KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR Analysis of Unfair Trade Factors in Agency Deals

Enacted in 2015, the Fair Agency Transactions Act of South Korea mandates annual written fact-finding investigations of agency transactions. Per this mandate, the Korea Fair Trade Commission (KFTC) has conducted agency deal surveys since 2017 to identify unfair trade practices in agency transactions, with results disclosed through press releases. However, KFTC’s investigations do not deal with specific instances of unfair trade conditions. This study aims to determine factors contributing to unfair trade in agency transactions based on these survey results, focusing on the cosmetics sector as investigated in the 2021 fact-finding survey. Dissatisfaction with transactions serves as an indicator of the existence of unfair trade practices.

This study first investigates the factors influencing supplier dissatisfaction. Findings indicate that suppliers are more likely to be satisfied if they are market leaders with a significant market share and less dependent on the agency channel for transactions. This suggests that supplier satisfaction in agency deals decreases with lower market share or higher reliance on agents. These results are connected to the concept of bargaining power, implying that suppliers with greater negotiating power face fewer challenges when negotiating with agents. The study also examines the factors that influence agent dissatisfaction. Conditions frequently leading to unfair trade in agency transactions include the lack of a defined sales territory, diversification of supplier distribution channels (e.i., online), and shorter contract cycles.
However, this study finds the impact of contracts granting exclusive rights to suppliers and agents is inconclusive. While exclusive agents experience a greater variety of unfair trade, there is no higher likelihood of dissatisfaction with their transactions. This suggests that exclusive agency agreements foster a greater dependence on suppliers, which can lead to a higher likelihood of encountering unfair trade, but may also result in increased satisfaction due to more consistent transactions.

All these results have several implications. To enhance the effectiveness of KFTC’s surveys, it is essential to analyze unfair trade practices specific to each industry, which can improve KFTC’s monitoring functions. Additionally, including open-ended questions rather than solely relying on closed-ended ones is crucial, as agency transactions entail a myriad of scenarios that are difficult to capture accurately with quantitative queries alone. To reduce the burden on respondents and improve efficiency, KFTC should consider incorporating narrative questions into the survey design and streamlining the questionnaires through a thorough evaluation.

Summary

Research Monograph KOR Green Transition Strategy and Implementation

It is imperative for the Republic of Korea to prioritize the development of elaborate green transition strategies and implementation plans. In light of this urgency, this study offers ten chapters addressing select issues on green transition, which provide policy recommendations drawn from identification of problems, assessment of current policies, and empirical analysis.

Chapter 2 (Dr. Yong Hyeon Yang) assesses the national greenhouse gas emission reduction plan the Korean government announced in Oct. 2021. It finds the sectoral strategies to be insufficient for the stated targets and suggests that an energy transition ambition has to be increased as either targets have to be decreased in other sectors or there could be a need for more extensive electrification. Chapter 3 (Prof. Wonhyuk Lim) offers insights on energy transition strategies and their implication for the electricity industry. Periodical simulations should be conducted for multiple scenarios, and the overall cost of transition, including the expenses for networks and standby facilities as well as the levelized cost of energy, should be minimized. Accordingly, transition and phase-out of fossil fuel plants should be systematically planned in stages.

Chapter 4 (Dr. Yeochang Yoon) points out the limitations of the Korean emission trading system (ETS) and presents potential solutions. The current restrictions on banking need to be relaxed to keep the ETS allowance prices from dropping, but such adjustments should be introduced gradually to prevent a sudden decline in supply. Chapter 5 (Prof. Hyungna Oh) raises a possibility of insufficient investment in decarbonization technologies due to first-mover disadvantages. It advocates introduction of carbon contracts for difference to incentivize R&D in green technologies, especially when carbon prices are low or uncertain. Chapter 6 (Dr. Karam Jo) presents the empirical result that patents in some digital transformation technologies can increase patents in climate technologies by an average of 17.3% and underscores the need to promote such digital transformation technologies.

Chapter 7 (Dr. Junghyun Kwon and Dr. Joseph Han) reveals that elevated outdoor temperatures decrease working hours in an inequitable manner and deteriorate workers’ health. These observations imply that climate change could magnify income inequality. As such, protective measures for outdoor workers against high temperatures and support for their job transitions are crucial. Chapter 8 (Dr. Hyunseok Kim) proposes selective subsidies for regions heavily impacted by climate change and green transition, and highlights the necessity of assessing those impacts objectively. Most importantly, local governments should formulate transition plans in line with central government guidelines.

