July 2003, The 2003 KDI-KAEA Conference
Aging Population, Emerging China, and Sustainable Growth in KoreaIn this work, we extend Constantinides, Donaldson and Mehra’s work (2002) by incorporating habit formation in a three period overlapping-generations economy. Using comparative static analysis and model calibrations, we verify that there is a positive impact of habit formation on the savings levels of middle-aged investors. The findings imply that taking into account habit formation within the overlapping-generations framework provides a more convincing explanation of the equity premium puzzle than what would be obtained from a non-habit forming model.
Korea is entering into the class of an aging population nation. The aging of a population raises some important issues This paper investigates to what extent does the aging population affect the saving rate, using the life-cycle/permanent income hypothesis, and the tests are carried out with Korean household data from 1977 to 2002. The result of the investigation reveals that real saving rates increase when the duration of lifetime and per household real disposable income rise, and they decrease when the growth rate of income and net worth–to-GDP ratio rises. The growth rate of per household real disposable income has negative effects, suggesting that the households calculate their life cycle income in a forward looking manner. The elasticities with respect to a change in the lifetime horizon and the growth rate of per household income are 0.58 and –0.03, respectively. A one percent rise in the net worth to GDP ratio reduces the saving rate by 0.3 percent. A one percent rise in per household income increases the saving rate by 0.33. Hence, the saving rates are inelastic to a change in the determinants. The younger age and the elder age dependency ratios have insignificant effects on the household saving rate behavior. When the life expectancy rises, while all other things remaining unchanged, the private saving rate modestly decline and the government saving rate is expected to decline significantly. The economy’s real net saving rate decline from 33 percent in 2002 to 30 percent by the year 2030.
This paper explores how aging will influence inequality in societies where the family support system, in the form of multi-generation extended households, is the principal means by which resources are transferred from workers to retirees. On a priori grounds it is indeterminate whether aging leads to an increase or a decline in extended living arrangement, but if it leads to a decline in extended living arrangements the effect is to raise inequality. The model is applied to Taiwan. The evidence suggests that aging has led to an increase in extended living arrangements. The effect is greater than the compositional effects that previous studies identified. Thus, our conclusion is that aging has actually reduced income inequality in Taiwan.
In this paper, we introduce the new accounting standards for social insurance in the United States for the National Pension Fund (NPF) of Korea. Required supplementary stewardship information (RSSI) in annual reports of social insurance programs includes various actuarial estimates that show annual surplus or deficit of the plan, and actuarial present values that are needed to pay all promised benefit payments to participants during the projection period. Current annual report of the NPF does not provide any actuarial estimates that are important in assessing the long-term sustainability of the program. We suggest that the National Pension Corporation adopt social insurance accounting standards and provide both long-range actuarial estimates and actuarial present values of the NPF in order to enhance public trust toward the NPF.
This paper investigates Korea’s direct investment in China and its implications for economic integration in Northeast Asia by examining its effect on bilateral trade between the two countries. The empirical part of the research is based on two recent surveys on Korea’s overseas direct investment (ODI), one carried out by the Korea Institute for Industrial Economics and Trade and the other by the Korean Export-Import Bank. The paper concludes that although the motives for investing in China are diverse Korea’s ODI in China as a whole has had a positive effect on bilateral trade and thus on the economic integration of the two economies. Economic relations between the Republic of Korea (henceforth Korea) and the People’s Republic of China (henceforth China) have been expanding ever since China undertook the Four Modernization reforms in the late 1970s. Ever since then, bilateral trade between the two countries has been growing steadily in terms of both the volume and the variety of goods traded. Capital flows between the two likewise have been increasing although the flows have been mostly from Korea to China and in the form of direct investment. Between 1989 and 2000, for instance, Korea’s merchandise exports to China grew from $213 million to $18.4 billion while China’s merchandise exports to Korea grew from $3.9 million to $11.3 billion (ICSEAD 2002). In fact, China has now emerged as Korea’s third largest trading partner. Also, by the end of 1999 Korea had invested $4.3 billion in China where it had virtually no investment before the late 1970s, and in the year of 2000 alone Korea invested $307 million in China (China Statistical Press 1999, and Lee 2001). These increases in both trade and investment are signs of growing economic interdependence and integration of the two economies, which, we expect, will further economic growth in both countries.1 China and Korea are two key players in Northeast Asia, a region that