KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Monthly Economic Trends KOR KDI Monthly Economic Trends 2024. 10

■	The Korean economy is experiencing limited improvement as therecovery of domestic demand, especially in construction investment,is delayed, despite favorable conditions in exports.

	○	ICT exports continued strong growth, while manufacturing productionsteadily recovers from a temporary adjustment.

	-	As disruptions in automobile production caused by facility maintenanceand wage negotiations ease, both production and shipments areincreasing, suggesting that the manufacturing sector is maintaining itsrecovery trajectory.

	○	However, amid continued weakness in goods consumption, therecovery of domestic demand is being delayed by the continuedslump in construction investment.

	-	The decline in the value of construction completed continued, andgiven the accumulated weakness in leading indicators, the slump inconstruction investment is likely to continue for the time being.

	-	Amid the ongoing increase in service consumption, retail salescontinue their downward trend due to the high interest rateenvironment.

	○	Moreover, external uncertainties are expanding as conflicts in theMiddle East region intensify.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 9

■	Despite strong export growth, the Korean economy is showing signs of constrained improvement, as elevated interest rates are delaying the recovery of domestic demand

	○	The manufacturing sector persists in its recovery trajectory, driven by sustained high growth in exports, particularly in the ICT industry.

	-	Although manufacturing-related indicators observed some adjustments due to disruptions in automobile production, the overall recovery trend in manufacturing remains intact, with semiconductor production maintaining high levels.

	○	Despite strong export momentum, consumption and investment remain sluggish, indicating that domestic demand recovery has yet to materialize.

	-	Retail sales remained subdued amid the persistent high interest rate environment.

	-	Construction investment and related employment may remain suppressed for the time being, given the prolonged decline in its leading indicators, potentially constraining the recovery of domestic demand.

	-	Furthermore, the delinquency rate among individual business owners continues to rise, indicating an escalating debt repayment burden.

Summary

Journal of Economic Policy KDI Journal of Economic Policy, August 2024

The Impact of US Export Controls on Korean Semiconductor Exports / Hanhin Kim and Jaehan Cho

This study empirically investigates the impact of recent US export controls on China on South Korea’s semiconductor exports. We analyze South Korean export data to shed light on the repercussions of US export restrictions on a third country. Our findings reveal a significant decline in Korean semiconductor exports following the October 2022 imposition of US controls. This decline was most pronounced in the memory, discrete devices, and discrete device components subsectors of the semiconductor industry. In addition, we observed a decrease in unit prices, especially for memory semiconductors, pointing to downward pressure on South Korea’s high-value-added semiconductor exports. These results provide some evidence of substantial negative impacts of US export controls on South Korea’s semiconductor industry, and particularly with regard to its high-tech products.

Trump Tariffs and Roundabout Trade / Tadashi Ito

Although there are many news articles of tariff dodging via the rerouting of made-in-China goods through third countries, relabeling these goods as made in Mexico or made in Vietnam, there have been no scientific studies on this issue. This paper provides statistical evidence regarding whether such practices are taking place. Using monthly trade statistics at the most disaggregated level and analyzing data up to 2019, the year before the COVID-19 shock, little evidence of roundabout trade is found. With an extended dataset up to 2023, overall there is little sign of roundabout trade, although some slight signs of roundabout trade are found for Mexico and Vietnam.

Experts to the US and Imports from China during the US-China Tariff War: Evidence from Regional Trade Data in Vietnam / Kazunobu Hayakawa

This study empirically investigates how the exports of downstream products to the US change the imports of their upstream products from China during the US-China tariff war. To accomplish this, we use province-level trade data in Vietnam, known to be a country that increased its exports to the US market in place of China, i.e., known to enjoy a trade diversion in the US market. The use of regional trade data enables us to capture the input-output linkages more precisely. Specifically, focusing on the trade in general and electrical machinery industries from January of 2019 to December of 2023, we regress imports of upstream products from China on exports of their downstream products to the US, finding that the rise of exports of downstream products to the US significantly increases imports of their upstream products from China. On the other hand, the rise in these products does not significantly increase the imports of upstream products from Japan, Korea, and Taiwan. Furthermore, the inputoutput linkage between exports to the US and imports from China was found to be greater in provinces with better business environments in terms of entry costs, transparency in public services, and public support to businesses.

