International Cooperation for Industrial Development in Indonesia


Jongil Kim and Mikyung Yun



Industrial development is crucial for creating employment and income growth in developing countries. Since the recognition of the importance of development effectiveness in addition to aid effectiveness at the recent G20 Seoul Summit and Busan High Level Forum on Aid Effectiveness, development cooperation in the field of industrial capability enhancement has received increasing attention from the international development community. As a country which achieved rapid development based on industrial competitiveness, Korea is now facing high demand from developing countries for development cooperation in building industrial capabilities.

Against this background, the present study has selected Indonesia, with which Korea is increasing economic cooperation, for the country case study in order to undertake an analysis of desirable forms of development cooperation in industrial capability enhancement. The study first explores general economic conditions and the level of industrial development in Indonesia, and Indonesia’s Masterplan for development. Then, the study examines how Korean ODA to Indonesia is currently conducted, especially with respect to industrial capability enhancement, and evaluates its performance. On the basis of such analysis, the study proposes possible development cooperation programs between Korea and Indonesia in the field of industrial capability enhancement. The reason for selecting Indonesia as a cases study is that, above all, Indonesia is one of the core countries that has received the largest proportion of Korean ODA. This trend has continued, with the total amount of Korean ODA going to Indonesia increasing even more during the 2000s. Not only that, increasing comprehensive economic cooperation between the two countries after 2012 is brightening the prospects for even greater industrial development cooperation between the two countries in the future.

Chapter 2 looks at Indonesia’s macroeconomic performance in general, explores the level of its industrial development and related policies, and critically examines its overall economic development Masterplan as to appraise Indonesia’s demand for ODA in the field of industrial development. Indonesia has successfully overcome the economic and political crisis caused by the Asian financial crisis, through democratization and sustained growth. It has achieved middle income country status in 2012 when it attained GDP per capita of more than 3,500 dollars. Despite bright prospects for growth in the long run, Indonesia has at present a great deal of structural problems to solve, before turning that prospect into reality. Deficient social infrastructure and private sector development, slow growth of the manufacturing sector and rising economic inequality along with issues of corruption, are among the most serious problems. Since the focus of this study lies in private sector development and strengthening industrial capability, when analysing the Indonesian economy, Chapter 2 devotes most of its effort on understanding the industrial structure and related policies.

In Chapter 3, the study looks at development cooperation in Indonesia in general, and then evaluates the performance of Korean ODA to Indonesia. Although Indonesia has attained middle income country status, ODA to Indonesia showed an increasing trend during the 2000s. Important bilateral donors in terms of total ODA amount are Japan, Australia, US, and Germany. Compared to those countries, Korea’s ODA in terms of absolute size is miniscule, for example, only 1/40th of Japan’s total ODA. Nevertheless, Indonesia is the fourth largest recipient of Korean ODA, and Korea’s share of total ODA going to Indonesia has continued to increase over the past ten years. Governance, energy and health sectors received the most ODA. Despite rising comprehensive economic cooperation between the two countries, development cooperation in the field of industrial sector has been minimal. According to Korea’s CPS for Indonesia, the three fields selected as the core focus of Korean ODA, considering Indonesia’s development needs and Korea’s comparative advantage, are public administration, economic infrastructure and management of environment and natural resources.

Chapter 4 continues with a more detailed study of specific development cooperation projects undertaken in the industrial sector by Korea’s three major ODA organizations: KOICA, EDCF, and KSP. Korean ODA organizations seemed to have specialized by concentrating their projects in the fields of information & telecommunication, and industrial energy, which are believed to be areas where Korea has a competitive edge. However, the strategy of specialization was not fully successful in that each of these projects were small grant aid, unrelated with each other in project substance. Such fragmented character of aid has greatly impaired development effectiveness. Whether Indonesia, already a high middle income country, should continue to receive grant aid predominantly should also come under review. For Korean ODA to become more effective in supporting industrial capability and infrastructure development in Indonesia, Korea must consider increasing the size of its aid in the form of loans, and integrating various small scale industrial projects into a closely-related, sector-based programs. KOICA’s technical cooperation in the textile industry, and industrial park feasibility study, if placed under an overall industrial sector development program, would be promising projects. They point to the right direction in the way of designing appropriate, specific development cooperation projects that can support strengthening the industrial capability of Indonesia.

Chapter 5 proposes new directions for Korea’s development cooperation in the industrial sector by suggesting four promising types of aid programs for industrial sector development: enhancing business development service (BDS) provision for SMEs, building global business partnership programs which embraces corporate social responsibility (CSR)-related activities to foster cooperation between large and small firms, assisting human resources development through connecting training programs with migrant labor programs, and supporting development of industrial parks. The programs proposed here are only rough schemes, requiring detailed feasibility studies and specific implementation plans or strategies. If the Korean ODA organizations decide to adopt the proposals made here and apply it to specific industrial sectors and regions in Indonesia, appropriate implementation plan for the sector or the region will need to be fully developed. The most important thing is not to lose sight of 1) making use of Korea’s comparative advantage in successfully implementing industrial capability enhancing policies in designing sufficiently specialized programs; 2) merging various small projects into a single, adequately-sized aid, linking loans and grants if necessary; and 3) complying with the overall development Masterplan and specific industrial policies of Indonesia.

