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KDI FOCUS Reforming Korea’s Wholesale Electricity Market amid Renewable Expansion

To ensure power stability amid rising renewables, Korea must reform its rigid wholesale electricity pricing to incentivize essential grid investments.

September 04, 2025
Economic Outlook KDI Economic Outlook 2025-2nd Half

The Korean economy is expected to grow by around 1.8% in 2026, as export growth slows but domestic demand recovers.

November 11, 2025
KDI FOCUS Health Insurance Expenditure Growth: Driving Factors and Policy Implications

To curb soaring primary care prices requires reforming fee-for-service and strengthening expenditure review.

April 21, 2025
KDI News 2025 KDI GKEDC Capacity-Building Program

Enhancing Sustainable Urban Mobility in Cambodia

September 22, 2025
KDI FOCUS The Role of Capital Structure in Real Estate Project Financing: Risk, Cost, and Policy Implications

A more sophisticated policy framework is required to enhance capital adequacy, address regulatory arbitrage associated with PFVs, mitigate risks in real estate project financing, and improve the overall capital structure of financial institutions

October 17, 2025
News 2025 G20 Global Financial Stability Conference

MOEF-KDI co-hosted the 2025 G20 Global Financial Stability Conference on September 3 (Wednesday) at The Plaza Hotel Seoul under the theme “Enhancing Financial Stability and Resilience amid Structural Changes and Uncertainty.”

September 03, 2025
KDI FOCUS Reforming the Basic Pension Eligibility Threshold

South Korea should reform its Basic Pension by linking eligibility to median income for better targeting and consider integrating it with the National Basic Livelihood Security System to ensure a minimum income for the elderly

May 29, 2025
Other Research KOR KDI Review of the North Korean Economy, November 2025

The November issue offers a synthesized assessment of the evolution of inter-Korean economic cooperation and the policy context shaping current approaches toward North Korea.

November 27, 2025
KDI News What‘s Up Newsletter Vol.27

The 27th issue of the KDI What's Up newsletter is now available!

November 19, 2025
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Summary

Policy Study KOR A Study on Strategic Procurement
Around the world, public procurement is increasingly being designed to serve broader social objectives ― such as supporting disadvantaged groups or promoting innovation ― alongside its traditional economic goals. This trend is also gaining momentum in Korea. In this paper, we refer to the use of procurement to achieve these secondary aims as “strategic public procurement” and explore its potential benefits and costs. Specifically, we conduct an empirical analysis of strategic procurement practices that prioritize certain companies or products, with a focus on Korea’s purchase target ratio system. Our findings suggest that procurement aimed at fostering innovation can be economically effective, whereas evidence supporting procurement targeted at disadvantaged groups is less consistent.

Summary

Policy Study KOR Time Preference Estimation in Korea: Focusing on the Impact of Age
This study systematically analyzes the relationship between time preference and age in South Korea, offering policy implications. It reviews the theoretical foundations of age-specific characteristics of time preference and empirically examines time preferences using survey methodology. Findings reveal that time preferences follow a U-shaped pattern with age, reaching their lowest point in the 45-50 age range. Educational attainment significantly impacts time preferences, with college graduates linked to lower preferences and smoother age-related patterns compared to those with high school education or less. Additionally, life insurance policyholders and groups with high financial literacy demonstrate lower and more stable time preferences. These results suggest the need for targeted life-cycle policies. Contrary to traditional economic theory’s view of time preference as a fixed exogenous variable, this study suggests potential endogenous changes, advocating tailored policy approaches in savings, education, finance, and information provision.

Summary

Policy Study KOR The Impact of Demographic Changes on Productivity
Demographic transitions in South Korea are projected to slow its potential economic growth through declining labor input and lowering total factor productivity (TFP). However, the TFP channel has been relatively underexplored compared to the labor input channel due to data limitations. To address this gap, this study constructs a comprehensive firm-level dataset by combining KISDATA from the NICE Information Service with income tax records from the National Tax Service. The resulting dataset includes information on both firm-level productivity and the age composition of employees, enabling a quantitative analysis of how workforce aging affects TFP.

