Executive Summary
I. Introduction

II. Empirical Methodology and Data
1. Dynamic Latent Factor Model
2. Variance Decompositions
3. Dynamic Correlations
4. The Data

III. International Business Cycle Comovements
1. Latent Factors of International Business Cycles
2. International Business Cycle Comovements

IV. Driving Forces of Business Cycles
1. Regional Characteristics
2. National Characteristics

V. Concluding Remarks

References

Appendix

This paper examines the characteristics of international business cycles among the Asia-Pacific economies in the period of 2000:Q1-2013:Q4. A dynamic factor model is estimated for the output fluctuations and five macroeconomic drivers of business cycles. The estimation extracts the latent common factor shared by fourteen APEC economies and the region-specific factors of North America, Northeast Asia, Southeast Asia, and Oceania. We find that the relative contributions of the common and region-specific factors of business cycles are significant in accounting for national output fluctuations. Evidence for international business cycle comovements is strong between North America and the common business cycle particularly at low frequencies. North America and Northeast Asia also show significant business cycle synchronization. As for the driving forces of business cycles, international trade provides the largest contribution across four regions in the Asia Pacific and the monetary policy and productivity drivers are subsequent to it. The overall finding signifies the greater probability of economic cooperation and regionally coordinated monetary policies among the APEC economies.

Executive Summary I. Introduction II. The Panel Smooth Transition Regression Model III. Results from the PSTR Mode 1. Data 2. Results from the PSTR Model IV. Supplementary Linear Panel Estimations 1. Linear Dynamic Panel Estimations 2. Panel Granger Causality Test V. Conclusion References Appendix

This paper investigates the nonlinear relationship between income inequality and economic growth using a heterogeneous panel data set of 77 countries. The estimated nonlinear function exhibits relatively smooth regime switching, as regards the income inequality level in the previous period. The point above which the time-varying coefficient estimate on inequality turns from positive to negative is found to be the Gini index of 24.5. The results suggest that while inequality hinders economic growth in most of the countries, it accelerates economic growth only in a country where the level of inequality is very low. Furthermore, the results reveal that the negative effects of income inequality on economic growth become more serious in developing countries whose level of inequality is relatively higher. The supplementary linear regressions with various specifications generally confirm the results obtained from the nonlinear model.

China’s IT industry ranks high in the world. As the production network expanded during the 2000’s, China emerged as the world’s center for global IT production. In 2013, China accounted for more than half of the world demand for major IT products including mobile phones, computers, and color televisions.
China’s IT industry has been developing mainly along the eastern and coastal regions including the Pearl River Delta, the Yangtze River Delta and the Bohai area. But recently, these areas have experienced a steep rise in factor costs and pressure from industrial advancement due to changes in the methods of economic development. It forced the IT manufacturing industry of China to gradually shift its production base from the eastern coast to the western inland areas. Most IT enterprises have moved manufacturing facilities to cities like Chongqing, Chengdu, Xi’an, with these cities concomitantly emerging as China’s new IT manufacturing clusters. In this regard, this study conducts a comparative analysis on core manufacturing clusters in Chongqing, Chengdu and Xi’an. Based on the findings, this study provides implications for Korean companies seeking to conduct business operations in the area and also for the Korean government in supporting these companies.
In comparison, IT manufacturing clusters in the West are similar in that they are formed around a key industrial complex. Nonetheless, the clusters in Chongqing, Chengdu, and Xi’an possess distinctive features. For instance, Chongqing IT manufacturing industry has seen a rapid annual growth of more than 77% for three consecutive years, starting in 2009. Such rapid growth was a result of an increase in the number of laptop computer manufacturers in the Xiyong micro electronics industrial park, which also led to a vertically integrated production system with computers and the peripherals in the center. Centering around the Chengdu hi-tech industrial development zone, many companies whose business involves IC‧Display‧Computer and related peripheral and communication networking devices made its inroad to Chengdu. The cluster also has a well-established value chain from raw material to product manufacturing. Meanwhile, centering around the Xi’an hi-tech industrial development zone, the sectors of IC and telecommunication devices are highly developed in Xi’an. Xi’an is also noted for RF (Radio Frequency) products and sensor industry within China. Also, R&D sector is one of the Xi’an’s strengths as there are ample numbers of research personnel for electronics and telecommunication sectors. Nonetheless, with the exception of a few products such as computers, production in the IT manufacturing clusters in the West are not fully compatible to those in the Eastern region. Therefore the central and local governments in China are providing various measures for budding IT enterprises in western China. These preferential treatments include deduction in corporate tax, subsidy grants, and support for zero interest loans from the local banks. In practice, these preferential treatments worked as an important motivation for enterprises which made their inroads into the mainstream industry.
The prospect for IT manufacturing clusters in West appear to be positive for the central and local government are providing ample and active support. Nevertheless, companies seeking to invest in western China must thoroughly examine the local market as the level of technology and the extent of development varies by each cluster.
These regions commonly possess high demand for companies specializing in the design and manufacturing of SoC (System on Chip) in the communication and network facilities sector. On the other hand, the Chongqing cluster lacks competitiveness in digital medical system, and the automobile-IT convergence system, while the Chengdu cluster has weakness in IC for display devices and color filter manufacturing. Therefore, Korean SMEs (Small and Middle Enterprisers), noted for high-end technology and innovative idea, have a high chance of promoting successful business in the area. Such SMEs will not only be able to seek their own economic benefit but also will contribute to technological development of the clusters.
On the other hand, the Korean government should step up its collaboration with the local governments in China since the local governments play a pivotal role in the development of the cluster. Also, it is necessary that the Korean government provide support in identifying and developing inter-enterprise collaboration through measures such as business counseling. Since many SMEs experience hardship in acquiring information and network in the region, such opportunities will facilitate the network between the SMEs and the local businesses, eventually leading to increased partnership. In addition, forming a durable base for active technical cooperation is imperative. By launching joint research programs between institutions in Korean and those in Chengdu and Xi’an, we will be able to construct a stable base for technological cooperation. Lastly, the governments could consider collaboration in establishing special industrial zones which provide a favorable environment for Korean enterprise. With their expertise, the Korean companies will be able to complement the growth of the clusters and at the same time take advantage of the abundant labor in the region.

