This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Pointing to the fact that large foreign firms are allowed to sell used cars in Korea, domestic carmakers called for an end to restrictions on their participation in this market space.
• The Ministry of SME’s and Startups is reportedly looking into allowing conglomerates to reenter the used car market under specific conditions.
• 51.6% of the public is in favor of allowing conglomerates to participate in this market.

Implications: South Korean policymakers are forced to weigh between the ability of conglomerates to deliver better consumer services and the prerogative of protecting SMEs. The used car market of USD 23 billion could be quickly swallowed up by conglomerates who will likely use price competitiveness to drive out smaller competitors. Moreover, consumers have expressed frustration with the disparate pricing practices of various SME players in the market. As a result, there is widespread expectation that the entry of conglomerates into the market will not only lower prices but also increase standards. However, policymakers worry that this will help further concentrate corporate dominance over the Korean economy with potential long-term consequences on employment.

Context: Six conglomerates make up more than 70% of Korean exports. These vertically-integrated corporations also channel businesses to their subsidiaries, promoting their growth while pushing out smaller competitors. In 2011, the Fair-Trade Commission (FTC) reported that conglomerates composed nearly half of Korea’s manufacturing industry and generated 33.8% of total industry profit. In this environment, SMEs are limited in both domestic and international growth. This lopsided relationship has major consequences for employment as 80% of the labor force is in a SME. In response, the FTC has been regulating corporate expansion since 2013 – but in areas like the used car market, the poor price competitiveness and services by SMEs have led to a consumer backlash.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from the flickr account of Stephan

By Juni Kim

Next week’s U.S. presidential election has, to put it mildly, significant implications for the future of U.S.-Korea relations. The Trump administration’s aggressive approach to rethinking U.S. alliances has unnerved longstanding allies like South Korea. The last four years saw the renegotiation of the U.S.-Korea Free Trade Agreement, U.S. demands for South Korea to pay more for military costs, and Trump’s push for withdrawing U.S. troops stationed abroad. Stalled peace talks with North Korea also underline the continuing danger of North Korea’s increasingly capable missile and nuclear arsenal.

To understand where American voters stand on important issues on U.S.-Korea relations, KEI commissioned a study by YouGov that surveyed 1,064 American adults on August 26^th to the 31^st. Respondents were asked both who they voted for in the 2016 presidential election and who they would likely vote for in next week’s election. The results show that despite a split response among likely Biden and Trump voters on approving the Trump administration’s overall handling of South Korea and North Korea, there is clear agreement by American voters on specific policy issues like North Korea’s denuclearization and stationing U.S. troops in South Korea.

When asked on approving or disapproving of the current administration’s handling of relations with North Korea, 70% of likely Biden voters predictably disapproved while 69% of likely Trump approved. The split is similar for respondents who voted in the 2016 presidential election, with 72% of Democratic candidate Hillary Clinton voters who disapproved and 74% of 2016 Trump voters who approved. On approving or disapproving of the administration’s handling of relations with South Korea, 22% of likely Biden voters approved and 65% of likely Trump voters approved.

Despite the wide split on the administration’s overall approach to North Korea and South Korea, U.S. voters generally agree on how important it is for North Korea to give up is nuclear arsenal. Likely Biden and Trump voters responded nearly identically with 89% and 88% respectively believing it is very important or important. There is some divergence when voters were asked about the U.S. providing humanitarian assistance to North Korean citizens. More likely Biden voters (60%) are in favor of providing assistance than likely Trump voters (47%), though there are still more Trump voters approving of assistance than disapproving (25%).

U.S. voters also show general agreement on the benefits of U.S.-South Korea trade, the U.S.-South Korea military alliance, and support for U.S. troop presence in South Korea. 74% of likely Biden voters and 67% of likely Trump voters believe that U.S. trade with South Korea is beneficial for the United States, and 68% of both sets of voters believe the U.S.-South Korea military alliance is in U.S. national security interests. Despite Trump’s critical view of U.S. troop presence abroad, including in South Korea, more likely Trump voters (66%) are in favor of maintaining or increasing troop presence in South Korea than likely Biden voters (59%).

Even in the current divisive political climate, the results reflect an understanding by Americans regardless of voter preference of the importance of the U.S. commitment to South Korea and the seriousness of the North Korean threat. While voters may be divided on Trump’s own performance, the public consensus should be noted by the next administration and how it approaches relations to the Korean peninsula.

Juni Kim is the Senior Manager for Operations and Technology at the Korea Economic Institute of America (KEI). The views expressed here are the author’s alone. 

Graphics created by Juni Kim. Cover image created by Juin Kim from photos on Gage Skidmore’s photostream on flickr Creative Commons.

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Universal basic income has gained public support in South Korea as the government attempts to ride out the economic slowdown from COVID-19.
• Programs spearheaded by local governments that distribute cash to residents for use within the community serve as pilots for a wider proposal.
• Receiving the most attention, the program in Gyeonggi Province pays a quarterly cash pay-outs to its residents – this program has reportedly led to a 45 percent increase in sales for local businesses.

