KDI

Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank’s mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

This paper examines the role of rural regions in the economic transformation of Korea. The analysis at regional level reveals that, while having experiencing continued urbanisation and rapid demographic shift of aging and depopulation, the Korean rural areas performs well in terms of productivity growth thanks to the relatively higher share of tradable sectors in rural economies. It also provides the overview of how the rural policy in Korea, which has evolved in response to the socio-economic changes and growing well-being concerns. With the balanced national development at the centre of the national agenda for decades, regional policy approaches have diversified from state-led large projects to flexible policy packages and functional approaches to enhance rural economies and well-being. Finally, the paper presents a number of international policy approaches that can be useful for Korea, including the case of France, Italy and Sweden.

The Republic of Korea fully launched its green finance scheme in 2009, an environmental information disclosure system in 2013, and an emissions trading scheme in 2015. However, use of these schemes has not increased dramatically, as the public sector has taken the major role in green finance. Nowadays, green finance is expanding as the Government of the Republic of Korea is making efforts to change the energy mix by decreasing the share of nuclear energy and increasing that of new and renewable energy. The private sector is also attempting to revitalize green finance in the Republic of Korea, such as through commercial banks, private equity funds, and so forth. Changing the energy mix needs huge funds, so the government alone cannot be responsible; the government is seeking to reach this goal in combination with private firms. In this context, the motivation of the Korean people to adopt eco-friendliness and energy efficiency through green financing, public or private, is necessary, together with industrial support from the government or financial institutions.

This paper compares the situation of children in Korea relative to other OECD countries in terms of child poverty and well-being. First, trends in child poverty and living standards are described. An overview of key internationally available indicators of child well-being is also provided. The paper discusses the observed poverty trends in relation to social protection programs and to policies implemented to support families. Some priorities for action to make the alleviation of child poverty more effective are discussed.

Large business groups, which played a key role in Korea's economic development, are still dominant today, especially in exporting. The concentration of economic power creates a number of problems and risks. Ensuring a level-playing field between the business groups, also called chaebols, and SMEs and start-ups is essential to promote innovation and inclusive growth. While the business groups have long been subject to a number of special regulations, a comprehensive strategy is needed. The top priority is to improve corporate governance by strengthening the role of outside directors and protecting minority shareholders. A greater say for institutional investors and more active use of private remedies, such as class action suits, would also be beneficial. In addition, strengthening competition by reducing barriers to trade and FDI and activating a market for corporate control would lead to better performance by the groups. The ownership structure of the groups needs to be improved, notably by phasing out circular shareholding among their affiliates. This Working Paper relates to the 2018 OECD Economic Survey of Korea (www.oecd.org/eco/surveys/economic-survey-korea.htm)

Making SMEs and start-ups a driver of growth and job creation requires a number of policies to improve the performance of SMEs, whose labour productivity in the manufacturing sector has fallen to less than a third of that in large companies. The large-scale support for SMEs should shift from supporting the survival of firms to raising productivity. Measures to accelerate SMEs' take-up of new technology and increase their participation in international trade would boost productivity and inclusive growth. Given the chronic labour shortages facing SMEs, reforming the education system to reduce labour market mismatch is a priority. Relaxing the regulatory burden and government control would allow innovative SMEs to create new products and services. Entrepreneurship is lagging, reflecting a higher fear of failure and a lack of skills in Korea. Upgrading entrepreneurship education and lowering the personal costs faced by entrepreneurs who fail would be beneficial. A greater role for venture capital, in part by activating the M&A market to allow investors to recuperate their funds, would encourage firm creation. This Working Paper relates to the 2018 OECD Economic Survey of Korea (www.oecd.org/eco/surveys/economic-survey-korea.htm)

This paper discusses NEPs in Korea. It is organized in three sections. The first section reviews and compares the key employment policies in different periods in response to the Asian and international financial crises, and introduces the new employment strategy under the new government since 2013. The second section analyses the NEP implementation mechanism that includes the coordination, support and accountability systems. The concluding section summarizes the main findings of the case study and distils lessons learned that may be considered by policymakers in formulating and implementing employment policies.

Given Korea’s prowess in digital services, it should come as no surprise to see the country leading the field in e-governance. Its lead, notably in open data, owes much to government efforts and investments in digital infrastructure and systems since the 1990s. In 2014 more than 70% of all Koreans reported having used the internet at least once over the previous 12 months to interact with the public authorities, whether to obtain information on a government website, or to download or file a form, for instance. That’s far more than the OECD average of 55%.

Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we document that increased marginal funding costs lead to larger solvency risk (as measured by the Tier 1 regulatory capital ratio), which, in turn, leads to larger marginal funding costs. A 100 bp increase in marginal funding costs (solvency risk) is associated with a 155 (77) bp increase in solvency risk (marginal funding costs). The findings of an economically and statistically significant relationship are robust to considering different proxies for solvency risk, types of banks, interest rate regimes, and interest margin management strategies. They also hold irrespective of the funding profile considered. FX-related macroprudential policies can affect the negative feedback loop by muting the effect of marginal funding costs on solvency risk. Our findings can inform the calibration of macroprudential stress tests.

Housing in Korea has been part of the government policy development agenda for the past three decades contributing to reducing the historical housing shortage and improving the quality of dwellings. Despite its achievements, Korea now faces a housing affordability challenge as prices are too high for several social groups (i.e. newly wedded), owner occupancy levels are decreasing, and social housing is struggling to meet demand. Korea has a complex social housing system largely focused on low-income households, who still suffer from housing poverty in terms of housing stability, affordability and quality. A holistic view on housing policy to promote a more inclusive society and sustainable economic growth is needed. To overcome the current housing challenge requires expanding the network of public housing providers by including the private and community sectors that could alleviate the government’s financial burden. Korea is linking housing and urban regeneration strategies to respond to the complex challenges of social inclusion, job creation, housing and economic revitalisation. Korea has been at the forefront of smart city development for more than a decade, which has brought benefits to Korean cities such as integrated transport systems, and it is now committed to applying the concept as a vehicle for inclusive growth.