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News KDI-Brookings Joint Research Book Launch Event

KDI and the Brookings Institution held an event in Washington, DC to commemorate the release of their third joint research report.

October 22, 2024
KDI News What‘s Up Newsletter Vol.14

The 14th issue of the KDI What's Up newsletter is now available!

October 23, 2024
Other Research KOR KDI Review of the North Korean Economy, September 2024

The September issue features eight articles on recent trends and future challenges in North Korean economic research.

September 30, 2024
Economic Bulletin Economic Bulletin, October 2024

In July, services production and facilities investment increased, while industrial production, retail sales, and construction investment decreased.

September 30, 2024
News 2024 KSP Dissemination Conference

Celebrating the 20th anniversary of Knowledge Sharing Program (KSP), "2024 KSP Dissemination Conference: 20th Anniversary of Knowledge Sharing Program(KSP)" was held on Friday, September 6, 2024.

September 12, 2024
News 2024 Global Economy & Financial Stability Conference

Korea Development Institute (KDI) and The Ministry of Economy and Finance hosted the "2024 Global Economy & Financial Stability Conference" on September 3rd and 4th at the Plaza Hotel in Seoul.

September 11, 2024
KDI FOCUS Impact of Policy Incentives on Adoption of Electric Vehicles in South Korea

South Korea’s strategies for deploying battery electric vehicles (BEVs) primarily include providing purchase subsidies and expanding charging infrastructure.

July 03, 2024
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Summary

Research Monograph KOR Establishing a Macroeconomic Model System Considering Changes in Economic and Social Structure
This report analyzes economic models from three perspectives to respond to the evolving macroeconomic environment. First, the COVID-19 crisis has substantially increased economic volatility and uncertainty, underscoring the need for timely assessment of economic conditions. However, the delayed release of major indicators like gross domestic product (GDP) limits real-time understanding. In this report, we test the performance of economic models by incorporating high-frequency data from private sources alongside traditional low-frequency data. As data accumulate throughout the concerned quarter, real-time forecasts converge closely with actual outcomes, demonstrating strong potential for real-time economic forecasting models.

Second, South Korea’s economy has likely experienced both short-term fluctuations and structural shifts following shocks such as the COVID-19 pandemic. Macroeconomic policies should address short-term volatility and structural shifts differently, yet structural changes are often unobservable. Therefore, macroeconomic models should estimate these unobservable factors for effective policy responses. This report constructs a model to estimate aggregate demand pressure, a cyclical indicator, and the real neutral interest rate, a key guide for determining monetary policy stance. The estimation results are discussed in detail.

Third, since peaking in 2019, Korea’s working-age population has been declining, with rapid demographic shifts driven by low birth rates and an aging population expected to continue. These demographic changes affect labor input and can be a major factor in slowing down economic growth. Also, long-term forecasts serve as baseline data for managing government finances and national pension funds. In this report, we use population estimates from Statistics Korea to project long-term economic growth rates through 2050. Scenario analyses for demographic changes and trends in total factor productivity are used to suggest policy directions for sustainable growth.

Summary

Policy Study KOR Structural Transformation and Development Strategies for Local Universities
Local areas in Korea are on the verge of extinction due to the dual challenges of population decline and the magnetism of the capital region. Local industries are collapsing, and students turn a blind eye to local universities that support these industries. From this sense of urgency, this paper examines the current crisis level of Korea's local universities, seeks solutions, and considers the direction they should pursue moving forward.

As per the analysis in this paper, by the year 2040, most private universities outside the capital area are projected to be overlooked by students, leading to a stark prediction that one out of two might naturally disappear due to regional decline. Additionally, the analysis reveals that both students and professors perceive local universities as lagging in competitiveness compared to their counterparts in the capital region, with the faculty members at these institutions also viewed as falling behind. This collective perception demonstrates the crisis local universities are facing.

