Tag Archive | "economics"

To Three or Not to Three? South Korea Weighs Raising its Social Distancing Threshold

By Kyle Ferrier

With daily new COVID-19 cases rising to over 400 recently, South Korea finds itself on the brink of a second outbreak of the virus. Looming over the possible outbreak is the government’s decision whether to elevate social distancing measures to contain the spread of infections at the expense of, at least in the short-term, an already struggling domestic economy.

In June, the South Korean government adopted a new three tiered social-distancing system in preparation of a new wave of infections. Currently the country is at level two. These rules cap indoor and outdoor gatherings at 50 people and 100 people, respectively; suspend 11 categories of high-risk facilities such as bars, karaoke rooms, and large after-school academies; and require moderate-risk facilities such as movie theaters and religious establishments to strictly adhere to disease prevention rules. Moving to stage three would effectively be instituting a lockdown. Tier three mandates all schools implement classes online or shut down, both high and medium-risk facilities suspend operations, and all but essential workers are required to work from home. Yesterday, the government decided to stay at level two until at least next Sunday, though they have already ordered schools in Seoul to close temporarily and are considering limiting business hours of restaurants and cafes.

Both the government and public are, of course, highly concerned about the implications of a lockdown. Such a move will undeniably be a significant hit to the economy. It would likely pause or even reverse rising consumer demand in South Korea that was crucial in the second quarter GDP numbers not being as bad as other major economies. From May to June, the economy shrank 3.3% from the first three months of the year, the sharpest fall since 1998. This fall was led by a 16.6% drop in exports as global demand plummeted. The one bright spot in the GDP numbers was the 1.4% increase in private consumption, buttressed by government stimulus, though still only possible with the virus under control. Level three social distancing measures would disproportionately impact the sizeable Korean service industry that is built around face to face contact, but the effects would still ultimately be felt throughout the economy. Additionally, because the epicenter of outbreak is now the capital region – home to about half of economic production – as opposed to the smaller city of Daegu this spring, the slowdown could be more serious.

However, just as the government is considering strict measures to contain COVID-19, so too are they considering ways to soften the economic blow. So far, the National Assembly has passed three supplementary budgets amounting to 59 trillion won ($50 billion) to help stimulate the economy. The latest extra budget passed in early July was 35.3 trillion won and was geared towards helping struggling businesses and keeping people employed, with the government estimating nearly 9 million people would benefit. This week the government and the Democratic Party, holding the majority of National Assembly seats, agreed to continue down the path of expansionary fiscal policy to help keep the economy churning even as the pandemic tries to slow it down. The government has ample fiscal space to keep this spending up and, as the current deadlock in the United States Congress proves, having a favorable political environment for the stimulus is just as important. It is not yet clear how this will manifest in the immediate future in the case of a lockdown, but we should expect more spending on the most vulnerable as well as the possibility of another round of stimulus checks.

Further, despite the short-term fears, it is important to remember dealing with COVID-19 is a marathon, not a sprint. Even with significant progress on major vaccine candidates, all signs currently point to us being over a year away from one being available on the market, and even then it will take more time for it to be more widely available in South Korea. A short-lived and effective elevation to phase three could actually do more to help South Korean GDP this year than the prolonged uncertainty of an outbreak or even another major outbreak itself. As difficult as things may get with a lockdown, if it is deemed truly necessary than the long-run gains should be worth much more than the short-term losses.

Kyle Ferrier is a Fellow and Director of Academic Affairs at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Image from 87ab’s photostream on flickr Creative Commons.

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Why Did Kim Jong-un Call for a Party Congress?

By Stephan Haggard

How are we to interpret Kim Jong-un’s surprising decision to call a Party Congress for early 2021? The regime held ad-hoc Party Conferences in September 2010 and April 2012—before and after Kim Jong-il’s death—in order to cement the succession. But Party Congresses are still rare: the one held in May 2016 was the first since 1980, despite the fact that they are nominally to be held every five years and stand at the organizational apex of the Party’s formal structure.

The Announcement was made at the 6th Plenary (of the 7th Central Committee), and indirectly referenced the external shocks the country has faced not only from sanctions and the unexpected failure at Hanoi but from the COVID border shutdown (the “unexpected and inevitable challenges,” including those in “the region surrounding the Korean peninsula.”)

What got attention, however, was the blunt mea culpa in the formal decision to convene the Congress that was splashed across the front page of Rodong Sinmun: that

“…the economy was not improved in the face of sustaining severe internal and external situations and unexpected manifold challenges, thereby planned attainment of the goals for improving the national economy has been seriously delayed and the people’s living standard not been improved remarkably.”

Picking through the small shards of information we have suggests a number of hypotheses for an all-party gathering, including an effort to strengthen institutions and taking the weight off of anniversaries in the fall to extend the time horizon of recovery. But the most obvious interpretation follows a plain reading of the announcement: that the North Korean economy is in worse shape than we—or the leadership—had thought.

It’s the Economy, Stupid

If the Congress is being held for the reasons the announcement suggests–to try to right the economic ship–what does that ultimately portend? Could the current shock actually generate a real about-face and more wide-reaching reforms? Hope springs eternal, but there is little evidence to support such a fundamental shift. Rather, the Congress is more likely to engage in blame-shifting purges while simultaneously outlining new economic plans not fundamentally different than those that have just failed.

