KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 12

■	The Korean economy exhibits signs of limited improvement, primarily in the construction industry, amid escalating uncertainties.

	○	Semiconductor production and exports continue to show robust growth, with related equipment investment maintaining its upward trend.

	○	However, goods consumption and construction investment remain subdued, constraining the recovery of domestic demand.

	-	Goods consumption continues to slide while delinquency rates among sole proprietorship businesses remain on an upward trend.

	-	Despite improving leading indicators related to construction, the value of construction completed continues to recede, while employment conditions are experiencing modest adjustments, particularly in the construction industry.

	○	Meanwhile, the deteriorating global trade environment following President Trump’s election could adversely affect Korea’s export performance.

Summary

Research Monograph KOR Economic Security and Strategies to Strengthen Supply Chains

On top of the US-China strategic competition, the COVID-19 pandemic, climate crisis, and rising geopolitical risks have pushed economic security and supply chain policies to the forefront of policy dialogue in South Korea. This study examines the factors behind the growing importance of economic security and response measures from geo-economic and traditional economics perspectives, along with analyses of case studies in key sectors. The primary aim of this research is to identify strategies to enhance Korea's economic security.

The policy directions regarding Korea’s economic security presented in this study are as follows: First, Korea should build upon its manufacturing capabilities in advanced industries and actively foster related cutting-edge technologies to secure strategic advantages. To achieve this, industrial policies should be more closely integrated, and supply chain vulnerabilities should be mitigated particularly by reducing dependence on China.

Second, simple localization or domestication of intermediate goods suppliers should be avoided. Instead, the Korean government should actively participate in international joint investment and R&D cooperation to support private-sector investments for diversifying supply chains.

Third, the strategy of large enterprises sharing technological know-how with small and medium-sized enterprises (SMEs) with similar technological development goals has been a key driver of Korea’s high localization rate and international competitiveness in the display industry. Therefore, in promoting the localization of advanced strategic sectors, the government should enhance support for improving the technological capabilities of domestic supply chain firms. Moreover, industry associations should establish various mechanisms and channels to strengthen collaboration between advanced industries firms and supply chain firms.

Fourth, a stable supply of mineral resources urgently requires investment in R&D, international cooperation, and the mobilization of financial resources for large-scale investments. Expanding R&D in mineral resource development technologies and leveraging these efforts as a platform for international cooperation should be prioritized. Additionally, concrete strategies for securing financial resources to support large-scale investments should be explored.

Fifth, when supply chain crises in advanced strategic industries pose risks that can potentially escalate to national crisis level, it is critical to consider adopting the 'emergency acquisition flexibilities' strategy used in defense material procurement. To this end, existing systems should be restructured to enable rapid procurement and response, ensuring greater resilience in times of crisis.

Sixth, to enhance the competitiveness of advanced strategic industries, priority should be placed on expanding power generation capacity through targeted investments in energy infrastructure. Simultaneously, measures such as connecting and expanding power grids, developing smart grids, and diversifying energy resources to improve efficiency should be pursued. As for water resource infrastructure, ensuring quantitative stability requires the multipurpose use of existing infrastructure, the activation of alternative water resources, and the construction of new water resource infrastructure. Additionally, strengthening technological capabilities through localization efforts is essential to securing a stable supply of ultrapure water.

Last but not least, prompt establishment and implementation of a national logistics strategy is required to adapt to changes in the global logistics network. This strategy should focus on securing overseas networks and global logistics hubs, as well as fostering globally competitive logistics companies, and enhancing adaptability to shifts in the logistics environment.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 11

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The Korean economy maintains favorable export momentum, led by ICT products, yet domestic demand recovery is constrained by sluggish construction investment.

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The manufacturing industry maintains its recovery trend as ICT exports continued their growth momentum

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Although export growth moderated due to base effects, the overall momentum remained favorable, led by ICT products

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Consequently, the inventory-to-shipment ratio decreased, particularly in semiconductors, and the average capacity utilization rate remained elevated.

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However, despite the upward trend in equipment investment, the sustained weakness in goods consumption and construction investment continues to constrain domestic demand recovery.

