About KIEP
President’s Message
About KIEP
Vision & Mission
Organization
History
KIEP 2014

 

Infographics
KIEP in Policy
KIEP in the Media
KIEP in the World

 

Highlight 2014
Projects Noted for Excellence in Policy Contribution for 2014

 

Bright 2014
Research Goals in 2014
Project Composition & Performance for 2014
Research Achievements by Category for 2014
International Macroeconomics & Finance
International Trade
International Cooperation Policies
Asia-Pacific Studies
Europe, Americas and Eurasia Studies

 

Flight 2015
2015 Research Goals
The Way Forward in 2015

 

Settlement of Accounts for 2014
Statement of Revenues,Expenditures, and Changes in Fund Balance

The 2014 annual report is a compilation of our in-depth studies and reports to give readers clear information on what we have done over the year. KIEP’s research spans a broad range of economic issues - i.e. the Korean economy and its increasing relevance to the global economy; new global challenges, such as climate change,
development aid, and global commons; economic integration in East Asia and in Asia-Pacific; Korean economic paradigm and income disparity; and country comparison of issues, such as employment and population aging.
KIEP’s work will gain importance as a reliable source of information and analysis in shaping public policies. KIEP remains committed to supporting the government in its economic policy development. On behalf of KIEP, I extend my heartfelt gratitude to all for the support and keen interest in our work.

Executive Summary

1. Introduction

2. Benchmark Model
2.1 Preferences
2.2 Production and Learning Technology
2.3 Entrepreneur
2.4 Worker
2.5 Occupational Choice
2.6 Competitive Equilibrium
2.7 Accumulation Thresholds

3. Two Regimes of Growth Paths
3.1 Endogenous Growth Regime
3.2 Neoclassical Growth Regime
3.3 Tax Policies for Regime Change

4. Small Monitoring Costs
4.1 Worker-Capitalists
4.2 Occupational Choice

5. Income Distribution Policy and Growth
5.1 Model with Imperfect Competition
5.2 Market Distortion and Income Distribution Policy

6. Conclusion

References

This paper develops a model which allows us to analyze the effect of policies that influence income distribution between capitalists and workers (such as taxes and market imperfections) on the log-run growth path of an economy. More specifically, we present a heterogeneous agent model where some agents choose to be capitalists to specialize in accumulating physical capital and others become workers accumulating human capital. An important feature of this model is that it can be reduced to either an endogenous growth model or Neoclassical growth model. For a range of the parameters of technology and policy variables, the model generates a balanced growth path where capitalists continue to accumulate physical capital and workers human capital, as in AK model of endogenous growth. For a different range of parameters, the model generates a steady state along which both capitalists and workers do not increase physical or human capital any longer as in Neoclassical growth models. This model, therefore, can be viewed as a synthesis model of endogenous and neoclassical growth.
An advantage of this synthesis growth model is that it allows us to explain the shift in the growth path in response to policy shocks that affect the capital-labor income distribution. This growth model explains the change in the path from sustained growth to zero growth as a regime change from endogenous growth to Neoclassical growth regime, and that from zero to sustained growth as a regime shift of the other way around. Based on the synthesis growth model, we show that changes in labor income share or government policies that make such changes may induce a shift in the growth regime and subsequent change in the balanced growth path. The policies of capital-labor income distribution include those of changing labor and capital income tax rates and regulations on monopoly or monopsony. The monopolist firms which have monopsony power in labor market can choose the wage rate rather than take it as given. Thus they may drive the wage rate down below labor productivity, which would induce a decline in labor income share and zero growth. We show that in this situation the government policy of regulating monopoly/monopsony or raising wage rates may raise labor income share, and by doing so, trigger human capital accumulation and an ensuing shift to a path of sustained growth.

Acknowledgements 

Notes on the Contributors 
 
1. Diversification of Bilateral Foreign Economic Relations between Uzbekistan and Korea / Ibrohim Umarov
Introduction 
Analysis of Economic Development of Uzbekistan 
Perspectives of Further Development of Uzbek-Korean Economic Relations 
Conclusion 
References 

2. Political Economy of SAARC and Regional Trade Integration: The Recent Ontogeny and Future Prospects / Khalid Ahmed
Abstract 
Introduction and Background 
Regional Cooperation to Free Trade Agreement 
Trade Integration in View of Political Economy 
Regional and Intra-Regional Trade in South Asia 
Collective Challenges and Conflict Resolution 
Future Perspective: Some Concluding Remarks 
References 