Implications: Although the Korean government traditionally frames national economic policies as measures to boost export competitiveness, advocates for a nationwide Universal Basic Income (UBI) focus on the proposal’s benefit to local economies. This approach also differs from peer countries like Finland whose UBI pilot measured success based on its impact on employment. Similar to the direct cash payments that Seoul distributed during the height of the coronavirus outbreak, Korea’s UBI proposal promises to boost the domestic consumer market, particularly small and medium-sized businesses. Notably, provincial governments would play a key role in any prospective implementation, giving them greater scope to address issues like the income gap, etc.

Context: Under the Youth Basic Income program, Gyeonggi Province currently provides 1 million won (USD 900) to 24 year-olds living in the region. According to a survey conducted in July 2019 by the Gyeonggi Research Institute, 80.6 percent of the youth recipients said they were satisfied with the program. Meanwhile, politicians from both sides of the aisle have grown more vocal on the issue of implementing basic income on a national level.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from the flickr account of photostudio81

By Randall S. Jones

The 2020 OECD Economic Survey of Korea released last month stressed that Korea’s economic contraction in 2020 is relatively mild compared to other advanced countries. Nevertheless, it will leave durable scars that heighten the need to tackle the challenges of population aging and low productivity. To address these challenges, the Survey focuses on raising employment, enhancing job quality and promoting the diffusion of technology. This is the 17^th OECD Economic Survey of Korea, including two that were published before Korea joined the OECD in 1996.

The economic outlook and macroeconomic policies to support growth

The OECD now projects that Korea’s real GDP will decline 1.0% in 2020, a mild contraction compared to the United States (-3.8%), Japan (-5.8%) and the euro area (-7.9%). This compares to a 1.1% decline most recently projected by KDI and to a 1.3% decline in the central scenario published by the Bank of Korea. A decline of more than 4% is projected for G20 countries and the world economy (Figure 1). Korea’s swift and effective policy response to the coronavirus has enabled it to “avoid the extensive lockdowns of many other countries.” In addition, a wide range of government measures have been implemented to protect households and firms. These measures thus far total 277 trillion won (14.4% of GDP), including three supplementary budgets amounting to KRW 59.0 trillion (a fourth supplementary budget was passed by the National Assembly on September 22). Loans and guarantees to households, SMEs and affected industries accounted for the remainder of public support.

Figure 1. Real GDP
Index, 2019 = 100

Note: The 2020 projection for Korea was slightly revised downward from the 0.8% decline projected in the 2020 OECD Economic Survey of Korea to 1.0% in the OECD Interim Economic Assessment, on account of the resurgence of infections in the third quarter and the measures taken to contain them. Source: OECD Interim Economic Assessment, 16 September 2020.

Fiscal support was accompanied by two cuts in the Bank of Korea’s policy rate by 75 basis points in total to a record low 0.5%. In addition, the central bank injected liquidity in financial markets to promote financial stability and encourage lending to small and medium-sized enterprises.

The Survey projects that domestic-oriented activities will normalize gradually in 2021, boosting real GDP by 3.1% (Figure 1). Private consumption is expected to rebound following its 2020 drop, while government consumption remains strong. However, weak global demand will hold back exports and investment, even assuming no major resurgence of the pandemic. The main risk is the coronavirus: “A second global wave of infections would delay the recovery in consumption and exports, further depress investment and push up unemployment.”

The reliance on fiscal policy was projected to shift the government balance (general government basis) from a surplus of 0.9% in 2019 to deficits of nearly 3% in 2020 and 2021.  Consequently, gross government debt would jump from 38% of GDP in 2019 to 48% in 2022, though still well below the 109% for the OECD area. This projection was made before the fourth supplementary budget in late September, which may push the deficit up to close to 4%. The Survey argues that sound public finances provide room to increase spending in the current downturn. It recommends that the government “continue to provide support to households and businesses until the economy is recovering,” while ensuring that fiscal plans preserve long-term fiscal sustainability.

Consumer price inflation is projected to remain low at 0.3% in 2020 and 2021, well below the 2.0% target. The Survey recommends that the Bank of Korea maintain its accommodative monetary policy stance while monitoring concerns about financial imbalances, notably rising housing prices in an increasing number of areas and an acceleration in lending to households. Moreover, the central bank should stand ready to adopt unconventional monetary policy measures, such as the purchase of government bonds to lower long-term interest rates.

Policies to raise per capita income and achieve inclusive growth  

Korea faces the most rapid population aging in the OECD area. In 2020, its elderly dependency ratio was the sixth lowest in the OECD at 22%, well below Japan’s 48% (Figure 2). By 2060, Korea is projected to have the highest ratio among OECD countries at 83%, surpassing Japan at 76%. The Survey notes that rapid aging is “clouding economic growth prospects and generating risks of widening inequality and weakening well-being, as well as challenges for public finances and the welfare system.”