Chapter 9 (Prof. WooRam Park) indicates that a large portion of greenhouse gas comes from establishments with more than 300 workers, and in such industries as petrochemical and steel. It also shows higher carbon productivity in industries with lower greenhouse gas emissions and establishments using less energy. Chapter 10 (Dr. Joseph Han) reveals the empirical result that firms who entered in the first stage of ETS had significantly lower greenhouse gas emissions, energy usage, annual turnover, and employment than those who did in the second stage. The performance of these firms was influenced by the design of the ETS, for example, on what basis the allowances were assigned free of charge or for a fee. Hence, policy design for green transition should pay particular attention to its effects on businesses and employment. Lastly, Chapter 11 (Dr. Sora Chon) observes that the global green transition might trigger both green and energy inflation. Analyzing the effect of inflation factors on the Korean economy finds that such impacts vary based on whether inflation arises from a demand or a supply shock. Consequently, the Korean government's responses should differentiate between inflation factors that are demand-side and supply-side.

Summary

Policy Study KOR The Contingent Effects of Anti-Corruption Agencies on the Right to Prosecute

The efforts of international organizations such as the UN and EU are prompting anti-corruption agencies to spring up across multiple countries as a useful tool to curb corruption. The success of the Corrupt Practices Investigation Bureau of Singapore and the Independent Commission Against Corruption of Hong Kong broadened the horizon for the fight against corruption and built momentum for this movement.

The aims of this study are two-fold: (1) clarification of the conditions of an anti-corruption agency that increase the possibility of investigation and punishment of corruption crimes and (2) identification of policy implications for strengthening Korea’s anti-corruption capacity.

More specifically, this study analyzes how the presence or absence of the right to prosecute in an anti-corruption agency affects its effectiveness. An analysis of dynamic panel data demonstrates that corruption is exacerbated with the power to prosecute given to anti-corruption authorities. The data also show that the lack of such a prosecutorial power reduces corruption, increases prosecutions for office abuse, and strengthens the rule of law.

With the right to prosecute, an anti-corruption agency will weaken its anti-corruption capacity due to collusion or obstruction, and without the power, it will strengthen its function to combat corruption through competition with the prosecutor’s office or police.

Per “double jeopardy,” with the right to prosecute on top of the right to investigate, an anti-corruption body has no choice but to have jurisdiction strictly separate from the prosecutor’s office, so there is no effect of reducing moral hazard through competition. Instead, collusion between authorities with the right to prosecute or obstruction of one another’s investigations may weaken the anti-corruption capacity.

Accordingly, the criminal justice system should be designed based on the principle of checks and balances, taking into account the possibility of conflicts of interest between investigator, prosecutor, potential criminals, or their guardians. The most important thing is that an objective and strict investigation by those who have no interest in the case should always be premised.

Summary

Research Monograph KOR A Study on the Characteristics and Formation of Social Capital in Korea

In the process of compressed growth, Korean society has missed an important aspect of the cooperative value that members of society should share. Trust and ties, norms of reciprocity, and practices of civic participation are remarkably lacking, and enmity and value conflicts threaten the foundation of the community. We believe that this is the biggest obstacle for Korean society to become a truly advanced country, not only in terms of political and economic sense but also in terms of societal. With this awareness in mind, this study empirically explored the accumulation and depreciation process of social capital in Korea, focusing on 'the reciprocal value norms shared by a society' among various types of social capital. The report consists of the following.

First, Chapter 2 examines the origins of social capital discourse and explores the theoretical justification of the social capital concept(i.e., reciprocal social norms) defined in this study. In particular, it explores the relationship between various discussions assuming 'homo socialis' and social capital theory, from Adam Smith to the recent social preference theory in economics. In addition, as a basic requirement for the concept of social capital, the Solow criteria are presented and the validity of the concept of social capital defined as reciprocal social norms is reviewed.

In Chapter 3, for empirical analysis, we construct three indicators for measuring social capital―social (general) trust, civic norm consciousness, and respect for others― and then analyze the effects on economic growth using those indicators. In addition, the relationship with various socio-economic outcomes other than economic growth, specifically, corruption control, governance, and income inequality is analyzed.

Chapter 4 focuses the analysis on Korea and analyzes the characteristics and changes of the reciprocal value norms of Koreans. Assuming that the formation of social capital(i.e., accumulation and depreciation) is achieved by transmission of values from generation to generation and subsequent adjustment by socio-economic environment and experiences, we examine the process of changing reciprocal social norms by generation. In addition, various factors affecting individuals' attitudes toward reciprocal value norms are explored.

Finally, Chapter 5 summarizes the analysis results of this study and presents the following four policy directions based on them.
First, it is necessary to understand that the behavior of economic agents has social motives that cannot be reduced to selfish motives and avoid approaches that emphasize only economic incentives in policy and institutional design. (Policy design for 'homo socialis')

Second, public trust in government institutions, laws, and norms must be restored first to prevent a decline in civic norm consciousness and moral hazard To this end, it is most important to design policies and systems that do not differ significantly from the expectations of members of society and promote them consistently. (Restoring confidence in government policy)

Third, open community activities should be encouraged so that members of society can cultivate community values. It is necessary to expand the experience and learning opportunities in which various opinions are coordinated and mediated from a small and specific agenda. (Encouraging community values and ‘small’ democracy)

Fourth, school education should be rebuilt to foster pro-social future citizens, by contributing to the establishment of inclusive values and ethical norms, not by encouraging selfishness and competition. (Educational reform to foster future citizens)

Summary

KDI FOCUS Public Deliberation in Korean Society: Where It Stands and Should Head toward

□ Public deliberation has demonstrated its potential as a conflict resolution mechanism through deliberative discourses on Shin-Kori nuclear power plant units 5 and 6 and the college admissions reform. However, these deliberative processes revealed some flaws in representativeness, inclusiveness, and the derivation of social consensus building through deliberation. In light of growing efforts to incorporate it into public decision-making, there is also an increasing need for proficiencies in systematic planning, support, and oversight.

- Public deliberation on Shin-Kori NPP (units 5 and 6) in 2017 showed its potential as a new mechanism for conflict resolution.

- In a public survey on the wide use of public deliberation, 75.9% are satisfied while a mere 4.7% remain worried, but still, there are both expectations and concerns.

- Discussions on the pros and cons of public deliberation need to be based on objective evaluations of respective cases.

- Deliberative democracy is a complementary system to representative democracy, and unlike participatory democracy, it undertakes a debate process to check on public opinions and attempts to make decisions based on the confirmed opinion.

- Deliberative democracy gives legitimacy to the decision made by ordinary citizens and their representatives through participation and deliberation.

- Public deliberation can be assessed and evaluated under three frameworks of planning, participation, and deliberation.

- Citizen participants must be able to fully represent and include the general public who will be affected by their collective decisions and policies.

- A proportional extraction of population is not enough to fully ensure the representativeness of deliberative discourses (principle of inclusiveness).

- Preliminary public surveys and deliberation groups showed a statistically meaningful difference regarding conflicting policy issues.

- In terms of the composition of citizen participants, supporters of nuclear phaseout in the Shin-Kori case and those prioritizing school records in the college admissions case were overrepresented.

- Among preliminary survey respondents who had expressed their willingness to participate in public deliberation, citizen participation groups were selected using the stratified extraction method.

- Politically apathetic or conservative citizens tend to be systematically less willing to participate in public deliberation.

- By the criteria of inclusiveness, the final sampling of participants was biased towards amplifying the shortcomings of representativeness.

- The deliberation group for Shin-Kori NPP Units 5 and 6 got more and more right answers in knowledge quizzes with each survey.

- Valuing safety and the environment tipped the scales toward construction suspension, and stressing economic and industrial aspects tilted it to resumption.

- A shift in preference among debate participants most strongly demonstrates reflective deliberation.

- In the deliberative process, 32.7% formed opinions, 7.0% changed viewpoints, and 58.6% maintained initial positions.

- After public deliberation, the Shin-Kori NPP construction transformed from a contest between 29% for suspension vs. 37% for resumption to a debate between 41% vs. 56%.

- Knowledge gain functioning as the primary driver of preference shifts supports that such changes are more likely when the level of understanding improves.

- In the college admissions reform deliberation, the completion rate of online lectures by debate participants surpassed 97%, and the number of correct answers to knowledge questions gradually increased over time throughout the deliberative process.

- A factor analysis narrowed down eight opinion bases into two perspectives: ① fair opportunities in education and ② efficiency of the education system.

- The tendencies became clear to favor Agenda 1 and 4 as more supportive of fair opportunities in education and Agenda 2 and 3 with a higher value on efficiency and safety of the overall education system

- In the college admissions deliberation, twothirds of participants experienced a shift in preference.

- The college admissions reform case also shows that knowledge gain increased the probability of preference shift.

- The factor analysis extracted a single common factor (metaissue) that runs through four agendas.

- In light of the correlation with each agenda, the meta-issue translates as preferences for CSAT.

- Potential preferences for CSAT tend to be more scattered after the deliberative process.

- The deliberative process might have reinforced the divide among participants rather than closing it, and perhaps agendasetting was not properly designed to capture key agenda issues.

