KEA RESEARCH

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The Korean Economic Association was launched in Pusan on November, 30, 1952.

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KOREAN JOURNAL OF ECONOMIC STUDIES

Did Pro-natal Policy in Korea Fail?: A Decomposition of Fertility Change from 2000 to 2016

Chulhee Lee (Seoul National University)

Year 2018 / Vol 66 / No 3

The result of decomposition analysis of the change in total fertility rate(TFR) suggests that marital fertility substantially increased during the lastdecade after the government started to implement pro-natal policy measures in2005. The rise of marital fertility was offset by rapid decline in nuptiality (thefraction of women who are married). The results of panel fixed-effect modelestimations based on county-level data show that local characteristics related topro-natal policies (such as the allowance for newborn children and availabilityof child care facilities) promoted marital fertility, whereas they were negativelyrelated to the marriage rates of single individuals. These results cast doubts onthe general consensus that the pro-natal policies since 2005 entirely failed. Theincrease in marital fertility, the major aim of the government policies,contributed to keep TFR from plummeting to an extremely low level. Hadmarital fertility remained unchanged since 2005, TFR would have plunged to0.73 by 2016 because of the sharp decline in nuptiality.

Economic Performance of Global Value Chain Participation: Evidence from Plant-level Data of Korean Manufacturing Sector

Jung Hur (Sogang University), Haeyeon Yoon (Sogang University) and Yongdae Lee (The Bank of Korea)

Year 2018 / Vol 66 / No 3

The purpose of this study is to analyze the effects of global value chain(GVC) participation on plants’ performance using Korean establishment-leveldata. To mitigate the selection bias in the global value chain participation, weutilize difference in difference model with propensity score matching technique.We find empirical evidence that participation in the global value chain increasesthe growth rate of plants’ performances. Furthermore, we found theheterogeneous effect of GVC participation by trading partner or the path of theparticipation. On the basis of the unique trade-establishment matched data,our results revealed that manufacturing plants participating in the global valuechain system can grow more than those not.

International Profit Shifting of Multinational Corporations with the Corporate Income Tax Rate Gap

Gyeong Lyeob Cho (Korea Economic Research Institute) and Yun Ho Chung Keimyung University)

Year 2018 / Vol 66 / No 3

We estimate the semi-elasticities of profit shifting of multinationalcorporations with corporate tax rate gap using firm-level micro panel data. Wedistinguish the estimation with the overseas subsidiaries of the Korean firmsfrom the foreign cases. We also distinguish the cases whether the parentcorporations or the subsidiaries are located in the low tax rate countries andtry to see any policy implication from this. The semi-elasticity with the Koreansubsidiaries facing the Korean corporate tax rate is estimated at 1.55, whichis higher than 1.05 with the foreign subsidiaries. If the corporate tax rate ofthe country where the Korean subsidiaries are located is higher than theKorea’s, the semi-elasticity is estimated to be 4.15, which is more than threetimes higher than the otherwise expected 1.36. In the case of foreigncorporations as well, if the corporate tax rate faced by the parent corporationsis lower than the subsidiaries, the estimated semi-elasticity of 2.196 is 1.8times higher than the otherwise estimated 1.246. We conclude that the effectof tax rate gap on profit shifting is greater when the parent corporations arelocated in the low tax rate countries than the subsidiaries. That is, the effectof profit shifting is greater when the countries of the parent corporations,rather than the subsidiaries, cut the corporate tax rate.

KOREAN ECONOMIC REVIEW

Price Discrimination with Loss Averse and Horizontally Differentiated Consumers

Jong-Hee Hahn (Yonsei University), Jinwoo Kim (Seoul National University), Sang-Hyun Kim (Yonsei University) and Jihong Lee (Seoul National University)

Year 2018 / Vol 34 / No 2

This paper considers a monopolist seller facing horizontally differentiated consumers,whose preferences are reference-dependent and loss averse in the frame of Kőszegi and Rabin(2006). Our results on optimal menu suggest that consumer loss aversion does not necessarily limit the benefits of screening under the horizontal demand structure, in contrast to the findings of Hahn, Kim, Kim and Lee (2018) and Herweg and Mierendorff (2013) who consider the case of vertically differentiated preferences. 