Raising employment

Although Korea’s overall employment rate of 71% is close to the OECD average of 73%, significant employment disparities exist between socio-economic groups. The Survey points out that the employment gap between prime-age males (aged 25-54) and disadvantaged groups is high at 31.8% compared to the OECD average of 24.7%. Employment gaps relative to the OECD average are particularly large for youth and women, particularly those with young children (Figure 3), underscoring the importance of tailored measures to improve outcomes.

To increase the female employment rate, the Survey stresses a number of policies. First, increase the share of women who take maternity leave from its current level of 76.5% in the private sector. A key obstacle is the large number of firms that are reluctant or unable to fill temporary vacancies. Second, raise the share of parents, particularly men, who take parental leave, in part by offering a higher replacement rate for shorter leaves. Third, improve the quality of childcare. Fourth, reduce Korea’s gender wage gap, which is the highest in the OECD area at 34%, in part by increasing transparency about factors determining pay.

Figure 2. Korea faces the most rapid population aging in the OECD

Note: Ratio of population aged 65 and over to population aged 15-64. Projections are based on the medium fertility variant of the United Nations World Population Prospects 2019. Source: 2020 OECD Economic Survey of Korea.

Figure 3. Disadvantaged groups face large employment gaps
Employment gap relative to prime-age men in percent

Note: Average difference in the prime age men’s (25-54 years) employment rate and the rates for the five disadvantaged groups as a percentage of the prime-age men’s rate. Youth excludes those in full-time education or training. Mothers with young children concern working-age mothers with at least one child aged 0-14 years. Non-natives refers to all foreign-born people with no regards to nationality. Data refer to 2016. Source: 2020 OECD Economic Survey of Korea.

While the employment rate of older persons is relatively high, the quality of their jobs is relatively low. Many employees are forced to retire from their career job in their fifties, reflecting the large weight of seniority in wage-setting. Older persons tend to move to lower-skilled jobs, resulting in a waste of human resources. In addition, it exacerbates poverty among older persons. The relative poverty rate for those above age 65 is 44%, more than three times the average of 14% in the OECD area. The Survey notes that “the ultimate objective should be a flexible wage system based on performance and job content and skills” rather than seniority, although this has proven to be difficult in practice. Another problem is mandatory retirement. The minimum mandatory retirement age that firms can set was raised to 60 in 2016-17. The Survey states that it is necessary to analyze the employment effects of the 2016-17 hike and then gradually increase the age in the long run. Given the link between seniority-based wages and mandatory retirement, raising the retirement age – or abolishing it as many countries have done – would help achieve the goal of a flexible wage system based on performance and job content and skills.

Raising productivity

Productivity per hour worked in Korea was $41 in 2018, well below the OECD average of $57 (Figure 4). Moreover, Korean productivity is only about half of the top half of OECD countries, suggesting considerable scope for convergence. Wide productivity gaps between large firms and SMEs and between manufacturing and services weigh on economy-wide productivity. Indeed, average productivity in Korean SMEs is only about a third of large companies, compared to the OECD average of one-half. Moreover, productivity in the service sector, where SMEs are most prevalent, is about 45% of that in manufacturing, far below the 85% OECD average.

Figure 4. Labor productivity in Korea lags behind the most advanced countries
U.S. dollar (purchasing power parity exchange rates) per hour in 2018

Source: 2020 OECD Economic Survey of Korea.

The Survey notes that “Korea is a top player in emerging digital technologies, with an outstanding digital infrastructure and a dynamic ICT sector.” Moreover, the pandemic demonstrated the benefits of digitalization to contain the spread of the virus, by allowing quick testing and tracing of infected people. It also spurred the development of the “untact economy,” enabling many people to continue working remotely, thereby mitigating the economic impact of the pandemic. Digital technologies offer opportunities to raise firms’ productivity and narrow the gap between leading and lagging firms.

The Survey identifies obstacles to digitalization and recommends policies to narrow the digital divide by enhancing the diffusion of digital technologies among firms and individuals. First, a wide skills gap between youth and older generations prevents a significant share of the population from participating in a digitalized economy. Expanding quality ICT education and training for students, teachers, SME workers and older people is essential to ensure adequate skills. Second, given the small share of R&D taking place in SMEs, it is important to promote innovation networks between SMEs, academia and large firms through vouchers or platforms to support SMEs. Third, waiving stringent regulations through regulatory sandboxes can help identify and alter regulations that hinder the adoption and diffusion of digital technologies.

Large potential gains from reform

Korea’s annual average GDP per capita growth over 2005-18 was nearly 3%, more than double the OECD area (Figure 5). In the OECD’s long-term model, Korea’s per capita growth slows to 1.2% annually over 2020-60, a rate more in line with the OECD average. The baseline incorporates a reduction of the gender employment gap from about 18 percentage points at present to 6 points in 2060.

