Acknowledgements

Notes on the Contributors

1. Services Trade Liberalization between Taiwan and China: Assessing the Impacts of the ECFA and Its Future Development ― A One Year Review of Taiwanese Banks in China - Kristy Tsun Tzu HSU (徐遵慈)
Introduction
Assessing the ECFA and Its Effects
Taiwanese Banks in China: First Year’s Review
Conclusions
References

2. Accession to the WTO: The Case of Azerbaijan - Aynura ISMAYILOVA
General Review
Historical Review of the Economics for the Last 20 Years: from 1991 to 2012
Azerbaijan is on the Way to WTO Membership: from 1997 until 2012
Azerbaijan’s WTO Membership Wish: Expectations for Future
References

3. Features of the Currency Policy and Exchange Rate of Belarus in the Conditions of Forming the Common Economic Space - Maryna Markusenka
Introduction
The Currency Exchange Rate Adjustment in the Republic of Belarus
Scientific Base of Methods and Instruments of Monetary Policy in the Common Economic Space (CES) Conditions
Conclusions
References

4. Services Sector in India and India-Korea Economic Cooperation - Sandip Kumar Mishra
Introduction
Services Sectors of India
Issue of FDI in Services Sector
Issue of Employment
Challenges and Prospects in the Indian Services Sector
India-Korea Economic Cooperation
CEPA and Economic Cooperation
Indian Services Sector and Bilateral Cooperation
FDI from South Korea
Concluding Remarks

5.The Impact of the Internationalization of the Renminbi on Asian Economies - Lee-Rong Wang
Introduction
Body
Conclusions
References

6. Comparative Research on Automotive Industry Policies between South Korea and China - Fu Baozong
Introduction
Comparison of China and Korea's Development of Automobile Industry
Similarities in Automobile Industry Policies of China and Korea
Differences of Automobile Industry Policies between China and KoreaComparison on Results of Automobile Industry Policies between China and Korea
Conclusions
References

7. Private Economy and Economy Transformation in China - Liu Xianwei
Introduction
Development of Private Economy in China
The Key for China’s Economy Transformation
Historical Mission of China’s Private Economy
Suggestion and Conclusion
References

8. Azerbaijan Economy: Diversification in lens of Modernization - Vusal Gasimli
Introduction
Diversification Trends
Causality Relationship between Economic Growth and Labor Productivity
Conclusion
References

9. Building a Korean-Portuguese Business Partnership for Sub-Saharan Africa: Opportunities and Challenges In Mozambique - Luis Mah
Introduction
From “Hopeless” to “Hopeful” Continent: The Rise of Sub-Saharan Africa
Go Africa? Korea´s Engagement with the Emerging Continent
The Political Economy of Mozambican Growth and Development
Portugal as a Business Partner for Korea in Mozambique
Conclusion
References

10. The Second-Tier “Tigers” in the Light of Latin American Experience - Victor Krasilshchikov
Introduction: “Unhappy” Latin America and “Lucky” East Asia
Comparing Latin America to East Asia: Visible Differences and Hidden Similarities
“A Santa Fé” Tecnocrática: The Brazilian Experience and Its Implications
The Second-tier “Tigers” from the Rise to Distress (1970s – 1997)
The Post-Crisis Development (1998 and onwards): Did the “Tigers” Make Right Conclusions?
Towards a Knowledge-Based Society?
Conclusion
References

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute focusing on international regional studies with strong cooperative relationship with the world’s leading research institutes. The Center for Emerging Economies Research (CEER) has been enforcing visiting fellows program since 2008 in an effort to vitalize exchange among internal and external institutions and enrich competence in regional studies. This program cultivates close network and promotes cooperation through sharing of research outcomes and information among eminent scholars and experts of regional studies. ‘KIEP Visiting Scholars’ Paper Series’ is an accomplishment of this program that enabled higher understanding of international regional studies.

A Study on Aid Predictability: Focusing on Multi-year Rolling Planning and Budgeting Framework

Yul Kwon and Ju Young Lee


At the Fourth High Level Forum held in Busan in 2011, OECD Development Assistance Committee(DAC) member countries pledged to ensure that by 2013, they would provide partner countries with rolling three- to five-year indicative forward expenditures and/or implementation plans. Also, they made an agreement to enhance aid predictability by reforming the process of establishing and implementing the aid budget. Nevertheless, a limited number of studies reviewed the donor countries’ ODA budget systems and its operation mechanism to find the way to promote the effective use of the aid budget.

This study examines how donor countries establish and implement multi-year aid budgets and applies the results to the Korean ODA budget system in order to improve mid-term aid predictability.

The main findings of this study are as follows. First, several DAC members have made efforts to improve mid-term aid predictability by linking the forward strategic spending plans with their ODA budget process. Mokoro Ltd.(2011) has categorized aid planning and budgeting systems of OECD DAC member countries into three types; agency-wide rolling multi-annual programme, agency-wide cliff-edge multi-annual programme, and no agency-wide multi-annual programming with country-level multi-annual programming.

Second, the Australian budget system, adopting no agency-wide multi-annual programming with country-level multi-annual programming, is selected as a good example that can be applied to the Korean system. Australia has been reforming its ODA policies since 2010. In order to increase aid effectiveness and predictability, Australia adopted the rolling four-year budget plan, aid budget system by program, and performance evaluation system on achievements of policy objectives.

