KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Macroeconomic Impact of AI Diffusion

This report examines how artificial intelligence (AI), particularly modern, data-driven, and increasingly generative systems, is likely to affect Korea’s productivity, growth, employment, and wages over the next decade or two. Three layers of evidence are integrated within a unified task-based framework: (i) micro-level measures of AI exposure and economic viability at the task and occupation levels, (ii) firm-level panel evidence on AI adoption and productivity, and (iii) a macroeconomic general-equilibrium model that aggregates task-level shocks into total factor productivity (TFP) and long-run labor market outcomes. The study defines AI as software systems that replicate human capabilities in learning, prediction, pattern recognition, perception, and natural language processing―a definition consistent with that used in the underlying firm survey and broad enough to encompass both earlier, narrow algorithms and more recent foundation models and AI agents.

Chapter 2 offers an accessible overview of the technological evolution of AI from traditional machine learning to transformer-based large language models and emerging agent-like systems. It emphasizes two features of particular macroeconomic relevance. First, advances in general-purpose and multimodal models have greatly expanded the range of tasks technically exposed to AI. Second, effective deployment requires complementary investments in data, organizational capacity, and human capital, suggesting that technical feasibility alone is a poor predictor of short-run economic impact.

Chapter 3 develops a task-based measure of AI automation potential tailored to the Korean labor market. Using detailed work descriptions from the Korean Employment Classification of Occupations (KECO) and Workpedia, the study decomposes 537 occupations into 6,824 unit tasks and scores each task along five dimensions: measurability of outcomes, data availability and quality, context dependence, required human judgment necessity, and agentability (the ease with which an AI agent can execute a given task). These components are combined into a task-level AI score that captures effective automation potential rather than mere technical exposure. A cost-benefit framework inspired by recent work on computer vision and AI costs is then applied to identify tasks and task·firm combinations for which automation is economically viable, given realistic assumptions about data, development, inference, integration, and maintenance costs relative to labor savings. The findings are conservative by design. Under a naive exposure-only criterion, AI could potentially affect roughly 8-12% of current employment and 10-11% of current sales, concentrated in finance, insurance, R&D, ICT, and certain transport and business services. Narrowing the focus to tasks that are both technically automatable and economically viable reduces these shares to about 1-3% of employment and 1-2% of sales. This suggests that, in the near term, AI will likely induce selective and partial automation in specific occupations and industries, rather than a broad-based, immediate displacement of labor.

Chapter 4 analyzes firm-level evidence using the nationally representative Korean Survey of Business Activities for 2017-2023, which asks firms whether they use AI―defined in the questionnaire as software that replicates human learning, reasoning, perception, and natural language understanding―and other fourth industrial revolution (IR4) technologies. To address the endogenous timing of AI adoption, the analysis employs panel IV (2SLS) models with firm and year fixed effects, instrumenting AI adoption with industry-level economic viability measures from Chapter 3. In the preferred specifications, firms that adopt AI and related IR4 technologies exhibit statistically significant increases in log sales per employee on the order of 5-20%, driven primarily by higher sales rather than systematic employment cuts. Pure “AI only” effects, net of broader digitalization, are estimated with less precision, consistent with AI operating as a general-purpose technology that must be embedded in a broader digital and organizational transformation. As a robustness check, propensity-score matching and difference-in-differences estimates for AI first movers suggest modest but positive short-run effects on labor productivity, with limited evidence of strong dynamic effects within the short observation window.

Chapter 5 incorporates these micro-level estimates into a task-based general-equilibrium model following the approach of Acemoglu and Restrepo to simulate AI-induced TFP paths over the next 10-15 years. Hulten’s theorem implies that, under certain assumptions, aggregate TFP change can be approximated by a Domar-weighted sum of task-level cost savings. The model therefore combines (i) the economically viable task shares by industry, (ii) firm-level productivity effects of AI, and (iii) alternative adoption scenarios―baseline, optimistic, and pessimistic―to trace out possible TFP trajectories. Under baseline assumptions, AI contributes a cumulative TFP gain of about 2.3% over a decade, nontrivial but below some of the more optimistic global projections. These simulations focus on the task automation channel and treat parameters as exogenous. They abstract from structural transformation, intangible capital accumulation, idea-generation effects, and potential discontinuities in AI capabilities. Then the analysis turns to long-run employment and wage effects across occupations. Using a cross-section of Korean 2-digit occupational categories over 2014-2024, the analysis estimates reduced-form relationships between changes in employment and real hourly wages and measures of routine and structured task content, while instrumenting for endogenous employment changes with leave-one-out labor-demand shocks. Occupations with higher routine task shares experience lower employment growth and somewhat lower wage growth over the decade, consistent with international evidence that automation pressure exerts downward pressure on labor demand and wage growth in exposed jobs. Combined with the AI exposure metrics presented earlier, these estimates imply that, under realistic adoption scenarios, the annual displacement and wage-drag effects attributable to AI are likely modest relative to existing demographic and structural trends, but non-negligible for specific groups.