A simulation in the Survey suggests that Korea could maintain per capita growth at close to 3% per year through 2060. In its most optimistic scenario: i) the employment rates in each age group for men and women rise to the highest rate in the OECD; and ii) labor productivity in the service sector increases from 45% of the manufacturing sector (its current level) to 85% (the OECD average). In the second, less optimistic scenario, Korea’s employment rates reach those in Japan and SME productivity converges to the OECD average. In this scenario, GDP per capita would rise at an annual rate of 2.3%, still double the 1.1% rate in the US baseline reported in the OECD’s long-term model.

Maintaining 3% annual growth in GDP per capita would allow Korea to surpass the United States by 2040, assuming that it followed the baseline path in the OECD long-term model. In scenario 2, Korea’s GDP per capita would surpass the United States by 2050. Sustaining such high growth through reforms to boost labor inputs and productivity would be an exceptional outcome, given that GDP per capita growth typically slows as a country’s income gap with the top OECD countries shrinks, thereby reducing opportunities for rapid catch-up.

Figure 5. Simulations suggest that reforms can lead to large income gains
Annual average GDP growth in percent

Sources:  2005-18: OECD Economic Outlook Online, https://stats.oecd.org/Index.aspx?DataSetCode=EO.
2020-60: Guillemette, Y. and D. Turner (2018), “The long view: scenarios for the world economy to 2060”, OECD Economic Policy Papers, Vol. 2018/22, http://dx.doi.org/10.1787/b4f4e03e-en
2020-60 Korea Scenarios: 2020 OECD Economic Survey of Korea.

Randall S. Jones is a Visiting Fellow at Columbia University and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

KEI will also be hosting an event on this topic on October 6, 2020 at 10:00am. You can register for the event here.

Photo from Stanley Young’s photostream on flickr Creative Commons.

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• The government announced that it would provide a one-time voucher worth USD 17 to all nationals above the age of 13 to help with their phone bills.
• Simultaneously, the government will pay telecommunications service providers USD 784 million to bolster their operations.
• Current opinion polls show that 58.2% of respondents believe the subsidy is wrong.

Implications: As the pandemic places growing strains on the economy, the Korean government is struggling to balance the public messaging around individual sacrifice and its efforts to bolster domestic corporations. Critics point out telecommunications firms should be competing to lower their fees instead of receiving handouts. They were also critical of the vouchers, which were seen as too little to make any long-term impact on the people’s finances. The South Korean public is expressing growing disquiet around the ongoing emphasis on personal sacrifice while the government appears more interested in shoring up corporations.

Context: Meanwhile, the pandemic has forced the government to soften its posture towards domestic corporations. The economic uncertainty has raised fears that harm to these national industries could have wider consequences on the economy. Domestic corporations have used this environment to their advantage, justifying layoffs without consultation with labor unions and advocating for lower punishment for past misdeeds.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from flickr user Jens-Olaf Walter

By Randall S. Jones

The steep upward trend in housing prices has become a key social and economic issue in Korea. The failure of government policies to stabilize housing prices is blamed for a sharp fall in President Moon’s approval rating from 71% in early May, when he received credit for effective policies to stop the coronavirus pandemic, to 39% in Gallup Korea’s recent weekly poll.

The concern about housing may seem surprising given that Korea ranks among the top countries in the housing indicator in the OECD’s Better Life Index (Figure 1). Korea’s ranking is primarily due to the fact that housing costs accounted for only 15% of households’ gross adjusted disposable income, the lowest in the OECD area. In addition, nationwide housing prices, adjusted for inflation, have been remarkably stable since 2007, in contrast to the rising trend in the OECD area (Figure 2, Panel A), reflecting policies in the late 1980s and early 1990s to expand the supply of housing. Moreover, the price-to-rent ratio is close to its historically average (Panel B).

Figure 1. Korea ranks high in the housing indicator in the OECD’s Better Life Index

Note: the housing indicator has three components: i) housing costs as a percentage of households’ gross adjusted disposable income; ii) percentage of people with indoor flushable toilets in their home; and iii) average number of rooms shared per person in a dwelling.
Source: OECD (2017), OECD Better Life Index, www.oecdbetterlifeindex.org.

