The 40 Year Anniversary of Korea-India Amity: Evaluation and Prospects of Trade Sector

Woong Lee, Young Chul Song, and Lee Jung Mi

The year 2013 represents the 40th anniversary of the establishment of Korea-India diplomatic relations. This report is prepared for evaluating the achievements and future challenges in Korea-India economic cooperation. The study analyzes trade relations using all available sources from the 1970s until today, as the trade sector is the most influential among all sectors between Korea and India in terms of their bilateral economic cooperation.

In Chapter 2, respective trade policies of Korea and India are listed and the Korea-India CEPA (Comprehensive Economic Partnership Agreement), which has been the cornerstone of the two countries' economic cooperation, is evaluated. In Chapter 3 is presented the overall picture of Korea-India trade including long-term trends of trade, by items, with focus on Korea and India. It also analyzes the competitiveness and complementarity of Korea and India in international trade with various indices. Lastly, in chapter 4, the trade volume between Korea and India is predicted through a VEC (Vector Error Correction) model.

At the time of the establishment of diplomatic relations in 1973, bilateral trade between Korea and India was not active, with a total volume of approximately 14 million dollars. But trade figures have shown a gradual increase since the beginning of Indian reforms and openness policies in 1991. Around the early 2000s, when India experienced vigorous economic growth, the bilateral trade increased rapidly. Though trade declined by about 8% in 2012 following the recent recession in India, the upward trend in trade volume is likely to continue.

According to the trade volume prediction through a time-series estimation, the trade volume will show a declining trend in 2013 but will increase in 2014, reaching about 27 billion dollars in 2015 and then 56 billion dollars in 2020. This estimate is lower than the past predictions of 34 billion dollars by 2015 and 68 billion dollars by 2020 because the reduced growth rate is taken into account following the economic recession of both countries in 2011 and 2012. Nevertheless, if both countries take actions to expedite tariff reduction through upgrading the Korea-India CEPA or perhaps enact additional reduction/removal of the countries’ bound tariff rates, greater degree of trade volume than what is predicted can certainly be achieved.

In this study, the importance of Indian markets is emphasized. Between 2004 and 2006 when the Indian economy was at its peak, the share of consumer goods in Korea’s export to India reached nearly 20% due to its brisk mobile phone exports. In contrast, however, the share of consumer goods has dropped off rapidly to below 5% between January and September of 2013. This is attributed to both declining consumption in India due to the recession and lowered price competitiveness of Korean products. Fortunately, the importance of Indian consumption goods market is predicted to grow higher as India’s population is expected to exceed that of China, hitherto the world's most populous country, sooner or later. In addition, it also contributes to increased importance of the Indian market as Korean exports to China has been showing a downward trend since 2010 after experiencing more than 20% annual growth on average in the past two decades. Thus Korean firms should secure price competitiveness by differentiating their products to target the Indian market whose potential is near infinite.

Korea’s imports from India have been affected by the implementation of the Korea-India CEPA. The tariff rate for naphtha, which accounts for more than half of the imports from India, had been 1% but was immediately removed after the Korea-India CEPA went into effect in 2010. Accordingly, Korea’s import of naphtha from India increased to 34% and 51% in 2010 and 2011 respectively. The amount of naphtha imports in 2011, after the effectuation of the Korea-India CEPA, redeemed the precipitous 41-percent decrease in naphtha imports due to the 2009 economic crisis, increasing 20% from 3.9 billion dollars in 2008 to 4.6 billion dollars. This is one of the immediate benefits of India having signed an FTA with Korea which has a positive impact on Korea’s cost reduction and India’s deficit resolution toward Korea. Thus it is shown that both countries are mutual beneficiaries of the Korea-India CEPA.

The case of naphtha has well exemplified the relationship, in terms of specialization of trade between Korea and India. Korea imports and refines raw materials like naphtha from India and exports petrochemical products and this could be considered specialization based on comparative advantage of each country. Discovering items in this type of relationship and eliminating related tariffs can lead to lowered costs for Korea and reduction of the trade deficit for India.

Moreover, as the revealed comparative advantage and market comparative advantage show, there are no overlapping items with high export competitiveness in each other’s market and even in the global market. Therefore, firms and consumers of both countries should hereby benefit from mutual elimination of tariff and non-tariff barriers.

