The emergence of China in the international financial order can be analyzed in three aspects: strengthening its position within the IMF system led by the West, establishing a new financial order through multilateral development banks (MDBs) like the AIIB and NDB, and the internationalization of the renminbi (RMB).
  China has steadily demanded an increase in its share in the IMF.
Following the effectuation of the reform plan in 2016, China became the third largest member of the IMF and the RMB is now included in the SDR basket. China also succeeded in launching the AIIB by formulating a consensus on the necessity for launching an alternative multilateral development bank in Asia where the ADB had a monopoly. On the other hand, RMB internationalization is executed based on a set of internal and external goals: stabilizing inflation and the engine for internal reform, and consolidating the international status of China. As a result, RMB settlements accounted for approximately 2% in world trade, while investment accounted for 16.6% in 2015. However, the RMB still accounts for only 0.6% of the global bond market, and only 1.1% of global foreign reserves. As such, although the internationalization of the RMB has achieved some degree of success, it is hardly keeping up with the extent to which China’s economic power is growing.
  For the China-led financial order to take root, China should continue to pursue further reforms and openness regarding free convertibility, capital accounts, and the exchange rate. China, however, is maintaining a cautious approach. Some of the reasons for this are as follow. First, there are concerns about an outbreak of financial crisis through the opening up of China’s capital account.
  Second, there are fears that there will be an increase of non-performing loans and decrease of interest rate in the event of non-interference by China’s financial authorities. As China also has tried to maintain a managed floating system and to allow capital opening only on an experimental basis, it will not be easy for it to expand its influence in the international financial market in a short period of time. Moreover, as the recent appreciation of the yuan has weakened, the impetus for internationalization of the RMB has weakened.
  The recently launched AIIB, NDB and the Silk Road Fund are financially contributing to China’s national strategy known as “The One Belt, One Road (OBOR)” initiative and the internationalization of the RMB. The AIIB and NDB are different from existing MDBs in that their establishment was mainly aimed at infrastructure investment, and that China holds a significant stake in these banks, as well as in that it plans to raise capital for these banks in yuan, and has established a quicker and easier loan procedure. It is also noteworthy that the AIIB is devoted to transportation and power infrastructure investments in countries along the Belt and Road, while the NDB focuses on renewable energy infrastructure investments in BRICS countries. SCODB, which is to be newly established, focuses on infrastructure investment in Central Asia. The Silk Road Fund, the national fund into which Chinese government bodies such as the State Administration of Foreign Exchange have invested, will act as a dependable fund for OBOR projects by swiftly and boldly making investment decisions. Since both the AIIB and NDB are MDBs, they have to go through certain procedures when reaching financing and investment decisions. However, they lack in internal capabilities such as the know-how to operate international organizations and understanding about the global infrastructure market.
  Therefore, financial support for the OBOR initiative is likely to be led by the Silk Road Fund for the time being, with the AIIB and NDB assisting. But these institutions face considerable challenges in the future, such as difficulties in finding bankable projects in Eurasia, as well as raising funds from domestic and overseas sources. The new financial order led by China will gradually become clearer if the institutions show remarkable progress, and if the internationalization of the RMB gathers momentum from the OBOR initiative.
  Meanwhile, China has realized some achievements in terms of RMB internationalization since 1997, such as the expansion of RMB settlement in world trade and the development of offshore RMB markets. The trade settlement function and the investment currency function of the RMB have also improved. Having been added to the SDR currency basket has elevated the global status of the RMB more than ever. Until recently, however, the Chinese government has prioritized economic growth and export expansion through currency depreciation rather than stabilizing the exchange rate for internationalization. Thus, China is faced with several tasks, such as minimizing the effects that the exchange rate shock accompanying RMB internationalization will have on its domestic economy, as well as responding to the disruption in the reform and opening-up policy caused by external factors, and managing prudent finance regulation and risks related to floating funds flow.
  In any case, the internationalization of the RMB is a national strategy of China, and the relevant system will be improved during its 13th Five-Year Plan. In addition, the countries along the Belt and Road are becoming increasingly clear as a key area of internationalization for the RMB, although discussions are underway to form a yuan currency bloc that will include China mainland, Hong Kong and Taiwan.