Rising housing prices in Seoul

The key problem is rapid price increases in the nation’s capital, which make home ownership impossible for many. Only two-fifths of people living in Seoul own their homes. According to the Korea Appraisal Board, a government company that reports transactions-based sale prices, housing prices in Seoul jumped by 40% (in nominal terms) between May 2017 (when President Moon was inaugurated) and March 2020 (Figure 3). The increase was fueled in large part by demand for scarce high-quality apartments in popular districts such as Gangnam. Moreover, prices in the Seoul Metropolitan Area, which accounts for about half of the country’s population and 12% of its area, rose by 23%. The Seoul Metropolitan Area includes Incheon and Gyeonggi province in addition to Seoul. In contrast, prices in metropolitan areas excluding Seoul fell by 2% over that period. The Citizens’ Coalition for Economic Justice, a non-governmental organization, reported that apartment prices in Seoul, which typically increase faster than single-family homes, jumped 52% in the three years since President Moon took office, citing data from the Kookmin Bank. Mortgage lending increased at 9.9% and 7.2% (seasonally-adjusted annual rate) in the first two quarters of 2020, respectively, boosting the already high level of household debt.

Figure 2. Korea’s housing prices have been remarkably stable since 2007

Note: Real housing prices in Panel A are deflated using the private consumption deflator.
Source: OECD, House Price database.

Housing price increases is thus primarily an issue in the Seoul Metropolitan Area, which has continued to grow to despite government policies to promote development in other parts of the country. For example, the government established Sejong City as the administrative capital in 2007 and has created ten “innovation cities” throughout the country. In addition, environmental rules and measures that restrict construction limit the growth of population and economic activity in the capital region. Nevertheless, economies of agglomeration attract firms to the capital region, which offers a wide range of specialized business services, highly educated workers and high-quality infrastructure. At the same time, though, the concentration of population has worsened air quality and raised the cost of congestion.

Recent policies to cool the housing market

The Moon administration has introduced 24 sets of measures, focusing primarily on regulations and tax increases, to stabilize real estate prices.

Price caps on new apartments

In 2019, the government announced that it would impose price caps on privately-built apartments, stating that it would drive down the presale price of new homes to “70% to 80% of the current level.”  After a delay due to the coronavirus pandemic, the price cap was introduced in July in 18 districts in Seoul and three cities in Gyeonggi Province. Price caps, which were originally introduced in 2007 and largely removed in practice in 2015, were based on the value of the housing price site and public disclosure of the developers’ construction costs.

While the cap on the price of new apartments may slow the upward trend in housing prices in the short run, it is likely to be counterproductive in the longer run. Setting the cap at a low level in line with the objective of reducing the price of new homes by 20% to 30% would reduce incentives for residential construction. The impact may be most severe in the high-end market, which has higher profit margins and faster-growing demand. Moreover, requiring private firms to publicly disclose construction costs as part of the price-setting process removes incentives to increase profits by reducing costs. Instead, ensuring adequate competition between developers would be the best way to prevent excessive increases in prices of new apartments. If developers still enjoy windfall gains, taxing such gains in a transparent manner would be more efficient than price controls.

Figure 3. Housing prices in Seoul rise rapidly while nationwide prices have edged down since 2017

November 2017 = 100

Note: Data provided by a government company that reports transactions-based sale prices. The prices are not adjusted for inflation.
Source: Korea Appraisal Board.

Automatic rollover of jeonse contracts and a price cap

Under Korea’s jeonse system, a tenant pays a lump-sum leasehold deposit, which is typically around 60% to 70% of the property value, to the landlord in return for the right to live there for two years. The tenant does not pay any monthly rent during that time and the deposit is returned in full at the end of the contract. Many tenants find jeonse contracts to be less burdensome than paying monthly rent, given that the deposit is returned at the end of the contract. During the first half of 2020, there were 670,000 jeonse contracts signed nationwide compared to 460,000 monthly rent contracts. The jeonse system is particularly popular in Seoul: in June, monthly rent accounted for only 29% of tenant contracts. From the landlords’ perspective, the deposit from a jeonse contract helps them to purchase additional residential properties. The fact that around four-fifths of tenants rent from individuals rather than corporations or the government may reflect the widespread use of the jeonse system.

In July 2020, the National Assembly passed several laws to revise the jeonse system; i) tenants have the right in most cases to extend their two-year jeonse contract for another two years; and ii) the increase in jeonse deposits are capped at 5% when the contract is renewed. The changes are intended to help jeonse tenants by reducing the number that are forced to move every two years. However, it could undermine the jeonse system by prompting landlords to sell the lodgings rather than accept the price cap, thus reducing housing options for young people and those with low income. Landlords might instead shift to monthly rent systems, which would increase the tenants’ housing expenses. Already in July, the number of jeonse contracts in Seoul fell to its lowest level since the city government started tracking the number, reflecting the new policy as well as low interest rates. On the positive side, a shift to monthly rent would free up cash placed in housing, allowing it to be used more productively elsewhere. 

