KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Reforms in Primary and Secondary School Administration and Finance Suitable for a Population-Declining Society

Korea faces inevitable policy shifts due to prolonged demographic declines, affecting not just the primary and secondary school age populations but the overall population as well. This report tackles these shifts by exploring issues to formulate more effective and efficient reform strategies for the administration and finance of education in a shrinking society. It emphasizes the importance of strategically allocating the national budget across various sectors to optimally use limited resources. This requires a national interest perspective, moving beyond sector-specific stakeholders’ gains and losses, and seeking alternatives. The report argues for the necessity of system and policy reform, acknowledging the challenge it poses to entrenched interests but highlighting its importance in addressing our country's challenges through flexible budgeting and efficient execution.

We critique the current method of the total budget calculation for primary and secondary education, which is too rigidly tied to tax revenues, and call for significant reforms in funding allocation to schools. They propose a new method that boosts school autonomy and accountability, allowing educational outcomes to play a role in budget decisions. Moreover, they suggest that operational and project funding managed by provincial education offices should be clearly separated from direct school funding, advocating for rigorous performance evaluations to enhance fiscal efficiency in education. The report offers various recommendations for reforming education finance, aiming to improve both the quality of education and the efficiency of its financing, hoping these policy suggestions will be actively considered.

Chapter 2 evaluates the appropriateness of giving precedence to the primary and secondary education budget over other sectors is evaluated, particularly as public spending on education begins to exceed the OECD average. Through international comparisons and empirical analysis of various factors like the school-age population, GDP per capita, and data from the Programme for International Student Assessment (PISA), it investigates these elements' impact on educational budgeting, priorities, and student outcomes, offering policy recommendations for more effective and efficient resource use.

Chapter 3 consists of three parts. First, we analyze the impacts of changing the method of electing the superintendent of education from election by the school management committee to direct election by residents, focusing on students' educational achievement and health using a difference-in-differences method. Second, we examine the impact of per-pupil public education expenditure on academic achievement in South Korea, employing the method of instrumental variables. Third, we assess the impact of per-pupil public education expenditure on academic achievement in the United States using a state-fixed effects model.

The estimation results indicate that in regions where the direct election of superintendents was first implemented, there was a decrease in the proportion of students scoring in the top tier of the College Scholastic Ability Test, and an increase in the proportion of students in the middle and lower tiers, compared to regions where the direct election had not yet been implemented. No significant changes are observed in students’ health. In South Korea, an increase in per-student expenditure positively affects the academic achievement of elementary school students, although the magnitude of this effect is not substantial. No significant, positive effects are found for middle and high school students. In the United States, there is no significant relationship between per-student educational expenditure by state and the academic achievement of students in 4th, 8th, and 12th grades.

The results suggest a need to strengthen accountability for a range of student outcomes among superintendents of education. They also imply a necessity to adjust how education budgets are allocated in response to the declining school-age population and to enhance the allocative efficiency of these budgets.

In Chapter 4, we study the effect of the current institutional features of the education administration and finance system on the structure of local education finance. Specifically, we focus on changes in school budgets when the overall volume of educational finance increases beyond expectations. For recent years, the local education grant has increased unexpectedly, as the national tax revenue increased and large volumes of supplementary budgets were added due to Covid-19. We analyze how this unexpectedly large surplus of educational funding was distributed and executed. In addition, we investigate how the provincial superintendents, elected at the local election, distributed targeted funding to schools.

Our analysis of the budget and balance data of the school and provincial education offices reveals a behavioral response of the education offices to the current institutional characteristics of educational administration and finance. As the total volume of education funding is uncertain at the beginning of the financial year, they first underestimate the total revenue and expend additional revenue through the supplementary budget. A targeted funding, which the superintendent distributes to the schools autonomously, is a good way to expend such extra revenue. Regression analysis using targeted funding distribution data and local election data shows that superintendents distributed a higher amount of funding per school population to schools in a district where the percentage of votes for the superintendent in the last local election was relatively higher. This implies that the distribution of targeted funding is affected by the political interests faced by the superintendent under the current system of the educational administration and finance system.