Kim Jong-un’s response to progress on the Pyongyang General Hospital can be read as a microcosm of how the Congress could go. A prestige project nonetheless designed to showcase populist policy priorities, the effort is not going well. In July, Kim offered up a scathing assessment of the state bodies tasked with implementing construction. According to KCNA coverage and analysis by Ben Silberstein, Kim Jong-un claimed that the construction coordination commission had failed to carry out the instructions of the Party. It would therefore need to be held to account by the relevant departments of the Central Committee, including through sacking the commission as a whole and making “strict referral of them.”

As Silberstein points out, this shadow dance is now virtually an institutional feature of the socialist sector of the North Korean economy, in which the party makes plans that are unrealistic then blames lower level officials for subsequent failures. There are already open hints that the Five Year Plan has been running well-behind schedule: at Party Plenum in December and indirectly confirmed in the agendas of the Politburo and SPA meetings in April. And mentions of corruption suggest that the de facto mixed economy model is a disability when resources are scarce and private entrepreneurs and households are hoarding. The Congress could thus be a wider forum for shaking up the economic ministries, launching a crackdown on corruption—in short, a resort to controls–while not fundamentally shifting course.

Meetings, Meetings, Meetings: It’s About the Party and Appointments

A second hypothesis that is complementary to the first is that Kim Jongunn is in fact seeking to use institutions more effectively. A number of analysts have noted the uptick in meetings. Setting aside Central Military Commission meetings, these include an “emergency” Politburo gathering at the end of July, and another one in mid-August; a Workers Party of Korea “Executive Policy Council” meeting; and the Central Committee (CC) plenum that rendered the decision to convene the Congress.

A charitable interpretation would see Kim Jong-un seeking to institutionalize his rule; for example, there was explicit mention in the announcement that the Congress should in fact convene every five years that is worth citing at length:

“Calling for regularly convening the congresses of the Party, the supreme guidance organ of the Party, in order to confirm the line, strategic and tactical measures for steering the development of the times and the revolution and adjust and reinforce the leadership body for guaranteeing their execution, he advanced the important guidelines for the operation of the congress. “

If Kim does in fact have health problems, then such institutionalization could even be in anticipation of a succession, as was the ad hoc Party Conference in 2010.

Yet another possibility is that the regime might undertake more fundamental institutional changes. Instead of simply re-arranging the deck chairs on a sinking ship, the leadership could move toward a more deliberative policy-making model along the lines of the Chinese Politburo Standing Committee (which has itself been weakened by the accretion of power in the hands of Xi Jinping).

But there is little evidence of any deviation from the system’s highly centralized, leader-oriented structure. Rather than moving toward a more institutionalized, consultative or deliberative model, the Party Congress will probably be used to exhort, cajole, monitor and ultimately to threaten and instill fear. The run-up to the Congress could—in line with the observations above—be preceded by a substantial shakeup of personnel, again for blame shifting reasons; Martin Weiser among others has picked up on this theme and provided detail on recent moves in this regard.

Timing is Everything

A final cluster of hypotheses center on timing. As we are seeing in spades in the U.S. elections, the timing of key political events is consequential. In this regard, Kim Jong-un and Donald Trump face quite similar challenges: will the economy rebound on a schedule that permits them to claim credit in advance of elections (in the U.S.) or the usual round of fall anniversaries (in North Korea).

Moreover, the U.S. elections themselves may warrant hosting a major party meeting after November, as knowing who is in the White House would add some clarity to North Korean planning.  Kim Yo-jong’s recent comments likely signal as much and that there is little expectation of an October surprise in Pyongyang.,

Yet if we are expecting some fundamentally new departure in North Korean foreign or domestic policy, the Congress is almost certain to disappoint. What evidence do we have that the fine tacking between strategies in Pyongyang that analysts have been forced to pore over the last nine years really have had much enduring consequence on where the regime is going?

Stephan Haggard is a Non-Resident Fellow at the Korea Economic Institute and the Lawrence and Sallye Krause Professor of Korea-Pacific Studies, Director of the Korea-Pacific Program and distinguished professor of political science at the School of Global Policy and Strategy University of California San Diego. 

Photo from Wikimedia commons.

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Stable Housing Continues to Elude Government

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

  • In response to the rapidly rising cost of housing in Seoul, the National Assembly passed a new bill that allows tenants to extend their contracts and placed a cap on the amount that rental deposits could be increased.
  • However, observers expressed worry that this may lead landlords to favor monthly rental contracts over the traditional “jeonse” payment in which renters pay a lump-sum for their long-term lease and receive the deposit back when they vacate the space.
  • According to polling in June, 57.1% of people in their 30s said that the current government’s housing policy is “untrustworthy.” This has been the main headwind dragging down the Moon Jae-in administration’s public approval rating.