Chapter 6 synthesizes these findings and discusses their implications for policy and business. For policymakers, the central message is that AI is unlikely to trigger an immediate, economy-wide employment collapse, but will require active management of selective automation, task restructuring, and skill upgrading in exposed sectors. The study argues for a market-friendly policy mix: clarifying AI-related regulation and liability, investing in data and compute infrastructure, strengthening education, training, and retraining systems, and fostering complementary innovations and organizational change. For firms, the key insight is that productivity gains derive less from AI in isolation and more from integrating AI into workflows, data pipelines, and human capital strategies.

Summary

Policy Study KOR Government Forms and Economic Security

This report explores the relationship between government forms and economic security, analyzing how political systems in democratic countries influence economic development. Unlike previous studies that focus on dichotomous comparisons between democracy and authoritarianism, this research empirically identifies the conditional effects of micro-institutional combinations in OECD high-income democracies―such as government type, electoral rules, and power structures―on long-term economic levels through government capacity. It emphasizes that beyond the polar extremes of the Washington Consensus and the Beijing Consensus, the economic conversion efficiency of government capacity within democratic institutions is the key determinant.

The literature review examines contrasting views on the impact of democracy on economic growth. Some studies argue that democracy promotes growth by strengthening property rights and investment incentives, while others point out that it can hinder growth due to policy delays and populism. Presidential systems are praised for long-term stability and executive power, whereas parliamentary systems are noted for flexibility and consensus, though empirical results are mixed. Recent analyses, like Acemoglu et al. (2019), confirm positive effects of democracy when using income levels rather than growth rates as the dependent variable, as this captures long-term cumulative effects while controlling for short-term volatility.

For the analytical method, panel data from 38 OECD countries (1995-2023) is utilized with the Arellano-Bover/Blundell-Bond System GMM. The dependent variable is ln(GDP per capita) to measure economic development levels, with political system dummies (presidential, semi-presidential, parliamentary; single-member district, multi-member district; separation of powers, fusion of powers) and their interactions with government capacity indicators (government effectiveness, control of corruption, political stability, regulatory quality, rule of law) as key explanatory variables. Control variables include historical legacies (Spanish colony, former USSR, Scandinavian legal origin), economic structures (trade dependence, inflation, FDI, oil rents), and demographic factors (aging) to mitigate endogeneity.

Empirical results show that the combination of presidential system + single-member district + separation of powers yields the greatest increase in income levels from improvements in government capacity. A 1-unit improvement in government effectiveness leads to a 47.1% rise (real 60.2%) in presidential systems (ps), but is nearly insignificant in parliamentary systems (cm). Similar patterns hold for control of corruption and rule of law, with regulatory quality showing 4-7% uplift effects. Political stability is positive in presidential systems but has reverse effects in parliamentary ones. This is interpreted as the fixed terms and separate survival in presidential systems enhancing incentives for long-term reforms, while bottom-up nominations in single-member districts ensure political stability.

Policy implications suggest that for countries like Korea, with vulnerabilities in single-term presidencies and top-down nominations, reforms are needed. Introducing a four-year re-election system to secure long-term vision, midterm elections to turn divided governments into negotiation opportunities, and bottom-up nominations to strengthen legislative independence are recommended. Constitutional amendments should exclude incumbent politicians and emphasize citizen participation to block agency problems. This forms an "institutional trinity" to complete economic security within democracy, providing a roadmap for the post-Washington-Beijing world.