stretches from Japan on its eastern edge to the Mongolian People’s Republic in the west and the Russian Federation’s Far Eastern provinces in the north. It is one of the most dynamic regions in the world although it has yet to develop into a well-integrated economic entity with formal regional machinery similar to the European Union and the NAFTA. The European experience has clearly demonstrated that the establishment of formal regional institutions such as a free trade area and supranational or intergovernmental institutions can pave the way toward greater regional economic integration. Such institutions are, however, unlikely to emerge unless the region develops its own identity through economic interdependence and creates political support for them (Seliger 2002). Trade and investment are what brings national economies together into close economic interdependence and will thus contribute to the process of regional economic integration.2 In this paper we investigate Korea’s direct investment in China and its implications for economic integration in Northeast Asia by investigating its effect on bilateral trade between Korea and China and other possible effects on economic integration. These two countries are key players in Northeast Asia and increasing interdependence between the two through trade and investment will significantly contribute to region-wide economic integration, as their increasing interdependence will lead to a greater division of labor, greater scale economies, and a higher rate of growth in their economies and thus create further incentives for other countries to join in. In the following section we lay out various possible linkages between outward direct investment (ODI) and bilateral trade between home and host countries. In section II we discuss the motives for Korea’s ODI in China with the purpose of shedding light on the investment-trade linkages between the two economies, and in section III we investigate the geographical distribution of Korea’s ODI within China and its determinants. We offer some concluding remarks in Section IV.
Korea has experienced tremendous changes in economic structure and regulatory statutes in the past half century. In particular, at the behest of the IMF after the financial crisis in 1997, numerous economic reform measures have been proposed and implemented. Past studies on the effectiveness of these reform measures have focused on the change in mean and volatility of the rate of equity returns. Many reform measures, however, seem to be designed to reduce low-end risk to avoid another financial crisis. In this paper we propose to use the ratios of low quantiles (Value-at-Risk) or mean excess losses (Conditional Value-at-Risk) of the distributions of equity returns as a summary statistics for the effectiveness of risk-reducing reform measures. Their usefulness is demonstrated by using Korean equity return data.
This paper re-examines the relationship between public investment in transportation and communication and economic growth in a dynamic panel framework using traditional instrumental estimation approach and the mixed fixed and random coefficient approach. We find that there is a dynamic effect of public investment in transportation and communication on economic growth and its impact is positive. In contrast to earlier studies, our estimated coefficients are reasonably lower. However, for the reverse causal relationship proposed by acceleration investment hypothesis, we find that there is significant heterogeneity across countries and our empirical study does not support the reverse causality.
In order to induce foreign investment, many countries often offer multinational firms various investment incentives such as low tax rates and accelerated depreciation. In Korea, where only straight line (SL) depreciation is allowed, the central and local governments provide low tax rates to certain types of foreign corporate investments. To evaluate the effectiveness of this investment incentive policy, the paper examines how different levels of tax rates and an accelerated depreciation affect the profit and risk aspects of a typical foreign investment. The examination provides several important implications which are useful in evaluating the current tax incentive policy and straight line depreciation.
Tuition control in the education market necessarily creates excess demand. The educational goods then must be rationed out through non-price competition. One non-price selection device commonly adopted is the admission test. Parents and students pour their resources in competition to win the prize, the admission ticket. In this paper, we build a simple choice-theoretic model to analyze how much would be spent for this kind of rent-seeking activity and how the aggregate amount would respond to various measures to discourage it. We show that many seemingly plausible measures will not generate the desired effects.
We discuss corporate governance reforms in the Korean banking sector, which include reforms in board composition and executive compensation, implemented after the Asian financial crisis in 1997 and examine the stock market’s response to the reforms. We find that the banking returns and volatilities became more Granger-causally prior to both KOSPI and finance sector returns after 1998. The announcements of banking governance reforms are generally associated with significant increases in banking sector stock returns. The KIF survey finds that board governance is considered essential in assessing the value of the firm. The participants in the McKinsey survey indicate that they are willing to pay a premium of 24% on average for firms with outstanding corporate governance systems.