Chapter 5 discusses how the main issue with the current funding system for education stems from the provincial education offices' lack of incentive to improve financial efficiency, rooted in a system overly reliant on national and local tax revenues without accountability for fund raising. It suggests the need to revise the budget calculation method due to the projected overabundance of funds, following an analysis that shows maintaining 2022 levels of educational infrastructure could lead to increased expenditure per student but not significantly higher total costs. In addition, it is proposed that a hypothetical criteria for integrating schools to enhance financial efficiency. Lastly, it advocates for abolishing the tax revenue-linked budgeting method and introducing a new support system with ten structural elements aimed at improving educational outcomes and addressing regional decline. The report calls for a unified governance structure for education and further research on the necessity of the elected provincial superintendent system.

Summary

Policy Study KOR Economic Effects of Sectoral Fiscal Expenditure and Policy Implications

This study presents an agreeable standard among various criteria used for discussions in setting the upper limit on financial resource allocation by sector via economic effect analysis. A dynamic stochastic general equilibrium (DSGE) model estimates fiscal multipliers according to economic character classification. In the DSGE model, economic agents (households, businesses, government, etc.) are equipped with microeconomic foundations for making optimal choices with reasonable future expectations, and macroeconomic variables (consumption, investment, etc.) are linked to fiscal spending. Sectoral fiscal outlays sorted by economic qualities have these multipliers to calculate economic impacts over the past six years, both on average and per input unit.

To summarize the findings of this study, the economic effects range from least to greatest in order of social welfare, national defense, general & local public administration, education, health, environment, and public order & safety. However, the impact on social welfare, general & local public administration, and education is more significant because of the sheer size of the budget increase from the previous year. Accordingly, from most to least, the effect per budget unit can be listed from transportation & logistics, public order & safety, national defense, environment, and agriculture & fisheries to health. In addition, the public order & safety and defense sectors, which have a high proportion of government consumption, show a gradual decrease in economic effects over the medium term. On the other hand, transportation & logistics and environment, with a high proportion of government investment, show an increased impact in the same time frame.

Sorting by economic characteristics per consolidated fiscal balance may lead to heterogeneous economic ripple effects bundled together as one group and making decisions with social and political factors instead of economic ones. Also, even in the presence of limitations in research, like the assumption of a closed economy model, the impact of economic growth estimated in this study can be used as a sensible reference for preparing guidelines for making sectoral priorities for efficient spending or budgeting in line with economic characteristics and deciding fiscal reforms in the order of importance. That is, this study offers key implications for policymaking that, with expenditure ceilings put in force lately, earmarking more funding for budget categories with greater economic knock-on effects and restructuring ineffective budgets can ensure sound fiscal management in response to the expected economic slowdown.

Summary

Policy Study KOR A Study on the Effectiveness of Care Services in Elementary Schools and Efficient Policy Measures: Focusing on the Seoul Case

This study discusses Korea’s elementary care service which provides a variety of care services to elementary school students needing care to reduce the burden of parenting. In 2017, the government established a policy that bolsters the care infrastructure to expand elementary care, community-linked and “village care” classrooms. However, the policy lacks detailed discussions on the shortfalls and measures to expand. In this regard, this study focuses on preparing effective policy plans based on an analysis of the impact of care services on women's economic activities, and on the effects of private education. In particular, in order to see the effects of the increase in regular class hours, which was recently discussed, this study is of great significance in the analysis on the effects of the increased regular class hours on decisions about after school hours.

In summary, the use of elementary care classrooms is found to contribute to the increase in women’s working hours, and it is most effective for working couples. In terms of private education, the use of elementary care and after school classrooms have been shown to affect the cost of private education, and care services play a part in reducing the burden of raising children. Finally, prolonged school hours have resulted in parents becoming more inclined to choose private academies than care services, suggesting that there may be unforeseen effects due to the increase in regular class hours.