Analysis utilizing data from the Graduate Occupational Mobility Survey (GOMS) reveals that individuals who completed both their high school and university education in the capital region had a 13.2% higher probability of finding employment within the region, and an 11.3% higher chance of securing employment specifically in Seoul, compared to their peers with different educational paths. Furthermore, capital region high school graduates attending capital region universities were 2.5 times more likely to be employed by large companies in the region, earned a starting salary of 240,000 won higher, and had twice the likelihood of securing full-time positions than those who attended universities outside the capital area. The analysis of factors influencing university choice uncovers that the primary reasons for choosing universities in Seoul at the admission stage are peer influence and the social recognition and reputation of the institutions, rather than employment prospects. In addition, it finds that students with higher grades place significant importance on the suitability of their major.

In a survey of freshmen and sophomores during the 2023 academic year, education quality and reputation emerged as the primary reasons for choosing universities in the capital region. This finding underscores that if these factors are decisive for students selecting universities in the capital area, including Seoul, local universities should place a strategic priority on improving these aspects to attract students.

Drawing from the analysis outcomes, this paper proposes the following structural transformation and development strategies for Korea's local universities: Firstly, the Korean government should enable private universities to strategically and flexibly exit the education market by amending relevant laws, including the Private University Structural Improvement Support Act (draft). Secondly, local universities should commit to enhancing their competitive advantages through deliberate selection and concentration. Thirdly, the effectiveness of existing policies supporting local universities requires thorough reevaluation to inform the design of more sophisticated support measures. Fourthly, the objective understanding of student mobility within and between regions, together with the diagnosis of the causes of their movement, is essential for developing strategies that bolster the synergistic effectiveness of the policy linkages between 'local high schools-local universities-local businesses'. Lastly, to advance local universities, a comprehensive and effective policy for balanced regional development must be clearly articulated.

Summary

Research Monograph KOR Korean Unique Regulations in Housing Market
We study regulations in the housing market, which are very unique and have great influences in Korea. Due to COVID-19, the housing market have experienced rapid changes. Thus, the government responded boldly with unprecedented policies. Among others, 3 special regulations are on the table for discussion. The first is the Land Transaction Permit, which was implemented to reduce demand on housing in specific regions. Second, the Price Cap on New Houses is investigated for housing supply policy. The final is a regulation on the contract renewal claims in the housing rental market.

Chapter 2 analyzes the direct and indirect price effects of the Land Transaction Permit (LTP), a selective regulation introduced in 2020 for high-priced houses in Seoul to stabilize skyrocketing prices. The LTP is an administrative regulation that requires local governments to permit transactions in designated "areas," and as of 2022, the total area covered by the LTP is about 9% of Seoul's land area.Houses in the LTP zone can only be purchased by buyers who are either homeless or will eventually become single-family homeowners, and they must actually live in the houses for two years immediately after purchase. In this study, we analyzed the price and transaction volume of LTP regulated and unregulated houses, focusing on "Jamsil-dong, Samsung-dong, Daechi-dong, and Cheongdam-dong," which were designated in June 2020. In the regulated area, the LTP scheme directly reduced transaction volumes by 38.3% and prices by 4.3% compared to unregulated areas. However, the LTP scheme unexpectedly had a positive price appreciation effect on homes located closer to the regulated areas. When unregulated dwellings are categorized according to their distance from the regulated area, we estimate that dwellings closer to the regulated area increased in price by 2.3% relative to dwellings further away, and this effect is larger the closer they are to the regulated area. It appears that some of the demand in the regulated area shifts to nearby unregulated areas with higher substitutability. The different direction of the direct effect on regulated areas and the indirect effect on nearby areas suggests that selective regulation, such as LTP, may not be the right regulatory approach to achieve the goal of stabilizing the housing market.

The next chapter, Chapter 3, examines the effects of the Price Cap on New Houses. This price cap, which limits the price of new homes, is one of the controversial regulations that raises concerns that it may limit housing supply in the future. However, this study's analysis found no evidence that the price cap reduces the supply of new homes. Although the pre-sale price cap limits the profits of housing construction projects, it is operated by reflecting all the costs of land and construction for housing supply. Even if the prices of newly supplied homes are limited by the price cap during the period when the housing price is on the rise, the sales of new homes is likely to increase as well. Thereby housing development projects are profitable enough to cover all the costs. Therefore, there appears to be no empirical evidence for concerns that future housing supply will be reduced by this price cap implemented during the housing market boom. However, these results are contradictory to the results of existing studies, so caution needs to be taken when interpreting them further.