Consequently, one of the most important issues in economic cooperation between Korea and India is the resumption of the Korea-India CEPA upgrade negotiation. Korea will not be the only one to benefit from this but India will also obtain much advantage through the upgraded CEPA, which will broaden the range of tariff-free items and accelerate the reduction of existing bound tariff rates. As analyzed in Lee, Song and Cho (p. 13, 2011), the wider the tariff reduction gap, greater the decrease in India’s trade deficit with Korea which means a potentially larger welfare effect for India (producer surplus and consumer surplus). Since India is a beneficiary of the tariff reduction, and elimination in the case of naphtha, India should be actively involved in a CEPA upgrade negotiation. If the tariff reduction/elimination through Korea-India CEPA upgrade is realized, the actual trade volume increase will be achieved, which could surpass 27 billion dollars in 2015, which is what our research predicts. Besides, it is very likely that the trade volume between Korea and India will jump above 60 billion dollars, exceeding the predicted 56 billion dollars in 2020.

However, the 2nd Korea-India Joint Committee, which was to be held in Seoul in 2012, has not yet convened, and thus the negotiation to upgrade the Korea-India CEPA is being delayed. It is expected that when a new cabinet is formed after India’s presidential elections in the first half of 2014, India will be able to engage with greater enthusiasm in negotiating the Korea-India CEPA upgrade. Therefore the Korean government needs to pay attention to the new administration of India after the election, and prepare adequate agendas and strategies for successful negotiation with respect to a CEPA upgrade in the near future.

The High Growth Economy of the Philippines and Its Implications

Yoon Ah Oh and Mingeum Shin

Once called the “sick man of Asia,” the Philippines has become the fastest growing economy in the region over the past two years. Its economy expanded by 6.6 percent in 2012 and it is expected to grow by 7 percent in 2013. High economic growth has been driven by remittances-fueled domestic consumption, the expanding BPO industry, and the construction boom. Increased public spending in infrastructure by the Aquino government also contributed to the high growth.

However, the economy’s structural vulnerabilities, which include chronic poverty, high inequality, persistent unemployment, high population growth, weak manufacturing, and low investment, remain largely unchanged. 28 percent of its population live in poverty and its exceptionally high inequality by regional standards has been largely unaffected by the recent growth. High population growth, which is largely created by a policy failure, puts considerable pressure on job creation and hinders poverty reduction. In addition to chronic unemployment, most jobs are in the informal sector and of low-wage and low-productivity. The situation has led to a growing concern that the Philippines may be experiencing “jobless growth.”

The Philippines went through “premature deindustrialization” where the economy developed without experiencing manufacturing-driven growth and moved into services. Services now dominate the Philippine both in terms of output and a share of employment. Yet except the BPO industry, the productivity of service sector is low and most of the employment in services is informal and of low quality.

Compared to other developing countries in Asia, investment in the Philippines has been low and stagnant. Low tax capacity, complex government regulations, and corruptions are blamed for low investment. Although recent governance reforms by the Aquino government led to an increase in FDI and public spending, further reforms may turn out to be an extremely difficult task due to political economy reasons.

Korea needs to consider a two-pronged approach to expand the Korea-Philippine economic cooperation considering the opportunities and challenges of the current Philippine economy. First, on the opportunity side, the positive outlooks for infrastructure investment and consumption markets offer attractive business opportunities to Korean businesses. The Philippine government will proceed with the large-scale infrastructure projects to improve the country’s inadequate infrastructure. High remittances and the high-performing BPO industry will continue to support the market for consumer goods. Korean businesses can tap into these opportunities. Second, to help the Philippine economy address its structural challenges, Korea needs to strengthen industrial cooperation with the Philippines in the manufacturing sector. This is indeed where Korea has been on the right track. Korea has already included the Philippine in its global supply chain in electronics and shipbuilding. Strengthening these ties will help create jobs and reduce poverty by helping promote the manufacturing sector in the Philippines.

The Policy and Implications of Islamic Finance in Non-Islamic States: Cases of the UK, Singapore, and Japan

Daechang Kang, Sung Hyun Son, and Young Kyoung Suh

Islamic finance, once limited to Muslim countries, has recently been expanding rapidly to non-Islamic regions. This report studies Islamic finance in the UK, Singapore, and Japan which are major non-Islamic states, with focus on the harmonization of Islamic finance with conventional finance. This analysis will help elicit useful implications for Korea when it is introduced to Islamic finance in the future.

Chapter 2 discusses the current situation and policy of Islamic finance in the UK. Recognizing the potential of Islamic finance since 1995, the UK has exerted efforts to develop Islamic finance. Islamic finance started to develop in the UK as the UK government created the institutional framework for financial supervision and taxation in the middle of the 2000s.