Third, Korea, however, does not present the explicit budget plan in the process of establishing Country Partnership Strategy(CPS). Thus, it is difficult to improve the effectiveness of mid-term plans as well as aid predictability. Moreover, Korea lacks a performance management system that enables reasonable distribution of the ODA budget by gathering feedback on performances of previous projects.

The results from this study provide some policy recommendations as follows. First, Korea needs to develop a performance management system for ODA to utilize the feedback on previous performances as the standard of establishing and distributing the aid budget.

Second, Korea should improve the budget structure to introduce multi-year ODA planning and mid-term budget system which are suitable for ODA projects that extend periods of time.

Third, Korea should reduce the number of priority partner countries from 26 countries to 15 to 20 countries. In addition, consulting with partner countries, Korea should establish a three-year operation plan for each country and priority project support plans to enhance aid predictability.

China's advance into Emerging Markets and Korea's Response
－A Focus on ASEAN, Latin America and Africa

Pil Soo Choi, Young Ho Park, Kisu Kwon, Jae-Wan Cheong and Hyo Jin Lee

In 2001, China adopted “Go Global” as its official policy agenda, which pertains to Chinese businesses in overseas. The policy was set as the primary means of foreign economic cooperation in the 10th 5-year plan(2001–2005). Consequently, in 2009 and in 2008 were legislated. Moreover, the Export-Import Bank of China and the China Development Bank provide policy loans and preferential loans for financial support. In line with this, the Chinese government’s flexible diplomatic and political stance contributes to Chinese businesses in emerging markets.

The proportion of trade between China with ASEAN countries, Latin America, and Africa has been constantly increasing from 11.7% in 2003 to 20.0% in 2012. In spite of the recent reduction in China’s total exports, China’s exports in emerging countries have increased. With this, China has consequentially taken an aggressive part in their import markets as well.

Since 2010, China has been the top contractor in international construction projects, showing remarkable performance particularly in transportation, housing, and electric power utility structures. China is very much dependent on energy resource in emerging economies—China depends on Southeast Asia(34.7%), Latin America (44.7%), and Africa (37.0%) for petroleum, coal, and iron ores.

China’s overseas expansion in Southeast Asia can be characterized in the following ways. First, China associates its Southwest regional development with Southeast Asian strategies. In order to achieve this, China employed the “One Axis & Two Wings” and the “Two Corridors & One Circle” strategies. Second, many efforts are put into securing mineral and energy source along with electric power utilities construction. Third, China connects aid and business especially in Cambodia, Laos, Myanmar, and Vietnam(CLMV countries). Fourth, China has employed strategies to turn Myanmar as land a bridge to gain access to the Indian Ocean and South Asia. Fifth, China actively pursues RMB internationalization to neighboring countries. Sixth and lastly, in terms of diplomatic security, China tries to eliminate fear brought about by the “China threat” and seeks to check the expansion of the United States’ influence. However, recently, vigilance against China is growing as seen in the halt in the construction of the Myitsone dam project in Myanmar.

Expansion of China in Latin America can be characterized as follows. First, unlike what is com-monly known, China’s focus for expansion is not only on resource acquisition. Recently, Chinese companies showed a growing trend of investment on securing market, rather than resource development given that companies made remarkable advances especially in the automobile industry. Expansion through building of shopping malls also stands out. Moreover, China’s strategy is to make Cancun in Mexico as a distribution center for Latin American markets.

The characteristics of China’s expansion in construction fields can be summarized in three ways. First, China obtains construction projects by providing loans. Second, harbors are developed for transporting natural resource to China. Third and lastly, the construction of electric power systems, such as hydropower systems, is booming.

In developing natural resources, China tries to make Latin America as an alternative source for energy. For this, China engaged in the “loan for oil” strategy. Instead of developing by itself, China employed a strategy to take the shares of existing mines. When providing loans, China provides a procurement condition that assures the participation of its downstream service firms. Lastly, China is involved in cooperation with Spanish enterprises to be able to extend to Latin America.

China’s scale of expansion in Africa is currently incomparable. The Chinese government supports its firms’ advances into Africa through high-level diplomatic visits, holding forums that are as large as those of the UN and providing loans. However, the China-Africa relationship today is not just for financial assistance as it is more of a cooperation that has lasted for half a century. China’s investment in Africa does not focus on resources alone. Construction, manufacturing, and banking sectors account for half of the investment. China invests in industrial projects and in projects that positively affect people’s livelihood, such as construction of schools and hospitals. With this, China has also experienced a lot of failures. Loan offer, which requires resource as mortgage, is faced with limitations and its immature global bidding and safety accidents have caused condemnation by the international community. In some parts, there is growing hostility toward exports of Chinese industrial products and imports of resources from Africa. However, those transitional events cannot explain the whole picture of China’s advance into Africa and it is reasonable to anticipate that China’s expansion in Africa is expected to increase further.

To analyze trade competition between Korea and China, this study selected 32 countries by the amount of export and the target items are as follows. For consumer durables, white goods, black goods, and automobiles accord to HS 4-digit codes; for whole items, 32 goods according to HS 2-digit codes. In comparing the Revealed Comparative Advantages (RCA) of four-digit items, it shows that Korea still has the higher position in washing machines, cars, vans, trucks, and refrigerators while vice versa in tractors, special vehicles, mobile phones, TVs, digital cameras, and air conditioners. In 2-digit measure, Korea’s advantage has risen in 12 items and fallen in 20 during last 10 years. On the other hand, China’s advantage has risen in 21 items and fallen in 11. China’s rapid catching-up is an irreversible tendency.