  Taking all the three abovementioned aspects together, it will be difficult for China to dramatically change the current international financial order in the short term, when taking into consideration the Chinese financial goals and internal capability, the speed of progress in AIIB’s projects, and the West’s containment policy toward China.
  Korea, however, will have to secure its own national interest by establishing mid- to long-term strategies and specific countermeasures against the new financial order, which is encapsulated in the newly launched international financial institutions and internationalization of the RMB.
  Above all, Korea needs to actively and accurately adopt a bandwagon policy, since China will carefully deal with domestic problems like insufficient financial capacity and the existing order centered on advanced countries. For example, Korea needs to evaluate and preemptively participate in institutions and organizations led by China, as it participated as a founding member of the AIIB. For this, it will be important to establish an organic cooperation system between the government and the private sector. In addition, Korea should pursue a so-called two-track strategy to lead the Northeast Asian Development Initiative while at the same time taking a proactive stance in Southeast Asia, Southwest Asia and Central Asia, where China-led financial order will be expanded. As a concrete measure, it will be necessary to prepare a plan to set up a differentiated offshore RMB hub from Hong Kong and Singapore by issuing a RMB bond through cooperation with Chinese financial institutions. Korea should take the lead in establishing the AIIB Institute and setting it up in Korea. In the mid- to long-term it needs to concentrate on establishing a Korea-led development financial institution which will focus on development in North Korea.
  The launch of the AIIB will be both a challenge and opportunity for Korea. However, the competitiveness and infrastructure market share of Korean companies are evaluated as quite low. Korean construction companies are lacking in financing capacity, technological skills, and business networks. Korean financial companies were evaluated to be lacking in financial advisory and arranging ability, deal-sourcing channels and networks, and in their track record and market reputation. Therefore, it is crucial for Korean companies to improve their competitiveness and work out strategies to expand their business globally in order to grasp business opportunities.
  The construction companies need to strengthen their competitiveness by nurturing professional manpower, enhancing their capacity to gather local information by dispatching overseas personnel, and collaborating with foreign companies. They should try to win orders for projects operated by the AIIB or included in the OBOR initiative, in both upstream and downstream sectors. The government should support the companies by lowering guarantee fees and commission, and by providing timely information on the MDB procurement market and orders.
  For the financial companies, it will be necessary to purchase the AIIB’s initial issuance of bonds, accumulate a track record through co-financing with the AIIB, and expand overseas branches in the six economic corridors of OBOR regions. In addition, they will need to reduce the risk of using guaranteed loans by K-ECA, increasing financing capability by using ODA funds, and establishing a deal sourcing channel with K-ECA. The government also must try to provide support by strengthening overseas financial cooperation, dispatching financial advisors, reorganizing diversified overseas infrastructure investment institutions, and setting up specialized funds.
  As for North Korea, it will be difficult for it to join the new order led by China since North Korea is not a member of the AIIB and the international community continues to level sanctions against it.
However, Korea should consider establishing a development financial institution (Northeast Asia Development Bank) for North Korea’s development and unification costs from a mid- to long-term perspective. Once the North Korean nuclear issue has been resolved, this institution can become a unified Korea-led development institution. It could also lead cooperation with the AIIB in Northeast Asian development, including North Korea.
  In conclusion, the China-led new financial order is still in its infancy. In terms of the OBOR initiative, projects in Southwest Asia are speeding up while projects in Southeast Asia are slowing down. This is because of the expansion of economic power and border disputes in the South China Sea, and neighboring countries are wary of the expansion of China’s influence. In the same vein, China-led financial institutions such as the AIIB and NDB are also hampered by a lack of support from neighboring countries. The internationalization of the RMB is still in its development stage, and it seems premature to discuss the RMB currency bloc, as the Chinese government might establish a more sophisticated strategy for the regional currency order to establish a considerable position in the international monetary order.
  On the other hand, there has been some controversy over the fact that Korea has become overly involved on the Chinese side by joining the AIIB. However, Korea needs to consider its national interests and actively participate in the emergence of a new financial order led by China.
  Korea should discuss policy coordination with China preemptively, especially while China remains in an uneasy situation due to its lack of international financial capability and delays in OBOR projects due to the vigilance of neighboring countries. Ensuring that Korea gains strategic value from the forming of a new financial order will correspond to our national interests. 

