KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS South Korea Needs More Big Company Jobs

South Korea stands out among OECD countries for its lowest proportion of jobs in large enterprises. Good jobs, often synonymous with employment opportunities in large enterprises, are in short supply. This shortage prompts various societal issues: the overheating of college admission competition, a decline in social mobility, decreased birth rates, stagnating employment rates for women, and increased concentration in the capital area. There is a pressing need to identify and address policy barriers to company scale-up.

- Despite the stronger employment preference among young adults in large enterprises, the majority of available job opportunities are actually in smaller businesses.

- Larger establishments tend to offer higher wages and better working conditions.

- The marked wage gap between graduates of top and bottom universities intensifies competition for admission to top-ranking schools.

- The scarcity of good jobs results in both low utilization of maternity protection programs and female underemployment.

- Even at the city and province levels, larger establishments are observed to have higher labor productivity.

- Identifying and addressing policy barriers that impede company scaleup through targeted policy improvements is a necessary course of action.

Summary

Policy Study KOR A Study on Service Expenditure Slowdown in Korea

This article investigates structural transformation of domestic consumption in Korea.

Korean economy exhibits a typical pattern of structural transformation commonly observed in advanced economies; In a long term perspective, the share of service consumption expenditure increases while the share of agricultural consumption expenditure shrinks over time.

However, a unique feature of structural transformation is also observed. After the global financial crisis, the share of service consumption expenditure stagnates, at most.

This article analyzes these features of structural transformation in Korea through the lens of the utility maximization framework. In particular, this article aims to explain the structural transformation in Korea with income and price effects.

The estimation result suggests that the key source of structural transformation in Korea is a income growth. At the same time, the price effect, summarized by the rapid increase in relative price of service to other consumption goods, also plays non-negligible role in a long run perspective.

Limiting the scope of the analysis to the post global financial crisis period, the estimation result suggests that the weakening relative price of the service to manufacturing goods played a central role in explaining the stagnation of the share of service expenditure. The relative price of the service to manufacturing goods seems to have decreased as a result of the great trade collapse and the weakening of global value chain after the global financial crisis.

If the relative price of service to other consumption goods and the income have evolved following the pre-global financial crisis trend, the share of the service expenditure would have been 3.2~3.6 percentage points higher as of 2018.

Summary

KDI Policy Forum Business Groups and Declining Allocative Efficiency in Korea

□ The allocative efficiency in Korea is on a rapid downturn.

- Based on Statistics Korea’s Survey of Business Activities, an analysis was conducted on firms with over 50 regular employees and 300 million won in equity during 2006-2015 to find that allocative efficiency has continued to decline since 2008 (labor productivity from 2008, TFP from 2011).

- Using the methodology proposed by Melitz and Polanec (2015), allocative efficiency was measured through the covariance between firms’ productivity and market share―a decline in allocative efficiency means that resources are being excessively allocated to low-productivity firms while the opposite is true for high-productivity firms.

□ Since 2011, the decline in allocative efficiency has been observed mostly among affiliates of large business groups that are designated by the Korea Fair Trade Commission (KFTC) for limitations on cross-shareholding.

- Considering large business groups’ immense share of inputs (labor and capital), their diminishing efficiency in resource allocation accounts for much of the recent productivity slowdown in Korea.

□ To improve overall economic growth, efforts must be made to offset the declining allocative efficiency engendered by large business groups.

- The holding company system needs an overhaul to prevent the growth of business-group firms from eroding allocative efficiency.

- Actions need to be taken so that any problems incurred from the misconduct of controlling shareholders do not lead to misallocation within business groups.

Summary

Policy Study KOR Economic Dynamism of Korea: With a Focus on the Economic Concentration of Business Groups

The gross domestic product (GDP) growth rate of South Korea has declined since 2011 mainly due to dampened growth in total factor productivity (TFP). By studying changes in productivity growth from 2006 to 2015 with firm-level microdata, this paper shows that a decrease in allocative efficiency across firms can account for the recent dampened aggregate productivity growth and that most of a decrease in allocative efficiency since 2011 can be attributed to firms affiliated with business groups subject to the limitation on cross-shareholding designated by the Fair Trade Commission. Given the fact that business groups’ shares in input markets have been steadily rising, the economic concentration of business groups can be a main factor in the recent misallocations, which give rise to the diminished economic dynamism and dampened TFP growth of South Korea.