To investigate Korea’s priority items and regions, we calculated the market shares (MSs) of each item in different regions. To compare them with RCAs, this study created the 2×2 RCA-MS matrix. The matrix reveals that without fundamental competency, higher market shares are hardly produced. In other words, local conditions hardly make a difference. In items with lower RCA, one should improve the core competency first. In some items with lower RCA and higher MS, Korea should analyze the local condition and keep the advantage related to it. The most effective strategy involves the items with higher RCA and lower MS. If a certain item shows different MSs in countries within a region, it could be further explored and focused on. If, for instance, there are no items with higher MSs in Myanmar and Cambodia while vice versa in Vietnam and Thailand, those items with higher MSs in other countries have higher possibilities to gain more market. Such benchmark markets include Venezuela in Latin America and South Africa, Nigeria, and Côte d’Ivoire in Africa.

Another strategy could be to increase MSs in mature markets within each region, namely, Vietnam, Indonesia, and Thailand in ASEAN, Brazil, Mexico, and Chile in Latin America, and South Africa, Nigeria, and Ghana in Africa. Marketing expertise in these countries could be easily expanded to other countries within the region because it is possible that they will share a similar growth pattern and observe similar consumer behavior.

To select the regions of comparative advantage, this study referred to Engineering News-Record’s Top 225 International Contractors. In doing so, it is revealed that Korea shows evident advantages in the Middle East since 2006. Asia is also identified as the largest and fastest growing market in which Korea possesses 20% share comparing with China. Korea’s share stands atonly10% in Africa, while it continues to increase in Latin America since 2008 when it was able to reach 40% after its long stay at 10%.

To select construction areas of comparative advantage, we referred to Korea’s International Construction Contract Statistics and China’s International Contracting Development Report. Korea holds a dominant position in Petrochemicals but this dominance continues to decrease. In Electric Power Plant and Industry Plant, Korea’s performance is as much as 60–80% to China. In Construction, Transportation Infrastructures, and Water and Sewage, however, China shows a much higher performance. This is especially the case in Electronics and Telecoms and Mining Development given that Korea has no contracting records.

After analyzing regional contracting performances, this study suggests the following. First, political position does make difference in some countries, such as Iran and Venezuela, so Korea is required to show a more flexible political and diplomatic stance. Second, Korea should raise its competency in Industry Plant, Petrochemical Plant, and Thermal Power. Third and lastly, in New Town Development and High Value-Added Constructions, Korea has potential to make a difference to China.

To conclude, Korean firms can create synergy in cooperating with Chinese firms as private firms in China are still inexperienced in overseas business and Korean firms could be cooperative partners to them. In Venezuela, Korean and Chinese firms has established a joint venture and has built a refinery in mutual cooperation. To support these kinds of cooperation projects, a financial scheme could be introduced. A reciprocal risk participation agreement between the Export-Import Bank of Korea and of China and the Global Cooperation Fund of the KoFC could be examples for this.

China continues to involve itself in various cooperation programs and an example of this is the China-ASEAN Expo in which Japan, Taiwan, and Hong Kong actively participate. Knowing this, Korea could also participate in this program or create its own cooperation program with its partners in emerging economies.

 

An Analysis on the Criteria and Methodology of Priority Recipient Selection for Country Partnership Strategy 

 

 

Bokyeong Park, Hongshik Lee, and Jeong-Woo Koo

 

 

South Korea has provided serious efforts to reform the structure and process of ODA since the country joined OECD DAC in 2009. Selecting and managing “priority countries” has been one of those efforts, but it has led to controversies regarding the relevant standards and methods. This study addresses these controversies and further explores a theoretical and methodological alternative to such limited strategies regarding the selection of priority countries. In addition, this study seeks to deal with other related issues, such as the proper number of priority countries, the adequate procedures, and the degree to which the relevant information needs to be released. 

 

Methodologically, we use the following strategies: (1) review of past studies; (2) conduct case studies that reflect the experiences of traditional donor countries; (3) employ regression analyses to explicate the factors determining the selection of priority countries in other advanced donor countries; and (4) use of the Delphi technique to assign proper weights to the factors considered. Taken together, this study demonstrates the utility of a mixed method in order to suggest an alternative approach to the selection of priority countries. 

 

The analyses of past studies and cases lead us to consider the following four principles as crucial in selecting priority countries: (1) development needs of aid-receiving countries; (2) strategic correspondence; (3) international norms; and (4) aid-effectiveness. First, development needs involve the degree to which recipients need foreign aid in connection with their income-level and the level of poverty. Second, strategic correspondence refers to the extent to which economic and diplomatic interests overlap between a donor and a recipient. Third, respect for international norms indicates the necessity of adhering to globally-recognized norms involving proper ODA. Finally, the principle of aid-effectiveness involves the extent to which the provision of ODA might be used in ways to effectively solve the problems facing the recipient countries. Motivated by those principles, we suggest dozens of quantitative indicators that might highlight the principles and justify the designation of certain countries as priority countries.

 

When using the proposed quantitative strategy, one needs to consider the following caveats: (1) The quantitative strategy needs to be supplemented with a qualitative approach because of the salience of non-qualifiable factors and/or concerns and the possibility that selected indicators might lack a proper level of reliability. (2) No country considers only the quantitative approach for the selection and management of priority countries. It is equally important to consider the pitfalls of the arbitrary use of a qualitative method because it might result in policy biases that weigh down donors’ interests or strategic considerations. Considering the caveats, we select and present twice as much potential priority countries at the first stage, and suggest that policy-makers need to choose the final priority countries at the second stage in conjunction with various diplomatic considerations. 