Chapter 4 investigates the price impact of the deposit control imposed on the housing repo contract in Korea, known as Jeonse. Jeonse is a unique housing repo contract in Korea where the landlord borrows a deposit from the tenant, using the house as collateral. The tenant is granted the right to occupy the house during the contract period at the expense of the deposit’s opportunity cost. In July 2020, the Korean legislature passed a law granting tenants the right to renew the Jeonse contract once, with the new deposit amount not exceeding a 5% increase from the original amount. While this new regulation has been heavily criticized as the primary driver of the surge in Jeonse deposits during the pandemic, its actual price impact has not been properly estimated.

We estimate the value of the Jeonse renewal option monthly using option pricing techniques, based on reasonable assumptions about the housing price process and information gathered from the current term structure of interest rates. Our estimation results indicate that the deposit control regulation raised Jeonse deposits nationwide by only 0.97% and by 4.80% in Seoul at the time of the introduction of the regulation, a magnitude significantly lower than previously discussed in both media and academic circles. Furthermore, we demonstrate that the renewal option does not have any intrinsic value over the past 10 years, suggesting that the option can be considered pure insurance against an unexpected increase in the equilibrium level of Jeonse deposits by the time of expiry. Based on the background of the regulation and the results of our analysis, we provide policy suggestions.

Summary

Policy Study KOR A Study on Elderly Poverty: Focusing on Income and Consumption
This study investigates elderly poverty in South Korea by incorporating both consumption and income to provide a comprehensive assessment of the economic status of the elderly population. By examining these two factors, the study aims to identify vulnerable groups experiencing financial difficulties across multiple dimensions. The findings underscore the variability within income poverty among older adults, highlighting notable differences based on asset holdings. Accounting for both income and consumption allows a more nuanced understanding of elderly poverty, revealing vulnerable groups facing economic hardships in both dimensions. Furthermore, elderly poverty is examined across generations, showing that its high rate in Korea primarily stems from pre-1950s cohorts, who benefited less from rapid economic growth and pension schemes. Consequently, effective poverty alleviation strategies should target the older and poorer demographic relatively left out of economic growth and pension programs. Restructuring the Basic Pension to offer substantial support to vulnerable groups, while excluding high-asset but low-income individuals, can enhance the system’s sustainability and effectiveness in poverty alleviation.

Summary

Policy Study KOR Impact of Carbon-Neutrality Policies:Focusing on Trade and Environment
This study examines the impact of carbon neutrality policies on Korea and explores potential government responses to the rapidly evolving global policy landscape concerning carbon and trade. Specifically, it focuses on the European Union’s Carbon Border Adjustment Mechanism (CBAM) and how South Korea's carbon neutrality policies might influence the CBAM's impact. In addition, it analyzes the effects of each carbon neutrality policy option on Korea’s economy, including trade and GDP, and emissions.

This study finds that the EU CBAM may not affect Korean exports due to its relatively narrow scope of products and emissions covered in the current version of the policy. However, its influence is likely to grow if the scope of regulated products expands and the range of indirect emissions covered increases. The study then considers carbon pricing, green technology R&D, and green supply chain policies as strategic directions for Korea's government to both respond to global policy changes, such as CBAM, and achieve climate neutrality. Although both increasing carbon prices and developing carbon reduction technologies mitigate the negative impacts of CBAM by decreasing CBAM tariff rates, their effects on Korea's production, exports, income, and welfare differ.

Green supply chain policies involve adjusting trade costs according to the carbon intensity and price of intermediate inputs’ origins. This aims to reduce production's embedded indirect emissions and increase the carbon price already paid in source countries. The study evaluates two opposing approaches to implementing this policy: lowering trade costs for 'green' suppliers and raising them for 'dirty' suppliers. The results indicate that decreasing trade costs, as opposed to increasing them, results in higher GDP, greater export competitiveness, and improved welfare. The study shows that although different policy options are themselves effective in responding to CBAM and reducing carbon emissions in Korea overall, their impact on Korea’s economy and emissions are heterogeneous. Therefore, understanding the complex consequences of these policies and selectively implementing them based on the distinct characteristics of the affected industries is crucial.