The analysis reveals five key findings. (1) An inverse U-shaped relationship exists between employee age composition and TFP, peaking at ages 35-49. (2) Among employees aged 50 and older, TFP significantly decreases as their share rises. Relative to the 35-39 reference group, an increasing share of 40-49 year-olds has no statistically significant effect. However, a 1%p increase in the 50-54 share decreases TFP by 0.2%, and a 1%p rise in those aged 55 and above shows a larger 0.5% decline. (3) The negative impact of workforce aging is more pronounced in firms in the Seoul metropolitan area, firms with 50-299 employees, manufacturing and construction sectors, and firms operating over 30 years. (4) Firms with low average education and wage levels, high labor intensity, or low value-added per employee exhibit greater TFP declines due to workforce aging. (5) While strong seniority-based wage systems are associated with an earlier peak in the inverse U-curve, firms with weak seniority wages experience larger TFP declines due to aging.

The findings suggest that overlooking the TFP channel may lead to underestimating the demographic effects on economic growth. Mid-to-long-term population projections indicate that population aging will reduce TFP by an annual average of 0.2% between 2031 and 2041. The persistent downward pressure on productivity should be incorporated into assumptions about the future TFP trajectory.

This study identifies firms most vulnerable to population aging through heterogeneity analyses, offering targeted policy recommendations for South Korea's labor supply strategies. As industries become more labor-intensive, low-skill, and low-wage, their productivity declines are expected to be even steeper from workforce aging. Expanding younger foreign worker inflows in the short term can bolster labor supply, while long-term strategies should enhance productivity in these industries to attract domestic youth. Additionally, as seniority-based wage systems exacerbate the productivity impact of aging, reducing reliance on seniority and expanding task- and performance-based compensation systems is advisable for improving TFP.

Summary

Policy Study KOR Impact of Global Trade Fragmentation on South Korea’s Exports: The U.S-China Trade War and Policy Insights
This study analyzes the effects of the U.S.-China trade war on third-country exports to the U.S. and China, focusing on South Korea. Using tariff change data that occurred during the 2018~19 US-China trade war, it estimates product-level elasticities of substitution, i.e., tariff cross-elasticities, and investigates their determinants across countries, industries, and products. This analysis elucidates the heterogeneous effects of the trade war, informing policies to seize new export opportunities amid ongoing global trade fragmentation.

The results show that Korea’s tariff cross-elasticities toward the U.S., relative to U.S. tariffs on Chinese imports, were generally positive, implying that higher U.S. tariffs tend to boost Korean exports to the U.S. In contrast, the elasticity toward China, relative to Chinese tariffs on U.S. imports, was negative on average, suggesting that increased Chinese tariffs tend to reduce Korea’s exports to China. Comparing predicted and actual export changes reveals a potential underestimation bias in the regression model.

Decomposing the determinants of tariff cross-elasticities into country, industry, and product factors reveals the significance of country-specific elements for exports to the U.S. and China, with industry factors also exhibiting relevance for exports to the U.S. In the case of Korea, tariff elasticities were higher in high-tech, capital-intensive, or export-integrated industries.

Additionally, analysis of Korean manufacturing shows that industries with economies of scale reduced production costs and expanded output during the trade war. Zooming into factors for economies of scale, capital-intensive industries with prior investments saw increased value-added, expanded investment, and lower costs. Export-integrated industries exhibited similar positive outcomes.

Lastly, simulations based on the estimated elasticities project that four U.S.-China tariff scenarios increase Korea’s exports to the U.S. by 0.1% to 7.0%, depending on the extent of U.S. tariff changes on Chinese imports. In a severe scenario where both countries impose roughly 10%p additional tariffs on all bilateral imports, Korea's exports are projected to rise by about 4.7% to the U.S. and 9.1% to China.

These findings inform policy decisions for Korea to navigate global trade changes, such as the U.S.-China trade war, by prioritizing targeted support for high-tech and capital-intensive industries and bolstering investment and export infrastructure to enhance resilience and capture emerging export opportunities.