Research limitations include its restriction to OECD high-income democracies, making generalization to developing countries or authoritarian regimes difficult. The low institutional heterogeneity limits identification of regime effects themselves, and it fails to capture advantages of authoritarian models. However, it provides empirical evidence for optimizing efficiency through fine-tuning in high-institutional environments.

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

Research Monograph KOR Policy Strategies for Sustainable Regional Development

Rapid aging and low birth rates have sparked concerns over population extinction in some provinces, and fundamental questions have been raised over the sustainability of basic local governments and effectiveness of regional development systems. In particular, amid the swift progress in digital and new technologies, the accelerating pace of low growth has precipitated the need to enhance regional industrial competitiveness and build innovative growth engines more than ever before. Therefore, the research in this paper was conducted with the following in mind: ① determinants of the transfer of industries or companies; ② effects of the transfer of public regional development institutions; ③ differential factors of regional industrial diversification and innovation systems; ④ sustainability of local government finances; ⑤ measures to resolve the inconsistency between the administration and daily life, and strengthening the connectivity between cities and their surroundings; ⑥ housing policy measures for regional development.

Regional development policies must consider both fiscal efficiency and economic growth at the national level, and connect and cooperate with the central and local governments to narrow regional gaps and bolster uniqueness while enhancing the effectiveness of policies. This highlights a crucial point in Korea's regional development policy. Indeed, when the issues of low growth, aging, and regional gaps facing Korean society and economy are considered, an examination of the sustainability of regional development must first be conducted followed by a guarantee of sustainable growth in which finances are managed.

Accordingly, this study first identifies a strategy for industrial diversification that is effective for regional economic growth, and provides implications by dividing the local environment into the dimensions of industrial diversity and innovation capability. It is found that the diversity of industries can have a positive effect on regional development but the economic impact can vary according to industry. As such, the industrial characteristics and conditions of a region should be considered. Secondly, it is also shown that while the relocation of a company can positively effect employment and investment in the short-term, it can diminish its soundness and profitability in the long-term, and the possibility of survival and growth decreases; which has negative repercussions for regional development. Thirdly, the relocation of public institutions is found to have boosted employment in local manufacturing and services which relates to the improvement of settlement conditions. However, no significant effects were observed in the employment in knowledge-based industries suggesting that the main industry must be nurtured for the region to continue growing. Fourthly, an examination of the financial conditions of local governments confirms that, with the exception of Seoul, unsustainable fiscal operations were implemented in 2013-2018. Fifthly, a direction for the reorganization of administrative districts is suggested as metropolitanization could accelerate the decline of non-capital cities. Besides the linkage between administrative districts, it is also recommended that areas with declining populations identify the living area system and strengthen their connections with neighboring areas. And lastly, a direction for housing policy is also presented since an inflow into and concentration of the metropolitan area can exacerbate the polarization of asset prices and income by region. In particular, this paper proposes a shift from the jeonse-centered lease policy to a guaranteed monthly rent and in the policy direction to respond to the increase in vacant homes in the non-metropolitan area.

Summary

Research Monograph KOR Reconsideration of Tax and Fiscal Policies after COVID-19

The purpose of the study is to put forth tax and fiscal policies necessary to make worsened fiscal conditions after COVID-19 more constructive and sustainable. We first present the long-term fiscal baseline projections until 2060 and suggest four policy measures that could enhance the future fiscal space of Korea. Then, we analyze the possible positive impact of intangible investment other than R&D on improvements in total factor productivity (TFP), which could result in a natural increase in government revenues through economic growth. Finally, we also empirically evaluate the pros and cons of several types of fiscal rules and suggest rules for spending that could be one plausible alternative considering the current policy environment in Korea. The main findings and policy implications are summarized as follows.

In chapter 2, we present policy measures needed to achieve the long-term fiscal policy goal announced by the Korean government in September 2020, the government debt-to-GDP ratio of 81.1% in 2060. Before delving into specific measures to enhance fiscal space, we look at the baseline debt-to-GDP ratio for 2060, projected at 144.8%. Among three risk factors considered in this study, the failure of discretionary expenditure control was most detrimental to future fiscal conditions. If the discretionary expenditure ratio to GDP is kept at 14.7% until 2060, the debt-to-GDP ratio is expected to add 86.1%p compared to the 2060 baseline.