Executive Summary

1. Introduction

2. Measure of Inter-Industry Distance

3. The Empirical Analysis
3-1. Model Specification
3-2. Data Description
3-3. Empirical Results

4. Concluding Remarks

References

Appendix 

We propose a new measure of inter-industry ‘distance’. This is constructed a la Antras et al. (2012). While they measure the distance of an industry from its final use ？ what they call ‘downstreamness’ of an industry ？ we measure the distance between a pair of industries. Our proposed index is a measure of input-output linkages between industries that incorporates a ‘distance’ flavor. Our measure distinguishes the number of vertical production stages that an industry’s product goes through until it is finally used by another industry by assigning larger weights to the value of input use with longer production chains.
Hence our measure contains more information on the relation between two industries along the vertical production chain. We use this index to construct an aggregate measure of ‘industry connectedness’ of regions in the U.S. It measures the degree of industrial linkages of a region. We then empirically establish that each region’s labor productivity is positively associated with the ‘industry connectedness’. The result contributes to the large literature of agglomeration economies that the industrial linkage is one of the main sources of agglomeration economies and productivity growth, as emphasized by Marshall (1920). It also suggests that our index can serve as an alternative measure of the industrial linkages.

Keywords: Inter-industry Distance, Regional Growth, Input-Output Linkages
JEL Classification: F43, F63, O11
 

Acknowledgements

Notes on the Contributors

1. Study on the Marine Development Cooperation between China and South Korea
Cao Zhongxiang

Introduction

Body

Conclusions

References

2. Study on the Innovation Driven Industrial Upgrading in Korea
Sheng Chaoxun

Introduction

The Course of Industrial Upgrading Driven by Innovation and

the Main Measures of South Korea

Chinese case: The New Situation and New Characteristics of Innovation Driven Industrial Upgrading in China

Conclusions

References

3. Gravity, Borders, and the Potential for Economic Integration in the Asia Pacific: Evidence from Korea and Russia
Kiril Tochkov

Abstract

Introduction

Methodology

Data

Results

Potential Determinants of the Border Effects

Conclusions

References

4. Korea’s FTA Strategy and its Implications to China
Zhou Mi

Introduction

Body

Conclusions

References

5. Are China’s Exports Crowding Out or Coexisting with Korea’s Exports in the Arab Region?
Nashwa Mostafa Ali Mohamed

Abstact

Introduction

The Performance of Arab Imports

Determinants of Arab Imports Demand Function

Relationship between Chinese and Korean Exports towards Arab Region

The Results

References

6. Free Trade between Korea and Mexico: Obstacles and Advantages
Adolfo Alberto Laborde Carranco

Summary

Introduction

Mexico-South Korea Bilateral Relations (1960-2014)

Economic Relations between Mexico and South Korea

Conclusions

Appendix

References

Mexicon Figures

7. The Role of MIKTA: Understanding Korean and Turkish Perspectives
Selcuk Colako？lu

Introduction

MIKTA: A New Global Initiative

Conclusion

References

8. China-US Bilateral Investment Treaty (BIT)
Xu Man

Introduction

The Interest Demands of the U.S. from the China-US BIT

The Interest Demands of China from China-US BIT

Negative List as the Core Issue and Sticking Point: from the Perspective of Reform and Opening Up

Suggestions on BIT Negotiation Strategy

Conclusion

References 

In 2009, Korea Institute for International Economic Policy (KIEP) launched “Visiting Fellows Program (VFP)” with the view of advancing cross-border exchanges of knowledge, information, insights and expertise.
Since its inception, the VFP has demonstrated that sharing thoughts and ideas through face-to-face contacts and dialogue works as a catalyst for enhancing mutual understanding among scholars and professionals with diverse background.
By successfully implementing the VFP for the past 8 years, KIEP has been motivated to assume the role as a hub for international economic research in the region. As a host of the program, KIEP has many mandates. One of those tasks is to let more people know what has been accomplished through the program and how valuable it is.
In an effort to do so, KIEP has published series of research every year. This volume, the 7th of its series, contains eight research papers contributed by 2015 Visiting Fellows.
Publication owes many debts. Here I acknowledge just a few of them. First of all, I must express my deepest gratitude to the 2015 visiting fellows for their outstanding performances. My special thanks also goes to Ms. RIM Jeewoon and the staffs of the KIEP Publishing Team who worked very hard for the publication of this volume.
The views expressed in this publication are the views of the author and do not necessarily reflect the views or policies of KIEP. KIEP does not guarantee the accuracy of the data included in the publication.

 

[ 대상 ]

Financial Intermediaries, Volatility, and Cross-Border Lending: Empirical Evidence from the Euro Area
RYU DonghanㆍSON Jang Ho

Ⅰ. Introduction

II. Literature Review

III. Econometric Framework and Data Description

IV. Empirical Results

V. Conclusion

References

 

[ 우수상 ]

EU Energy Policy Agenda and European Commission: The Case Study of Energy Union Agenda-Setting Strategy
SOHN Hyodong

Ⅰ. Introduction

II. European Commission and (Energy) Policy Agenda-Setting

III. Case Study of European Commission Agenda Strategy: Energy Union

IV. Discussion and Conclusion

References

 

The KU-KIEP-SBS EU Centre, an education & research consortium sponsored by the European Commission, was established on May 2014 by three partners: Korea Institute for International Economic Policy (KIEP), Korea University, and Seoul Broadcasting System (SBS), The KU-KIEP-SBS EU Centre is dedicated to make contribution to enhancing interest in Europe and to expanding research base in EU area studies.
Therefore, the KU-KIEP-SBS EU Centre hosted “The 2nd KU-KIEP-SBS EU Centre Research Paper Competition on EU Studies” and this book includes two best papers from the competitions. The KU-KIEP-SBS EU Centre will contribute to analyzing issues on European integration, the economic and political dynamics in EU and promoting cooperation between Korea and EU through this research competition.
 

