Since Kim Jong-un came to power, the North Korean regime has placed greater emphasis on the economy, adopting the policy line of “Simultaneous development of Economy and nuclear weapons capability” in 2013. North Korea has promoted the “Measures for Our Way of Economic Improvement”(so-called June 28th measures) since 2012 with the aim of increasing the efficiency of its economic operation. In addition, the Kim Jong-un regime newly designated 19 special economic zones in an attempt to attract more foreign investment and has not suppressed the market despite changes at home and abroad. Partly boosted by these efforts, North Korea’s economy is reportedly improving in recent years. However, there are few signs of a rapid economic growth that North Korea is so eager to achieve. This is attributable to North Korea’s system itself, the socialist economic system, acting as a primary constraint to the country’s economic growth. For North Korea’s robust economic growth, economic reforms within the system are not sufficient, but rather the country should move forward towards transition to a market economy.
This study was conducted to identify the determinants of economic growth for North Korea and to present policy suggestions for its successful transition. To this end, the study analyzed the determinants of economic growth of transition economies as well as countries by income level. Based on the analysis, it deduced the determinants of economic growth for North Korea.
In this study, variables such as infrastructure, institutional conditions, human capital, domestic investment were identified as important variables for economic development of North Korea along with several transition-related variables such as privatisation, corporate restructuring, and trade/foreign exchange system. The policies which simultaneously affect all the determinants of economic growth are not feasible, and are likely to put a greater burden on the country both politically and economically. In this regard, this study suggests policies along with timing and sequencing for the economic development of North Korea, through analysis of examples from transition economies.
The study proposes policies that can successfully eliminate fundamental barriers to economic development in North Korea, providing greater economic boost but reducing the possibility of shocks for the country. By conducting theoretical analysis for the socialist economies in addition to the empirical analysis, the study seeks to improve the coherence of the empirical study.
This study presents policies by period, dividing the periods into short term, mid term and long term. In the short term, North Korea should set out to introduce small-scale privatisation on its own along with price liberalization, and the international community should offer help with respect to improvement of the impoverished country’s essential infrastructure and nutritional/dietary conditions of its population. For the mid and long term, it is necessary to promote policies regarding improvement of trade and foreign exchange systems, large-scale privatisation, corporate restructuring, and competitiveness. During the process of adopting these policies, the assistance of the international community is indispensable.
Policies regarding North Korea have often been suggested without firm academic evidence. Against this backdrop, the results of the study can provide evidence which can help empirically evaluate economic policies of North Korea. This study is distinguished from previous studies in this issue in that it also suggests inter-Korean cooperation policies on the part of the South Korean government, considering both sequencing and timing.
Unfortunately, this study was not able to consider all variables regarding economic growth. Instead, it chose variables that can be applied to policies and of which relevant data were accessible. Despite such limitations, this research can hopefully become a stepping stone for further policy research on North Korea’s economic growth.

