For the past 20 years, APEC has worked on a wide range of Regional Economic Integration (REI) activities with sustained efforts for establishing the Asia-Pacific Economic Community. In order to follow up Leaders’ instructions to implement the REI agenda, various activities related to trade and investment including Rules of Origin (ROO) have been addressed. More specifically, APEC-wide efforts for harmonizing ROOs are being made, aiming to minimize administrative costs caused by complex ROOs. In this regard, the purpose of this research is to provide policy makers and academics with solid and tangible policy implications and recommendations based on qualitative and quantitative analysis on APEC’s ROO activities. To serve this purpose, this research first examines characteristics of both preferential and non-preferential ROOs. It then endeavors to explore ways to enhance the trade creation effect of FTAs/RTAs, while minimizing trade cost, when we employ ROOs as policy tools. Quantitative and qualitative analyses are attempted to derive policy implications and suggestions.
Chapter 2 provides a general outline and characteristics of ROO followed by review/examination of non-preferential Harmonized Rules of Origin (HRO) and preferential ROOs including ASEAN, EU, NAFTA, MERCOSUR and TPP. Major findings in this chapter can be summarized as follows: HRO which represents non-preferential ROO, features consistency with general rules. Meanwhile, preferential ROOs are complex with a number of exceptions, that is, product-specific rules. However, the recent preferential ROOs have fewer exceptions and reinforce general rules with regional value content. In light of the pros and cons of the non-preferential and preferential ROOs, we draw the implication for APEC ROO. A more consistent and coherent general rules with fewer exceptions should be established by making the best use of de minims and cumulation.
Chapter 3 presents APEC-wide discussion and activities relevant to ROO and provides theoretical basis for the need to harmonize and simplify ROO. ROO was included in the REI agenda since the mid-1990s. However, it was not regarded as an independent policy tool for promoting free and open trade. Compendium of Rules of Origin published in 1997 containing preferential trade initiatives and non-preferential ROOs of 16 APEC economies can be regarded as one of APEC’s several earlier achievements in ROO. Since the end of the 1990s, FTAs/RTAs in the region have increased sharply and the region deteriorated into a spaghetti bowl situation. It entailed high administrative costs for application of preferential tariffs, which hampered economic benefits of free trade. In 2008, as a part of REI activities, APEC has agreed on a working plan for the harmonization of ROOs and the simplification of documents and customs procedures. APEC has developed Model Measures for RTAs and FTAs to encourage a coherent and consistent approach to the design and content of such agreements. ROO-related activities and analytical studies have been undertaken to promote greater convergence and build capacity. In February 2009, APEC Senior Officials identified Rules of Origin as a priority agenda for 2009, and tasked the Committee of Trade and Investment (CTI) and its various sub-fora to look into making ROOs more business-friendly. They sought to undertake work related to harmonization, cumulation and simplification of documentation and procedures. In 2009, Leaders instructed that Pathfinder Initiative on Self-Certification of Origin be set to reduce administration costs and capacity-building projects be promoted to induce more economies’ to participate. Also, they instructed that global supply chain activities be conducted aimed at 10% improvement by 2015. In 2011, APEC Leaders instructed to enhance SMEs’ participation in global supply chains. In terms of reducing costs at the border, behind the border, and cross the border, ROO is closely linked with next generation trade and investment issues, trade transaction costs, supply chain, SMEs, and ease of doing business. In this regard, APEC-wide activities and efforts will give greater focus to the simplification and harmonization of ROOs.
Chapter 4 examines the impact of ROOs on trade through theoretical analysis, case studies, and test them empirically by utilizing the gravity model. To reduce the trade diversion effect caused by spaghetti bowl effects, regime-wide ROOs, such as cumulation, de minimis and certification, are examined as policy tools. Analysis on bilateral/diagonal/full cumulation is made to estimate the economic impact. The empirical analysis reveals that full cumulation creates 18.8% increase in trade, followed by 5.53% increase by diagonal cumulation and 3% increase by bilateral cumulation. De minimis results in a 6.8% increase in trade. However, the economic efficiency of a system of self-certification compared to public-certification remain unproved in statistical terms. This may imply that, in practice, self-certification requires more burdensome documentation and additional procedures.
Building on the major quantitative as well as qualitative findings, Chapter 5 delineates several principles/directions and policy recommendations for effective promotion of APEC’s ROO activities. First, standardization and simplification of ROOs should be attained to promote greater utilization of FTAs/RTAs and create a business-friendly policy environment. The recently established WebTR provides customs procedures, tariffs, and ROO-related information. Its function should be developed further and made more user-friendly with respect to APEC REI activities. For instance, it should be a diversified database that can guide APEC business specifically towards understanding the complicated ROOs of various FTAs/RTAs in APEC. Its role as a network hub needs to be strengthened further for it to contribute to the reduction of administration costs and time, and promotion of transparency and predictability of APEC ROOs. Second, adoption of the Pan-Asian Pacific Cumulation System (PAPCS) should be considered a pathway to achieving an FTAAP. As proven in the quantitative analysis, diagonal or full cumulation lead to increased trade. Hard work is required to identify economic impacts and challenges of diagonal and full cumulation through policy dialogue and analytical study. Also, a study for best practices should be undertaken on a consistent basis. Third, further efforts to promote regulatory cooperation and convergence should be made. Relevant regulations should be realigned for simplification and harmonization of APEC ROOs. The application of ROOs requires both strictness and flexibility in laws and regulations of individual economies. The self-certification procedures greatly differ from economy to economy - rigidity and heterogeneity of laws and regulations undermines the benefits of self-certification of ROOs. To facilitate better application, ‘Simplification of Documents and Procedures Relating to ROOs’ should be developed and advanced through regulatory cooperation and convergence. It will enable a more efficient process of self-certification of ROOs. Finally, all the work of simplification and harmonization of ROOs covers not only regulations but also cross-cutting and trade facilitation issues. For APEC’s establishment as a single market, more APEC economies should participate in discussions for a single cumulation zone and APEC-wide capacity building programs for better utilization of ROOs, and APEC economic integration. Since 2010, Korea proposed and conducted the Regional Economic Integration Capacity Building Needs Initiative (REI CBNI), aimed at expanding opportunities for participation in APEC REI projects including an FTAAP. The REI CBNI will be in operation for 5 years starting in 2012. Under this initiative, tailor-made programs including ROO capacity building will be developed and implemented. Supply of expertise and financial resources are important factors for a successful REI CBNI. For expertise and financial resources, utilization of Official Development Assistance (ODA) or APEC-wide business participation under Corporate Social Responsibility (CSR) can be considered.

Many countries/regions including the US, the European Union, and China have implemented a wide variety of protectionist measures since 2008 when the global economic crisis occurred. As major economies are afraid of the devastating impacts of competitive protectionism, they have been warning against the strengthened protectionism at the G20 and the WTO meetings.
When we review the tariff rates from 1996 to 2010, the applied tariff rates dropped from 10.5% on average in 1996 to 7.0% level since 2006. However, it turned out that the number of trade remedy measures including the anti-dumping duties, safeguards, and countervailing duties increased rapidly since the late 1990s. In addition, we have also seen non-tariff measures including TBTs and SPSs becoming more widespread in recent years.
This study investigates the level of protection in 2000 and 2010 implementing the two-stage approach suggested by Helpman et al. (2008) and Kee et al. (2009) to address problems involving endogeneity and sample selection. The empirical results reveal that the level of protection dropped from 19.7% in 2000 to 11.0% in 2010. It implies that the level of protection decreased mainly due to the Uruguay Round concessions and the spreading Free Trade Agreements.
When we analyze the economic costs of protectionism by types, it turned out that the trade remedy measures have a negative effect on trade, which is statistically significant. New types of non-tariff measures including TBTs and SPSs, which have been spreading rapidly all over the world, turned out to have depressing effects on trade. However, older types of non-tariff measures including price and quantity measures which have been kept under effective control by the WTO system, turned out to have mixed effects.
This study also investigates the impacts of protectionism on employment in the Korean manufacturing industries between 1991 and 2006, employing the GMM (the Arrellano-Bond dynamic panel estimation technique) system to account for potential endogeneity arising from the inclusion of the lagged dependent variable into explanatory variables. It finds that the effects of protectionism on employment depend on the wage level. In particular, protection measures such as high tariffs result in reduction of employment in industries paying higher wages. We also find that tariffs in Korean manufacturing industries have significant impact on employment of blue collar workers, whereas its impacts on the white collar workforce are not significant.

