2011 Summaries of Research Report

Message from the President
Mission and Brief History

I. Overview of KIEP's Projects
1. Overview of Projects
2. Affiliated Bodies and Research-Related Activities

II. Review of 2011 Projects
1. Research Trends in 2011
2. Basic Research Tasks

III. Research Plan for 2012
1. Research Plan for 2012
2. Basic Research Tasks

IV. Appendix
A Glimpse at KIEP
List of Publications (2011)

 

In 2011, those of us at KIEP had designated four main research topics we deemed most pertinent to current circumstances, and engaged in twenty major projects in line with those topics. These include negotiations for liberalization of the services market and other multilateral trade issues in response to WTO regime reforms and other changes in the world trading environment; economic cooperation in APEC and other regional issues; and current bilateral trade issues including free trade agreements. KIEP conducted research to address changes in the macroeconomic environment surrounding Korea, such as changes the internationalization of the Korean won as a result of Korea's increasing prominence on the international economic scene, and presented basic resource materials and provided directions to prepare for changes in North Korea. Policy responses to global inequalities in light of the current rapid transnational movement of capital were forwarded, in addition to measures to facilitate Korea's entry into foreign markets and attract foreign investment. In recognition of rising demand for research on the world's regions, KIEP did not limit itself to providing data on Korea's major trading partners such as the US or China, but made efforts to provide basic data on Central/South America and Africa that had hitherto been lacking.

This book presents a detailed record and an in-depth analysis of the negotiations that took place within the G20 – the premier forum for international economic cooperation – to achieve historic outcomes on the IMF quota and governance reforms in the lead up to and at the G20 Seoul Summit in 2010. It captures the entire negotiation process that was adopted to shift quota shares and improve governance structure of the IMF, thereby enhancing its legitimacy, effectiveness and credibility. We, the authors, worked on the preparation of the Summit as working level staff and were privileged enough to get involved in one of the most successful multilateral negotiation processes in action. As such, we thought our experiences and analyses of the negotiation process might be helpful to others who may be involved in negotiation processes from time to time or carry out research on negotiations. So we decided to share our experiences and analyses by writing this book.

As the massive global financial crisis swept the world in 2008, one of the major tasks the G20 Leaders focused on at their first Summit in Washington was the reform of the international financial institutions. The G20 delivered its first concrete result in April 2009 when it agreed to increase the IMF resources by more than 500 billion dollars at the London Summit. Then, in Pittsburgh in September 2009, the G20 Leaders further agreed to shift at least 5 per cent share of the IMF quota to emerging market, developing and under-represented countries and undertake governance reforms. But making promises was the easy part. Delivering on them required a lot of hard work and careful negotiations. That’s why when these commitments were finally delivered at the Seoul Summit in November 2010, people said it was the most comprehensive reform in the history of the IMF. While it took many years of negotiations to achieve this result, the book mostly focuses on the negotiations that took place between the Pittsburgh Summit and when Korea hosted the G20 Summit in Seoul.

Shifting IMF quota shares amongst countries is a zero-sum game. If one country wants its quota share increased, it cannot be achieved without a corresponding decrease for some other countries. That is why the IMF quota share reform process was so arduous. Although the 2010 IMF reform was agreed in almost record time, when compared to past agreements, it too was a rough journey consisting of many formal and informal meetings, disagreements and, at times, complete stand-offs in the course of negotiations. This book meticulously records and analyzes the whole 2010 IMF reform negotiation process. But rather than provide a witness statement in a chronological order, the authors divided up the negotiation process into four stages – preparation, exploration of negotiation strategies, actual negotiation and settlement – and evaluated what happened in each stage against a theoretical framework for multilateral negotiation. In addition, the IMF’s major functions, structure and role are explained throughout the book. The authors adopted this approach to enhance readers’ understanding of the issues and provide meaningful insights to those who may have to go through similar negotiation processes in the future.

Finally, the book does not record or evaluate Korea’s role as one of the participants of the negotiation. Rather, it records and evaluates its role and position as the chair country of the G20. However, the book is not an official record or assessment of the implications and achievements of the Seoul Summit.  Official records and assessments can be found in the White Paper published by the Presidential Committee for the G20 Summit. This book was written by working level staff to complement the White Paper by focusing on technical aspects of negotiations and providing lots of firsthand experiences with the negotiation in the form of anecdotes.

In conclusion, we the authors hope that this book will enhance readers’ understanding of the IMF quota and governance reforms, but at the same time provide good insights to general procedures and characteristics of international negotiations. We look forward to it being used as a practical guide for other negotiations in the future.
 

 

This study aims to analyze the productivity spillover effect of inward foreign directive investment in Korea by FDI mode and present some policy implications to improve the policy in order to increase FDI into Korea. To overcome the limitations of previous studies on this subject, a dynamic panel model is set up in this study using the System Generalized Method of Moment (System GMM) with the aggregated FDI data by industry and by mode, i.e. Greenfield-type and M&A-type FDI.
This study shows that inward FDI in Korea has a significantly positive productivity spillover effects, with the effects of Greenfield-type FDI being greater in terms of productivity than M&A-type FDI, considering the overall effect including intra-industry and inter-industry effects. It also shows that total inward FDI as well as each mode of that investment causes significant intra-industry spillover effects. In particular, the effect is greater when FDI for upstream and downstream industries includes service industries. Moreover, Greenfield-type FDI leads to inter-industry linkage effects, while M&A-type FDI does not.
Based on this analysis, we draw out implications for FDI policies of the Korean Government. First, Korea’s FDI policy needs to remain active in order to continuously improve the productivity of the domestic industry. Second, The effort to improve the investment environment in Korea will have to focus on increasing Greenfield-type FDI in terms of productivity spillover effects. Last, it is necessary to take further liberalization actions for FDI, as well as improve the investment incentive system related to service industries in light of the direct and indirect linkage effects upon productivity by FDI.