Environmental ODA to Africa: Policies, Determinants and Implications

Sungil Kwak and Hyelin Jeon

We explore the trends and policies of environmental ODA and empirically analyze the determinants of Japanese and Swedish environmental ODA for Africa. We choose two countries, Japan and Sweden; Japan is the largest donor of environmental ODA, and Sweden is a role model of this type of ODA provision. From the CRS data, we find that many major donors have expressed interest in environmental ODA as time passes. However, each country has its own environmental ODA policies.

The Japanese environmental ODA determinants and its policies can be summarized as follows. First, whereas Japan is the world’s largest donor of environmental ODA, the amount of giving to Africa has been relatively small. That is, Japan has not been interested in the environmental issues in Africa for years. Second, the amount of trade significantly affects the decision to grant environmental ODA for Africa. This implies that the economic relationship between Japan and its recipient countries is a major factor in determining whether Japan provides environmental ODA or not. Third, recently Japan seems to have changed its environmental ODA policy for Africa. For example, Japan announced that it would increase the amount of environmental ODA for Africa at the 3rd and 4th TICADs. Fourth, Japan provides environmental ODA for resource-poor rather than resource-rich African countries. For instance, Nigeria, a major oil exporter, got relatively little environmental ODA from Japan, while it is the number 1 recipient country in Africa of ODA from Japan.

On the other hand, the Swedish environmental ODA determinants and its policies can be summarized as follows. First, Sweden, with extensive experience providing ODA, has focused on environmental mainstreaming, even though the size of ODA is relatively small. Second, the Swedish environmental ODA has been meeting the needs of recipient countries. To investigate their individual needs, Sweden often holds a policy dialogue with recipients. Fourth, the ratio of the total amount of ODA to environmental ODA continues to maintain a certain level and converges to a small number. However, Japan’s number does not; this number is stable due to the fact that Sweden many times has held policy dialogues to persuade the recipient countries to satisfy their needs.

Our findings give the following implications. First, Korea has to reflect the issues of the environmental mainstreaming to the ODA policy. By doing so, Korea can grow to become one of the significant donors in this field. In particular, Korea must note that Japan has expressed the will to take part in environmental mainstreaming through the announcement at the 4th and 5th TICADs. Second, Korea has to hold more policy dialogues with recipient countries. Policy implementation is a totally different process from policy making. When the Korean government determines that it will give environmental ODA to African recipients, the distinct features of Africa should be understood. In particular, the causes of environmental deterioration differ across regions, as the poor in Africa have different reasons that they remain poor across residential regions. Hence, the causes should be explored in a dynamic view to provide suitable treatments, rather than in a static view. To do so, more policy dialogues with African recipient countries are required.

The Investment Environment Changes in the Mining Industry of the Kyrgyz Republic and Implications

Jinhong Joo

The Kyrgyz Republic is one of the most impoverished countries in Central Asia and its economic cooperation with Korea has been far from robust. However, the Kyrgyz Republic has untapped mineral resources including those of precious minerals that was first developed during the Soviet era. The Kyrgyz Republic is the 3rd largest gold producing country in Central Asia and is also noted for mining of rare earth elements. The mining industry is the most important export industry in the Kyrgyz Republic and the core industry of the Kyrgyz economy. The export of mineral resources represents more than 50% of total exports of the Kyrgyz Republic and the gold export accounts for the largest share of the country’s mineral resources export. The foreign mining companies have entered the Kyrgyz Republic since its independence but their operations have been less than successful due to severe interference of the Kyrgyz government. After the first revolution, the Bakiyev government put forth efforts to attract the foreign investment to its mining industry, which led to increased Kazakh and Chinese investments in the industry.

However, since the new Kyrgyz government declared the investment policy to attract foreign capital after the second revolution in 2010, the investment environment has deteriorated. The main reason for the deterioration is increased political risk from the change of political structure and an unstable political environment. The political risk stems from the fact that the government is a fragile coalition; the policies adopted are often the based on populism and there is much political strife surrounding the core industry, mining. Such political risk has obstructed the long term investment. In addition, the Kyrgyz government did not expend sufficient effort towards improving its investment environment. The investment environment for the mining industry as the Kyrgyz Republic's core industry also became worse, because of the government's policy of increasing its control over the mineral resources and the mining industry, in addition to rising conflicts between the Kyrgyz government and foreign mining companies resulting from the Kyrgyz government interference in the mining industry, conflicts between foreign mining companies and local populations around the mines, and the growing awareness among foreign mining companies of the negative investment environment of the Kyrgyz mining sector.

The Kyrgyz government policies to reinforce its control over mineral resources and the mining industry is not expected continue, however, as development of the Kyrgyz mining industry is essential for economic development in Kyrgyzstan, which is only feasible through infusion of foreign capital into the mining sector. There is actually historical precedence regarding Kyrgyz government easing regulations related to its mining sector as a response to the weak foreign investment into its mining sector. Also, any stringent policy on the part of Kyrgyz government would not be successful given the fragile coalition government, the parliamentary government system, and the nearly even distribution of parliamentary seats among parties. This is the reason why the failure of economic policy threatens to turn into political failure immediately. Recently, the Kyrgyz government's policy regarding the mining sector seems to have relaxed somewhat because of foreign mining companies' legal battles against the government and their announcements of possible divestment from the Kyrgyz mining sector, threatening and frustrating the government. On the other hand, the new Kyrgyz government's policy on mining sector is opposed to those of the former Kyrgyz government. The abolition of the former government's policy could ease the way for the new government, which means new mining projects permitted by the new government would not be overly burdened by regulations.