 

 2013 Annual Report

The purpose of this study is to examine how the recent trade negotiations have dealt with Mode 4 issues and what policy implications have been drawn for Korea’s Mode 4 negotiations and the improvement of the domestic system related to Mode 4.
This study provides the following policy recommendations for Korea’s Mode 4 negotiations. First, the Korean government needs to set up the consistent bargaining strategy in Mode 4 issues based on medium-and long-term foreign labor policy such as immigration policy. The coherent policies are the most effective way to negotiate Mode 4 issues with developing countries. Second, as to the issues of Mode 4 coverage, Korea has to build closer cooperation with like-minded developed countries against the GATS-plus requests made by developing countries in the multinational or plurilateral trade negotiations. Third, in the RTA negotiations with developing countries, while the Korean government should stick to the negotiation principle of Mode 4 whose scope is limited in the GATS, it should also take part in the discussions of professional mobility for CSS (Contractual Service Suppliers) and IP (Independent Professionals) with a prospective attitude. Forth, the Korean government authorities should conduct in-depth research on the gap between supply and demand of the specific labor markets to identify the prominent areas for liberalization of CSS and IP in the domestic services sectors. Fifth, in order to prevent from using foreign workers illegally and maximize economic benefits from Mode 4 liberalization, it is crucial for the Korean government to establish its own Mode 4 monitoring system. Finally, it is essential to improve and align the Korea’s professional licensure system with the global standards, which will facilitate mutual recognition for the attainment of policy objectives, such as preventing the substantial influx of the unqualified and promoting overseas employment of Korean professionals.

 

International Macroeconomy

Trade Investment

Multilateral Negotiations

Economic Cooperation

Economic Opening

International Cooperation for Korean Unification

Advanced Economies

China

Southeast Asia

Central Asia

India-South Asia

Russia/Eastern Europe

Asia

Middle East

Latin America

ODA

APEC

Others

2013 Summaries of Research Report

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request.