Based on the results of the above, the implications for the effective operation of the elementary care policy are as follows. Targets should be expanded by easing the eligibility for primary care classes, and care services for non-semester hours. In addition, the quality of care services should be improved; the appropriate number of care teachers must be secured and; care classes should be integrated in the mid- to long-term. Finally, a discussion is presented on the integrated cooperation of line ministries.

Summary

Policy Study KOR Welfare Impacts of the Renewable Portfolio Standard in Korea

This study evaluates the policy goal of ‘renewable energy 3020’, raising the proportion of renewable power generation to more than 20% by 2030 through staged strengthening of the Renewable Portfolio Standard (RPS), compared to other alternative policies. The analysis focuses on the business-purposed power supply that is subject to the RPS, where self-consumption generation in households is excluded. We propose a tractable equilibrium model that provides a structural representation of Korea’s electricity market, including its energy settlement system and renewable energy certificate (REC) transaction system. Arbitrage conditions are used to define the core value of REC prices to identify relevant competitive equilibrium conditions. The model considers R&D investment and learning effects that may affect the development of renewable energy technologies.

In the model, two periods are considered: ‘the period in which knowledge related to renewable energy technology development accumulates’ and the ‘period in which technology development is realized due to accumulated knowledge’. The model is parameterized to represent the current situation as the first period and the future situation, in which the renewable energy 3020 is implemented, as the second period. The 2016 raw data and forecasts in the 8th Basic Plan for Long-term Electricity Supply and Demand (2017~2031), respectively, are used as representative figures for each period. The model is then simulated for alternative scenarios such as renewable energy 3020 (baseline scenario), repeal of RPS, previously planned RPS, optimal RPS, production subsidy, and nuclear power reduction under RPS.

The result shows that in the baseline scenario the retail electricity price is dropped by 4.1% in the second period relative to the first period. Also, in the second period the REC price is hugely reduced but greater than 0, meaning that the RPS is still binding. Strengthening the RPS in the second period leads to the expansion of R&D investment in the first period, thereby contributing the reduction of renewable generation costs in the second period. In consequence of learning-by-doing and technological innovation, in the baseline scenario the second-period generation cost of solar power is reduced by 24.7% and that of wind power is reduced by 17.3%.

As to the welfare effects, it turns out that the baseline scenario yields a higher welfare level than the RPS abolition scenario. Specifically, compared to the case of its absence, the introduction of RPS increases the retail electricity price in both periods. At the same time, the overall welfare, despite the reduction of consumer surplus, is improved because environmental externality costs are reduced owing to shrunk nonrenewable power generation. The baseline scenario has a higher welfare level relative to the scenario of past RPS schedule, and the welfare can be further enhanced from the baseline scenario by additional strengthening of the RPS. The ranking of welfare effects by scenario is maintained throughout sensitivity analysis.

It is confirmed that renewable production subsidies, corresponding to REC prices in the baseline scenario, can achieve the same level of renewable power generation as in the baseline. On the other hand, subsidies less increase in retail electricity prices. Because of the high financial burden, however, the subsidies are inferior to the RPS in terms of overall welfare. The simulation is also conducted for the case in which the second-period aggregate capacity of the nuclear power plants is forced to be cut by 5% from the baseline scenario. It is found that despite the reduction in the accident risk costs of the nuclear power, welfare is lowered compared to the baseline because there is a dominating increase in environmental damages due to the expansion of LNG power generation.

Summary

Policy Study KOR The Local Economic Impacts of University Campus

This paper studies the role of universities in local development by analyzing 14 cases of establishments and closures of colleges in Korea. To ease concerns over the endogenous determination of campus openings and closures, the Synthetic Control Method was used which constructs the counterfactuals of cities in which campus openings or closures occur.