In summary, the present, deteriorated state of investment environment in the Kyrgyz mining sector could continue until the 2015 parliamentary elections changes the present distribution of present parliamentary seats. But the investment environment would be improved for the mid and long terms because the Kyrgyz republic sees prospects for continued exploitation of minerals such as gold and rare earth elements and the present Kyrgyz government does not have the economic and political leverage for exerting strong influence on the mining sector.

Therefore, based on this analysis of prospects for foreign mining companies and the investment cases, the implications for companies are as follows: First, the deterioration of the Kyrgyz mining sector's investment environment would continue at least until 2015 but the improvement of investment environment is expected for the mid and long terms. Second, changes in Kyrgyz mining regulations are aimed at transparency of its mining sector and the removal of corruption, so the companies would do well in adhering to them. Third, the mining projects are vital to local populations, and so companies have to recognize the need to create jobs around the mining areas and of the contribution to the local economy. Fourth, companies need to respect Kyrgyz sensitivity to environmental pollution and thus must heed relevant environmental regulations. Fifth, Korean companies need to recognize the strategy of the foreign mining companies. Foreign mining companies are perfectly willing to accept the Kyrgyz government's demand for contribution to the local economy, in order to participate in the mining industry in the Kyrgyz Republic.

The strategy for the mining companies are as follows: First, the companies must focus on the development of prospective mineral resources such as gold and rare earth elements. Second, they must meet demands for contribution to the local economy, meaning mining companies need to plan together in advance with agricultural products-processing companies or infrastructure construction companies, as local communities need to develop agricultural business networks and build infrastructure. Third, companies should try to invest in the mining sector with local companies in joint ventures because joint ventures with local companies will allow them to avoid political controversies. To support the mining companies, the Korean government is able to utilize Official Development Aid especially for job education and training programs, construction of healthcare infrastructure and cleanup of environmental pollution caused by mining. These ODAs will help create a qualified local labor force in the mining sector and contribute to the health of locals and the local economy. In the end, this would lead to increased competitiveness for Korean companies in the Kyrgyz mining sector.

Toward Korea-Belarus Cooperation in the ICT Sector

Jiyoung Min

Belarus’s ICT sector is burgeoning since 2000. In 2012, the country ranked 48th in the world in terms of IT infrastructure and 46th in ICT development index in 2012. The ICT industry of Belarus is competitive in ICT service, offshore programing and so forth. Considering the rapid growth rate and excellence of ICT experts, the ICT sector has many potentials in the coming years.

Recently, the Korean government has set “Creative Economy” as a key agenda for the nation. Further development of the ICT sector is one of pillar industries. For internationalization of Korean ICT and international cooperation in the fields should be realized. Given Korea’s recent policy and Belarus’s relative competence in the ICT sector, the author tried to find out possibilities of cooperation between the two sides.

Due to lack of interest and information, Belarus’s potential promising ICT industry is undervalued in Korea. Therefore, the study contributes to study on Belarus in Korea and provides guidelines for cooperation in ICT the ICT sector between Korea and Belarus by analyzing Belarus’s ICT sector, policies, projects, etc.

The study is consisted of five chapters. The first chapter introduces background and purpose of the study and previous research. Then, an overview on the Belarusian economy and industry is presented in the second part.

In the third chapter, structure and features of Belarus’s fast growing ICT industry is discussed. Also, the study contains evaluations on institutions, infrastructure, ICT experts of the Belarusian ICT sector. Chapter four exhibits how major organizations of the ICT in Belarus collaborate with foreign counterparts. Although, ICT-related bodies in Belarus have few international cooperation experience so far, they are open to work with foreign partners and actively trying to strengthen relations with them. The study is concluded with suggestions to cooperate in the ICT sector between Korea and Belarus, based on the first four chapters.

Third-term Putin Government's ‘Concept of Foreign Policy’ and Korea-Russia Cooperation

Sung Hoon Jeh and Boo Gyun Kang

Since 2000, Russia has announced a foreign policy doctrine under the Concept of the Foreign Policy of the Russian Federation (hereinafter, the “Foreign Policy Concept”). The Foreign Policy Concept, which is created by the Ministry of Foreign Affairs and approved by a Presidential Decree, is the most basic document that defines the basic principles, preferential orientations, objectives, and tasks related to foreign policies, including foreign economic policy.

The Foreign Policy Concept updated on February 12, 2013 is structured in a similar manner as those of 2000 and 2008. In terms of content, however, it reflects the global economic crisis, and the changed global economic-political situation since the Arab Spring. Accordingly, it can be considered a new doctrine that defines the orientation of the foreign policies of the third-term Putin Government in that Russia’s priorities for the global and regional levels have been modified.

The implications of the adoption of the new Foreign Policy Concept are as follows: First, the third-term Putin Government's perception of foreign countries are well-established. The perception is that the world order is being transformed from the one once led by the U.S. to a multipolar system in which major powers share responsibilities. Moreover, there is an increase of instability and unpredictability on the global and regional levels because during the process of the transformation, the challenge is brought up due to persisting global economic crisis, changing balance of military power, increasing influence of ideological factors, risk solutions that deviates from the UN Security Council, and misuse of “soft power”.