Executive Summary

Contributors

1. Introduction 

2. Korea and Global Imbalances

3. Data and Methodology

4. Decomposition of Korea’s Current Account Surplus

5. Policy Implications

6. Conclusion

References
 

Some countries have persistent current account surplus, contributing to global imbalances up to a level that is worrisome. For example, Germany has been continuously experiencing current account surpluses since 2002, amounting to 8.4% of GDP in 2015. China has never experienced current account deficits since 1997, the year that data is first available. Japan's record is even longer; its consecutive current account surplus started from 1981. Recently, Korea joined this large current-account surplus club: since the currency crisis in 1997, Korea's current account balance has been continuously in the black, expanding even more in these recent years.
  In this paper, we present an empirical methodology that explains how current account balances are determined and by employing it, try to diagnose factors that account for Korea's current account surplus. In fact, the IMF has introduced a methodology, the External Balance Assessment (EBA: Phillips et al., 2013), to assess exchange rate and current account gaps that are defined as the difference between current levels and those consistent with fundamentals. For example, the 2016 External Sector Report, by utilizing this methodology, demonstrates that Korea's real effective exchange rate in 2015 was 4 to 12 percent undervalued than the level consistent with fundamentals.
  While the IMF's EBA is a state-of-the-art methodology that incorporates major studies in the literature, we feel that it has some limitations when analyzing the movements of Korea's current account balances. The method implicitly assumes that the current account surpluses of these countries will be substantially reduced by changing the exchange rate. However, the current account surpluses of Korea cannot be explained by the exchange rate alone. After the global financial crisis, despite rapid appreciation of the real effective exchange rate, Korea's current account surplus has been continuously increasing.
  Korea experienced a currency crisis in 1998. Since then it has experienced continuous current account surpluses. The current account surpluses just after the crisis were extremely helpful for the economy to recover from the crisis. Managing a modest level of current account surpluses has also been beneficial for the economy in preventing future crises. However, Korea's current account surplus in 2015 amounted to 7.7% of GDP, causing a concern that it may be too excessive. This exorbitant reliance on external demand can esca-late political pressures from trading partners to appreciate the exchange rate. It is also argued that maintaining more balanced demand sources by giving domestic demand a greater role is essential for a sustained growth path.
  In this paper, we investigated underlying reasons as to why Korea's current account surpluses are widening. We found that the upward trend in Korea's current account surpluses is essentially explained by demographical changes it is currently experiencing. Moreover, we show that since Korea's population is rapidly aging, its current account surplus is expected to disappear by 2042 as it becomes one of the most aged economies in the world. In fact, demographical changes are so powerful that they explain quite successfully the trend of current account balances of other aged economies such as Japan, Germany, Italy, Finland and Greece as well. However, demographics do not explain cross-country differences in the level of current account balances, i.e. the high level of Korea's current account surpluses is mainly explained by a country fixed effect.
  When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, in order to reduce current account surplus by 1 percentage point, a whopping 12% depreciation is needed. Since other economic variables are yet included as explanatory variables, this can be considered to be the maximum estimate of the effect of the exchange rate changes. If it is true that Korea's current exchange rate is 4 to 12 percent undervalued than the level consistent with fundamentals, it is impossible to reduce Korea's current account surplus to a reasonable level by adjusting the exchange rate alone. Another possibility to reduce current account surplus is expanding fiscal policies. We find, however, that the impact of fiscal adjustments on current account surplus is even more limited. According to our estimates, reducing current account surplus by 1 percentage point requires a 5-6 percentage points increase in budget deficits (as a ratio to GDP).
  The above impacts of exchange rate and fiscal policy adjustments are estimated without considering the endogeneity of these policy variables. If we allow endogenous movements of these variables, the impact of exchange rate adjustment is 1.6 times larger, while that of fiscal policy decreases so that it is no longer statistically significant.
  When we add other economically fundamental variables such as GDP gap, oil prices, net foreign asset and so on, they contribute to explaining short run fluctuations without much improvement in explaining the trend nor country fixed effects. On the other hand, while the upward trend in Korea's current account surplus since 1997 is mainly explained by demographical changes, the current level of current account surplus, i.e. 7.7% of GDP, is placed quite above the fitted line derived by the economically fundamental variables including demographical changes.
  This idiosyncrasy of Korea's current account surplus seems to be related to increasing saving propensity of households especially among aged people. However, we will need further detailed analyses for more rigorous evidence to support this argument.

Executive Summary

Contributor

1. Introduction

2. Literature

3. Government Spending Policy Uncertainty Index: Construction and Evaluation

4. Econometric Method and Data

5. Results

6. Discussion

7. Concluding Remarks

Appendix

References
 

In this paper, I empirically examine the effects of uncertainty about government spending policy on economic activity using U.S. time series data. To this end, I constructed government spending policy uncertainty indexes and estimate proxy SVAR model. Proxy SVAR model with constructed indexes shows that an increase in government spending policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, the results imply that the commonly adopted recursive SVAR model in literature on policy uncertainty systematically underestimates the adverse effect of government spending policy uncertainty because of the endogeneity issue. One policy suggestion based on the empirical finding is clear announcement of future government spending path.

