KDI Korea Development Institute

Summary

Policy Study KOR Enhancing the Effectiveness of the Long-Term Care Insurance System

Korea’s rapid aging has brought the pressing policy concern of social hospitalization to the forefront. Older adults with low medical but high long-term care needs often occupy beds in high-cost medical institutions for extended periods―a trend that is driving up elderly medical spending. In 2008, the government introduced the Long-Term Care Insurance (LTCI) system to address the growing demand for care among older adults and improve their quality of life, while curbing inefficient medical spending. Since then, long-term care services have expanded in both eligibility and scope. The original three-grade classification was restructured into a six-grade system encompassing older adults with mild dementia, and home-based benefits were strengthened as part of a broader shift from facility-centered to home-centered care.

This study uses the Elderly Cohort Database of the National Health Insurance Service to examine how expanding LTCI affects medical expenditures. For identification, it employs a fuzzy regression discontinuity design and an event study design, exploiting the fact that LTCI grades are assigned based on the Long-Term Care Need Score and that the costs and benefits of these grade assignments shift exogenously around each threshold.

Comparing first-time applicants near each grade threshold, the analysis finds that, for Grades 1 and 2, which correspond to greater care needs, the expansion of either facility-based or home-based benefits reduced medical facility utilization and medical expenditures. By institution type, expenditures declined at hospital-level institutions and long-term care hospitals; by utilization type, inpatient costs decreased. For Grades 3 through 5, by contrast, expanding home-based benefits did not have a statistically meaningful effect on reducing medical expenditures. The event study results show that for the Cognitive Support Grade, which covers older adults with mild dementia, expanded home-based benefits lowered medical expenditures.

These results suggest that the effect of LTCI on medical expenditures may be heterogeneous across grades. Particularly for Grades 3 through 5, the quantity and quality of home-based services may have been insufficient to provide the integrated support to meet complex needs for both medical and long-term care. For the Cognitive Support Grade, however, beneficiaries face fewer physical constraints compared to those with greater care needs. This allows easier access to cost-efficient services such as Day and Night Care Centers for extended hours, which may explain the relatively larger reduction in medical expenditures.

Based on these findings, the study proposes policy measures for improving the quality of home-based care through the integration of medical and long-term care services. In particular, drawing primarily on international case studies, it offers recommendations to ensure the stable and effective implementation of the Integrated Care Support System scheduled for 2026. These measures include introducing intermediate long-term care facilities capable of providing a continuum of medical and long-term care services; developing a specialized workforce to ensure the smooth operation of the new framework; optimizing the expansion of this workforce in depopulating regions; and clarifying accountability for social hospitalization among stakeholders to improve the efficiency of medical expenditures.

Summary

Policy Study KOR A Study on Competition in the Mobile Ecosystem: Focusing on the Market Dominance of App Stores

Using detailed market data, this study provides an in-depth analysis of competition in app store related markets and derives implications for the market dominance of app store platforms. It examines the state of competition both between the app stores of Google and Apple, and among leading apps within them from various perspectives, while also examining where the Korean market diverges from other major markets.

Chapter 2 analyzes the market sizes of Google Play and Apple’s App Store across multiple dimensions, including free versus paid apps, non-game versus game apps, and category-level breakdowns. The relative dominance of each app store varies considerably across countries. In Korea, Google Play accounted for over 70% of both downloads and revenue as of 2023. Across all major countries, the share of free apps has risen steadily in both measures, recently surpassing 98%―a pattern consistent with revenue models anchored in in-app purchases rather than paid app sales. Comparing non-game and game apps, game apps account for 93% of Google Play revenue and 71% of App Store revenue, making them the primary driver of overall revenue growth. Korea stands out in this regard. Not only is the revenue share of game apps disproportionately high relative to major countries, but concentration in a narrow set of top-performing categories is also markedly more pronounced.
Chapter 3 uses app-level performance data for the top 1,000 apps to analyze within-store concentration. The degree of concentration is substantial: these apps account for nearly 100% of revenue and roughly 60% of downloads. When a Pareto distribution is fitted to app performance, the estimated shape parameters fall below 1 in many categories―especially for free downloads―indicating an extreme bias toward top-ranked apps. Revenue distributions are more uneven still for game apps than for non-game apps.

Chapter 4 examines the volatility of app performance rankings, focusing on top-ranked apps. Monthly transition matrices constructed across ranking groups, reveal a tendency for apps to remain within the same ranking group from one month to the next, with persistence more pronounced among higher-ranked groups. Revenue rankings exhibit considerably less volatility than download rankings.