This paper explores multilateral engagement in North Korea’s economic rehabilitation, with particular focus on the establishment of special Trust Funds. North Korea’s economic recovery in the 2000s has been stagnant, the socialist regime seemingly lacking the capacity to resolve food shortages and economic problems. Moreover, due to the recurrence of the nuclear issue and subsequent imposition of tighter sanctions against Pyongyang, not only has the scale of foreign aid for North Korea deceased sharply, but the engagement of international donors in humanitarian assistance has also been greatly reduced. Thus, a feasible institutional instrument for the amelioration of the regional instability caused by North Korea’s economic problems and nuclear standoff would be the establishment of a multilateral framework that would involve bilateral donors and international financial institutions. The setting up of special Trust Funds is a possible option for resource mobilization for and aid coordination in providing development assistance to North Korea. Given the potential benefits of such a mechanism, creating multi-donor Trust Funds (MDTFs) for North Korea as denuclearization in the Korean Peninsula progresses could help strengthen relations between Pyongyang and the international donor community. Moreover, the joint funding mechanism of the special Trust Fund would help to ease the political burden currently shouldered by South Korea and neighboring countries directly involved in providing development assistance to North Korea.

This paper endeavors to articulate the establishment of MDTFs in the early stages of denuclearization, which would facilitate the dismantling (or abandoning) of North Korea’s nuclear programs, as well as the construction of an international aid coordination mechanism. It also explores the potential roles that Trust Funds could play in resource mobilization and policy dialogue. The paper also considers areas of support and procedure in the operation of MDTFs for North Korea. By drawing attention to issues around the administrative structure of the MDTF, it proposes that international donors establish the ‘North Korea Development Assistance Group’ (NKDAG) as the principal special Trust Fund governing body. The NKDAG could provide a forum for policy dialogue in the coordination of development assistance to North Korea. Effective fund-raisings, and the successful implementation and management of the Trust Funds would serve as an impetus for enhancing the roles the NKDAG would have to play in the coordination of providing development assistance to North Korea and for the country’s economic recovery. This, in turn, would help to placate the donor community in respect of the transparency and effectiveness of its funding contributions, which could attract more foreign assistnance to Trust Fund activities.

In this paper, we explicitly address the role of comparative advantage in effects of outward FDI on domestic productivity, both theoretically and empirically. In the theoretical framework, we place Irarrazabal, Moxnes and Opromolla’s (2009) outward FDI model into Bernard, Redding and Schott’s (2007) framework of international trade with heterogeneous monopolistically competitive firms and comparative advantage; and show that ex ante high average industry productivity triggered by firm self-selection enhances ex post average industry productivity during the process of increase in FDI. Using Korean industry-level data from 1992 to 2008, we also empirically test our theoretical predictions using the fixed effect model as a benchmark model, followed by system GMM estimation methods for sensitivity analysis. Our empirical findings suggest that Korean outward FDI is positively correlated with domestic productivity and this link is likely to take place in those sectors above median competitiveness measured as export-based RCA (Revealed Comparative Advantage). Thus, we find that the empirical results were consistent with previous theoretical predictions as well as our analysis.

The labor market situations in Tunisia, Libya, Egypt, as well as the gulf countries such as Saudi Arabia and the UAE are under the world’s scrutiny since the high unemployment rate amongst the labor force, especially that of the youth, was analyzed to be the main driver behind the 2011 MENA unrest.

Unemployment arises when labor supply falls short of labor demand. The chronical unemployment in the MENA region, especially that of the youth and female labor forces, however, seem to indicate to a structural problem. This report analyzes the labor market structure of saudi arabia and the UAE. It also addresses the recent labor market policies and discuss how South Korea can cooperate with the two countries in the areas of human resource development, public sector reform, and nationalization policies. The report provides hard data behind the claims and suppositions of the existing literature.
The report is constructed as follows. Chapter 2 examines how certain characteristics of the labor market results from each country’s resource dependent economic structure, mainly represented with an oversized public sector. From the labor demand side, the government may provide its employees higher wages, greater job security, and a generous pension system for political reasons. Moreover, it is the government who plays the employer of the last resort when the price of resources drop unexpectedly due to external shocks and in case of private sector contraction. From the labor supply side, on the other hand, workers prefer jobs in the government that provides greater wages, benefits, and social status. They also tend to put importance to job security and thus prefer public employment due to the economy’s fragility to external shocks. A resource dependent economy may also lead to a in low labor participation rate of females, as well.
Based on statistics provided by the two governments and the literature on their labor markets, we summarize the population and labor market structures and its immediate concerns. Specifically, we focus on the high unemployment of the Saudis and Emiritis in the domestic labor market, especially that of the youth, female, and the highly educated. The mismatch between labor supply and demand in the private and public sectors are discussed.
In chapter 4, we summarize the main labor market policies of the two countries. Specifically, human resource development, nationalization, job-matching, and female employment policies are addressed. In Chapter 5, we evaluate the policies that are discussed in chapter 4 and conclude with various policy recommendations in the relevant areas. Public sector reform focusing on reduction of number of public jobs and change in the wage structure are also discussed.