Expected Effects of Entrenching Financial Cooperation between Korea and the Middle-East and International Expansion Strategies of Korean Banks to the Middle-East Financial Markets

Oh Suk Yang

Throughout the Chapters 2, 3, 4, 5 in respective order, this paper examines the concentration ratio of bank market in GCC at status quo, competitiveness of Islamic bank in GCC, and competitive advantage and internationalization strategy of banks comprising GCC market, local commercial banks, and global commercial banks in GCC market.
In chapter 2, we examined the distribution of Islamic banks at status quo, the peer group analysis on 11 peer groups of the world’s largest (total asset) Islamic banks, and regional distribution of Islamic banks, along with careful observation on development and prospect of GCC bank market. The competition in bank market of GCC and MENA countries was analyzed through peer group analysis and PR H-statistics, together with thorough analysis on the consumption behavior for GCC bank at both individual and corporate level.
GCC region is the most concentrated area of Islamic banks and assets, where "troika" of Islamic bank industry is established among Bahrain, Malaysia, and Iran. Meanwhile, GCC occupies a great share, outweighing other regions among the Top 20 Islamic banks. The average of net interest margin (3.01%) of GCC Top 20 Islamic banks surpasses the average of the Islamic banks all over the world (2.35%).
The size of GCC bank market measured by total asset to bank equity ratio has grown by 17.4% during 2000~2011; domestic private credit (to GDP %) has grown by 63.7% during 1993~2011, which proves its outstanding financial development in light of bank market activity. In terms of asset size, UAE and Saudi Arabia are predominant, while Bahrain shows a steady rising tendency of GDP ratio. Furthermore, GCC bank industry, in general, presents rapid trend of recovery and development. The fall of bad debts and increase of bank profitability are expected to be consistent, and the saving ratio over 170% makes the prospect even brighter.
The peer group analysis substantiates the competitive status of GCC bank market. This is evident in the Gini’s coefficient measured by Lorenz curve: net income (0.24), total asset (0.38), operating revenue/turnover rate (0.01), market capitalization (0.38) and so on. However, for the purpose of methodological rigor, this paper applies PR-model to demonstrate the level of competitiveness in GCC bank market. As a result, it has been proven that GCC Islamic bank market is at balanced-competitive status (H-statistics 0.6386), which is a fairly equivalent level in comparison to bank’s H-statistics (0.60~0.80) over 50 different countries according to preceding research (Claessens and Laeven 2003). Meanwhile, GCC commercial bank market is also proven to be at balanced-competition level (H-statistics 0.6652).
In chapter 3, for escalation of practicality and holistic evaluation, an empirical analysis was conducted using pertinent firm specific variables, derived from internal factor such as financial structure and managerial attribute, and macro economic variables to analyze external factors affecting profitability of banks. As a result, the deviation in the determinants for each indicator between Islamic bank and commercial bank is verified: profitability, growth, efficiency, financial strength and stability.
In chapter 4, an empirical analysis was conducted to examine the correlation between corporate governance and firm values of Islamic bank and commercial bank.
The biggest distinction in corporate governance between Islamic bank and commercial bank is the presence of board of Sharia and Sharia executive department. Through ex ante and ex post supervision of bank business, Sharia board reinforces the compliance of Islamic law in their business. However, there are arguments purporting that multilateral supervision rather hinders efficiency, which abates the authority of Sharia board’s regulation. Furthermore, the original function of Sharia board may stand out in financial trade, but at work of bank management, the practical managerial skills of Sharia executive management is appraised to be more significant. The operation of Sharia board differs from country to country, mainly in two ways: The presence of internal Sharia board and the employment of external consultants.
In chapter 5, GCC bank market was investigated as to inquire the suitability for overseas expansion site of Korean banks. The examination encompassed the study of entrance and concentration of global bank’s GCC bank market, and the internationalization of participants in GCC bank market and Korean domestic banks. Competitive advantage of GCC bank market participants including Korean banks was also analyzed.
Concentration ratio of GCC commercial bank, executed with peer group analysis, delineated fairly low value. In measuring market concentration ratio using Lorenz curve, the Gini’s coefficient substantiated the GCC commercial bank at balanced-competition: net interest revenue (0.16), operating income (0.16), net income (0.32), savings & short-term fund (0.17) and so-on.
It can be proposed that a bank has sustainable competitive advantage when the bank’s resource for its competitive advantage is valuable(V), rare(R), immitable(I) for its competitors, and have organization(O) that can exploit such resource. Through VRIO internal analysis, domestic bank’s competitive advantage is based on its IT and consumer-on-demand service. Information, which is the pivotal source of competitive advantage for financial industry, is essential to realize economy of scale, and is expected to function as a resource that can overcome the ownership-specific advantage and location-specific advantages of Islamic bank and local commercial banks.
Meanwhile, result from quantitative analysis on performance suggests that Islamic bank has the highest competitive advantage on growth and financial strength, and competitive disadvantage on profitability, efficiency and stability. Global banks have displayed the highest competitive advantage on growth, but stopped at showing only fairly high competitive advantage on the rest of the indicators. Local commercial banks have shown the highest competitive advantage on profitability and growth, but fairly high competitive advantage on efficiency, stability and financial strength. Meanwhile, the Korean domestic banks appeared to have competitive disadvantage on growth, but they also appeared to be equipped with the highest competitive advantage on stability and financial strength, and fairly high competitive advantage on profitability and efficiency.
This study ultimately proposes Korean bank’s strategies for GCC bank market entrance. There are various strategic options for Korean domestic banks to penetrate into foreign bank market. First, collaborative entrance with another Korean bank already existing in the market would be the most favorable strategy. Second, collaboration with a local bank could be a safe choice in eluding the potential risks associated with foreign market entrance. The third option would be augmenting the risk-avoiding opportunities by joint overseas expansion with a manufacturing firm.
However, the following factors are required for Korean domestic banks to sustain its growth after its entry to GCC bank market. The first factor is the ability to incorporate various needs of local people in their financial products. Secondly, a pursuance of long-term orientation is a prerequisite for the acquisition of sustainable development, offsetting potential costs from internationalization at the same time.
Another strategy that drives GCC bank market entrance of Korean domestic banks to success is the optimization of internalization, which serves as a catalyst in reducing potential risks through experiential learning. At similar marginal cost-marginal benefit level, it is favorable for banks to reduce risks by maximizing the process of internalization.
However, entering GCC bank market is unachievable with sole effort of Korean domestic banks. Thus, in addition to persistent efforts of the Korean government through different policies, the following complementations are required to be processed. First, more active and practical moves regarding contracting agreements and treaties at government level are to be encouraged. Secondly, the government support to the bank's entry to GCC by training mid-east Islam experts are to be expanded and intensified. Third, a policy promoting GCC market penetration of domestic banks and firms is also a pressing matter.
Lastly, unlike the aforementioned optimistic expected effect from global business activities, foreign market entrance may become easier due to deregulation, which could result in excessive penetration on specific regions, arousing concerns about deterioration of profitability and financial accidents. In order to prevent such accidents, the supervisory authorities should strive to reinforce their superintendence on foreign branch, control over imprudent foreign market entry, stay vigilant on law compliance, and ameliorate internal control systems.