These findings suggest that the app store market is close to a competitive bottleneck, situation in which platforms can exercise strong market dominance over app developers. The heterogeneous user bases of Google Play and the App Store further suggest that inter-store competition for single-homing consumers may be limited. Korea’s market situation heightens these concerns. Compared to other major countries, game apps account for a dominant portion of revenue in Korea, and spending is heavily concentrated in popular categories―particularly games with high in-app purchase volumes. For app stores, this concentration raises the stakes of attracting top game apps; for app developers, it elevates the importance of marketing tools such as chart rankings and featured placements. This environment can amplify both the incentives for and the effects of practices already under scrutiny―mandatory in-app payment requirements, the use of featured placements to exclude rival app stores, and self-preferencing―suggesting a need for close monitoring by competition authorities.

Summary

Research Monograph KOR Who Cares for Us?: Policies on Eldercare Workers

South Korea reached the super-aged mark in December 2024, with over 20% of its population aged 65 and older. Eldercare jobs, labor-intensive and emotionally demanding yet accessible to low-skilled workers at low wages, are globally undesirable, leading to labor shortages in advanced economies. As baby boomers (born 1955-1963) enter the late elderly (75 and older) after 2030, demand for eldercare services is projected to surge, worsening supply-demand imbalances.

This study examines the current state and limitations of Korea’s eldercare workforce to propose policy improvements. It estimates eldercare labor supply and demand to forecast the scale of labor shortage and discusses strategies for workforce expansion. Additionally, an empirical analysis assesses how quantitative and qualitative workforce expansion impacts the quality of life for residents in long-term care facilities, providing policy insights.

Chapter 2 forecasts demand for eldercare services and estimates the eldercare labor supply to assess the scale of labor shortage and analyze supply-demand imbalances at the national and metropolitan/provincial levels. The findings indicate that the rapid rise in the super-aged population will sharply increase demand, outpacing the growth of care worker supply and deepening supply-demand imbalances. Regional variations in aging and available workforce are expected to widen the regional supply disparities, suggesting the need for proactive and region-specific workforce expansion policies. This chapter also estimates demand for services that reflect improvements in elderly health in the past decade, highlighting that workforce expansion alone is insufficient to resolve the supply-demand gap amid sustained demand growth. Managing demand for long-term care services through elderly health promotion and functional improvements is essential.

Chapter 3 investigates how expanding the eldercare workforce in long-term facilities affects health outcomes for care recipients. Using health insurance claims and long-term care insurance data, it examines the impact of the 2018 minimum wage increase and the 2022 staffing requirement changes on facility employment and recipients’ medical service utilization. The results indicate that workforce expansion is associated with reduced medical service use, leading to positive health outcomes, suggesting investment in care worker expansion can be a cost-effective policy measure.

Chapter 4 empirically analyzes the impact of enhancing nursing functions in eldercare workers on care recipients and discusses the need for improving their expertise. This chapter examines how changes in nursing staff skill composition following the 2018 minimum wage increase and the specialized nursing care unit pilot program launched in 2019 affected recipients' medical service utilization. The analysis shows that strengthening medical functions in long-term care facilities significantly reduces residents' use of high-cost inpatient services, leading to lower overall healthcare expenditures. While the increased costs of long-term care services partially offset these savings, the results suggest that the specialized nursing care unit program aligns with policy goals of optimizing healthcare utilization among facility residents.

Chapter 5 identifies the characteristics of foreign care workers using administrative data, albeit to a limited extent, aiming to enhance understanding of migrant labor in the eldercare sector. With restricted foreign worker employment in eldercare roles in Korea, this chapter assesses the potential impacts of their integration through existing literature. Furthermore, it reviews specific policy responses from countries utilizing migrant worker policies to mitigate eldercare labor shortages and discusses implications for Korea's eldercare sector.

Chapter 6 proposes future policy directions for eldercare workforce expansion based on the findings from the preceding chapters. First, quantitative workforce expansion enhances job quality, reduces workload through care technology, and utilizes migrant labor. Second, elevating the professional competence of the eldercare workforce involves strengthening nursing functions in long-term care facilities, clarifying the scope of nursing care that can be provided within such facilities, and enhancing education and training in geriatric medicine for facility staff. Third, managing care demand through health promotion entails implementing mental health and chronic disease management strategies to delay the need for eldercare. By addressing these areas, this study aims to contribute to the development of sustainable policies that ensure adequate workforce supply while improving the quality of eldercare services in Korea.