Summary

Research Monograph KOR Enhancing the Dynamism of Korea: the Role of Financial Policy on Vitalizing Firm’s Entry and Exit

This study tries to examine policy direction for improving the dynamics of the Korean economy by analyzing how the financial policy of the government affects the entry and exit of enterprises. From the empirical analyses on the government’s role in the establishment and growth of enterprise and restructuring of insolvent company, we draw the following policy implications. First, it is necessary to strengthen the evaluation of policies, such as financial support to start-up companies and large restructuring firms, to reduce the social cost of 'government failure'. Government intervention through financial aid, though it has inevitable aspects due to market failure, can sometimes cause a consequence inferior to what would be observed under laissez-faire. Second, the incubating role of venture capital to start-ups should be strengthened because the analysis results indicate that the mentoring activity of venture capital to young firms actually increases the possibility of follow-up investment. Third, it is desirable to construct a new corporate restructuring framework which integrate the existing corporate workout and court receivership system. Due to the complexity of creditor structure and the proliferation of industry-wide restructuring, the current system is found to be no longer efficient in supporting corporate restructuring in recent years.

Summary

Policy Study KOR Korea’s Demographic Changes and a Long-term Growth Projection: a General Equilibrium Analysis

This research monograph builds a Overlapping Generations Model to study the effects of Korea's demographic transition on the GDP growth rate in the long-run. The model incorporates the population projection through 2060 by Statistics Korea and the effects of low fertility and rise in life expectancy on the output growth rate are studied. In the model, endogenous responses of female labor are also considered. Under the assumption that the TFP growth rate will be slowed moderately in the future, maintaining 1.3% per annum, the GDP growth rate of the Korean economy is projected to slow down to 1.1% per annum in 2050s from 4.0% in 2000s. The shrinking workforce due to persistently low fertility will play a significant role in the slow-down. The rise in life expectancy will play a mitigating role, but the magnitude of its effect is not large enough to offset the negative effect of the low fertility.

Summary

Research Monograph KOR Understanding Korean Economic Development from the Perspectives of Agricultural Development and Structural Transformation

This monograph studies the process of structural transformation of Korea during the period of remarkable growth, focusing on the role of agriculture. Understanding the structural transformation, defined as a phenomenon of the overall shift of resources from agriculture to non-agriculture, has a critical importance because such process not only deliver the growth of per capita income hence the improvement of individual welfare, but also accompanies fundamental progress and transformation of a society such as industrialization and urbanization which involves the changes of life style as well as the mode of technology. In particular, most failures of development in many developing countries are due to their failure to transform themselves from agricultural to industrial economies. Thus, understanding the precise feature of such process from Korea’s development experience would provide significant hints to promote the development of current developing countries.

We find that the productivity growth of agricultural sector rather than that of industrial sector played a key role for Korea’s structural transformation. This finding is an interesting surprise because most existing literature on Korean industrialization tends to focus on industrial policies in relation to export promotion. There are no doubts that industrial policies and export promotion played an important role for the economic development in Korea. However, our finding sheds new lights on the importance of agricultural development in understanding Korea’s development process in terms of structural transformation. Specifically, this study shows that agricultural productivity growth is an integral factor in driving the development during the initial take-off stage.

Based on the above finding, this monograph pursues to deepen our understanding of the agricultural development of Korea in various dimensions. We study how the structural changes happened within the agricultural sector by comparing the agricultural development paths across nations as well as tracing the changes of the key characteristics of Korea’s agriculture. We find that there were two critical changes in mid-1970s and mid-1990s for Korea’s agriculture. In particular, we try to propose the how Korean agriculture should transform itself for the new period of low growth after the year 2000.

We construct the long-run time-series database of agricultural inputs, outputs, and productivity for the 1955-2012 period using various sectoral and micro surveys. Here we try to articulate what difficulties exist in estimating the agricultural productivity in long span of time.

The evolution of the rural household income since 1960 until now is another important topic of this monograph. This part of research illuminates that the average rural household was higher after 1970s than the average urban household income in Korea. However, this income ordering was reversed after mid-1980s and the rural income continued to fall relative to the urban income. We find that major reason for this reversal is the continual deterioration of human capital of rural households relative to the urban households rather than the differences in returns to schooling between rural and urban areas.

We also try to identify the roles of Korea’s two important dimensions of agricultural development such as agricultural water development and the agricultural land reform. We emphasize the rational division of labor among diverse agents of state, local governments, public enterprises, and association of farmers in developing agricultural water system, and the importance of establishment of legal and institutional infrastructure in promoting such development.

The research on land reform aims to provide an empirical analysis to identify, although being incomplete, the causal direction of land reform on agricultural land productivity growth. For this purpose, the land reform study first describes the debate if introducing owner-farmer system indeed improved the land productivity compared to the colonial landowner system and sorts out the relevant list of variables for the empirical analysis using simple regression. This study shows that there were no serious moral hazard problems regarding landowners’s management and tenants, but the incentive effects of farmers by having their own land were strong in improving the land productivity.

Main contributions of this monograph are to shed new lights on the importance of agricultural development for the structural transformation, which is perhaps the most important first step in national development. We showed that it was indeed the case of Korean economic development. We hope our findings provide new insights for development policy design such that development strategy should be balanced between agricultural and industrial sectors and it needs to focus on productivity growth, in particular the agricultural productivity during the initial stage of development.

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