Development of Russian Far East and Baikal Region and Korea’s New Northern Economic Cooperation

Weon-Yong Sung et al.

Since the beginning of the third term of the Russian President Vladimir Putin, Russian foreign policy has given strategic priority to the economic and political integration of the entire Eurasian continent. In addition, Russia is unfolding plans to make Russia the central axis of a vast strategic belt between the EU and the Asia-Pacific region. Now Russia is carrying out its ‘New Eastern Policy’ in order to more actively expedite Russia’s integration into East Asia and the Asia-Pacific region.

Currently the Korean government and companies are trying to find appropriate investment methods under the banner of the so-called ‘New Northern Policy’, paying attention to a series of changes in the conditions regarding the development of the Russian Far East. However, it is not clear which are the actual components of ‘New Northern Policy’ and the what the policy has in common with Russia’s New Eastern Policy; and lastly, the role it can serve in strengthening the strategic partnership between Korea and Russia.

Therefore, it is important to examine the goals, tasks, and policy directions of the RFE development strategy and to analyze how we should manage the ‘New Northern Policy’ in response to Russia’s New Eastern Policy. The main challenge is to fully understand the real aspects of the ‘New Eastern Policy’ that Russia has proposed after the APEC summit in September, 2012 and to assess the manner in which the RFE development strategy and the Asia-Pacific regional integration will proceed. In this regard, we should pay attention to some of the programs under way in Russia. On March 29, 2013, the Russian government approved the national program “Socio-Economic Development of the Far East and the Baikal Region until 2025.” However, only a fragmentary description of this program was made known in Korea and comprehensive analysis of this program has not been done out until now.

Under these circumstances, the authors reviewed the policy directions and problems in RFE development, focusing on the national program “Socio-Economic Development of the Far East and the Baikal Region until 2025.” And we analyzed the sets of interests which Russia’s New Eastern Policy and Korea’s New Northern Policy might have in common.

This study consists of six chapters. In the first chapter we presented the background and purpose, the scope and methodological approach of this study, and provided an overview of previous studies on this issue. In the second chapter we analyzed the RFE development strategy and policy directions of the Russian government. The impact of the global economic crisis (2007~9 years) on the economy of the RFE was very great. The rate of economic growth decreased, investment activities shrank, the extraction industry’s share in industrial production rose considerably, and the preexisting problem of imbalance in the RFE economy became worse than before. The problem of outdated infrastructures and resulting limitations in capacity are serious. Also, there is also the continuing problem of a declining population.

The development of the RFE is marked by a combination of two driving forces. One is a program for regional development, initiated and financed by the Russian federal government. The other is foreign economic cooperation. The purpose of the national program “Socio-Economic Development of the Far East and the Baikal Region until 2025” is as follows: 1) formation of conditions for accelerating development of the RFE and the Baikal region, and the transformation of the RFE into a competitive macro-region with a diversified economy led by high value-added technology production; 2) achieve significant improvement of socio-demographic conditions in the RFE and the Baikal region with creation of conditions for stemming and reversing population loss with qualified specialists, and improvement of living standards of the population to levels above the average European standard.

In chapters three to five, this study made a comprehensive analysis of the current situation in terms of transportation, energy, and social infrastructure in the RFE and the Baikal region based on the analysis of the national program “Socio-Economic Development of the Far East and the Baikal Region until 2025”. The authors overviewed the goal, tasks, and policy directions represented in each sector subprogram and assessed the prospects for their development in the future. Lastly, in Chapter six, this study assessed the performance of economic cooperation between Korea and the RFE, and analyzed potential cooperation projects in transport, energy, and social infrastructure for Korean investment into the RFE.

Since the establishment of Korea-Russia diplomatic relations in 1990, the turnover of trade between Korea and the Russian Far East trade has increased rapidly due to their geographical proximity and complementary industrial structures. Trade relations now play a critical role. The Korea- Russian Far East trade turnover accounts for 41.2% of the total trade volume between Korea and Russia. But, on the other hand, Korea’s investment into the Far East is paltry, as it accounts for barely 0.7% of the total volume of FDI into this region. The Korea-Russian Far East economic relations has been locked in the frame of simple trade -the exchange of fuel, raw materials from the Far East for finished industrial products from Korea. In fact, Korean companies are reluctant to invest in the Russian Far East owing to poor investment conditions.

