The Effect of Opening ICT industry and Cooperation by the KoreaㆍIndia CEPA

Hankyoung Sung, Sang-Joon Lee, Soon Cheul Lee, and Sung-Gul Hong

This study aims to identify development plans and to explore their application in the ICT industry related to utilization of the Korea-India CEPA. The Indian economy was under the danger of financial crisis during the recession but still has maintained its position as a major emerging market. After Korea-India CEPA entered into force in January 2010, trade between the two countries rapidly increased. However, bilateral trade has declined due to the recent global economic crisis. In addition, while Indian investment to Korea is being expanded, Korean investment to India among small and medium enterprises has been shrinking.

In terms of competitiveness, Korea has comparative strengths in the ICT manufacturing sectors, and also in banking and finance. Since the Ministry of Science, ICT and Future Planning was established, Korea views the ICT as a pivotal sectors in its quest for a creative economy. India’s policy goal on ICT involves making India a global hub and destinations for IT-ITeS. There are obstacles in this regard as Korea suffers from the shortage of ICT expertises and India is weighed down by potential IPR issues. The Korea-India CEPA could strengthen the complementary cooperation in ICT between Korea and India. According to the dynamic CGE model analysis, both economies would have benefit if the Korea-India CEPA succeeds in increasing the productivity of ICT manufacturing and ICT service sectors in both economies.

Korea has increased cooperation in ICT with the US., the EU, as well a inemerging markets through its FTAs. The expansion of the CEPA concession, enhancement of the CEPA utililization rate and the movement of ICT expertise would be implemented by regular job fairs, which not only provide information on Indian IT-related firms, universities and the market but also provide ‘practice’ projects on ICT for small and medium enterprises. In addition, it is necessary to figure out problems on a fundamental level regarding mismatches of HS codes and certification of the origin. Lastly, we should pursue long-term performance to bolster relations between the two countries by adopting a careful and gradual approach.

Production Networks and Economic Cooperation in the Asia Pacific Region

Chul Chung et al.

The new landscape of international trade negotiations in the Asia-Pacific can be summarized by the emergence of plurilateral regional trade agreements (RTAs), such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). These two ongoing regional economic integration (REI) initiatives have shifted the focus of trade negotiations from bilateral free trade agreements (FTAs) to plurilateral RTAs in the region. Recent progress in these initiatives together with growing regionalism has drawn more attention to global production networks and regional supply chains.

This study examines whether and how production networks affect the regional economic integration of the Asia-Pacific region. By investigating the relationship and pattern of production networks and REI initiatives both theoretically and empirically, this study aims to provide policy implications for APEC and Korea's approach to the ongoing REI initiatives. Further, a desirable REI model is suggested in the study by conducting policy simulations based on scenarios of expansion of production networks in the region.

Global outsourcing and production sharing activities are most prominent in East Asia and the Asia-Pacific region. Economies in the Asia-Pacific are more deeply interconnected through trade than those in any other region. Statistics show that the share of intra-regional trade in parts and components for APEC increased from 68 percent in 1989 to 72 percent in 2012, while that for the EU decreased from 66 percent to 60 percent. In the case of NAFTA, the intra-regional trade share in parts and components stayed mostly the same at around 43 percent during the period.

The empirical results show that the stronger the existing production network between a pair of economies, the greater the probability of entering free trade agreements into effect between those economies. Furthermore, the correlation between production networks and regional economic integration measured by RTAs and FTAs among members is the highest in the APEC region. Thus, the empirical results imply that production networks are one of the most important determinants of regional economic integration and APEC is one of the most active region in that regard. On the other hand, results from the policy simulation analysis using the probit model and gravity equation suggest that the simplicity of the rules of origin (ROOs) and the efficiency of trade facilitation are the two most critical factors in improving the welfare of REI.

Based on the results of the empirical and policy simulation analysis, this study suggests the following policy implications for APEC in the context of expanding regional production networks and deepening economic integration in the region.

First, specific action plans and persistent efforts to attain Bogor Goals and trade and investment liberalization, including EGS (environmental goods and services) and ITA (Information Technology Agreement), should be made for the expansion of regional production networks. To this end, it is crucial for APEC to provide an environment within the region in which the formation of production networks can be achieved through properly functioning markets. As this study showed, production networks, which reduce production costs through production fragmentation, play an important role in regional economic integration. That is, the transition mechanism operates through the market and hence the focus of trade and investment liberalization should be on policies aimed at keeping markets free and properly functioning. Meanwhile, one of the specific action plans of this sort involves establishing measures to effectively implement the agreed liberalization of EGS in APEC. Special attention should also be paid to policy measures to create jobs and promote the competitiveness of small and medium enterprises (SMEs).

Second, APEC needs to set the priority on enhancing the competitiveness by promoting "open regionalism" from the early stage of REI. In order for APEC to effectively establish a regional production network under open regionalism, institutional cooperation is an integral part of reducing and eliminating tariffs and non-trade barriers, facilitating finance and services trade, increasing mobility of human capital and persons, establishing infrastructure for trade and investment facilitation, and consolidating regulations among member economies. In addition, it is necessary to establish concrete policy measures and institutional instruments that can put the concept of open regionalism into practice.

Third, the rules of origin should be simplified, as the policy simulation analysis of this study suggested, so that member economies can reduce the cost of building regional production networks and raise the utilization rate of existing FTAs/RTAs in the region. As a way of simplifying ROOs, APEC may adopt complementary instruments such as de minimis, diagonal cumulation, and self-certification so as to minimize costs and losses stemming from the complexity of ROOs, which will eventually contribute to enhancing productivity. In the case of diagonal cumulation, this study recommends APEC to introduce a Pan-Asia-Pacific Cumulation System (PAPCS).

Fourth, APEC-wide efforts to raise the effectiveness of trade facilitation should be made on a continuous basis. Increased effectiveness of trade facilitation is the key to bringing about a more pragmatic use of the regional supply chain in practice. To this end, APEC member economies need to work together painstakingly to lower potential costs associated with building the production network in the region. It is recommended for APEC to prioritize certain areas such as integration of cross-economy standards, bolstering electronic commerce, enhancing transparency of information and customs procedures, and alignment of domestic rules and regulations. In so doing, it will improve the supply chain connectivity among APEC economies along with regional economic integration.

Lastly, Korea can play a pivotal role as a middle power and founding member of APEC; expanding the production network in the region by actively engaging other member economies to find a way to facilitate ongoing regional trade negotiation initiatives towards the free trade area of the Asia Pacific (FTAAP); thus providing ways to enhance transparency. For instance, Korea has successfully led the capacity building needs initiative (CBNI) as a way forward on REI towards FTAAP in APEC for three years starting in 2012. Korea can contribute to expanding the APEC-wide production network and REI in the region by extending and upgrading the CBNI program to make it more comprehensive and promote intensive discussion for specific action plans.

 

Economic Impact of the Bali Packages of the Doha Round


Jin Kyo Suh et al.

The 9th WTO Ministerial Conference in Bali reached agreement in December 2013 on a package of measures that form a small component of the much wider Doha Development Round agenda. The study seeks to review the outcomes of the Conference in terms of their possible impact on the world economy, including Korean economy.

On the issue of trade facilitation, an extensive Ministerial decision was agreed in Bali committing member states to publication of a range of information relevant to import duties and procedures, including where possible through the internet; establishing inquiry points; advanced notification of new measures; timely and priority treatment of perishable goods; defined appeals and review procedures; freedom of transil; border agency and customs cooperation.

Under the S&D provisions, a commitment was made to providing assistance on a “best endeavor” basis, in line with the needs of developing and least developed country(LDC) WTO members. The timing of the implementation of the provisions of the trade facilitation agreement is also related to the implementation capacities of developing and LDC members. Implementation will not take place until the required capacity is in place. Nevertheless, LDCs will required to make commitments in line with their capacities.

At the Bali Ministerial meeting, agreement was reached on a range of simplification measures related to the administration of tariff-rate quotas (TRQs). Agreement was also reached on bringing TRQs under the Uruguay Round Agreement on Importing Licensing Procedures, with some specific modifications. Where cases of unjustified TRQ under fill are identified, the administrative authorities are required to establish transparent mechanisms for the reallocation of quotas to operators who can effectively utilize the quota, within a framework laid down in the agreement.

On export competition, the Bali agreement took the form of a Ministerial declaration rather than a decision. This declaration reiterated the recognition of the highly trade distorting and protectionist nature of various forms of export support and the importance of addressing this issues within the overall agricultural negotiations. However, regret was expressed that no agreement had been reached on how to eliminate export subsidies and equivalent measures in the run-up to the 2013 Ministerial Conference.

On the issue of duty-free, quota free access for LDCs, the Ministerial decision agreed in Bali commits “ developed country members that do not yet provide duty-free and quota-free market access for at least 975 of products originating from LDCs” to seek to improve their existing duty-free and quota-free coverage for such products, so as to provide increasingly greater market access to LDCs, prior to the next Ministerial Conference.

The Bali Ministerial decision commits WTO members to endeavor to develop or build on their individual rules of origin arrangements applicable to imports from LDCs in accordance with guidelines set out in the decision. These guidelines requires simplicity, objectivity and transparency in establishing the rules of origin applicable to LDCs.

Using computable general equilibrium model of the world economy (GTAP), we simulate the economic impacts of the 2013 Bali agreements.

The most important finding at the aggregate, global level is that Bali agreements will produce modest gains, in the world real GDP of $1,550 to $2,320 billion. Both developing and developed countries would be major beneficiaries of an agreement on trade facilitation. Global benefits are almost equally distributed to both economies. However, other agreements such agricultural TRQs, even duty-free and quota-free for LDCs has a little effect on the increase in world GDP. Trade facilitation can thus be described as critical in allowing both developing and developed countries to improve their economy, and thus we can recognize trade facilitation as a balanced interest of WTO members.

In conclusion contrary to a popular perception the Bali Ministerial Conference made progress on the Doha round of trade negotiations, adopting decisions on the ten texts regarding the three pillars of the Bali package: trade facilitation, some agricultural issues, and selected development-focused provisions including LDC issues.

Now more than 80 percent of the work of the Doha round is complete and for the rest, the WTO members will have to take a political call keeping in mind their developmental needs and overall balance of negotiations. This shows that members still have faith in the system. The key to unlocking the Doha impasse lies in pragmatically focusing on attainable outcomes, first in bali and then preferably before embarking into the post-2015 world of achieving larger development gains.

In these process, Korea needs to participate actively in the negotiations, particularly with a possible compromise on essential issues such as agriculture and NAMA.

Analysis on the Service and Investment Chapters of Korea’s FTAs: A Comparative Analysis of the Korea-US FTA vs. the Korea-EU FTA

Jong Duk Kim and Jun Hyun Eom


Since the late 2000s, Korea has actively engaged in FTA negotiations. As a result, Korea had already ratified nine FTAs, including the Korea-US FTA (the KORUS FTA) and the Korea-EU FTA. Nowadays, FTA negotiations have broadened their scope to include issues other than trade in goods such as service and investment. In addition, there is a distinct shift toward the so-called Mega-FTAs such as TPP, TTIP, and RCEP.

This study examines service and investment chapters of the Korea-US FTA and the Korea-EU FTA. Taking GATS as a starting point, the authors first compared the legal texts between GATS and the Korea-US FTA and between GATS and the Korea-EU FTA. Then, they proceeded to find explanations for the identified differences.