Raising taxes on property holding and capital gains

Annual local property taxes are set between 0.15% and 0.5%, depending on the location and type of building. In addition, Korea introduced a national tax, the Comprehensive Property Tax (CPT), in 2005. The tax is applied to households and companies owning housing with a combined assessed value of more than 600 million won ($506,000). In 2018, the tax rate for owners of three or more homes ranged from 0.6% to 3.2%, as part of an effort to curb “speculative demand”. To achieve that goal, the government announced in July 2020 that it would raise the property tax on owners of three or more homes to a range of 1.2% to 6%. The top rate would apply to only 0.4% of the population. However, the higher rate may discourage landlords from investing in real estate, thus restricting supply. Moreover, they may be able to pass the tax burden on to tenants. To limit speculation, the high rates should be applied only to landlords who own properties for short time periods. The government also promised to sharply raise capital gains taxes, which are steeply progressive, ranging from 6% to 42%. The current deductions based on length of ownership – ranging from 10% for a period of three to four years to 30% for more than ten years – would already appear to discourage speculation.

Regulations on mortgage lending

Regulations on household mortgage lending have been tightened. The loan-to-value (LTV) ratio, which restricts the size of a housing loan to a certain percentage of the value of the property securing the loan, was cut from 70% in 2017 to between 0% and 40% in “overheated areas”, depending on the location and the value of the home. For example, the maximum LTV allowed on a dwelling worth more than 900 million won ($760,000) was cut to 20%. Mortgages were banned on properties worth more than 1.5 billion won, which is around the price of an average apartment in the Gangnam area of Seoul. In addition, the debt-to-income (DTI) ratio, which shows borrowers’ monthly debt burden relative to gross monthly pay, was lowered from 60% to a range of 0% to 40%. While reducing the availability of mortgages may hinder speculators, it is also hurting young people and those who cannot afford to pay large down payments, forcing them to continue renting.

The key is to increase the supply of housing

Changes in property taxes and regulations alone cannot stabilize soaring apartment prices. It is necessary to shift the focus of housing policy from reducing demand and discouraging speculation to increasing the housing supply. This would address the fundamental problem: the supply of high-quality housing in areas where people want to live has not kept up with demand. Policies to address the supply-demand imbalance is not an overnight solution, but will take some time. In the short run, there will continue to be strong demand for housing in the context of the exceptionally accommodative monetary conditions introduced to offset the impact of the coronavirus pandemic.

The government moved in this direction in August when it announced that land planning regulations in Seoul would be relaxed and that the government would begin developing publicly-owned land. The two measures are expected to increase the number of apartments in the greater Seoul area by 132,000 by 2028. In Seoul, the maximum floor ratio area for redevelopment of existing apartments is 250% of the area of land on which it is built, while the maximum height for apartment towers is 35 stories. These limits have been expanded to allow a maximum floor ratio area of 500% and buildings as tall as 50 floors.

However, high-density reconstruction projects have to fulfil a public service role. Moreover, it requires the participation of state-owned housing developers (Korea Land & Housing and Seoul Housing & Communities), which will play a role in key issues, including the selection of construction companies.  Between 50% and 70% of the additional apartments that will be built thanks to the easing of the floor area ratio restriction and the additional floors must be donated to the government, which will lease them to low-income households, newlyweds and young people. Nam-ki Hong, the Minister of Economy and Finance, said that the government will collect 90% of the profits generated from the reconstruction of apartment complexes. This raises the question of whether cooperatives of primarily elderly apartment owners will agree to government terms for reconstruction.

Finally, the introduction of 24 real estate policy initiatives in a little more than three years has created excessive uncertainty for long-term investors. Housing price trends are affected by structural factors, including regulatory and tax changes, as well as by business cycles and interest rates. Many studies thus show that volatility in housing prices is exacerbated by frequent policy changes. As Minister Hong stated, “In the market, there is still uncertainty on the real estate measures.”

Randall Jones is a Visiting Fellow at Columbia University and a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Image from Stanley Young’s photosream on flickr Creative Commons.

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• The Seoul government has decided to include foreigners in its disaster relief payout scheme linked to the COVID-19 outbreak.
• Under this program, the city will pay up to 500,000 won (USD 421) to households whose income is below the median income.
• In June, the National Human Rights Commission of Korea advised that Seoul not exclude foreign residents from the assistance program without a reasonable cause.

Implications: Seoul’s decision to distribute relief funds to foreign residents is primarily motivated by its desire to relieve the economic stress of the coronavirus pandemic. Despite previous calls for the equal treatment of foreigners under the cash payout program, the municipal government had largely left them out of consideration. However, now that South Korea faces a new spike in COVID-19 cases, authorities are seeking to help more households cope with the potential financial fallout from the virus. This indicates that the government is more concerned about keeping the country’s economy afloat than it is about discriminating against its foreign population.

Context: In March, the South Korean government granted coronavirus relief funds to 70% of the country’s households. This plan excluded a majority of foreigners from receiving the one-time cash support, with the exception of those who are married to Korean citizens or hold permanent residency visas. Foreigners and migrant workers living in South Korea were the first to be hit economically by COVID-19, as many of them fill jobs with poor working conditions in the manufacturing, agricultural, and fishing sectors.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

From the flickr account of the Republic of Korea

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• The National Assembly has approved three supplementary budgets worth nearly USD 50.5 billion combined, setting a record high of total USD 431 billion of annual expense.
• Despite these increases, Korea’s debt to GDP ratio of 43.5% remains below the OECD average (109.2%) and that of other peer economies like the United States (106.9%), France (122.5%), and Japan (224.1%).
• Nonetheless, government officials raised alarm over the fact that debt is growing faster in 2020 than during the Asian Financial Crisis of 1997-98.

