KDI - Korea Development Institute - RESEARCH - Research Areas

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

Policy Study KOR Investment and Business Cycles: focusing on Investment Dispersion

This study empirically verifies that the form of the adjustment cost function serves as an important mechanism in investment decision-making after confirming that the investment dispersion of Korean companies is pro-cyclical and can affect economic fluctuations. Specifically, it is revealed through empirical analysis using corporate financial data rather than a macroeconomic model that the investment adjustment cost function generally assumed in macroeconomics is asymmetric and irreversible in the Korean economy. In particular, since the substitution effect of the marginal value-to-cost of a one-unit investment in inter-temporal investment decision-making is affected by the additional adjustment cost from the sale of equipment assets, and not the investment in equipment assets, it is empirically proven to lead to an expansion of investment dispersion. This ultimately shows, albeit indirectly, that investment dispersion can affect economic fluctuations as the investment adjustment cost function influences the decision-making in investment. What is implied here is that the adjustment cost function is not merely a deep parameter that fits the dynamics of economic fluctuations in a macroeconomic model, but it could be a macro policy variable that can be endogenized through economic policy.

Summary

Research Monograph KOR Fiscal Policy Challenges for Sustainable Growth: Focusing on Aging Policies

This study focuses on the utilization of the senior workforce as a key factor in the policy task to promote sustainable economic growth in response to population aging. Accordingly, a review was conducted of the need for and the economic consequences of using older workers and suggestions were presented for a comprehensive policy direction to expand elderly labor force participation as well as supplemental policy options for the senior population who are unable to participate in the market.

Chapter 2 examines the impact of population aging on long-term economic growth through growth accounting and emphasizes the use of older workers as a fundamental direction for aging policies. Chapter 3 shows that the average additional work capacity of Korean elderly men is a mere 2-4%p in terms of the current health status, but the additional work capacity of elderly male college graduates, whose numbers are expected to increase, stands relatively high. Chapter 4 examines the possibility of future labor supply changes for the elderly and its macroeconomic implications. Based on the results, we explore institutional improvements to increase the participation of seniors in the labor market.

In order for the senior population to participate in the labor market, comprehensive and multifaceted policy efforts are needed in terms of labor supply and demand. For labor supply, an institutional environment should be established to maintain the labor productivity of workers including the elderly, and to raise economic incentives to reduce distortions in the decision-making of the elderly. And for labor demand, it is important that uncertainties in labor productivity are mitigated to reduce distortions in employers’ decision to hire older workers and to establish a labor market environment that allows flexible employment and wage setting according to labor productivity. Additionally, policy efforts should be made to increase demand for the elderly by adjusting the industrial and technological structure in response to population aging.

Summary

KDI FOCUS China’s Changing Consumer Market and the Policy Implications

□ China's rural consumer market has exhibited extraordinary growth. Over the past decade, the consumption growth rate and average propensity to consume of rural residents have surpassed those of their urban counterparts, with the former’s consumption patterns becoming increasingly similar to the latter’s. Such a phenomenon prevails in rural areas that neighbor 2nd and 3rd tier cities whose urbanization is progressing rapidly. Accordingly, Korean companies must diversify their products in line with China’s expanding rural markets while further differentiating product composition to satisfy the heterogeneous demands in urban markets. As for the government, efforts must be placed in strengthening the export cooperative system targeting China between domestic manufacturers, distributors (operating in China) and logistics companies.

- This study aims to analyze the growth of and changes in China’s consumer market to gain a better understanding and to discuss the future direction of governmental and corporate responses

- China’s consumer market started to grow in full swing in the mid-1990s and exhibited continued explosive growth since the mid-2000s.

- China’s consumer market grew to the world’s second largest in 2013 with a market scale of $3.4 trillion.

- Over the past three decades, the nominal consumption expenditure of urban and rural residents has expanded over 20 fold.

- Overall, the consumption growth of rural residents have surpassed that of urban residents since 2004.

- The APC of rural residents exceeded that of urban residents in 2005.

- When limited to cashonly consumption, rural residents’ APC has improved continuously.

- Consumption growth rate by item is found to be higher in rural residents than in urban residents.

- China’s rural areas today are also experiencing servitization in line with the increases in income and consumption.