Even if these risk factors are not realized and remain as the assumption of the baseline outlook, the 2060 debt-to-GDP ratio far exceeds 81.1%, the government's long-term fiscal goal. The analysis finds that the government debt ratio in 2060 could be reduced to 87.6% by reforming local education financial grants, additional control of discretionary expenditures, raising effective tax rates of income and value-added taxes, and reducing tax expenditures.

Over the past two decades, the Korean economy has experienced low economic growth despite the persistent expansion in traditional inputs, capital, and labor. In this circumstance, TFP has come into the spotlight as a new engine to revitalize economic growth, which could enhance government revenues and fiscal sustainability.

In chapter 3, we investigate the determinants of TFP, focusing on the role of intangible assets on firms' productivity. Exploiting firm-level data from Kisvalue, we first estimate the TFP of sample firms by applying Olley-Pakes (1995) method and examine the determinants of TFP. Our findings show that other intangible assets such as patents and copyrights play a more decisive role in improving the productivity of firms rather than R&D investment. This tendency appears to have strengthened after the global financial crisis. Thus, our results indicate that Korean firms have not achieved effective allocation among their investments in intangible assets. In this sense, we suggest the Korean government seriously consider re-designing the institutional system to encourage firms to diversify their investment in intangible assets.

In chapter 4, several empirical analyses were conducted to understand the expected positive and negative effects of the controversial introduction of the fiscal rules to enhance fiscal soundness. An international panel analysis confirmed that introducing such rules could increase fiscal space mainly by reducing the intrinsic interest cost of the existing national debt. On the other hand, it also confirmed concerns that the pro-cyclicality of fiscal spending could increase if fiscal resources were insufficient, especially in developing countries, or if applied excessively multi-layered fiscal discipline. In addition, it was shown that the introduction of the spending rules regulating the total amount of fiscal spending significantly lowered the probability of occurrence of a systematic banking crisis.

In Korea, it is difficult to set realistically achievable national debt and fiscal balance ratios due to rapid changes in demographic and industrial structure. Given this reality, the government needs to prepare reasonable fiscal rules for the growth rate of government spending and the ratio of expenditure to GDP in order to reduce the excessive burden on the national economy due to fiscal uncertainty. Although the current level of the national debt is relatively low, it is desirable to manage its increasing rate by applying reasonable fiscal expenditure rules coupled with the appropriate fiscal balance rules when a rapid increase in national debt raises concern.

Summary

Policy Study KOR External Capital Accounts and Macroeconomics: Capital Flows and Aggregate Productivity

We examine the correlation between aggregate productivity and inefficiencies in the distribution of a production factor, capital. We also discuss how these misallocation of capital is correlated with capital flows. It has been well known that the growth rate of the Korean economy has declined over the past 20 years. Using ORBIS company data, we confirm that the marginal revenue productivity of capital productivity has been continuously rising since 2002. We argue that the pattern signals the rise of capital misallocation, which could hamper the aggregate productivity growth. Furthermore, comparing with other ten countries, we show that the Korean economy exhibits a tendency to show the GDP growth rate decreas with the increase of the dispersion of MRPK(marginal revenue product of capital). Also, the economy tends to show the increase of the dispersion of MRPK(marginal revenue product of capital) when net capital inflows increase. We note that we are abstract from the causality or full dynamic system of the aforementioned macroeconomic variables, which we will remain for the future research.

Summary

Policy Study KOR Projecting the Long-Run Natural Rate of Interest: the Case for Korea

The KDI’s long-term projection method for real interest rate has been based on based on a regression that uses the marginal productivity of capital as an explanatory variable. This paper provides a theoretical background for the KDI’s projection method. In addition, as the decline in long-term interest rates was considered as an global and unexpected phenomenon, we argue that the projection method should be augmented to reflect this global trend at least for the near future.

Summary

Policy Study KOR Economic Growth and the Quantitative Expansion of Financial Resources

Based on Korea’s data, this study empirically analyzes the relationship between economic growth and the quantitative scale of financial resources. The scale can be measured in various ways, and this study uses one of the most important indicators applied in preceding literature, private credit as a share of nominal GDP.