Implications: The Korean government’s reliance on regulatory interventions to stabilize the housing market suggests that authorities are unwilling to see scarcity as the fundamental root of the problem. This conforms with President Moon Jae-in’s suggestion in his 2020 New Year’s press conference that the media’s negative portrayal of the government’s housing policy is partly to blame for the market instability. The administration’s skepticism may be further strengthened by the fact that while buying a house may be prohibitive for the average Korean, the cost of housing as a share of disposable income remains far lower in Korea compared to other countries in the OECD.

Context: This is not to discount efforts by the Korean government to both increase supply and decrease demand for housing in Seoul. Public policy has pushed developers to build new housing units in satellite cities. However, heavy traffic and insufficient public transportation connecting these new exurbs to Seoul’s city center have discouraged people from moving to these new areas. Simultaneously, the government has pushed to relocate major public institutions to Sejong City and elsewhere in the country; thereby, reducing the pressure on the capital to supply housing for its employees. However, these measures are unlikely to significantly shift the country’s center of gravity away from Seoul.

Korea View was edited by Yong Kwon with the help of James Constant and Sonia Kim.

Picture from user Chris Harber on Flickr

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After a Sharp Decline, Korean Economy is Poised to Rebound in the Second Half of 2020

By Randall S. Jones

Following a 5.0 percent decline in the first quarter of 2020, real GDP fell 12.7 percent at a seasonally-adjusted annual rate (saar) in the second quarter (table below), the largest decrease since the Asian financial crisis more than two decades ago. Despite Korea’s success in limiting the spread of the coronavirus and its large-scale fiscal response to boost the economy, it was unable to escape the economic impact of the pandemic and avoid a recession.

Stabilization of domestic demand, while exports collapsed

Private consumption rebounded with growth of 5.5 percent (saar) in 2020Q2, reflecting strong purchases of durable goods. Consumption was supported by the easing of some pandemic-related restrictions on economic activity and the government’s cash payments to households beginning in May. The payments were 1 million won ($833) to households with four or more members. Government consumption also increased in 2020Q2, supported by the first two supplementary budgets. Consequently, final domestic demand increased 2.9 percent, despite a decline in fixed investment that included both construction and facilities investment.

However, exports fell 51.7 percent (saar), led by declines in shipments of cars and petroleum products. With imports falling by only half as much as exports, net exports made a huge negative contribution of 15.1 percentage points to GDP.

On the production side of GDP, the drop in exports had a severe impact on manufacturing output. It fell 31.5 percent (saar) in 2020Q2, even though sales of goods in Korea returned to pre-pandemic levels by May, according to data on credit card transactions. Service-sector output fell 4.3 percent in the April to June period, compared to a 9. 3percent drop in the previous quarter. While the service sector is recovering, credit card payments for services remain about 10 percent below historical norms. As in other countries, the recovery of services lags behind that of goods, reflecting the fear of physical contact during the pandemic.

An economic rebound in the second half of 2020

After the release of the 2020Q2 data, Nam-ki Hong, the Minister of Economy and Finance, said that “It’s possible for us to see a China-style rebound in the third quarter as the pandemic slows and activity in overseas production, schools and hospitals resume”. Chinese GDP jumped 11.5 percent on a quarter-on-quarter basis in 2020Q2 following a 10 percent decline in the first quarter.

Fiscal policy will help support an economic rebound. On July 3rd, the National Assembly passed the third supplementary budget, which amounted to 35.3 trillion won (1.9 percent of GDP), the largest single extra budget ever approved. The government expects to spend around three-quarters of the budget during the third quarter of 2020. Combined with the first and second supplementary budgets (11.7 trillion won and 12.2 trillion won, respectively), extra spending in 2020 amounts to 59 trillion won.

The third supplementary budget focuses on employment growth by extending for three months a program that helps companies keep employees on their payroll by covering 90 percent of the wages of workers on paid leave.  Additional funds were allocated to the employment insurance fund, which is overwhelmed with applications for benefits. The government estimates that around 8.9 million workers will benefit from the third supplementary budget, including 3.2 million workers who are at risk of losing their jobs, 1.0 million small business owners and 4.7 million receiving quarantine support.

The Korean New Deal will be supported by 6.3 trillion won of investment from the third supplementary budget. This initiative for 2020-25 is aimed at transforming the economy from a fast follower to a leader, from a carbon-dependent economy to a green economy, while making society more inclusive. The New Deal includes a Digital New Deal (12 projects), Green New Deal (8 projects) and stronger social safety nets (8 projects). 

GDP growth for 2020 is projected to be negative

The government is hoping that policies will keep GDP growth positive at 0.1 percent in 2020. However, the Bank of Korea said at its July 16 monetary policy meeting that “GDP growth this year is likely to be lower than the May forecast of minus 0.2 percent.” The next projection by the central bank is expected at the end of August. According to the IMF’s June outlook, Korea’s GDP will fall by 2.1 percent in 2020, though this is a relatively modest decline compared to its forecast of an 8.0 percent contraction in the advanced economies.

With the rapid implementation of the third supplementary budget, the decline in Korea’s GDP in 2020 is likely to be less than 1 percent. For example, taking the OECD’s estimates in June for GDP growth in the third and fourth quarters of this year (9.9 percent and 8.2 percent, respectively at an annualized rate), GDP would decline by around 0.7 percent in 2020. Such an outcome assumes that Korea continues to be successful in coping with the coronavirus. In fact, the number of new cases is limited to around 50 per day. Thus far, Korea has limited the total number of infections to around 14,000 and the number of deaths to around 300, relatively low numbers by international standards.