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The substantial increase in semiconductor equipment investment suggests that the effects of strong export performance may gradually spill over into domestic economic conditions.

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By contrast, goods consumption continued its downward trajectory, while service consumption maintained modest growth.

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Some leading indicators related to construction improved, yet the construction market remains contracted, as indicated by the value of construction completed continuing to post declines.

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Accordingly, the inflation rate continues to decelerate.

Summary

Research Monograph KOR Establishing a Macroeconomic Model System Considering Changes in Economic and Social Structure

This report analyzes economic models from three perspectives to respond to the evolving macroeconomic environment. First, the COVID-19 crisis has substantially increased economic volatility and uncertainty, underscoring the need for timely assessment of economic conditions. However, the delayed release of major indicators like gross domestic product (GDP) limits real-time understanding. In this report, we test the performance of economic models by incorporating high-frequency data from private sources alongside traditional low-frequency data. As data accumulate throughout the concerned quarter, real-time forecasts converge closely with actual outcomes, demonstrating strong potential for real-time economic forecasting models.

Second, South Korea’s economy has likely experienced both short-term fluctuations and structural shifts following shocks such as the COVID-19 pandemic. Macroeconomic policies should address short-term volatility and structural shifts differently, yet structural changes are often unobservable. Therefore, macroeconomic models should estimate these unobservable factors for effective policy responses. This report constructs a model to estimate aggregate demand pressure, a cyclical indicator, and the real neutral interest rate, a key guide for determining monetary policy stance. The estimation results are discussed in detail.

Third, since peaking in 2019, Korea’s working-age population has been declining, with rapid demographic shifts driven by low birth rates and an aging population expected to continue. These demographic changes affect labor input and can be a major factor in slowing down economic growth. Also, long-term forecasts serve as baseline data for managing government finances and national pension funds. In this report, we use population estimates from Statistics Korea to project long-term economic growth rates through 2050. Scenario analyses for demographic changes and trends in total factor productivity are used to suggest policy directions for sustainable growth.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 10

■	The Korean economy is experiencing limited improvement as therecovery of domestic demand, especially in construction investment,is delayed, despite favorable conditions in exports.

	○	ICT exports continued strong growth, while manufacturing productionsteadily recovers from a temporary adjustment.

	-	As disruptions in automobile production caused by facility maintenanceand wage negotiations ease, both production and shipments areincreasing, suggesting that the manufacturing sector is maintaining itsrecovery trajectory.

	○	However, amid continued weakness in goods consumption, therecovery of domestic demand is being delayed by the continuedslump in construction investment.

	-	The decline in the value of construction completed continued, andgiven the accumulated weakness in leading indicators, the slump inconstruction investment is likely to continue for the time being.

	-	Amid the ongoing increase in service consumption, retail salescontinue their downward trend due to the high interest rateenvironment.

	○	Moreover, external uncertainties are expanding as conflicts in theMiddle East region intensify.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 9

■	Despite strong export growth, the Korean economy is showing signs of constrained improvement, as elevated interest rates are delaying the recovery of domestic demand

	○	The manufacturing sector persists in its recovery trajectory, driven by sustained high growth in exports, particularly in the ICT industry.

	-	Although manufacturing-related indicators observed some adjustments due to disruptions in automobile production, the overall recovery trend in manufacturing remains intact, with semiconductor production maintaining high levels.

	○	Despite strong export momentum, consumption and investment remain sluggish, indicating that domestic demand recovery has yet to materialize.

	-	Retail sales remained subdued amid the persistent high interest rate environment.

	-	Construction investment and related employment may remain suppressed for the time being, given the prolonged decline in its leading indicators, potentially constraining the recovery of domestic demand.