Subsidy disputes under the WTO system have continuously increased in number as a result of the strengthened WTO discipline on governments’ subsidization policies which were previously viewed as intrinsic economic policy measures. In particular, as subsidization policies to support such major basic industries as steel, vessels, aircraft and energy are closely related to countries’ export growth and economic development, and thus considered to be unfair trade-related measures, there have been a number of counter -subsidy disputes to directly counteract the WTO-inconsistent activities of other Members under the WTO dispute settlement system.
This study examines the WTO rules and the practical application of the rules on subsidies related to several major key industries through legal analysis of subsidy disputes involving the aircraft, vessels, and renewable energy industries that were brought to the WTO dispute settlement system since 2005. Based on the analysis, this study has identified several important issues related to subsidy policies in major basic industries, and provided several policy and legal implications regarding the discipline on subsidies in accordance with the WTO Subsidies and Countervailing Measures (SCM) Agreement.
As a result of the analysis, we have identified several common characteristics in WTO subsidy disputes involving basic industries. First, as shown in the WTO subsidy disputes involving vessels and large-sized aircraft, a number of disputes seem to take the form of counter-subsidy disputes. This may be proof of the importance of the relevant industry in the country’s economy, and the willingness to resolve disputes in an expeditious and efficient way. Secondly, most of the direct grants and tax incentive programs provided to major key industries were determined to be government acts to provide ‘financial contribution’. This may be due to the fact that significant amounts of initial investment by the government are inevitably required to establish basic industries. On the other hand, there were different rulings regarding whether the subsidy measure provided a ‘benefit’, while the appropriate ‘market benchmark’ and consideration of both the supply and demand aspects in selecting the appropriate ‘market’ were considered to be important elements in the ‘benefit’ analysis of a subsidy. Thirdly, most of the subsidy measures in the basic industries were considered to be ‘specific’, particularly based on the documental evidence that explicitly showed that relevant subsidy programs targeted specific industries.
There are several implications for policy and legal reform that have been derived from this study: First, bilateral agreements that provide the terms for appropriate discipline on the use of subsidy measures among the parties to the agreement may be considered as an effective method for regulating subsidization practices in basic industries. In most cases, the multilateral discipline on subsidies is more desirable since a mere bilateral agreement to regulate subsidies may enable ‘free-riding’ from non-parties. However, in the case of basic industries, which are inherently dominated by a few number of competitive countries that can afford to make substantial investments in the establishment and maintenance of the industry, a bilateral form of agreement to discipline subsidization activities may actually be effective without concerns about ‘free-riding’.
Secondly, as a means to prevent subsidy disputes involving basic industries which typically involve a substantial amount of R&D programs, joint international R&D programs may be considered as another practical alternative. Compared to other industries, basic industries require more substantial amounts of fund for establishing the facilities and manufacturing the products, while appropriate economies of scale and large enough markets for the recovery of moneys from the intiial investment are also needed. A joint R&D program among WTO Members that are engaged in R&D activities in the relevant industry may help to reduce financial burdens and prevent WTO disputes at the same time.
There also lies the need for legal reform to the current WTO rules on subsidies and dispute settlement. First, many R&D contracts that are frequently ordered out by the government fall under ‘services’, whereas there are currently no rules to regulate service-related subsidies under the WTO SCM Agreement. Such absence of rules may open the door to opportunistic acts by some WTO Members, when subsidies for services have the same impact as subsidies for goods through distortions in resource allocation and competition. Furthermore, the criteria for selecting the appropriate ‘market’ for the ‘benefit’ analysis in subsidy disputes is unclear, leading to the need for reform through clarification of the ‘market benchmark’ criteria. Also, the current WTO subsidy rules do not provide clear regulations on ‘green subsidies’, of which there has recently been an apparent increase in WTO disputes involving countervailing measures.
Lastly, the prompt implementation of WTO Dispute Settlement Body (DSB) rulings is particularly important in the case of subsidy disputes involving basic industries due to the size and economic importance of the industries involved. However, the current WTO rules on subsidies and dispute settlement only provide for ‘prospective’ remedies which do not provide any reparation of damages incurred by subsidies that are paid in the past. Furthermore, despite the more expeditious dispute resolution procedures provided for subsidy disputes as compared to the general dispute settlement procedures, there appears to be a significant delay in withdrawing the illegal subsidy measure. The limitations of the current rules on subsidy dispute settlement thus require reforms to address this problem.

About KIEP
President’s Message
About KIEP
Mission & Vision
Organization
History
KIEP 2013

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

Highlight 2013
Top Research by Category

Bright 2013
Key Research in 2013
Research Goals in 2013
Project Composition
International Macroeconomics & Finance
Trade and Commerce
International Cooperation Policies
Asia-Pacific Studies
Europe, Americas and Eurasia Studies

Flight 2014
2014 Research Goals
The Way Forward in 2014

Appendix
2013 Settlement of Accounts

The 2013 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
I. Introduction

II. Empirical Methodology and Data
1. Dynamic Latent Factor Model
2. Variance Decompositions
3. Dynamic Correlations
4. The Data