However, as Russia recently continues to drive the ‘New Eastern Policy’ forward and invests into Far East development projects, Korean companies are trying to make inroads into the Far East markets. Accordingly, investment cooperation between Korea and the Far East is expected to expand. Most of all, Korean companies can participate in projects in the field of transportation such as the construction of seaports and logistics facilities, including the realization of the ‘Rajin-Khasan Project’ as a pilot project for linking the TKR with the TSR. Additionally, Korea should strengthen policy coordination on tasks related to the activation of the Northern route including: 1) simplifying the process for using the Northern route, 2) reduction of the tariff for icebreaker use, 3) research on actual conditions for Northern route use, 4) build the information exchange system for safe navigation through the Northern route.

In the field of energy cooperation, it is expected to increase the import of coal for power generation from the Far East regions, and with the development of the gasification, the growth of investment in power generation will stimulate the regions’ import of electric power equipment and facilities from Korea. Supply of pipeline natural gas from Russia through North Korea to South Korea will be implemented only in a situation where Russian gas has an edge in price competitiveness and with enough quantity to satisfy market demand compared to shale gas from North America. In the future, in order to successfully implement the strategy for energy material exports to the Asia-Pacific region, Russia needs to gain the trust of regional countries by implementing sustainable and consistent FDI policy. And regional countries need to look for solutions such as establishing investment funds to secure a huge amount of investment money required for energy development projects.

Social infrastructure, a field into which Korea can invest, are divided into two parts. One part is the investment activities related to high-quality jobs to create sustainable additional value. For example, we can consider such activities as the management of universities such as MBA and hospitals, building industry-university R&D centers, and the operation of CNG stations for gasification. The other involves facilities that serve as a basis for a more comfortable and convenient life. For example, it would be possible to receive construction orders for housing and infrastructure, water and sewage system, a water purification plant, waste disposal facilities, and housing complexes.

Recently we have widely discussed the ‘New Northern Policy’ regarding Korea’s entry into the Russian Far East. There are clear strategic directions implied in the ‘New Northern Policy’. It means that Korea should extricate itself from its geographical handicap of being a virtual ‘island’ country and become an open country advancing into the continent and the sea. Also, the ‘New Northern Policy’ implies the building of trilateral cooperation belts in such forms as South-North Korea-China, or South-North Korea-Russia. In this regard, the ‘New Northern Policy’ is a kind of policy for unification of Korea. And South-North Korea economic cooperation is the starting point of ‘New Northern Policy.’

Considering the ‘New Northern Policy’ with Russia, it should be noted that it is directly linked to trilateral cooperation between South Korea, North Korea and Russia. That is the essence of the ‘New Northern Policy’ and it can become an indicator to measure whether the realization of that policy is possible.

For a more rapid progress in Korea-Russia economic cooperation, it is necessary to increase Korea’s FDI into Russia and implement the trilateral cooperation between South Korea, North Korea and Russia. In this respect, we need to overcome the physical and geographical distance between the two countries. This can be done through the three megaprojects including the Trans-Korean and Trans-Siberian Railway connection projects, supply of natural gas from Russia via pipelines through North Korea to South Korea, and supply of electric power from the Russian Far East to South Korea through North Korean territory within the framework of the NEAREST program. Therefore, in examining the economic feasibility of these projects, it is necessary to consider not only the economic benefit-cost analysis, but also geo-strategic, geo-economic interests. And because of the nature of the projects, mega-projects mentioned above are interconnected. Therefore, we require comprehensive and integrated approaches to deal with these projects.

Three mega-projects are closely interlinked with other tasks such as modernizing transport and energy sectors that Russia has given special meaning to in connection with the development of the Russian Far East. Therefore, we need to use these projects as a springboard to facilitate Korea’s entry into Russian Far East, Siberia, and the Eurasian Continent as a whole.

Development of China’s Northeast Region and Korea’s New Northern Economic Cooperation

Dong Wook Won, Seungho Kang, Hong Gyoo Lee, and Changdo Kim

Northeast China played a key role as China's major industrial base during PRC’s early years and planned economy period. Recent years, however, have seen Northeast China’s heavy-industry-based economy stagnate since the initiation of reform and open-up policies. To counter this problem, the Hu Jintao government established ‘Northeast Development Strategy’ in accordance with the concept of balanced national development. As a result, Northeast region has emerged as a new growth pole through the innovation of system and mechanism, adjustment of the functional relationship between market and the government, and the new plan for industrialization. In addition, the region has been growing as a major strategic base for economic integration in Northeast Asia, through active opening-up and cross-border cooperation.

With the succession of the 'fifth generation' of leadership, the Xi Jinping government seems determined to sustain pursuit of this strategy. This does not only provide us with bilateral and multilateral platforms for normalizing inter-Korean relations and promoting new northern economic cooperation, but also gives impetus to renewal of Sino-Korean relations which has regressed owing to political disagreements. We should take part in the cross-border cooperation which has been in Northeast China, not only to overcome the limitations in and instability of economic cooperation between two Koreas, but also to bring about change in inter-Korean relations through building multilateral cooperative platforms with China and Russia, which retained a fair amount of influence over North Korea. In conclusion, we can operate new growth engines of national economy through revitalization of the northern economy, based on development and enhancement of industrial structures in Northeast China.