In regards to the establishment of campuses, the two campus openings for the National Institute of Science and Technology (DGIST and UNIST) generated positive employment effects for the local economies. The effects have been larger in the manufacturing sectors due to the entry of new firms, but the local service sectors have also expanded due to the increased demand. The impact on land prices in general has been limited. These results suggest that the university research, local industrial structure as well as the competence of university must be correlated to generate any spillover effects from campus openings.

For the closure of college campuses, most cities do not experience significant changes in employment or other outcomes. But, two regions where campuses left due to relocation experienced a decrease in service sector employment. These results imply that an exogenous and large population decrease may lead to a significant loss in local employment. Therefore, policy makers should consider measures to ease the negative employment effects from campus closures.

Summary

Research Monograph KOR Improving the Performance Management System of Budgetary Programs: Focusing on In-depth Evaluation

In the decade since its introduction, the performance management system for budgetary programs has effectively bridged budgetary outcomes with financial allocation, enhancing the efficiency of public resources. However, changing conditions have demanded constant improvements. In particular, the critical mindset that was present at the intial stages of the system has waned and an increasing number of information utilization cases for performance assessments, etc. have become mere formalities and do little but monitor.

The majority of OECD members who have implemented the performance- based budgeting system face common obstacles. However, these challenges are important elements in improving the system, for example: enhancing the accuracy of performance assessments; operating effective systems that incorporate feedback into the budgeting process; gaining the attention of major policymakers and; upgrading the quality of information on program performance. Above all, producing and utilizing information on performance is essential in managing budgets. In addition to concentrating on outcome and performance rather than the input in the allocation of resources, the performance-based budgeting system is also effective in enhancing the understanding of the purpose and priorities of government decisions and actions. The system is effective not only externally but also within government e.g. policy enforcement agencies and decision- makers. Specifically, the disclosure of information to the public and National Assembly will enhance the transparency of budget programs. And more importantly, decision-makers will be better able to understand how and how much programs contribute to policy goals. For instance, at the early stages of program planning, the information could be used to identify which programs work via which channel. And, it should be noted that the information is a primary component in improving the efficiency of resource allocation.

The above issues are typical in performance-based budgeting systems as the conflict between accuracy and timeliness is a common phenomenon in producing and using information. As such, there are no quick, radical solutions. Rather, gradual progress could be made through a multifaceted perspective and more suitable methods. Accordingly, this study intends to review the production and use of information on performance assessments in key areas and present recommendations for meaningful improvements.

Overall, the government must uphold its obligation and guarantee value for money to all budget programs. And, although countless laws, systems and procedures have been established during the budgetary process, identifying and producing information that is essential to government endeavors will be the most fundamental and important aspects in implementing future mechanisms and practices. Indeed, producing and providing accurate information on the outcomes of public activities will not only meet the demands of the people but the information can be used as an effective tool by the government to assess its own performance.

Summary

Research Monograph KOR Korea’s Industrial Support Budget: Achievements and Policy Direction

This study aims to examine the government’s ongoing industrial policies and present the future policy direction. A review was first conducted of the relevant 2017 budget under the Ministry of Trade, Industry and Energy (MOTIE) and Ministry of SMEs and Startups (MSS)―key competent authorities in major industrial policies. The industrial support budget was classified into eight categories according to the policy purpose: startups, enhancement of human resources, facilities, R&D, sales channel, business change, infrastructure and support agencies? And, using statistical data on MOTIE’s budget for corporate support within its R&D support programs, the effectiveness of the support policies was analyzed. Recommendations on the goals and principles for industrial support policies are presented based on the results in order to upgrade the Korean economy’s innovation capabilities. Additionally, the current problems in the support policies for R&D, startups and sales channels and the ideal policy direction are addressed.

