By MeeRoo Kim and YoonHae Oh,  Fellow at KDI

※ This article is part of KDI Journal of Economic Policy, May 2021

Starting in late February of 2020, when the number of COVID-19 (coronavirus disease 2019) confirmed cases rose rapidly in Daegu and Gyeongsangbuk-do, household consumption fell sharply in South Korea. Therefore, like other governments such as the U.S. and Japan, the South Korean government provided an emergency COVID-19 relief fund (EDRF) to all households in May of 2020 to mitigate the economic disruption caused by the COVID-19 pandemic.

At around the same time, most metropolitan governments and municipal governments also provided various additional subsidies to residents. For example, some regions gave cash to residents, while most local governments granted subsidies by means of paper gift cards or magnetic prepaid cards. Some districts, including nine “Gu” areas in Busan, Namyangju-si in Gyeonggi, Donghae-si, and Sokcho-si in Gangwon-do, provided cash to residents. This study analyzes whether local small businesses’ sales increased more in areas with additional cash subsidies than in areas without any additional payments from local governments apart from the EDRF.

The EDRF was the first national universal stimulus payment policy in South Korea. Thus, evaluating the impact of the national EDRF policy could be meaningful. Moreover, the total amount of the additional local stimulus payments was smaller than the nationwide EDRF total amount. However, this study mainly focuses on regional governments’ cash payment policies, and not the national EDRF payment, to analyze whether the cash subsidy flowed to residential, small businesses by way of sales.

Analyzing payment by regional governments has the advantage of distinguishing the effects of specific payment methods. The primary goal of the stimulus payment policy is to support households’ income and boost the sales of small businesses, which dropped distinctly due to the COVID-19 pandemic. Hence, in preparing the stimulus payment policy in early 2020 in South Korea, determining which payment methods to use was one of the major issues, along with the payment targets. Accordingly, the national EDRF and most local governments’ subsidies were paid as local currency coupons with several limitations to their use. First, the validation period was short as three to four months. Second, gift cards or prepaid cards and credit card coupons were valid only within the recipients’ residency areas. Third, the payments were only available in specific sectors and excluded department stores and online malls. These limitations were established to increase the effectiveness of the policy, preventing the subsidy from flowing into saving accounts or online shopping malls, where sales increased even after the outbreak of COVID-19.

However, as most households consume a large portion of their living expenses within their residential areas, even a cash subsidy could flow to local small businesses. Chetty et al. (2020) also report that small businesses’ revenues increased after the U.S. government provided a stimulus payment as cash. It is costly to issue certificates/coupons and to establish a system that distinguishes transactions within a residential area and in specific sectors. Furthermore, for consumers, it is confusing to attempt to determine where the coupons would be accepted. On the other hand, providing subsidies as cash can be an economical and straightforward payment method. However, cash payments were regarded as an ineffective method in the policy design absent any empirical evidence.

We utilize the combined credit and debit card sales of eight prominent card companies in Korea. We find that businesses in regions with additional cash subsidies experienced significantly more card sales compared to areas without additional support. Thus, a simple payment in the form of cash can also increase business sales in residential areas, without high administrative expenses and/or consumer inconveniences. Some local governments paid subsidies as local consumption vouchers in a similar period, and comparing the policy impact between coupon payments and cash payments would be more informative. However, this approach was not plausible here, as voucher consumption data pertaining to local governments were not available.

Moreover, analyzing the effect of regional cash payments can evaluate the impact of the stimulus payment in a more robust way than analyzing the national EDRF subsidy. Several studies have reported the impact of the EDRF stimulus payments in South Korea. However, as it is challenging to find an appropriate control group (excluded as recipients), various methods have been tested, with varying results. Hong (2020) and W. Lee et al. (2020) utilize consumption in the previous year (2019) as a type of control sample, reporting marginal propensity to consume (MPC) as 76.2% and 65.4~78.2%, respectively. However, this approach can severely overestimate the consumption boosting impact, as it cannot control factors that significantly facilitate consumption only in the period after the policy in 2020, which was not present in 2019.

Kim and Oh (2020) utilize the synthetic control method by Abadie and Gardeazabal (2003) to construct control groups from the sales of sectors that do not accept EDRF coupons. They report that the increment ratio in nationwide card spending among sectors that accept consumption vouchers relative to the total amounts of funds injected is in the approximate range of 26.2~36.1%. On the other hand, Kim et al. (2020) report that the MPC of Seoul residents within six weeks is 24%. They utilize Shinhan card spending by non-Seoul residents within the Seoul area as a control group.

In this study, we compare the card sales of the regions’ businesses with additional cash subsidies to the sales of areas without any local governmental support, which is a distinct control group. Thus, we can utilize the difference-in-difference method as a traditional setting.

This study also investigates how the impact of the cash subsidy differs by industry. In a situation where the pandemic is still spreading, the effect of the stimulus payment can be asymmetric according to how each business requires personal interaction to transact. In this case, even with the increased income, households may not significantly increase their consumption in the high-contact service sectors, while the damage by COVID-19 was concentrated in these sectors. We estimate the policy’s heterogeneous effects in different industries, i.e., face-to-face services, restaurants, (semi)-durable goods such as clothes and furniture, essential goods, and education/fitness services, among others.

This study also uses the number of confirmed COVID-19 cases by district (Si/Gun/Gu) as a control variable and analyzes whether the effect of the cash subsidy on local business sales is asymmetric according to the degree of the spread of the pandemic. This approach is also distinct from other in the literature.

The rest of this paper is structured as follows. Section 2 reviews related studies and the features of the regional stimulus payments in South Korea. Section 3 presents the data and the empirical strategy. The descriptive statistics and regression results are presented in section 5, Section 6 concludes the paper.