3. India-Korea CEPA: Analysis of Industrial Competitiveness and Environmental Implications / Sudhakar Yedla
Introduction 
Pattern of Trade between India and the Republic of Korea 
Cmprehensive Economic Partnership Agreement (CEPA)？Basic Constructs and Key Features 
Impacts of CEPA on Trade between India and Korea 
Qualitative Analysis of CEPA's Impact on the Environment and Natural Resources Base in India and Korea 
Concluding Remarks
References 

4. Iranian Economic Policy after the Election (2013) / M. H. Mozafari
Introduction 
Various Aspects of Iranian Economic Policies 
Conclusion 
References 

5. Research on Counties' Economic Development of Jilin Province / Ni Jinli
Introduction 
Body 
Conclusion 
References 
Appendix 

6. Industrial Policies: A Comparison between Korea and Turkey / Murat A. Yulek
Introduction 
Turkey's Industrial Strategy in Historical Perspective 
Korean Industrial Strategy in Historical Perspective 
Assessment of Industrial Policies in Turkey and Korea in Historical Perspective 
Conclusion 
References 
Appendix. Turkey's Industrial Strategy Documents 

7. The Arab Spring: Facts and Illusions / Moaness Tahoun
Abstract
Introduction 
Political Stagnation as Causal Force 
Corruption and Rule of Law 
Conclusion 
References

Korea Institute for International Economic Policy (KIEP) has expanded its cooperative relations with the world since it took the role of the hub of regional studies in public research areas of Korea. As a part of our systematic efforts to foster international exchanges and build the knowledge based through interdisciplinary collaboration, The Center for Regional Economic Studies (CRES) initiated a researcher-exchange program called CRES Visiting Fellows Program in 2008. The program brings together influential professionals from academia and the public sector to advance individual, institutional and national understanding of regional economic matters and to improve international cooperation on related research. This volume is a part of our achievements through the program and we hope this proceeding would work as another channel to deepen the understanding of regional economies in Korea.

 

North Korea’s trade amount has been gradually increasing since the global financial crisis of 2008, and its economic conditions are also improving after Kim Jong Un’s rise to power. However, in order to prepare for unification, we first need to understand the underlying causes for change in North Korea’s economic conditions so that we can explore challenges that await us and find solutions to them.
This study aims to investigate the factors regarding the fluctuations in North Korea’s trade and the relationship between trade and economic development by using North Korean trade data. Using UNCTAD Comtrade’s data ranging from 1990 to 2013, we analyzed North Korean trade by year, by industry, by application, and by region, and analyzed change in North Korean trade by dividing it into factors that facilitate trade and those that obstruct trade; and based on this analysis, we also analyzed the correlation between trade and economic development by using the gravity model and production function.
First of all, regarding the current state of North Korean trade, its volume is showing an increasing trend, but is highly concentrated in primary industrial products such as iron ore or anthracite coal, and highly dependent on China as its major trade partner and therefore is vulnerable to changes in external trade environment.
Through the analysis of the factors of change in North Korea’s trade, this study found that trade fluctuation can be explained primarily by internal margins (effect of changes in price and quantity) than by the external margins (effect of introduction of new items and exit of old items), and by quantity more so than the price within the internal margins.
We also analyzed changes in North Korea’s economic policy and neighboring countries’ North Korean policies as factors contributing to North Korea’s trade facilitation. The approach to North Korea’s economic policy was made in three aspects ？ decentralization, foreign investment, and the establishment of trade infrastructure. Decentralization is implemented through gradual expansion of the number of trade entities and establishment of legal and institutional infrastructure related to trade. Foreign investment and establishment of trade infrastructure is being encouraged through concurrent designation of economic development zones and renovation of railroads. The year 2011 is noteworthy in that it indicates that after Kim Jong Un’s rise to power, North Korea is generating its own economic growth momentum through trade facilitation by internal efforts.
Regarding neighboring countries’ economic policies for North Korea, although China has been the primary motive force in eliciting and facilitating North Korean trade based on its ‘special’ historical relationship with North Korea, current circumstances now influence China-North Korea relations just as much as the hsitoric legacy, which leads to the conclusion that it may be unclear whether China’s North Korea policy may continue to facilitate North Korea’s trade.
In case of Russia, due to recent strengthening of ties between Russia and North Korea, it seems that Russia will implement economic cooperation centered around the Russian Far East and North Korea’s Northeastern area including the Rason special economic zone, facilitating North Korea’s trade in diverse ways. As for Japan, which is constantly imposing strict sanctions, North Korea will not likely engage in any trade relationship unless Japan lifts the sanctions. However, most outcomes of Japan’s sanctions are already substituted by North Korea’s trade with China, meaning there will not be any new negative effects.
According to the analysis of the effect of tariff barriers in the North Korea-China trade and the international society’s sanctions against North Korea on North Korean trade as obstacles to trade, our results show that it is difficult to regard tariff barriers between North Korea and China as well as international sanctions as obstacles to North Korean trade. In case of tariff barriers, while China’s total imports were negatively correlated with tariff rates, China’s imports from North Korea had a positive correlation with tariff rates. This is because China’s tariff policy did not act as a trade barrier impacting the China-North Korea trade, and because most of North Korea’s export to China consist of primary industry goods which usually have low tariff rates.
However, we found through field research that recently, due to the increase in the share of North Korea’s clothing exports to China, which has comparatively high tariff rates, more diverse forms of trade emerged, such as consignment processing trade and China-based processing by sending North Korean labor into China. Our quantitative analysis on the effects of international sanctions on North Korean trade show that sanctions had a negative effect on its intensive margins of trade, but due to North Korea’s response, which involved diversifying the range and types of items, the sanction's impact on the number of items was negligible.
Lastly, by using the gravity model to analyze the direct effects of economic development on trade, we found that economic sizes of North Korea’s trading partners had a statistically significant impact on its trade. When we used the result of the gravity model to predict the scale of North Korea-China trade, we found that if China’s economy grew by 7.2% in 2015, there would be a 10.4% increase in trade between North Korea and China. In terms of trade facilitation index, the trade facilitation index for China-North Korea in 2013 was expected to be 3 times the normal level, indicating the intensification of their already close relationship.
Meanwhile, when we analyzed the indirect effects of trade on North Korea’s economic development using the production function, the result was that the import of intermediate goods had a statistically significant, positive effect on North Korea’s GDP, which implies that North Korea’s economy is import-driven, in addition to the expansion of the production base through importation of capital goods, raw materials and transportation. Based on the production function, we also derived the total factor productivity of North Korea which revealed an improving trend for North Korea’s productivity after 2010.
From our findings, we derived the following implications for inter-Korean economic cooperation. Firstly, North Korea must develop labor-intensive secondary industry by taking advantage of its productive and cheap labor force in order to improve its trade situation which is vulnerable to changes in the external trade environment. South Korea should indirectly support North Korea through a multilateral framework such as those involving the two Koreas and China, two Koreas and Russia, and finally, the two Koreas and Russia/China, respectively. Also, with the establishment of the AIIB, joint efforts involving both Koreas, China and Russia have become more important for the development of infrastructure in Northeast Asia; not to mention the increased importance of improving investment efficiency through cooperation on development of trade infrastructure among neighboring countries, which would be difficult for one single country to undertake on its own. It is also important to share South Korea’s and China’s economic development experiences and development model with the gradually reforming North Korea, and expand opportunities for programs for the exchange of experts on international law and trade-related contracts, which would induce economic reform. Moreover, we also would like to suggest that North Korea itself needs to work on improving its infrastructure for trade facilitation.