- Regarding participation, the criteria of demographic representation were satisfied, but the discourses were neither representative nor inclusive enough.

- As for deliberation, the analysis confirmed that the better participants understand the debate issue, the more likely they form a reasonable opinion.

- However, public deliberation came short of building a social consensus through its process.

- A deeper analysis is necessary as to what caused the dispersion of viewpoints in the case of college admissions reform.

- The design of the admissions reform debate was unnecessarily complex.

- Without a step closer to public opinion formation, public deliberation is just another form of majority rule with some deliberation process.

- Now is the time to build resources, capacities, and institutional mechanisms for more systematically designed and managed public deliberation.

Summary

Research Monograph KOR The Role and Impact of Public Deliberation in Public Decision-making

From public debates over Shin-Kori Power Plant Units 5 and 6 to open discussions on university admissions reform, public deliberation is emerging as a major option in the public decision-making process for not only the central government but also local governments in their resolution of controversial policy issues. However, while many acknowledge the need for public deliberation and share high expectations, there are also those who believe that it can amplify, rather than abate, conflict, and is sometimes misappropriated by policymakers to shift blame or delay decision-making.

Accordingly, this study is based on the recognition that, in addition to a comprehensive understanding of the purpose and process of public deliberation, a rigorous evaluation of past performances must first be acquired to effectively utilize it as a mechanism for conflict resolution.

Led by a theoretical analysis of the roles public deliberation can play in public decision-making, the achievements and limitations of specific cases (as those above) are reviewed to fully examine the applicability of the public deliberation approach. Furthermore, unlike previous studies that focus on qualitative aspects, this study uses quantitative data to empirically analyze how faithful the public deliberation process has been to the original purpose. These are laid out in the following six chapters.

Chapter 1 presents the reasons why this study is needed while Chapter 2 investigates the various forms of public deliberation, starting with 'deliberative democracy,' the theoretical basis, and introduces major cases at both home and abroad. Chapter 3 tackles the theoretical and practical issues surrounding public deliberation, and details the analysis framework which consists of three evaluation criteria―planning, participation, and deliberation―developed from previous studies. Using microdata on the public deliberations for Shin-Kori Power Plant in 2017 and university admissions reform in 2018, Chapter 4 empirically analyzes these cases based on two of the above criteria; participation and deliberation. Indeed, in terms of ‘participation’, the composition of citizen participation groups is assessed to verify whether the standards for representation and inclusiveness are being met, and for ‘deliberation’, an examination is conducted into whether opinions of civic participants are introspectively formed and changed based on sufficient information. Additionally, the effectiveness and problems of the two cases are evaluated from the perspective of formation and confirmation of public opinion, which are the original purposes of public deliberation. Issues related to the third criteria, ‘planning,' were excluded from the empirical analysis due to difficulties in data quantification, but the subsequent sections will provide an outline while presenting the analysis results.

Finally, recognizing that the rapidly growing demand for public deliberation must be met, and that a more systematic approach is needed in terms of planning and management, the last two chapters explore ways in which the public deliberation process can be institutionalized. To that end, Chapter 5 reviews three overseas cases in which the process was established and stabilized as an official system. Comparing the discrepancies and similarities will help create a reference point that can be of great use when designing Korea’s own public deliberation process. Chapter 6 looks into the experiences at home with regards to the legislation of public deliberation, and analyzes the remaining issues and possibility of institutionalization to present policy implications.

Summary

Policy Study KOR Candidate Selection Systems and Legislative Incentive

We explore theoretically and empirically the implications of the political party's candidate selection systems on politicians’ incentives. Through a contract theory model for the problem of multiple principles and an agent with multi-task, we have shown that the bottom-up nomination system is socially optimal, and the politician's effort for re-election under the top-down nomination system is much less than social optimal. By utilizing the partial introduction of the bottom-up nomination system in the 17th general election, we empirically have found that the legislative effort of politicians elected through bottom-up nomination is greater than that of politicians elected through top-down nomination.

Summary

Research Monograph KOR A Study on the Effects of Farmland Regulations and Financial Support on Agricultural Productivity: Focusing on Agricultural Promotion Areas and the Direct Payment System

This study focuses on agricultural promotion areas and the direct payment system―the two most representative policies directly linked to Korea’s agricultural production―to examine their effects on agricultural productivity through theoretical and empirical analyses. The designation of agricultural promotion areas is deemed both a tool and a regulation as it helps secure sufficient farmland to stabilize the food supply but may also incur an infringement of private property rights. As such, the goal of enhancing agricultural productivity is viewed as a means to minimize the degree of infringement. Here, based on the fact that farmers are provided with differentiated payment depending on whether their land is a promotion area, agricultural promotion areas and the direct payment system are linked to examine how this affects productivity, while at the same time, each policy is assessed separately for their impact.

