KDI - Korea Development Institute - RESEARCH - Research Areas

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 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

KDI FOCUS Health Insurance Expenditure Growth: Driving Factors and Policy Implications

As financing tools such as higher premiums and government subsidies are increasingly unsustainable, national health insurance system faces growing pressure to optimize spending. Empirical analysis of health insurance expenditure drivers identifies price increases as the dominant factor. In particular, rising service prices in local primary care clinics rather than utilization rates are disproportionately contributing to overall expenditure growth. For efficient management of health insurance resources, policy efforts should focus on strengthening the primary care function of local clinics by reforming the current fee-for-service payment model, while also institutionalizing a robust expenditure review framework.

- Despite a sharp rise in healthcare expenditure, Korea’s health insurance system lacks mechanisms to control spending.

- Premium increases and subsidy expansions are becoming unsustainable as financing tools, underlining the need for effective expenditure control.

- Effective expenditure management requires understanding the drivers of health insurance spending.

- From 2009 to 2019, price accounted for 76.7% of the increase in health insurance expenditure, with quantity and demographics contributing 14.6% and 8.6%, respectively.

- The price contribution to health insurance expenditure growth has increased over time.

- While the demographic contribution remains significant, it has declined.

- In 2019, the contribution of price in outpatient services accounted for 38.7% of health insurance expenditure growth, making it the largest contributor.

- As inpatient utilization slows and price gains greater influence, the inpatient quantity contribution to health insurance expenditure growth has declined.

- In 2019, price in primary care clinics accounted for 24.9% of the increase in health insurance expenditure―the highest among all institution types.

- Quantity contributions have declined most noticeably in primary care clinics and tertiary hospitals.

- Among individuals aged 65+, demographic change was the primary contributor to health insurance expenditure growth, while the influence of price has expanded in recent years.

- Among the young-old population (65-74), a decline in quantity contribution has moderated the growth of health insurance
expenditure.

- For those aged 85+, the demographic and quantity factors remain the primary contributors to health insurance expenditure growth.

- The decline in healthcare utilization among the young-old population and the gradual slowdown in health insurance expenditure growth suggest the possibility of healthy aging.

- Managing health insurance expenditure requires exploring ways to supplement the current fee-for-service payment system.

- Supplementing the fee for-service model is also necessary to strengthen the primary care role of local clinics.

- Proactive investment to promote health among the young-old population is required.

- For those aged 85+, management strategies for end-of-life care, including the use of life-sustaining treatments, are needed.

- A formal evaluation framework for health insurance expenditure should be established to support fiscal management strategies.

Summary

Policy Study KOR A Study on Strategic Procurement

Around the world, public procurement is increasingly being designed to serve broader social objectives ― such as supporting disadvantaged groups or promoting innovation ― alongside its traditional economic goals. This trend is also gaining momentum in Korea. In this paper, we refer to the use of procurement to achieve these secondary aims as “strategic public procurement” and explore its potential benefits and costs. Specifically, we conduct an empirical analysis of strategic procurement practices that prioritize certain companies or products, with a focus on Korea’s purchase target ratio system. Our findings suggest that procurement aimed at fostering innovation can be economically effective, whereas evidence supporting procurement targeted at disadvantaged groups is less consistent.

Summary

Policy Study KOR Decomposing Health Care Expenditure Growth in Korea

This paper analyzes healthcare expenditure growth in Korea using National Health Insurance Claims data from 2009 to 2019. Healthcare expenditure growth is decomposed into three components at the disease level: service utilization growth, service price growth and demographic transition.

The decomposition shows that growth in prices is the primary driver of healthcare expenditure growth since 2013 at the aggregate level. The main driver has shifted from service utilization growth towards service prices growth. The contribution of demographic shift remains stable over the period, however the contribution pattern varies across age group, type of services and suppliers.

Decomposition of healthcare expenditure of elderly shows different pattern compared to aggregate level decomposition. Demographic shift is the main driver of healthcare expenditure growth among elderly. The contribution of service utilization decreased and suggests possible healthy aging.

Summary

Policy Study KOR Tax Revenue Structures in an Aging World: International Comparisons and Policy Insights

This study aims to foster informed public discourse on inevitable tax increases in response to the substantial fiscal pressures of population aging. Chapter 2 examines how major advanced economies that experienced population aging earlier than South Korea mobilized financial resources during this demographic shift. Chapter 3 empirically analyzes tax reform strategies that reduce revenue volatility, support economic growth, and promote equitable taxation. The findings support strengthening value-added tax (VAT) and personal income tax―a widely endorsed approach mong tax experts and implemented in major advanced economies. However, Korea has limited experience with universal tax increases and faces considerable public resistance to such measures. To assess whether these concerns are based on empirical evidence, Chapter 4 examines 150 cases of VAT or personal income tax increases implemented in major advanced economies. The findings reveal that only 20% of these tax increase cases resulted in a change in government. Finally, Chapter 5 argues that concerns over political repercussions should not preclude universal tax increases as a key policy option for enhancing the sustainability of public services. The study also emphasizes two prerequisites for the government to address before initiating public discourse on tax increases: earning public trust in the efficiency and effectiveness of fiscal expenditures through structural reforms and improving the general public’s fiscal literacy.

