KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI Policy Forum Impacts of Climate Policies on Industrial Competitiveness in Korea

■ As carbon reduction targets are being strengthened globally, it is increasingly important in Korea to comprehend the impact of two major greenhouse gas (GHG) reduction policies, Target Management System (TMS) and Emissions Trading System (ETS), on industrial competitiveness.

- ETS relies more on individual firms’ economic incentives compared to TMS, which is a command-andcontrol regulation.

■ While the transition from TMS to ETS in 2015 is found to have partially alleviated the burden for manufacturing firms, there is a need to enhance policy effectiveness by acknowledging their limited performance in reducing carbon emissions thus far.

- While TMS was introduced in 2011 with the aim of enforcing emissions reduction and enhancing energy efficiency across different sectors, heavy emitters have been managed separately through ETS since 2015.

- Knowing the low abatement performance in the manufacturing industry after mid-2010, the reduced burden can be attributed to two factors: i) improvement in efficiency resulting from the transition, and ii) alleviation of the burden through the provision of free allocations.

- The policy efforts should aim for a greater reduction by strengthening the targets for the regulated firms, which is in line with the reinforced policy goals announced in October 2021.

■ Stricter goals are inevitable in the future, and therefore, policymakers must endeavor to bolster the sustainability of the manufacturing sectors by developing a detailed roadmap based on multiple indicators.

- Taking into account the varying impacts of GHG reduction policies on the competitiveness based on the energy intensity and emission intensity of each sector, the roadmap needs to be carefully crafted in order to impose a feasible burden on the regulated firms.

Summary

Policy Study KOR Impacts of Climate Policies on Industrial Competitiveness in Korea

This study quantifies the impact of major climate policies on industrial competitiveness in manufacturing sectors that require large-scale decarbonization in the future. Two climate policies, the Target Management System for GHG and Energy (TMS), a command-and-control type policy introduced in 2011, and the Emission Trading System (ETS), a market-friendly policy introduced in 2015, are mainly considered, where both policies cover selected companies that emit heavily. Based on pathways through which climate policies can affect industrial competitiveness, we estimate impacts of the abatement burden through channels of the level of energy intensity (energy consumption per production) and the level of emission intensity (emissions per energy use) by covering 2011~2019. Furthermore, based a firm-level survey, we estimate determinants that drive and hinder the implementation of abatement practices and determinants that enhance environmental and economic performance.

As a result of the analysis, during the last 10 years (2011-19) it was confirmed that the higher the level of energy intensity and emission intensity, the negative impact on production cost and value added, which are direct indicators of the manufacturing industry’s competitiveness, was greater. Impacts become greater when limiting to the energy-intensive and emission-intensive sectors, such as “iron and steel”, “non-ferrous metals”, “chemicals”, “petroleum refining”, and “non-metal” industries. Meanwhile, it is found that there is no signficant impact on sales. Overall, it is understood that the upward pressure on production costs was at a level that could be endured through a decrease in value added rather than leading to a decrease in production. Furthermore, it is confirmed that while negative impacts on competitiveness through energy-intensity has gradually increased during the analysis period, that through emission-intensity has decreased after the introduction of ETS. Meanwhile, burden of carbon abatement has not yet been realized in earnest for some large companies that have been active in introducing abatement measures. Nevertheless, in line with the strengthening of climate policies in the future, policy considerations to ensure the sustainability of the manufacturing sector should be accompanied.

Policy suggestions this study provides are tow-fold. First, it is necessary to understand the extent to which TMS and ETS actually affect and to identify detailed impact pathways. Considering the results of previous studies and this study, there is a possibility that in the manufacturing industry the distribution of abatement burden is not proportional to that of emissions. Therefore, it is essential to broaden the perspective and consider impact pathways at the level of the production and supply chain. Second, it is necessary to set TMS targets and allocate ETS allowances using multiple indicators. Industries with high direct emissions such as fuel combustion can lower their emission intensity through their own strategies (switching to environmentally friendly fuels, etc.), while in industries with high indirect emissions, energy intensity adjustment may be a more effective means than emission intensity adjustment. Altogether, it needs to enhance the sustainability of manufacturing industry in the process of decarbonization by differentially allocating as much burden as necessary to the firms under TMS and ETS, and by alleviating the burden that firms outside the system may bear in a disproportionate way to their emissions.