Regarding comparison of the Korea-US FTA and the Korea-EU FTA, there are two systematic differences: the existence of the investment chapter and the negative or positive list approach in liberalizing services and investment. First, only the Korea-US FTA has a separate chapter on investment. It is because the European Commission has not been empowered to negotiate on investment issues before the Korea-EU FTA negotiation was concluded. Second, the Korea-US FTA takes the negative list approach while the Korea-EU FTA takes the positive list approach.

When it comes to the detailed provisions of the service and investment chapters, the authors have found nine points as follows. First, the National Treatment (NT) provision of the Korea-US FTA contains a unique regulation on the “regional level of government,” taking into consideration the U.S. position. Second, the Most-Favored Nation (MFN) provision of the Korea-EU FTA stipulates a unique regulation on “the regional economic integration agreement,” taking into consideration the EU's position. Third, Market Access provisions of the two FTAs are similar. Fourth, the “Local Presence” (LP) provision of the Korea-US FTA is superior to that of the Korea-EU FTA in terms of coherence and cohesion. The Korea-EU FTA stipulates the LP provision, which is a qualitative restriction, as a form of footnote under other quantitative restrictions. Fifth, the “Senior Management and Boards of Directors” (SMBD) provision of the Korea-US FTA is also superior to the Korea-EU FTA in terms of coherence and cohesion. The Korea-EU FTA stipulates the SMBD provisions as a form of footnote under two different articles. Sixth, the “Domestic Regulations” (DR) provision of the Korea-EU FTA is similar to that of GATS. But the DR provision of the Korea-US FTA turns out to be much improved compared even to that of NAFTA in terms of clarity and logic. Other three points, which are the “performance requirement” (PR), “subrogation”, and the “investor-state dispute settlement” (ISDS) are found only in the Korea-US FTA.

With these findings, the authors offer some suggestions. First, the Korean government has to pay close attention to negative or positive list approach in service liberalizing talks in the so-called Mega-FTAs, such as TPP and TTIP. Second, the Korean government should be active in stipulating certain provisions including “performance requirement” (PR), “subrogation”, and the “investor-state dispute settlement” (ISDS) in future FTA negotiations. Third, the Korean government should pay special attention to the “regional level of government” issue when negotiating with China.

A Study on Japanese Fiscal Sustainability and Fiscal Discipline

Gyu Pan Kim et al.

This report analyzes Japanese government’s fiscal discipline mechanism, focusing on the fiscal sustainability of Japan which has re-ignited controversy after the Great East Japan Earthquake in 2011. The research scope covers the fiscal sustainability of central and local governments of Japan as well as that of social security funds. The main purpose of this report is to clarify how the fiscal discipline mechanism has failed in Japan, and to draw policy implications for Korean government’s fiscal management. It is highly probable that the economic and fiscal conditions in Korea will follow in the footsteps of Japan’s case, taking into account its rapid aging speed and onset of low growth rate.

Chapter two reviews fiscal sustainability issues of Japanese central government through key indicators, then introduces the studies dealing with Japanese fiscal sustainability from an economic perspective. We find that fiscal conditions in Japan has not been sustainable since the late 1990s. Nevertheless, Japan is free from fiscal crisis in virtue of its ‘zero-interest rates policy’. At the same time, foreign investors’ lower holding of Japanese government bonds contributes significantly to avoid fiscal crisis in Japan. Second half in chapter two exhibits the importance of tax reform to establish the future fiscal sustainability in Japan. We examine the background of Japanese government putting emphasis on consumption tax reform against individual income or corporate tax yet going through countless political impasses.

Chapter three shows that Japan’s cumulative government debt has derived from the relaxation of fiscal discipline in the government’s budget operation and the relationship between politics and bureaucrats. The relaxation of fiscal discipline in Japan has three major points. First, frequent issue of government bonds does not comply with the Golden Rule in Article four of the Public Finance Act. Second, a large part of various economic measures is organized in supplementary budget, which is free from the budgetary ceiling guidelines set by the Ministry of Finance Japan. Third, this budgetary ceiling guidelines also contributed to encourage budget planning with political considerations since 1990s, especially in public investment. It is apparent that the power game between politicians and bureaucrats limits the budget examination authority of the Ministry of Finance. Second half in chapter three analyzes three examples of how Japanese government intended to promote the establishment of fiscal discipline in the past; Hashimoto cabinet adopting Fiscal Structural Reform Law in 1997, Koizumi cabinet proposing Intergrate Expenditure and Revenue Reform in the early 2000s, and National Fiscal Management Strategies of the ruling Democratic Party of Japan(DPJ) in 2010. We point out the limits of expenditure cut priority and the lack of national consensus on the reform.

Chapter four covers fiscal sustainability and fiscal discipline issues of Japanese local governments. First, we examine the fiscal capacity of local governments through expenditure and revenue indicators. We confirm the main two factors threatening the local fiscal sustainability in Japan are the lack of resources on revenue side and the increase in social security spending on expenditure side. Then, we confirm that the Japanese government has put efforts on the reform of local revenue-sharing system and local tax system to promote the local fiscal sustainability. The reform of local revenue-sharing system is focused on reduction of reliance on temporary local bonds, adjustment of local subsidy through identifying local fiscal demand, pursuing decentralization of local power through the adoption of horizontal fiscal transfer system, and reinforcing accountability of local government’s fiscal management. On the other hand, the reform related to local tax system corrects the distribution of national and local revenue sources. Second half in chapter four examines whether local fiscal consolidation is valid for strengthening fiscal discipline, which was introduced in the wake of Yubari city’s fiscal crisis in 2007. We conclude that the recent improvement in financial indicators suggests positive correlation between the two factors. Finally, we review the local fiscal reform which Abe administration is pursuing and the new system change to mitigate regional tax revenue disparities.