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.

Summary

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. An empirical analysis of new vehicle registrations from 2019 to 2022 shows that investing in charging facilities is more costeffective than offering purchase incentives for increasing BEV adoption. To achieve a higher share of BEVs, a stronger policy focus on improving the charging network is necessary to stimulate overall demand for BEVs.

- Achieving the target of ‘deploying 4.5 million BEVs and FCEVs by 2030s’ requires a substantial increase in the number of these vehicles, necessitating a comprehensive review of effective policy strategies.

- While Korea has witnessed a consistent increase in the cumulative number of BEVs (and PHEVs), it still lags behind the global average.

- Recent data indicates a deceleration in the growth rate of new BEV registrations.

- Korea’s government policy support to promote the adoption of BEVs and FCEVs primarily comprises purchase subsidies and charging infrastructure installation. Fiscal spending for these measures has increased dramatically, with the related budget accounting for 25.3% of the Ministry of Environment’s total budget in 2023.

- Analysis reveals that a 10% increase in the cumulative number of chargers correlates with a 12.4% rise in new registrations, while a 10% price reduction due to subsidies results in a 15.8% increase in new registrations.

- Also, private vehicles exhibit lower elasticity in response to changes in the number of chargers and in price compared to their government and business counterparts.

- Subsidy-induced adoption accounted for about 27.4% of the 240,000 BEVs eligible for purchase subsidies in 2019~22.

- Analysis suggests that promoting BEV adoption through the expansion of charging infrastructure would be more cost-effective than offering purchase subsidies. Additionally, the direct social benefits derived from BEV subsidies generally fail to outweigh their costs, indicating current subsidy levels may be excessive.

- Future BEV deployment policies should prioritize reinforcing charging infrastructure over providing purchase subsidies. In particular, deploying enough fastchargers at key travel hubs is essential to improve convenience and facilitate long-distance travel.

Summary

Research Monograph KOR Analysis of Public Procurement Contracts: Effectiveness of the APAS

The Korean government implemented the Average Price Auction with Screening (APAS) in 2016 for construction contracts of a certain size or larger that are ordered by the public sector, including central government offices and public enterprises. The APAS takes into account both price and non-price scores which are tallied using the Average Price Auction (APA), and not the more common First Price Auction (FPA) method. The FPA awards the highest score to the lowest bidder while the APA calculates the average price, and awards the highest score to the closet bid. As such, the APA regulates the bidding competition, and forces bidders to place similar offers. Before being replaced by the APA in 2016, the FPA received harsh backlash for inciting aggressive competition, and awarding contracts to incapable bidders which resulted in frequent contract changes and cost overruns.

This study empirically analyzes whether the APAS produces meaningful effects that achieve the intended goals in regard to price and non-price scores. The outline of the major findings are as follows. Firstly, the bid-hit ratio increased by a statistically significant 6% after the adoption of the APAS. This is in line with expectations that the transition from the FPA to APA keeps competitions in check and raises the bidding ratio. Secondly, no improvements were observed in the resolution of fallouts such as contract changes and cost overruns. In sum, these results indicate that the APAS is not effective, and could place a bigger fiscal burden on the government authorities awarding the contracts.

Summary

Policy Study KOR Evaluating the Effectiveness of Social Policies through a Policy Experiment System

This study proposes that a policy experiment system is introduced to examine the validity of new social polices. Such polices cannot be assessed with the existing Preliminary Feasibility Test and require a small-scale pilot program with an experimental design (typically, randomized controlled trial or RCT) to first be implemented. When the program ends, it is evaluated by the fiscal authorities to decide on whether to scale up the policy.

The policy experiment system presented in this study is applicable to social policies with the following characteristics: i) concrete objective; ii) measurable main outcome and realized in a short period of time and; iii) accessible control group. It is particularly useful when a policy is surrounded by skepticism and/or when budgetary needs are expected to increase in the near future. Accordingly, it can be concluded that the active labor market program is most suitable for the pilot application of the policy experiment system.

Chapter 1 briefly introduces the concept of the policy experiment system while Chapter 2 presents the implementation of the experiment through existing and new labor market programs. Prime examples are the Employment Success Package which was initiated in 2010 and the Youth Job Search Subsidy which is slated for 2019. Chapters 3 and 4 provide practical guides for researchers conducting the policy experiment and summarize the issues of conducting the experiment in the health and welfare field. Finally, Chapter 5 discusses the potential limitations of the system and draws on a conclusion.

SITEMAP

HOT ISSUE

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Public Finance

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary