Since the global financial crisis, inflows and outflows of foreign capital increased greatly and this resulted in higher volatility of exchange rate. In addition, each country ended up implementing quantitative easing in order to overcome the Eurozone financial crisis and the global recession. However, the value of their national currency declines as a consequence and this triggered the concern for global currency war. Under such situation, as Korea is constantly exposed to the risk of foreign exchange market due to its small open economy limitation, we need to be always prepared for the foreign exchange risk that fluctuate depending on the condition of global economy. With this in the background, we try to study the current state of Korean companies’ foreign exchange hedging activities, find out whether or not such hedging is required by analyzing the currency exposure, and if it is needed, seek for the most efficient measure through studying international cases.
Generally, Korean firms hold economic structure that appears to be vulnerable to foreign exchange volatility. This is because of the low awareness among companies regarding foreign exchange risk management and the fact there are not enough derivatives that allow firms to hedge foreign exchange risk via financial markets. Also, the companies’ lack of understanding about foreign exchange risk management methods exists and the fear for derivatives as an aftereffect of KIKO situation is just as influential to hinder market access. The Foreign Exchange Risk Insurance, a typical exchange risk hedging product, is exclusively provided by Korea Trade Insurance Corporation (K-sure). However, it does not fully meet the consumer's demand and it even gets taken off the market in times of crisis.
According to the findings in this paper, we were able to suggest the following policies for Korean firms’ efficient foreign exchange risk management. For short-term, the information sharing system of financial derivatives, the knowledge sharing system of exchange risk, institutional demand on companies’ foreign exchange risk management, and finally the disclosure system need to be introduces in order to vitalize the functioning of financial market for foreign exchange hedging activities. Moreover, exchange risk position on external debt should be strictly supervised as well as carrying out the policy that promote internationalization of Korean Won in mid-to long-term.
An introduction of information transmission and disclosure system of derivatives should be regarded as priorities for the transparent management of derivative’s price or value in particular. In Sweden, foreign exchange risk hedging through financial markets has been relatively easy since companies fully understand the value or price of financial commodities that can hedge foreign exchange risk. On the other hand, South Korea considered the difficulty of evaluating price and value of derivatives as the most significant obstacle. Therefore, South Korea, too, needs to improve derivatives management system so that information on financial commodities can be sufficiently opened and explained to the firms.
Just as Israel, we need to pursue the drastic privatization of insurance industry and the aggressive regulatory reform. The most used foreign exchange risk insurance by Korean firms is monopolized by Korea Trade Insurance Corporation(K-sure). Although it is being provided in the form of public goods by the public enterprise, there was a time when Range Forward was taken off the market due to a sudden increase in stress levels following 2008 financial crisis. To cover all the possible risks and diverse market conditions, there must be more providers as well as more financial commodities. Thus, the market completeness needs to be enhanced by diversifying Foreign Exchange Insurance products and letting other public or private enterprise to enter the market.
Furthermore, we need to consider promoting the internationalization of Korean Won as the case of Australia shows. It was the internationalization of Australian currency that allowed Australia to sell derivatives to the foreigners in order to hedge foreign exchange risk. Of course, the existence of foreigners demand on the possession of Australian Dollar affected as an important factor, but the internationalization of currency was the prime groundwork. The cost of hedging activities can be cut substantially if the hedging through national currency is possible. Hence, it is advisable to seriously consider promoting the internationalization of Korean Won.

 