- Consumer markets in the 2nd and 3rd tiers have spurred the consumption growth in rural areas.

- Urban areas are showing slower growth due to the reduced consumption by residents in 1st tier cities.

- Consumption growth in urban 2nd and 3rd tiers has been steadily maintained at a relatively high 11%.

- Urbanization rate has risen fast mainly in prefecture-level cities in 2nd and 3rd tiers, and there is enough room for additional increase.

- A 1%p rise in the urbanization rate equals an increase of 93 yuan in the annual average per capita consumption and 123.6 billion yuan in China’s total consumption.

- Urbanization which results in the rise in consumption goes beyond urban areas to reach neighboring rural areas.

- The contribution of urbanization to the rise in consumption is confirmed in all estimated results.

- Domestic consumer goods manufactures need to be actively encouraged to enter China’s rural markets with diverse products.

- Product composition targeting urban consumer markets must be differentiated, relying on the collaboration between Korean distributors in China and domestic consumer goods manufacturers.

- The Korean government should strengthen the cooperative export system targeting China between Korean distribution companies operating in China and domestic consumer goods companies as well as the logistics companies that link them.

Summary

Research Monograph KOR Economic Dynamism of Korea: With a Focus on the Comparison with Japan

Will Korea follow Japan that has been stagnating for the past 20 years? This question is frequently asked by ordinary people as well as economists as dynamism of the Korean economy is weakened. Yet, the answer does not seem to be simple.

This book analyzes similarities and differences between the Korean economy of today and that of Japan in the 1990s. Results of respective chapters are not complete enough to draw definite conclusions, and a single recap of the entire study would cause excessive leaps in logic. Nevertheless, it is hard to deny the observation that the recent Korean economy exhibits similarities in many respects to those seen in Japan in the early 1990s.

First of all, age structures of Korea lag Japan by about 20 years. As seen in Japan, population aging will affect every corner of the Korean society. Investment demand is getting lowered and current account surplus is being expanded as a result. Export industries of Korea are being chased by Chinese firms just as Korea has caught up with Japan for the past 20 years. Although real estate market of Korea does not seem to have excessive bubbles, unlike in Japan in the early 1990s, aging population will become a critical factor that will weaken housing prices in Korea. Overall inflation rates are also being lowered to around 1% per annum, generating concern on deflation. Potential growth rates are also being lowered, and projected to be lowered to 1~2% by the 2030s even under the assumption that productivity growth is reasonably well maintained.

However, markets of Korea do not appear to function distinctively better than those of Japan. As in Japan, financial market in Korea fails to effectively thin out Zombies (i.e., firms that would not be able to survive without financial supports of either government or financial institutions) that are hampering investment and employment of sound firms. Labor market of Korea does not efficiently allocate resources due to excessive protections for regular workers, which toss away the whole burden of adjustments to irregular workers. Product market of Korea is also distorted by various entry barriers and excessive protections for small and/or self-employed firms.

Faced with these difficulties, the book recommends bold structural reforms coupled with accommodative monetary policy to keep the Korean economy from deflation risks. First, financial supervision needs to be strengthened to oblige zombie firms to make active restructuring efforts. At the same time, the extensive financial supports for small- and medium-sized firms by government, which are mostly motivated by political reasons, should be reduced. For labor market flexibility, excessive protections for regular workers need to be eased because otherwise the dual labor market structure would be permanently fixed. In addition, various entry barriers in product markets should be either lifted or relaxed.

As for macroeconomic policies, the book stresses potential risks of optimistic forecasting that would hinder formulating the right macroeconomic policy mix. In particular, the experience of Japan in the 1990s that optimism delayed monetary policy responses until the economy finally plunged into deflation should not be repeated. As for fiscal policy, too, the experience of Japan that optimistic forecasting of tax revenues ended up with unsustainable budget deficits should be borne in mind of Korea's key policy-makers.

Summary

Research Monograph KOR Structural Changes and New Policy Directions

The housing sector in Korea is currently undergoing several structural changes. Aging population, shrinking household size, and slowing economic growth represent on-going transitions in the demand side. Meanwhile, resolving the chronic housing shortage, at least in the national level, along with shifting policy focus from the government-driven mass production of affordable owning units toward various rental housing services for low- and moderate- income households are some of major changes in the supply and policy sides. Furthermore, the rising role of financing since the Asian Financial Crisis in 1997~97, for consumers as well as for producers, became another critical element that shapes market outcomes in the sector.