MOTIE allocates approximately 76 percent of its budget on R&D, infrastructure and support agencies while the lion’s share of MSS’ budget is spent on support for infrastructure and startups. Data combining the 2017 industrial support budget of both ministries show that infrastructure (27%) received the largest support, followed by R&D (23.5%), startups (14.3%) and facilities (10.6%). Moreover, roughly 1,448.2 billion won (10%) was assigned to support agencies. To analyze the effectiveness of MOTIE’s R&D projects, data was compiled on companies that undertook projects estimated at over 100 million won in 2010-2012. The result shows that MOTIE’s support policy on corporate R&D had a positive impact on TFP, sales and employment, with new firms being more affected.

For the future, Korea’s industrial policies should aim to establish a solid industrial foundation for innovative growth in response to a rapidly changing global economy. Specifically, policy goals should center on support for the advancement of productivity in order to upgrade innovation capabilities and ultimately create quality employment. To that end, the following principles are recommended based on relevant theories and empirical analyses.

A clear distinction must be made between industrial policy and welfare policy. And, focus must be placed on sectors that have market failures and expected positive externalities. When planning industrial policies, the demand side as well as the production side must be taken into account. Policy designs must be comprehensive as to not incur a crowding-out effect on the private sector, and targets should be selected with caution to prevent moral hazard. In addition, systemic ex-post evaluations and a reflux mechanism are needed. For the evaluation system, industrial policies need to be classified according to goal, target and tool. A reflux system should be constructed, thereafter, so that the evaluation results are appropriately applied to make improvements. Finally, questions as to whether the effects can be maintained even after the policy expires should be taken into consideration.

Based on these goals and principles, this study also addresses the current issues and policy direction of the support for R&D, startups and sales channels―elements that are believed to significantly affect the fostering of innovative firms. R&D support is a key policy for enhancing the innovation capabilities of firms that are essential to the sustainable growth of the Korean economy. Analysis of the R&D support budget shows that programs vary widely in target and content but also have numerous elements that are difficult to discern. The positive impact from MOTIE’s R&D support is clearly evident, with firms who receive support exhibiting increases in their TFP, sales and employment rate. However, to further enhance the effectiveness of support, efforts must be made to optimize the government’s R&D implementation mechanism. This study recommends US case studies including the ‘Small Business Innovation Research (SBIR)’ and ‘Small Business Technology Transfer (STTR)’ as examples to explore solutions to the pending problems in Korea’s mechanism. Also, to improve the system for R&D support, a full-scale review should be conducted on procedural aspects such as selecting the research theme; R&D implementation methods; researchers; evaluation and rewards; and means to disseminate outcome.

In order to seamlessly transition into an innovation-driven economy, Korea needs the active participation of technology startups, rather than subsistence businesses. However, there currently exists a notable discrepancy between reality and ideal in terms of the current condition of startups and impact of support policies. Indeed, despite the government’s continued efforts to expand relevant support, the share of rapidly-growing new firms has been subpar. This implies that support programs are not focused on fostering highly productive technology startups and hence, little consideration is given to business type. The government has earmarked over 2 trillion won for the support of startups, and as such, a shift in focus is needed―from the quantity of a budget increase to the quality―by enhancing the effectiveness of policies. Excessive government support could prompt moral hazard and a crowding-out of private capital, resultantly hindering the progress of the financial market. To prevent such problems, startup support funds should gradually be privatized and the role of the private financial sector in support programs reinforced. Accordingly, case studies on ‘Yozma,’ the Israeli government-owned fund which was eventually privatized are suggested. In addition, the government must evolve from providing just financial support to including education and consultation, which could contribute to the rise of better-prepared technology startups.

Support for sales channels carries the risk of moral hazard due to the overlapping and/or similar issues present in support programs. For instance, numerous programs all designed to assist SMEs’ entrance into overseas markets are in operation not only under the two competent ministries (MOTIE and MSS) but also under several others. This naturally leads to problems such as overlapping or prolonged support from various programs, thus necessitates a reexamination of the feasibility of the support programs. To enhance the effectiveness of the support for sales channel, this study recommends three points to consider. Beneficiaries should be selected with more discretion to prevent moral hazard. Also, similar programs need to be integrated and performance evaluated. And finally, programs should be redesigned to help incorporate SMEs into the global value chain. To do so, government procurement policies must be overhauled to purchase quality products and services produced by SMEs as the government purchases themselves can serve as an important guarantee of quality.