The UK built the 9th largest Islamic finance market in the world and possesses the largest Islamic financial assets among non-Islamic countries. A significant number of Islamic banks operate in the UK, and these banks play major roles in international Islamic finance markets. Banks represent the primary institutions for Islamic finance in the UK, while the size of the assets of Islamic funds is very small and that of takaful is negligible. The London Stock Exchange (LSE) remains one of the main international stock exchanges for sukuk issuance. There have recently been cases in which Islamic finance is applied to investments toward infrastructure increase in the UK.

The services sector which assists and educate for Islamic finance is also being developed in the UK. Large accounting firms, consulting companies, and professional service corporations contribute to the development of Islamic finance, while providing consulting services for Islamic financial institutions. In line with this, professional educational institutions establish new standards and award certificates for Islamic finance, and many colleges and business schools offer courses on Islamic finance.

The UK adopted Islamic finance, its policy objective being that it would establish the UK as the hub of Islamic finance globally. While pursuing this goal, it sought to enhance the UK's competitiveness in overall financial services and allow every one in the UK to benefit from diverse financial services. The UK government has developed a financial system in response to the issues of financial supervision posed by Islamic finance, and it has applied the same standards of financial supervision both to Islamic and conventional finance.

In the process of adopting Islamic finance, the UK government has developed a financial supervision scheme and enacted a phased, gradual modification of the tax system. It made small changes to the financial supervision system while adjusting the system to sustain neutrality of financial supervision and taxation. In addition, it has indirectly affected standardization of Islamic financial products, and strongly supported efforts to increase awareness of Islamic finance. It has also indirectly supported the creation and the operation of education and training programs for Islamic finance. In the whole process of developing the Islamic finance system, the UK government has formulated and implemented relevant policies while consulting closely with the stakeholders.

Chapter 3 discusses Singapore's current situation and policy regarding Islamic finance. By introducing Islamic finance, the Singapore government aims to strengthen its role as the global financial hub and facilitate the flow of capital from Middle East countries. As trade has increased and the economic relationship has been strengthened between Singapore and Middle East states, capital flows from the Middle East countries to Singapore have expanded through Islamic finance. Under these circumstances, Singapore recognized that Islamic finance could be useful as a conduit for transactions and investments between Middle East and Asian states.

Islamic finance in Singapore continues to grow rapidly, mainly in areas such as wholesale banking, insurance, asset management, and sukuk. Although Islamic banks in Singapore started operations in retail banking, they have expanded into the wholesale banking area especially for corporate finance. Foreign non-bank financial institutions in Singapore do business actively in investment advisory services, consulting services, and securities related to Islamic finance. In the Islamic capital market of Singapore, Shariah exchange trade funds (ETFs) and sukuk issued by the Singapore government are heavily traded as major financial products. In the asset management area, Islamic financial institutions from many countries invested intensively in Singapore and Asian real estate.

The Monetary Authority of Singapore (MAS) supervises Islamic financial institutions as well as conventional financial institutions using the same criteria. This is because of the policy orientation of the Singapore government in which it should manage the risks of every financial institution equally, given that it deems these risks as similar regardless of whether the financial institution is conventional or Islamic. In order to establish Islamic finance, MAS has modified its laws and systems according to the principle of equal treatment. That is, it has developed the system to ensure that earnings and tax burden of Islamic and conventional finance are equivalent. Singapore thoroughly excludes religious issues from the financial supervision system.

In order to develop Islamic finance, the Singapore government has realigned the system by enacting or revising the banking acts and tax laws. Islamic banking started to develop in Singapore from 2005, as the Singapore government revised the Banking Act in 2005 pertaining to how banks acquire and trade non-financial assets. Since then, it has made various facets of Islamic finance operable by enacting and revising the banking acts. To maintain tax neutrality between Islamic finance and conventional finance, the Singapore government prevents double taxation on Islamic finance contracts and arranged the clauses for exemption of stamp duty.

Chapter 4 discusses Japan's current situation and policy regarding Islamic finance. Realizing the necessity for ensuring maintenance of various financial channels, the Japanese government has created an environment for Islamic finance through rearrangement of laws and the system. By revising the enforcement regulation for the Banking Act in 2008, banks in Japan were allowed to participate in Islamic banking through their subsidiaries. Since 2011, the Japanese government has revised the laws and the system related to sukuk to enable sukuk issuance in Japan. With these efforts, the government expected that Japanese companies and financial institutions would actively issue sukuk in Japan, with foreigners able to invest in sukuk issued in the country.

