[The Editors' Verdict] High Prices for Food, Clothing, and Housing, Low Public Utility Charges... Who Benefits?

"When a system is introduced or a policy is implemented, the most important thing to focus on is who benefits and who loses from the changes."

This was a lesson I received from excellent senior reporters during my early days as an economic journalist. Especially, economic systems and policies often have significant impacts on various economic agents. Of course, when a system or policy is introduced, it is usually intended to solve existing problems, so it is necessary to comprehensively consider the severity of the problem and the new beneficiaries and those who suffer losses. In any case, the advice from my seniors was very helpful in judging how to view new systems and policies.

On the 18th, the Bank of Korea released a very good report. It analyzed that while South Korea's overall price level is close to the average of the Organisation for Economic Co-operation and Development (OECD), clothing and footwear prices are 161% of the OECD average, food prices are 156%, and housing costs are 123%. On the other hand, public utility charges are only 70% of the OECD average.

At a press conference, Lee Chang-yong, Governor of the Bank of Korea, explained the price differences by saying, "(The Bank of Korea) reviews data to understand why prices of these goods differ, and if policy factors caused the differences, who benefits and who loses from such policies, and what other negative effects might arise if these policies continue. By providing this information, we aim to guide policies in the right direction."

He also emphasized again by stating, "Because this is a structural issue, there are groups that benefit and groups that lose, making it a very difficult problem. However, understanding this is necessary to solve it." The advice I received as a junior reporter was about new changes, but Governor Lee’s remarks were about current policies and realities. The framework of thought is similar.

Although many media outlets have written numerous articles, it seems necessary to summarize a few points from the above perspective.

First, public utility charges such as electricity, gas, and water are very low at about 70% of the OECD average, but the benefits increase with higher income. Among household expenditures saved due to low electricity, gas, and water charges, the top 20% income group (quintile 5) receives 26.8% of the benefits, nearly twice that of the lowest income group (quintile 1) at 14.0%. The fourth quintile receives 22.9%, the third 19.7%, and the second 16.6%. Because price elasticity for public services increases with income, low public utility charges may lead to energy overconsumption among high-income groups.

Second, food prices are very high at 156% of the OECD average, and the damage is greater for lower-income groups. Looking at the consumption share of food by income quintile, the lowest income group (quintile 1) spends 20.3%, about twice that of the highest income group (quintile 5) at 11.8%. The second quintile spends 16.3%, the third 15.3%, and the fourth 13.4%. Low-income groups mainly consume cheaper products, so when prices rise, they cannot substitute with even cheaper alternatives, resulting in a heavy burden. Agricultural products have low substitutability, causing particularly severe shocks to vulnerable groups.

Third, based on domestic apple distribution costs for Yeongju apples in November 2022, the distribution cost share varies by distribution channel. In the 'producer-distributor → wholesale market → retailer' channel, producers (farmers) received only 31.6% of the price, while distribution costs accounted for 68.4%. In the 'producer organization → wholesale market → retailer' channel, producers received 39.4%, and distribution costs were 60.6%. Distributors earned more profits than the farmers who directly produce the goods. Only in the 'producer organization → large retailer' channel did producers receive more than half, at 57.6%, with distribution costs at 42.4%.

Fourth, commission rates by distribution type for clothing in 2022 were approximately 40.4% for TV home shopping, 29.4% for department stores, 22.1% for large supermarkets, 18.2% for outlets, and 13.6% for online sales. The share of direct purchasing without intermediate distribution through department stores by country was 80-90% in the U.S., 62% in the U.K., 60-70% in France, 5-10% in Japan (all based on 2016 data), and 3% in South Korea (2023 data). However, the sales share of clothing, footwear, and bags through department stores was about 35% in 2023.

In summary, low electricity, gas, and water charges benefit higher-income groups more, while high food prices cause greater harm to lower-income groups. Middlemen in agricultural product distribution and department stores currently enjoy significant profits under the existing distribution structure.

From a personal perspective, large supermarkets that directly purchase agricultural products have lower commissions, so products of the same quality are likely to be cheaper. For clothing, department stores have high commission rates and low direct purchasing shares, so prices tend to be higher. If appearance is not a concern, using outlets or online shopping would be better.

As an economic reporter, I often heard the saying, "A developed country is one where the costs of the three basic necessities of life?food, clothing, and shelter?are low." Even people who are not wealthy need a certain level of food, clothing, and shelter to live a dignified life. It seems South Korea still has a long way to go before becoming a true developed country.