This study is composed of four sections. Starting with the background of this research, Part 1 outlines Korea’s key agricultural policies and the current conditions. Firstly, compared to major countries, Korea’s agricultural development has relied more on labor than on land to increase productivity. This is a small-sized, labor-intensive production structure and thus, not only is it cost inefficient but also highly dependent on government regulations and financial support. Furthermore, due to an increasing fiscal burden, falling rural population and population aging, Korea’s current agricultural production structure is not sustainable. Accordingly, a shift is needed in the production structure to a capital-intensive model using methods such as improving farmland scale and agricultural mechanization. Ultimately, efforts should be made to bolster Korea’s agricultural competitiveness, internally and externally, through the enhancement of productivity and to respond to the changes in the agricultural population structure.

Part 2 provides a theoretical perspective on the nature of the two policies. From the aspect of law and economics, the designation of agricultural promotion areas can be a substantial infringement of private property rights for farmland owners, and requires compensation. Accordingly, the section discusses the provision of additional fixed direct payments to such land owners, which is stipulated under current law.

Then, using a theoretical model, the authors show that the current system may have an adverse effect on agricultural productivity. Specifically, although the designation of agricultural promotion areas was intended to increase the efficiency of agricultural production, it could have a negative impact when the compensation is linked to the current direct payment system when it includes variable direct payments. The system was adopted to optimize agricultural production taking into account the significant restrictions to the property rights of farmland owners. However, the system’s unique structure and additional fixed direct payment give rise to the possibility that the incentives in relation to agricultural production may become distorted.

Part 3 draws on the agricultural TFP growth rates and indices for the nine provinces and overall nation using the Tornqvist productivity index, and examines their trends. Two empirical analyses are then conducted to look into the effects of the designation of agricultural promotion areas (farmland regulation) and financial support (direct payment system) on agricultural productivity.

In the first analysis, based on data compiled for the respective provinces in 2013-2017, the productivity index is fixed as a dependent variable and the determinants of productivity are analyzed in a reduced-form model. The key explanatory variables are the share of agricultural development areas within the respective provinces’ farmlands and the amount of compensation for agricultural damages—a category that includes the variable direct payment. Meanwhile, the macroeconomic aspects such as the national R&D stock and climate and economic conditions are controlled. The results show that an increase (decrease) in the share of development areas due to additional designations or maintenance has a negative (positive) effect on agricultural productivity. This contradicts the intended goal, and becomes even more so from 2005 onwards when the direct payment to compensate for rice income was introduced. This can be considered an indirect evidence of a possible deterioration in the productivity of promotion areas which are under the variable direct payment system as presented in the theoretical analysis in Part 2.

In the second analysis, three analysis periods are established―2003-2007, 2008-2012 and 2013-2017―and the components of productivity in the structural model are examined using farm level panel data. In particular, unlike the Tornqvist index which assumes that technological efficiency is always achieved, this empirical analysis examines the TFP in terms of the scale effect according to the degree of returns to scale (RTS); technological change (TC) and; technological efficiency (TE). All three periods fail to show any changes in the returns to scale, and the 2013-2017 period reveals a regression in the technological level with some significance. Lastly, an analysis is conducted on the effects of financial support for farms and their various characteristics on technological inefficiency (distance from production frontier). According to the analysis, an increase in compensation for agricultural damages and subsidies relative to farmers’ income leads to a statistically significant decrease in technological efficiency. In particular, the negative effects from compensation seems to even amplify for rice producing farmers.

Part 4 presents the direction to improve the system based on the discussions at home and abroad in regards to the reform of agricultural subsidies. Compulsory regulations for farmland inevitably entail compensation, but the current method of linking farmland regulations with direct payment does not contribute to the purpose of compensation or to the enhancement of productivity. Accordingly, compensation should be provided explicitly and independently, and should not be linked to direct payments. In addition, the designation of promotion areas should be more flexibly managed rather than being unconditionally maintained, taking into account the improvements to productivity. On the other hand, considering that the direct payment itself can cause inefficiency in production and that this is would worsen if the payment is linked to the production of a particular crop, policymakers need to take caution when determining the amount of direct payment. Also, they must reform the current system so that it is not linked to production activities, as recommended by agriculturally developed countries and the WTO. This will help to ensure an increase in productivity while providing effective compensation for regulatory losses.

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