Preface
Contributors
Introduction and Overview

Part 1. Investment Requirements and Strategies for Cooperation in Infrastructure and Energy Development in Northeast Asia

The Socio-Economic Situation in the Russian Far East and Prospects for Developing
Investment Cooperation with Northeast Asian Countries
A. B. Levintal

Cross-Border Economic Cooperation: Notes on Creating a Northeast Asian Economy
Tony Michell
1. Economic Cooperation in the Region
2. Chinese Investments in the Far East and Siberia
3. Agricultural Development
4. Multilateral Funding and Day to Day Banking
5. Why Land Transit Is Important
6. Road Connections
7. Cross-border Cooperation, Hubs, and Clusters
8. Multilateralizing Kaesong Industrial Estate
9. Dandong-The Last Frontier
10. The Disruption of Sanctions on Third Parties–The Need for A Study
11. The Disruption of Sanctions and the Need for a Fairer Sanctions Regime Development in the Future
12. Sanction Exempt Cross-Border Economic Cooperation
13. Conclusion: A Cross-Border Economic Cooperation Wish List for 2014

Challenges to a Northeast Asia Regional Logistics System Satoshi Inoue Port Cooperation in the Northeast Asia
Dong-Keun Ryoo
1. Introduction
2. Concept of Port Cooperation
3. Cases of Port Cooperation
4. Conclusion

Japan’s Sustainable Electric Future
Yoshiki Iinuma

A Note on Power Grid Interconnection in Northeast Asia
Mitsuho Uchida

Russia and Northeast Asia Energy Security
Sergei Sevastyanov
1. Key Findings
2. Introduction
3. The Main Principles of Russia’s New Energy Policy
4. Energy Security and Energy Market in Northeast Asia
5. Russia’s Activities and Vision for Energy Policy in Northeast Asia
6. Evaluation of Russia’s Input into Northeast Asia Energy Security
7. Recommendations and Conclusions

The Yellow River and Cooperation in Northeast Asia
Liu Ming

Part 2. Financing Economic Integration and a Regional Multilateral Bank: Research Papers on the Northeast Asian Bank for Cooperation and Development (NEABCD)

Creation of a Joint-Venture Bank by China, Japan, and Korea
Jai-Min Lee
1. Introduction
2. Challenges for development finance in Northeast Asia
3. Creation of a Joint-Venture Bank by China, Japan and Korea
4. Conclusion

Economic Development of the Russian Far East and the Northeast Asian Development Bank (NEADB)
Dmitry A. Izotov
1. Introduction
2. Economic Development Prospects of the Russian Far East and Foreign Economic Activity Alternatives
3. Development Programs of the Russian Far East and the Northeast Asian Development Bank (NEADB)
4. Conclusion

Re-analysis of Innovation in Asian Infrastructure Financing Mechanisms
Liqun Jin
1. Demand for Innovation in Asian Infrastructure Financing Mechanisms
2. Feasibility of Innovation in Asian Infrastructure Investment

Review and Strategy for the Proposed Northeast Asia Bank for Cooperation and Development
Byungwon Bahk

A Perspective from the Republic of Korea
Jae Hyong Hong

Appendix

Summary

The Seventh Meeting of the Ad Hoc Committee for Establishing the Northeast Asia Bank for Cooperation and Development
Nankai University, Tianjin, China
July 1-2, 2013

On July 1-2, 2013, the Seventh Meeting of the Ad Hoc Committee for Establishing Northeast Asia Bank for the Cooperation and Development (NEABCD) organized by Northeast Asia Economic Forum (NEAEF) was held at Northeast Asia Financial Cooperation Research Center (hereinafter refer to as the Research Center), at Nankai University, Tianjin, China. More than twenty leaders and experts from China, Korea, Japan, and the US attended this meeting. Prior to the meeting, Dr. Jiang Zhenghua, Former Vice Chairman of National People’'s Congress of China and Honorary Chairman of the Research Center, and Mr. Cui Jindu, Executive Vice Mayor of Tianjin Municipal Government and Honorary Chairman of the Research Center met Dr. Lee Jay-Cho, NEAEF and Research Center Chairman and all the foreign participants. The President of Nankai University, Dr. Gong Ke, attended this meeting as well. The meeting was organized by Dr. Lee Jay-Cho and Mr. Wang Shuzu, Former Deputy Chairman of Tianjin People’'s Congress and Deputy Chairman of the Research Center. Mr. Zhang Xiaoyan, Deputy Secretary of Tianjin Municipality and Director of the Research Center, Mr. Zou Ping, the Research Center Secretary General, Prof.
Ma Junlu, Executive Deputy Director of the Research Center, and Dr. Liu Ming, Deputy Secretary of the Research Center all expressed their views on the theme of the meeting. All the participants together discussed the latest developments on the subject of the proposed Northeast Asia Bank, and exchanged their views on new trends, ideas, perspectives and proposals. They agreed on the major issues summarized below.