Summary

Policy Study KOR Price Spillover Effects in Housing Market: Reconstruction of Apartment

This paper studies price spillover effects in housing market, utilizing a policy change on apartment reconstruction. Under the circumstance of various years built of houses in Seoul, the policy on reconstruction applies to a part of houses in Seoul. However, the policy change may affect the whole housing market via spillover effects of the policy.

To investigate spillover effects, I suggest an extended version of difference- in-difference model that captures both the direct and spillover effects of the policy. Using thorough data on apartments in Seoul, combined with geographical information, I found a significant spillover effect that diminishes with the distance from apartments in the process of reconstruction. Meanwhile, the direct effect is found insignificant. The spillover effect seems to make it hard to capture the direct effect of the policy since the prices of houses near the reconstruction apartments follow the prices of the reconstruction apartments. In sum, the spillover effect of the policy was a crucial factor in the housing market of Seoul in 2018.

This study finds a type of externalities which is prevalent in housing market. This spillover effect must be taken into account when policies are applied not only to the whole market, but to a part of the houses.

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.

Summary

Research Monograph KOR Opinion Polarization in Korea: Its Characteristics and Drivers

If democracy is to function effectively, voters and their representatives must have access to accurate information and engage in rational discourse on policy challenges. However, this democratic premise is undermined by opinion polarization, where extreme positions on either end of the opinion spectrum tend to dominate discourse, especially when it is strongly associated with demographic attributes such as race and religion. The hardening of attitudes (intensification), in combination with increased sorting, can lead to opinion polarization, as illustrated by “echo chamber” and “filter bubble” effects when individuals have a relatively narrow range of biased information sources either by choice or by algorithm. In the age of social media, disinformation, or “fake news,” can further exacerbate opinion polarization. Ultimately, opinion polarization among the elite and among the general public may interact with each other to increase the risk of political gridlock and social conflict (Chapter 1).

The United States provides a useful example in this regard. Elite polarization, as measured by the distance between the ideal points of Democrats and Republicans in the U.S. Congress, appears to have taken place primarily due to three factors: (1) political realignment in the wake of the civil rights movement in the 1960s; (2) neoliberal ascendancy in the Republican Party since the 1970s; and (3) increasing economic inequality and identity-based politics since the 1980s. In turn, voter (popular) polarization has accelerated since the 2000s, especially between groups with different party preferences. The disproportionate influence of political activists and large donors, amplified by the media, has tended to drive opinion polarization in the U.S (Chapter 1).

This study looks at the characteristics and drivers of opinion polarization in Korea and draws policy implications. Unlike in the U.S., it is difficult to find empirical evidence in support of voter (popular) polarization in Korea. However, elite polarization is at a high level, and some of the factors that have exacerbated opinion polarization in the U.S. are present in Korea, including the role of social media. Accordingly, it would be advisable to craft policy responses to curb opinion polarization.

World Values Survey (WVS) and Korean General Social Survey (KGSS) results show that it is difficult to find empirical support for a trend toward voter polarization in Korea, even when responses from progressives and conservatives are compared with each other, although there is a slight increase in differences between progressives and conservatives since 2010 with respect to the role of the government in addressing inequality (Chapter 2). Accrording to KGSS results, self-reported political preferences do not show a polarizing trend over the 2003-2018 period.