Since WTO has been established in 1995, trade liberalization has led multilateral and interregional corporation to reduce the world’s average tariff rates by an active and robust movement. Hence recently the key issue in the field of international trade is moving from tariff barriers to no-tariff barriers as the latter is not transparent, complicated and not estimated virtually unlike the former. Especially, the importance of Technical Barriers to Trade (TBT) among various non tariff barriers is gradually increasing as many developed and developing countries have started to adopt many technical regulations and relevant systems since 2004.
Analyzing the TBT notifications that have been reported to WTO, the number of the member country’s new technical regulation has constantly increased. Especially the TBT notifications have drastically increased since 2004 and hit the peak in 2009. This recent trend is mainly from the increased intervention of developing country. In addition, the recent increase in the number of specific trade concerns (STCs) implies that new technical regulations are more and more likely to be trade barriers to other trading partners.
TBTs in the U.S, EU, China, and Japan which are Korea’s major trading partners have also been increased since 2004. By industry, the increased reports are shown under mainly rubber and chemical, general machinery and electrical equipment among these countries. These sectors have the high percentage of bilateral trade between Korea and them. By objective, there are many TBT notifications for environmental protection among these countries. A technical regulation for environmental protection is more likely to be adapted by each country’s subjective criterion. It is remarkable that these countries record top rankings of the country list which is brought STCs by other trading partners.
Theoretically, the economic effects of TBT can be various and different based on its type. First, viewing TBT from producer and consumer’s perspective, it can be classified by production cost and consumer utility. The TBT which increases just production cost is more likely to be trade barriers to foreign exporters, especially when it applies to only foreigners unequally. On the other hand, The TBT which increases consumer utility renders a consumer’s intention for expenditure. In this case, exporters with high technology are more likely to gain higher profit due to the TBT so that it promotes international trade.
Second, depending on the norms of TBT level it can be divided into horizontal and vertical one. The vertical TBT can be defined as the intensity of rigor on regulation, while the horizontal one exists within the cultural and geographical difference. The technical regulation for gas emission can be an example of the former, while the standard voltage for home appliances can be of the latter. It is clear that the vertical TBT is more likely to be barriers to trade. However, domestic producers can also use the horizontal TBT as useful instrument to protect from import penetration although the horizontal TBT is naturally formed from the demand side.
Theoretical analysis on TBT with its economic effects is supported by empirical results from previous researches. Previous researches result in opposite side of TBT’s economic effects depending on national, industrial and periodical property. The opposite results are influenced by the trade-off relationship between an increase in adjustment cost and a decrease in transaction cost and/or demand-stimulating effects. Again, the trade-off relationship can be differentiated by national, industrial, periodical properties.
Based on the theoretical analysis and previous researches, this paper empirically tests the effects of TBT on bilateral trade among Korea and its major trading partners, using the WTO TBT IMS and the UN COMTRADE datasets over the period 1995-2009. The empirical results show that overall there are negative effects of TBT on trade between Korea and its major trading partners. However, these negative effects persisted just in the short run generally: in the long run, the negative effects are disappeared or even transferred to positive effects in some situation. By country, the negative effects persisted longer in Korea’s bilateral trade with EU and Japan. By industry, the negative effects of TBT on exports are less prominent in sectors with comparative advantage and/or higher international competition, but more prominent in high technical-intensive sectors. These various effects of TBT on trade can be explained by the trade-off relationship which we mentioned above.

World has grown so rapidly and the amount reached to $ 27.2 trillion. This is not only because of the multilateral or regional efforts toward free trade but because of global production networks and global outsourcing.
Korea’s trade volume continues to grow, and achieve $ 1 trillion and becomes the world’s ninth country in 2011. About 50% of total exports and 70% of total imports are intermediate goods trade. Korea’s intermediate goods trade is closely related to changes in division of production structure with China, Japan, ASEAN, and other Asian regions.
Various researches have been conducted about total trade, while comprehensive studies on Korea’s intermediate goods trade is very rare despite of its importance and weight. The purposes of this study is to increase the overall understanding on trade in intermediate goods and to present relevant policy implications by analyzing the trends, current situations, the determinants, input-output structure, and productivity spillover effects of Korea’s intermediate goods trade.
According to the results of determinants for World’s intermediate goods trade, not only traditional explanatory variables but comparative advantage variables and institutional variables turn out to be significant determinants. Moreover, geographic factors, customs duties, shipping costs, and comparative advantage  factors play more important role in intermediate goods trade than final goods trade. We found similar results for Korea’s trade data. Korea mainly exports capital-intensive goods and relation-specific goods. Also Korea imports capital intensive goods from capital abundant countries and does relation-specific goods from countries with high levels of legal and institutional system.
We analyze input structure of imported intermediate in Korea’s industrial production by using industry linkage analysis. For analysis period (from 2000 to 2009), the share of imported intermediate is increasing. On average, each industry requires imported intermediate by 0.03 billion won in order to produce final goods by 0.1 billion won. More imported intermediates are used to produce goods for exporting than for domestic consumption or investment.
We study the productivity effects and spillover path of imported intermediates by using a computable general equilibrium (CGE) model considering endogenous international technology spillover effects. The effects of imported intermediate on domestic competitive sectors depend on technology types and the trade relations with exporting countries. The productivity effects of imported input on final sectors using the imported intermediates are affected not by shares of imports but by amounts of imports. The greater the industry linkage relations of industy affected by imported intermediates’ productivity are, the greater the real GDP growth rate and welfare improvement are.
Based on this analysis, we make three policy proposals. First policy proposal includes domestic technology development for replacing imported inputs, aggressive FDI promotion, and raising concern for producer services as intermediate goods to mitigate the dependency on imported intermediate goods. Second, we propose investment in human capital, enhancement of institutional level, and improvement of investment environment to strengthen the comparative advantage. Last, we recommend to develop trade policy strategy taking intermediate goods trade into consideration. The strategies include  inducing high-level concessions for industry with comparative advantage, open strategy considering technology types and industrial characteristics, increasing efforts toward exporting to enhance learning by exporting effects, and raising interest in opening intermediate service sectors.

The East Asian countries-Japan, Taiwan, Korea, and China-have shown better economic performance than any other region in the world with respect to increased income and reductions in poverty during the last half century. There have been thoughtful debates on whether their performance was due to a development model specific to the region which could be differentiated from development models in other regions. After the East Asian crisis of 1997~98, in particular, several economists indicated the serious problems of the development strategies in East Asia. However, the swift and strong recoveries from the East Asian crisis and the more recent global financial crisis of 2007~08 have raised the need for reevaluation of East Asia’s development model.
First, this study shows the economic performance of the East Asian countries during the last half century compared to that of other countries and regions. Then we discuss what the unique development strategies were that can be differentiated from the traditional Anglo-American model. Higher government intervention, more emphasis on exports and manufacturing, and higher saving-investment ratios are commonly understood to be the major components of the East Asian model. We compare and evaluate them with those of the Anglo-American model.
In the early stage of economic development, the governments of the East Asian countries placed their priorities on resource allocation because of their limited physical, financial and human resources. The most important criteria on which governments selected and supported industries and firms were their ability to export, because sizes of domestic markets were limited and foreign currency was badly needed for imports of technology and capital goods. They also understood that export promotion could only be accomplished through the development of their manufacturing sectors which are better suited to a trade economy than the service sector. Through this process the East Asian model put more emphasis on the export and manufacturing sectors than the Anglo- American model.
However, the East Asian crisis of 1997~98 revealed to us that the traditional East Asian model could not guarantee a sustained, long-run growth of the East Asian countries. They thus modified traditional development strategies by accepting several components of the Anglo-American model. It would be necessary for East Asian countries to make compromises in the future and harmonize their development models with those of the west, including the Anglo-American model, to obtain robust growth that can be sustained over the long-run. The balance of emphasis between government intervention and market mechanism, the balanced growth of manufacturing and service sector, more emphasis on domestic demand, the maintenance of appropriate saving ratio, and the strengthening of East Asian economic cooperation are suggested as examples of ‘harmonized’ development strategies for the future.

This report analyzes the problems of the current international monetary system under given circumstances of a weakening dollar and the decreasing weight of the US Economy in the world. This study tries to figure out whether there will be changes in the current international monetary system and, if so, the possible picture of new system. As alternative international key currencies, EURO and Yuan are proven, in diverse aspects, as international key currencies. This report suggests the introduction of an Asian regional currency and makes the case for a multi-polar international currency system, starting with the East Asian Currency Unit between Korea, China and Japan.
The first issue concerns the search for a possible alternative international monetary system. SDR has been regarded as a substitute for the dollar, as it already has worked as an international currency since the launch of the Bretton-Woods system. SDR’s advantage is that the currency is not bound to specific national interests. However, there is no private market where the SDR might be traded. SDR also requires an international central bank, which the IMF is not likely to become.
Another alternative may be a multi-polar international monetary system in which the dollar, Euro and probably the Yuan would compete with each other. The result of this study shows that the dollar still dominates other currencies with regard to GDP, volume of financial assets, size of the financial market as well as military power. The EURO has a strong potential to be a key currency considering trade volume, well-developed financial markets and internationalized financial institutes. The Yuan, however, will take quite a while before coming onstage as a global key currency. The major weaknesses of the Yuan are capital control, a shallow financial sector, financial depression, inefficient financial system and relatively high political risk. This result implies that the international monetary system will be dominated by the dollar for the foreseeable future. Then a bi-polar system with the dollar and EURO may slowly emerge to replace the current system. A tri-polar system with the dollar, Euro, and the Yuan will only emerge after a relatively long time.
The tri-polar system may be easier to establish if Asian countries introduce a regional currency instead of a national currency, the Yuan, as that regional currency will not be subject to vicissitudes of China’s domestic conditions. An Asian regional currency will get the credit on the market more easily than the Yuan. The fastest way to introduce an Asian regional currency will be to start in a small but influential group involving China, Japan, and Korea. The three countries account for over 80% of Asia’s GDP and cooperate with each other institutionally. They have already established the trilateral cooperation secretariat, and are connected by a currency swap arrangement. If the three countries would initiate efforts to establish an Asian regional currency, other countries will join afterwards.
In addition to the factors explained above, this study shows how the three countries may create a regional currency and how that currency can be used. A set of exchange rates beginning in 2000 to November 2011 is calculated and attached as an example in the appendix.

This study focuses on implementing strategies for the Korea-EU FTA at government and firm levels, and reviews EU’s recent trade policy for suggesting policy responses in the post-FTA era. Korea-EU FTA has entered into effect since July 2011 and it is de facto Korea’s first FTA with large trade partners. It is expected that this FTA will have tangible economic effects on the Korean economy. However, an FTA is only a framework which defines trade relations between two countries and it would be more important to develop appropriate strategies on how to actually utilize the FTA.
This study has four purposes. First, it reviews potentially important trade issues between Korea and the EU in the post-FTA era. For that, this study analyzes EU’s trade policy since 2000. Particular attention is paid to recent institutional change in the EU’s legal system since the implementation of Lisbon Treaty and EU’s new trade policy in the period 2010-2015. Second, this study tries to forecast how the FTA will influence sectoral trade flow between Korea and the EU. In order to answer this question, this paper analyzes trade specialization and complementarities between the two trade partners. Third, this study presents in-depth analysis on FTA implementation procedures, potential trade conflicts, non-tariff barriers and implications of EU’s competition policy on Korean firms. In addition, market penetration strategy for the government procurement market is also discussed. Fourth, this paper tries to invite policy makers and business stakeholders to revisit  existing FTA policies that Korea has pushed forward since late 1990s. Korea will have more than 20 FTAs with different trade partners and over 90% of Korea’s total trade will be covered by FTAs by 2020. Considering this development, this paper suggests coordination of different FTAs and how to respond to this development at the firm level.   

Investment into Indonesia from Korea had already begun in the 1980s, while Vietnam became an investment destination for Korea beginning in 1992 following the establishment of diplomatic relations. The scale of investments into Indonesia remained far larger than those into Vietnam in the 1990s, with investment into the latter picking up during the 2000s. Investment into Vietnam, for its part, was concentrated in the materials industry such as textiles and clothing. Over half of Korean investment into each country goes into the manufacturing sector: the majority of investments into Vietnam is received by primary metals and textiles industries; whereas food processing, electronic parts, computer, visual/audio/communications equipment manufacturing are the major recipients of Korean investments into Indonesia. Mining is second after manufacturing in terms of level of investment in both countries. Mining is followed by real estate/rentals and construction in Vietnam; and wholesale/retails and agriculture/forestry/fisheries for Indonesia.