However, these activities did not lead to results intended by the Japanese government. Japanese banks did not actively respond to domestic demands, and Japanese institutions have yet to issue sukuk in Japan. Insufficient domestic demand, complexity of procedure, and incomplete realignment of laws and the system are cited as causes making the Japanese sukuk market sluggish. While examining the necessity of additional legal revisions, the Japanese government attempts to devise various measures that would ensure participation of diverse institutions in the Japanese sukuk market.

At present, it is simply too early to evaluate the performance of Islamic finance in Japan. Japan has only recently started to revise the laws and the system to adopt Islamic finance, modifying relevant laws and systems to introduce Islamic finance gradually, while keeping the existing financial supervision system as intact as possible. It appears that the Japanese government proceeded with the revision of the laws and the system in a relatively short period, to prepare proactively for the potential demand for Islamic financial services in Japan.

Chapter 5 presents policy implications for Korea, drawn from discussions on the current situation and observations of Islamic finance policies in the UK, Singapore, and Japan. It discusses policy implications, categorizing them for the Korean financial market and in accordance with the policy orientation of the Korean government.

In line with this, implications for the Korean financial market are considered. It is possible to introduce Islamic finance without a significant Muslim base, as we can see in Singapore's case. It is desirable that Korean institutions expand operation of Islamic finance overseas during the early phase. In addition, it would be more effective to begin business operations in the wholesale finance areas. In order to do that, opportunities for education and training in Islamic finance must be provided. It is also required that Korean institutions take note of sukuk as a means of raising capital and seek ways to make use of them. In particular, it is necessary for Korean venture firms to pay attention to sukuk, recognizing that sukuk provide channels for raising capital efficiently. They also need to consider measures to procure the Shariah committee members and prevent possible conflicts of interest.

The policy direction for the Korean government is suggested as follows. First of all, it is important to enhance awareness of the necessity of Islamic finance. It is necessary to know the introduction of Islamic finance will have a positive effect on the development of the Korean financial system. It is also necessary to consider that it is highly probable that the introduction of Islamic finance will create new jobs. Keeping this in mind, the Korean government must confirm the establishment of the hub of Islamic finance for Northeast Asia as the policy objective in the adoption of Islamic finance. As an important measure to achieve this goal, Korea needs to exert greater efforts to increase openness of its domestic market. In order to develop Islamic finance in the long run, it is necessary for the Korean government to create a neutral system of financial supervision and engage in a comprehensive revision of laws and the system to secure tax neutrality essential for sukuk issuance. In doing so, it is important for the Korean government and the private sector to formulate measures for the development of Islamic finance by discussing relevant issues broadly and cooperating closely. The Korean government should also establish the basic principles for supervision of the Shariah committee to prevent conflicts of interest.

Chapter 6 summarizes the entire discussion, focusing on policy implications and discussing future approaches to Islamic finance.

The cases of the UK, Singapore, and Japan ascertain that the government's policy initiative is an important factor for the development of Islamic finance. In this regard, it is necessary to take note of the process through which the government integrated Islamic finance into the existing system of financial supervision and taxation. The neutral system of financial supervision and taxation provides the foundation for stable operation of Islamic finance. Introducing Islamic finance can offer opportunities for the development of Korea's overall financial system.

It is necessary to approach Islamic finance based on long-term prospects. It is expected that, because of high transaction costs, Islamic finance will not replace conventional finance but merely account for a small portion of the financial market. Korean institutions have to consider measures to reduce the cost of raising capital by applying Islamic finance to areas, such as large projects or venture firms, for instance.

It is necessary to take an active approach throughout the process of the introduction of Islamic finance. If Korea establishes a clear development strategy for Islamic finance and pursues it systematically and persistently, it would likely present sufficient opportunities for the development of Islamic finance in Korea.

All of these should be predicated upon a clear recognition of the policy objectives for the introduction of Islamic finance. If we consider Islamic finance simply as a means to secure an alternative source for raising capital, we will not fully elicit benefits that Islamic finance can provide. The Korean government has to formulate policy objectives that will establish Korea as the hub of Islamic finance in Northeast Asia in from the long term perspective, and exert an array of efforts to achieve the goal in the different areas. If Islamic finance develops as a result, it will facilitate the development of the conventional finance as well. That is, the policy of establishing the hub of Islamic finance in Northeast Asia can be a momentum for the enhancement of the overall quality of Korea's financial system.