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 1st KU-KIEP-SBS EU Centre Research Paper Competition on EU Studies』 and this book includes three 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.

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request.

Introduction and Overview 
Affiliations of the Contributors 
Keynote Address
Are Mega Free Trade Agreements the Best Alternative for Advancing Global Trade Liberalization? / Cae-One Kim

Session 1 Prospects for the Region’s Economies
 
Assessing Macroeconomic Policies in the US in Response to the Great Recession / David J. Stockton
Introduction 
Key Characteristics of the Recession and Recovery 
The Response of Monetary and Fiscal Policies 
Prospects for US Macroeconomic Policies and the Implications for the Economy 
Risks to the US Outlook and the Implications for the North Pacific Economies 
Conclusions
 
Challenges and Opportunities in China’s Economy / Wang Yijiang
Introduction  
Economic Challenges for China 
New Opportunities 
Concluding Remarks 

Abenomics and Beyond: The Japanese Economy in the 2010s / Tokuo Iwaisako
Introduction  
Brief Chronology of Abenomics 
Japan’s Macroeconomic Performance under Abenomics 
Potential Dangers for Abenomics 
Conclusion
 
Prospects of the Korean Economy / Il Houng Lee and Seongman Moon
Introduction  
Searching for Lost Economic Growth in Korea 
Reasons for the Decline in Domestic Demand Growth 
Conclusion
 
Commentary:
Prospects for the Region’s Economies: Discussion on Session 1 Papers / Sang-Hyop Lee
Report of the Session Rapporteur:
Prospects for the Region’s Economies: Overview by Session Rapporteur / Michael G. Plummer

Session 2 Pathways toward Trade and Investment Integration in the North Pacific Region 