 

In recognition of the importance of assigning proper weights to the indicators proposed, we conducted a Delphi survey for dozens of experts specializing in international development in Korea. The survey results assign 38% for development needs, 17% for strategic correspondence, 20% for international norms, and 25% for aid-effectiveness. The assigned weights for each principle area determine the actual weight of each indicator that corresponds to the demarcated principle area. The assigned weights might need to be modified in ways to balance the survey results reflecting positions of development experts and the real diplomatic considerations coupled with the sentiments of policy-makers. Considering the possibility of such modifications, we assign 30-35% for development needs, 25-30% for strategic correspondence, 25-30% for respecting international norms, and 15-20% for aid-effectiveness. 

 

Furthermore, we make several suggestions and/or recommendations regarding the processes by which to officially determine the list of priority countries and the proper levels of public disclosure of information. More specifically, we suggest public discussion of the selection strategy, consultation with experts, in-depth discussion among policy makers, and reporting the strategies and discussions to the National Assembly. With respect to the degree of public disclosure, we suggest that the public disclosure needs to be confined to the broad strategies and plans involving the selection of priority countries.

 

The Rise of Multilatinas in Latin America and the Implications for Korea

Kisu Kwon, Jino Kim, Misook Park, Siun Yi and Taekyoon Lim

 

Multinational firms originating in Latin America, or “multilatinas,” have risen over the past twenty years, and they are now affecting Latin American economies significantly. The current study draws attention to these relatively new economic actors and suggests how to promote economic cooperation with them.

The study consists of six chapters. The first and introductory chapter discusses the purposes of the study, methodology and existing literature. Especially it reviews theories on the choices of firms for foreign direct investment according to their origins: developed countries, developing countries and Latin America.

Chapter two analyzes the current state of multilatinas and their major characteristics, especially in terms of sectors and geographical locations. The list of multilatinas included in this chapter are major multilatinas drawn from the ranking of multilatinas that The Boston Consulting Group and America Economia have reported.
The third chapter closely discusses the process of the rise of multilatinas. It analyzes how multilatinas have become the world leaders, how they are affecting global economy. It also examines their influence on their own national economies by looking at their business networks at the national and regional levels. In so doing, this chapter introduces major families that own multilatinas in Brazil and Mexico since multilatinas are predominantly controlled by individual families.

Chapter four presents several cases of non-Latin American foreign firms that have successfully utilized multilatinas to enter Latin American markets. The nationalities of the foreign firms include the United States, Spain, Canada, UAE, Singapore, Australia and Japan. The cases of Korean firms cooperating with multilatinas are discussed as well. The sectors of cooperation are limited to plant construction, natural resource, and ICT.

Finally, the concluding chapter includes some suggestions about how Korea can utilize multilatinas in order to expand the economic cooperation with Latin America. To this end, it discusses Korean firms' perception of multilatinas, and the potential cooperation between them. The suggestions include i) creating multifaceted cooperation networks, ii) building strategic partnerships, and iii) inducing the investment of multilatinas in Korea.

With respect to building multifaceted cooperation networks, first, the Korean government needs to support Korean firms in joining local industrial organizations or associations in Latin America, to provide them with more useful information on multilatinas. The government also needs to help Korean firms, especially SMEs, strengthen their cooperation networks with multilatinas. Second, other than existing general conferences or councils, business councils classified specifically by industry, for instance the Korea-Latin America plant construction business summit, needs to be created. Third, business councils at a regional level are important since many Latin American countries are eager to form one big integrated market. Fourth, business councils such as the Korean Chamber of Commerce needs to expand their membership to include Latin American as well as Korean entrepreneurs. Fifth, Korean entrepreneurs need to actively participate in the annual 'Multilatinas Forum' so as to join the networks of multilatinas in Latin America. Sixth, collaboration with Latin American MBA schools would be useful because they are the sources of insightful knowledge on Latin American business and have abundant human resources. Seventh, student internship programs that provide work experience in multilatinas may increase job opportunities for Korean college graduates in Latin America and therefore expand networks with Latin American business.

As for building strategic partnerships with multilatinas, first, various forms of strategic partnership are needed to successfully enter Latin American markets. Second, cooperation with Latin American distribution companies, especially from Chile, needs to be promoted. Third, making a strategic alliance with Brazilian multinationals, especially construction engineering enterprises, is needed to reinforce the presence of Korean firms in the Brazilian market that is very closed to foreign firms. Fourth, multilatinas would be appropriate partners for Korean companies to enter BOP markets in Latin America. Fifth, it is important to expand cooperation with national oil companies(NOCs) in Latin America such as ENAP of Chile, Ecopetrol of Colombia, Petrobras of Brazil.

Last but not the least, in regard to inducing the investment of multilatinas in Korea, "Latin America Desk" or "Multilatinas Desk" should be created within the Invest Korea for systematic promotion. Korea also needs to increase an awareness of Korea's positive business environment among multilatinas. In addition, Korea needs to promote itself as the hub for Latin American firms to invest in Asia. To this end, Korea should promote institutional platforms for doing business with Latin America, such as FTAs, Investment Promotion and Protection Agreements, and double tax avoidance agreements.