Economic Effects of Unemployment Insurance for Entrepreneurs in South Korea / Jiyeon Kim

This paper aims to examine the economic impact of the implementation of an unemployment insurance (UI) program for entrepreneurs in South Korea. Despite facing labor market risks similar to paid employees, entrepreneurs are often not eligible for UI in many countries. South Korea, where entrepreneurs represent over 20% of the workforce, is considering a design of UI for entrepreneurs, with the goal of providing coverage to this group by 2025. This study examines how the addition of UI for entrepreneurs would impact the economy using a model of entrepreneurship based on a search and matching framework. The study’s findings suggest that the implementation of UI for entrepreneurs would lead to increased business closures and reduced hiring, resulting in a slack labor market, which in turn would reduce social welfare overall. However, social welfare can be improved by subsidizing UI contributions paid by entrepreneurs, which provides the greatest improvement in social welfare compared to other social protection systems such as unemployment assistance.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 8

■	The Korean economy has sustained strong export growth, primarilyfueled by the semiconductor sector. However, domestic demandremains subdued, constraining overall economic improvement.

	○	Semiconductor-related production indicators maintained positivemomentum, with exports continuing to ascend, particularly in ICT items.

	-	Increased semiconductor production and shipments, coupled withreduced inventory, are driving the recovery in the manufacturing sector.

	-	Exports sustain their upward trajectory amid modest global economicexpansion and robust semiconductor market conditions.

	○	However, services production growth remained tepid, andconstruction investment continued its descent, indicating that therecovery phase of domestic demand has not yet materialized.

	-	Services production exhibited tepid growth, primarily driven bywholesale and retail trade and accommodation and food services.

	-	Amid persistent declines in retail sales and rising loan delinquencyrates, the accumulated slump in construction orders received led to acontraction in construction investment, suggesting employmentconditions are gradually adjusting.

	○	Meanwhile, external uncertainties have slightly increased on therecent escalation of geopolitical risks in the Middle East andconcerns over a U.S. recession.

Summary

Policy Study KOR Demographics and Inflation in Korea

This study empirically analyzes Korean data focusing on the impact of the demographic change on the inflation. The analysis indicates that the ongoing aging of the population does not statistically significantly induce inflation in terms of the aggregate price index. However, an analysis of the sub-items of the price index shows that changes in the age composition of the population are associated with sector-specific inflation. Particularly in the service sector, the increase in the population of the young and the elderly appears to have an inflationary effect, while a relative increase in the working-age population seems to be deflationary. In conclusion, this study finds that the relationship between population structure and inflation varies by sector, with a more pronounced correlation in the service sector. This is an analytically significant finding that deserves policy attention. It suggests that policy decisions for price stability should carefully evaluate and distinctively respond to the potential impacts of demographic changes on a sector-by-sector basis.

Summary

Policy Study KOR Inflation Expectations Through the Lens of the Slack in the Real Estate Asset Market

This study examines inflation expectations implied in the real estate asset market. Land is an asset that accounts for more than half of South Korea's national wealth and, like labor, is an essential input factor despite its inelastic supply. Based on this idea, we examine whether a similar regularity as the Phillips curve observed in the labor market is also observed in the real estate asset market. The main results are as follows. First, an increase in the relative price of land can be a pass-through, transferring inflationary pressure over the years. Second, comparing the existing expected inflation indices, an expected inflation rate extracted from the real estate asset market can provide additional information. Third, theoretical analysis shows that the relative price of land and expected inflation can be positively correlated in general equilibrium.

Summary

Policy Study KOR Empirical Analysis of Political and Economic Relations between the Korean Peninsula and Surrounding Countries: Focusing on Country Relations Index Using Big Data

Recently, tensions between the US and China have been escalating across various sectors, concurrently with rapid shifts in the international arena due to conflicts such as the Russia-Ukraine war and the Israel-Hamas conflict. The Korean Peninsula is also entwined in the fabric of these dynamics. The Taiwan issue, one facet of the US-China rivalry, is linked to the strategic presence of US forces in South Korea, and semiconductors, South Korea's key industry, are among the most affected by the intensifying tensions between the US and China. North Korea's economic and military ties with Russia, as evidenced by North Korea's supply of conventional weapons and materials to Russia in defiance of international sanctions, are strengthening. Given the complex and grave political and economic environment surrounding the peninsula, evidence-based policymaking grounded in objective data becomes indispensable.