China has already put its visions of a Northeast Asian economic community into practice through the ‘Northeast Development Strategy’ and cross-border development. In this regard, we now stand at a crossroads where we should propose our own New Northern Economic Cooperation plan that accords with China’s plan. A corresponding strategy for the future does not only take into account the negative aspects of a China-led cross-border cooperation, but also constitutes wise preemptive response by anticipating geoeconomic change in this region. In other words, we should seek closer cooperative relations with Russia which expresses concern over ‘sinicization of the Far Eastern Region’ and restore economic relations with North Korea. We must take part in China-led cross-border cooperation with North Korea for the short term, yet thereafter secure a balance in the Northeast Asian economic community by gradual transition from a China-led bilateral cooperation system to a trilateral or multilateral cooperation system including Mongolia, Russia, Japan, and the US in the medium and long term.

China’s Green Growth Strategy and Implications for Trade between Korea and China

IkJoon Moon, Jihyun Jung, Su Yeob Na, HyunJung Park and Hyo Jin Lee

When the Chinese capital of Beijing was enveloped by unusually heavy smog in 2013, alarms were raised at home and abroad concerning environmental problems facing China. In response, the Chinese government decided on a policy change, making the switch from quantitative to sustainable development, while promoting green growth. This report reviewed Chinese green growth policy overall; and also analyzed trade policy, trade disputes, and Korea-China trade.

This report consists of six chapters. Following the introduction, Chapters 2 examine China's green growth strategy. China's promotion of green growth was studied in both domestic and international terms, and accordingly, some features related to green growth were identified. A key point in understanding China's green growth is that it represents a transition in the mode of economic development. China's green growth strategy began with reflections on past mode of economic development. However, it is still in the early stage, as transition to resource-saving or environment-friendly models of development is a comprehensive and time-consuming process. Hence, green growth in China would require more time and appropriate economic reform policy.

Chapter 3 discusses Chinese green growth policy and its relation to trade policy, including a review of Chinese environmental regulations and an outline of related trade prohibitions, restriction policies and TBT. Recently, China has deemed free trade to be one of the causes of pollution and restricted trade somewhat to decrease environment pollution. This implies that the number of on trade prohibitions related to environmental pollution increased. Empirical analysis reveals that the export industry of China is still labor-intensive rather than capital-intensive. It is also empirically proven that improvement of environment - the result of environmental regulation policies - actually provide positive impact on export increases.

Chapter 4 examines trade disputes related to China’s green growth policy. As case studies for Chinese green industry subsidies, countervailing duty of US and EU, along with wind power equipment subsidy case of the WTO, were analyzed. According to the analysis, grants, preferential policy loan and price under the production element were the main types of subsidies that US and EU protested against in applying countervailing duties. On the other hand, wind power equipment subsidy case of WTO showed the nonfulfillment of subsidy notification can bring about lawsuits. Recent countervailing duty towards polysilicon of US and EU is an expression of the Chinese government's strong willingness to respond to countervailing duties utilized by developed countries.

Chapter 5 includes analysis of environmental products in Korea-China trade. Import statistics data from China Customs was utilized in order to understand environmental products imported for domestic use. In 2012, the import market for environmental products was 18.17 billion USD and domestic use accounted for 34.3% of the total, or 6.25 billion USD. According to analysis of collaborative cases, it is suggested that Korean companies engage in joint venture with local companies to learn the Chinese system before switching to become an independent entity at a later date.

Implications of the Chinese green growth strategy to Korea and Korean policies in response are as follows. First, Chinese adoption of green growth strategies is inevitable but would involve a long, drawn-out process. Hence, Korean companies should strengthen competitiveness and simultaneously prepare for further environmental restrictions in the long term. In addition, during FTA negotiations, the Korean government should push for diversification of bidding, and also discussion on methods for sharing green funds and appeals.

Second, the Korean government should prepare for green industry disputes Korea might become involved in. Factors that can cause disputes should be identified ahead of time to avoid the disputes between major trading counters. Multilateral action at the WTO level must be considered to ensure that China its obligations for subsidy notification, in order to raise awareness on Chinese subsidies in the green industry. In case Korea is targeted with excessive countervailing duties, Korea should actively utilize the WTO disputes settlement system.

Third, the Korean government should provide support for the Korean environmental industry to develop a niche market where it has comparatively high competitiveness. This should include financial and management support, and matching service with outstanding local companies. Moreover, the government needs to negotiate issues such as simplification of customs procedures, customs and duty-free imports with the Chinese government.

Last, cooperation channel among environmental experts and trade professionals should be created at the government level to share information and establish a specific mechanism to resolve environment and trade conflicts.

Changes in the Labor Market Since India’s Economic Reforms

Woong Lee, Young Chul Song, Choongjea Cho and Yoonjung Choi

The momentum of the unexpected economic reform triggered by an external force led the Indian government to apply for the IMF bailout program, following the exhaustion of its foreign reserves at the end of 1991. India’s economic reform is an important example for the Korean economy because of its similarities to Korea’s 1997 foreign reserve crisis. The two countries have both experienced reform led by an IMF bailout.

This report examines changes in the Indian labor market since the economic reforms of 1991. Analyzed here is the direction toward which the labor market moved, as the economic reform has proceeded, with particular focus on the labor market change pre-and-post reform. For the distinction by period, four phases are defined as follows: the period of economic reform by external factors after the 1991 reform, the period of economic reform that reflected domestic demand, the period of booming economy and then the period after the global financial crisis. In industrial relation analysis, the time period under discussion is simply divided into two by 1991 economic reform as the divider because there has not been much change in labor market institutions, including industrial relations, compared to other sectors.

First, Chapter 1 highlights that this study covers a wide range of information regarding the labor market in detail and also attempts to estimate the aggregate matching function for India for the first time.