Summary

Policy Study KOR International Comparison of R&D Tax Incentives and Their Policy Implications

The research report examines tax support systems for private corporate research and development activities, comparing Korea's system with those of other major 31 countries. While Korea provides differentiated support based on company size and specific technology types through tax credits, general R&D expenditure support, particularly for general enterprises, is notably low compared to other countries. Historically, Korea's R&D tax support was very high in the early 2000s, but support for both small and medium-sized enterprises and support for general enterprises has stagnated or decreased since 2010, while other major countries have expanded their support, leading to a reduced gap for SMEs and a wider gap for general enterprises compared to the international average. By benchmarking Korea’s R&D tax incentives against those of other leading economies, this research assesses the support mechanisms for private-sector innovation, a vital catalyst for the nation’s long-term economic growth, and suggests strategic recommendations for future policy.

Summary

Policy Study KOR The Impact of Public Education Properties on Student Outcomes: Focusing on the Causal Effects of High School Assignment within School Districts

This study exploits Seoul’s 2010 high school equalization policy to empirically examine how differences in average academic achievement across schools translate into school effects on individual students. It links the 2005 Korean Education Longitudinal Study (KELS) data with school-level results from the National Assessment of Educational Achievement for Seoul high schools in 2010, and estimates the effect of being randomly assigned to a school with a higher average achievement level. To strengthen the assumption of random assignment within each school district, the analysis clusters geographically adjacent high schools within districts ― thereby comparing students within groups of nearby schools ― while additionally controlling for a wide range of students’ observable socioeconomic background variables.

The results indicate that a significant portion of the achievement gap observed across schools reflects causal school effects. On average, students who attended schools with a higher share of students performing at “proficient or above” showed greater improvements in first-year high school achievement test scores, College Scholastic Ability Test (CSAT) scores, and class comprehension. However, the study finds no statistically significant effects on outcomes beyond academic achievement, such as values formation or non-cognitive abilities, and the achievement gains are concentrated among students who had already exhibited high performance prior to entering high school. These findings suggest that improvements in academic performance do not necessarily extend to broader dimensions of student development, and they also imply that educational investments for students who are already behind in the admissions competition may be relatively insufficient even among high-performing schools.

The study then explores which school characteristics may be associated with the estimated school effects. Among the school-type features available in the data, single-sex status, private school status, and the share of highly educated teachers show significant relationships. Further analyses using survey data from students and teachers reveal clear associations with teacher quality, the school climate experienced by students, and the strict enforcement of school rules. In contrast, no significant relationships are found for characteristics such as the student·teacher ratio, the share of tenured (regular) teachers, or school land area per student. Overall, these results imply that qualitative features―such as teacher capacity and school climate ― may matter more for strengthening a school’s educational effectiveness than quantitative inputs like the number of teachers.

Summary

Policy Study KOR Evaluating Fiscal Rules over Business Cycles and Population Aging

This paper evaluates the general-equilibrium effects of escape clauses within fiscal rules in an economy subject to business-cycle fluctuations. It embeds an AR(1) total factor productivity (TFP) supply shock into a closed-economy overlapping generations (OLG) model to conduct a 70-year transition-path analysis by incorporating Statistics Korea’s projections of annual changes in population age structure and mortality. To ensure high predictive accuracy while capturing annual demographic shifts, the model employs a Krusell·Smith (1998)-type linear approximation for aggregate forecasting functions, estimated and applied on a year-to-year basis.

The escape clause is modeled as a rule that adjusts the fiscal deficit-to-GDP ratio across three TFP states. In the absence of population aging, the escape clause reduces tax volatility but increases government debt volatility. The higher debt, through crowding-out effects, raises volatility in aggregate capital and GDP, potentially amplifying the persistence of tax shocks. By contrast, the volatility of aggregate assets is mitigated in part: in booms, the escape clause increases debt, which lowers interest rates via crowding out and partially offsets asset accumulation; in recessions, the mechanism cushions against asset declines. When incorporating population aging, overall macroeconomic volatility rises, and the escape clause further magnifies fluctuations in government debt, aggregate capital, and GDP. These findings suggest that under supply shocks, fiscal easing should be limited to targeted support for vulnerable households, with escape clauses gradually narrowed as aging intensifies.