Second, foreign policy tasks President Putin previously mentioned have materialized. Major contents of various articles, publicized by Putin during his premiership and presidential campaigns, have been systematized into foreign policy tasks. These ‘tasks’ revolve around the key contents of the “Decree by the President of the Russian Federation on Measures to Implement the Foreign Policy of the Russian Federation (No. 605 of 7 May 2012)” signed by President Putin immediately after his inauguration on May 7, 2012.

Third, prior tasks on the global/regional levels have been readjusted. Russia's global-level priorities in terms of foreign policy have been readjusted to include the following: “Emergence of a New World Order”, which is based on a strengthened role of the UN and the collective leadership of major powers; “Rule of Law in International Relations”, centered around conformance with international legal norms and securing of national sovereignty; “Strengthening of International Security” through control of military power and reinforcement of trust regarding military issues; “International Cooperation in the Sphere of Economy”, for innovative development of the national economy and for minimizing risks; “International Humanitarian Cooperation” at the global level that contributes to the guarantee of human rights of the Russian diaspora and the enhancement of “soft power”; and “Information Support for Foreign Policy Activities”, which increases efficiency of the fulfillment of foreign policies.

Russia's regional-level priorities have also been modified and supplemented to reflect economic-political changes of and Russia's changed relationship with various regions of the world, such as the former Soviet region, Europe, USA, the Arctic and the Antarctic regions, the Asia-Pacific, the Middle East, Northern Africa, the Latin Americas, and Sub-Saharan Africa. Most remarkably, Russia has presented a new framework for economic integration centered around the countries of the Commonwealth of Independent States (CIS), namely, the “Eurasian Economic Union”. It also has clearly expressed negative opinions and concerns about the activities of the North Atlantic Treaty Organization, and voiced a strong warning toward the foreign policies of USA as well as willingness to improve its relationship with USA at the same time. In addition, they have decided on their priorities regarding the Arctic and the Antarctic regions, which have never been mentioned in the past “Foreign Policy Concepts”. Moreover, reinforcement of relationship with countries in the Asia-Pacific and its neighboring regions has been further emphasized.

Given such a background, Korea's main tasks related to its cooperation with Russia are as follows:
First, Korea should consider the establishment of a cooperative relationship with the Customs Union and the Common Economic Space, which are being led by Russia in the former Soviet region aimed at the realization of the “Eurasia Initiative”. The “Eurasia Initiative” consists of proposals promoting the formation of the Eurasian economic zone by connecting economic zones in various parts of Eurasia, under the concept of “one continent”. Russia is forming a Customs Union and the Common Economic Space with Belarus and Kazakhstan, bordering EU on the west and APEC on the east. This forms the basis upon which the third-term Putin Government is attempting to establish the “Eurasian Economic Union” by 2015. In addition, other CIS countries are expressing their intentions to participate in such former Soviet regional economic integration. In order for Korea to become the starting point of the “Eurasian economic zone”, and the portal through which Eurasia and the Pacific are connected, it should consider establishing an institutional basis on which it can reinforce economic solidarity with the former Soviet regions, as well as with the Asia-Pacific. Accordingly, although the method of participating in such an initiative might require more policy reviews, it is deemed necessary for participation in the Customs Union and to establish a cooperative relationship within the Common Economic Space.

Second, as Russia is pursuing the development of its Far East region to take advantage of the potential of the Asia-Pacific, Korea urgently needs to expand Korea-Russia economic cooperation, which would target the area. As Russia has yet to resolve its conflicts with Europe and USA in areas of energy and national security, it would naturally reinforce its relationship with Asia-Pacific countries. In reality, the third-term Putin Government is giving much emphasis to economic-political emergence of the Asia-Pacific region, and is showing a significant interest in the expansion of economic cooperation with Northeast Asian countries, such as China, Japan, South Korea, and North Korea. Taking advantage of such a situation, therefore, South Korea should seek various measures to expand Korea-Russia economic cooperation in the region.

Third, as Russia is maintaining a balanced relationship with both Koreas while it pursues the realization of trilateral economic cooperation projects, Korea should actively utilize it to move forward with the “Korean Peninsula Trust Process”. South-North-Russia trilateral economic cooperation projects promoted by Russia to connect railways, construct gas pipelines, and interlink power system networks, will stimulate North Korea's economic development, and establish infrastructure connecting the South and the North in preparation for the unification of the Korean Peninsula. Therefore, the realization of the trilateral economic cooperation projects will be instrumental in moving the “Korean Peninsula Trust Process” a step further.

Fourth, Korea needs to establish and implement tasks of cooperation with Russia in the Arctic region. The fact that the Arctic region is mentioned in the “Foreign Policy Concept” for the first time in history clearly shows the special interest of the third-term Putin Government in the region. Korea-Russia cooperation in the Arctic region should be deemed significant. Considering that areas under Russian sovereignty or jurisdiction contain very large petroleum and gas reserves, and that it is required to pass through the waters under the Russian jurisdiction by using Russian ports and icebreakers in accessing the Arctic route, a new international maritime trading passage. Therefore, for Korea to enter the Arctic region in earnest, it needs to establish and implement cooperative tasks in a systematic manner through creating an “Overall Strategy for Cooperation with Russia in the Arctic Region” or a similar initiative.

Russian Arctic Development Strategy and New Possibility for Korea-Russia Cooperation

Sung Hoon Jeh and Jiyoung Min

The Arctic is changing due to global warming. While this poses potential environmental risks, the region is also emerging as a new shipping route and an alternative source of energy supply. Recognizing the enormous potential of the region, both Arctic and non-Arctic countries are devoting increased attention to the use and development of the area. Korea, a non-littoral nation, also is moving quickly to involve itself in Arctic issues. Namely, it received permanent observer status at the Arctic Council in May 2013 and adopted the “Comprehensive Arctic Plan” in July.