The Healthcare Industry in the MENA Region and Its Policy Implications for Korean Companies

Kwon Hyung Lee, Sungil Kwak, Jaeeun Park and Sung Hyun Son

The aim of the research is to suggest policy implications for promotion of the healthcare industry on the basis of analyses of the features and trends of the Middle Eastern and North African healthcare sectors as well as cooperative environments between Korea and the MENA(Middle East and North Africa). The healthcare sectors in the MENA have been expanded with the help of increasing population, life expectancies, and household income. The governments in the region have also made efforts to establish hospitals and medical centers and activate private markets in the sector. Thus, bilateral medical cooperation between Korea and the MENA could engender mutual benefits applying Korean medical technologies and devices and management systems of university hospitals. In the process, it is necessary to implement industrial policies for small and medium sized enterprises and strengthen export competencies. Then, it can be expected that the healthcare sector will create professional jobs as a growth sector and contribute to expansion of creative economy.

The report suggests ‘establishment of creative economy through promotion of industrial linkages and integration between Korean and the MENA healthcare sectors’ as a policy vision of their bilateral medical cooperation. Policy goals and actions are proposed in the division of three areas: industrial linkages and integration, professional manpower capability building and localization of Korea-based technology and hospital management systems.

First, government policies should be implemented so that the healthcare sector could enhance industrial synergies between medical service sectors and manufacturing sectors including medical devices and pharmaceutical products. The healthcare sector should also increase integration effects with other enabling industries including consulting services, ICT, finance, etc. Korean hospitals and manufacturers should strengthen cooperative relations with global top hospitals and enterprises to penetrate into the MENA markets utilizing global brands.

Second, lack of professionals like nurses, medical device engineers, ICT programmers etc. could prevent the MENA countries from developing the healthcare sector even though advanced facilities are established. Thus, vocational education and training program should be promoted with establishment of medical colleges and training centers. Exchange of professionals between Korea and the MENA could enhance mutual understanding of differing institutions, policies and markets.

Third, medical aid to public healthcare system in the rural areas could increase brand values of Korean medical technology and products. Small and medium sized hospitals specialized in chronic diseases in the region have favourable conditions in publicizing new brands in the initial stage of localization. Also, cultural and religious factors should be emphasized including food and prayer facilities. In the longer term, joint manufacturing projects could be considered a key policy tool to create jobs and strengthen industrial cooperation in the private sector.

Trade Openness, Skill Composition and Wage Inequality in Korea

Chankwon Bae, Joo Yeon Sun, Jeong Gon Kim and Jumi Lee

This study aims to identify the impact of trade openness on skill premium and labor force composition at the national and industry levels in Korea providing a comprehensive analysis of trends in demand for skills. In particular, it focuses on specialization and knowledge spillovers as channels through which trade affects the labor market. Finally, the study emphasizes the importance of government policies to reduce inequality between skilled and unskilled workers, which results from the expansion of trade such as FTAs, and it makes some policy recommendations for the trade adjustment assistance program that is currently being run in the nation.

Chapter 2 takes a look at changes in employment and wages in the manufacturing sector, defining skilled labor as university graduates and non-production workers. It is shown that the relative demand for skilled labor across the manufacturing sector has increased between 1993 and 2010, while working conditions for unskilled workers have aggravated constantly. It seems that these changes attribute to skilled-biased technical changes for the period before the mid 2000’s and to international trade for the period after the mid 2000’s.

Chapter 3 empirically analyzes the influence of foreign technology transferred through trade on skill upgrading in the labor market, focusing on the interaction between trade and technological progress. As a result, the study finds that advanced foreign technologies embodied in imported goods increase the employment and wage shares held by skilled workers. Yet, it turns out that there is actually some time lag for this impact to be observable. In addition to the impact of foreign technology spillovers, international trade itself turns out to increase employment and wage shares of skilled labor, and especially, trade in intermediate goods turns out to have more immediate effects.

Chapter 4, which is a more in-depth analysis of Chapter 3, focuses on addressing the impact of changes in the structure of international trade. The changes in the trade structure are measured by the Trade Overlap Index and the International Outsourcing Index. The results show that as intra-industry trade increases, the shares of skilled labor increase as well. The effects of international outsourcing vary among trading partners. It is shown that outsourcing to the U.S. and Japan has replaced skilled labor, and on the other hand, intermediate goods from China and Germany have complemented skilled labor in Korea.

Chapter 5 compares the Korea’s Trade Adjustment Assistance program, which is meant to alleviate inequality between skilled and unskilled workers, with the European Globalization Adjustment Fund (EGF) and the U.S. Trade Adjustment Assistance (TAA). The EGF and TAA are centered around workers unlike the former, which is very firm-focused. They provide adjustment assistance to workers who have been adversely affected by trade, offering better benefits than other programs available to unemployed workers. Also, it is seen that the core supports have been shifting from financial aids to vocational training.