The wide range of forecasts for Korea in 2020 reflects the great uncertainty about the impact of the pandemic and the risk of a second wave of the coronavirus. Given the importance of exports in the Korean economy, the pace of recovery depends to a large extent on the depth and length of the global recession, which is depressing investment and employment in Korea.

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 xoxoryan’s photostream on flickr Creative Commons.

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Real Estate Remains a Persistent Achilles Heel

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

  • Although the government announced a new real estate policy on June 17, the unabated increase in housing cost attracted criticism from left-wing figures and groups.
  • Adding to the growing dissatisfaction, research by news agencies revealed that many high officials were multi-homeowners. This prompted President Moon Jae-in to strongly urge senior government figures to sell any additional homes they own.
  • According to polls released on June 24, 57.1% of people in their 30s said that the current government’s housing policy is “untrustworthy.” The 49.9 percent of the same cohort also responded negatively to the overall direction of the government’s economic policy, overtaking negative sentiments of respondents in their 50s.

Implications: More than challenges associated with managing South Korea’s ties with the United States or North Korea, disciplining Seoul’s housing market remains the issue that consistently catalyzes the most public scrutiny against the Moon Jae-in administration. The soaring real estate market has been a stumbling block for the administration since it took office in 2017. Critics point to its over-regulation of the market as the source of more intense speculative behavior and cost of living inflation for people without homes. As the Moon administration heads into the second half of its five-year term, the failure to address housing price volatility may erode the public mandate it gained in the April 15 legislative election.

Context: The Moon government’s strict real estate regulation draws on the policies of the previous progressive administration under President Roh Moo-hyun. The Roh administration introduced comprehensive real estate holding tax and implemented strong real estate regulations. However, it failed to control speculative behavior in the market. As a consequence, real estate prices continued to rise and created an opening for the conservative opposition to characterize progressive as “economically incompetent.”

Korea View was edited by Yong Kwon with the help of James Constant, Sonia Kim, and Ingyeong Park.

Picture from user Chris Harber on Flickr

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The Impact of Coronavirus on the Youth Unemployment

By Hyungim Jang

The coronavirus pandemic poses a new challenge for the Moon administration’s ongoing efforts to boost domestic employment, especially for the youth. Some predict that young Koreans will become part of a “lost generation” as a consequence. However, national initiatives under the banner of a “Korean New Deal” are attempting to forestall this looming economic crisis.

Moon Administration’s Past Youth Employment Policies

When Moon Jae-in came into office in May 2017, the youth unemployment rate was at 9.3%. To address this issue, President Moon announced the following plans to bolster youth employment:

  1. Increase the employment quota for young people (age 15-34) from 3 to 5% in public institutions, and gradually apply the quota to private companies, depending on their size.
  2. Introduce jobseekers’ allowance of KRW300,000 ($249) for three months for the youth to invest in certification, job interviews, and application charges.
  3. Support small and medium-sized enterprises (SMEs) when they hire young people through a “2+1” initiative: When a SME hires two young people, the government will provide the salary of a third young worker.

Although the administration did not fulfill its promise to adopt the quota, the youth unemployment rate fell by 1.4% points amid positive shift in the overall employment rate in 2018. The following year, the administration expanded its efforts to support youth employment with a 12.2% increase in the budget for these measures. As a result, the jobseekers’ allowance was increased to KRW500,000 ($415) for six months. The government also promised to expand the unemployment safety net by the end of 2020 to cover all vulnerable communities, which included lower-income workers, young people, and women who discontinued their careers. The administration also sought to legislate new rules requiring the prime minister to renew this commitment to youths every five years.

The Impact of COVID-19 on the Job Market

According to a survey of the top 500 companies in February 2020, more than a quarter of the companies (27.8%) said they planned to reduce new hires in the first half of the year compared to the same period in 2019. As COVID-19 spread rapidly, employment conditions for younger job seekers worsened. The open recruitment season for major corporations in Korea is generally between March and April. Due to the risk of infections, companies showed a preference for hiring experienced workers over new employees who required training. Most of the firms delayed open recruitment by more than a month, further reducing the number of young jobseekers who successfully found employment. In March, Statistics Korea reported that people in their 20s experienced the largest drop in the number of employed people compared to other age cohorts. In addition to this surge in unemployment, the number of people in their 20s who did not participate in the labor force (i.e. not looking for a job) jumped by 109,000 (35.8%) compared to the previous year. This is the largest change since Statistics Korea began compiling data in 2003

As the size of the workforce shrank due to the coronavirus, the recruiting process also shifted drastically. Many firms adopted contactless recruitment. For example, Samsung, the largest conglomerate in Korea, introduced a written test called Global Samsung Aptitude Test (GSAT) and conducted online interviews in May. Other large companies are also considering recruitment and interviews via social media and video. While online interviews received overall positive reviews from both interviewees and interviewers for its convenience and effectiveness, there were considerable frustrations with the online written test.