In fact, participation in activities in the Arctic is an arduous task for a non-Arctic country under the current Arctic governance regime. However, Korea, an energy-and-trade-dependent economy, is seeing new opportunities, because the opening of the Arctic provides an irresistible attraction. In order to actively participate in the Arctic, Korea needs to take part in tackling relevant global issues, such as environmental protection and preservation, development of technology applicable to the Arctic, etc. as a member of the global community. Building and maintaining close relationships with relevant countries should be sought as well.

In this context, cooperation with Russia, in particular regarding the Arctic, has significant meaning to Korea for the following reasons. First, the majority of hydrocarbon resources in the region lay in the Russian Arctic region. Since Russia is developing fields for exploitation of energy resources through international cooperation, Korea needs to consider ways to participate in such projects. Second, when using the Northern Sea Route, it is inevitable that shipping pass through waters under the authority of the Russian Federation and employ Russian facilities, such as ports and ice-breakers. In addition, the Russian government’s plans to establish infrastructure for the development of the region including an integrated transport system and ICT network may provide chances to Korean investors. Third, Russia is an influential participant in Arctic governance such as the Arctic Council, BEAC, etc. Thus, closer cooperation with Russia can make Korea‘s participation in Arctic governance much easier.

In this report, the following measures are suggested in order to strengthen cooperation with Russia. First, apart from the “Comprehensive Arctic Plan,” an “Extensive Cooperation Strategy toward Russia” should be devised. The document needs to encompass all possible forms of collaboration and opinions of experts regarding Arctic issues. Second, establishment of an “Arctic Cooperation Committee” under the Korea-Russia Joint Commission on Economic, Scientific and Technological Cooperation and “Korea-Russia Joint Arctic Research Center” will be helpful in developing constructive bilateral cooperation. All Arctic-related topics between the two nations can be discussed within the Committee and the Center will take a role as a think-tank on Arctic issues. Third, creation of Asia-Pacific-Arctic Council modeled on the Barents Euro-Arctic Council jointly with Russia will help intensify regional cooperation. Through this system, Korea may have more chances to engage in the Arctic issues earnestly as an active member. Fourth, the opening of the Arctic provides investment opportunities for Korean companies. Participating in consortium or joint investment projects, and technological cooperation with Russian organizations can be viable ways to become involved in the Arctic. Since Russia’s dilapidated ports require new construction or maintenance, investing in relevant projects could also be considered. Fifth, various civil and academic exchange programs will contribute to nurturing Arctic specialists, extending cooperation with indigenous peoples, and raising Korea’s image as a trustworthy partner in the Arctic for the long term.

The 40 Year Anniversary of Korea-India Amity: Evaluation and Prospects of Trade Sector

Woong Lee, Young Chul Song, and Lee Jung Mi

The year 2013 represents the 40th anniversary of the establishment of Korea-India diplomatic relations. This report is prepared for evaluating the achievements and future challenges in Korea-India economic cooperation. The study analyzes trade relations using all available sources from the 1970s until today, as the trade sector is the most influential among all sectors between Korea and India in terms of their bilateral economic cooperation.

In Chapter 2, respective trade policies of Korea and India are listed and the Korea-India CEPA (Comprehensive Economic Partnership Agreement), which has been the cornerstone of the two countries' economic cooperation, is evaluated. In Chapter 3 is presented the overall picture of Korea-India trade including long-term trends of trade, by items, with focus on Korea and India. It also analyzes the competitiveness and complementarity of Korea and India in international trade with various indices. Lastly, in chapter 4, the trade volume between Korea and India is predicted through a VEC (Vector Error Correction) model.

At the time of the establishment of diplomatic relations in 1973, bilateral trade between Korea and India was not active, with a total volume of approximately 14 million dollars. But trade figures have shown a gradual increase since the beginning of Indian reforms and openness policies in 1991. Around the early 2000s, when India experienced vigorous economic growth, the bilateral trade increased rapidly. Though trade declined by about 8% in 2012 following the recent recession in India, the upward trend in trade volume is likely to continue.

According to the trade volume prediction through a time-series estimation, the trade volume will show a declining trend in 2013 but will increase in 2014, reaching about 27 billion dollars in 2015 and then 56 billion dollars in 2020. This estimate is lower than the past predictions of 34 billion dollars by 2015 and 68 billion dollars by 2020 because the reduced growth rate is taken into account following the economic recession of both countries in 2011 and 2012. Nevertheless, if both countries take actions to expedite tariff reduction through upgrading the Korea-India CEPA or perhaps enact additional reduction/removal of the countries’ bound tariff rates, greater degree of trade volume than what is predicted can certainly be achieved.

In this study, the importance of Indian markets is emphasized. Between 2004 and 2006 when the Indian economy was at its peak, the share of consumer goods in Korea’s export to India reached nearly 20% due to its brisk mobile phone exports. In contrast, however, the share of consumer goods has dropped off rapidly to below 5% between January and September of 2013. This is attributed to both declining consumption in India due to the recession and lowered price competitiveness of Korean products. Fortunately, the importance of Indian consumption goods market is predicted to grow higher as India’s population is expected to exceed that of China, hitherto the world's most populous country, sooner or later. In addition, it also contributes to increased importance of the Indian market as Korean exports to China has been showing a downward trend since 2010 after experiencing more than 20% annual growth on average in the past two decades. Thus Korean firms should secure price competitiveness by differentiating their products to target the Indian market whose potential is near infinite.