 

Case Studies on the Operation and Managing Framework of Country Partnership Strategy


Cae-One Kim, Chong-Sup Kim, and Yeongseop Rhee

In implementing their global commitments such as the principles of the Paris Declaration in 2005 and the Accra Agenda for Action in 2008, donor countries and international development organizations have long been concerned about ways to improve the effectiveness of their international development programs and aid policies. Country Partnership Strategy (CPS), sometimes referred to as Country Assistance Strategy (CAS), is a widely adopted policy instrument for the purpose of designing an effective and efficient aid program at the country level. As a result, most of the OECD DAC countries are actively adopting the CPS policy by carefully selecting priority recipient countries and establishing detailed and practical CPS implementation plans with guidelines.

This study basically aims to examine such country-level aid strategies as CPS, with a particular focus on its operation and management framework of three selected countries - Spain, France and New Zealand. Each of the cases has its own merit that is considered in the study, when compared to Korea’s current CPS framework and management.

Before beginning an in-depth case study of the 3 countries, Chapter 2 describes significant roles of the CPS in promoting efficient resource allocation, enhancing country-level aid effectiveness and fortifying evaluation system and management. It further discusses general features of the CPS operation and management, particularly focusing on the procedures of priority country selection, methods of planning and establishment of practical strategies through close consultation with recipients, and systems for evaluating the results of previous CPS operation and reflecting the outcomes to a subsequent CPS operation.

After a brief overview of the general aspects, the next three chapters successively explore in detail specific features of each country. Chapter 3 illustrates the characteristics of Spain’s CPS management and operational framework. It thoroughly reviews Spain’s CPS framework, i.e., priority country selection procedures, establishment of detailed plans and strategies, implementation of the strategy based on close interaction between local departments and the central government bodies. Spain has recently made substantial efforts to overcome its relatively fragmented CPS management structure, and their recent amendments contain valuable lessons and implications for Korea’s development of its own CPS framework, which still lacks sufficient structural integrity and efficiency.

Chapter 4 discusses the characteristics of France’s CPS management and operational framework. It particularly takes note of the multi-layered but fairly interactive and well-organized ODA decision-making process as well as efficient CPS operation and framework. France’s systematic and integrated CPS framework for resource allocation among priory countries/regions, CPS operation, management, monitoring and evaluation provide Korea with valuable lessons to consider.

Chapter 5 discusses characteristics of New Zealand’s CPS management and operational framework. New Zealand shares several common features with Korea, which include relatively short experience of implementing ODA policy, no past colonies to refer to in selecting priority aid recipients, and recent attempts to reform and improve the overall CPS framework. The New Zealand’s recently successful reforms may suggest a directly applicable model to follow for Korea to improve its own CPS framework.

Finally, Chapter 6 summarizes and compares the three case studies in order to draw out implications for Korea’s development of CPS management and operational framework. For instance, it suggests ways to improve its efficiency and effectiveness such as by creating a more actively functioning and responsible coordinating body, establishing more comprehensive plans and long-term visions for overall ODAs as well as CPS policies and setting up more concrete and practical guidelines for managing the CPS. This study especially proposes to make available sufficient time in preparing CPS documents to consult the recipient countries concerned on what their needs regarding its development plan.

 

Development Assistance for the Trade Sector in the Lao PDR: Evaluations and Future Directions for Korea's Aid for Trade

 

Yoocheul Song, In Soo Kang, and Hosaeng Rhee

 

The total size of Aid for Trade (AfT) and the share of AfT in ODA have increased substantially during the past decade. Likewise, Korea now gives greater priority to Aid for Trade in its development assistance program. Currently categorized as one of the Least Developed Countries, Lao PDR is seeking to graduate from LDC status by 2020. In its 7th National Socio-Economic Development Plan, it is outlined that trade has a critical role in developing the country’s economy. Therefore, international organizations and donor countries are making efforts to strengthen trade in Laos through the implementation of AfT programs.

 

After carefully observing the current domestic situation in Laos as well as aid activities by other donor countries, we have selected the garment industry, trade finance and export promotion services as potential areas of cooperation between Korea and Laos. Korea possesses abundant experience in the above-mentioned areas since it utilized them to encourage trade activities during its development stage during the 1970’s and the ’80s. By reflecting on Korea’s own development experience, the paper aims to provide an analysis of the challenges Laos is currently facing, and seeks to map out plans for future program to promote trade in Laos.

 

The garment industry is one of the most important exporting industries in Laos. However, its productivity is lower compared to competing countries. Therefore, we chose technical/vocational education and training (TVET) in the garment industry as one of the fields for Korean AfT. The problems regarding TVET in Laos are as follows: difference between demand of the industry amd supply from the TVET institutions, lack of effective participation of the industry and its constituent enterprises, and difficulty in accessibility. Therefore, we recommend development of a systematic support plan for TVET in the Laotian garment industry.

 

The high interest rates, small amount of loans and vulnerability of the private banking system are reasons why we also selected trade finance and export credit as one of the fields to be improved by Korean AfT. In particular, the efficiency of private banks in Laos is very low and the net interest margin appears very significant. Therefore, utilization of state owned commercial banks in trade financing to lower interest rates should be introduced at the first stage. Because the scale of trade financing is not sufficient to cover all sectors, a specific sector should be chosen to bring about sufficient results. However, Laos should follow the Agreement on Subsidies and Countervailing Measures of the WTO, as it is a member of the WTO.