	-	Furthermore, the delinquency rate among individual business owners continues to rise, indicating an escalating debt repayment burden.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, August 2024

The Impact of US Export Controls on Korean Semiconductor Exports / Hanhin Kim and Jaehan Cho

This study empirically investigates the impact of recent US export controls on China on South Korea’s semiconductor exports. We analyze South Korean export data to shed light on the repercussions of US export restrictions on a third country. Our findings reveal a significant decline in Korean semiconductor exports following the October 2022 imposition of US controls. This decline was most pronounced in the memory, discrete devices, and discrete device components subsectors of the semiconductor industry. In addition, we observed a decrease in unit prices, especially for memory semiconductors, pointing to downward pressure on South Korea’s high-value-added semiconductor exports. These results provide some evidence of substantial negative impacts of US export controls on South Korea’s semiconductor industry, and particularly with regard to its high-tech products.

Trump Tariffs and Roundabout Trade / Tadashi Ito

Although there are many news articles of tariff dodging via the rerouting of made-in-China goods through third countries, relabeling these goods as made in Mexico or made in Vietnam, there have been no scientific studies on this issue. This paper provides statistical evidence regarding whether such practices are taking place. Using monthly trade statistics at the most disaggregated level and analyzing data up to 2019, the year before the COVID-19 shock, little evidence of roundabout trade is found. With an extended dataset up to 2023, overall there is little sign of roundabout trade, although some slight signs of roundabout trade are found for Mexico and Vietnam.

Experts to the US and Imports from China during the US-China Tariff War: Evidence from Regional Trade Data in Vietnam / Kazunobu Hayakawa

This study empirically investigates how the exports of downstream products to the US change the imports of their upstream products from China during the US-China tariff war. To accomplish this, we use province-level trade data in Vietnam, known to be a country that increased its exports to the US market in place of China, i.e., known to enjoy a trade diversion in the US market. The use of regional trade data enables us to capture the input-output linkages more precisely. Specifically, focusing on the trade in general and electrical machinery industries from January of 2019 to December of 2023, we regress imports of upstream products from China on exports of their downstream products to the US, finding that the rise of exports of downstream products to the US significantly increases imports of their upstream products from China. On the other hand, the rise in these products does not significantly increase the imports of upstream products from Japan, Korea, and Taiwan. Furthermore, the inputoutput linkage between exports to the US and imports from China was found to be greater in provinces with better business environments in terms of entry costs, transparency in public services, and public support to businesses.

Economic Effects of Unemployment Insurance for Entrepreneurs in South Korea / Jiyeon Kim

This paper aims to examine the economic impact of the implementation of an unemployment insurance (UI) program for entrepreneurs in South Korea. Despite facing labor market risks similar to paid employees, entrepreneurs are often not eligible for UI in many countries. South Korea, where entrepreneurs represent over 20% of the workforce, is considering a design of UI for entrepreneurs, with the goal of providing coverage to this group by 2025. This study examines how the addition of UI for entrepreneurs would impact the economy using a model of entrepreneurship based on a search and matching framework. The study’s findings suggest that the implementation of UI for entrepreneurs would lead to increased business closures and reduced hiring, resulting in a slack labor market, which in turn would reduce social welfare overall. However, social welfare can be improved by subsidizing UI contributions paid by entrepreneurs, which provides the greatest improvement in social welfare compared to other social protection systems such as unemployment assistance.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 8

■	The Korean economy has sustained strong export growth, primarilyfueled by the semiconductor sector. However, domestic demandremains subdued, constraining overall economic improvement.

	○	Semiconductor-related production indicators maintained positivemomentum, with exports continuing to ascend, particularly in ICT items.

	-	Increased semiconductor production and shipments, coupled withreduced inventory, are driving the recovery in the manufacturing sector.

	-	Exports sustain their upward trajectory amid modest global economicexpansion and robust semiconductor market conditions.

	○	However, services production growth remained tepid, andconstruction investment continued its descent, indicating that therecovery phase of domestic demand has not yet materialized.

	-	Services production exhibited tepid growth, primarily driven bywholesale and retail trade and accommodation and food services.

	-	Amid persistent declines in retail sales and rising loan delinquencyrates, the accumulated slump in construction orders received led to acontraction in construction investment, suggesting employmentconditions are gradually adjusting.

	○	Meanwhile, external uncertainties have slightly increased on therecent escalation of geopolitical risks in the Middle East andconcerns over a U.S. recession.

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