I. Fully endorse the establishment of Northeast Asia Bank for Cooperation and Development In Dr. Lee Jay-Cho’'s remarks, he stated that at this year’'s summit meeting of Chairman Xi Jinping and President Barack Obama, there was a historic consensus on the need and importance of a mutual and closer relationship between China and the US for the future of the two largest economies of the world. The Assistant Secretary for Asian Affairs of the US state department believes that regional cooperation with Asia is utmost importance in the next ten years, and should be vigorously promoted.
Former Assistant Minister of Finance and Former Executive Vice President of the Asia Development Bank, Dr. Stanley Katz observed that, based on discussions in Washington regarding the BRIC Bank, the proposal lacks basic building blocks and a foundation based on experience and research. However, the US is not opposed to the establishment of the NEABCD. On the proposed Bank, Japan should portray a clearer attitude, China should release a positive massage initially, and then Korea will have a positive response.
The former Japanese Foreign Minister and the Research Center Honorary Chairman, Dr. Taro Nakayama addressed the meeting in a written statement saying that in order to pursue peace and security in Northeast Asia, regional development through economic cooperation should be our goal. If the cross-border gas pipeline from Siberia all the way to China, Busan Korea, and Fukuoka Japan, can be constructed, it can promote mutual understanding among these countries and people, and it might serve to prevent war and strife and build a system of mutual cooperation.
Large-scale cross-border infrastructure requires huge capital and funding. Therefore, it is necessary to establish a regional development bank for Northeast Asia. Dr. Nakayama expressed his willingness to work with meeting participants to realize this vision. Mr. Byungwon Bahk, the former Executive Vice Minister of Planning and Finance and Chairman of the Korean Federation of Banks, pointed out that the ADB only provides 0.9% of its funds to three northeast provinces in China and Mongolia, there still remains a large gap for establishing a Northeast Asian Bank for future dynamic economic development in Northeast Asia. He also stated that China should take the leadership in the Northeast Asian Bank, and persuade Japan, Korea, Russia, Australia, New Zealand, and other countries to participate. China, Japan, and Korea already have shown a willingness and ability to cooperate evident in their funding arrangements in ASEAN. Why can’'t these countries cooperate to establish funding arrangements for the Northeast Asia region? Japan and the US will not take the initiative in promoting the establishment of the Bank, but once China proposes doing so, Japan, and the US would not be opposed to it.
The chief representative of the Japan Bank for International Cooperation’'s Beijing office, Mr. Kikuchi on behalf of the Japanese Cabinet Adviser, JBIC Executive Director, Mr. Maeda stated that the opportunity for establishing the Northeast Asia Bank is ripe and Japan through establishment of the Bank would change the its role from simple investor to beneficiary/partner investor.
Dr. Zou Lixing, Deputy Director of China State Development Bank for Research and the Research Center Advisor, emphasized that the Northeast Asia Development Bank is important for regional strategic cooperation. It will promote the development of regional infrastructure, economic development and corporation through trade, financial cooperation, cultural exchanges, etc. The establishment of the NEABCD will become a new driving force of economic development in Northeast Asia and a useful compliment to the existing international multilateral financial institutions.
Mr. Kwan-Yong Park, Former Speaker of the Korea National Assembly of Korea, underscored the great significance in the establishment of a Northeast Asia Bank. He stated his belief that most important is to promote the cooperation and collaboration of all countries involved and his hope that we can work together for a common understanding of our goal.
The Former Vice Chairman of China’'s National People’'s Congress and honorary Chairman of the Research Center, Dr. Jiang Zhenghua stated that, peaceful development and win-win cooperation is not only the world trend, but also China’'s responsibility.
The leaders of China’'s State Council repeatedly instructed the relevant departments to conduct a study on the establishment of the Northeast Asia Bank, stating that we now have a better vision for establishing the Bank. They stressed that we should not limit ourselves to the region of Northeast Asia, but set a wider framework and be more inclusive. We can start from reality, and consider and envision a long-term strategy.
The information, input, and ideas provided by the participants from China, the US, Korea, Japan, and other countries showed that the continued efforts to set up the Northeast Asia Bank rest on a solid social and economic foundation. The meeting concluded that the establishment of the Northeast Asia Bank is currently in a most critical period –. it requires that all the relevant countries bolster their confidence and continue their work.