Empirical results from surveys and experiments conducted in 2019 are consistent with the KGSS results. On a Likert scale from 0 (the most progressive) to 10 (the most conservative), self-reported political preferences had a mean of 4.59 and a standard deviation of 1.93, with the neutral position of 5 accounting for 45% of the 1,000 respondents. Political preferences deduced from responses to 25 policy questions, ranging from national security to social welfare, also exhibited a single-peaked, weakly normal distribution. Two-thirds of the respondents were between 4 (moderately progressive) and 6 (moderately conservative), and those who took extreme positions were rare. Self-reported political preferences were statistically associated with respondents’ innate preferences. For example, respondents with a higher level of inequality aversion or risk aversion were more likely to be progressive; whereas, those with a stronger preference for competition, more likely to be conservative. Also, self-reported political preferences showed a statistically significant difference from deduced political preferences, depending on respondents’ demographic characteristics and innate preferences. For example, men compared with women, and the old compared with the young, tended to overestimate their own conservativeness (Chapter 3). Overall, ideological preferences among the general public exhibit a weakly normal distribution in Korea, not a dispersed bimodal distribution typical of opinion polarization.

By contrast, ideological preferences among the elite show a significant level of polarization. According to Han et al. (2018), elite polarization in Korea increased from 0.7 during the 17th National Assembly (2004-2008) to 0.9 during the first half of the 20th (2016-May 2018), as measured by the distance between the ideal points of the two largest political parties. Since the ideal points of lawmakers range from –1 (the most progressive) to +1 (the most conservative), the distance of 0.9 represents 45% of the maximum value and is comparable in magitude to elite polarization in the U.S. around 2010 (Chapter 1).

Moreover, some of the factors that have contributed to opinion polarization in the U.S. are present in Korea. In particular, people with strong political preferences tend to wield a disproportionately large influece in Korea due to to their high level of participation in opinion formation activities, including political demonstrations and social media (Chapter 2).

In fact, empirical results suggest that internet media (social media and internet-only news sites) can drive opinion polarization by providing biased information and influencing popular views. When the degree of information bias is measured by the frequency with which an internet media channel of a certain ideological inclination uses expressions preferred by the opposite ideological camp, it turns out that internet media are more biased than members of the National Assembly. An empirical analysis of the impact of internet media on consumers’ political preferences, based on media panel data in 2012 and 2016, shows that consumers exposed to social media and internet-only news sites tend to become more progressive and more conservative, respectively. In addition, it shows that those who do not prefer news (presumed to have a lower level of news literacy) tend to be affected more by internet media (Chapter 4).

Policy responses to address opinion polarization should be based on the understanding that opinion polarization stems from socioeconomic factors, amplified by the disproportionate influence of political activists and the media. At a fundamental level, because opinion polarization is exacerbated by group polarization, it is important to craft an inclusive identity and prohibit discrimination based on socioeconomic characteristics such as race and religion. It is also important to address economic inequality, which may provide the background for identity-based politics. In order to reduce the disproportionate influence of political activists, election and political financing rules should be amended to better reflect the concerns and aspirations of the general public and rely less on those with strong ideological preferences. Last but not least, in order to reduce information bias, including disinformation, media literacy should be improved through education.

Summary

Research Monograph KOR Regulatory Reform to Foster Innovation Ecosystem

This research project is planned under the recognition that establishment of innovative ecological system is an urgent task for Korea facing the Fourth Industrial Revolution, and that government reform and regulatory reform are at the core of the challenging future. In this backdrop, KDI published a book entitled Reinventing the Government to Foster Innovative Ecosystem as the first phase of the research in 2017, and this study is the result of the research focusing on regulatory reform as a follow-up study.

Although Korea has taken various measures related to regulatory reform over the past decades, it has not made significant progress in streamlining regulations in particular in the areas of labor market, service industry, and bio-health industry, among others. Furthermore, regulations affecting society and the market as a whole are either too high or there are still a large number of regulations that exist only in Korea compared to other developed countries. Accordingly, Korea's regulatory reform should pay attention to these fundamental areas. The government should be more active in challenging high-level regulatory tasks such as ideological conflicts or conflicts of interest among stakeholders, and thereby come up with reasonable improvement measures.