In Chapter 2, major contents of the reform by sector are organized in different phases after economic reform as follows: ① a period of general reform driven by external factors after adopting IMF stabilization policy (end of 1991 to 1997), ② gradual reform period reflecting the demands of various firms and industries (1998 to 2002), ③ high-growth period (2003 to 2008) and ④ the phase following the global economic recession (after 2009).

The achievements about economic growth, trade, investment and foreign exchange reserves after economic reform are then analyzed, mainly concentrated on the outstanding growth after the 2000s. Although the economy as a whole was impacted significantly by the global recession, the economic reform of the 1990s has turned potential negatives into positive achievements in each sector as India entered the 2000s.

Chapter 2 introduces the future tasks with respect to India’s economic reform. India has been successful in the reform of many sectors although challenges still remain in terms of improving the transparency of the economy and politics as demand for better infrastructure, consistent government policies, a less rigid labor market and the large gap between wage and labor productivity still await resolution.

Chapter 3 investigates several leading indicators of the Indian labor market after the economic reform in 1991 such as labor force participation rate, employment rate, unemployment rate, employment structure and wages.

Firstly, figures for labor force participation rate have appeared to show only minimal changes since the economic reform, though it begins to decline by the mid-2000s. The downward trend of youth population was steadily seen and has become clearer especially since the mid-2000s. The ratio of women in the labor force had quite increased but started to decline after 2005.

Even though the employment rate seemed to have experiences no major change after the economic reform, it tends to decline due to the global recession from 2010. This is attributed to the declining employment rate of the younger population in particular.

The unemployment rate of India has constantly decreased since the reform of 1991, except in 2005, and reached its lowest point since 1998 in 2010 due to the global recession. In the case of the unemployment rate, however, only the labor force population is considered so when the non-labor force such as those who gave up looking for jobs and students are included, the real number of the unemployed are not accurately reflected despite evident signs of a weakened labor market. This issue has been appearing also in the recent unemployment trend of India. Particularly in 2010, when the global economic crisis brought a recession to India’s shores, the unemployment rate actually declined. The unemployment rate of the younger population appeared higher as a proportion to the total employment rate, especially among urban youth and the unemployment rate of women was found to be higher than that of men.

Looking at the employment structure since the economic reforms of 1991, the employment rate in rural area showed a downward trend while the employment rate in manufacturing and services shows an upward trend. This most likely attributes to the enhancement of the Indian economy rather than economic reform. On the other hand, the economic reform may well explain the fact that employment in the public sector has experienced a significant decrease since the economic reform.

As employment elasticity, which measures the growth of employment caused by a unit of economic growth, is analyzed, India appears to have a low level of job creation in contrast to its rapid economic growth from the 2000s. Although the employment elasticity increased with the economic growth after 2000, only the elasticities in agriculture and mining appeared over 1 but the elasticities in services and manufacturing still stayed at 0.12 and 0.24 respectively. As opposed to the high growth of India, this is mainly due to the inability to create jobs in manufacturing and services, sectors that generated a significant portion of the growth. In addition, it also carries negative implications for job creation, meaning that the Indian economy has grown with focus on services rather than labor-concentrated manufacturing, and that India’s labor-related laws and institutions are not flexible. In addition, the wage inflation that exceeds the growth rate is another challenge that Indian economy faces at the moment.

Chapter 4 summarizes the labor market structure and institutions. This chapter then examines changes in India’s industrial relations by dividing the period into ‘before 1991 economic reform’ and ‘after 1991 economic reform.’ Then the industrial relations of Korean firms operating in India are listed and analyzed.

It is generally said that India’s labor market institutions have rarely saw any change since the start of the economic reform. The organized (formal) sector of which regular employees take up the major share accounts for less than 10 percent of all employees and since pro-employee labor laws only apply to them, consequently, the firms hire more and more irregular employees such as contractual and temporary employees. Furthermore the rapid decline of employment in the public sector since 1991, which used to represent three-fourths of the organized sector, could also be another factor that contributed to the growth without employment. During the same period, the private sector employment showed increasing trends in various aspects but it was not enough to compensate for the employment decline of public sector.

The power of employees and labor unions of India seem to move as the employment rate changes. At times of increasing employment, the number of labor unions, labor disputes and dispute participants increase and at time of decreasing employment, the number appears to decrease. Since the 1991 economic reform, the status of labor and labor union displayed a weakening trend. Especially the BJP government, with its pro-business character, ceased to create new employment in the public sector and began restructuring by voluntary retirement so employment fell and thus the influence of labor unions and laborers declined. In the 2000s, as a consequence of the increase in employment led by the private sector, the number of unions and laborers rapidly increased but the number of labor disputes decreased, leading to stable shape of industrial relations.

Weakening of labor unions could be the result of the special circumstances of India. Labor unions in India had been first organized primarily for political purposes. In the major union's case, it is affiliated with political parties especially if it is at the state level, it is nearly impossible for labor unions to form coalitions and led to segmentation of labor unions. This implies that first, the mutual solidarity among labor unions is weak and second, the weak labor unions are unable to support the increasing number of union members. Moreover the Indian government has weakened the power of labor unions by implementing pro-business policies and institutions. For example, the labor union law that was revised in 2001 had made it difficult to register a new labor union.

Strong response from firms was another contribution to the weakening of labor unions. The number of strikes by laborers has started to diminish recently but the number of lockouts is not decreasing accordingly. We could add to this the situation where strikes declined rapidly after the reform in the 1990s and that labor unions have a fear of employers imposing lockouts. Firms also have implemented a variety of institutions namely voluntary retirement, incentive systems, contractual employees and outsourcing.

