KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Policy Study KOR The Macroeconomic Effects of Social Welfare Reform in South Korea

This study examines the macroeconomic and welfare impacts of replacing South Korea’s targeted income support programs with a universal income support system. A life-cycle overlapping generations (OLG) model with heterogeneous households is constructed to reflect existing programs, such as basic livelihood assistance, child allowances, earned income credits, and public pensions, and to incorporate institutional features and household-level income distribution, including joint household labor decisions.

Simulations of five policy scenarios show that universal benefit increases aggregate output but reduces social welfare due to weaker safety net effectiveness. Program impacts vary, suggesting well-designed targeted schemes may outperform universal income support. Findings also highlight the importance of aligning income support policies with household needs while ensuring fiscal sustainability.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.12

■	The Korean economy continues to exhibit a modest improvement led by consumption, while weakness in the construction industry persists.

	○	Although weakness in the construction industry has been prolonged, consumption continues to improve as the effects of base rate cuts feed through with a lag and government support measures remain in place.

	○	As a result, services production remains solid, supporting a modest increase in all-industry production.

	-	Employment in sectors closely linked to consumption also shows a gradual easing of weakness.

	○	Meanwhile, export growth expanded due to favorable semiconductor conditions, although trade-related uncertainty persists.

	-	Trade in non-semiconductor items weakened somewhat amid high U.S. tariff rates.

	-	Semiconductor exports remain robust, but part of their strength reflects the surge in prices; in volume terms, the previously strong gains are gradually moderating.

Summary

Policy Study KOR Time Preference Estimation in Korea: Focusing on the Impact of Age

This study systematically analyzes the relationship between time preference and age in South Korea, offering policy implications. It reviews the theoretical foundations of age-specific characteristics of time preference and empirically examines time preferences using survey methodology. Findings reveal that time preferences follow a U-shaped pattern with age, reaching their lowest point in the 45-50 age range. Educational attainment significantly impacts time preferences, with college graduates linked to lower preferences and smoother age-related patterns compared to those with high school education or less. Additionally, life insurance policyholders and groups with high financial literacy demonstrate lower and more stable time preferences. These results suggest the need for targeted life-cycle policies. Contrary to traditional economic theory’s view of time preference as a fixed exogenous variable, this study suggests potential endogenous changes, advocating tailored policy approaches in savings, education, finance, and information provision.

Summary

Policy Study KOR The Impact of Demographic Changes on Productivity

Demographic transitions in South Korea are projected to slow its potential economic growth through declining labor input and lowering total factor productivity (TFP). However, the TFP channel has been relatively underexplored compared to the labor input channel due to data limitations. To address this gap, this study constructs a comprehensive firm-level dataset by combining KISDATA from the NICE Information Service with income tax records from the National Tax Service. The resulting dataset includes information on both firm-level productivity and the age composition of employees, enabling a quantitative analysis of how workforce aging affects TFP.

The analysis reveals five key findings. (1) An inverse U-shaped relationship exists between employee age composition and TFP, peaking at ages 35-49. (2) Among employees aged 50 and older, TFP significantly decreases as their share rises. Relative to the 35-39 reference group, an increasing share of 40-49 year-olds has no statistically significant effect. However, a 1%p increase in the 50-54 share decreases TFP by 0.2%, and a 1%p rise in those aged 55 and above shows a larger 0.5% decline. (3) The negative impact of workforce aging is more pronounced in firms in the Seoul metropolitan area, firms with 50-299 employees, manufacturing and construction sectors, and firms operating over 30 years. (4) Firms with low average education and wage levels, high labor intensity, or low value-added per employee exhibit greater TFP declines due to workforce aging. (5) While strong seniority-based wage systems are associated with an earlier peak in the inverse U-curve, firms with weak seniority wages experience larger TFP declines due to aging.

The findings suggest that overlooking the TFP channel may lead to underestimating the demographic effects on economic growth. Mid-to-long-term population projections indicate that population aging will reduce TFP by an annual average of 0.2% between 2031 and 2041. The persistent downward pressure on productivity should be incorporated into assumptions about the future TFP trajectory.

This study identifies firms most vulnerable to population aging through heterogeneity analyses, offering targeted policy recommendations for South Korea's labor supply strategies. As industries become more labor-intensive, low-skill, and low-wage, their productivity declines are expected to be even steeper from workforce aging. Expanding younger foreign worker inflows in the short term can bolster labor supply, while long-term strategies should enhance productivity in these industries to attract domestic youth. Additionally, as seniority-based wage systems exacerbate the productivity impact of aging, reducing reliance on seniority and expanding task- and performance-based compensation systems is advisable for improving TFP.

Summary

Policy Study KOR Impact of Global Trade Fragmentation on South Korea’s Exports: The U.S-China Trade War and Policy Insights

This study analyzes the effects of the U.S.-China trade war on third-country exports to the U.S. and China, focusing on South Korea. Using tariff change data that occurred during the 2018~19 US-China trade war, it estimates product-level elasticities of substitution, i.e., tariff cross-elasticities, and investigates their determinants across countries, industries, and products. This analysis elucidates the heterogeneous effects of the trade war, informing policies to seize new export opportunities amid ongoing global trade fragmentation.