III. International Business Cycle Comovements
1. Latent Factors of International Business Cycles
2. International Business Cycle Comovements

IV. Driving Forces of Business Cycles
1. Regional Characteristics
2. National Characteristics

V. Concluding Remarks

References

Appendix

This paper examines the characteristics of international business cycles among the Asia-Pacific economies in the period of 2000:Q1-2013:Q4. A dynamic factor model is estimated for the output fluctuations and five macroeconomic drivers of business cycles. The estimation extracts the latent common factor shared by fourteen APEC economies and the region-specific factors of North America, Northeast Asia, Southeast Asia, and Oceania. We find that the relative contributions of the common and region-specific factors of business cycles are significant in accounting for national output fluctuations. Evidence for international business cycle comovements is strong between North America and the common business cycle particularly at low frequencies. North America and Northeast Asia also show significant business cycle synchronization. As for the driving forces of business cycles, international trade provides the largest contribution across four regions in the Asia Pacific and the monetary policy and productivity drivers are subsequent to it. The overall finding signifies the greater probability of economic cooperation and regionally coordinated monetary policies among the APEC economies.

Executive Summary I. Introduction II. The Panel Smooth Transition Regression Model III. Results from the PSTR Mode 1. Data 2. Results from the PSTR Model IV. Supplementary Linear Panel Estimations 1. Linear Dynamic Panel Estimations 2. Panel Granger Causality Test V. Conclusion References Appendix

This paper investigates the nonlinear relationship between income inequality and economic growth using a heterogeneous panel data set of 77 countries. The estimated nonlinear function exhibits relatively smooth regime switching, as regards the income inequality level in the previous period. The point above which the time-varying coefficient estimate on inequality turns from positive to negative is found to be the Gini index of 24.5. The results suggest that while inequality hinders economic growth in most of the countries, it accelerates economic growth only in a country where the level of inequality is very low. Furthermore, the results reveal that the negative effects of income inequality on economic growth become more serious in developing countries whose level of inequality is relatively higher. The supplementary linear regressions with various specifications generally confirm the results obtained from the nonlinear model.