Applicants who took the GSAT noted that the problems were difficult to solve when administered on a computer. Adding to these challenges, applicants also received more difficult exam questions, adding further hurdles to employment. Even though the youth are tech-savvy, these efforts to transition recruit online still pose a significant barrier.

Government’s Immediate Plans for Youth Employment Post COVID-19

On March 20, the Ministry of Employment and Labor (MOEL) announced a supplementary budget to deal with the economic impact of the coronavirus outbreak. It proposed KRW 435.1 billion ($361 million) in funds to support small and medium-sized firms hiring young people this year.

In addition, at the end of April, the government announced an aid package to tackle a possible economic crisis from the COVID-19 outbreak. Among the funds, an additional KRW 10 trillion ($8.2 billion) was set aside for emergency employment stabilization measures. About KRW 870 billion ($721 million), approximately 8.7% of the total, was specifically allocated to support youth jobseekers. The administration also began specifically discussing ways to create new jobs for young people in the 5th Emergency Economic Council Meeting that was held on April 22. This came in response to concerns that if young jobseekers fail to enter the job market at the right time, they might become a “lost generation,” drifting through part-time jobs like many people who lived through the Asian Financial Crisis in 1997-98.

For example, during the Asian Financial Crisis and the 2008 global financial crisis, people in their 20s experienced the lowest employment rate compared to other age groups. To avoid a similar decline in employment, the government announced that it will work to create additional 550,000 jobs for young adults and low-income earners, which include “remote-jobs (contactless), tech jobs, and positions in SMEs,” in addition to allocating KRW 10 trillion ($8.2 billion) for employment support. Further specificity in what these jobs will entail have not been announced. The breakdown of the positions are as follows:

Source: Ministry of Economy and Finance

A key challenge is the rigidity of the employment market. Korea’s labor market is difficult to restructure because of strong laws protecting permanent employees. This makes companies prioritize reducing new employment when facing an economic recession.

In this environment, temporary employment for public-works projects are not expected to solve the problem in the long term. One Blue House officials described the 550,000 jobs as a short-term project that will end by the end of this year. The problem is that these jobs for the youth need to be managed carefully and differently from job-creation programs for senior citizens. It should be focused on building a sustainable career and vocational training to ensure that young people will adapt to the job market in the future.

Many studies such as Card et al. (2010, 2015) or Kluve (2010) suggested that direct employment programs in the public sector are not effective in the long term especially for the youth, and that they could even have negative effects. Researchers also criticized the fact that these public works programs are concentrated in digital, engineering, construction, and manufacturing sections, which are not sustainable or take into account the specialty of the youth labor force. In an interview with Dong-A Daily, Professor Park Ji-Soon recommended that more diverse jobs for the youth be created in the private sector through investments, instead of focusing in the public sector to simply endure the employment shock.

Korean New Deal policy: The Long Term Potential

Regulatory reform and integrating the youth workforce with the 4th Industrial Revolution may lead to high-quality jobs in the private sector and reduce youth unemployment.

On April 22, Moon administration announced a new economic plan during the 5th emergency economic meeting. President Moon explained that this “Korean New Deal” will not only create new jobs but also prepare the country for the 4th industrial revolution and a post-COVID-19 economy.

The administration started to outline more details of the Korean New Deal during the first and second Meeting of Central Economic Response Headquarters, which was held on April 29 and May 9. The project is mainly comprised of “the Green New Deal” to cope with climate change, and “the Digital New Deal” to redesign existing systems that are based on face-to-face relationships and replace them with digital platforms. In addition, the Korean New Deal incorporates biotechnology research, cultural content generation, and adopting digital management platforms to improve performance in areas such as public transportation. According to President Moon, Korean New Deal is not intended to merely overcome the crisis by creating temporary jobs, but to build a sustainable foundation for a new digital economy.

“Promoting Digital New Deals will make decent job opportunities, especially for young people,” said Kim Yong-beom, the 1st Vice Minister of Economy and Finance. “Since the service industry was hit the hardest by the COVID-19, the number of young job seekers has decreased significantly. I think it will also contribute greatly to complementing those jobs,” he added. Since the administration is working on a large-scale project to promote a digital economy, there are expectations for the increase in demand of the young talents in the technology field. Indeed, there was a rise in stock prices and increased recruitment in the IT industries in spite of the pandemic.

Moreover, immediate job dividends from these initiatives can help young jobseekers. According to research conducted by the Korea Development Institute (KDI), the time it takes for a college graduate to find their first job is negatively correlated with their long-term earning power. In Korea, the wage loss stemming from the delay in landing one’s first job is particularly high. If a college-graduate is held up from finding their first job by one year, their income for the first 10 years of employment will be reduced by 4 to 8% annually compared to peers of the same age who immediately found employment. Therefore, KDI argues that finding jobs at the right time is deeply important.

There are concerns whether these programs will be sustainable in the long-run. The Korean New Deal is set to continue until 2025. Since President Moon leaves his office in 2022, the project can only be maintained as part of a national agenda if the next administration commits KRW 45 trillion ($38 billion) out of the total New Deal budget of KRW 76 trillion ($63 billion).  If COVID-19 is not to have long-term employment consequences for Korea’s youth, the efforts only begin with the Moon administration.