Chapter five describes financial and structural problems threatening the sustainability of Japanese social security system. we find that it is necessary to eliminate disparities inter- and intra-generation in addition to the consumption tax increase and pay cut reform, so that the social security system function properly as a safety net. Next, we analyze the historical evolution of the Japanese social security system and arrive at the following three conclusions. First, the social security system has not been subject to the increase in premium, which resulted in increased fiscal burden. Second, the various reform measures took place until 1985 caused the increase in the fiscal burden and the imbalance between the existing public pension system. Third, the pension reform measures, so called the macroeconomic slide system introduced in 2004, does not function well in deflation, while the announcement of the consumption tax hike in 2012 is insufficient to secure fiscal sustainability in the low birth and aging era. Second half in chapter five identifies the effects and limitations of reform measures that the Japanese government has introduced in order to ensure sustainability of the social security system. Specifically, the public pension and medical insurance system, referred to as the two major axes of the social security system, are reviewed to identify the problems in fiscal management. Although the public pension system repeatedly implemented such measures as increasing insurance premium, cutting coverage, and raising the age of entitlement, it has failed in proactive response to the changes in the aging society. Also, in the public medical insurance system, fine-tuning approaches such as adjustment of finances between the insureds, and measures to reform senior medical insurance system can not guarantee the sustainability of the system.

The Russo-Sino-North Korea Triangle: The American Factor and Policy Implications for Korea

Jung Chul Lee, Jun-Kee Baek, Jae-Kwan Kim, and Nam-Ju Lee

The purpose of this work is to provide the Park Geun-hye administration with policy implications in response to the current diplomatic situation in the East Asia region: a rising China, the US “Pivot to Asia”, Japan’s reversion to conservatism under the Abe administration, and North Korea’s revisionist behavior. To this end, this research paper seeks to highlight the Russo-Sino-North Korean triangle that is the historical legacy of the region and how it affects the current state of affairs, through certain elements of path dependency and eliciting features of and prospects for a newly established trilateral relationship. We are entering the age in which the Northern trilateral relations are indispensible to the peaceful unification of the North and South Korea and the diplomacy of coexistence through trust, upon which Park’s administration places special emphasis.

The Russo-Sino-North Korea triangle which was established in the 2000’s has become less institutionalised and the interaction among three parties involved has also been declining in terms of frequency and intensity compared to the trilateral regime established in the 1950’s. The Russo-Sino-North Korea triangle once characterized as a military alliance has been considerably weakened by the elimination of the automatic-military intervention clause from the treaty involving those three nations; and the close association between the parties and governments regarding domestic and international affairs is no longer in place. Nevertheless, China-Russia and Russia-North Korea concluded treaties of friendship in the 2000’s which included a specific clause stipulating that the parties work closely with each other in case the other party is faced with immediate threat, and the Sino-North Korea treaty of friendship effectively maintained the clause for automatic military intervention. In other words, although there is no explicit treaty including all three nations, there is a probable mechanism among three parties which allows tripartite consultation or common action in case of a crisis arising in one party. In fact, it is an undeniable reality that the Russo-Sino-North Korean triangle has strategic significance in North East Asian geopolitics in light of the fact that they have been cooperating, albeit loosely, to deal with key issues such as the North Korean nuclear issue.

In this regard, the structure of the Russo-Sino-North Korean triangle identified by this research is as follows. Firstly, the triangle is not a systematisation or institutionalisation of the tripartite consultation but it comprises the total sum of the bilateral relations. There is, however, a dynamism as this triangular character is in operation with respect throughout the bilateral relations between the three countries, which can be seen in the interactions between Sino-North Korea and Russo-North Korea in particular. Nonetheless, the state of the Russo-Sino relationship also exerts a strong influence on the position of North Korea within the triangle. Secondly, each bilateral relationship has its own separate status within the triangle and it is the different interactions among those bilateral relations that create its dynamism. The Sino-Russian relations can be said to be the stabiliser of the triangle. Sino-Russian relationship provides a foundation as China is the most important actor within the triangle and Russia also happens to be a global power. Without the stabilizing force of the Sino-Russian relationship, the triangle would lose its unique strategic value. In view of the fact that China and Russia are reinforcing their strategic alliance, it seems that a Sino-Russian relationship is likely to serve as an impetus for the development of the triangle in the future as well.

The Sino-North Korea relationship takes the position of a conduit within the triangle. The Sino-North Korea relationship brings more strategic value to the triangle and shows greater variation in comparison to Russo-North Korea relations. Since 1992, when North Korea came into serious conflict with China, there have been three phases which led to the restoration of relations eventually, but this actually demonstrates the instability of the relationship. Increased cooperation between China and North Korea would amplify the impetus gained from Sino-Russia relations, and decreased cooperation would cause the opposite result. The Russo-North Korea relations plays a role of a balancer within the triangle. North Korea makes full use of the Russo-North Korea relation in order to achieve balance vis-a-vis the Sino-North Korea relationship while Russia endeavors to make the best use of its relationship with North Korea in order to prevent the triangle in Northeast Asia from being replaced entirely by the Sino-North Korea relationship.

With regard to future prospects for changes in the triangle, a number of possible scenarios can be predicted considering the roles of internal and external variables. The most important internal variable is the value of the triangle, which is complementary to national strategies. Higher level of cooperation within the triangle would lead to more complementarity and vice versa. The research result shows that the level of complementarity within the triangle is still not very high and quite a few factors remain for conflicts and competition in development and economic relations. Therefore, it would be unlikely that the internal impetus of trilateral cooperation will develop into something similar to the trilateral regime in the 1950’s based on ideological identity, given that the trilateral regime in the 1950’s was itself an exception. However, it is worth paying attention to the possibility of increased complementarity within the triangle economically since the economic benefits, not ideology as in the past, can raise the level of cooperation. Such a change is particularly noticeable in the China-Russia relationship. For example, bilateral trade volumes within the triangle is rising rapidly and energy cooperation is being pushed forward vigorously. Regarding Sino-North Korea relations, North Korea’s degree of dependence on trade with China is increasing but is far from complementary. Besides, the level of economic exchange between Russia and North Korea remains very low, which implies the possibility of rapid expansion of cooperation. Especially, the pace with which North Korea opens itself to the world will be the most decisive factor. Nonetheless, it should not be a matter of concern to us that the level of cooperation within the triangle is increasing under such circumstances because the three parties are in need of external capital and technology from South Korea, Japan, and the USA for economic cooperation within the triangle. Russia and China are seeking a policy which is compatible with national interests of South Korea, who has a positive perspective on open-door policy for regional cooperation activities. Therefore, as the triangle pivots around the possibility of North Korea’s opening to the world, other actors are given sufficient ‘space’ for cooperation and, by utilizing this space as a medium, South Korea can raise the level of regional cooperation in Northeast Asia. South Korea’s strategy should be to effect such a change in this direction.’’