 

During the development period, trade promotion service in Korea played a critical role in increasing the amount of exports and diversifying export destinations. Because the private sector in Laos is not big enough to have a specialized ‘section’ for exports, a government-supported trade promotion service can bring new opportunities to the Lao private sector, and especially for small and medium size enterprises. At the first stage, the individual service based on a Trade Portal can be introduced; followed by the establishment of a government-affiliated trade promotion agency, which should be considered the next stage.

 

The Aid for Trade by the Korean government for improvement of competitiveness of the garment industry, and on trade finance/export credit and export promotion services can help economic development of Laos by increasing trade. Korea has much experience on its implementation from its own development process and Korea also has more than adequate experience in the aforementioned fields, in terms of ODA to help other countries. Therefore, AfT in these three fields can lead to greater effectiveness and efficiency. These fields are also relevant for Laos as the Lao government placed much emphasis on them. If the work programs in this study are created and implemented, it would greatly facilitate and promote trade in Laos.

China and Iran: Current Relations and Implications

Pilsoo Choi, Minkyung Lim, and Jaeeun Park

In response to United Nations Security Council resolution (UNSCR) 1929 in 2010, the United States (U.S.), member states of European Union (EU), Korea, and other countries have imposed strong restrictions on Iran’s nuclear, energy, financial, and other sectors. However, China, the largest trade partner of Iran, only agreed to UNSCR 1929 and it has been criticized for weakening international sanctions against Iran. China has expanded business in Iran by filling the void consequences of that Korea and other participants have been forced to reduce business with Iran. This paper examines current amicable relations between China and Iran in terms of economic, political and diplomatic relations amid international sanctions against Iran. Analyzing current relations, this study provides policy implications for Korea to prepare strategic plans toward Iran.

China-Iran trade had been generally increased even after the adoption on UNSCR 1929 in 2010. Despite the fact that the trade decreased in 2012, China became Iran’s largest export destination and second largest import destination. As many western companies pulled out of Iran, Chinese companies take advantages of sanctions in Iran’s cars, auto parts, steel and iron products markets. Also, the EU ban on purchases of Iranian oil allows China to become the largest buyer of Iranian oil. It implies that China’s role has become more important in Iran’s economy. Moreover, China has expanded its influence in Iran’s energy and infrastructure industries with financing ability. The number of Chinese companies invest in Iran drastically increases from one in 2002 to 14 in 2013.

It needs to explore internal and external environmental factors in order to explain close China-Iran relations amid international sanctions against Iran and critiques of China. China’s internal factor is a tremendous increase in energy demand resulting from rapid industrialization and urbanization. It indicates that China is required to maintain stable relations with oil exporters including Iran, China’s fourth largest oil supplier. Iran’s internal factors are anti-Western sentiment based on guardianship of the Islamic Jurists, and economic difficulties due to 30-year economic sanctions. It leads Iran to build friendly relations with China, a world’s economic power, which could replace Western firms. Furthermore, anti-Western and anti-imperialism sentiment of China and Iran helps improve diplomatic relation and cooperate third-country issues such as Syria conflict. Meanwhile, China-U.S. relations have a constraining effect on China-Iran relations because U.S. is the top priority for China’s diplomatic policy.

China might continue to cooperate with Iran, but not at the expense of relations with U.S. Iran is expected to maintain current amicable relations with China and request brokering Iran and other parties concerned. Considering the close ties between two countries, it is necessary to not only preemptively prepare possible economic cooperation with Iran, but also strengthen cooperation in culture, education, or other non-sanctioned sectors. Moreover, it is helpful for Korea to regard limitations under sanction as usual business environment in weak institutions and resource abundant countries. Based on this experience, Korea will overcome external environment and establish new cooperative partnership with those countries on resources.

This study develops a methodology to assess the potential economic impact of liberalizing FDI as well as trade in goods and services using a computable general equilibrium model. By doing so, it is meant to help find supportive reasons for an FTA and establish proper strategies for the FTA negotiations.

Chapter 2 measures non-tariff barriers (NTB) taking the Novy(2010)’s approach and estimates how much the NTBs can be reduced through an FTA. According to Novy(2010), total trade costs can be divided into three parts: tariffs, transportation, and the rest. The NTBs are measured by the rest of the total trade costs. It turns out that the costs are induced much higher by NTBs than tariffs. For example, the tariff rate on imported electronics is only 1.87% while the tariff equivalent of their non-tariff barriers reaches 42.01% on average. As a consequence, it is expected that the impact of reducing the NTBs through an FTA would be substantially great. The size of NTBs that can be reduced by an FTA is obtained from estimating a gravity model. The estimation shows that an FTA’s effect associated with NTBs is biggest in the automotive industry, followed by chemistry, rubbers and plastics, steel, and food processing.

Chapter 3 calculates a country’s barriers to foreign investment by adopting Gormsen(2010)’s method, and reviews previous studies to explore the impact of FTA on FDI. It is revealed that the U.S., Germany, and U.K have a relatively lower FDI barrier than Korea, China, and Japan. According to previous literature, an FTA would increase FDI between member countries by 27-57%. The measures for FDI barriers are transformed into risk premia as exogenous shocks for the CGE model. Then, it is determined how much the risk premia should be reduced through an FTA based on the relationship between FTA and FDI shown in the previous studies.