Keywords: Policy Uncertainty, Government Spending Policy Uncertainty Index,
Government Spending Policy Uncertainty Shock, Proxy SVAR
JEL Classification: C32, E32, E62 

Executive Summary

Ⅰ. Introduction

Ⅱ. Gains in Labor Productivity from Trade Liberalization

Ⅲ. Economic Effect of Labor Productivity Gain by Trade Liberalization

Ⅳ. Results

Ⅴ. Concluding Remarks

Appendix

References
 

This paper uses the most recent Global Trade Analysis Project (GTAP) DB version 9 and a recursive dynamic computable general equilibrium model (CGE) to analyze the economic effect of enhancement in labor productivity that trade liberalization has in the APEC. In particular, unlike the previous studies that apply tariff reduction, this paper focuses on the changes in labor productivity reported by Ahn et al. (2016). The results show an increase in the real GDP of countries with gains in labor productivity. In particular, the results of this study indicate that the benefits of trade liberalization would be even larger for developed countries with a similar level of gains in labor productivity. It is also suggested that the efficiency of production structure or scale of economy may work for developed economies. In conclusion, this paper suggests another reason to pursue trade liberalization within in the APEC region.

 

Keywords: Labor Productivity, Dynamic CGE Model, Trade Liberalization, Real GDP
 

Executive Summary

Ⅰ. Introduction

Ⅱ. Why ‘Inclusive Integration’?

1. What is ‘Inclusive Integration’?
2. Trade Liberalization and Inequality
3. Cost of Less-Inclusive Integration

Ⅲ. FTAAP: Current State of Play and Missing Link

1. Pathway to the FTAAP
2. Assessment of Scenarios
3. Missing Link in the Current Scenarios

Ⅳ. Strategy for Realizing Inclusive Integration with the FTAAP

1. Negotiations Front
2. Domestic Policy Front

Ⅴ. Conclusion

References 

   While the pathway to the Free Trade Area of the Asia-Pacific (FTAAP) has been intensely discussed with a focus on its architecture, something has been missing: how to link trade and investment liberalization with inclusive growth of the APEC economies. The APEC economies have been increasingly open to trade and investment, but domestic distortions persist. The consequences have been less beneficial effects of trade and investment liberalization to domestic stakeholders. In particular, less-advantageous minorities have become more vulnerable to external economic shocks. If these failures are not urgently and seriously addressed, political support for further integration towards the FTAAP will continue to weaken. This reckoning has led to this paper.
   This paper offers policy options to make the FTAAP more conducive to inclusive growth of the APEC economies. Policy proposals are offered in two fronts. At negotiations, a grand compromise between advanced and developing economies should be sought to make negotiations agenda more comprehensive and balanced. Under this grand bargain, protected sectors in advanced economies ? potential exporting sectors for developing economies ? would be opened in exchange for more commitment in new rules by developing economies. To make this grand bargain politically possible, each side should do its homework domestically. Empowering human capital and skill upgrading programs will be urgent and imperative, along with designing more effective trade adjustment assistance programs. To enhance the possibility of achieving this comprehensive and balanced agenda, and to ensure all are on board, a two-track commitment should be designed. At the domestic front, major distortions which have obstructed a more inclusive integration in the past should be urgently corrected. Specifically, policy preference for incumbents should be removed; labor markets should become less rigid; capital markets should be accessible to all; and social safety nets should be strengthened.
 

 

  The Northeastern China actively started implementing customs facility modernization along with transport development projects since 2010. Countries which borders with the Northeastern China, Russia Far East, Mongolia and North Korea also joined cross-border infrastructure projects mostly initiated by China while Korea’s participation is still limited.
  The purpose of this paper is to investigate the recent cross-border infrastructure projects and the financial source in the Northeast Asia. In particular, this paper investigates the current status of transport, energy, customs construction projects, planned and implemented at the northeastern part of China which borders with the Russian Far East, Mongolia and North Korea.
  The characteristics of the recent cross-border infrastructure projects can be summarized as follows. At First, the recent implemented projects were mainly initiated and funded by China. Secondly, projects initiated and funded by China were better being implemented. Third, a majority of projects were initiated based on political reasons rather than economic feasibility.
  Cross-border infrastructure projects in Northeast Asia have produced limited results so far due to different national interest, but as economies in this region are highly complementary, infrastructure development is expected to gain momentum in the long run. In this aspect, the paper suggests to utilize all possible financial cooperation options which includes the GTI(Greater Tumen Initiative) scheme, an intergovernmental cooperation mechanism among four Northeast Asian countries as well as bilateral, existing funding cooperation scheme to further promote infrastructure projects in the region.
 