Among other external variables, it seems that the US factor will have a huge impact on the triangle. From the standpoint of the dynamic inside the triangle, there is little likelihood of a Russo-Sino-North Korean triangle developing into exclusive cooperation. However, there is a possibility that the triangle might come into a conflict with other powers from outside, contingent on the way in which U.S. factor comes into play. Given the circumstances, this research pays special attention to US “Pivot to Asia” strategy and the reactions of Russia, China, and North Korea to the strategy. Since the USA expressed its intentions on the“Asia shift”, Russia, North Korea, and China have become more wary and, if this trend continues, it might lead to closer security cooperation within the triangle as a result. In particular, the closer cooperation in security among South Korea, the USA, and Japan will be a decisive factor affecting such circumstances. The USA will likely seek ways to avoid such a confrontation that might place a heavy strain strategically as it adjusts rebalancing policy while maintaining separate relationships with China and Russia. However, Russia and China will remain vigilant towards America’s Asian policy because it is clear that the USA’s intention is to make use of the ROK-USA alliance and Japan-USA alliance more effectively.

Given these circumstances, there is a high likelihood of competition between countries of the ‘triangle’ and the USA, and cooperation within the three countries relations will continue to increase unless the North Korean nuclear issue emerges as an obstacle within the triangle. It is necessary that we brace ourselves for such a situation where North Korea’s efforts to enhance its relationship within the triangle expedites exclusive cooperation.

In summary, it is highly likely that increased economic cooperation within the triangle might leave more room for South Korea to engage its constituent countries. On the other hand, it would be a highly undesirable scenario if the US “Pivot to Asia” strategy resulted in increased conflict between the USA and China; and leads to security cooperation within the triangle to counter the South Korea-America-Japan military cooperation. This would reduce the role of South Korea and confirm the exclusivity of tripartite relations as a result.

Based on the analysis above, the following policy responses are necessary if the Russia-North Korea-China relationship is to accord with South Korea’s interests.

1. Economic cooperation
It is recommended that Korea actively utilize economic means in dealing with the Russo-Sino-North Korea triangle, in line with South Korea’s national interests and strategy. The ROK should also take practical measures to take the initiative by making full use of favourable elements that are already present within the Russo-Sino-North Korea triangle; as the three nations are focusing on economic development as their main priorities and they have great interest in the Russia-North Korea-China joint development such as the Greater Tuman Initiative(GTI). To this end, they are looking forward to the participation of other actors who are capable of providing capital and technology, as well as relaxing competition among themselves. Thus it is possible for Korea to take the lead in encouraging cooperation from the nations involved by vigorously exploring elements that could promote cooperation. South Korea should play an active role to facilitate changes as an insider rather than passively responding as an outsider who could easily be ostracized as an outsider in that area. Korea should also be prepared to launch a project which can bring about changes and give impetus to development. Especially, it is vital that South Korea take the initiative in forming “the East Sea rim and the Pan Yellow Sea economic bloc” simultaneously, with the Korean Peninsula taking the centre stage.

2. Security cooperation
Recently, the security environment in Northeast Asia has deteriorated to its worst state since the Cold War. There is the possibility of military conflict between China and Japan, along with advances in North Korean nuclear capability and as well as unstable USA-China relationship since America’s “Asia Shift” strategy. At this point, it is important to note that creating an impetus for cooperation in Northeast Asia is possible only when current conflicts between China and Japan does not lead to actual military clashes. South Korea should vigorously speak out and criticize Japan’s rightward shift and distorted view of history, and strengthen diplomatic ties with Japan and USA in order to prevent Japan from turning further to the right. Under these delicate circumstances, Korea should remain prudent in its diplomatic responses since there is a high probability that strengthening South Korea-Japan military cooperation might exacerbate the rift in the region, thereby pitting the Russo-North Korea-China triangle against the South Korea-USA-Japan triangle. At the same time, we should also demand that China refrain from military posturing.

3. South Korea-North Korea-USA relationship
Given the current circumstances, it is necessary to prevent North Korea’s nuclear program from worsening, to maintain a stable East Asia. Simultaneously, South Korea needs to encourage USA to actively engage in efforts to keep the peace by emphasizing that the US show strategic patience in dealing with North Korea. It is very likely that, if inter-Korean relations continue to grow worse and consequently North Korea reverts to behavior which disrupts the status quo, USA-China relations will grow worse again and America’s diplomacy policy will shift from rebalancing to containment, which will cause conservative swing in the US in favor of acknowledging Japanese claims of its right to military action.

In this regard, managing stable North-South-USA relations will be an important element in ameliorating the ‘hardness’ of the Russo-Sino-North Korea triangle, as South Korea becomes an insider in the northern triangle while playing the role of a balancer. This would mean that South Korea-USA-Japan relations would not be in opposition against Russo-Sino-North Korea triangle. Therefore, it is important to realise that stable management of inter-Korean relations is the key to positioning South Korea at the centre of efforts to moderate between all parties in North-South Korea-USA, Russo-Sino-China, and South Korea-USA-Japan relations.