Chapter 4 models the Korea’s existing four FTAs, which are the agreements with ASEAN, India, EU, and the U.S., in the recursively-dynamic GTAP framework in order to compare the potential effects on real GDP growth of reductions in tariffs and non-tariffs, and FDI through the FTAs. The FDI scenarios are modeled only for the FTAs with EU and the U.S. as the main sources of FDI. The results of the simulations indicate that the impact of non-tariff reductions would be greater in all the FTAs except the Korea-U.S. FTA, compared to the impact of tariff reductions as expected. The effects of the tariff and non-tariff reductions of the Korea-U.S. FTA would be similar to each other, understandably staying at the lowest level among the FTAs. However, in the Korea’s two major FTAs the potential economic impact of reducing FDI barriers are assessed less than expected. It is estimated that the Korea-U.S. FTA would increase real national GDP only by 0.22-0.24% in the short run. For the Korea-EU FTA it is ranged from 0.09% to 0.178%, which is substantially smaller than the impact of tariff and non-tariff reductions through the FTA.

The Role of International Development Finance Institutions in Financing Infrastructure in Africa and its Implications for Korea

Young Ho Park, Youngki Kim, Jong-Moon JANG, and Hyelin Jeon

Africa, once a land of ceaseless civil wars and abject poverty, is now emerging as a continent of new potentials and opportunities, drawing attention from governments and corporations worldwide. The growing interest in Africa is evident in a recent opinion poll involving construction companies in Korea. The respondents’ interest in Africa was much higher than that in either the Middle East or Asia. It is no exaggeration to say that the sound of bulldozers and hammers are fast replacing the sound of guns on the continent, whose demand for construction is growing explosively. In line with this, however, the backward business environment in general, continuing political instability, and breaches of contracts that are still prevalent throughout the region make Korean corporations reluctant to enter into the African market. Furthermore, these risks limit the amount of financial support that Korean export credit agencies (ECAs) provide. It is believed that one way to overcome this is to foster financial cooperation with policy financing bodies overseas. This study surveys the types and amount of financial resources that overseas policy financing bodies, such as development finance institutions (DFIs), provide for Africa, and makes in‐depth analysis of major projects in Africa financed by them. Moreover, this study explores how Korean ECAs and investors can use partnership with financial institutions worldwide to provide greater finance for Africa.

This study finds the following characteristics and attributes in the financial support that DFIs have been providing for Africa. Firstly, DFIs are increasing their support for Africa, particularly prioritizing projects on infrastructure development. The World Bank (i.e., the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)), for instance, allocated 20% of all loans it provided in 2012 on Africa, which was spent on a wide range of development projects, including plant construction, roads, bridges, water resources, and wireless communication networks. International Financial Corporation (IFC), which has traditionally focused on Central Asia and Latin America, has also been increasing its financial assistance for Africa in the recent years. Whereas IFC’s assistance for Africa stood at USD 278 million in 2002, it multiplied by over 13 times to reach USD 3.7 billion by 2012. Much of IFC’s investments and loans for Africa concerns infrastructure development, amounting to over USD 1 billion in 2012. The Multilateral Investment Guarantee Agency (MIGA) encourages and guarantees private‐sector investments in developing countries. It has played a pivotal role in the development of Africa by providing guarantees for multiple projects. MIGA’s attention these days is on assisting postwar reconstruction in countries coping with the aftereffects of civil wars. In 2012, 34% of the number of projects guaranteed by MIGA was allocated to sub‐Saharan Africa, representing 24% of the total value of investments the agency guaranteed.

The European Investment Bank (EIB) is another major source of finance for Africa’s development projects. The EU‐Africa Infrastructure Trust Fund (ITF) which the bank established in 2007, has been crucial to the expansion of infrastructure in Africa. The African Development Bank (AfDB) shows a similar concern for developing infrastructure, which claimed almost half of all the loans and concessions the bank provided in 2012. The AfDB’s goal is to promote market integration across Africa and it prioritizes trans‐Africa infrastructure projects that involve multiple African countries accordingly.

Secondly, the most active bilateral DFIs in Africa today are CDC of the United Kingdom, Proparco of France, and DEG of Germany. These institutions mainly focus on assisting private‐sector projects that aim to achieve significant development impact and financial returns. Although these bilateral institutions count as organizations of official development assistance (ODA) as they support the eradication of poverty and sustainable development in developing countries, they are also akin to commercial banks in their pursuit of profits. These institutions have been successful with the development projects in Africa they have invested in. These projects have yielded much development impact and financial returns, particularly reflecting these institutions’ extensive experience with, and expertise on, the feasibility and analysis of development projects. Another interesting characteristic of these European DFIs is that they mobilize private‐sector capital through proactive investments for risk management. By providing investments, loans, and guarantees for risky private‐sector projects, these institutions serve to catalyze the participation of other investors and lenders. CDC, for instance, has been participating in a broad array of development projects in Africa, making use of the UK‐Africa relations that go back to the colonial days. Having decided to concentrate investments in Africa in 2011, CDC is rapidly increasing its presence on the continent. Its operating policy today requires that 75% of all new investments be made in low‐income countries (i.e., countries with a GDP per capita of USD 905 or less each), and that 50% of those investments be made in sub‐Saharan Africa. Thanks to this change in policy, Africa claimed the majority of investments that CDC made in 2012. Most of these investments have gone into former British colonies, such as Kenya, Nigeria, South Africa, Ghana, Uganda, and Tanzania.