Hyungim Jang is a student at Sungkyunkwan University, pursuing a degree in Economics and Politics.  She was an intern at the Korea Economic Institute of America in the Spring of 2020. The views expressed here are the author’s alone.

Picture from flickr user Mark Hanna

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South Korea Seeks to Lead Hydrogen Economy

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

  • On July 1, South Korea announced its plans to foster more businesses in the hydrogen industry over the next 20 years. This new roll out comes as part of the country’s larger efforts to reach net zero emissions by 2050.
  • The Moon administration has promoted the use of hydrogen as the main source of energy for power generations, vehicles, and battery cells.
  • At present, the government aims to make hydrogen more accessible for local firms and consumers by building new production facilities in Busan, Daejeon, and three other cities.

Implications: Similar to South Korea’s previous economic transitions, the public sector is playing a critical role in moving industries from fossil fuels to alternative energy sources. If Seoul is successful in building a carbon-neutral economy, it would present a model for policymakers elsewhere who are looking to establish a more sustainable future. The latest plan from South Korea more firmly marries the transformation of its national energy system with the establishment of a new growth engine that will generate both exports and employment.

Context: In 2013, South Korean car manufacturer Hyundai launched the first commercially produced hydrogen fuel cell electronic vehicles (FCEVs). Most recently, South Korea hosted the world’s first hydrogen mobility energy show, thus further cementing its status as a hydrogen frontrunner. More than 100 companies and research institutions from 11 different countries participated in the inaugural event and discussed ways to boost hydrogen-related businesses.

Korea View was edited by Yong Kwon with the help of James Constant, Sonia Kim, and Ingyeong Park.

Picture from flickr user francoisjouffroy

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Unexpected Challenge to Ending Worker Precarity

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

  • On June 22, Incheon International Airport Corp. announced plans to convert thousands of irregular workers into regular employees.
  • This decision prompted a Blue House petition spearheaded by many current full-time employees at the airport that opposed the move.
  • Incheon Airport acted as a pilot for the administration’s wider goal of eliminating irregular positions in the Korean public sector.
  • The Blue House said its plan is aimed at addressing “fairness in the labor market” rather than “fairness in the hiring process.”

Implications: Pushback from regular workers to the government’s plan to extend benefits to their irregular peers betrays the fragility of worker solidarity in Korea’s labor market. The Blue House petition opposing this measure argues that upgrading irregular workers at the Incheon Airport is unfair to current full-time employees and people who are trying to find employment at the airport. The ongoing controversy at Incheon Airport reveals that regular workers themselves will likely be a major roadblock to the Moon administration’s goal of extending job security to more people in the labor market.

Context: Reforms instituted after the 1997 Asian Financial Crisis increased the number of irregular workers in Korea. This term is a shorthand for jobs that are poorly paid, provide few benefits, and do not offer long-term employment guarantees. On the other hand, more stable, better-paid regular jobs at publicly owned institutions like Incheon Airport are highly desirable, and many prospective employees prepare for years in hopes of landing a similar position. As of 2015, 86 percent of workers at Incheon Airport were classified as irregular. The bifurcation of Korea’s labor market into regular and irregular workers may have affected the sense of solidarity between these two classifications, amplifying existing challenges to worker advocacy stemming from the country’s low unionization rate.

Korea View was edited by Yong Kwon with the help of James Constant, Sonia Kim, and Ingyeong Park.

Picture from flickr user odius kim

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Setting Korea’s Fiscal Path

By Randall S. Jones

The Moon administration’s fiscal policy was expansionary even before the coronavirus pandemic. With government spending increasing more than 9% in both 2019 and 2020, the OECD projected last year that Korea’s budget surplus, which was nearly 3% of GDP in 2018 (on a general government basis), would disappear in 2020. The additional spending to support the economy during the pandemic, combined with falling tax revenues, will likely result in a significant budget deficit this year. In fact, the OECD Economic Outlook released on June 10th projects a budget deficit of around 3% of GDP this year, with gross government debt rising as high as 44% of GDP in 2021. The necessary fiscal response to the economic downturn in 2020 should be coupled by measures to ensure fiscal sustainability in the face of the long-term challenges facing Korea.

Korea’s fiscal position remains sound

In March and April 2020, the National Assembly approved supplementary budgets each equivalent to around 0.6% of GDP. On June 2nd, the government announced that the third supplementary budget will total 35.3 trillion won (1.8% of GDP), the largest ever.

Korea’s government debt is low relative to GDP compared to other major economies (Figure 1). Interest rates are likely to remain low for an extended period, making debt more sustainable. Moreover, Korea appears less vulnerable to capital outflows during periods of turbulence than it was in the past, thus reducing financial risks associated with debt.

Nevertheless, the deterioration in the fiscal position has created some concern. It is important to establish a stronger medium-term framework that ensures Korea’s fiscal sustainability. The National Fiscal Strategy Meeting, held on May 25th discussed plans for the 2021 budget and the 2020-24 fiscal management plan.