New policies and institutions were implemented in many sectors after the economic reform in 1991, but there were still no significant changes in the labor market system. As for revision of policies and relevant law, labor happens tho be the sector where the least progress has been made. The main reason was that while the status of laborers and labor unions continued to weaken, it remained difficult for politicians to establish policies that displease laborers, who are also voters.

The Indian government has been trying to implement pro-business policies and institutions since the 1991 economic reform by such means as increasing labor market flexibility and improving the transparency of labor unions. All of these have not been fulfilled so far and as a matter of fact, revision of relevant laws was not made.

Korean firms operating in India have experienced amicable labor relations. Most Korean firms are operated without labor unions. Nevertheless, there certainly exist potential factors that can provoke labor disputes. Disputes may soon arise from demand for wage increases and large proportion of irregular employees. High rate of employee turnover is also pointed as one of the biggest troubles.

Chapter 5 approaches the economic reform from the perspective of trade liberalization and deregulation. This chapter provides extensive literature reviews on the influence of economic reform in the Indian labor market. Next, this chapter performed empirical analysis on aggregate matching function, a widely used macro-labor tool in economics, focusing particularly on the relationship between trade liberalization and new hires.

This study performed an empirical analysis of the impact that India’s trade liberalization on the process of job matching (the relationship between job search and new hires). The results of this research do not differ from the results of the past research (e.g., Hasan et al. 2012). In other words, we may infer that the impact of trade liberalization can vary by region, industry and type of profession since the relationship between trade liberalization and new hires appears negative with no statistical significance when the whole country is considered. On the other hand, from the analysis by period, it is shown that new job creation tended to decline when trade liberalization was slowed due to the industries’ demand. This implies the high probability that the gradual opening to protect domestic firms will actually lead to a decrease in new job creation and thus increase in unemployment.
Chapter 6 provides implications through previous chapters, labor market conditions, labor-related institutions, industrial relations, and empirical analysis of this research.

The institutions of labor market in India have not experienced much change since the economic reform of 1991. The main reason is that state governments possess strong authority regarding labor law-related matters. The pro-worker labor laws are limited only to regular employees and revisions of labor laws for enhancing market flexibility has been delayed or has not proceeded due to political reasons. This type of rigidity in the organized sector has produced a large number of irregular employees and has resulted in economic growth without increase in employment in India during the booming 2000s.

The pro-worker character of labor institutions only apply to regular employees, which firms attempt to balance by hiring irregular employees as contractual and temporary employees. Therefore it is a task of the Indian government to secure the flexibility of regular labor.

From a broader perspective, however, India’s growth without growth of employment is largely attributed to the declining employment in the public sector since the economic reforms began. Besides, the trend of increasing employment in the private sector is very clear, therefore the interpretation of India’s growth without growth of employment should not be exaggerated. The job-mismatch for highly educated workers of India could apply to the current situation of Korea as well. Thus, both governments should prepare systematic and long-term solutions to balance the workers with high-degree education.

The status of labor unions in India became progressively weaker since the 1991 economic reform. The fundamental structure of society takes away from the power of labor unions, since Indian labor unions carry strong political colors and are unable to ally with each other due to their affiliations with political parties, especially labor unions at national level. In addition, since the beginning of the 21st century, Indian government has helped the employers’ side by implementing the systems that make registration of new labor unions difficult. Moreover, because most of the Korean firms in India are operating without labor unions, we may predict that fortunately, Indian labor unions will not become a barrier to the entry of Korean firms to the Indian market.

However, there clearly remain factors with potential to cause labor disputes in India. First, labor disputes may arise during wage negotiations because continued inflation is leading to high demands for wage increase whereas the level of labor productivity stays low. Second, Korean firms in India have a large proportion of irregular employees and this may provoke labor disputes regarding hiring and firing of irregular employees. Third, problems could arise because the process of forcing retirement in the case of regular employees might become tumultuous. Fourth, the turnover rate of regular employees in India is very high thus trouble may occur from the lack of skilled employment. Fifth, in contrast with the continued weakening of labor unions’ status in India, labor disputes, especially in foreign firms about particular issues, are associated with a high level of violence. Korean firms in India should also be aware that there might be other factors in addition to the ones above, hence full attention should be made to establish amicable industrial/labor relations.

The gap between wage increase and labor productivity is also an important factor in the investment climate for Korean firms in India. They should pay more attention to this problem and formulate an adequate solution. To do so, Korean firms are required to either establish or facilitate the educational programs within the firm and prepare long-term solutions by cooperating among themselves and with the Korean Chamber of Commerce in India.

In particular, one of the most troublesome features of India’s changing investment environment is labor management. Therefore, the Korean government should provide assistance through supporting policies. A possible plan of support by the Korean government could be the establishment of a system for sharing of databases among Korean firms in the local market. Additionally it can also strengthen the role of KOTRA’s local branch or the Korean Chamber of Commerce in India to expand its support to include labor relations as well as labor management.

India’s economic reform, which began in earnest during the early 1990s, has transformed the labor market into one that aims to improve workers' living standards. This is well reflected in the previous literature, especially after the 2000s. According to earlier studies, the economic reform, which triggered trade liberalization in India, achieved decreases in poverty and wage increases. With respect to unemployment, victims and beneficiaries may coexist by different type of profession or industry but overall, economic reforms had little effect on unemployment in India. In sum, trade liberalization may contribute to the living standards of workers because it has only a limited impact on unemployment while lowering poverty as well as increasing wages.