Summary

Research Monograph KOR Competition Policy in the Digital Platform Economy
Digital platforms have boosted consumer welfare and driven innovation and competition by integrating diverse technological advancements. These online platforms facilitate easier business transactions, instant information and content sharing, and the introduction of new products and services. However, as economic agents increasingly depend on them, concerns are growing about the excessive concentration of economic power in a limited number of platforms. As a result, in the past few years, competition policy related to digital platforms has gained more attention, prompting vigorous discussions for improvement.

Globally, competition authorities have conducted numerous investigations, and there have been several lawsuits regarding the abuse of market power by digital platforms, along with active merger reviews. In addition, major jurisdictions, including Germany, the EU, and the US, have taken legislative actions to bolster regulations over their market dominance outside the purview of current competition or antitrust law. This policy shift stems from recognizing the limitations of existing competition policies, as enforcing such laws against the anti-competitive behaviors of digital platforms becomes increasingly challenging, and there is criticism about the asynchronicity in ex-post regulatory approaches.

Against this backdrop, this report puts forth directions for competition policy reform to effectively address anti-competitive behavior by digital platform firms. The focus is on the abuse of market power and mergers that contributed to acquiring and strengthening their dominance. This report consists of four chapters as follows. The first two chapters deal with the unilateral conduct of digital platforms. Chapter 1 analyzes self-preferencing practices resulting from their dual roles, drawing out appropriate regulatory improvement measures based on their categorization, a review of their economic effects, and empirical analysis results. Chapter 2 examines the issue of platform fees, which has become a significant social concern. While exploring desirable approaches, this chapter assesses whether this issue can be viewed from the perspective of price abuse whenhigh platform fees areproblematic by reviewing price abuse cases.

The next two chapters include studies on platform mergers, focusing on vertical and conglomerate mergers, which are receiving increasing attention as they are actively used to form platform ecosystems and diversify businesses. Chapter 3 analyzes how to consider the potential for self-preferencing by platforms in the merger review process. Self-preferencing is possible only when a platform has a dual role, securing its own or affiliated firms that compete with its business users, and non-horizontal mergers are a primary means of acquiring this dual position. Based on literature reviews and theoretical analysis, this chapter identifies considerations for non-horizontal merger reviews related to self-preferencing. Lastly, Chapter 4 investigates the formation and reinforcement of entry barriers due to platform mergers. Through theoretical analysis and reviews of past cases, this chapter provides recommendations for effectively evaluating entry barrier issues in merger reviews.

The collective conclusions can be summarized in two points. Firstly, competition policy reform should fully reflect the unique characteristics of digital platforms. The analysis of their typical unilateral conduct and mergers indicates that their economic effects and pathways are not fundamentally different from those of traditional companies. However, the distinct features of digital platforms can lead to new or multiple forms of anti-competitive behavior, make certain actions more pronounced or severe, and heighten the complexity and technical challenges in analyzing and judging their anti-competitive effects.

Secondly, caution is needed when introducing or strengthening antitrust regulations that extend beyond existing legal frameworks. This report emphasizes the importance of better market monitoring and industry-led discussions on active regulatory intervention on platform fees. For self-preferencing and platform mergers, it highlights the value of case-by-case reviews with assessment criteria for effectiveness. Without sufficient consideration for the dynamism of the digital market, where rapid technological change and innovation lead to emerging business models and blurred market boundaries, regulations mayend up hindering innovation incentives, ultimately hurting competition in the long run. Digital platform competition policy should achieve a delicate balance between reducing the harms of monopolies and protecting the incentives for innovation and healthy competition. At present, a flexible response approach to competition law is deemed necessary, tailored to the specific context of each case, while enhancing enforcement through improved timeliness and effectiveness.