Proparco is similarly active in Africa, with eight of its fourteen overseas offices located on the continent. Proparco’s area of focus is sub‐Saharan Africa, which has taken almost half of all the investments that the company has made so far. On the contrary, Africa is relatively minor in the investment portfolio of DEG, a company based in Germany that has no comparable historical or colonial relations with Africa. Nevertheless, DEG has been steadily increasing its investments in Africa in the recent years, especially in the form of cofinancing with other DFIs.

Thirdly, financial resources of quite diverse natures come together through cofinancing to form financial packages for Africa. Large‐scale projects involving construction and plant development rely primarily on the financial assistance provided by multilateral development banks (MDBs) and bilateral DFIs, with ECAs and commercial banks tending to participate in these projects as latecomers. African projects tend to involve multiple and diverse financial institutions, not only to find sufficient financial resources, but also to distribute and mitigate the risks inherent to those projects. Africa is still home to a wide range of unpredictable risks. Most African states have relatively low credit ratings, making it impossible for financial institutions to fund projects in the region either by themselves or in small groups.

This study develops suggestions on how Korean ECAs and investors can make use of DFIs overseas based on their analysis of these characteristics. First, Korean ECAs need to attempt to broaden the range and scope of cofinancing. As Korean corporations have begun to pay greater attention to construction and plant development markets in Africa, the Export‐Import Bank of Korea, an ECA, has been trying to enlarge the range of export credits and Development Cooperation Fund (EDCF) it provided for projects in Africa. The high business risks and rampant poverty in African states, however, still make it nearly impossible to draw sufficient investments to satisfy Korean developers’ needs. Constructor‐financed projects in Africa crucially impinge upon the developers’ ability to secure financial resources for their success. Korean developers, however, lag behind their competitors overseas in this regard. One way to overcome this shortcoming is to increase cofinancing with DFIs overseas. Cofinancing may serve to anchor the stability of projects and mitigate risks. DFIs and ECAs of advanced countries possess significant negotiating power when it comes to African governments and may effectively provide a bulwark against breaches of contracts, expropriation and foreign exchange control, restrictions on remissions, and other such political risks. Because construction and plant development projects require massive amounts of investments for setting up the necessary equipment and also for operating the projects for relatively long spans of time, effective risk management strategies are essential. The inherent characteristics of these projects also render them riskier than other types of projects. Should the Export‐Import Bank of Korea and other Korean ECAs decide to cofinance these projects in Africa with financial institutions overseas, they will be able to catalyze and encourage other Korean corporations’ investments in Africa as well. To this end, Korean ECAs first need to build and strengthen the network of financial cooperation with DFIs and ECAs abroad and actively seek out measures of multisource financing by combining resources and services with these institutions. Without sharing risks with other ECAs or MDBs worldwide, Korean ECAs would always remain passive in terms of investing in high‐risk regions like Africa. Moreover, Korean ECAs also need to broaden financial partnerships with other types of financial sources worldwide, including ODA institutions of advanced countries, international commercial banks, local financial institutions, investment funds, among others. However, because these financial institutions carry different aims, policies, and terms and conditions of investment, it is important to choose the right type of financial sources and design the financial package strategically. Cofinancing is a great way to enlarge the pool of available capital, share experience and expertise, and mitigate risks. The Export‐Import Bank has worked on six cofinancing projects in Africa so far, with institutions, such as the World Bank and AfDB.

Second, cooperation with financial institutions abroad also enable Korean ECAs to take part in infrastructure projects with great development impact. DFIs prefer projects with high development impact and cross‐border infrastructure development projects that promote regional economic integration, such as energy and transportation projects. The decisive fact about the Kenya‐Uganda Railway Network Project, for instance, that drew DFIs’ support was that it would equip Uganda, a landlocked country, with a logistics network and routes of exports so that it could grow along with the neighboring country of Kenya. Should Uganda have promoted this project solely for its own benefit, it would have failed to mobilize such a massive amount of financial assistance from DFIs.

Third, cooperation with financial institutions abroad will also allow Korean ECAs to make better investment decisions through securing project viability. Projects with poor project viability face considerable constraints in securing the financial resources they need and thus tend to drag on for extensive periods. Even in projects in which Korean companies’ participation is limited merely to construction, these companies will have difficulty receiving payments on time insofar as those projects lack sufficient project viability. Securing project viability is crucial for projects where Korean companies take a lead or participate in.

Thorough analyses of feasibility are important to foster the private sector’s participation and investment in projects. The case studies included in this research all ensured the viability of their projects based on detailed feasibility studies.

Fourth and finally, cooperation with financial institutions abroad will also enable Korean ECAs to make use of the available financial advisory services. Entering the African market entails a wide range of complex risks and requires thoroughgoing preparations for minimizing them. As Korean financial institutions lack experience and capability to advise on development projects in Africa, Korean investors need to seek out help from foreign financial institutions with expertise on financing projects in the region. It is usually investment banks with well‐established international reputation that provide these advisory services. European banks have vast experience in handling financial advisory services for prospective investors in Africa. They do not only possess extensive knowledge on the states and industries of Africa, but also offer expert advice on how to secure investments and minimize risks. These financial advisory institutions of advanced countries can provide a broad array of helpful services, including consultation on project structures, feasibility reviews, financing plans, finance modeling, and contracts. Moreover, they can serve as mandated lead arrangers for securing loans and finding other financial resources. It is thus crucial to make effective use of the services they provide in order to enter the risky African market.