Acknowledgements

Notes on the Contributors

1. Services Trade Liberalization between Taiwan and China: Assessing the Impacts of the ECFA and Its Future Development ― A One Year Review of Taiwanese Banks in China - Kristy Tsun Tzu HSU (徐遵慈)
Introduction
Assessing the ECFA and Its Effects
Taiwanese Banks in China: First Year’s Review
Conclusions
References

2. Accession to the WTO: The Case of Azerbaijan - Aynura ISMAYILOVA
General Review
Historical Review of the Economics for the Last 20 Years: from 1991 to 2012
Azerbaijan is on the Way to WTO Membership: from 1997 until 2012
Azerbaijan’s WTO Membership Wish: Expectations for Future
References

3. Features of the Currency Policy and Exchange Rate of Belarus in the Conditions of Forming the Common Economic Space - Maryna Markusenka
Introduction
The Currency Exchange Rate Adjustment in the Republic of Belarus
Scientific Base of Methods and Instruments of Monetary Policy in the Common Economic Space (CES) Conditions
Conclusions
References

4. Services Sector in India and India-Korea Economic Cooperation - Sandip Kumar Mishra
Introduction
Services Sectors of India
Issue of FDI in Services Sector
Issue of Employment
Challenges and Prospects in the Indian Services Sector
India-Korea Economic Cooperation
CEPA and Economic Cooperation
Indian Services Sector and Bilateral Cooperation
FDI from South Korea
Concluding Remarks

5.The Impact of the Internationalization of the Renminbi on Asian Economies - Lee-Rong Wang
Introduction
Body
Conclusions
References

6. Comparative Research on Automotive Industry Policies between South Korea and China - Fu Baozong
Introduction
Comparison of China and Korea's Development of Automobile Industry
Similarities in Automobile Industry Policies of China and Korea
Differences of Automobile Industry Policies between China and KoreaComparison on Results of Automobile Industry Policies between China and Korea
Conclusions
References

7. Private Economy and Economy Transformation in China - Liu Xianwei
Introduction
Development of Private Economy in China
The Key for China’s Economy Transformation
Historical Mission of China’s Private Economy
Suggestion and Conclusion
References

8. Azerbaijan Economy: Diversification in lens of Modernization - Vusal Gasimli
Introduction
Diversification Trends
Causality Relationship between Economic Growth and Labor Productivity
Conclusion
References

9. Building a Korean-Portuguese Business Partnership for Sub-Saharan Africa: Opportunities and Challenges In Mozambique - Luis Mah
Introduction
From “Hopeless” to “Hopeful” Continent: The Rise of Sub-Saharan Africa
Go Africa? Korea´s Engagement with the Emerging Continent
The Political Economy of Mozambican Growth and Development
Portugal as a Business Partner for Korea in Mozambique
Conclusion
References

10. The Second-Tier “Tigers” in the Light of Latin American Experience - Victor Krasilshchikov
Introduction: “Unhappy” Latin America and “Lucky” East Asia
Comparing Latin America to East Asia: Visible Differences and Hidden Similarities
“A Santa Fé” Tecnocrática: The Brazilian Experience and Its Implications
The Second-tier “Tigers” from the Rise to Distress (1970s – 1997)
The Post-Crisis Development (1998 and onwards): Did the “Tigers” Make Right Conclusions?
Towards a Knowledge-Based Society?
Conclusion
References

The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute focusing on international regional studies with strong cooperative relationship with the world’s leading research institutes. The Center for Emerging Economies Research (CEER) has been enforcing visiting fellows program since 2008 in an effort to vitalize exchange among internal and external institutions and enrich competence in regional studies. This program cultivates close network and promotes cooperation through sharing of research outcomes and information among eminent scholars and experts of regional studies. ‘KIEP Visiting Scholars’ Paper Series’ is an accomplishment of this program that enabled higher understanding of international regional studies.

A Study on Aid Predictability: Focusing on Multi-year Rolling Planning and Budgeting Framework

Yul Kwon and Ju Young Lee


At the Fourth High Level Forum held in Busan in 2011, OECD Development Assistance Committee(DAC) member countries pledged to ensure that by 2013, they would provide partner countries with rolling three- to five-year indicative forward expenditures and/or implementation plans. Also, they made an agreement to enhance aid predictability by reforming the process of establishing and implementing the aid budget. Nevertheless, a limited number of studies reviewed the donor countries’ ODA budget systems and its operation mechanism to find the way to promote the effective use of the aid budget.

This study examines how donor countries establish and implement multi-year aid budgets and applies the results to the Korean ODA budget system in order to improve mid-term aid predictability.

The main findings of this study are as follows. First, several DAC members have made efforts to improve mid-term aid predictability by linking the forward strategic spending plans with their ODA budget process. Mokoro Ltd.(2011) has categorized aid planning and budgeting systems of OECD DAC member countries into three types; agency-wide rolling multi-annual programme, agency-wide cliff-edge multi-annual programme, and no agency-wide multi-annual programming with country-level multi-annual programming.

Second, the Australian budget system, adopting no agency-wide multi-annual programming with country-level multi-annual programming, is selected as a good example that can be applied to the Korean system. Australia has been reforming its ODA policies since 2010. In order to increase aid effectiveness and predictability, Australia adopted the rolling four-year budget plan, aid budget system by program, and performance evaluation system on achievements of policy objectives.

Third, Korea, however, does not present the explicit budget plan in the process of establishing Country Partnership Strategy(CPS). Thus, it is difficult to improve the effectiveness of mid-term plans as well as aid predictability. Moreover, Korea lacks a performance management system that enables reasonable distribution of the ODA budget by gathering feedback on performances of previous projects.

The results from this study provide some policy recommendations as follows. First, Korea needs to develop a performance management system for ODA to utilize the feedback on previous performances as the standard of establishing and distributing the aid budget.