Korea’s imports from India have been affected by the implementation of the Korea-India CEPA. The tariff rate for naphtha, which accounts for more than half of the imports from India, had been 1% but was immediately removed after the Korea-India CEPA went into effect in 2010. Accordingly, Korea’s import of naphtha from India increased to 34% and 51% in 2010 and 2011 respectively. The amount of naphtha imports in 2011, after the effectuation of the Korea-India CEPA, redeemed the precipitous 41-percent decrease in naphtha imports due to the 2009 economic crisis, increasing 20% from 3.9 billion dollars in 2008 to 4.6 billion dollars. This is one of the immediate benefits of India having signed an FTA with Korea which has a positive impact on Korea’s cost reduction and India’s deficit resolution toward Korea. Thus it is shown that both countries are mutual beneficiaries of the Korea-India CEPA.

The case of naphtha has well exemplified the relationship, in terms of specialization of trade between Korea and India. Korea imports and refines raw materials like naphtha from India and exports petrochemical products and this could be considered specialization based on comparative advantage of each country. Discovering items in this type of relationship and eliminating related tariffs can lead to lowered costs for Korea and reduction of the trade deficit for India.

Moreover, as the revealed comparative advantage and market comparative advantage show, there are no overlapping items with high export competitiveness in each other’s market and even in the global market. Therefore, firms and consumers of both countries should hereby benefit from mutual elimination of tariff and non-tariff barriers.

Consequently, one of the most important issues in economic cooperation between Korea and India is the resumption of the Korea-India CEPA upgrade negotiation. Korea will not be the only one to benefit from this but India will also obtain much advantage through the upgraded CEPA, which will broaden the range of tariff-free items and accelerate the reduction of existing bound tariff rates. As analyzed in Lee, Song and Cho (p. 13, 2011), the wider the tariff reduction gap, greater the decrease in India’s trade deficit with Korea which means a potentially larger welfare effect for India (producer surplus and consumer surplus). Since India is a beneficiary of the tariff reduction, and elimination in the case of naphtha, India should be actively involved in a CEPA upgrade negotiation. If the tariff reduction/elimination through Korea-India CEPA upgrade is realized, the actual trade volume increase will be achieved, which could surpass 27 billion dollars in 2015, which is what our research predicts. Besides, it is very likely that the trade volume between Korea and India will jump above 60 billion dollars, exceeding the predicted 56 billion dollars in 2020.

However, the 2nd Korea-India Joint Committee, which was to be held in Seoul in 2012, has not yet convened, and thus the negotiation to upgrade the Korea-India CEPA is being delayed. It is expected that when a new cabinet is formed after India’s presidential elections in the first half of 2014, India will be able to engage with greater enthusiasm in negotiating the Korea-India CEPA upgrade. Therefore the Korean government needs to pay attention to the new administration of India after the election, and prepare adequate agendas and strategies for successful negotiation with respect to a CEPA upgrade in the near future.

The High Growth Economy of the Philippines and Its Implications

Yoon Ah Oh and Mingeum Shin

Once called the “sick man of Asia,” the Philippines has become the fastest growing economy in the region over the past two years. Its economy expanded by 6.6 percent in 2012 and it is expected to grow by 7 percent in 2013. High economic growth has been driven by remittances-fueled domestic consumption, the expanding BPO industry, and the construction boom. Increased public spending in infrastructure by the Aquino government also contributed to the high growth.

However, the economy’s structural vulnerabilities, which include chronic poverty, high inequality, persistent unemployment, high population growth, weak manufacturing, and low investment, remain largely unchanged. 28 percent of its population live in poverty and its exceptionally high inequality by regional standards has been largely unaffected by the recent growth. High population growth, which is largely created by a policy failure, puts considerable pressure on job creation and hinders poverty reduction. In addition to chronic unemployment, most jobs are in the informal sector and of low-wage and low-productivity. The situation has led to a growing concern that the Philippines may be experiencing “jobless growth.”

The Philippines went through “premature deindustrialization” where the economy developed without experiencing manufacturing-driven growth and moved into services. Services now dominate the Philippine both in terms of output and a share of employment. Yet except the BPO industry, the productivity of service sector is low and most of the employment in services is informal and of low quality.

Compared to other developing countries in Asia, investment in the Philippines has been low and stagnant. Low tax capacity, complex government regulations, and corruptions are blamed for low investment. Although recent governance reforms by the Aquino government led to an increase in FDI and public spending, further reforms may turn out to be an extremely difficult task due to political economy reasons.

Korea needs to consider a two-pronged approach to expand the Korea-Philippine economic cooperation considering the opportunities and challenges of the current Philippine economy. First, on the opportunity side, the positive outlooks for infrastructure investment and consumption markets offer attractive business opportunities to Korean businesses. The Philippine government will proceed with the large-scale infrastructure projects to improve the country’s inadequate infrastructure. High remittances and the high-performing BPO industry will continue to support the market for consumer goods. Korean businesses can tap into these opportunities. Second, to help the Philippine economy address its structural challenges, Korea needs to strengthen industrial cooperation with the Philippines in the manufacturing sector. This is indeed where Korea has been on the right track. Korea has already included the Philippine in its global supply chain in electronics and shipbuilding. Strengthening these ties will help create jobs and reduce poverty by helping promote the manufacturing sector in the Philippines.