Preface

Chapter 1. Introduction - Are SEZs and Business Hubs the Best Tools for Development?(Douglas Zhihua ZENG and Hyung-Gon JEONG)

1. Special Economic Zones
2. Business Hubs
3. Structure
4. SEZs and Business Hubs Are Contextualized Policy Tools

Chapter 2. Special Economic Zones as a Tool of Industrial Development: case of Masan FTZ in South Korea (Hyung-Gon JEONG and Jong-Hun PEK)

1. Introduction
2. Export Processing Zone as a Tool of Industrialization: Case of Seven Zones in South Korea
2-1. Background
2-2. Evaluation of the FTZ Policy in South Korea
2-3. The Success Factors of Masan FTZ
2-4. Challenges Regarding Continued Success

Chapter 3. Free Economic Zone as a Tool of Transition to an Innovative Economic Growth: Case of IFEZ in South Korea (Hyung-Gon JEONG and Jong-Hun PEK)

1. Introduction
2. Incheon Free Economic Zone: Its Performances and Future
3. Evaluation of Incheon Free Economic Zone (IFEZ)
3-1. Evaluation of Development
3-2. Evaluation of FDI Attraction
4. Possible Measures for Success of IFEZ
4-1. Improving Competitiveness by Attracting More Domestic Firms
4-2. Consolidation through De-designation
4-3. Strengthening Linkage between SEZ Policy and Overall Industrial Development Policy
5. Key Lessons Learned from Korean Special Economic Zone Policies
5-1. Offering Overarching Development Strategy and Vision for SEZs
5-2. Designation of SEZs Should Be Based on Economic Demand
5-3. Reducing the Overlaps among SEZs
5-4. Establishing an Efficient Governance System
5-5. One-Stop-Shop Service and Customized Support
5-6. Building an Outcome Evaluation and Exit System Appendixes

Chapter 4. Innovation and Structural Transformation: The Case of Shanghai Free Economic Zones and Free Trade Zones (Guangwen MENG and Douglas Zhihua ZENG)

1. Economic Development in Shanghai
1.1 The Rapid Growth of Economy
1.2 Service-oriented Industrial Structure
2. Development of Shanghai Free Economic Zones
2.1 Phase of ETDZs (1984-1990)
2.2 Phase of Comprehensive FEZs (1991-2012)
2.3 Phase of Pilot Free Trade Zones (2013-Present)
3. Successes and Challenges of Shanghai FEZs
3.1 Factors Leading to Success of Shanghai FEZs
3.2 Challenges Faced by Shanghai FEZs in Its Development
4. The Major Lessons Learned

Chapter 5. Invitation Strategy for Cutting Edge Industries through MNCs and Global Talents: The Case of Singapore (Kim Song TAN)

1. Introduction
2. Business Hub for MNCs: 1960s to Late 1990s
3. Business Hub for Global Creative Talents: From Early 2000s to Date
4. The Singapore Experience: Success Factors and Lessons
5. Conclusion
Appendix

Chapter 6. Hong Kong’s Business and Financial Hub Development: Factors, Challenges and Policy Implications (Yan DONG)

1. Introduction
2. Profile of Hong Kong Business and Financial Hub
3. Hong Kong Financial Sector’s Development History
4. Key Factors for Success
4.1 Policy Factors
4.2 Internal Factors
4.3 External Factors
5. Challenges regarding Continued Success
5.1 Regional Challenge from Other Business and Financial Hubs
5.2 Trade Modes Changing and Prevalent of Intra-firm Trade 239
5.3 Industrial Hollowing and Comparatively Slow Economic Growth
5.4 Economic Independence
6. Key Lessons Learned
6.1 Innovation and Industry Promotion Polices are Important
6.2 Free Market Environment Invigorates the Economy
6.3 Sound Legal System and Effective Regulation Policies Should Be Adopted
6.4 Fair Competition are Embodied in Economic Policies
6.5 Skilled labor and Talented Professionals are Crucial to Industry Development
6.6 Improving the Autonomy of the Economy
7. Policy Implications
7.1 Foster an Innovation-led Growth Mechanism
7.2 Further Optimize Free Market Economic Environment
7.3 Promote Manufacturing Sector Development
7.4 Construct a Politically Stable Society
7.5 Strengthen Economic Relations with Mainland China
7.6 Provide Better Physical Infrastructure
7.7 Harmonizing the Relation between Hong Kong, Shanghai and Beijing

Chapter 7. Building a Successful Logistics and Production Hub: The Case of Dubai with Special Reference to the Jebel Ali Free Zone (Sherif MUHTASEB)

1. Introduction
2. Profile of Dubai and the JAFZ
3. Background and History of Zones in Dubai
4. Key Factors for Success
5. Challenges for Continued Success
6. Key Lessons
7. Policy Implications

Chapter 8. Policy Implications of SEZ and Business Hub Development in Asia (Douglas Zhihua ZENG and Hyung-Gon JEONG)