This study was conducted through collaboration by professional researchers in the relevant fields, and consisted of three parts and ten chapters according to the subject of the study. The first part approaches the topic based on a new perspective of regulatory reform on the implementation and evaluation systems

of regulatory reform, and the model to facilitate civic engagement or more active public participation. Part 2 focuses on the institutional improvement for enhancing innovation activities. To this end, the direction of regulatory reform corresponding to the Fourth Industrial Revolution is studied by comparing with developed countries, and the optimal regulatory design to promote innovation is presented. In addition, the R&D sector presents alternatives to the content and level of appropriate regulations, and furthermore, measures to reform auditing system for the creation of innovative ecosystems. Part 3 deals deeply with the task of regulatory reform for health care innovation. More specifically, the bio-health industry and bio-ethics, the issues and alternatives of the new medical technology evaluation system, and the regulatory reforms to create an innovative ecosystem of smart health care, which have recently been drawing attention.

The research also expands the scope of previous studies and discussion on regulatory reform in terms of how to encourage civic participation and approach regulatory reform from a public perspective, which has been a major issue of the discussion on regulatory reform. In the process of regulatory reform, imperative is the open-minded communication and sharing information with the public, which ultimately promote democracy through cooperation among the government-business-civil society. In this regard, key challenge is how to bring the public to the arena of the regulatory reform in manners of voluntary participation of citizens equipped with collective intelligence.

Summary

Policy Study KOR Proving Collusion through Economic Analyses

Economic analysis has become a vital component in proving collusion as (i) Korean courts are less favorable to allegations made by the Korea Fair Trade Commission (KFTC) and (ii) suspected firms are more inclined to counter with economic analysis than ever before. Accordingly, this study examines the feasibility of economic analysis as a form of indirect circumstantial evidence in legally proving collusion conspiracies.

In response to the lack of existing research that systematically summarizes the economic analysis methodology to prove collusion, techniques were first categorized and analyzed by econometrics methodology, variable for analysis, environment of the analyzed market, data availability, etc. Indeed, the competition authorities could directly utilize such methods according to research conditions such as data availability and market specific practices. Additionally, they could make a manual to conduct analyses if the methodologies were systematically organized

This study also sought ways to improve the system for utilizing economic analysis in the collusion-proving process. The first and foremost factors in analyzing cartels are the quantity and quality of the workforce. The KFTC is now only at the initial stages of economic analysis and considerable efforts are still needed to secure specialized personnel and to educate existing research teams when compared to the organizations and use of manpower of the US and other advanced countries.

Besides, even with a reliable manual and competent analytical staff to carry out the economic analyses, competition authorities need adequate data to achieve the desired results. The procedure to secure data was centered on the examination of the US subpoena system. It was concluded that the introduction of the system would not be an easy task considering the differences in the legal environment between the US and Korea. Instead, a review was conducted on the recently introduced penal clause and charge for compelling compliance for intereference in KFTC investigations. The clause and charge have very similar mechanisms to the US subpoena system with regards to forcing the cooperation of suspected firms in investigations. Thus, the effectiveness of these schemes need to be closely monitored over time.

Progressive changes are also needed in the court’s rulings. Indeed, in some cases, the excessive demand for evidence resembles that of a criminal trial. Economic analysis is not without fault. However, it offers valuable insight into market conditions and colluding firms’ incentive structure which can be used as indirect circumstantial evidence to prove the collusion.

Finally, this study discusses legislations to punish information exchanges in competition. Unlike the US and EU and despite ample research that proves the contrary, such behavior is not penalized under current Korean law if there is no agreement on collusion. But, since some information exchanges can increase economic efficiency, an economic analysis may be required to confirm whether a specific information exchange behavior does in fact lessen competition.

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