Effects of Financial Integration on the Transmission of the Global Financial Crisis

Dong-Eun Rhee, Eunjung Kang, Ju Hyun Pyun and Jiyoun An


The integration of the global financial markets has been accelerated due to rapid growing international capital movement since 2000s. This financial globalization led by advanced and emerging economies was expected to promote efficiencies in the economy and spur economic growth. However, as we observed the negative spillovers of the Global Financial Crisis (GFC, hereafter) on the world economies spreading through channels of the financial globalization, many started to question whether financial integration buffers or amplifies negative shocks during the crisis. This study examines roles of financial integration in the spread of negative shocks from the U.S. throughout other real economies during the crisis, and provides implications on the financial integration channels that could transmit financial instability in the upcoming future.

Empirical assessment has been carried out on the impacts of the GFC originated from the U.S. on the other real economies, in relation to their levels of stock market integration and bond market integration with the U.S. We employ a simultaneous equation model that considers endogeneity issues among variables using the sample of 63 countries during 2001-2011. To measure the degree of real economic spillovers of the crisis initiated from the U.S. to other countries, we use real business cycle synchronization index between the U.S. and other countries. We argue if a country’s real economic growth worsens along with the U.S. growth during the crisis (i.e. real output growths of two countries are highly synchronized), then real contagion of the crisis is more severe on that country. The estimation results suggest that the crisis brings about business cycle convergence between the U.S. and countries that have greater stock market integration with the US during the GFC while the crisis leads to business cycle divergence to countries with greater bond market integration. Since we observed overall precipitous decline in stock market integration across countries during the crisis, this capital flight from the integrated stock market during the crisis would lead to the spread of the crisis to a country whose stock market is highly integrated with that of the U.S. However, a higher level of bond market integration with the U.S. would provide buffer against negative shock spillover during the crisis and make the crisis less contagious.

In addition, the study investigates whether the real economic spillover of the GFC cannot be fully explained by the intensity of the financial integration, and tests the ‘wake-up call hypothesis’ suggesting that economic fundamentals play an important role in the transmission of negative shock during the financial crisis. This study finds that real economic contagion from the U.S. through financial integration is robust by controlling for economic fundamentals of each country. Moreover, it is observed that a country’s economic fundamentals amplified the contagion effect during the GFC as well: countries with lower foreign currency reserves, lower financial development and higher foreign debts tend to be more vulnerable to contagion of the GFC.

The results of this research give twofold implications: First, this research can provide foresight on the spillover of current Fed’s exit strategy to Korean economy. As a matter of fact, Korea was less affected by the start of Fed’s tapering of 2013 talks due to its robust fundamentals, compared to other emerging countries like Brazil, India, Turkey, Thailand and Indonesia. Second, if the bond market integration does function as a buffer against negative shocks as our work suggested, then the further development of ‘Asian Bond Market Initiative (ABMI)’ will strengthen East Asian countries’ ability to respond to a crisis and also their fundamentals.

Cooperation between North Korea and China in Tourism and Policy Implication


Jiyeon Kim, Pilsoo Choi, Minkyung Lim, and Seung Kwon Na




China is the most significant partner to North Korea in economic cooperation of tourism. In 2012, 4,500 North Koreans traveled China, while at least 50,000 Chinese traveled North Korea. It is between April and November that Chinese tourists visit North Korea. During winter, North Korea close its door to foreign tourists due to a electronic power shortage, ice formation, problem in heating supply, and other limitation in environmental factors.

There are two different types of tour programs in North Korea, in terms of border city tour and Pyongyang and other city tour. The first one focuses on traveling border cities between the North and China, while tour programs in the second one concentrate on traveling Pyongyang and its nearby cities. Vehicle, train, or walking on foot is main transportation in the border program, while airplane, cruise, train, and vehicle are main transportation for the interior city tour. Average cost for the border program is approximately 700~2,500RMB per person, and it is 1,700~6,500 RMB per person for the Pyongyang and nearby city program. Yanji, Hunchun, Tumen, Shenyang, Dandong, and Peking are gate cities for traveling North Korea. Travelers from Yanji, Shenyang, and Peking are available for airplane, train, and vehicles, while those departing from Hunchun, Tumen, and Dandong take only train or vehicles.

