Policy Analyses
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Policy Analyses
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The Role of Foreign Direct Investment in Korea's Economic Development: Productivity Effects and Implication for the Currency Crisis
This paper seeks to investigate the role of foreign direct investment (FDI) in Korea focusing on productivity spillover effects in manufacturing and implications for the current currency crisis. Estimation results of a random-effe..
June-Dong Kim et al. Date 1998.09.10
Foreign investmentDownloadContentSummaryThis paper seeks to investigate the role of foreign direct investment (FDI) in Korea focusing on productivity spillover effects in manufacturing and implications for the current currency crisis. Estimation results of a random-effects model with instruments using the annual data of six subsectors in manufacturing industries reveal that foreign direct investment had a positive but statistically insignificant effect on the productivity of Korean manufacturing during 1970-1996. The paper also examines whether or not FDI has the role of preventing bail-out loans in a currency crisis. The probit estimation results using cross section data of 90 developing countries show that the incidence of bail-out loans from the IMF during 1994-1997 is negatively associated with FDI stock relative to total GDP. The probit analysis using pooled data of 84 countries in 22 years of 1973-1994 also reveals that FDI inflow relative to total debt is negatively associated with both currency crashes and the IMF rescue loans. -
Change in Japan's Trade Policy Directions since the 1980s and Implications for Korea
Change in Japan's Trade Policy Directions since the 1980s and Implications for Korea Sungsup Ra This study intends to investigate changes in Japan's trade policy directions since the 1980s. Since the 1980s, facing changes both i..
Sungsup Ra Date 1998.08.31
Trade policyDownloadContentSummaryChange in Japan's Trade Policy Directions since the 1980s and Implications for Korea Sungsup Ra This study intends to investigate changes in Japan's trade policy directions since the 1980s. Since the 1980s, facing changes both internationally and domestically, Japan's trade policy, once known as "managed," has been gradually transformed into a liberal policy, yet it is still taken as an example of export-led trade or industrial policy.
Japan's trade policy since the 1980s has, in its principles, shown three distinctive changes: firstly, it has increasingly interacted with competition policy and its scope include an area where trade and competition policies interact together; secondly, Japan has been inclined to take more active or aggressive reaction toward foreign pressure in formulating its trade policy than before; finally, Japan has shown its effort to enhance harmonization between the Japanese and the international economy.
Under these changes in the principles, Japan's economic growth strategy has shifted from export-led to domestic-led since the 1980s. Steps have also been taken towards deregulation and structural reform in Japan's economy. Some measures for promoting import and foreign direct investment into Japan have also implemented. And Japan has actively supported a multilateral trading system under the framework of GATT/WTO as a free and non-discriminatory trade dispute settlement mechanism. However, these Japanese efforts are, in this study, evaluated to be partial in scope and several sectors including agriculture, construction and certain services, especially financial, remain subject to restrictive regulation that affect both foreign market access and better allocation of domestic resources.
This study firstly overviews the background affecting changes in Japan's trade policy since the 1980s and identifies important aspects of changes in Japan's trade policy through careful examination of trade policies and policy instruments taken by Japan and case studies on the U.S.-Japan semiconductor issue, the U.S.-Japan automobile and auto parts issue, and the U.S.-Japan film issue. This study also shows that Japan is expected to continue the trade policy directions into the 21st century. Finally, evaluating Japan's trade policy, implications for Korea are drawn. -
Bilateral Investment Treaties of the United States: Implication and prospects of the BIT between Korea and the U.S.
Bilateral Investment Treaties of the United States: Implications and prospects of the BIT between Korea and the U.S. Kwan-Ho Kim Korea and the U.S. agreed at last June's Summit to conclude a Bilateral Investment Treaty by the end..
Kwanho Kim Date 1998.08.20
DownloadContentSummaryBilateral Investment Treaties of the United States: Implications and prospects of the BIT between Korea and the U.S. Kwan-Ho Kim
Korea and the U.S. agreed at last June's Summit to conclude a Bilateral Investment Treaty by the end of this year. The treaty will prescribe a wide range of investment protection standards: including non-discriminatory treatment; prompt, adequate and effective compensation in the event of expropriation; and free transfer of all kinds of funds. The treaty will also contain topics regarding investment liberalization. Performance requirements such as local content will be prohibited.
It was unusual that the treaty was inititated not by the U.S., but by Korea, which is in the position to import capital. This reflects the changing circumstances in Korea, which is undergoing rapid structural reform and actively seeking to attract foreign direct investment. Rather than waiting for a proposal from the U.S., Korea decided as a matter of policy to conclude a BIT with the U.S.