The Policy and Implications of Islamic Finance in Non-Islamic States: Cases of the UK, Singapore, and Japan

Daechang Kang, Sung Hyun Son, and Young Kyoung Suh

Islamic finance, once limited to Muslim countries, has recently been expanding rapidly to non-Islamic regions. This report studies Islamic finance in the UK, Singapore, and Japan which are major non-Islamic states, with focus on the harmonization of Islamic finance with conventional finance. This analysis will help elicit useful implications for Korea when it is introduced to Islamic finance in the future.

Chapter 2 discusses the current situation and policy of Islamic finance in the UK. Recognizing the potential of Islamic finance since 1995, the UK has exerted efforts to develop Islamic finance. Islamic finance started to develop in the UK as the UK government created the institutional framework for financial supervision and taxation in the middle of the 2000s.

The UK built the 9th largest Islamic finance market in the world and possesses the largest Islamic financial assets among non-Islamic countries. A significant number of Islamic banks operate in the UK, and these banks play major roles in international Islamic finance markets. Banks represent the primary institutions for Islamic finance in the UK, while the size of the assets of Islamic funds is very small and that of takaful is negligible. The London Stock Exchange (LSE) remains one of the main international stock exchanges for sukuk issuance. There have recently been cases in which Islamic finance is applied to investments toward infrastructure increase in the UK.

The services sector which assists and educate for Islamic finance is also being developed in the UK. Large accounting firms, consulting companies, and professional service corporations contribute to the development of Islamic finance, while providing consulting services for Islamic financial institutions. In line with this, professional educational institutions establish new standards and award certificates for Islamic finance, and many colleges and business schools offer courses on Islamic finance.

The UK adopted Islamic finance, its policy objective being that it would establish the UK as the hub of Islamic finance globally. While pursuing this goal, it sought to enhance the UK's competitiveness in overall financial services and allow every one in the UK to benefit from diverse financial services. The UK government has developed a financial system in response to the issues of financial supervision posed by Islamic finance, and it has applied the same standards of financial supervision both to Islamic and conventional finance.

In the process of adopting Islamic finance, the UK government has developed a financial supervision scheme and enacted a phased, gradual modification of the tax system. It made small changes to the financial supervision system while adjusting the system to sustain neutrality of financial supervision and taxation. In addition, it has indirectly affected standardization of Islamic financial products, and strongly supported efforts to increase awareness of Islamic finance. It has also indirectly supported the creation and the operation of education and training programs for Islamic finance. In the whole process of developing the Islamic finance system, the UK government has formulated and implemented relevant policies while consulting closely with the stakeholders.

Chapter 3 discusses Singapore's current situation and policy regarding Islamic finance. By introducing Islamic finance, the Singapore government aims to strengthen its role as the global financial hub and facilitate the flow of capital from Middle East countries. As trade has increased and the economic relationship has been strengthened between Singapore and Middle East states, capital flows from the Middle East countries to Singapore have expanded through Islamic finance. Under these circumstances, Singapore recognized that Islamic finance could be useful as a conduit for transactions and investments between Middle East and Asian states.

Islamic finance in Singapore continues to grow rapidly, mainly in areas such as wholesale banking, insurance, asset management, and sukuk. Although Islamic banks in Singapore started operations in retail banking, they have expanded into the wholesale banking area especially for corporate finance. Foreign non-bank financial institutions in Singapore do business actively in investment advisory services, consulting services, and securities related to Islamic finance. In the Islamic capital market of Singapore, Shariah exchange trade funds (ETFs) and sukuk issued by the Singapore government are heavily traded as major financial products. In the asset management area, Islamic financial institutions from many countries invested intensively in Singapore and Asian real estate.

The Monetary Authority of Singapore (MAS) supervises Islamic financial institutions as well as conventional financial institutions using the same criteria. This is because of the policy orientation of the Singapore government in which it should manage the risks of every financial institution equally, given that it deems these risks as similar regardless of whether the financial institution is conventional or Islamic. In order to establish Islamic finance, MAS has modified its laws and systems according to the principle of equal treatment. That is, it has developed the system to ensure that earnings and tax burden of Islamic and conventional finance are equivalent. Singapore thoroughly excludes religious issues from the financial supervision system.

In order to develop Islamic finance, the Singapore government has realigned the system by enacting or revising the banking acts and tax laws. Islamic banking started to develop in Singapore from 2005, as the Singapore government revised the Banking Act in 2005 pertaining to how banks acquire and trade non-financial assets. Since then, it has made various facets of Islamic finance operable by enacting and revising the banking acts. To maintain tax neutrality between Islamic finance and conventional finance, the Singapore government prevents double taxation on Islamic finance contracts and arranged the clauses for exemption of stamp duty.

Chapter 4 discusses Japan's current situation and policy regarding Islamic finance. Realizing the necessity for ensuring maintenance of various financial channels, the Japanese government has created an environment for Islamic finance through rearrangement of laws and the system. By revising the enforcement regulation for the Banking Act in 2008, banks in Japan were allowed to participate in Islamic banking through their subsidiaries. Since 2011, the Japanese government has revised the laws and the system related to sukuk to enable sukuk issuance in Japan. With these efforts, the government expected that Japanese companies and financial institutions would actively issue sukuk in Japan, with foreigners able to invest in sukuk issued in the country.