Figure 1. Korea’s gross debt is relatively low
General government gross financial liabilities as a percent of GDP in 2018

Note: The OECD total is a weighted average of the member countries.
Source: OECD Economic Outlook database.

A timely, targeted and temporary response to the economic downturn is the immediate priority

Korea’s measures to support an economic rebound and limit the long-term economic damage from the global downturn is appropriate. The 2008-09 Great Recession left a permanently negative legacy on growth potential by reducing capital accumulation and employment. In addition, the Great Recession caused the failure of companies that had successfully mobilized management, technology, human capital, suppliers and customers. Replacing them took time, resulting in a slowdown in multi-factor productivity growth.

Korea’s response to the Great Recession was “timely, targeted and temporary”. Additional expenditure was supplied by the supplementary budget of September 2008 – the same month that Lehman Brothers collapsed – and in the 2009 budget. The fiscal response was effectively targeted on employment; the government created 0.3 million public-sector temporary jobs in 2009, limiting the decline in employment to 0.4%. Finally, it was temporary. Spending soared at an 11.6% annual rate over 2008-09, but then its growth rate slowed to 2.5% in 2010.

As noted in the 2010 OECD Economic Survey of Korea, “Korea has achieved one of the fastest recoveries in the OECD from the global recession. The government implemented the largest fiscal stimulus package among OECD countries”. Fiscal support, combined with robust exports, kept real GDP growth in positive territory in 2009 (0.8%) and produced a strong recovery in 2010 (6.8%).

Moreover, the targeted and temporary nature of the 2008-09 fiscal support, combined with the strong economic rebound, led to a 2½ percentage-point improvement in the budget balance (from a deficit of 1.5% of GDP in 2009 to a surplus of nearly 1% in 2010) (Figure 2). In contrast, the improvement in the OECD area’s budget balance was only ½ percentage-point of GDP.

Figure 2. Korea’s budget position improved quickly after the Great Recession
General government balance as a percentage of GDP

Source: OECD Economic Outlook database.

Korea’s fiscal response to the coronavirus pandemic has also been timely. Moreover, it is targeted again on employment, which plunged 1.8% (year-on-year) in April, as the economy shed the largest number of jobs since February 1999 in the aftermath of the Asian financial crisis. The government aims to create at least 550,000 jobs as part of the “Korean New Deal” announced in April. Minister of Economy and Finance Nam-ki Hong said the government’s four key goals for employment are securing existing jobs through job stability, using unemployment benefits to help those who have lost their jobs, providing support for those who are in unemployment insurance blind spots and creating jobs. The public-sector jobs, though, are only temporary, as Minister Hong stated that the private sector should ultimately be responsible for maintaining and creating jobs.

Ensuring long-run fiscal sustainability

Maintaining a sound fiscal position in Korea is a priority given spending pressures, including those stemming from population aging and the potential cost of intensified economic co-operation with North Korea. With the drop in the fertility rate to below one and lengthening life expectancy, Korea faces the most rapid population aging among OECD countries. Indeed, the old-age dependency ratio (the ratio of the population aged 65 and over to the population aged 15-64) is the sixth lowest in the OECD in 2020 but it is projected to be the highest by 2060 (Figure 3). Population aging will sharply boost public social spending, which accounted for only 11% of GDP in 2018, about half of the OECD average of 20%. The government projects that under the current framework public social spending will reach 25.8% of GDP by 2060, exceeding the current OECD average. In particular, pension outlays by the National Pension System are projected to rise by 7% of GDP by 2060.

Figure 3. Korea faces the most rapid aging in the OECD
The ratio of the population aged 65 and over to the population aged 15-64

Source: United Nations, Department of Economic and Social Affairs, Population Division (2019), World Population Prospects 2019.

Aiming to ensure sound fiscal policy and promote an efficient allocation of public expenditure, Korea introduced the National Fiscal Management Plan in 2004, as a five-year rolling Plan. The government is required to submit the Plan to the National Assembly each September, along with the budget for the following fiscal year. However, the Plan is not legally binding and its impact on fiscal policy has been limited.

It is important, therefore, to create more binding fiscal rules, as suggested last week by the Board of Audit and Inspection. It is also essential that the Plan be based on realistic assumptions about economic growth. With social spending rising, the Plan should include measures to raise revenue, while limiting any negative impact on economic growth, promoting social inclusion, and protecting the environment. A more focused and disciplined approach is important to help ensure Korea’s long-run fiscal sustainability in the face of rapid population aging.

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.

Picture from flickr user Jean-Pierre Dalbéra

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North Korea Turns to Bonds to Address Financial Distress

By Stephan Haggard

According to a story in DailyNK by Jang Seul Gi, the North Korean government has taken the initiative to issue government bonds; several astute analysts of the Korean economy have picked up on the story (Tom Byrne at Foreign Policy here and Benjamin Katzliff Silberstein at 38North here). As with all such stories, we need to take it with the appropriate grain of salt. Nonetheless, the particular details reported by their informants are highly plausible. The episode provides another piece of evidence that the regime is coping with significant financial distress from the combination of sanctions and the economic effects of the border closures with China as a result of COVID-19. And it is also likely to show that as in the past, this distress is going to lead to a struggle for resources between the regime and the private sector.