Korea hopes the BIT with the U.S. will help establish a favorable investment climate, bulid confidence, and send a positive signal to investors. While the BIT may contribute to some growth in foreign investment, we should not have too many expectations. The BIT with the U.S. is only a tool - one factor creating a favorable investment climate. Existing studies show that BITs play a minor and secondary role in influencing foreign investment flows. Unless we can offer a secure profit-making ventures to foreign investors, the existence of the BIT will not itself attract investment.
Some of Korea's policies might be challenged by the BIT with the U.S., e.g., the screen quota system which is contrary to the obligation to not enforce local purchasing requirements. Korea is currently maintaining this policy to foster its film industry. Whether we should expose this cultural industry to open market competition will be a contentious issue. -
Trade and Labor Standards
A number have countries have moved to impose trade sanctions against manufactured goods from countries that are considered to have substandard labor conditions. The issue of labor standards was brought up before and after the Mara..
Yunjong Wang Date 1998.08.19
DownloadContentSummaryA number have countries have moved to impose trade sanctions against manufactured goods from countries that are considered to have substandard labor conditions. The issue of labor standards was brought up before and after the Marakeshi cabinet meeting of 1994 because France and the United States were seen to adopt it as a new agenda item in trade negotiations in the Uruguay Round.
Advanced countries were seen to link trade to labor standards for political motives and from a desire to protect their declining industries, lower unemployment rates and stem the flow of goods from countries with low labor costs, including China, East Asia and South Asia.
In other words, by creating a relationship of cause and effect between low labor costs and low labor standards, advanced countries have argued that their economies should be protected from social dumping of developing country based on sweat-shop labor and unfair working conditions. -
Adjustment Reforms in Korea since the Financial crisis(1997.12-1998.6): A Comprehensive Report
Adjustment Reforms in Korea Since the Financial Crisis(1997.12 - 1998.6) : A Comprehensive Report Hyoungsoo Zang, Yunjong Wang On December 3, 1997, the Korean government sent a Stand-By Arrangement with a Letter of Intent to the..
Hyoungsoo Zang et al. Date 1998.07.20
Economic development, Financial crisisDownloadContentSummaryAdjustment Reforms in Korea Since the Financial Crisis(1997.12 - 1998.6) : A Comprehensive Report Hyoungsoo Zang, Yunjong Wang On December 3, 1997, the Korean government sent a Stand-By Arrangement with a Letter of Intent to the International Monetary Fund asking for 21 billion dollars of emergency assistance to replenish foreign exchange reserves depleted by the financial crisis. The government announced its commitment to carrying out fundamental reforms in the financial and corporate sectors as well as further trade and capital market liberalization under the IMF program. This progress report is the first comprehensive study of adjustment reforms in Korea since the inception of the recent financial crisis.
The Korean government has now implemented all measures recommended by IMF, and in some areas reform has surpassed program targets. However, still much remains to be done. As stability of the foreign exchange market has been restored, the government's primary emphasis has shifted to impementing restructuring in the financial and corporate sectors and the social consequences of reform. These are certainly not easy tasks to tackle. For successful adjustment reforms in Korea, which are long overdue, a comprehensive blueprint envisaging how the Korean economy should look like after overcoming the crisis should be given first priority. Based on the blueprint, reforms should be done swiftly and boldly.
Futhermore, Korea should not overlook the widespread consensus that the current crisis was originated from low productivity borught out by high cost and low efficiency. -
Bankruptcy Procedure in Korea: A Perspective
Considering Korea's current economic environment, foreigners are likely to have greater interest in Korean bankruptcy procedures than before. However, little English-written material covering the subject currently exits. To fill t..
Mikyung Yun Date 1998.07.10
Financial crisis, Business managementDownloadContentSummaryConsidering Korea's current economic environment, foreigners are likely to have greater interest in Korean bankruptcy procedures than before. However, little English-written material covering the subject currently exits. To fill this gap, this paper briefly describes reorganization procedures and introduces some of the related discussions that have taken place recently. Korean reorganization consists of two distinct processes: composition and corporate reorganization. Some of the most important issues raised with respect to these procedures are; 1) treatment of existing managers and shareholders, 2) the appropriate roles of composition and corporate reorganization (and whether they should be unified), and 3) interim financing. -
Korea's Economic Reform Measures under the IMF Program : Government Measures in the Critical First Six Months of the Korean Economic Crisis
By November 1997, the financial crisis that had been tormenting Southeast Asia since the summer of that year spread to Korea. The foreign exchange difficulties were quite unlike anything the world had ever seen. The resultant econ..
ChanHyun Sohn et al. Date 1998.06.30
Economic reform, Financial crisisDownloadContentContents
Foreword
I. Summary of the IMF Stand-By Arrangement
II. Comprehensive Reviews of Implemented Actions and Plans for the IMF Program
III. Government Reform Measures
1. Macroeconomic Policies
2. Financial Sector Restructuring
3. Trade and Capital Account Liberalization
4. Corporate Governance and Structure
5. Labor Market Reform
6. Information Provision
IV. Official Announcements and Speeches
V. News on International Loans
VI. Miscellaneous Entries
Appendix : Index of All Items by Date
SummaryBy November 1997, the financial crisis that had been tormenting Southeast Asia since the summer of that year spread to Korea. The foreign exchange difficulties were quite unlike anything the world had ever seen. The resultant economic chaos is still being sorted out and the effects will likely be felt for years to come.
The crisis in Korea was touched off in November when a loss of confidence by foreign investors resulted in huge withdrawals of funds and a swift, massive depreciation of the Korean won. In early December, the Korean government requested the assistance of the IMF. The government and the IMF agreed on a program of fundamental economic reforms to curb the foreign exchange crisis. In particular, the reforms aimed to eliminate some of the long-standing problems with the Korean economy such as excessive regulations, inefficient financial sector, corporate governance without checks and balances, high levels of restrictions in trade and capital flows, rigid labor markets, and non-transparency.
At the same time, the government requested that we, the Korea Institute for International Economic Policy (KIEP), establish the "Nation's Confidence Enhancement Team" which, with the assistance of the Ministry of Finance and Economy (MOFE), would help restore foreign investor confidence in the Korean economy. Since the biggest problem that foreign investors faced was the lack of information about the Korean economy, the team was to provide information about economic reforms and restructuring. Information covering reforms and the current economic situation was compiled, summarized, translated, and placed at the "Korea's Economic Reform Update" website within the KIEP homepage (http://www.kiep.go.kr/ENGLISH/ekiephome.html).
While at times quality had to be sacrificed for the sake of making material available immediately, we are proud of what the team has accomplished. Therefore, upon the completion of the project on May 8, we decided to publish their efforts. This volume compiles the individual entries of the website. We believe this compilation provides a unique insight into the critical first six months of Korea's financial crisis, and will provide useful background material to anyone interested in early government responses to the country's financial crisis. -
China's Financial Reform: Current Status and Challenges
China's Financial Reform: Current Status and ChallengesJang-Kyu Lee/Tae-joon Kim/Jai-Won RyouThe essence of financial reform lies in the improvement of allocative efficiency in financing productive projects through household savin..
Jang-Kyu Lee et al. Date 1998.06.30
Economic reform, Financial policyDownloadContentSummaryChina's Financial Reform: Current Status and ChallengesJang-Kyu Lee/Tae-joon Kim/Jai-Won Ryou
The essence of financial reform lies in the improvement of allocative efficiency in financing productive projects through household savings. Until now, China's financial reform has been focused on institutional reorganization rather than deregulation and liberalization. Financial liberalization in China has progressed slowly in comparison with her Asian neighbors, with only a handful of foreign banks opening branches locally.
China's monetary authorities declared that they would overhaul the financial system in such a way that the state banks would clear their books of bad loans and start lending on purely commercial terms until the year of 2000. The challenges to achieving this goal are overwhelming: improving the functing of the central bank, commercialization of the banking sector, deregulation of interest rates, integrating domestic and international capital markets, and developing a modern foreign exchange control system. It remains to be seen whether the government-led financial system can transform itself into a market-driven one.
On the other hand, no clear evidence currently exists that would lead to the belief that Asia's financial woes will spread to China, nor is devaluation of the Chinese yuan is yet a foregone conclusion. Experiences of many developed and developing economies, however, imply that financial deregulation and reform may destabilize the financial system. The lack of both adequate surveillance and risk management, which is common under financial repression, often causes financial crisis. The success of Chinese financial reform depends on a synchronized reform of fiscal, industrial and corporate policies. In particular, it should be kept in mind that the structural adjustment of state enterprises and the establishment of property rights are prerequisites to the successful financial reform of a socialist economy such as China's. -
Trade Expansion Strategy and Trade Dispute Issues for the New Government
■ Korea's trade surplus for this year was forecasted to range between US$20.4 and US$27.7 billion. However, export growth in the first quarter has reached only 17.4% of what was expected from the devaluation of the Korean Won. Ko..
Chan-Hyun Sohn Date 1998.06.30
Trade policyDownloadContentSummary■ Korea's trade surplus for this year was forecasted to range between US$20.4 and US$27.7 billion. However, export growth in the first quarter has reached only 17.4% of what was expected from the devaluation of the Korean Won. Korea's terms of trade have deteriorated by 35% as well. The trade surplus reflects a sharp drop in imports of raw materials and capital goods, engendering the possibility of a collapse of the Korean economy's production base. Therefore, the government needs to implement appropriate export support measures as well as import incentives for raw materials if the Korean economy is to emerge from the current financial crisis.