II. The new connotation and orientation of the Northeast Asia Bank
Liqun Jin, the Chairman of China International Capital Corporation Ltd., Advisor of the Supervision and Guidance Committee of the Northeast Asia Financial Cooperation Research Center, and Former Vice Minister of Finance stated in a written statement that, given Asia’'s economic growth and its energy and infrastructure investment demands, currently available financing channels are inadequate and therefore, innovative financing mechanism are necessary. Asia should establish a multilateral financial institution that would run parallel to the ADB system, and would help meet the need for infrastructure construction and economic development. China needs to further strengthen financial cooperation with Northeast Asia and Asia. The Northeast Asian Bank represents such an innovative financing mechanism.
Zou Ping, Chairman of the China Asia Pacific Institute and Secretary General of the Research Center for Financial Cooperation in Northeast Asia stated that in accordance with the “"open development, cooperative development, and win-win development”" requirements, we should insert the establishment of the Northeast Asian Bank into a broad strategy of innovative mechanisms for investment in and financing infrastructure development in Asia. The Northeast Asian Bank would be open to participation by Northeast Asia and Asian countries with China taking a lead and in Northeast Asia it would principally focus on cross-border infrastructure investments.
Zhang Jianping, Senior Economist and Director of the Department of International Regional Cooperation, Institute for International Economic Research, National Development and Reform Commission (NDRC) argued that China, Japan, and South Korea already work together through the China-South Korea FTA and the China-Japan-South Korea FTA negotiations. The regional trade will increase rapidly after the two FTAs are established and they will need the safeguard and guarantee of the Northeast Asian Bank. The establishment of the FTAs and Northeast Asian Bank share some common ground and thereby the establishment of each will contribute to the other.

III. Main consensus and suggestions at the meeting
1. The meeting approved in principle “"The report in 2013 on setting up the Northeast Asia Bank for Cooperation and Development”" drafted by the research center.
After modification and improvements, the report is scheduled to be submitted for discussion at the twenty-second annual Forum Conference in Vladivostok, Russia in August 2013, aimed at obtaining a broader consensus and further extending the international thrust. The Northeast Asia Economic Forum will submit it to the relevant policy institutions of the Chinese, Japanese, and Korean governments at an appropriate time.
2. The meeting endorsed the proposal that the Northeast Asia Bank can be put into an innovative mechanism of investment and financing for developing cross-border infrastructure interconnections. The most important task is to act as soon as possible. The Northeast Asian countries will play the leading role and the participating countries can be expanded to other areas of Asia, including Australia and New Zealand.
3. Expecting China to play an important role in the establishment of the Northeast Asia Bank, we suggest China could initiate the proposal for the establishment of the Northeast Asian Bank initiatively. South Korea will give a positive response and jointly promote the establishment of the Northeast Asia Bank with China as well as leading the way for Japan, Russia, Mongolia, the United States and other Asia countries to participate in it.
4. The Northeast Asia Economic Forum will continue to play a coordinating and catalytic role, by disseminating relevant information and promoting dialogue with policymakers in Northeast Asia. Tianjin Municipal Government, according to the needs of an innovative mechanism for investment and financing Northeast Asian infrastructure interconnections, will pursue further studies and develop strategies for the Northeast Asian Bank taking into consideration any new international circumstances. This will serve as a reference base for policy decisions.
5. It is hoped that the participants will make timely report on the meeting results to the relevant government institutions, in order to obtain the support of central governments. At the same time, we hope each country will encourage their national think-tanks to exert their influence by participating in policy research on the establishment of the Northeast Asian Bank.
The Seventh Meeting of the Ad Hoc Committee finds that, through the exchange of communication, we can further understand what should be done and how, and we can promote mutual understanding to reach a necessary consensus for further achievements. The meeting stressed that the Tianjin Municipal Government has and will play a very important role in the establishment of the Northeast Asian Bank. We expect China to play the leading role in encouraging breakthroughs in financial cooperation in Northeast Asia.