This research monograph contains research findings from a year-long research project sponsored by Korea Development Institute (KDI), which investigates sources of systemic risk from this transitioning housing sector in Korea, their expected impacts on market outcomes, and appropriate policy responses to deal with them. In particular, the following three areas represent the main subjects of our inquiry: consequence of aging and other demographic changes in the housing sector; effectiveness of alternative policy instruments to stabilize the housing market; and, development of rental housing market and housing welfare policies. The monograph consists of eleven chapters in total, divided into five parts, along with four international cases of the real estate driven financial crises.

Part I (Chapter 1) summarizes key research questions and findings from all subsequent chapters.

Part II (Chapters 2 to 4) attempts to measure effects of aging and other demographic shifts on housing prices based on innovative empirical methods. In particular, Chapter 2 tests effects of changes in shares of aged population (those who are 65 or older) in the county-level localities in Korea during the 1990s on housing returns during the 2000s by using a three-factor CAPM (Capital Asset Pricing Model), and documents a significant negative effect of a rise of aged population on the returns; Chapter 3 quantifies levels of housing demand for different sizes (i.e., large vs. medium vs. small units) of various age and household-size cohorts, and predicts an over-supply of the very small housing units if government continues the current course of promoting that size segment; and, Chapter 4 estimates extents of co-movement among local housing prices in Korea, and reports a market stabilization effect of the loan-to-value (LTV) restrictions in mortgage lending (i.e., the more restrictive the lending control is, the smaller the extent of the price co-movement).

Part III (Chapters 5 to 7) analyzes consequences of the alternative policy instruments for stabilizing the housing market, along with policy measures to respond to real estate lending driven financial crisis. Chapter 5 measures time- and location-varying effects of the frequently changing housing tax regimes in Korea for acquiring, holding, and re-selling home on housing returns, and reports a predominantly large (and negative) impact of the capital gains tax; Chapter 6 simulates the effects of monetary policy, LTV restriction, and housing acquisition tax on private consumption and other macroeconomic variables based on a DSGE(Dynamic Stochastic General Equilibrium) model, and documents that the more relaxed the lending restriction, the larger the effect of change in the policy interest rate on the variables examined; Chapter 7 analyzes the extent of liquidity risk caused by the structure of consumer lending products in Korea (short maturities and non-amortizing principals in particular), and suggests to consider a two-by-two matrix in designing policy responses to a real estate driven financial crisis (i.e., ex ante vs. ex post, and permanent vs. temporary, policy responses).

Part IV (Chapters 8 to 10) discusses the rental housing markets and policies in Korea along with a set of policy recommendations to enhance program efficiency and welfare of beneficiaries. Chapter 8 investigates rental housing policies - in particular, the rent subsidy program - and argues for increasing rental housing supply to meet the rising need in the demand side, for promoting private rental housing service providers, and for assisting economic self-help of subsidy recipients; Chapter 9 analyzes consequences of different unit-based public rental housing programs, and suggests to consider a more focused (and sustained) housing safety net program for very low-income households, as well as a realignment of national government, localities, and other service providers; Chapter 10 elaborates the ways to reform the private rental housing market in Korea, the core of which is to convert the informal and non-institutionalized Chonsei system to a more stable, affordable, and institutionalized rental housing mechanism, and recommends a set of policy initiatives by using the those in Japan and other advanced economies as a benchmark.

Part V (Chapter 11) discusses policy implications of major findings from the previous chapters with respect to four particular areas: those for dealing with demographic shifts, for stabilizing housing markets, for enhancing welfare of low-income households via rental housing policies, and for developing a well-functioning rental housing market and industry. Finally, four cases of the real estate driven financial crisis written by renowned international experts are given as examples - the Swedish financial crisis in the early 1990s (by Peter Englund), the S&K crisis during 1980s in the U.S. (David Geltner), the Japanese real estate and financial crisis in the 1990s (Tsutomu Watanabe), and the recent subprime mortgage crisis in the U.S. (Tyler Yang).