■ The expansion of commercial banks' purchases of D/A export bills is essential for expediting exports. For this reason, it is important for the government to negotiate with the IMF so that the Bank of Korea can use some of its excessive foreign reserves to facilitate exports. In addition, to resolve the shortage of raw material imports caused by a lack of foreign currency reserves, active application of a foreign export insurance system, which is widely used by U.S. and Japanese export-import banks in support of their exports, is needed.
■ As exports surge into the U.S. and the EU following the East Asian financial crisis, the likelihood of trade friction in these markets is mounting. As a preemptive strategy to avoid possible trade disputes, the Korean government can consider a trade-off: Korea can expand exports today to the U.S. and EU markets in exchange for Korea's committment to open major markets tomorrow. It is also necessary to enhance transparency and objectivity of decision criteria whenever bankruptcy laws, assistance loans and related financial decisions are made. This will prevent the IMF, the World Bank and other interested parties from misunderstanding Korea's use of IMF bail-out money.
■ To effectively carry out the WTO's New Round negotiations, the government should adopt tariff reductions for manufactured goods and so-called new trade issues (investment, competition policy, environment, electronic commerce, etc.), thereby offsetting Korea's weak negotiating position in agriculture and services. In addition, Korea needs to utilize an indirect export support system and an industrial injury remedy system that should be implemented transparently and in compliance with WTO rules and provisions. -
Major Issues in WTO: Korean Perspective
Major issues in WTO: Korean perspective Kwanho Kim, Inbae Kim, Yoocheul Song, Hosaeng Rhee In chapter 1, the author considers 1997 WTO agreement on trade in financial sevices and finds out that, in the process of financial libera..
Kwanho Kim et al. Date 1998.05.02
Multilateral negotiationsDownloadContentSummaryMajor issues in WTO: Korean perspective Kwanho Kim, Inbae Kim, Yoocheul Song, Hosaeng Rhee
In chapter 1, the author considers 1997 WTO agreement on trade in financial sevices and finds out that, in the process of financial liberalization and financial market opening, it is vital that market principles are strictly applied. In spite of some side-effects, market principles must be maintained to ensure macroeconomic stability as well as prudential regulations of financial institutions. He emphasizes that the government's role in the financial liberalization must be confined to providing transparent policies and enforcing prudential regulations with consistency. Unnecessary intervention in financial institutions by the government will obstruct efficient resource allocation.
In chapter 2, the current WTO norms do not provide a clear answer as to whether environmental taxes imposed on inputs consumed in production processes can be adjusted at border. The author believes that it would be reasonable and plausible to modify related WTO rules so that environmental taxes on production inputs consumption of which causes global environmental problems such as climate change, should be allowed to be adjusted at the border. Considering the possible changes in related WTO rules, the author recommends that environmental taxes on inputs (especially energy) be introduced with gradually increasing tax rates according to a pre-determined time schedule. This would provide producers with economic incentive for developing environmentally-friendly production methods.
In chapter 3, the importance of the rules of origin (ROO) is growing in step with the strengthening of regionalism and globalization in production. However, the ROO in each country and trading bloc are different. As a result, the WTO decided to harmonize various ROO to make the common rules which confer the origin. The author considers the on-going issues in the WTO and tries to analyze the impact of the new ROO on Korean exports and industries.
In chapter 4, the current WTO Agreement contains provisions related to anti-competitive practices, though they are not comprehensive. The scope for non-violation disputes concerning competition policies is unclear at this stage. GATT Art. XXIII:1(b), especially the meaning of 'enforcement of measures' and 'reasonable expectation', needs to be clarified.
The first step to avoid unnecessary disputes related to competition policies is to identify and regulate private anti-competitive practices that are formed under the direct and indirect influences of the government.
In chapter 5, one of the most important decisions made at the first Ministerial Conference of the WTO in 1996 was the agreement to set up a working group on "trade and investment". Though the activities of the working group do not predetermine future directions, the process is likely to lead to negotiations and finally to an agreement on investment. Though the views of the developed and the developing countries often contrast, there is much room for convergence. This article examines the background and presents a view of possible future Multilateral Frameworks on Investment(MFIs). It also emphasizes the positive aspects of MFIs for the Korean economy.
In chapter 6, Regional trade agreements (RTAs) directly account for over 50% of world trade and this share will continue to grow. Not onlt is the number of RTAs growing, but the coverage of each RTA is broadening. In this context, Korea must actively participate in the WTO Committee on RTA (CRTA) to prevent discrimination against non-member countries. The author considers the meaning of WTO rules related to RTAs and trends in CRTA discussions in order to make the Korean standpoint in the CRTA. He also tries to find the new ways of rule making to make RTAs consistent with WTO multilateralism.
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