Implications: Both the residual trauma from the 1997 financial crisis and the looming demographic change may affect South Korea’s future efforts to stimulate the economy. Some policymakers fear that the debt growth might erode investor confidence in the Korean market as it had during the 1990s. Even with emphasis from the International Monetary Fund that a growing government debt ratio is both desired and anticipated, there are additional fears that Korea’s currently robust fiscal capacity should be preserved for future spending on the country’s aging population. With these limitations, policy discussions in the near future on further stimulating the economy may become more contentious.

Context: When Western lenders began withdrawing money from Asia in the summer of 1997, South Korea’s debt-to-GDP grew 4.3%, which panicked investors and accelerated capital outflows. The subsequent crisis in South Korea left deep social scars: unemployment rate tripled and 80% of households experienced lower income. The current debt-to-GDP is growing at 5.5%, which has led to understandable alarm among domestic policymakers.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from flickr user Mark Hanna

By Phil Eskeland 

“As Vice President… [Joe Biden] backed the horrendous South Korea trade deal, which took many jobs from our country which I reversed and made a great deal for our country.”

Remarks of President Donald J. Trump upon accepting the Republican nomination for President, August 27, 2020 (President’s extemporaneous remarks in italics)

Last Thursday night, President Donald Trump accepted the Republican nomination for a second term as President of the United States.  Every speech at political events contains embellishments, and this one was no exception.  President Trump’s remarks returned to the main themes that have animated his political beliefs for most of his lifetime, particularly on implementing his vision of fair and reciprocal trade.  In his list of alleged “blunders” committed by Vice President Joe Biden over the previous 47 years of public service, President Trump not surprisingly focused on four trade policy matters that represented the bipartisan and establishment consensus at the time – Biden’s votes, as a U.S. Senator, for the North American Free Trade Agreement (NAFTA) and China’s accession into the World Trade Organization (WTO) and the Obama-Biden Administration’s actions on negotiating the Trans Pacific Partnership (TPP) and passing the Korea-U.S. Free Trade Agreement (KORUS FTA) into law.

President Trump generally stuck to his prepared remarks throughout most of his acceptance speech, and only occasionally adlibbed, usually for emphasis.  However, the President improvised the last section of the sentence dealing with KORUS in which he said he “reversed” the trade agreement and then “made a great deal for our country.”  Yet, most of the underlying text of the original KORUS FTA remains unchanged.  In 2018, the Trump Administration negotiated a handful of modest adjustments to the agreement, most notably an extension of the 25 percent U.S. tariff on imported trucks from Korea for another 20 years and allowing more U.S. motor vehicles and parts to enter South Korea based on meeting U.S. environmental and safety standards.  Separate from the minor modifications to KORUS, Korea also agreed to voluntarily limit its exports of steel to the United States to avoid higher American import duties.  Since the adoption of this side agreement, the volume of Korean steel exports to the U.S. has declined by 31 percent or by $523 million in value, but possibly at a cost of higher prices and increased scarcity of supply to U.S. steel-using manufacturers.

Despite this difference on steel, the overall trend in the U.S.-Korea trade relationship continued to flourish after the implementation of the KORUS FTA in 2012, with most years showing a growth in U.S. exports of both merchandise goods and services to Korea.  At the same time, the bilateral trade deficit between the U.S. and South Korea declined to a low of $4.5 billion in 2018 after initial increases due to factors unrelated to KORUS, including falling agricultural commodity prices.  If one continues to use the metric from the Department of Commerce that every $1 billion in U.S. exports supports approximately 5,700 American jobs, the nearly $20 billion growth in U.S. exports to South Korea since 2012 created or supported approximately 112,000 U.S. jobs, beating the Obama Administration’s prediction that KORUS would support 70,000 U.S. jobs in 10 years.  This is on top of the $36.6 billion in new investment from Korea that has come into the United States since 2012 to employ at least 58,000 Americans.  The results of KORUS are precisely the opposite of what was said last Thursday night because the facts show the accord produced more U.S. exports and jobs as intended.