Summary

Research Monograph KOR Revisiting the DPRK Economy: Structural Evidence from Firms and Industries

This study aims to analyze the structure of the North Korean economy by utilizing an industry-firm database constructed from North Korean media reports. By examining firms and industries at the micro level and cross-validating findings with satellite-based indicators, the study assesses whether media reports can provide meaningful insights into actual economic activities.

Chapter 2 reconstructs the original database obtained from the Korea Institute for Industrial Economics and Trade (KIET), covering the period from 2000 to 2024. Separate annual datasets were consolidated into a unified format, with duplicate entries removed and inconsistencies in firm names standardized. In cases where firm identifiers differed despite referring to the same entity, a single identifier was adopted, and additional information, such as industry codes and administrative regions, was supplemented when necessary. As a result of this reconstruction, the number of observed firms increased from 3,557 to 3,973, while the total number of media reports expanded from 86,116 to 153,047 compared to the original KIET database.

Chapter 3 analyzes the distribution and evolution of North Korean firms, demonstrating that media coverage carries economic implications beyond purely propagandistic purposes. At the industry level, the share of media coverage shows a strong correlation with the Bank of Korea’s estimates of industry-specific GDP shares. Investment-related reports are found to be significantly associated with increases in production-related reports one to two years later, with the impact of investment coverage exceeding that of political coverage. At the firm level, the analysis also identifies firms that gained prominence or declined during specific periods. Firms that expanded after Kim Jong Un’s accession to power include Chongchongang Cascade Hydropower Plant, Tanchon Power Plant, and Sunchon Chemical Complex; those that experienced decline include Sinchang Coal Mine, Komdok Mine, and Huichon Machine Tool Factory. Following the imposition of international sanctions, rising firms include Sunchon Phosphate Fertilizer Factory, Equipment Assembly Complex, and Kosong County People’s Power Plant; declining firms include Chosan Youth Power Plant, Sariwon Coal Mine, and Kumya Youth Coal Mine.

Chapter 4 conducts a multidimensional analysis of North Korean industries using the reconstructed database. Trends in industry-related and non-industry-related coverage vary over time, reflecting fluctuations in production and investment activities across sectors. The regional distribution of major industries also differs substantially, shaped by natural, geographic, and demographic factors. With respect to the “20×10 Policy for Regional Development,” the analysis finds that some regions were selected based on their importance as benchmarks for policy success, while others ― characterized by poor living conditions ― were prioritized in line with the policy’s stated objectives.

Chapter 5 combines the reconstructed database with satellite-based nighttime light data and applies panel regressions and event study methodologies to examine whether reported investment and production activities are linked to actual increases in operations and electricity usage. The results indicate that both investment and production reports are positively and significantly correlated with nighttime light intensity. In the event study, investment reports are treated as events, with the month preceding the report serving as the reference period. The average post-event effect over 0~12 months shows an approximately 7.1% increase in nighttime light intensity, statistically significant at the 5% level, with positive and significant effects concentrated in the 7~12 month window. This suggests a persistent increase in nighttime illumination around firms following reported investment activities. Furthermore, a weighted nighttime light index based on the frequency of investment and production reports exhibits high correlations with the Bank of Korea’s estimates of GDP by economic activity, particularly in the energy, light manufacturing, and heavy and chemical industries.

Overall, this study treats North Korean media reports not merely as propaganda but as a source of indirect evidence for understanding economic policy directions, sectoral priorities, and firm-level activities. While media reports do not directly capture macroeconomic fluctuations, the findings suggest that they can function as a useful tool for tracking micro-level industrial and firm dynamics. The analytical potential of this approach may be further enhanced through continued validation using alternative data sources such as satellite imagery.

Summary

Policy Study KOR Economic Effects of Identified Exogenous Tax Policy Shocks: A Narrative Approach for Korea

This study addresses a key challenge in estimating the macroeconomic effects of fiscal policy: the difficulty of credibly identifying policy shocks. Using a narrative approach, we construct a quarterly series of exogenous tax policy shocks for Korea over 2005~2023 and use it to examine the short-run macroeconomic effects of tax policy.

The identified exogenous tax shocks exhibit a weaker association with business-cycle fluctuations than conventional measures based on observed tax revenue changes, suggesting that they may better capture discretionary policy actions rather than automatic stabilizers. We further assess exogeneity using checks based on GDP forecast errors (“surprises”), aiming to mitigate endogeneity concerns that arise when revenue fluctuations are used directly as shocks.