Peer Pressure with Inequity Aversion

Kangsik Choi (Pusan National University), Jae-Joon Han (Inha University) and Minhwan Lee (Inha University)

Year 2018 / Vol 34 / No 2

To examine the effects of peer pressure on outputs under symmetric and asymmetric information, we define a peer pressure function representing psychological costs and incorporate it into the agent’s utility function. Under symmetric information, an efficient agent who is averse to inequity (i.e., suffering from being ahead) produces less than he does without peer pressure whereas an inefficient agent suffering from being behind produces more such that the output gap between the two types of agents is lessened. Moreover,overproduction in total output will occur if the inefficient agent’s disadvantage inequity aversion is greater than that of the efficient agent’s. However, as the information structure becomes asymmetric, the overproduction disappears because the information rent paid to the efficient agent becomes too burdensome so that it countervails the active peer pressure effect.These results are consistent with previous findings from empirical and experimental studies. 

Retrospective Generational Accounts for Korea

Young Jun Chun (Hanyang University) and Ji Eun Song (National Assembly Futures Institute)

Year 2018 / Vol 34 / No 2

This study addresses fiscal sustainability and generational equity of Korea by using generational accounting (GA). Unlike previous Korean GA studies, we compute retrospective GA, assessing the value of net taxes paid in the past combining this with traditional forward-looking GA, appraising the rest-of-life net tax burden to obtain full lifetime accounts (FLGA). FLGA cover the entire life for all the cohorts. We find that the fiscal policies of Korea bring about generational inequity. The net tax burden of future generations should be raised to an unbearable level, higher than 40% of lifetime income, to service government spending under the current policies. In addition, we show that parametric reforms to resolve the problem have only limited effects even under the demographic assumptions that subsidy to childbirth and childcare and open-door immigration policy substantially reverse population aging and reduction, which indicates the requirement of many fundamental reforms.  

KOREAN ECONOMIC FORUM

How to Reform the Korean Economy

Jaymin Lee (Yonsei University)

Year 2018 / Vol 11 / No 2

Korea has to establish market economy while revising it at the same time.The two tasks have many complementary dimensions. The government shouldfirst check the interests of the more powerful forces of the society and theninduce weaker parries to join the reform efforts. Korea needs to pursueexpansionary fiscal policy to repair the infrastructure, create more governmentjobs, and increase welfare expenditure. In the longer run, the country shouldcontain rent-seeking activities, restructure the national innovation system andreform the dualism in industrial organization. The current Korean government’sefforts to create government jobs must be combined with the reform of thepublic sector. Minimum wage should be raised in combination with EITC. Thereduction of working hours and non-regular workers should be carried out byconcluding social pact. Labor supply should be more differentiated than thecurrent simple stratification based on schooling. To reduce income inequality,the bargaining power of subcontractors should be raised and fair trade regulationshould be strengthened. The coverage ratio of the national health insuranceshould be raised and the dead angle of the employment insurance and nationalpension service should be narrowed. The increase of taxation should beaccompanied by the reform of the public sector.

Korean Inclusive Growth: Its Measurement and Relationship with Policy Variables

Won-Kyu Kim (KIET) and Sung Wook Hong (KIET)

Year 2018 / Vol 11 / No 2

This paper defines the inclusive growth as the sum of labor productivity,employment ratio and income equality growth rates and measures Koreaninclusive growth(IG) using annual data since 1990. Korean IG showed decliningtrend as a whole since 1990 and in particular labor productivity slowdowncontributed to IG decline during 2011-2016. According to the estimation results,the following variables are found to have positive relations with IG in particular:investment ratio and total factor productivity in labor productivity part; incomeredistribution policy effect in income equality part; laborforce participation ratioand female & youth employment ratios in employment ratio part; and ICTinvestment ratio in the other variables.

New Growth Engine and Inclusive Growth in the 4th Industrial Revolution

Hee-Su Kim KT Economics and Management Research Institute)

Year 2018 / Vol 11 / No 2

With the advent of the 4th Industrial Revolution, innovative ICTs have beendeveloping steadfastly at enormous pace, and tremendous changes have takenplace throughout the economy and our daily lives as industrial structure centersaround platform businesses. The key leading technologies in the new era includebut not limited to 5G, artificial intelligence, and blockchain. These technologiesnot only comprise their own individual industry, but also can be utilized as acore infrastructure of the 4th Industrial Revolution and create future growthengines by converging with existing industries. On the other hand, there alsohave been some concerns that socioeconomic problems caused by previouseconomic models focusing on growth, such as widening of income inequalitygap, job losses, low fertility and aging, could be aggravated. ‘Inclusive growth,’which endeavors to solve such social problems and achieve economic growth ina lump, is considered as a new panacea. Especially with the rapid developmentof innovative ICTs, the role of ICTs is becoming much more crucial in dealingwith such social problems. However, it would be difficult to propel inclusivegrowth if solely done on a private level, and to that end, governments shouldtake the leading role in creating new markets by bearing potential risks of aproject in its initial stage and by designing it as a mission-oriented project fortackling social problems.