After the Trump Administration’s “great deal” with Korea to modestly modify KORUS in 2018, the bilateral goods and services trade deficit crept back up to $7.4 billion in 2019.  This is not the Administration’s fault because U.S. goods and services exports to Korea grew in 2019.  However, American consumers continued to purchase Korean products at a higher rate, ranging from advanced technology products, such as Samsung smartphones, to higher-value auto imports from Korea, such as the Hyundai Genesis luxury car or Kia’s Niro electric/hybrid vehicles.  The larger bilateral U.S.-Republic of Korea (ROK) trade deficit serves as another reminder that using trade policy as the sole tool to lower the trade deficit is bound to fail because larger macro-economic forces are at play.  The U.S. should continue to promote exports and combat illegal trade practices, but the impetus for these policies should not be to reduce the trade deficit because that is a fools-errand.  As the independent Congressional Budget Office (CBO) tactfully concluded in its 2000 report to Congress on the causes and consequences of trade deficits “…if one nevertheless wanted to reduce the (trade) deficit, trade policy would not be a good way to accomplish that goal.”  Would the U.S.-ROK trade deficit be even higher without the President’s action in 2018?  Perhaps, but no one can accurately predict the alternative outcome.

As the presidential campaign continues, President Trump and his team should drop the hyperbolic language from the past about the KORUS FTA, closely analyze the updated trade statistics to modify the rhetoric, and use this agreement as a model to encourage other countries to enter trade deals with the United States.  The facts show the KORUS FTA has worked as intended.  Instead, the focus should be on the future efforts to knock down barriers to trade so that the U.S. can return to historically high levels of export growth once the global pandemic is over.

Phil Eskeland is the former Executive Director of KEI and Policy Consultant at Gammon & Grange, P.C. The views expressed here are the author’s alone. 

Image from Wikimedia Commons.

By Sonia Kim

Since the start of the 1900s, the number of Koreans living abroad has increased significantly. The most recent data from South Korea’s Ministry of Foreign Affairs reveal that nearly 7.5 million ethnic Koreans reside outside the Korean Peninsula, with the largest diasporic groups in the United States, China, Japan, and Central Asia. With a focus on boosting the Korean economy, the ROK government continues to base its diasporic engagement policy on instrumental objectives, namely, to maximize material and economic gains. But as the country seeks to build a global image, it also aims at strengthening political and cultural ties with the worldwide network of Korean communities.

Korea’s diaspora engagement has been primarily developed through an economic relationship. This stems from the fact that some diasporic groups have been considered to be valuable sources of global talent and potential investment. In effect, the Korean government leverages its overseas population with an eye towards enhancing national economic competitiveness. Figures alone demonstrate that the ROK trades more with countries where a larger number of ethnic Koreans reside. Additionally, various transnational initiatives like the World Korean Business Convention and the Overseas Korean Traders Association promote business ties as well as networking opportunities between Korea and its diaspora. In 2017, more than 600 small and medium-sized companies in Korea signed deals with Korean entrepreneurs living overseas to further enhance Korea’s economic profile.

While diaspora engagement policies have been generally targeted towards highly skilled individuals from relatively advanced economies like the United States, Korea started to also import cheap labor from the pool of ethnic Koreans in China (Joseonjok) and Central Asia (Koryo saram). Though these two groups are limited to opportunities in 3-D (dirty, difficulty, and dangerous) jobs, the wages they earn in Korea are much higher than what they earn in their home countries. This is a unique phenomenon that affects Korea, as very few countries across the world have overseas ethnic members who provide cheaper labor to its homeland.

From the above analysis, it becomes clear that Seoul’s interactions with the Korean diaspora have focused on yielding economic dividends. Yet, another crucial aspect of Korean diasporic engagement policy looks beyond self-interest. Partially as a result of more active and influential advocacy from civil society groups, the Korean government extended political enfranchisement and granted dual citizenship to overseas Koreans. An expansion of these rights makes it much easier for members of the diaspora to live and work in Korea with many of the same privileges as South Korean nationals.

In terms of soft power diplomacy, Korea ranked 15th in the world as a major exporter of popular culture and tourism. And since the turn of the 21st century, the Korean Wave has helped create a transnational identity, which contributed to further engagement with diasporic communities. Through the spread of K-pop and K-dramas, overseas Korean youth are provided with a channel to build a sense of connection and loyalty to their ethnic homeland. Meanwhile, the founding of the Overseas Koreans Foundation (OKF) expanded educational and cultural opportunities for overseas Koreans to learn more about their Korean heritage. From a high-level perspective, OKF works to foster the relationship between Korea, their native country, and their countries of residence. Notably, the Foundation’s work is not as focused on cultivating commercial networks as it is on strengthening cultural ties between these communities and South Korea.

Although the economic dimensions of Korea’s relationship to its diaspora far outweigh other considerations, recent developments suggest that political and cultural forces have also come to shape how Korea interacts with its overseas population. Given the country’s ambitions to play a greater role on the international stage, it will benefit from continuing to diversify its outreach efforts toward the millions of Koreans living abroad.

Sonia Kim is an intern at the Korea Economic Institute of America. She is a recent graduate from Harvard College with a degree in Government and East Asian Studies. The views expressed here are the author’s alone.

Picture from Wikimedia Commons user GoToVan