Summary

Policy Study KOR Investor Composition of Government Debtand its Fiscal Implications
This paper estimates the demand for South Korea’s government bonds across investor categories and projects future bond yields in light of the country’s rising debt trajectory. A cross-country analysis shows that public and non-bank sectors have been key drivers of increased foreign investor holdings of Korean government debt during the COVID-19 pandemic. Using sectoral debt holdings data, the paper examines the evolution of marginal holdings of government bonds by each sector and estimates the responsiveness of debt demand to bond yield changes. Over the past decade, domestic banks and public institutions, including the National Pension Service, have reduced their marginal holdings, while private pension and investment fund sectors have increased theirs. These findings highlight the growing importance of non-bank sectors in government debt demand, consistent with the literature (Fang et al., 2022). Foreign investors exhibit the highest demand sensitivity to bond yields, whereas domestic insurance companies show the lowest. Based on sectoral demand estimates, a 10% increase in government debt is estimated to raise bond yields by 43 basis points. By 2030, when Korea’s government debt is expected to reach 2,000 trillion won, bond yields are projected to rise to 4.85%, ceteris paribus. Notably, 60% of the projected yield increase is attributed to the inelastic demand of insurance companies. This underscores the importance of adjusting the investor composition of the government bond market, with a greater share of investors with higher demand elasticity to alleviate pressure on borrowing cost.

Summary

Policy Study KOR Inflation Dynamics and Monetary Policy in an Aging Society: Insights from Consumption Patterns
South Korea, among the world’s fastest-aging nations, is projected to enter a super-aged society ― over 20% of the population aged 65 or older ― by 2025. Age-driven shifts in consumption patterns may significantly affect monetary policy effectiveness. This study analyzes the impact of age-specific consumption patterns on inflation and monetary policy outcomes, deriving policy implications.

Using consumption baskets, this study compares spending patterns across youth (15-34), middle-aged (35-64), and elderly (65+) cohorts. Findings reveal distinct consumption items by age group, with varying price rigidities. The elderly cohort primarily consumes items with frequent price fluctuations, suggesting a high likelihood of greater sensitivity to monetary policy changes.

Employing Jorda's (2005) local projection method, the study finds that tight monetary policy triggers a larger inflation decline among the elderly cohort than among the youth or middle-aged cohorts, reflecting the higher price flexibility of their consumption items.

These findings suggest that aging may diminish monetary policy’s impact on real consumption. To achieve policy objectives, the central bank must design policies that precisely reflect age-specific consumption patterns and price rigidities, with particular attention to the elderly’s consumption structure. In a rapidly aging society, detailed analysis of age-driven inflation responses and tailored policy measures are essential for monetary policy efficacy.

Summary

Policy Study KOR Anticompetitive Practices of Online Platforms: Focusing on App Stores
As economic and daily activities increasingly shift to mobile platforms, concerns are mounting over the excessive influence of platforms that play a central role in the mobile ecosystem. In particular, app stores, primary channels for distributing apps that enable online access via mobile devices, draw significant scrutiny from competition authorities, as platform dominance in the mobile operating systems (OS) market directly transfers to this market.

This study examines recent global regulatory trends concerning the app store market, identifying key anticompetitive practices by app store platforms: monopolization of app distribution, forcing proprietary payment systems, and self-preferencing. Among these, self-preferencing manifests in various forms and occurs when platforms enter adjacent markets they mediate, competing with business users. Thus, one of the critical issues in regulating the app store market is the entry of app store platforms into their own app stores and its implications.

Against this backdrop, the study focuses on analyzing issues related to platform entry into their own app stores. Theoretically, such an entry can have positive and negative impacts, necessitating empirical analysis. A comparative review of prior empirical studies on the app store platforms of Google and Apple reveals mixed effects on competing app developers’ innovation, varying by platform and app in question.

Given the challenge of defining an app market revealed by prior studies, this study conducts further empirical analysis using detailed app classification criteria from data.ai. This approach enables a more granular market definition and examination of multiple platform entry cases. Analysis of 16 Apple app launches, using data on apps available for download in the Korean App Store, finds the impact on competing developers’ innovation inconclusive. The effects likely vary by the platform app’s characteristics, the entered market’s competitive dynamics, and whether anticompetitive behaviors occur post-entry, yet further pathway analysis is needed.