The results show that the quantitative expansion of financial resources has a nonlinear effect on economic growth. When private credit (as a share of GDP) falls below a certain threshold, an expansion of private credit causes the mid-term economic growth rate (five-year average of per capita real GDP growth) to ascend―the reserve is true for when it exceeds beyond the threshold for the pertinent year. This finding implies that financial resources and economic growth are in an inverse U-shaped relationship. At the peak of the curve, the growth threshold of financial resources is estimated to be 117.2% in terms of the private credit to nominal GDP ratio.

Additional analysis of the nonlinear relationship found household debt to be a main casual factor. It was revealed that although financial resources can contribute to economic growth, the degree tends to decrease as the share of household credit in private credit increases. The threshold for the household credit ratio is estimated to be 27.8%. Private credit provided as corporate credit can contribute to economic growth but when that of household credit surpasses this figure, the increase in private credit can restrict it.

As of end-2016, the percentage of private credit exceeds 190% of GDP and the household credit ratio is near 50%, exceeding both thresholds estimated from the above analysis results. These results reaffirm that the qualitative development of financial resources needs more emphasis than the quantitative supply in the process of establishing future financial policies.

Summary

KDI Policy Forum Population Aging and Economic Growth: Impact and Policy Implications

■ Korea is aging at a faster pace than any other major country, and the negative impact on the economy is expected to be considerable.

- In thirty years, the old-age dependency ratio is projected to exceed 70% and GDP growth to mark around the 1% range. This would pose a tremendous threat to sustainability unless the economy makes significant improvements in productivity and the employment structure.

■ Korea’s population aging is proceeding at an unprecedentedly rapid pace while policy responses and institutional reforms fail to keep pace.

- Setbacks such as falling labor supply and growth seem to be unredeemable even if Korea’s labor force participation rate (by gender and age group) improves to the level of advanced countries.

- The labor supply policy to boost the economic participation of the working age population may work as a feasible response to the challenges of population aging to a certain extent. However, it is not enough to make a full recovery given the severe imbalance of Korea’s demographic profile.

■ Policy responses should be focused on reversing the quantitative decline in the labor supply by promoting the participation of the senior labor force while pushing towards the ultimate goal of human capital advancement and higher labor force productivity.

- Senior labor force participation can be effective in easing not only the fall in economic growth but also the pressure from the rising dependency ratio.

- At the same time, concerted policy efforts should be made in enhancing the general environment including educational and vocational training programs that could upgrade the productivity of the senior population.

Summary

Research Monograph KOR Korea’s Road to an Innovation Economy: Enhancing Productivity through Structural Transformation and Institutional Reform

This study starts with two premises: first, business enterprises are at the center of the innovation economy and second, entrepreneurial activities are most effective within a well-functioning innovation ecosystem. Accordingly, the analyses are comprised of certain aspects of the innovation activities of business enterprises as well as the systemic aspects of the Korean innovation system (KIS). Policy implications are also presented for Korea’s innovation-driven growth strategy including enhancing the innovative capacities of business enterprises and upgrading the support systems surrounding them.

The first, analytical part of the study deals with some of the key aspects of business enterprises’ innovation activities, such as the patterns of business innovation, the relationship between industrial organizations and business innovation and that between M&A activities and business performance. The section also introduces the results of a management survey, which is the first one of its kind in Korea. The second, systemic part contains two chapters on Korea’s innovation system: one on the distinctive nature of the KIS and the other on its evolutionary process. Additionally, in regards to the importance of human resources as a permanent and ultimate source of innovation, one of the following chapters makes a cross-country comparison between adults’ skills and another deals with Korea’s re-training system.

Despite the necessity of the government’s involvement in building an effective innovation ecosystem, government intervention is not straightforward. Governments face the same uncertainties as the market― although often with much more intensity―caused by the rapid changing nature of techno-economic paradigms. In this regard, the fourth industrial revolution presents a prime example. Policies will be most effective when business enterprises respond to the government’s initiatives with their own investments. The list of such policies includes: creating open, competitive market environments; pursuing a two-thronged labor policy of strengthening labor competence and enhancing flexibility in the labor market and; redirecting science and technology policies in a way that enhances the linkage between innovation actors such as business enterprises, universities, and government-funded research institutes. The government should also strive to improve system efficiency with consistency over longer-terms.

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