1. Key Elements of a Holistic Approach
2. A Sound Legal and Institutional Framework
3. An Attractive Business Environment
4. Careful Planning, Design, and Operations
5. Persistent Skills Training
6. Constant Technology Learning, Innovation, and Industrial Upgrading
7. Strategic Location and Strong Connectivity
8. Linkages With Local Economy
9. A Good Balance Between Industrial Development and Social/Urban Development
10. A Monitoring, Evaluation, and Exit System
11. Some Factors Specific to SEZs or Business Hubs
12. Conclusion
References

Executive Summary 

Around the world, there are 4,300 special economic zones throughout more than 130 countries: the zones in Asian countries have been quite successful, while on the other hand, those of Africa and some other countries have not performed well so far. Especially, some special economic zones and business hubs in Asian countries such as South Korea, China, Hong Kong and Singapore, as well as Dubai, have been quite successful in terms of innovative and dynamic economic growth. Not all of the zones in the countries were successful: some of those were recognized as so-called “white elephants.” As successful cases received more and more attention, however, there has been a steady increase in the need to learn the secret of success from these cases in terms of policy implications. This paper was designed to fulfill these needs, and especially to be a fine policy guide book for developing countries which will introduce special economic zones as a way to boost their economies in the near future.

The subject cases of this study include the Masan Free Trade Zone and Incheon Free Economic Zone in Korea, the Shanghai special economic zone in China, Hong Kong, Singapore, and Dubai. In this study, special economic zones are classified into two types, industrial zones and business hubs, analyzing each type’s success factors and policy implications. The examples of successful SEZs in industrial zone-type included the Masan Free Trade Zone and Shanghai special economic zone. These zones are the representative SEZs which have functioned as industry and economy boosters, along with the industrial clusters of the surrounding areas. The examples in business hub-type zones were Singapore, Hong Kong, and Dubai. The Incheon Free Economic Zone in Korea was also considered in the same category, which focuses on switching to a new innovative economy and growing into a business hub for the Northeast Asian region.

In general, the types of special economic zones in a certain country are closely related to the level of its economic development. Most of the industrial zone-type special economic zones have begun in labor-intensive industries, and then shift into a more complex form of SEZ as the income level increases. Especially, the zones gradually evolve into a business hub which covers all the features of a city, such as better circumstances for living, R&D environment, and superior environment for investments. In general, special economic zones based on manufacturing industries, the so-called “1st generation of special economic zones,” have less forward and backward industrial effects through linkages with the domestic economy, and are very dependent on the financial support of the central government. However, in modern times, more and more countries are now introducing new special economic zones in areas which have strong linkages with the domestic economy and relaxed regulation systems. For example, special economic zones in China have functioned well as “test-beds” for new policies and deregulations, as well as for maximized freedom of economic activities. These are the 2nd generation of special economic zones. Global environmental change and the concern about the sustainability of the environment have led to a new type of SEZ, which is a high-ranked and correlated type of SEZ. It can be called the 3rd generation SEZ, which is a convergence of the first and second types of SEZs, pursuing such goals as low carbon, green growth, and eco-industrial parks. As such, regardless of the generation of the special economic zones, the success of special economic zones is highly dependent on a certain country’s economic circumstances and comparative advantages. Based on this precondition, the long-term development plan of the country, commercial feasibility, target markets, accessibility of SOC, skilled workers and technical innovation ability have become additional success factors.

First, as a part of this study, the Masan Free Trade Area (Chapter 2) and Shanghai special economic zone (Chapter 4) were introduced as successful industrial zones. The Masan Free Trade Zone has been rated as one of the most successful examples since it was first designated as an export processing zone in 1971. It has contributed to the advancement of Korea’s export industries in conjunction with neighboring industrial clusters, greatly facilitated by Masan’s superior geographical location. It has also contributed to the dynamic growth of Korean companies through job creation, technology transfer, and technical cooperation between domestic and foreign companies such as Sony and Nokia. Due to its great achievements, the Masan SEZ is considered to be one of the best EPZs (Export Processing Zone) in the world and was chosen as a success model of promoting foreign investment policy for developing countries by the World Economic Processing Zone Association.

In China, the central government has designated a number of special zones since 1980 to carry out economic reform. The purpose of the zones was not only to attract foreign investment zones to boost manufacturing industries, but also to create test-beds of to compare the market economy against the formal socialist planned economy. Shanghai has designated various types of zones depending on each phase of the economic development, and has made steady efforts to make Shanghai the center in terms of economy, finance, trade, logistics and innovative economy through mutual cooperation between the zones. In this study, Economic and Technological Development Zones, Pudong New Area, Export Processing Zones, and the recently designated Free Trade Zone were included as the subjects. The study aims to indicate the roles of special economic zones in the process of transition to a dynamic economic development and innovation in the economy, the success factors, and the problems they face.