According to the empirical results by the matching function analysis with the use of monthly data from 1988 to 2012, the relationship between trade liberalization and new employment appears negative with no statistical significance, a conclusion similar to previous works about the effect of trade liberalization on unemployment. However, when the period of 1998 to 2002, marked by limited trade liberalization from the demands of India’s domestic firms, is applied, new job creation rather diminished in response to trade liberalization. This implies that gradual opening of markets to protect domestic firms can cause a shrinkage in new hires and thus an increase in unemployment. The result suggests much regarding conditions of continuing globalization.

Since the impact of liberalization on unemployment is limited in India, expansion of trade works positively to ameliorate the labor market environment. Therefore, the Indian government should constantly carry forward the promotion of trade liberalization. Regarding this, Korea and India are required to cooperate actively in connection with the negotiation for the CEPA upgrade and accelerate the mutual opening for trade expansion together.

The Changes in China’s Bond and Foreign Exchange Market and Their Effects on Korea.

Ik Joon Moon et al.

Shanghai Pilot Free Trade Zone, announced in October 2013, has attracted attention from around the world. This is because the world has noticed the potential for growth in China’s financial industry, which has yet to attain maturity commensurate with its sheer scale, despite the fact that China has the largest manufacturing industry in the world. This study focuses on analyzing the changes in China’s bond and foreign exchange market and their effects on South Korea.

This paper consists of five chapters. Following the introduction, chapter 2 outlines the Chinese government’s bonds policy, status of the bond market, direction of future development and et cetera. Although the Chinese bond market has expanded rapidly, when we consider the scale of the Chinese economy, it can be said that the market has not fully opened up to overseas firms and that its development has been slow. By looking at cases from Japan, Germany, and Australia, we can expect that China will develop its bond market by promoting the offshore bond market, opening the internal bond market and issuing increased amount of corporate bonds. Initially, it is expected that China will try to increase the amount of non-resident bonds issued and promote the offshore RMB bond market. Also, in an effort to change the mode of economic growth, China is expected to increase the issuance of corporate bonds for private SMEs, which struggled with their financing under the existing system.

The third chapter examines the changes, status and outlook of the Chinese exchange rates system. The Chinese exchange rate system has been transformed alongside China’s reform and opening-up process and the transformation is still ongoing. By implementing the unified managed floating system from January 1994, China has been operating both the fixed exchange rate and managed floating systems that fix or adjust exchange rate bands according to the economy’s status and speed of development process. The process of capital account liberalization in China is expected to be gradual, since the Chinese government is being cautious about the side effects of the open capital market and because of the low development level of the Chinese financial market. Exchange rates system reform is also expected to be gradual alongside the capital account opening and interest rate liberalization.

Chapter 4 conducts an empirical analysis on the effects of the fluctuation of Chinese bond interest rates on South Korea’s bond interest rates, and on factors determining the won-RMB exchange rates. Firstly, the results show that the Chinese bond yield fluctuation does not have a direct impact on South Korea’s bond yield. However, there were statistically significant indirect effects through channels of synchronization of business cycle, prices and policies. Therefore, if China were to open up its financial market through the interest rate liberalization, the effects on the Korean bond market are likely to become larger, through various channels including the aforementioned synchronization of business cycle, prices and policies. Secondly, according to the analysis on factors determining the KRW-RMB exchange rates, the fluctuation of exchange rates between South Korea and China are affected by the difference between the two countries’ bond yield and the difference between the two countries’ benchmark rates. However, when won-dollar exchange rates are added, only the difference between the two countries’ benchmark rates affected KRW-RMB exchange rates. Ultimately, this study concludes that changes in won-dollar exchange rates system have statistically significant effect on won-RMB exchange rates.

Changes in the bond and foreign exchange markets that were examined in this paper reflect certain implications and possible countermeasures for South Korea. First, as the Chinese government is expected to promote the offshore bond market and, although gradually, open up the internal bond market, South Korea needs to take advantage of this opportunity. Korea should participate in both the offshore and internal RMB bond market, for example, and Korea can use RMB in financing through offshore RMB bond issue or reinvest RMB obtained from trade in offshore RMB bonds. Also, Korea needs to expand its investment in Chinese bonds, which are relatively profitable and stable, for diversification of its investment in foreign exchange reserves.

Second, Korea needs to seek policies that can utilize and gradually change Chinese investors’ investment in Korea, which are expected to increase, to stable, long-term investment. So far, majority of the investment have been led by the government, however, meaning the QDII investment overseas are expected to increase in the future. Thus, South Korea should seek ways to attract these investments and utilize them in the long-term.

Third, it is expected that the changes in China’s exchange rates system will be carried out cautiously and simultaneously with RMB internalization and interest rate liberalization. Accordingly, Korea should, in the long term, form and expand a market for direct trading of KRW and RMB. The market for direct trading of KRW and RMB will reduce the impact of won-dollar rates fluctuation and instead strengthen the role of trade and financial transactions between South Korea and China in determining won-RMB exchange rates. In addition, the Korean government should consider establishing an offshore RMB centre.

International Support for Climate Change Capacity Development and Policy Implications for Korea


Jione Jung and Jihei Song

From Paris Declaration to Busan Partnership, High Level discussions on aid effectiveness have emphasized the need to improve developing countries’ capacity. It was mentioned that self-reliant capacity of developing countries is a key condition for sustained growth, and that donor countries’ active support is essential in fostering such capacity.

Meanwhile, at the 16th session of the Conference of the Parties to the United Nations Framework Convention on Climate Change, the parties reached an agreement on two significant issues. Firstly, the parties agreed to scale up climate finance to 100 billion dollars annually by year 2020. In addition, the parties agreed to establish the Green Climate Fund, a specialized international fund on climate change mitigation and adaptation. Six countries, including Korea offered to host the secretariat. At the second meeting in November 2012, the GCF Board members decided that the secretariat would be hosted by Korea. The Conference of the Parties session, held the following month, acknowledged the Board’s decision. Thus, Korea officially became the host country of the Green Climate Fund Secretariat.