The results show that Korea’s tariff cross-elasticities toward the U.S., relative to U.S. tariffs on Chinese imports, were generally positive, implying that higher U.S. tariffs tend to boost Korean exports to the U.S. In contrast, the elasticity toward China, relative to Chinese tariffs on U.S. imports, was negative on average, suggesting that increased Chinese tariffs tend to reduce Korea’s exports to China. Comparing predicted and actual export changes reveals a potential underestimation bias in the regression model.

Decomposing the determinants of tariff cross-elasticities into country, industry, and product factors reveals the significance of country-specific elements for exports to the U.S. and China, with industry factors also exhibiting relevance for exports to the U.S. In the case of Korea, tariff elasticities were higher in high-tech, capital-intensive, or export-integrated industries.

Additionally, analysis of Korean manufacturing shows that industries with economies of scale reduced production costs and expanded output during the trade war. Zooming into factors for economies of scale, capital-intensive industries with prior investments saw increased value-added, expanded investment, and lower costs. Export-integrated industries exhibited similar positive outcomes.

Lastly, simulations based on the estimated elasticities project that four U.S.-China tariff scenarios increase Korea’s exports to the U.S. by 0.1% to 7.0%, depending on the extent of U.S. tariff changes on Chinese imports. In a severe scenario where both countries impose roughly 10%p additional tariffs on all bilateral imports, Korea's exports are projected to rise by about 4.7% to the U.S. and 9.1% to China.

These findings inform policy decisions for Korea to navigate global trade changes, such as the U.S.-China trade war, by prioritizing targeted support for high-tech and capital-intensive industries and bolstering investment and export infrastructure to enhance resilience and capture emerging export opportunities.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.11

■	Despite weak construction investment and slower export growth, the Korean economy shows signs of a modest improvement, led by consumption.

	○	The semiconductor sector remained buoyant, but export growth gradually slowed due to negative spillover from U.S. tariff hikes. Construction investment also continued to lose momentum.

	-	With exports to the U.S. declining steadily and weakness persisting in non-semiconductor items, average daily exports showed a modest slowdown.

	○	However, consumption has been recovering gradually, supported by lower market interest rates and policy measures to stimulate spending.

	-	As a result, services production continued to improve, particularly in sectors tied to domestic demand, such as wholesale and retail trade.

	○	Meanwhile, although trade conditions have improved somewhat,with progress in KoreaU.S. trade negotiations and easing U.S. China trade tensions, uncertainty persists.

Summary

KDI FOCUS The Role of Capital Structure in Real Estate Project Financing: Risk, Cost, and Policy Implications

By examining project-level data on real estate project financing (PF), I find that higher equity ratios are associated with lower overall risk and reduced project costs. This finding supports policy measures aimed at strengthening capital structures without unduly constraining PF activity. If regulatory lending limits are to be introduced, they should target only low-equity PF projects. Moreover, preferred shares should be recognized as regulatory-eligible equity capital, and the deferral of capital gains tax should be made permanent to encourage in-kind land contributions. It is equally important to address regulatory arbitrage involving Project Finance Vehicles (PFVs), which are often exploited to pursue large-scale developments with minimal capital.

- The government has announced measures to expand PF equity capital, but without disclosing project-level data, there is no empirical basis to assess whether this expansion sufficiently reduces risk.

- Empirical analysis finds that expanding PF equity capital lowers risks across presale, default, postdefault recovery failure, and post-completion refinancing failure.

- PF capital expansion reduces construction, f inancing, and other costs, which in turn lowers total project costs.

- Increases in PF equity ratios diminish contractors’ guarantee risk, reduce construction costs, and thereby lessen completion risk.

- The current plan properly combines capital requirements with incentives, but specificity and effectiveness should be improved.

- PF lending caps should apply only to loans on low-equity projects, not to all PF loans.

- Policy incentives should extend to preferred shares as eligible PF equity capital to attract more equity investors.

- The capital gains tax deferral for in-kind land contributions should be permanent.

- PFVs have enabled undercapitalization in large projects, and prudential regulation and supervision on par with project REITs should be introduced in stages for PFVs to close regulatory arbitrage and strengthen the capital base.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2025.10

■	The Korean economy continued to show weak growth in overall production, weighed by contraction in the construction sector, while weakness in consumption appears to be easing

	○	The prolonged downturn in the construction sector continues to weigh on all-industry production growth, while employment also slowed, particularly in that sector.

	○	However, manufacturing indicators improved, as continued high growth in passenger car retail sales is driving a surge in motor vehicle output.

	-	Other retail sales also showed a gradual easing of weakness,supported by declining market interest rates and government consumption support measures.

	○	Meanwhile, downside risks to economic activity persist, as indicated by deteriorating global trade conditions.

