies in the housing market and, if effective, determines whether they enhance the utility for housing consumers.

Additionally, the government employs housing supply policies, which greatly impact the housing market. Housing provision is a lengthy and capital-intensive process. Korea supplies most of the new housing through a system known as the pre-sale policy. In fact, this system has consistently faced the challenge of overheating subscriptions for over 40 years. In light of the current housing market dynamics, Chapter 3 explores possible improvements to the existing housing supply policy.

As for the effect of financial regulation, the policy that lowers the upper limit of the LTV ratio from 70% to 40% reduces household loans by more than 31% while increasing the relative price of housing by 0.005%. If the upper limit on LTV ratios is lowered, households experience a low productivity shock, making it difficult to maintain consumption levels by increasing mortgage lending when incomes fall. As a result, they are motivated to increase savings. When the capital stock in the model economy increases due to the increase in household savings, the real interest rate falls. Wealthy households with relatively large amounts of assets reduce the share of financial assets in their asset portfolios and increase the share of housing because the real interest rate, which is the rate of return on investment in financial assets, has fallen.

The analysis in this study reveals that policies tightening household lending regulations do not effectively curtail housing prices in the long run. If the goal is long-term price stabilization, the study suggests that increasing the supply of new housing is more effective than suppressing housing demand through stricter lending regulations.

Lastly, the study proposes a new policy model for improving housing supply, especially for the younger demographic. This model seeks to address both the housing service and investment needs of younger people. Regarding public offerings and transactions of fractional ownership, housing demand is categorized into the demand for residential services and the demand for investment in housing assets. In the current pre-sale subscription method, the share of the house is divided, and public offering subscriptions are received. This method distributes shares to each subscriber in proportion to the competition rate for subscriptions. In this scenario, new housing is provided to young adults as rental properties in line with the existing subscription method to meet the need for residential demand.

Summary

Research Monograph KOR Future North Korea Policies and Inter-Korean Economic Cooperation

This report provides a comprehensive and systematic analysis of inter-Korean economic cooperation thus far, with the aim of deriving implications for future endeavors should cooperation resume. To achieve this goal, the report will examine four main topics: South Korean policies toward North Korea, relevant concepts and theories, economic history, quantitative analyses, and public opinion. Each of these topics will be discussed individually and then connected to facilitate a comprehensive discussion.

Firstly, the report will examine how inter-Korean cooperation is related to and derived from South Korea's unification and North Korea policies, and how its concept is defined as internal trade between ethnic groups. A theoretical analysis is conducted of how its objectives, systems, forms, and strategies are designed accordingly. In addition, a summary is presented of South Korea's two different positions on North Korea from the perspectives of conservatives and progressives, and a discussion on how inter-Korean cooperation is reflected in each perspective, how controversies and debates surrounding it are formed, and what diverse arguments exist using economic concepts and techniques. Based on this, the practical development process of inter-Korean cooperation that started in the late 1980s or early 1990s is discussed.

The policies and attitudes of South and North Korea toward inter-Korean cooperation is analyzed as well as what the progress and forms have been, and what influence was exerted between North and South Korea in the process. Moreover, the so-called “peace effect of inter-Korean cooperation” and the “principle of separation of economy and politics” in the context of inter-Korean relations was empirically analyzed. Based on these concepts, historical analysis, and empirical analysis, this report also analyzes what South Korean citizen’ thoughts are on what desirable inter-Korean cooperation would be through structured surveys. These surveys concentrate on not only on the past and present, but also on the expectations and aspirations of South Korean citizens for future cooperation, as well as their perceptions on feasibility in relation to various environmental factors. The aim is to obtain more insights into how the inter-Korean cooperation system should be designed in the future with focus placed on the future rather than the past.

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The economic outlook is bleak: ‘Flexibility’ is the key to resolving the situation

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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