Summary

Research Monograph KOR Structural Changes and New Policy Directions in the Korean Housing Sector

The housing sector in Korea is currently undergoing several structural changes. Aging population, shrinking household size, and slowing economic growth represent on-going transitions in the demand side. Meanwhile, resolving the chronic housing shortage, at least in the national level, along with shifting policy focus from the government-driven mass production of affordable owning units toward various rental housing services for low- and moderate- income households are some of major changes in the supply and policy sides. Furthermore, the rising role of financing since the Asian Financial Crisis in 1997~97, for consumers as well as for producers, became another critical element that shapes market outcomes in the sector.

This research monograph contains research findings from a year-long research project sponsored by Korea Development Institute (KDI), which investigates sources of systemic risk from this transitioning housing sector in Korea, their expected impacts on market outcomes, and appropriate policy responses to deal with them. In particular, the following three areas represent the main subjects of our inquiry: consequence of aging and other demographic changes in the housing sector; effectiveness of alternative policy instruments to stabilize the housing market; and, development of rental housing market and housing welfare policies. The monograph consists of eleven chapters in total, divided into five parts, along with four international cases of the real estate driven financial crises.

Part I (Chapter 1) summarizes key research questions and findings from all subsequent chapters.

Part II (Chapters 2 to 4) attempts to measure effects of aging and other demographic shifts on housing prices based on innovative empirical methods. In particular, Chapter 2 tests effects of changes in shares of aged population (those who are 65 or older) in the county-level localities in Korea during the 1990s on housing returns during the 2000s by using a three-factor CAPM (Capital Asset Pricing Model), and documents a significant negative effect of a rise of aged population on the returns; Chapter 3 quantifies levels of housing demand for different sizes (i.e., large vs. medium vs. small units) of various age and household-size cohorts, and predicts an over-supply of the very small housing units if government continues the current course of promoting that size segment; and, Chapter 4 estimates extents of co-movement among local housing prices in Korea, and reports a market stabilization effect of the loan-to-value (LTV) restrictions in mortgage lending (i.e., the more restrictive the lending control is, the smaller the extent of the price co-movement).

Part III (Chapters 5 to 7) analyzes consequences of the alternative policy instruments for stabilizing the housing market, along with policy measures to respond to real estate lending driven financial crisis. Chapter 5 measures time- and location-varying effects of the frequently changing housing tax regimes in Korea for acquiring, holding, and re-selling home on housing returns, and reports a predominantly large (and negative) impact of the capital gains tax; Chapter 6 simulates the effects of monetary policy, LTV restriction, and housing acquisition tax on private consumption and other macroeconomic variables based on a DSGE(Dynamic Stochastic General Equilibrium) model, and documents that the more relaxed the lending restriction, the larger the effect of change in the policy interest rate on the variables examined; Chapter 7 analyzes the extent of liquidity risk caused by the structure of consumer lending products in Korea (short maturities and non-amortizing principals in particular), and suggests to consider a two-by-two matrix in designing policy responses to a real estate driven financial crisis (i.e., ex ante vs. ex post, and permanent vs. temporary, policy responses).

Part IV (Chapters 8 to 10) discusses the rental housing markets and policies in Korea along with a set of policy recommendations to enhance program efficiency and welfare of beneficiaries. Chapter 8 investigates rental housing policies - in particular, the rent subsidy program - and argues for increasing rental housing supply to meet the rising need in the demand side, for promoting private rental housing service providers, and for assisting economic self-help of subsidy recipients; Chapter 9 analyzes consequences of different unit-based public rental housing programs, and suggests to consider a more focused (and sustained) housing safety net program for very low-income households, as well as a realignment of national government, localities, and other service providers; Chapter 10 elaborates the ways to reform the private rental housing market in Korea, the core of which is to convert the informal and non-institutionalized Chonsei system to a more stable, affordable, and institutionalized rental housing mechanism, and recommends a set of policy initiatives by using the those in Japan and other advanced economies as a benchmark.