	-	High tariffs on Korean motor vehicle exports to the U.S. remained in place, while trade uncertainty has increased, as indicated by renewed tensions between the U.S. and China.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, August 2025

Contract Type Selection in Korea’s Large-Scale Retail Sector / JINKOOK LEE, Myeongsik Seo

“Using firm-level data on 7,000 suppliers transacting with 26 major South Korean retailers, this study analyzes how contract types, referring to direct purchase, special contract, consignment, and store lease types, are determined and how they affect supplier performance. Contract choice varies systematically by retail format and product category, shaped by transaction costs and asset specificity. Regression results show that direct purchases are positively associated with advanced retailer procurement systems, high supplier trust in the retailer, and stronger supplier bargaining power, while special contracts are more prevalent when supplier-specific investments are required. Instrumental variable estimates indicate that a 1 percentage point increase in the special contract share reduces supplier revenue by approximately KRW 259 million. Regulatory enforcement data reveal that over 75% of unfair trade practices occur in direct and special contract transactions, with special contracts showing the highest violation rate per transaction. These findings suggest that contract type is a key channel through which bargaining asymmetries affect economic outcomes. Policy implications include enhancing supplier bargaining power and improving the oversight of contract-specific risks.”

On the Effects of National Debt on the Distribution of Household Assets / SEUNG-RYONG SHIN

This study examines the long-term effects of higher national debt in South Korea on asset distribution. Using an overlapping generations general equilibrium model, we focus on two key channels: rising interest rates and falling wage rates, both driven by the crowding-out effect of capital. Higher interest rates increase asset dispersion, benefiting older groups with more accumulated assets, while younger groups with fewer assets gain less. Falling wage rates reduce the capacity to save money across all age groups, partially offsetting the dispersion effects of higher interest rates. A simulation of a 50% increase in national debt reveals a decline in the Gini coefficient of asset holdings, driven by the diminishing marginal increase in future assets relative to current holdings. However, widening cross-sectional dispersion proved more welfare-relevant: older age groups, which experienced greater gains in average assets, saw increases in average welfare, whereas early life-cycle cohorts with low asset levels experienced welfare losses. Given this trade-off associated with higher national debt, initial asset transfers as a counteracting measure can enhance lifetime welfare overall, mitigate the rising asset dispersion, and improve the asset Gini coefficient.

The Macroeconomic Effects of Structural Oil Price Shocks: An International GVAR Analysis / SORA CHON

This paper investigates the macroeconomic impacts of structural oil price shocks by employing a Global Vector Autoregression (GVAR) framework, utilizing the structural shocks as identified by Baumeister and Hamilton (2019). Our analysis differentiates among three types of oil shocks: economic activity shocks caused by fluctuations in global demand, oil supply shocks driven by production disruptions, and oil inventory demand shocks linked to shifts in market expectations about future supply-demand imbalances. Empirical findings indicate that the macroeconomic consequences of these shocks differ depending on their underlying sources and related structural characteristics. In oil-importing countries such as Korea and China, oil supply disruptions and inventory-related shocks generally exert negative short-term effects on economic activity due to increased import costs and uncertainty-driven price volatility. Conversely, oil-exporting countries such as Canada and the United States respond differently, benefiting from increased export opportunities associated with higher oil prices. Overall, the study emphasizes the critical importance of distinguishing the structural causes of oil price fluctuations, highlighting how the indirect transmission of these shocks through international economic linkages significantly influences domestic macroeconomic performance outcomes. The results provide important implications for policymakers, underscoring the necessity of tailored policy responses to mitigate macroeconomic risks arising from energy transitions and geopolitical uncertainties.

Efficiency Effects of Regulations on Unfair Subcontracting Behaviors / YONG HYEON YANG

This paper investigates the efficiency effects of governing vertical relationships by analyzing the incentives of firms to engage in exclusive contracts. In particular, the analysis focuses on the subcontracting context. When a downstream firm possesses a superior bargaining position, upstream subcontractors do not prefer an exclusive contract, even when it is efficient, as such a contract lowers their bargaining power even further, ultimately leading to lower profits. It can therefore enhance efficiency to encourage upstream firms to engage in an exclusive contract by limiting bargaining power abuses by superior downstream firms. The paper discusses the required flexibility of such a regulation as well as the evaluation of the current regulation based on the analysis.

Sharing Economic Rents with Workers? Evidence from Matched Employer-Employee Data in Vietnam / NOBUAKI YAMASHITA

Utilising matched employer-employee data from Vietnamese small and medium enterprises (SMEs) surveys spanning the time frame of 2007-2015, we investigate the extent to which firms share economic rents with their employees through wage adjustments. Our analysis reveals rent-sharing elasticity of 0.08-0.1, demonstrating that small firms with limited market power engage in rent sharing in response to increased economic rents, measured as value added per employee. This rent sharing is prominent if a worker is related to an owner and is engaged in non-production jobs. However, the analysis based on worker panel data indicates caution against interpreting the results as causal evidence.

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