Summary

Policy Study KOR Analyzing the Productivity Spillovers of Foreign Direct Investment (FDI) Considering the Characteristics of Industrial Complexes
Using large-scale panel data at the business unit level in South Korea, this study analyzes how the presence of FDI firms in industrial complexes impacts the productivity of domestic firms through vertical spillovers. Due to industrial agglomeration, FDI firms in industrial complexes are expected to engage more in vertical interactions with local firms and to procure a higher proportion of inputs locally compared to those outside the complexes. Therefore, the backward linkage effects of FDI firms in industrial complexes on domestic firms are anticipated to be more significant than FDI firms not operating in these complexes. To test this hypothesis, it constructs an indicator for the backward linkage effects of FDI and analyzes its relationship with the total factor productivity (TFP) of Korean manufacturing establishments.

This study finds that FDI firms located in industrial complexes exhibit significant positive backward linkage effects on the productivity of domestic firms. In contrast, the backward linkage effects of FDI firms outside the complexes are significantly lower and sometimes negative when domestic firm productivity is measured by value added per employee. These results support the hypothesis that, at least from 2010 to 2019, clustering into industrial complexes positively affects the productivity of domestic firms through the backward linkage effects of FDI firms.

Summary

Policy Study KOR A Study on Impact of Korea’s Policy Instruments for Battery Electric Vehicles (BEVs) and Fuel Cell Electric Vehicles (FCEVs)
Over the past five years, there has been a swift increase in the registration of clean vehicles, including Battery Electric Vehicles (BEVs) and hydrogen-powered Fuel Cell Electric Vehicles (FCEVs). The total number of registered BEVs and FCEVs reached 1.6% of all vehicles by the end of 2022, driven by various government support policies. In pursuit of its net zero goal, the South Korean government aims to increase the share of BEVs and FCEVs to at least 85% by 2050. The 2023 budget for clean vehicles (3.3 trillion won) accounts for 29.0% of the Ministry of Environment's total budget. Against this backdrop, this study empirically examines the effects of recent deployment policies based on data from newly registered BEVs and FCEVs. Specifically, by compiling datasets of newly registered passenger cars, government subsidy levels, and cumulative charging infrastructure by region from 2019 to 2022, this study conducts regression analyses to determine the impact of regional differences in these variables on the changes in the number of newly registered BEVs and FCEVs, respectively.

The analysis reveals that the price elasticity of newly registered BEVs and FCEVs based on subsidy changes was -1.59 and -2.90, respectively, while the charging infrastructure elasticity was 1.24 and 0.93, respectively. Additionally, the high degree of fiscal independence among local governments and high fuel prices for internal combustion engine vehicles contributed to the increase in new registrations. In the case of EVs, the price elasticity for foreign cars was higher than for domestic cars. Moreover, when analyzing EVs restricted to private use, the price elasticity decreased, and the impact of deploying chargers diminished. Based on the obtained estimates, this study further examines alternative scenarios to evaluate the effectiveness of the EV subsidy policy. It turns out that approximately 27.4% of new registrations over the past four years were attributed to subsidy payments, and that charger installation is more cost-efficient than paying subsidy in terms of government expenditure. Furthermore, a cost-benefit analysis of the subsidy policy indicates that in most scenarios, costs outweigh benefits. However, if carbon emissions from the power sector are zero and the social costs of carbon emissions from internal combustion engine vehicles are high, the benefit-cost ratio (benefit amount ÷ cost amount) increases to 0.97.

Based on the analysis, the main policy implications are as follows. First, as future EV sales must target private use, which is less responsive to price changes, the effectiveness of purchase price support will decrease. Therefore, enhancing charging infrastructure to stimulate demand will become more crucial. From a qualitative standpoint, an effective deployment strategy involves ensuring the proper maintenance, repair, and replacement of previously installed chargers to maintain full functionality and enhance consumer convenience within the charging system. Additionally, enhancing charging infrastructure at mobile hubs such as highway rest stops in line with technological advancements like battery performance improvements would be effective in increasing deployment. For hydrogen cars, the higher price elasticity compared to electric vehicles suggests a greater effect of subsidies on their deployment. However, due to the uncertainty of the eco-friendliness of the hydrogen production process, a promotion strategy considering technological changes is required. Lastly, as the number of clean vehicles continues to grow, reforming the tax system becomes inevitable. This includes an overall reform of the tax structure applied to fossil fuels, alongside comprehensive investigations to secure a competitive advantage for clean vehicles during operation.