A summary of the results of an in-depth survey for Korean companies in Vietnam and Indonesia in 2011 are as follows. On the question of areas of local policy with the most impact on business operations, labor and tax administration were selected for Vietnam, whereas labor stood out in the case of Indonesia. In order to deal with ‘deteriorating labor situations’ firms induce competition among workers through disbursement of regular incentives as well as holding fast to the principle of annual negotiation for wages. The annual negotiation for wages was also an important principle among Korean firms in Indonesia, while also fostering loyalty to the firm through CSR activities. Also, whenever labor costs rise, they are offset by increased productivity in both countries. In cases where inflation causes costs of raw materials to rise, firms in both countries combat rising costs through corporate campaigns to economize and reduce waste, system of rewards, and raising factory prices.
On the other question of an area where ‘information is most necessary for domestic market entry,’ firms in both countries pointed out taxes and labor. In Vietnam, such information is provided by the Korean government agencies and related organizations, the local Korean community, and the local government. In Indonesia, firms acquire the needed information mostly through the local Korean community and the internet. There also calls by firms in both countries for the Korean government to work with the local government to create opportunities for procuring information on a more frequent basis, as well as set up a  system for exchange of information between Korean firms and the government.
The survey also shows that companies are engaged in earnest efforts at localization, by involving local personnel in decision-making, in addition to improving their perception among the public through community activities as part of fulfilling their CSR. But when conflicts arise in spite of all effort, Korean companies in Vietnam usually resolve them through agreed settlements with the parties concerned or Korean law firms; while companies in Indonesia also make attempts at agreed settlement, or seek help from a local legal firm.
In terms of ‘strengthening operational capability’, firms in Vietnam pointed to securing a professional workforce and labor management as the most important. Professional personnel were also considered important among companies in Indonesia, in addition for competitiveness in prices. Plans for expanding the organization among companies in Vietnam were general and across the board. Companies in Indonesia were more specific, with expansion planned for such departments as production, design, R&D, and marketing; whereas departments related to raw materials procurement, accounting/taxes, and labor management would be maintained at present levels for the most part. The majority of the requests among companies above for government assistance were made during the planning stages for making investments, or at the very early phases following entry into each country.
In terms of average annual total sales for Korean companies in each country during the 2009 fiscal year, Korean companies in Indonesia outperformed their counterparts in Vietnam by 3.9 times, and recorded 3.5 times the amount in cost of goods sold. Cost of sales and administration were also higher in Indonesia, by approximately 2.7 times; but nonoperating expenses were at similar levels. Nonoperating expenses, however, were higher than cost of sales and administration in Vietnam, pointing to greater expenses from loan interest payments, loss in value of local currency, and losses from investment into liquid and real assets; compared to Indonesia. Corporate taxes were much higher in Indonesia than in Vietnam. The average number of local workers employed in manufacturing firms were similar, about 770 in both countries.
According to Data Envelopment Analysis on Korean manufacturing in both countries, firm's efficiency is increased with ① greater length of sales operation ② location in Central regions - Ho Chi Minh area - Hanoi (Vietnam, in order) and regions other than Jakarta – Jakarta region (Indonesia, in order). However, the impact from ③ the presence of local executive/management on efficiency of operations was not significant.
Eliciting implications for Korean government policy would mean continued efforts for ① the establishment and strengthening of the system of information exchange between firms and local governments ② provision of an in-depth analytical/systematic information on local macroeconomic policy and economic trends ③ creation and active promotion of a local professionals database ④ construction of a production network and survey of corporate S&D related to entry into service markets ⑤ survey of time and location of entry and training programs. Corporate strategies should include the following consideration: ① earnest desire for entry into the domestic market ② maintaining sound labor relations and prompt response to rising wages ③ securing professional workers ④ experience in the local market and sound location.

International prices of major crops rose dramatically from late 2006 through mid 2008. Price collapsed dramatically in the second half of 2008 with the onset of the financial crisis. This episode is often referred to as the “2008 agflation”. It seems that such a price swing appears again. Between early June 2010 and February 2011, the price of grain increased sharply, surpassing the 2008 peaks that had spread anxiety among policymakers and low income consumers around the world.