Part V (Chapter 11) discusses policy implications of major findings from the previous chapters with respect to four particular areas: those for dealing with demographic shifts, for stabilizing housing markets, for enhancing welfare of low-income households via rental housing policies, and for developing a well-functioning rental housing market and industry. Finally, four cases of the real estate driven financial crisis written by renowned international experts are given as examples - the Swedish financial crisis in the early 1990s (by Peter Englund), the S&K crisis during 1980s in the U.S. (David Geltner), the Japanese real estate and financial crisis in the 1990s (Tsutomu Watanabe), and the recent subprime mortgage crisis in the U.S. (Tyler Yang).

Summary

Other Research POST-2015 DEVELOPMENT AGENDA: GOALS, TARGETS and INDICATORS

In September 2000, world leaders at the United Nations Millennium Summit recognized a collective responsibility to work toward “a more peaceful, prosperous and just world.” The Millennium Development Goals (MDGs) reaffirmed this vision and launched an ambitious global partnership for development, setting specific targets by 2015 and using numerical indicators to measure progress. The MDGs recognized the stark reality of widespread human deprivation and environmental degradation and galvanized support to reduce poverty, achieve basic education and health, and promote gender equality and environmental sustainability.

By 2015, the world will have met some of the key targets such as halving the poverty rate and will get close to completing primary education for all children; but achieving the health goals looks hard, and Africa lags behind, despite the substantial progress it has made since 2000. Overall, the MDGs have been remarkably successful in focusing attention and mobilizing resources to address the major gaps in human development.

Building on the MDGs, the global community should move beyond meeting basic human needs and promote dynamic, inclusive, and sustainable development. Future goals must reach beyond traditional development thinking to become sustainable one-world goals that apply to poor and rich countries alike. Surveys show that, even for the poorest, meeting basic needs is not enough. The World Bank’s Voices of the Poor (1999) exercise, for instance, concluded that the priorities of the poor were a job, better connections to the rest of the world, reduced threat of violence, and ending humiliation and disrespect. The new goals should not only provide for basic human needs, but also ensure essential human rights and create enabling conditions to help individuals realize their potential.

For basic needs, the new goals should do much more than just tackle extreme poverty and hunger and achieve basic education and health. The new goal should seek to deliver better living standards through inclusive growth, for instance, by accelerating income growth and increasing employment, especially for the poorest 20 percent. The education goal should move beyond primary schooling toward universal literacy and numeracy and improved job skills. The health goal should focus on productive life expectancy, for rich and poor countries alike. For essential human rights, the new goals should promote civil and political rights and security in addition to gender equality. Without being overly prescriptive, the civil and political rights goal should promote public participation, accountability, and transparency. The security goal should seek to reduce violence and vulnerability. For enabling conditions, the new goals should promote universal access to ICT, transportation, and energy infrastructure, in addition to ensuring environmental sustainability, disaster resilience, and good global governance, to ensure that dynamic, inclusive, and sustainable development can take place without perpetuating aid dependence.

Based on discussions at a meeting at Bellagio last year and regional consultations this year, this paper looks at the potential indicators for eleven potential future “Bellagio goals”:

1. Inclusive growth for dignified livelihoods and adequate standards of living

2. Sufficient food and water for active living

3. Appropriate education and skills for productive participation in society

4. Good health for the best possible physical and mental well-being

5. Security for ensuring freedom from violence

6. Gender equality for enabling males and females to participate and benefit equally in society

7. Resilient communities and nations for reduced disaster risk from natural and technological hazards

8. Infrastructure for access to essential information, services, and opportunities

9. Empowerment of people for realizing their civil and political rights

10. Sustainable management of the biosphere for enabling people and planet to thrive together

11. Global Governance and Equitable Rules for Realizing Human Potential

The availability of appropriate indicators to underpin targets for each of the goals is critical. Organizations’ and individuals’ behaviours are influenced by how success will be assessed. Without practical indicators, goals remain purely aspirational and progress cannot be measured. But there are daunting challenges to devise indicators that are both measureable and motivational — to galvanize public support for development. Serious data limitations exist, especially for cross-country comparison purposes. Metrics must be sophisticated — not too crude, but also not too technocratic. Indicators should allow disaggregation by sex, urban/rural, identity groups and income bands so as to unmask the inequalities that hide behind generalized statistics. This paper reviews a menu of indicators for the candidate goals to inform the future process of selecting the post-2015 successors to the Millennium Development Goals.

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