China’s IT industry ranks high in the world. As the production network expanded during the 2000’s, China emerged as the world’s center for global IT production. In 2013, China accounted for more than half of the world demand for major IT products including mobile phones, computers, and color televisions.
China’s IT industry has been developing mainly along the eastern and coastal regions including the Pearl River Delta, the Yangtze River Delta and the Bohai area. But recently, these areas have experienced a steep rise in factor costs and pressure from industrial advancement due to changes in the methods of economic development. It forced the IT manufacturing industry of China to gradually shift its production base from the eastern coast to the western inland areas. Most IT enterprises have moved manufacturing facilities to cities like Chongqing, Chengdu, Xi’an, with these cities concomitantly emerging as China’s new IT manufacturing clusters. In this regard, this study conducts a comparative analysis on core manufacturing clusters in Chongqing, Chengdu and Xi’an. Based on the findings, this study provides implications for Korean companies seeking to conduct business operations in the area and also for the Korean government in supporting these companies.
In comparison, IT manufacturing clusters in the West are similar in that they are formed around a key industrial complex. Nonetheless, the clusters in Chongqing, Chengdu, and Xi’an possess distinctive features. For instance, Chongqing IT manufacturing industry has seen a rapid annual growth of more than 77% for three consecutive years, starting in 2009. Such rapid growth was a result of an increase in the number of laptop computer manufacturers in the Xiyong micro electronics industrial park, which also led to a vertically integrated production system with computers and the peripherals in the center. Centering around the Chengdu hi-tech industrial development zone, many companies whose business involves IC‧Display‧Computer and related peripheral and communication networking devices made its inroad to Chengdu. The cluster also has a well-established value chain from raw material to product manufacturing. Meanwhile, centering around the Xi’an hi-tech industrial development zone, the sectors of IC and telecommunication devices are highly developed in Xi’an. Xi’an is also noted for RF (Radio Frequency) products and sensor industry within China. Also, R&D sector is one of the Xi’an’s strengths as there are ample numbers of research personnel for electronics and telecommunication sectors. Nonetheless, with the exception of a few products such as computers, production in the IT manufacturing clusters in the West are not fully compatible to those in the Eastern region. Therefore the central and local governments in China are providing various measures for budding IT enterprises in western China. These preferential treatments include deduction in corporate tax, subsidy grants, and support for zero interest loans from the local banks. In practice, these preferential treatments worked as an important motivation for enterprises which made their inroads into the mainstream industry.
The prospect for IT manufacturing clusters in West appear to be positive for the central and local government are providing ample and active support. Nevertheless, companies seeking to invest in western China must thoroughly examine the local market as the level of technology and the extent of development varies by each cluster.
These regions commonly possess high demand for companies specializing in the design and manufacturing of SoC (System on Chip) in the communication and network facilities sector. On the other hand, the Chongqing cluster lacks competitiveness in digital medical system, and the automobile-IT convergence system, while the Chengdu cluster has weakness in IC for display devices and color filter manufacturing. Therefore, Korean SMEs (Small and Middle Enterprisers), noted for high-end technology and innovative idea, have a high chance of promoting successful business in the area. Such SMEs will not only be able to seek their own economic benefit but also will contribute to technological development of the clusters.
On the other hand, the Korean government should step up its collaboration with the local governments in China since the local governments play a pivotal role in the development of the cluster. Also, it is necessary that the Korean government provide support in identifying and developing inter-enterprise collaboration through measures such as business counseling. Since many SMEs experience hardship in acquiring information and network in the region, such opportunities will facilitate the network between the SMEs and the local businesses, eventually leading to increased partnership. In addition, forming a durable base for active technical cooperation is imperative. By launching joint research programs between institutions in Korean and those in Chengdu and Xi’an, we will be able to construct a stable base for technological cooperation. Lastly, the governments could consider collaboration in establishing special industrial zones which provide a favorable environment for Korean enterprise. With their expertise, the Korean companies will be able to complement the growth of the clusters and at the same time take advantage of the abundant labor in the region.

 

 2013 Annual Report

The purpose of this study is to examine how the recent trade negotiations have dealt with Mode 4 issues and what policy implications have been drawn for Korea’s Mode 4 negotiations and the improvement of the domestic system related to Mode 4.
This study provides the following policy recommendations for Korea’s Mode 4 negotiations. First, the Korean government needs to set up the consistent bargaining strategy in Mode 4 issues based on medium-and long-term foreign labor policy such as immigration policy. The coherent policies are the most effective way to negotiate Mode 4 issues with developing countries. Second, as to the issues of Mode 4 coverage, Korea has to build closer cooperation with like-minded developed countries against the GATS-plus requests made by developing countries in the multinational or plurilateral trade negotiations. Third, in the RTA negotiations with developing countries, while the Korean government should stick to the negotiation principle of Mode 4 whose scope is limited in the GATS, it should also take part in the discussions of professional mobility for CSS (Contractual Service Suppliers) and IP (Independent Professionals) with a prospective attitude. Forth, the Korean government authorities should conduct in-depth research on the gap between supply and demand of the specific labor markets to identify the prominent areas for liberalization of CSS and IP in the domestic services sectors. Fifth, in order to prevent from using foreign workers illegally and maximize economic benefits from Mode 4 liberalization, it is crucial for the Korean government to establish its own Mode 4 monitoring system. Finally, it is essential to improve and align the Korea’s professional licensure system with the global standards, which will facilitate mutual recognition for the attainment of policy objectives, such as preventing the substantial influx of the unqualified and promoting overseas employment of Korean professionals.

 

International Macroeconomy

Trade Investment

Multilateral Negotiations

Economic Cooperation

Economic Opening

International Cooperation for Korean Unification

Advanced Economies

China

Southeast Asia

Central Asia

India-South Asia

Russia/Eastern Europe

Asia

Middle East

Latin America

ODA

APEC

Others

2013 Summaries of Research Report