The Trans-Pacific Partnership (TPP) as a Pathway to Asian Integration / Deborah Elms
The Goal: Free-Trade Area of the Asia-Pacific (FTAAP)  
Two of Four Pathways in Play 
The Launch of the TPP 
Specific Benefits of the TPP: Market Access for Goods 
Additional TPP Provisions 
Last-Minute Shaving of Quality? 
TPP Timelines 
TPP Institutional Framework 
Trade and Investment Diversion Coming 
Circling Back to the FTAAP
 
The Regional Comprehensive Economic Partnership (RCEP): Design, Status, and Challenges / Zhang Jianping and Nie Wei
Status of RCEP Negotiations  
Dilemma of RCEP Negotiations 
Compared with TPP, Is RCEP More Welcomed by Developing Economies in the Asia‑Pacific Region? 
Challenges of the RCEP under the Framework of Five “10+1” FTAs 
General Perceptions or Concerns about FTAs in China 
Implications of RCEP for FTAAP Proposals 
Implications of the RCEP for the North Pacific Economies 
Conclusion
 
China–Japan–Korea Free Trade Agreement (CJK FTA): Design, Status, and Challenges / Dukgeun Ahn
State of the Play of the CJK FTA  
CJK Trade and Economic Assessment Result 
Mega FTA Competition and CJK FTA 
Issues for Negotiation 
Challenges Ahead 

Commentaries:
Pathways toward Trade and Investment Integration in the North Pacific Region: Comments / Kiyoun Sohn
Pathways toward Trade and Investment Integration in the North Pacific Region: Discussion of Papers Presented in Session 2 / Michael G. Plummer
Report of the Session Rapporteur:
Pathways toward Trade and Investment Integration in the North Pacific Region: Overview by Session 2 Rapporteur / Theresa M. Greaney

Session 3 Assessing Economic and Social Change in North Korea 

Can North Korea Follow China’s Path of Reform and Open Door Policy? / Zhou Huji
China’s National Security, the Transformation of Political Concept and Open Door Policy  
Kim Jong Il’s Political Ideas and Survival Strategy 
“Songun Politics”: One of the Political Survival Strategies 
Improved Leader Worship: One of the Political Survival Strategies 
“7.1 Measures”: Economic Survival Strategies 
Nuclear Development and Asymmetric Dampening: International Survival Strategy 
Survival and Emerging from the Crisis: Conclusion and Discussion 

Economic Developments in North Korea / Marcus Nolan
Introduction  
Internal Developments 
External Relations 
Illicit Activities 
Conclusions
 
The Current Situation and Future Prospects of the North Korean Economy / Dongho Jo
Introduction  
The Current Situation 
The Reaction of the North Korean Leadership 
The Future Prospects 

Commentaries:
Assessing Economic and Social Change in North Korea: Discussion on Session 3 Papers / Hyung-Gon Jeong
Assessing the Economic and Social Change in North Korea: Discussion on Session 3 Papers / Nicholas Eberstadt
Report of the Session Rapporteur:
Assessing Economic and Social Change in North Korea: Overview by Session 3 Rapporteur / Anjali Nath

Roundtable Discussion on Strengthening North Pacific Cooperation 
North Pacific Integration from an International Financial Perspective / Hiroyuki Ito
Introduction  
Interest Rates Linkages and Their Implications on Monetary Policy Management  
“Internationalization” of the Renminbi 
Conclusion
 
Comments Based on the Roundtable Discussion / Tokuo Iwaisako
Comments Based on the Roundtable Discussion / Jong Seok Kim
“The Asian Paradox” 
The Limits of Bilateral Talks 
The Need for Multilateral Dialogs 
Soft Issues 
Harmony in Diversity 

Comments Based on the Roundtable Discussion / David J. Stockton
The Global Influences of Half of the World: Comments on North Pacific Cooperation / Wang Yijiang
Report of the Session Rapporteur
Strengthening North Pacific Cooperation: Overview by Roundtable Rapporteur / Duyen Bui

Conference Program
Program 
List of Participants

The conference was held on July 25, 2014 co-organized by the Korea Institute for International Economic Policy (KIEP) and East-West Center (EWC) in Honolulu. The key factors of the conference was to shape the economic future of the major North Pacific countries and the importance of economic cooperation among them. Major topics to be addressed were (1) the macroeconomic performances and outlooks of China, the United States, Korea, and Japan, and the interrelationship among them, (2) the emerging multilateral economic architecture and its implications, with specific reference to the TPP, the RCEP, and China-Japan-Korea free trade prospects, and (3) the future of the North Korean economy and its implications for North Pacific cooperation. The main sessions of the conference covered ‘Prospects for the region’s economies’, ‘Pathways toward trade and investment integration in the North Pacific region’, ‘Assessing economic and social change in North Korea’.