The Least Developed Countries (LDCs) are the poorest and the most disadvantaged members of the international community that face a broad range of socio-economic, geographical, political and environmental challenges. The United Nations defines LDCs based on three criteria: low gross national income, weak human development indices (ex. nutrition, health, education and adult literacy), and high level of economic vulnerability. Currently forty-eight countries, 33 in Africa, 14 in Asia and the Pacific and 1 in Latin America, are designated as LDCs by the United Nations. With only three countries having graduated from LDC status, the number of LDC countries has leaped from 24 in 1971 when the category was first officially established by the UN General Assembly to 48 in 2012.
Amid the growing interdependency in the global economic system the international effort to reverse the trend of socio-economic marginalization of LDCs officially began at the first UN Conference on Least Developed Countries held in Paris in 1981. In the realm of development, the adoption of Millennium Development Goals in 2000 has led to major donors targeting LDCs as their key aid recipient group. Nevertheless, despite global efforts to support LDCs, there has been growing concern over the deepening vulnerability of LDCs as they were stricken by the impact of the global economic recession, food crisis and climate change in the last several years.
In this context, this paper attempts to identify main development challenges facing LDCs and provide policy recommendations for South Korea as an emerging donor; to enhance its cooperation with LDCs in terms of aid, trade, debt relief and climate change. The paper begins by reviewing the UN criteria for LDC, defining socio-economic and geographical features of LDCs and also post-recession economic trends. The main challenges and priorities of the LDC group were assessed, with specific focus on limited production capacity and market access, lack of development resources, debt burden, and climate change vulnerability followed by the MDG progress and post-MDG needs. Then it moves on to examine the UN-led international efforts to support LDCs outlined in the Istanbul Program of Action adopted in the fourth UN Conference on the LDCs and suggests actions that should be taken by LDC governments and donors. The DAC donors’ aid to LDCs, their allocation patterns and quality of aid were analyzed along with bilateral and multilateral initiatives targeting LDCs such as the Tokyo International Conference on African Development (TICAD), the Forum on China-Africa Cooperation (FOCAC), the African Growth and Opportunity Act (AGOA) and the Extractive Industries Transparency Initiative (EITI). The trends and examples of South-South Cooperation and triangular cooperation with LDCs were also presented. Moving beyond aid, the following chapter develops its analysis further on international and Korean support in related areas such as trade facilitation through the Special and Differential Treatments, debt relief and climate change. 
The paper concludes by suggesting policy measures for the Korean government to improve its support to LDCs through ODA, trade facilitation, debt relief and climate change assistance. Firstly Korea needs to improve the quality of its aid to LDCs by expanding its aid untying ratio to LDCs and HIPCs. It is advised that Korea needs to strength its capacity to actively participate in local and international tender, to expand the use of local procurement systems and to promote co-financing with Multilateral Development Banks (MDBs). Secondly, it is recommended that Korea should extend the level of non-tariff Special and Differential Treatments (SDTs) to LDCs. The importance of the technical and financial cooperation to help LDCs combat effects of climate change is also highlighted. As for aid, Korea needs to reduce the number of priority countries, enhance the selection criteria and use the existing regional cooperation platforms more actively. Finally, in order to improve development effectiveness and policy coherence for development, there should be further efforts to strengthen the whole-of-government approach through policy-level partnership among related ministries in charge of aid, trade, debt and climate change.

 In terms of regional institutional economic integration, East Asia lags behind other major economic regions, and within East Asia, Northeast Asia lags even further behind. However, on November 2012, the 16 East Asian countries agreed to start the negotiations for the region-wide FTA (RCEP); and the trade ministers of China, Japan and Korea officially announced the launch of the CJK FTA negotiations. Thus, a significant first step seemed to have been taken toward both the East Asia Economic Community and the Northeast Asian Economic Community. 
Under this historic context, this study aims to propose the establishment of a consultative entity to enhance economic cooperation between China, Japan and Korea, named “the Trilateral Economic Cooperation (TEC),” which could serve as the mid-term goal in the pursuit of both the Northeast Asian Economic Community and the East Asian Economic Community.
Before describing the main characteristics and expected implications of the TEC and the strategies to achieve it, this study analyzes the status of China, Japan and Korea in the world economy as well as the economic interdependency among the three countries. In addition, various existing policy dialogue channels at the central government, regional government, and business levels are examined.
On the basis of assessment of existing policy dialogue channels and comparative studies on existing regional consultative entities such as APEC, ASEAN+3 framework and ASEAN, the main characteristics and expected positive effects of the TEC as well as the gradual strategy to realize it are suggested.
Being a regional consultative entity for economic cooperation, the structure of the TEC is likely to be similar to that of APEC. However, since it has only three members, it would be much easier to agree on the agenda and to operate effectively. In addition, the possible areas of cooperation would be more extensive than other regional consultative entities, because the three countries share many commonalities such as strong manufacturing sectors, weak service sectors and agriculture, high external energy dependency, and usage of Chinese characters.
Apart from its contribution to regional institutional economic integration, the TEC could provide the three countries with various benefits such as new engines of economic growth, enhancement of mutual understanding and confidence building resulting in the improvement of overall relations, effective voice in international economic arenas, and stronger regional political leadership.
Given the current political relations among the three countries, however, the TEC cannot be pursued right away. Therefore, this study proposes a gradual approach to accomplish the establishment of the TEC. At the first stage, one has to consolidate the current Trilateral Summing Meeting framework by aligning and synchronizing the existing Ministers’ Meetings to the Trilateral Summit Meeting, so that it could function more effectively. Having achieved the basic institutional framework necessary for the TEC at the first stage, only sufficient political would be necessary to establish formally the TEC at the second stage.
In the meantime, all three countries should strive to build the consensus on the need for the TEC, which would be instrumental in forming not only the Northeast Asian Economic Community but also the East Asian Economic Community.

Trade liberalization benefits consumers because it gives them access to a larger number and a wider variety of products, at lower prices, than their home country could supply. The principals of comparative advantage and specialization are well known. Competition from the increased availability of imported goods to domestic consumers also forces domestic firms to offer competitive prices, to improve production efficiency, and to innovate. Trade liberalization also presents domestic firms the opportunity to export their products and services to other countries, stimulating domestic growth.
While consumers as a whole are winners from free trade through lower prices and greater varieties, however, certain groups such as displaced workers in the import competing sectors are adversely affected due to increased imports. Much of the existing literature concerning trade liberalization focuses on the impact of trade on aggregate variables, such as the growth of GDP and GDP per capita, or net welfare effect on the economy as a whole. Although there is a general recognition that trade liberalization benefits consumers, there is only a handful of empirical research that investigate the direct impact of trade liberalization on consumers.
In this study, we examine the economic impacts of trade liberalization and estimate the impact of increased variety on the consumer welfare. In particular, within a CES framework, we develop an import price index that is corrected for new and disappearing varieties, by employing Feenstra (1994)'s approach and using Korea’s trade data. New varieties lower the unit-costs depending on their substitutability with other varieties and their expenditure shares. Further, a case study on major consumer goods that are imported by Korea was conducted in this paper. We have investigated the marketing margin of these consumer goods from the border to final consumers and estimated the margin stage by stage for each marketing channel.