Business hub-type special economic zones are bigger than industrial zones, designated in areas where trade and finance, logistics and services activity is very intense. Incheon Free Economic Zone, Hong Kong, Singapore, and Dubai, which aim to be the business hubs of Northeast Asia, serve as a logistics and financial hub as well as the regional headquarters of multinational companies. Business hub-type zones require a substantial period from their development to success. In order to attract multinational companies, a considerable period of time is required to establish confidence in the region’s bright future. Hard infrastructures such as ICT, transport and logistics infrastructure, better training conditions, and living environments that allow residents to enjoy their leisure time are very important. In addition, regulation should be minimized, English should be the official language, and efforts should be made to insure soft infrastructures, such as convenience in administration processes, are well developed.

The representative examples of successful business hubs in Asia would be Singapore and Hong Kong. Singapore has rapidly grown from an underdeveloped country into one of the most affluent countries in the world within a mere 50 years. Since its independence in 1965, it has transformed into one of the most dynamic and innovative economies, and one of the most successful business hubs in the world today. All institutions in Singapore work with the most transparent and advanced systems, and operate training facilities which can foster skilled workers and professionals. In particular, the nation is equipped with the hard and soft infrastructures mentioned above as a precondition of business hubs. With the government’s active support and one-stop services, a business-friendly environment and excellent human resources, it is recognized as one of the most successful business hubs in the world, with its geographical advantages. The fifth chapter of this report provides an analysis of this method of dynamic and innovative economic growth as a business hub. An analysis on Singapore’s economic policies after the 2000s, which have focused on the transition to an innovative economy, is also included in the chapter. Hong Kong is another city located in the most advanced and opened area, which operates as a representative business hub for the Asian region. Chapter 6 of this report indicates how Hong Kong has developed into Asia's business and financial center, and into a dynamic and innovative economy.

Dubai is one of the most dynamic and efficient business hubs in the world thanks to its various geographical advantages, linking Asian and European continents. The success of Dubai was based on huge investment in the infrastructure sector by the Dubai government, which has made Dubai one of the world’s most important trade hubs in a relatively short period. Dubai International Airport is the largest airport in the world, attracting 70 million passengers a year. Air freight has also increased exponentially ─ approximately 250 million tons of logistics passed through Dubai in 2015. The Jebel Ali Free Zone (JAFZ), founded in 1985, has been rated as the most successful free trade area in the world and become a benchmark target due to its success based on global linkages (connectivity) and the supply chain. The JAFZ currently generates approximately 20% of Dubai’s total GDP, and contributes to expanding the manufacturing base and the dynamic growth of Dubai’s economy. Chapter 7 provides a detailed analysis on the JAFZ in conjunction with the success story of Dubai. In particular, the success factors of the JAFZ, its roles in the process of Dubai’s growth into a global logistics hub, and JAFZ’s current challenges and the policy difficulties are discussed.

Finally, the Incheon Free Economic Zone is included as a subject of this study because it is seeking to transition into an innovative economy and attract foreign investors through deregulations, and finally aims to become a Northeast Asian business hub. South Korea designated the Free Economic Zone in 2003 as a measure to shift toward higher value-added industries and strengthen service industries after the Asian financial crisis in 1998. The Free Economic Zone was dedicated to attracting foreign investment by ensuring the maximum level of economic freedom and improving living environments for foreigners. The background of promoting the policy was to become a business hub of Northeast Asia, because Korea can utilize its geopolitical and economic advantages, located between Japan and China. The Incheon Free Economic Zone, introduced in Chapter 3 of this report, has the highest potential for success among the eight free economic zones in South Korea due to its advantageous geographical location. Incheon Free Economic Zone is drawing a huge amount of attention in terms of Korean SEZ policy, and a number of international media have expressed their interest. The Incheon Free Economic Zone is close to Incheon International Airport, which is one of the most competitive airports in the world in terms of service, and is also adjacent to Seoul and other industrial clusters in Korea, as well as to China. Based on this superior infrastructure, service industries and high-tech industries have been fostered intensively. Incheon Free Economic Zone serves as a test bed for the introduction of new technologies, as well as a shelter for leading research institutions for R&D, world-class universities, and a number of international organizations. Despite the achievements so far, many challenges lie ahead for the Incheon Free Economic Zone. This study provides a wide range of policy proposals for the success of the Incheon Free Economic Zone.

Chapter 8 provides the conclusion, drawn from the analysis of the success stories of the six special economic zones, and a summary of key success factors. In conclusion, the success factors of industrial zones and business hubs are each explained, together with the appropriate types of special economic zones for each step of economic growth. In addition, a well-run special economic zone policy enables dynamic and innovative growth, but an inappropriate special economic zone policy leads to a waste of high costs and effort, ending with a “white elephant” situation. The policy implications provided in the conclusion of this study were derived from the case studies in the previous chapters.