Summary

KDI FOCUS The Significance of Investing in School Facilities and Measures for Reform

□ Voices are being raised over the need to improve Korea’s educational environment for the health and safety of our students. And despite the fact that the educational environment plays a vital role in both learning and teaching, investment in school facilities has been given low priority. In response, the new government has laid out plans to reform neglected and aged school facilities, emphasizing the duty of the nation with respect to education investment. In this context, relevant policies should focus on the importance of investment in school facilities.

- Investment in school facilities has been a low priority due to policy decisions and a shift in the distribution of financial resources.

- Policies for the investment in school facilities should aim to provide safe and positive educational environments for students.

- Evaluation of the educational environment should include not only indicators for teaching conditions but also that for school facilities.

- One out of three elementary and middle school buildings were found to be over 35 years old.

- Aged school facilities pose problems that directly affect students’ health and safety such as asbestos, lack of seismic resistance and hazardous urethane blend tracks.

- Investment in school facilities could be effective not only in achieving its primary goal of improving health and safety but also in inducing secondary effects such as heightened academic performance.

- A quality educational environment can have a positive influence on the attitudes and behaviors of both students and teachers.

- Future investments in school facilities need to enhance quality and reflect the changes in the educational curriculum.

- To raise the needed financial resources for investment, it is necessary to adjust the expenditure structure by item within the total education budget.

- For efficient investment, a systemic and comprehensive system that can assess the educational environment must be formulated.

- Future investment in school facilities should be made in light of the government’s educational policy that fits the changing educational environment.

Summary

Research Monograph KOR Enhancing Fiscal Sustainability through Strengthening Fiscal Accountability

Korea is experiencing substantial changes in its fiscal environment due to population aging and low growth. Maintaining fiscal sustainability in spite of unfavorable changes requires various institutional adjustments. Main pillar of this study in seeking for solution is fiscal accountability.

The concept of accountability, in short, is the obligation of public officials to inform about and to explain what they doing, This could be an useful tool for checking rationality in fiscal decision, since being able to explain what has been done could be an useful barometer for the fact that the best possible decision has been made. For that reason, this study examines whether accountability is being observed or realized, contributing to rational decisions being made in the major fiscal areas.

Summary

KDI FOCUS Evaluating the Social Security Subsidy Program in Korea

□ Social security subsidies in Korea were introduced in 2012 to reduce the coverage gap in social security. Despite the large fiscal cost, however, the subsidies have only a small effect on the social security coverage: For every 1,000 workers and their employers who are subsidized under the program, the program added just 15 workers covered by social security. Rather than pursuing costly subsidization policies, the Korean government needs to make serious efforts for more efficient collection of social contributions to close the coverage gap in social security.

- To reduce the coverage gap in social security, the Korean government began to provide subsidies for the social security contributions of low-wage workers and their employers in small establishments.

- The subsidy program matches workers’ and employers’ contributions to the national pension and the unemployment insurance scheme.

- About 0.9 million workers and their employers in 0.5 million establishments were subsidized by the subsidy program in 2015.

- For every 1,000 subsidized employees and about 600 subsidized employers, the subsidy program creates only 15 additional covered employees.

- Unlike similar active labor market policies adopted in several European countries, the subsidy program had no discernible effect on employment.

- The subsidy program can act as a tax rather than a subsidy depending on whether the uncovered worker contributes to the medical insurance scheme.

- The subsidy program is contradictory because it gives subsidies for participation in mandated schemes as if it was a choice initially.

- A large informal sector with a modest social contribution burden in Korea indicates a sizeable room to enhance administrative efficiency for reducing coverage gap in social security

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