KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Empirical Analysis of Political and Economic Relations between the Korean Peninsula and Surrounding Countries: Focusing on Country Relations Index Using Big Data

Recently, tensions between the US and China have been escalating across various sectors, concurrently with rapid shifts in the international arena due to conflicts such as the Russia-Ukraine war and the Israel-Hamas conflict. The Korean Peninsula is also entwined in the fabric of these dynamics. The Taiwan issue, one facet of the US-China rivalry, is linked to the strategic presence of US forces in South Korea, and semiconductors, South Korea's key industry, are among the most affected by the intensifying tensions between the US and China. North Korea's economic and military ties with Russia, as evidenced by North Korea's supply of conventional weapons and materials to Russia in defiance of international sanctions, are strengthening. Given the complex and grave political and economic environment surrounding the peninsula, evidence-based policymaking grounded in objective data becomes indispensable.

This study utilizes Google's Global Database of Events, Language, and Tone (GDELT) to analyze country relations around the Korean Peninsula. The data provided by GDELT quantitatively measures qualitative variables of inter-country relationships, utilizing machine learning and other state-of-the-art technologies to extend traditional event data methodologies to a vast collection of news articles gathered worldwide by Google. However, despite its strength as one of the most comprehensive and objective event datasets available, it is important to acknowledge and address the limitations such as the reliability and scope of news sources and potential errors in event identification and classification.

Using trade data and GDELT, this study examines the economic and political dynamics between the US and China for time-series econometric analysis―what drives the US-China conflict, which country triggers cooperation and conflict, how the other country responds, and whether these outcomes vary over time. This analysis reveals that before President Xi Jinping's tenure, US-China relations were primarily influenced by trade, with a notable positive correlation between increased trade and more favorable relations. During this period, their interactions appeared to have no significant impact on each other. However, since the beginning of Xi's presidency, China has actively responded to US diplomatic protests and corrective measures. Empirical analysis supports this move, which aligns with China's strategy to assert itself as a global power through expanded political and military influence, underpinned by its economic growth. The shift towards mutual diplomatic and security issues over economic variables in influencing US-China relations indicates that future tensions are likely to arise from areas such as Taiwan rather than trade.

The study further explores inter-Korean relations and the dynamics among countries surrounding the Korean Peninsula, investigating how the US-China power dynamic, bilateral relations, and interactions among neighboring countries influence the two Koreas. Findings indicate that the US-China power dynamic and relations have a significant correlation with South and North Korea's external relations with these superpowers but exert minimal impact on the peninsula's international relations. This suggests that the US-China relationship is a major factor in shaping the external relations of both Koreas without directly affecting the internal tension or peace. However, it is important to acknowledge that the recent escalation in US-China tensions, if it has fundamentally changed the geopolitical context surrounding the Korean Peninsula, might render predictions based on historical data incomplete.

This study showcases an analysis of inter-state relations using quantified objective data. The data, methodology, and findings presented are expected to serve as reference materials for formulating future foreign policies.

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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.

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Policy Study KOR Influence of Global Investment Sluggishness on Value Added Inducement in Korea

A major driver of the downturn in world trade volume relative to global GDP, this study analyzes the impact of the slump in global investment following the global financial crisis on Korea’s economy. Accordingly, efforts were made to quantitative analyze the possibility that the global economy may be adversely affecting the Korean economy through the export path, as more heavily export-dependent value added is created.

The analysis reveals that the slump in global investment after the global financial crisis has had a particularly negative effect on the growth of the Korean economy than other economies. This is because the creation of value added is more dependent on global investment. Simulation results show that the decline in Korea’s economic growth rate is spurred not only by the slowdown in global economic growth but also by the decreased proportion of the investment sector in the global final demand. Indeed, the share of global investment in the global final demand diminished in the wake of the global financial crisis, causing the Korean economy's annual growth rate to decline by 0.21%p annually during 2008-14. An examination into the impact of the global investment slump by industry found that Korea’s major industries were dealt a particularly harsh blow, including electrical and electronic products, machinery, metals and transportation equipment.

Sluggish global investment can be attributed to both short-term and structural factors. The accelerating momentum of global aging and slowing productivity will likely continue to weaken global investment demand. And the fact that China, Korea’s biggest exporting partner, is reorganizing demand from investment to consumption, could also negatively affect global investment demand for a considerable period of time.

In order to tackle the problem, efforts must be made to create a malleable industrial structure capable of flexibly responding to the changes in the external environment. If Korea’s industrial structure is overly rigid, production resources will be continuously injected into a declining industry, and thus, promising industries may lose the opportunity to grow soundly. Therefore, policy efforts are required so that limited resources can be efficiently utilized by actively promoting the restructuring of insolvent companies and flexibility of the labor market. In addition, inroads for consumer goods exports should be aggressively pursued in major export markets like China, whose demand structure is shifting toward consumption.

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Policy Study KOR The Effect of Global Financial Crisis on Corporate Investment in Korea: From the Perspective of Costly External Finance

This paper considers the effect of global financial crisis on corporate investment in Korea. Especially, the crisis may constrain the firm-level investment as the negative shock to the credit supply unfolds dramatically. As Duchin et al. (2010) demonstrated, if the negative supply side effect is evident during the crisis period, the larger cash holdings before the crisis accumulated, the smaller the constraint to the corporate investment will be, or vice versa. In order to investigate the supply side effect of the crisis, we use firm-level financial data which includes Korean stock market listed firms, as well as small and medium enterprises. The corporate investment declined significantly after the crisis, even if we control the demand side effect such as contemporaneous capital productivity and cash flows. More importantly, the decline is positively and significantly related with the cash holdings before the crisis, implying that our data supports the negative effect of a credit supply shock. Large firms experienced relatively modest investment decline compared to small and medium enterprises, and the relationship between investment decline and cash holdings is much greater than that of large firms. Additionally, we examine whether the negative effect persists until recently, and find evidence that the cash-investment relationship still remains in small and medium enterprises.

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Research Monograph KOR Strategy for East Asian Integration (Ⅲ): Deepening and Enlargement of Regional Cooperation and New Challenges

Ⅰ. Purpose
Korea’s housing market in the 2000s has seen a couple of ongoing structural changes rendering the market framework. First, as chronic shortage of supply has been somewhat solved (at least on a nationwide basis), the expectation for a rise in house prices resulting from the mismatch between supply and demand is projected to weaken. Second, urban population which soared between 1970 and 1999 (40%→80%) posted little change at around 81% since 2000. Additionally, the scheduled relocation of government offices outside the capital region will lead to slowing the pace of concentration of population and economic activities in the capital region. Third, as the market for housing finance and real estate development financing grew, the role of institutional finance has increased. Accordingly, financial inclusion has broadened to cover more marginal borrowers, but at the same time the need to manage system risks—loan volatility spreading to macroeconomy—in an appropriate manner has risen as well. Fourth, changes in demographic and social structure resulting from low birth rate, population aging and small family trends have demanded a change in the types of housing. In the past, most of the supplied apartments were targeting a household with four members, but in the future, rental and self-owning houses will offer more variety in formats and styles. Lastly, the global financial crisis that started in the US and Europe between 2007 and 2009 has served as an opportunity for Korea to look back on issues and policies as to real estate market stabilization and housing welfare for mediumand low-income classes. This study aims to outline implications that the global financial crisis has brought to Korea’s housing sector which is presently undergoing several structural changes, such as reduced shortage of house supply, expanded institutional housing finance and changing demographics and social structures, and then to seek for a new paradigm for housing policy. The final paper includes 16 theses under six chapters including the introductory chapter, and its key policy implications are discussed under three categories below.

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