How to distort a pricing structure

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How to distort a pricing structure

Published: 03 Jul. 2024, 20:10

Park Sun-young
The author is an economics professor at Dongguk University.

I resided in the United States for seven years and spent a year in Europe. Still, I never imagined myself settling down in a country other than my own. Living in Korea has many advantages, apart from the wish to contribute my talent to my mother country. Few countries can beat Korea’s excellent public safety, accessibility to medical care, clean infrastructure and prompt and friendly public and private services, as well as cheap electricity fees and transportation fares. But ambivalence is inevitable — expensive housing, food prices and intense competition are certainly the downsides of living in Korea.

What begets such contrast in Korea? A recent Bank of Korea (BOK) report on Korea’s price features and their implications offers insights. Compared to other developed economies, Korea’s price levels fall in the middle. Food, clothing and housing costs are sharply above the OECD average, while utility and public transportation charges are a lot lower than the average. That makes Korea belong to the middle group among OECD members.

But a closer look shows that the price gap per item is widening. While Korea’s grocery prices that were 1.2 times the OECD average in 1990 rose more than 1.5 times in 2023, utility fees fell from 0.9 times the average of the OECD in 1990 to 0.7 times during the same period. Farm produce prices are higher than the OECD average due to Korea’s low productivity and liberalization rate on top of an inefficient distribution system. But public service fees are the lowest among key economies due to government intervention. Electricity and gas charges hover below the production cost.

The BOK report pointed out that low utility bills even below the production cost are not sustainable, as they result in energy over-consumption and deterioration in public service quality. State utility flagship Korea Electric Power Corp. (Kepco) sits on a debt of over 200 trillion won ($144 billion) that demands interest payments of 4.7 trillion won this year alone. This amount is more than enough to subsidize 1.69 million households relying on basic allowances with 2.5 million won energy vouchers per year. When Kepco can pay off its debt principal is uncertain, but it will have to come from the pockets of future generations.

Today’s living expenses underline two problems of the economy. One is that the prices of products and services the government can wield some influence over remain abnormally low. In other words, cheap prices are possible at the expense of the public sector. The problem does not just lie with debt-ridden public companies like Kepco, Korea Gas Corp., Korail and Seoul Metro. The Korea Government Employees’ Union demanded higher pay, pointing to the rising quitting rate of junior government officials, as their wage growth lags behind the rise in the inflation rate. Universities are struggling because the tuition freeze has been in place for 16 years.

Two, savings from cheap public services are wasted in the sector of low productivity and inefficient spending. Farmland per person is marginal at 0.3 hectares (0.7 acres), and farmers are mostly smallholders, placing among the lowest in the OECD agriculture labor productivity ranks. Because farm producers are small-scale, retail influences loom large. Distribution costs took up about half of final farm produce prices as of 2022, up from 39 percent in 1999. The agriculture sector is expected to weaken further due to the deepening aging of farmers and climate abnormalities.

What good is the cap on utility bills if expensive food and clothing costs eat up household finances? The money flow into the low-productivity stream also will impair public finance.

The abnormalities owe much to politicians of both right and left who took turns in governing power over the last 20 years. They controlled prices and put off restructuring with a spin of improving living standards. Current and future governments are expected to sustain prices at acceptable levels by the people, but they will most likely defer unpopular restructuring moves as long as possible.

Price levels and the inflation rate are different. If price levels remain high regardless of easing the inflation rate, livelihoods won’t get any better. If price levels of a certain industry are disproportionately high, structural endeavors are necessary through improving productivity, diversifying supply chains and rationalizing the distribution structure.

We cannot go on sustaining our society at the expense of the public sector and future generations. We cannot be sure if Korea remains livable a decade later, given the expedient approaches of politicians. There may yet be hope if experts’ reports like the BOK study stir lively discussions.

Translation by the Korea JoongAng Daily staff.