Empirical analysis based on a Bayesian vector autoregression (BVAR) indicates that exogenous tax cuts generally raise real GDP and prices in the short run. The effects vary across tax categories: labor tax cuts show relatively larger expansionary impacts on output, while consumption tax cuts display limited output effects despite pronounced revenue losses. Capital tax cuts tend to operate with longer lags, accompanied by relatively large short-run revenue declines. These patterns suggest that tax policy can affect the economy through heterogeneous transmission channels depending on the tax base, policy objectives, and the revenueoutput trade-offs. We also find that the response of total tax revenue after tax cuts is sometimes statistically insignificant, consistent with offsetting forces between direct revenue reductions and revenue gains induced by higher output.

Rather than offering prescriptive recommendations for specific taxes, this study provides a transparent framework for identifying and quantifying tax policy shocks and documents the relative patterns of macroeconomic and revenue responses across tax types and motivations. Important limitations remain, including residual uncertainty in narrative classifications when reforms pursue multiple objectives and the need for additional robustness analyses given the sample length and shock frequency. Future research could refine classification rules, compare alternative identification strategies, and integrate spending shocks to strengthen policy implications.

Summary

Research Monograph KOR Cultivating and Scaling Innovative Firms: Strategies for Creating New Growth Engine in Korea

Scale-up firms play a pivotal role in injecting new vitality into the economy and enhancing national competitiveness. Given the stagnant growth potential, it is increasingly important to create an ecosystem optimized for scale-up firms to grow and to establish an environment where high-growth firms can continuously emerge. However, in reality, many firms in Korea face various barriers during the scale-up process, including difficulties in securing skilled talent, utilizing digital tools, and expanding into global markets.

In response, this study examines whether Korea’s business ecosystem provides an environment where innovative and competitive firms can continuously grow beyond the domestic market into the global market. And by focusing on areas where such an environment is insufficiently provided, it presents policy directions and implementation strategies for transitioning to a more desirable ecosystem.

Consisting of four main chapters, the study emphasizes the following policy suggestions. First, as the decline in the proportion of high-growth firms weakens economic dynamism and job creation, the government must shift toward scale-up policies and establish an integrated management system to support these firms. Second, to enhance the global competitiveness of startups, it is essential to introduce a specialized visa focusing on innovation and growth potential, streamline permanent residency pathways, and expand tax benefits. Third, to encourage firms to pursue sustained growth in export markets, it is necessary to design export promotion programs that are performance-based and tied to their success in export markets. Fourth, revitalizing industry-academia-research collaboration requires a demand-driven policy approach, increased participation from large and mid-sized firms, patent box incentives, and strengthened industry linkages with public research institutes.

Summary

Policy Study KOR On City Size Distribution: Determinants, Spatial Policies, and Welfare

This study employs a quantitative spatial general equilibrium model to estimate the determinants of city size distribution in South Korea and quantify the effects of regional policies, evaluating the optimality of its current population distribution.

Defining 161 cities and counties nationwide as cities and analyzing data from 2005 to 2019, the study finds that differentials in total factor productivity (TFP) drove up the population share of the Seoul Metropolitan Area (SMA), while amenities and urban accommodation costs worked in the opposite direction. In particular, the TFP decline among non-SMA manufacturing cities, such as Geoje, Gumi, and Ulsan, during the 2010s accelerated concentration in the SMA. Although regional development initiatives in this period, including innovation cities and Sejong City, improved local infrastructure and supported moderate population growth, weak TFP gains limited their impact on alleviating SMA concentration.

Counterfactual policy experiments that designate seven non-SMA cities as regional hubs reveal that restoring the SMA population share to its 2000 level would require substantial improvements in TFP and urban accommodation costs. The upper bound of policy costs justifiable without welfare loss is limited, and even with such investments, the SMA would still account for nearly half the national population. The optimal spatial policy analysis further suggests that efficient utilization of agglomeration economies favors population concentration in major cities across the country. With population reallocating not only to Seoul but also to major non-SMA cities, such as Busan, Daegu, and Gwangju, the SMA concentration may not rise beyond its 2019 level.

These findings offer three policy implications. First, for regional development policies to be effective, they must include measures that boost regional productivity. Second, even under optimistic scenarios, reducing the SMA share below 40% remains challenging, suggesting that policy goals should be realistic and strategically focused. Third, to prevent further SMA concentration, proactive spatial restructuring through the development of regional hub cities could provide a path forward consistent with the Pareto optimum.

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