This study utilizes Google's Global Database of Events, Language, and Tone (GDELT) to analyze country relations around the Korean Peninsula. The data provided by GDELT quantitatively measures qualitative variables of inter-country relationships, utilizing machine learning and other state-of-the-art technologies to extend traditional event data methodologies to a vast collection of news articles gathered worldwide by Google. However, despite its strength as one of the most comprehensive and objective event datasets available, it is important to acknowledge and address the limitations such as the reliability and scope of news sources and potential errors in event identification and classification.

Using trade data and GDELT, this study examines the economic and political dynamics between the US and China for time-series econometric analysis―what drives the US-China conflict, which country triggers cooperation and conflict, how the other country responds, and whether these outcomes vary over time. This analysis reveals that before President Xi Jinping's tenure, US-China relations were primarily influenced by trade, with a notable positive correlation between increased trade and more favorable relations. During this period, their interactions appeared to have no significant impact on each other. However, since the beginning of Xi's presidency, China has actively responded to US diplomatic protests and corrective measures. Empirical analysis supports this move, which aligns with China's strategy to assert itself as a global power through expanded political and military influence, underpinned by its economic growth. The shift towards mutual diplomatic and security issues over economic variables in influencing US-China relations indicates that future tensions are likely to arise from areas such as Taiwan rather than trade.

The study further explores inter-Korean relations and the dynamics among countries surrounding the Korean Peninsula, investigating how the US-China power dynamic, bilateral relations, and interactions among neighboring countries influence the two Koreas. Findings indicate that the US-China power dynamic and relations have a significant correlation with South and North Korea's external relations with these superpowers but exert minimal impact on the peninsula's international relations. This suggests that the US-China relationship is a major factor in shaping the external relations of both Koreas without directly affecting the internal tension or peace. However, it is important to acknowledge that the recent escalation in US-China tensions, if it has fundamentally changed the geopolitical context surrounding the Korean Peninsula, might render predictions based on historical data incomplete.

This study showcases an analysis of inter-state relations using quantified objective data. The data, methodology, and findings presented are expected to serve as reference materials for formulating future foreign policies.

Summary

Monthly Economic Trends KDI Monthly Economic Trends 2024. 7

■	Despite high growth in exports, Korea’s domestic demand has yet to exhibit signs of a recovery trend, resulting in a somewhat tepid improvement in overall economic conditions.

	○	Exports maintain a favorable trend centered on ICT products.

	-	As the global trade downturn eases, the semiconductor market remains strong.

	-	Accordingly, semiconductor exports and production are showing high growth.

	○	However, as the high-interest rate environment persists, domestic demand has not shown signs of recovery.

	-	Loan delinquency rates are rising, while retail sales, equipment investment, and construction investment are all on the decline.

	-	Consequently, inflation is nearing the target, and employment conditions are adjusting, particularly in the service and construction industries.

	○	Meanwhile, external risk factors, such as heightened geopolitical tensions, continue to persist.

Summary

Policy Study KOR Land Investment and Its Impact on Corporate Performance

This study builds upon the 2019 research, The Macroeconomic Implications of Land Purchases: A Study on the Net Purchase of Land by Corporations, by focusing on the accumulation of land assets by manufacturing firms. Utilizing microdata from the Mining and Manufacturing Survey, it examines the ratio of land assets to tangible assets and observes a pronounced increase in land assets among these firms. The study conducts a regression analysis to compare the performance of firms that invested in land with those that did not, covering a two-year period before and after the investment. Firms that invested in land showed a significantly higher rate of value-added growth compared to their counterparts, though this gap in growth rates diminished after the investment. In particular, the year of land investment coincided with considerably new investments in buildings and machinery, as well as an increase in employment.

In light of these results, the study confirms the role of land as a productive resource. Firstly, land investment exhibits substantial complementarity with other capital goods, evidenced by increased investments in buildings and machinery during land investment periods. Secondly, similar to machinery investment, firms often expand their capital stock in response to positive productivity or demand shocks. However, land investment tends to be more strategically aligned with expanding the firm's scale, which is reflected in the simultaneous increases in employment and value-added, leading to a reduction in labor productivity during periods of land investment.

While land investment is mainly observed in small and medium-sized enterprises and has increased since the 2000s, this study does not provide specific reasons for this trend. The causes of land investment, presumably linked to Korea's unique institutional, regulatory, and economic changes, call for further detailed research.

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