A number of studies have discussed the factors which lie behind the 2008 agflation. A large number of potential explanation is avaliable. Those given greatest prominence are i) rapid economic growth, particularly in China and other Asian economies, ii) decades of underdevelopment in agriculture, ⅲ) low inventory levels, iv) depreciation of the US dollar, v) speculative influences.
However, there is still in debates of whether grain prices have become more variable. When looked at in the long term, there is little or no evidence that volatility in international agricultural commodity prices, as measured using standard statistical measures is increasing and this finding applies to both nominal and real prices. Volatility has, however, been higher during the decade since 2000 than during the previous two decades and this is also the case of wheat and rice prices in the most recent years (2006~2010) compared to the nineteen seventies.
To answer a basic question has grain price volatility risen? this study sets up GARCH (Generalized Autoregressive Conditional Heteroscedasticity)-type models and measures exact volatilities for rice, wheat, corn, and soybeans, which are important for food security of net food importing countries. The GARCH model is now the standard procedure for modelling volatility in financial markets. GARCH specifies an ARMA (AutoRegressive Moving Average) process for the variance scedastic process followed by a time series to yield an estimate of the conditional variance of the process at each date in the sample. To summarize, this analysis has generated three conclusions;
a) International rice and wheat price volatility was generally higher over the past two decades than in the nineteen seventies and eighties, the major exception being soybean.
b) Although many grains exhibited high volatility over three year periods 2006-08, and this volatility persists to the present, these volatilities are generally in line within historical experience, except rice.
c) There is weak evidence that volatility levels may be increasing relative to historical levels across the grains. However, we will need to wait for a few more years to now whether this is indeed the case
There is also considerable empirical evidence that the volatility in agricultural prices has changed over the recent decade. It is not only the levels of prices which have had powerful effects, but also their volatilities. Increasing volatility is a concern for agricultural producers and for other agents along the food chain. Price volatility can have a long run impact on the incomes of many producers and the trading positions of countries, and can make planning production more difficult. Moreover, adequate mechanisms to reduce or manage risk to producers do not exist in many markets and/or countries. Therefore, an understanding the nature of volatility is required in order to mitigate its effects, particularly in developing countries.
In order to examine the nature and determinants of volatility in food crops, this study sets up both the dynamic panel model and the system equation models. The dynamic panel regression approach is useful for catching a number of key variables which can explain grain volatility as a whole, while the system equation approach has advantages of considering the interrelation among each crop. The results of the analysis can be summarized as following.
There is convincing evidence that many of the candidate variables have an impact on grain volatility. Inventory-use ratios have significant effects on grain volatility, being negatively affected. For some individual commodities, the relationship does appear to be stronger, with wheat the clearest example. Oil price volatility has a positive impact on grain price volatility. Thus, the recent coincidental high volatility in oil and grain prices is symptomatic of a connection between grain price volatility and oil price volatility. The link between oil prices and grain prices is likely to arise through the impact of energy prices on the costs of production, along with the alternative use of some crops for biofuel production. Therefore, we would expect the link between oil price volatility and grain prices to continue or strengthen as the biofuels sector grows. Likewise, exchange rate volatility was found to influence the volatility of agricultural prices. Thus, perhaps unsurprisingly, if the global economy is experiencing high levels of volatility these will also be reflected in agricultural prices.
Higher inflation volatility tends to increase grain price variation. The sensitivities vary quite widely across commodities, but in most cases the relationship is highly significant. Higher levels of the U.S. inflation, also have a consistent impact to most gains, being significantly and positively affected. Higher futures market volumes increase the volatility in grains. The effect is statistically significant, but economically small.
Policy options to reduce the grain price volatility

a) Emergency food reserves
Relatively smaller food security emergency reserves can be used effectively and at lower cost to assist the most vulnerable. Unlike buffer stocks that attempt to offset price movements and which act as universal subsidies benefiting both poor and non-poor consumers, emergency food reserves can make food available to vulnerable population groups in times of crisis. In addition, emergency reserves of relatively small quantities of staple foods will not disrupt normal private sector market development which is needed for long term food security.