Second, Korea should improve the budget structure to introduce multi-year ODA planning and mid-term budget system which are suitable for ODA projects that extend periods of time.

Third, Korea should reduce the number of priority partner countries from 26 countries to 15 to 20 countries. In addition, consulting with partner countries, Korea should establish a three-year operation plan for each country and priority project support plans to enhance aid predictability.

China's advance into Emerging Markets and Korea's Response
－A Focus on ASEAN, Latin America and Africa

Pil Soo Choi, Young Ho Park, Kisu Kwon, Jae-Wan Cheong and Hyo Jin Lee

In 2001, China adopted “Go Global” as its official policy agenda, which pertains to Chinese businesses in overseas. The policy was set as the primary means of foreign economic cooperation in the 10th 5-year plan(2001–2005). Consequently, in 2009 and in 2008 were legislated. Moreover, the Export-Import Bank of China and the China Development Bank provide policy loans and preferential loans for financial support. In line with this, the Chinese government’s flexible diplomatic and political stance contributes to Chinese businesses in emerging markets.

The proportion of trade between China with ASEAN countries, Latin America, and Africa has been constantly increasing from 11.7% in 2003 to 20.0% in 2012. In spite of the recent reduction in China’s total exports, China’s exports in emerging countries have increased. With this, China has consequentially taken an aggressive part in their import markets as well.

Since 2010, China has been the top contractor in international construction projects, showing remarkable performance particularly in transportation, housing, and electric power utility structures. China is very much dependent on energy resource in emerging economies—China depends on Southeast Asia(34.7%), Latin America (44.7%), and Africa (37.0%) for petroleum, coal, and iron ores.

China’s overseas expansion in Southeast Asia can be characterized in the following ways. First, China associates its Southwest regional development with Southeast Asian strategies. In order to achieve this, China employed the “One Axis & Two Wings” and the “Two Corridors & One Circle” strategies. Second, many efforts are put into securing mineral and energy source along with electric power utilities construction. Third, China connects aid and business especially in Cambodia, Laos, Myanmar, and Vietnam(CLMV countries). Fourth, China has employed strategies to turn Myanmar as land a bridge to gain access to the Indian Ocean and South Asia. Fifth, China actively pursues RMB internationalization to neighboring countries. Sixth and lastly, in terms of diplomatic security, China tries to eliminate fear brought about by the “China threat” and seeks to check the expansion of the United States’ influence. However, recently, vigilance against China is growing as seen in the halt in the construction of the Myitsone dam project in Myanmar.

Expansion of China in Latin America can be characterized as follows. First, unlike what is com-monly known, China’s focus for expansion is not only on resource acquisition. Recently, Chinese companies showed a growing trend of investment on securing market, rather than resource development given that companies made remarkable advances especially in the automobile industry. Expansion through building of shopping malls also stands out. Moreover, China’s strategy is to make Cancun in Mexico as a distribution center for Latin American markets.

The characteristics of China’s expansion in construction fields can be summarized in three ways. First, China obtains construction projects by providing loans. Second, harbors are developed for transporting natural resource to China. Third and lastly, the construction of electric power systems, such as hydropower systems, is booming.

In developing natural resources, China tries to make Latin America as an alternative source for energy. For this, China engaged in the “loan for oil” strategy. Instead of developing by itself, China employed a strategy to take the shares of existing mines. When providing loans, China provides a procurement condition that assures the participation of its downstream service firms. Lastly, China is involved in cooperation with Spanish enterprises to be able to extend to Latin America.

China’s scale of expansion in Africa is currently incomparable. The Chinese government supports its firms’ advances into Africa through high-level diplomatic visits, holding forums that are as large as those of the UN and providing loans. However, the China-Africa relationship today is not just for financial assistance as it is more of a cooperation that has lasted for half a century. China’s investment in Africa does not focus on resources alone. Construction, manufacturing, and banking sectors account for half of the investment. China invests in industrial projects and in projects that positively affect people’s livelihood, such as construction of schools and hospitals. With this, China has also experienced a lot of failures. Loan offer, which requires resource as mortgage, is faced with limitations and its immature global bidding and safety accidents have caused condemnation by the international community. In some parts, there is growing hostility toward exports of Chinese industrial products and imports of resources from Africa. However, those transitional events cannot explain the whole picture of China’s advance into Africa and it is reasonable to anticipate that China’s expansion in Africa is expected to increase further.

To analyze trade competition between Korea and China, this study selected 32 countries by the amount of export and the target items are as follows. For consumer durables, white goods, black goods, and automobiles accord to HS 4-digit codes; for whole items, 32 goods according to HS 2-digit codes. In comparing the Revealed Comparative Advantages (RCA) of four-digit items, it shows that Korea still has the higher position in washing machines, cars, vans, trucks, and refrigerators while vice versa in tractors, special vehicles, mobile phones, TVs, digital cameras, and air conditioners. In 2-digit measure, Korea’s advantage has risen in 12 items and fallen in 20 during last 10 years. On the other hand, China’s advantage has risen in 21 items and fallen in 11. China’s rapid catching-up is an irreversible tendency.

To investigate Korea’s priority items and regions, we calculated the market shares (MSs) of each item in different regions. To compare them with RCAs, this study created the 2×2 RCA-MS matrix. The matrix reveals that without fundamental competency, higher market shares are hardly produced. In other words, local conditions hardly make a difference. In items with lower RCA, one should improve the core competency first. In some items with lower RCA and higher MS, Korea should analyze the local condition and keep the advantage related to it. The most effective strategy involves the items with higher RCA and lower MS. If a certain item shows different MSs in countries within a region, it could be further explored and focused on. If, for instance, there are no items with higher MSs in Myanmar and Cambodia while vice versa in Vietnam and Thailand, those items with higher MSs in other countries have higher possibilities to gain more market. Such benchmark markets include Venezuela in Latin America and South Africa, Nigeria, and Côte d’Ivoire in Africa.