There are 1,864 international travel agencies in China, and among them only selected number of agencies which make contract with national travel agencies in North Korea, in terms of Chosun International Travel Agency, Chosun International Youth Travel Agency, and Chosun International Physical Education Travel Agency obtain authority to send Chinese trip to North Korea. There are approximately 15 authorized agencies in Yanji, Hunchun, and Tumen. In Shenyang and Dandong, it is about 10 agencies, and there are approximately 10 agencies in Peking.

It is estimated that approximately 50,000~60,000 Chinese traveled North Korea in 2012. It also estimated that North Korea earned approximately 21.7million ~34.6million US dollar through Chinese travelers in 2012. When the fact that North Korea earned 86million US dollar through Kaesong Industrial Complex in 2012 is considered, economic cooperation size in tourism between the North Korea and China is not small enough to be ignorant.

Based on the paper results, fundamentally growth potential in tourism cooperation between North Korea and China is not high, because of limited chinese tourist demand to North Korea, poor infrastructure and system, and low rate of return in North Korea tour goods.

But, it could be positive factor that chinese demand for overseas travel is growing fast. And it is hard to estimate trend of china's tourism demand to North Korea, because china travel agency started to deal with travel good in North Korea, recently.

 

Strategies for Korean SMEs to Break into Latin American Markets: Based on the OLI Paradigm

Seungil Kim, Hwaseok Oh, and Hyun Seo Kee

Central and South America is approaching to Korea companies as a land of opportunities continuing a stable growth. This research covered the three countries around northwest-pacific, Colombia, Peru and Chile (“Andean three countries”), where our SMEs can access or enter into its market in the most effective way.

Among Central and South American countries, Andean three countries not only signed the Free Trade Agreement with Korea but also have a great condition in order that our SMEs can make inroad to its market in view of both geographical position and potentiality of growth. In particular, Andean three countries and Mexico established the economy community, the Pacific Alliance (Alianza del Pacifico), and its economic community is strongly emerging as a representative of Pacific coast of Central and South America.

The main purpose of this research is: (a) to analyze the present condition of economy, infrastructure, industrial composition, government policy, etc, (b) to evaluate the competitiveness of Korean SMEs in each industry field of local market after choosing the promising field and area to make inroad for their business, and (c) to seek the plans for expansion of Korean SMEs' business in the local market and the related policies.

To achieve this, this research analyzes the statics of export and import, the trend of investment, the competitive environment in local countries in depth, meanwhile, explain the condition of export and investment in central and South America through overseas direct investment theory such as OLI paradigm (Ecletic Paradigm), Phased entry theory, etc. Following this research results, the conclusion was reached as below,

Firstly, as regards OLI analysis, Korean SMEs are focusing on export based on O (Ownership-specific advantage) and I (Internalization-incentive advantage) in the Andean market. Except direct investment aiming for acquisition for local resources, however, it is very slightly to choose local direct production with all O, L(Labour-specific Advantage) and I.

Substituting the OLI paradigm, Korean SMEs have considerable Ownership-specific advantages in related industries of steel, petrochemistry, electron, auto, machine, IT, Korean wave, ete. On the other hands, There are not many elements to gain an advantage in the location-specific advantages by the infrastructure of industrial production and lack of skilled labours.

Secondly, based on the discussion in the chapter 3, we selected SMEs' 10 promising items for export in Andean three countries such as synthetic resins, steel plat, auto-component, computer, plastic product, raw material fine.

Furthermore, we select some promising products collecting opinions of Korean companies doing a business in Andean countries. As a result, daily supplies, auto-component, machine and machine-component and business related to mineral energy are selected as promising products for entering into local market for Korean SMEs.

Thirdly, as an expansion plan for entering into local market, we suggest the promotion of direct export, the business to business connection, the strategies for joint-venture entering, etc. As an example of the business to business connection and the strategies for joint-venture entering, we present two strategies as the joint overseas expansion with major company or between SMEs. the other strategy for the joint-venture overseas expansion is the connection and joint-advancement between SMEs. Thereby, SMEs with a paucity in resources can make a connection with their capability, reduce the risk and make inroads into overseas markets.

Fourthly, as policy strategies for the promotion of entering into local markets by SMEs, we present the present condition of various policies for the promotion of SMEs' entering into overseas market (export), and call on the government to strengthen foundation for the overseas expansion and come up with an effective plan for supporting the joint overseas expansion between enterprises.

In addition, as regards preparation plan for support for the joint overseas expansion, we suggest the government not only gives positive supports for the joint overseas expansion between large companies and SMEs or between SMEs but also examines and operates some policies such as support centers for joint overseas expansion with major company and SMEs to promote SMEs' overseas expansion, appointment system of outstanding company doing a business jointly.