b) International safety nets
In times of crisis, contingent and compensatory financing facilities are important mechanisms assisting countries to avoid major fiscal deficits, and lower the cost of imported food, while maintaining key social assistance programmes. The World Bank is currently helping countries deal with the food crisis through instruments to help manage short-term impacts, including grant funding for rapid response in the poorest and most vulnerable countries and expedited use of International Development Assistance (IDA) and International Bank for Reconstruction and Development (IBRD) funds under programs such as the Global Food Crisis Response Program (GFRP), as well as increased Regular IDA and IBRD lending, policy advice and technical assistance.

c) Risk management for governments
For price risks, the principal instruments that could be used to manage the price volatility of food import bills are futures and options contracts (financial instruments) or over the-counter (OTC) contracts (physical instrument). The main difference between them is that financial instruments can provide a country with a cash payout to enable them to offset higher food prices for physical imports, whereas physical instruments seek to manage price and supply risk and provide for the physical import of the food. Both types of instruments are offered by financial institutions and traders.
By buying futures contracts, a government which wishes to protect itself against a possible grains price surge “locks” in a price agreed at the time the contract was concluded. With futures contracts the country will obtain greater certainty over the price, but not flexibility. Call option contracts “lock” in a maximum price, but with no obligation to buy at that price if market conditions are favourable for the government (i.e. if prices have moved lower). The country will still be able to benefit from lower prices after the agreement, as they do not have to purchase at the agreed price. This approach provides certainty about a maximum price and flexibility.
Significant investment is needed to overcome the lack of technical expertise on the use of these instruments in developing countries. Experience has shown that engaging developing and emerging countries on risk management takes a sustained effort to build capacity to the point where decision-makers are comfortable with the use of risk management tools. Globally there is a need to learn lessons from countries such as Mexico that have become sophisticated in developing a framework for analyzing risks and taking innovative steps to manage those risks.
Finally, it is important to recognize that there is no single risk management tool that will meet the diverse needs of countries exposed to price volatility, particularly given the complexity of local market and policy environments. Solutions need to be highly customized, drawing on a mix of different tools and responses. A successful approach to strengthening risk management frameworks in low income countries will need to build on existing capacities, create platforms which allow private sector market participants to be part of the solution, and find ways to overcome the major constraints to greater use of risk management tools: weak legal/regulatory frameworks, poor credit standing, and a lack of knowledge, understanding, and confidence about how to use these tools.

We analyze the effectiveness of capital control in 2000’s by using EPFR (Emerging Portfolio Fund Research) dataset. In the chapter 2, we first summarize the status of emerging countries’ capital control before and after 2000. International capital flows have been increased since 1990’s. The global financial crisis after Lehman Brother’s collapse has interrupted the international capital flows since 2008. The capital flows to emerging markets, however, have resumed after the global financial crisis. The two main reasons of increasing capital flows to emerging markets are the increased liquidity due to monetary easing during crisis and the relative resiliency of emerging countries’ growth. Brazil, Chile, Columbia, Malaysia and Thailand introduced capital controls in 1990’s and Brazil, Columbia, Croatia, Thai, Indonesia and Korea has used capital controls in 2000’s. In particular, the number of countries, that is imposing, capital controls, increased after the Global financial crisis due to emerging concerns about sudden stop’s of foreign capital flows.
In chapter 3, we analyze the capital flows before and after capital controls imposed in selected countries. We select the countries with enough time-series data after the capital controls in order to have meaningful analyses. They are Brazil, Columbia, Thailand, Indonesia and Korea. We find that capital inflows in our sample countries do not show any statistically meaningful changes after imposing the capital controls in general. The capital flows to bond funds of Columbia has been contracted after capital control, but the capital flows to other countries have even been increased after capital controls.
In Chapter 4, we analyze the effectiveness of capital controls with the controlling variables including international capital markets’ variations and domestic macroeconomic and financial market variations. We could not find the statistically meaningful effects of capital controls on the capital flows or the capital market variations. As an exception, the forward position regulation of Korea has reduced the capital flows to bond funds. All capital controls have not affected the volatility of stocks or foreign exchange markets. The international capital markets’ volatility has affected the capital flows in most countries. If the domestic capital market is less volatile than the international markets, then the international capital flows into that country.
The capital controls in general could not have not affected the capital inflows, so it is more important to reduce the domestic market’s volatility. We only find 2 cases of statistically meaningful regulations of capital controls out of 7 cases. Therefore, we recommend to focus on policies of the domestic market stabilization in order to stabilize the capital flows.