Another strategy could be to increase MSs in mature markets within each region, namely, Vietnam, Indonesia, and Thailand in ASEAN, Brazil, Mexico, and Chile in Latin America, and South Africa, Nigeria, and Ghana in Africa. Marketing expertise in these countries could be easily expanded to other countries within the region because it is possible that they will share a similar growth pattern and observe similar consumer behavior.

To select the regions of comparative advantage, this study referred to Engineering News-Record’s Top 225 International Contractors. In doing so, it is revealed that Korea shows evident advantages in the Middle East since 2006. Asia is also identified as the largest and fastest growing market in which Korea possesses 20% share comparing with China. Korea’s share stands atonly10% in Africa, while it continues to increase in Latin America since 2008 when it was able to reach 40% after its long stay at 10%.

To select construction areas of comparative advantage, we referred to Korea’s International Construction Contract Statistics and China’s International Contracting Development Report. Korea holds a dominant position in Petrochemicals but this dominance continues to decrease. In Electric Power Plant and Industry Plant, Korea’s performance is as much as 60–80% to China. In Construction, Transportation Infrastructures, and Water and Sewage, however, China shows a much higher performance. This is especially the case in Electronics and Telecoms and Mining Development given that Korea has no contracting records.

After analyzing regional contracting performances, this study suggests the following. First, political position does make difference in some countries, such as Iran and Venezuela, so Korea is required to show a more flexible political and diplomatic stance. Second, Korea should raise its competency in Industry Plant, Petrochemical Plant, and Thermal Power. Third and lastly, in New Town Development and High Value-Added Constructions, Korea has potential to make a difference to China.

To conclude, Korean firms can create synergy in cooperating with Chinese firms as private firms in China are still inexperienced in overseas business and Korean firms could be cooperative partners to them. In Venezuela, Korean and Chinese firms has established a joint venture and has built a refinery in mutual cooperation. To support these kinds of cooperation projects, a financial scheme could be introduced. A reciprocal risk participation agreement between the Export-Import Bank of Korea and of China and the Global Cooperation Fund of the KoFC could be examples for this.

China continues to involve itself in various cooperation programs and an example of this is the China-ASEAN Expo in which Japan, Taiwan, and Hong Kong actively participate. Knowing this, Korea could also participate in this program or create its own cooperation program with its partners in emerging economies.

 

An Analysis on the Criteria and Methodology of Priority Recipient Selection for Country Partnership Strategy 

 

 

Bokyeong Park, Hongshik Lee, and Jeong-Woo Koo

 

 

South Korea has provided serious efforts to reform the structure and process of ODA since the country joined OECD DAC in 2009. Selecting and managing “priority countries” has been one of those efforts, but it has led to controversies regarding the relevant standards and methods. This study addresses these controversies and further explores a theoretical and methodological alternative to such limited strategies regarding the selection of priority countries. In addition, this study seeks to deal with other related issues, such as the proper number of priority countries, the adequate procedures, and the degree to which the relevant information needs to be released. 

 

Methodologically, we use the following strategies: (1) review of past studies; (2) conduct case studies that reflect the experiences of traditional donor countries; (3) employ regression analyses to explicate the factors determining the selection of priority countries in other advanced donor countries; and (4) use of the Delphi technique to assign proper weights to the factors considered. Taken together, this study demonstrates the utility of a mixed method in order to suggest an alternative approach to the selection of priority countries. 

 

The analyses of past studies and cases lead us to consider the following four principles as crucial in selecting priority countries: (1) development needs of aid-receiving countries; (2) strategic correspondence; (3) international norms; and (4) aid-effectiveness. First, development needs involve the degree to which recipients need foreign aid in connection with their income-level and the level of poverty. Second, strategic correspondence refers to the extent to which economic and diplomatic interests overlap between a donor and a recipient. Third, respect for international norms indicates the necessity of adhering to globally-recognized norms involving proper ODA. Finally, the principle of aid-effectiveness involves the extent to which the provision of ODA might be used in ways to effectively solve the problems facing the recipient countries. Motivated by those principles, we suggest dozens of quantitative indicators that might highlight the principles and justify the designation of certain countries as priority countries.

 

When using the proposed quantitative strategy, one needs to consider the following caveats: (1) The quantitative strategy needs to be supplemented with a qualitative approach because of the salience of non-qualifiable factors and/or concerns and the possibility that selected indicators might lack a proper level of reliability. (2) No country considers only the quantitative approach for the selection and management of priority countries. It is equally important to consider the pitfalls of the arbitrary use of a qualitative method because it might result in policy biases that weigh down donors’ interests or strategic considerations. Considering the caveats, we select and present twice as much potential priority countries at the first stage, and suggest that policy-makers need to choose the final priority countries at the second stage in conjunction with various diplomatic considerations. 

 

In recognition of the importance of assigning proper weights to the indicators proposed, we conducted a Delphi survey for dozens of experts specializing in international development in Korea. The survey results assign 38% for development needs, 17% for strategic correspondence, 20% for international norms, and 25% for aid-effectiveness. The assigned weights for each principle area determine the actual weight of each indicator that corresponds to the demarcated principle area. The assigned weights might need to be modified in ways to balance the survey results reflecting positions of development experts and the real diplomatic considerations coupled with the sentiments of policy-makers. Considering the possibility of such modifications, we assign 30-35% for development needs, 25-30% for strategic correspondence, 25-30% for respecting international norms, and 15-20% for aid-effectiveness. 

 

Furthermore, we make several suggestions and/or recommendations regarding the processes by which to officially determine the list of priority countries and the proper levels of public disclosure of information. More specifically, we suggest public discussion of the selection strategy, consultation with experts, in-depth discussion among policy makers, and reporting the strategies and discussions to the National Assembly. With respect to the degree of public disclosure, we suggest that the public disclosure needs to be confined to the broad strategies and plans involving the selection of priority countries.