While not providing direct policy implications, this study offers empirical evidence to inform app store market competition policies. Literature and this study’s findings suggest platform entry into app markets may yield positive effects, rendering blanket bans on platforms selling their own apps to prevent self-preferencing inadvisable. Recent competition authority actions targeting self-preferencing have spurred arguments against prohibiting proprietary app sales; however, such sales must be strictly distinguished from self-preferencing practices.

Summary

Research Monograph KOR Market Price System in North Korea: Policy Perspectives
This study revisits North Korea’s market price system to (i) address recent doubts about the reliability of external price observations using a long-run commodity-price series and (ii) broaden analysis beyond staples to include services, labor, finance, and quasi-taxes. Based on an original field survey in Pyongyang, Sinuiju, and Hyesan from September 2023 to October 2024, it compiles a long-run commodity-price series, capturing 55 service prices and approximately 40 quasi-tax items. Econometric time-series analysis reveals linkages between key North Korean commodity prices, Chinese and international benchmark prices, and the market exchange rate (North Korean won/U.S. dollar), while descriptive statistics systematize the incidence and regional variation of non-commodity prices.

Three main findings emerge. First, despite well-known reliability issues in North Korean market price data, externally collected observations remain informative, as inconsistencies across sources reflect equilibrium features of thin, segmented markets rather than mere reporting errors. Second, commodity prices show a relatively stable, competitive formation with clear international pass-through effects before the 2020 border closure, whereas service fees, unofficial financial rates, and quasi-taxes show greater dispersion and stronger dependence on local market power and informality. Third, quasi-taxes impose a significant economic burden, with households facing a rolling menu of 3540 compulsory contributions―averaging four items per month and totaling 34,00050,000 North Korean won―consuming a notable share of disposable income.

These results underscore the need to integrate non-commodity prices into future assessments of household welfare, regional inequality, and the transmission of external shocks within North Korea’s hybrid economy.

Summary

Policy Study KOR Decomposing Health Care Expenditure Growth in Korea
This paper analyzes healthcare expenditure growth in Korea using National Health Insurance Claims data from 2009 to 2019. Healthcare expenditure growth is decomposed into three components at the disease level: service utilization growth, service price growth and demographic transition.

The decomposition shows that growth in prices is the primary driver of healthcare expenditure growth since 2013 at the aggregate level. The main driver has shifted from service utilization growth towards service prices growth. The contribution of demographic shift remains stable over the period, however the contribution pattern varies across age group, type of services and suppliers.

Decomposition of healthcare expenditure of elderly shows different pattern compared to aggregate level decomposition. Demographic shift is the main driver of healthcare expenditure growth among elderly. The contribution of service utilization decreased and suggests possible healthy aging.

Summary

Research Monograph KOR Study on the Efficient Utilization of Human Resources in the Era of Population Decline
As South Korea experiences a demographic decline, the labor market must swiftly adapt to mitigate its economic impact. Expanding the participation of underutilized groups―such as older workers, people with disabilities, women, and immigrants―can help address its shrinking labor force. However, their underutilization stems from a complex interplay of multiple factors, and poorly designed policies for their economic engagement may lead to unintended consequences. A thorough, nuanced understanding of each group's unique challenges and circumstances is essential for setting realistic priorities for effective policy intervention.

For older workers, effective labor market integration demands both targeted support and phased, comprehensive labor market reforms. In an aging society, maintaining workforce participation or facilitating reintegration is increasingly important, even if individuals experience disabilities over their lifetime. Additionally, addressing the underutilization of women requires not only tackling work-family balance challenges during childbearing and childcare but also gender segregation across industries and occupations. Meanwhile, the growing presence of foreign-born workers, particularly long-term residents, should be carefully paced to minimize potential sociocultural disruptions.

Short-term policies (within five years) should prioritize productivity growth and attracting foreign talent. Mid-term initiatives (five to ten years) should focus on structural labor market reforms. Long-term investments (over ten years) should strengthen education and skills development while fostering gender inclusivity and social integration.