Before turning to the lessons from earlier bond issues in 2002, it is important to underscore that the bonds in question are domestic bonds, and not the highly-speculative packaging of North Korea’s foreign obligations that sometimes makes the news. North Korea participated in the wave of foreign lending to developing countries during the 1970s, drawing on loans and lines of credit from at least 30 institutions. But by the late 1980s it became clear that the regime did not have either the capacity or the willingness to repay. As Tae-jung Kim has detailed in a useful overview, exotic debt markets responded to the interests of bottom-trawlers. Rather than continuing to hold the debt on their books, creditors sold the rights to collect North Korean debt to the French bank BNP Paribas, which later launched derivative bonds under the moniker of the “NK Debt Corporation.” Although the bonds are basically worthless, they have periodically seen price movements during periods of optimism, particularly when progress on the nuclear issue seemed possible.

There is one deep underlying similarity between the foreign bond saga and the current bond issue, however: that the North Korean regime faces enduring credibility problems that fundamentally limit its capacity to raise funding through the issue of debt of any sort.

The government first issued domestic bonds in 1949-50 to fund the war effort; it is doubtful that these borrowings were repaid. In Famine in North Korea, Marcus Noland and I discussed the issue of government bonds during the 2002 economic reform effort, an episode that provides a useful lens on the current effort.

The purpose of the July 2002 reform was largely to ratify processes of marketization that had taken place during the famine. The effort had four central components: microeconomic policy changes with respect to both industry and agriculture; macroeconomic policy changes; and renewed efforts to create special economic zones and secure foreign aid.

The macroeconomic component of the reform included an ill-designed price reform that ended up producing rampant inflation, an inflation which had the consequence of devaluing the cash holdings of traders and households. With the central plan crumbling and the government unable to raise new revenue through a transaction tax, in March 2003 it announced the issuance of “People’s Life Bonds.” The government’s announcement stated, without irony, that “the bonds are backed by the full faith and credit of the DPRK government,” but they more closely resembled lottery tickets. The bonds had a 10-year maturity, with principal repaid in annual installments beginning in year five. However, there did not appear to be any provision for interest payments.  Rather, for the first two years of the program the government would hold semi-annual drawings (annually thereafter) with winners to receive their principal plus “prizes”; in effect the payment of interest appeared a matter of pure luck.  Needless to say, the purchase of the bonds was not altogether voluntary, as committees were established in every province, city, county, institute, factory, village, and town to promote their sale as a “patriotic deed.” Such efforts were hardly popular, as they amounted to little more than a new tax.

The details provided in the DailyNK story—if true—comport with this earlier episode but with a few interesting twists. The issue was apparently ratified during the Politburo meeting of April and clearly reflected fiscal distress: as Byrne points out, the Minju Chosun called on factories and businesses to fulfill their tax obligations, a clear indication that they were not in fact doing so. The bonds were apparently printed by mid-month and ready for sale (although we do not have any further information at this point on the progress of their sale).

An interesting twist is that they are not only targeted at households, but are to be used by organizations—say, Construction Bureau 8—to purchase materials from state-owned enterprises. My interpretation is that this effort to substitute bonds for cash is designed to avoid direct monetary emission that would have inflationary effect or lead to a depreciation of the exchange rate. Unlike the advanced industrial states, and even emerging markets, monetary policy is hard to conduct in the North Korean economy, where there are no functioning financial markets. Who wants to hold more North Korean won?

However, what the coverage of the event demonstrates most clearly is that a government completely lacking in credibility is unlikely to be able to manufacture it on short notice. As the DailyNK story notes, both high-level regime officials and the donju class are starting to hoard US dollars. The reason is simple: they rightly see the bond issue as both a sign of distress and as a signal that a crackdown on markets could be coming, as the state scrambles to extract real resources from a struggling economy. The reporting of the DailyNK again lines up with economic expectations.  In the absence of any trust in government, the Ministry of State Security (MSS) has mobilized teams to crack down on informal markets for foreign exchange, a clear indication that bond purchases will effectively be imposed on unwilling buyers and suppliers.

I have long predicted that the North Korean economy is vulnerable to an old-fashioned balance of payments crisis as it is unable to finance its ongoing deficit with China. I have consistently been wrong because of hidden reserves, Chinese foreign investment and aid, and probably arrears to Chinese suppliers. All of those factors may once again save Kim Jong-un, but we should again be monitoring the exchange rate. Recent movements show some short-run depreciation in black market prices for the dollar, but not out of line with prices since the first of the year. Nonetheless, the bond issue episode is a telling sign of what Kim Jong-un himself said as early as the 5th Plenum in December, and has no doubt only gotten worse as a result of the border closures to contain Covid-19. The North Korean economy is facing the most serious headwinds it has seen in the Kim Jong-un era.

Stephan Haggard is a Non-Resident Fellow at the Korea Economic Institute and the Lawrence and Sallye Krause Professor of Korea-Pacific Studies, Director of the Korea-Pacific Program and distinguished professor of political science at the School of Global Policy and Strategy University of California San Diego. The views expressed here are the author’s alone.

Photo from Marcelo Druck’s photostream on flickr Creative Commons.

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