Key findings of this paper are summarised as follows:
• Korea has continuously liberalized its domestic market since the mid 1980s. During the Uruguay Round (UR) negotiation and subsequent implementation process, Korea has reduced its bounded tariff voluntarily. As a result, the level of a weighted average tariff was reduced to 5.1 percent in 2011 from 11.3 percent in 1995. The reduction of import tariffs has contributed to the reduction of import prices denominated in domestic currency (Korean won). Nonetheless, final consumer prices do not show any trend of decline according to simple data plots in our investigation despite the reduction of import prices measured at the border. This tells us that there must be some price deteriorations in the process of domestic marketing channels for imported consumer goods.
• Although increased product variety is generally believed to bring welfare gains, standard national measures of welfare and prices do not assess how much better off consumers are when a new variety of an existing good or a new good becomes available. Both the import price index and the consumer price index (CPI) largely fail to capture the introduction of new varieties and the increase in the standard of living that new varieties bring about.Our recalculation of the import price index using Korean data suggests that the variety-adjusted index fell 20 percent faster than the conventional index between 1992 and 2011. To calculate the impact of variety growth on consumer welfare, we have to make an additional assumption about how the increased availability of foreign varieties affects domestic production. With the assumption that the number of domestic varieties is unchanged, we can proceed to estimate the impact of variety growth, due to the continuous expansion of trade liberalization on the well-being of Korean consumers. We found that the official import price index understates the rate of decline in import prices by 20 percent over the two decades from 1992 to 2011. If we take the average import share of Korean GDP for the past 20 years, which is 30 percent, then the value to consumers of the increase in global variety is in the range of 8.3 percent and 21.7 percent  of GDP in 2011, or roughly 93 to 243 billion US dollars depending on the estimates of elasticities of substitution. This sum represents what consumers would be willing to pay to have access to the expanded set of varieties available in 2011.
• We have further investigated the domestic marketing channels of some major imported consumer goods. Main findings of the investigation are summarized as follows:
- Most of imported manufactured goods, in particular, small household appliances are supplied by only one company. In other words, an overseas affiliate has virtually the monopoly power on household appliances in the Korean market.
- The marketing margin of imported goods is in general two or three times higher than that of domestic products.
- The marketing margin generated at the retailing stage is higher than that at the wholesale stage.
- Fair competition is one of the effective ways to reduce marketing costs of the imported goods including the marketing margin.
 
Policy implications derived from these findings are as follows:
• Fostering fair and competitive environments in the domestic market of the imported goods would be one of the most effective ways for reducing the marketing margin of the imported goods on the whole, and resulting in a decrease in consumer prices of those consumer goods, and hence ensuring gains from trade entertained by final consumers.
• Organized efforts by civil organizations and NGOs or consumer groups such as frequent consumer price reviews on imported goods and relevant monitoring activities should be encouraged for the benefits of consumers themselves.

 

Executive Summary 
  
I. Introduction 

II. Literature Review 

III. The Model 

IV. Quantitative Analysis 
1. Parameterization 
2. Results 

V. Conclusion 

References 

 

The fact that fluctuations in real exchange rates are highly volatile and persistent has been the central puzzle in international macroeconomics. This paper studies the role of real frictions in accounting for the puzzling behavior of real exchange rates. We show that the introduction of distribution costs and nontradable goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics. We view our framework as complementary to those that emphasize the role of nominal rigidities.

 

Executive Summary 

I. Introduction 

II. Inflation Targeting 

III. Sustaining the Foreign Exchange Market 

IV. Regulations on the Capital Market 

V. Conclusion 

References 

 

The Korean monetary authorities have implemented several policies on inflation, foreign exchanges and capital flows during and after the global financial crisis. The inflation target has been missed during the global financial crisis, as the Bank of Korea (BOK) was more lenient to supply shocks’ inflation in order not to impose the additional contractionary pressures on the economy during the global financial crisis. The Ministry of Strategy and Finance and the BOK tried to sustain the exchange market to be available for the public and to prevent the currency crisis. The monetary authorities have succeeded in preventing the currency crisis, but it is hard to say that the exchange market has been stabilized during the global financial crisis. The monetary authorities have imposed three macroprudential measures in order to prepare for the sudden stops. Those measures were not effective on reduction the volatility in the financial markets however they seem to have effect on the capital flows and lengthening the banks foreign debts.