In order to expedite action against the adverse impacts of climate change and shift to a low-carbon development paradigm, the GCF will concentrate on building developing countries’ capacity against climate change in the initial stages of its operation. Korea has pledged to provide 40 million dollars to assist climate-related capacity building in developing countries. As a consequence, establishing climate capacity programs to foster country ownership and also to link the programs with the GCF’s own capacity support has now become an urgent task. The program must also be innovative and effective in order to differentiate itself from existing programs. This study seeks to examine the international consensus related to capacity in developing countries. By reviewing previous and current activities on climate capacity promoted by international organizations and donor countries, the paper seeks to serve as a fundamental reference for Korea’s support on climate capacity.

The study is structured in the following order. As mentioned above, international discussions and consensus on capacity and capacity development are outlined in Chapter Two. To clarify an abstract term like “capacity,” the study borrows definitions from the OECD Development Assistance Committee. In the second part of the chapter, a review is provided on the negotiations and decisions made under the UNFCCC on capacity building. Chapters Three and Four describe some notable climate capacity support activities pursued by the World Bank, UNDP, and three donor countries: Germany, Denmark, and Sweden. The World Bank with abundant experience in large-scale projects, recognizes the importance of the recipients’ capacity in order to maintain aid effectiveness. The UNDP, likewise, has sufficient experience in implementing capacity projects. Meanwhile, Germany has been long involved in technical assistance and it is now actively expanding the scope of activities to include various interrelated topics. On the other hand, although not substantial in size, Denmark and Sweden also provide sizable assistance and display extensive interest in capacity development on environment and climate change.

To conclude, Chapter Five seeks to provide suggestions for Korea in order to support climate capacity. First of all, stakeholders’ understanding in capacity and capacity development is a priority. Through its own experience, Korea genuinely recognizes the necessity of capacity and possesses the willpower to pursue capacity development. Building on its understanding and experience, Korea will be able to match suitable activities with countries in need. In addition, principle and process regarding capacity development need to be established. Korea International Cooperation Agency (KOICA) and the Ministry of Environment could consider cooperation in developing a framework for climate capacity development at the national level.

The next task is to develop distinctive and innovative ideas on climate capacity. For instance, Korea could consider launching an online platform on green growth policy, strategy, legal framework, and technology in close collaboration with the Global Green Growth Institute. Such platform could serve as a medium to match developing countries’ needs with donors’ expertise. Furthermore, integrating capacity development into general international development activities can produce positive added impact. As an example, Denmark promotes capacity development as an element in each stage of their program. Likewise, Korea could include capacity development in its overall climate change projects.

Finally, internal or domestic capacity on the topic of climate change in Korea must be developed sufficiently. Activities in that regard include, needs assessment, program structuring, as well as monitoring and evaluation. In the internal capacity improvement process, private experts should also be included along with public implementing agency stakeholders. Especially since climate change covers a wide range of topics, a large pool of capacity specialists from private and public sectors alike can create a positive impact and is highly desirable.

Prospects of China’s Political and Economic Changes and the Path Forward for Inter-Korean Economic Cooperation

Dongho Jo and Young-sook Nam

The main objectives of this study are to review the prospects for China’s political and economic changes and challenges under the new leadership and to propose directions for inter-Korean economic cooperation.

China has emerged as North Korea’s largest economic partner through increasingly active economic engagement in the context of shrinking inter-Korean economic relations. As North Korea’s economic dependence on China has surged over the years, China is expected to play an ever-increasing role in shaping the outlook for the North Korean economy and the Sino-North Korean economic relationship.

Chapter II of the study reviews the status and characteristics of Sino-North Korean economic cooperation and inter-Korean economic cooperation. It shows that the Sino-North Korean economic relationship has accelerated since 2009 and has expanded to include the joint development of border areas, which reflects China’s national economic interests in advancing the economic status of Northeastern provinces as well as in playing a leading role in the Northeast Asian region.

Chapter III then analyzes the prospects for China’s political and economic changes and challenges under the new leadership. China’s new leadership faces many domestic and international challenges in achieving the “Chinese Dream” put forth by President Xi. The new leadership has also been pressing hard for a U.S. commitment to a “new model of major country relationship.” Reflecting China’s new role as an emerging major power, China is expected to emphasize normal state-to-state relations with North Korea.

North Korea’s new leader, Kim Jong-un, announced the “Dual Policy for Nuclear and Economic Development (known as the “Byungjin Line”)” in March 2013. Chapter IV discusses the meaning of the “Byungjin Line” and implications for North Korea’s economic policy. It also provides an overview of the status of the North Korean economy and analyzes the direction and limitations of its economic policy.

Based on the analyses of previous chapters, Chapter V proposes a path forward for inter-Korean economic cooperation in view of the current government strategy for a “trust-building process on the Korean peninsula.” The policy implications emerging from this chapter include the following: first, the major task of trust-building process on the Korean peninsula is to induce North Korea’s transition from Byungjin 1.0 to Byungjin 2.0. While Byungin 1.0 is a dual policy for nuclear and economic development, Byungjin 2.0 represents a dual policy for non-nuclear and economic development; second, our thinking for inter-Korean economic cooperation needs to be reshaped so that we can utilize it to serve as a growth engine for our economy; third, we need to be proactive in promoting inter-Korean economic cooperation and taking advantage of North Korea’s keen interest in improving its economy; and lastly, fruitful paths might include pursuing projects in line with North Korea’s economic policies, developing multinational projects involving China, and utilizing the “package” method by linking inter-related projects to maximize synergy effects.