Despite great success of derivative market, regulators express concerns regarding the additional volatility due to expiration of derivative securities. The expiration day effect around the world varies depending on the structure of settlement procedure. This paper examines the impact of the expiration of KOSPI 200 derivatives on the underlying cash market in Korea Stock Exchange (KSE). The KOSPI 200 derivative market has a unique settlement price determination process since the closing price of stock market is determined by call auction during the last 10 minutes. We analyze typical maturity effects such as volume, volatility, and price effects on the expiration days. In addition, we explore the influence of the unique settlement procedure of KSE on the underlying cash market during the last 10 minutes.
This paper aims to verify the hypothesis that Internet banking, rapidly expanding in the Korean banking industry, allows banks to reduce cost and ultimately contributes to higher profitability. Our analysis, based on the quarterly financial statements of 20 Korean banks from 2000 to 2002, suggests that Internet banking, especially when it expands, contributes to reduction of banks’ cost, while it does not affect their profitability. It implies that the primary objective of introducing Internet banking, which was to reduce the operating cost such as branch maintenance expenses, has been accomplished, but this cost-reduction effect has not reached the stage in which beneficial effects of Internet banking overcome the negative effect of initial investment on the profitability of banks. Considering that the growth potential of Internet banking consists in its cost efficiency, this also indicates that Korean banks’ strategies of expanding Internet banking would ultimately bring positive outcomes. The findings of this paper offer an important implication that Internet banking has increased social welfare by making banks distribute the benefit of cost reduction to customers in various forms such as preferential interest rates and fee exemption, rather than internalize the benefits to the banks’ profits. This paper also finds an indirect evidence that benefits to the Internet banking customers has been primarily provided through the interest rate channel rather than non-interest service channel. In addition, we found that the people’s preference for face-to-face transaction may be very low in Korea, which supports the hypothesis that the cost for securing customer base will be much reduced. From the results of empirical analyses, it can be also anticipated that the profit-enhancing effect of Internet banking will become more significant in the near future since the cost-reduction effect of Internet banking will be stronger with the technology development that reduces the cost of maintaining Internet banking system.
This paper demonstrates how the outside ownership of assets used in production can improve outcomes. If outside ownership improves outcomes, and assets which implement the gains from outside ownership are scarce, then assets can have value conditional on outside ownership. A framework with a continuous creation and destruction of such assets is developed in a model of firm entry and exit. Assets under outside ownership behave like a factor input which earns a periodic return. By mapping a reduced form version of my model to the canonical Hopenhayn (1992) model of firm entry and exit, a micro-foundation for such a model is provided.
This paper talks about the ‘art and science’ of nuancing conflict situations. The word ‘art’ is used to designate non-scientific factors, and the term ‘art and science’ is employed to introduce the use of non-economic factors, for example diplomatic know-how and negotiation skill, that are intertwined with factors which emanate from a rigorous scientific analysis of a conflict. To do so, this paper discusses a theoretic framework using a diagrammatic analysis of a conflict management procedure, and an application on IMF aid package negotiation process with Indonesia. The theoretic framework introduces a mechanism in which a small concession from each of conflict involved parties is incorporated, as a third dimension, into main action spaces, and it would result in a more effective negotiation process in the conflict situation. In a more conventional conflict setting, the involved parties do have their own action space where each of the parties would lock themselves in to mobilize their policy action. This strategy only leads the parties to a deadlock situation when possible compromises within the action spaces are exhausted. However, instead of starting the negotiation process from action spaces, specifying the objectives and starting from it would provide both parties more chances to devise a more effective negotiation scheme. This paper proposes this simple idea diagrammatically in a theoretic framework. Based on the theoretic approach introduced, an application study on the conflict between the IMF and Indonesia is conducted. The nature of conflict is arisen from disagreement on how IMF aid package on Indonesia’s sustainable development is effectively used. Both the IMF and Indonesia would agree on using the aid package for economic program. But the policy action that the IMF proposes would not meet the condition that Indonesia has in mind. Examining the objectives that the IMF and Indonesia perceive on Indonesia’s sustainable development, a proposal on an environmental program can be formulated. The proposal would satisfy the objectives perceived by both the IMF and Indonesia, and possibly break the stalemate that dealing mainly with action spaces would only result in. This paper concludes with emphasis on dialogue, discussion in a conflict situation that might lead to concessions which possibly bring about realizing mutual improvement in less important policy areas. Once such is realized, more trust, more friendliness and willingness to discuss other conflictual issues of greater import can be taken up and hopefully more successfully dealt with.