Mongolian Economy Development Strategy: CGE Analysis and Case study

Chang Soo Lee and Backhoon Song

RThis study derived policy implications and recommendations to Mongolian government by considering theories on economic development and past experience of other countries together. Specific methodologies adopted in this study are Computable General Equilibrium (CGE) analysis and survey of policy experiences of natural resource abundant countries.
In CGE analysis, we specially emphasis on the effects of various fund allocations generated by export behaviors on economic growth in the long run. The results show that policies of investments on education, public service sectors, and infrastructure can generate higher economic growth rather than policies for current consumption expansion. In addition, we deliver how resource abundant countries overcome so-called Dutch Disease and pursue the sustainable economic growth.

1. CGE model and simulation

Firstly we build Global SAM consisting of 4 countries (Mongolia, Korea, China, and Rest of World), 16 sectors and 5 production inputs and set up GTAPinGAMS model.
There are some assumptions that we take in this model to simplify the model. We assume that income generated from sales of natural resources is belong to government revenue, and then Mongolian government allocate this fund for the use of either government expenditure itself or for transfer to private sectors.
The simulation results show that the policy that is oriented to increase export or income of natural resources is not effective enough. In the long run, when the government uses the fund for education, public service, and infrastructure the better economic result we could be anticipated.
Many developing countries endowed with abundant natural resources tend to use their budgets for current consumption because the government puts more weight on reduction of social problems such as poverty and social instability. However, this type of policy would only reduce those problems in temporal, not in the long run. Hence, the government should try to improve infrastructure and public services including education.

2. Case studies

In the beginning stage of a developing country’s economic development, the export of natural resources helps to upgrade the level of economy by accumulating capital. However, when the government emphasizes too much on export of natural resources and current consumption, it ends up with economic disaster that is well known as ‘Dutch Disease’. For example, the export fund causes domestic inflation, appreciation of domestic currency, and finally aggravates export competitiveness. When a country hands out export fund to people just for the sake of welfare, it prevents the economy from growing sustainably. However, when a country spends the export fund for future economic development not current welfare, that country will have the good chance to upgrade not only manufacturing sectors but also its sound economic structure.
In Chapter 5, we examine successful and unsuccessful case studies about the management of natural resource export funds to avoid dutch disease. A few years ago, Mongolian government distributed lump sum allowance to people. This is because the government used the political-patronage tactic on the electorate in order to gain votes. Since Mongolian government has many projects and policies to pursue its economic development, this kind of policy does not help the economic development at all. Hence, Mongolian government should pursue long-term economy policies such as build-up of infrastructure, strengthening of public service including public education. In addition, we suggest the Mongolian government set up its sovereign wealth fund as other countries have been doing.

3. Policy recommendation

Mongolian economy leans too much toward natural resource industries. One of problems that Mongolian economy faces is that its level of export dependence on natural resources is too high. Under this situation, when Mongolian economy is shocked by external factors for example sharp decline of international prices of natural resources, it would be more negatively affected by them. In addition, its export is too much concentrated toward China. Geographical property of Mongol that is in a deadlock by China and Russia makes it too difficult to find other trade partners due to transportation cost.
Mongolian government should diversify its economy structure into more processing oriented one. Mongolia’s main exports are the raw types of natural resources which is not creating higher value added. Rather creating new industries such as BT, IT etc that Mongolia has never have before, it should develop forward-backward industries of current existing industries. We suggest that when the government invests into processing industries for raw materials, the economy earns more value added.
Second, textile and cloth industries should be put on the top priority of economic development. Livestock farming such as sheep, and goat has comparative advantage than other countries. Especially cashmere products have a price comparativeness over other countries’ products, so it exports mainly to European countries. Currently there are more than 50 million livestock in Mongolia. The competitiveness of textile and cloth can also be acquired when livestock farming industry should be promoted enlargement. When this is successfully done it leads the development of textile and cloth industries as well.
Third, Mongolian government should notice the importance of tourism. The peak season for tourism to Mongolia is only between July and August. During September to June, it is hard to attract foreign tourists to Mongolia because of cold weather condition. In order to overcome this situation, Mongolian government needs to develop winter sightseeing merchandises. By considering the fact that China is a neighboring nation and Chinese like gamble, Mongolian government sets up gambling facility near ski resort, then it would attract Chinese into there in winter season. But, in order to reduce negative effects from gambling industry, the government should also set up a law that could prevent domestic people from using the gamble facilities.