However, these activities did not lead to results intended by the Japanese government. Japanese banks did not actively respond to domestic demands, and Japanese institutions have yet to issue sukuk in Japan. Insufficient domestic demand, complexity of procedure, and incomplete realignment of laws and the system are cited as causes making the Japanese sukuk market sluggish. While examining the necessity of additional legal revisions, the Japanese government attempts to devise various measures that would ensure participation of diverse institutions in the Japanese sukuk market.

At present, it is simply too early to evaluate the performance of Islamic finance in Japan. Japan has only recently started to revise the laws and the system to adopt Islamic finance, modifying relevant laws and systems to introduce Islamic finance gradually, while keeping the existing financial supervision system as intact as possible. It appears that the Japanese government proceeded with the revision of the laws and the system in a relatively short period, to prepare proactively for the potential demand for Islamic financial services in Japan.

Chapter 5 presents policy implications for Korea, drawn from discussions on the current situation and observations of Islamic finance policies in the UK, Singapore, and Japan. It discusses policy implications, categorizing them for the Korean financial market and in accordance with the policy orientation of the Korean government.

In line with this, implications for the Korean financial market are considered. It is possible to introduce Islamic finance without a significant Muslim base, as we can see in Singapore's case. It is desirable that Korean institutions expand operation of Islamic finance overseas during the early phase. In addition, it would be more effective to begin business operations in the wholesale finance areas. In order to do that, opportunities for education and training in Islamic finance must be provided. It is also required that Korean institutions take note of sukuk as a means of raising capital and seek ways to make use of them. In particular, it is necessary for Korean venture firms to pay attention to sukuk, recognizing that sukuk provide channels for raising capital efficiently. They also need to consider measures to procure the Shariah committee members and prevent possible conflicts of interest.

The policy direction for the Korean government is suggested as follows. First of all, it is important to enhance awareness of the necessity of Islamic finance. It is necessary to know the introduction of Islamic finance will have a positive effect on the development of the Korean financial system. It is also necessary to consider that it is highly probable that the introduction of Islamic finance will create new jobs. Keeping this in mind, the Korean government must confirm the establishment of the hub of Islamic finance for Northeast Asia as the policy objective in the adoption of Islamic finance. As an important measure to achieve this goal, Korea needs to exert greater efforts to increase openness of its domestic market. In order to develop Islamic finance in the long run, it is necessary for the Korean government to create a neutral system of financial supervision and engage in a comprehensive revision of laws and the system to secure tax neutrality essential for sukuk issuance. In doing so, it is important for the Korean government and the private sector to formulate measures for the development of Islamic finance by discussing relevant issues broadly and cooperating closely. The Korean government should also establish the basic principles for supervision of the Shariah committee to prevent conflicts of interest.

Chapter 6 summarizes the entire discussion, focusing on policy implications and discussing future approaches to Islamic finance.

The cases of the UK, Singapore, and Japan ascertain that the government's policy initiative is an important factor for the development of Islamic finance. In this regard, it is necessary to take note of the process through which the government integrated Islamic finance into the existing system of financial supervision and taxation. The neutral system of financial supervision and taxation provides the foundation for stable operation of Islamic finance. Introducing Islamic finance can offer opportunities for the development of Korea's overall financial system.

It is necessary to approach Islamic finance based on long-term prospects. It is expected that, because of high transaction costs, Islamic finance will not replace conventional finance but merely account for a small portion of the financial market. Korean institutions have to consider measures to reduce the cost of raising capital by applying Islamic finance to areas, such as large projects or venture firms, for instance.

It is necessary to take an active approach throughout the process of the introduction of Islamic finance. If Korea establishes a clear development strategy for Islamic finance and pursues it systematically and persistently, it would likely present sufficient opportunities for the development of Islamic finance in Korea.

All of these should be predicated upon a clear recognition of the policy objectives for the introduction of Islamic finance. If we consider Islamic finance simply as a means to secure an alternative source for raising capital, we will not fully elicit benefits that Islamic finance can provide. The Korean government has to formulate policy objectives that will establish Korea as the hub of Islamic finance in Northeast Asia in from the long term perspective, and exert an array of efforts to achieve the goal in the different areas. If Islamic finance develops as a result, it will facilitate the development of the conventional finance as well. That is, the policy of establishing the hub of Islamic finance in Northeast Asia can be a momentum for the enhancement of the overall quality of Korea's financial system.

The Healthcare Industry in the MENA Region and Its Policy Implications for Korean Companies

Kwon Hyung Lee, Sungil Kwak, Jaeeun Park and Sung Hyun Son

The aim of the research is to suggest policy implications for promotion of the healthcare industry on the basis of analyses of the features and trends of the Middle Eastern and North African healthcare sectors as well as cooperative environments between Korea and the MENA(Middle East and North Africa). The healthcare sectors in the MENA have been expanded with the help of increasing population, life expectancies, and household income. The governments in the region have also made efforts to establish hospitals and medical centers and activate private markets in the sector. Thus, bilateral medical cooperation between Korea and the MENA could engender mutual benefits applying Korean medical technologies and devices and management systems of university hospitals. In the process, it is necessary to implement industrial policies for small and medium sized enterprises and strengthen export competencies. Then, it can be expected that the healthcare sector will create professional jobs as a growth sector and contribute to expansion of creative economy.

The report suggests ‘establishment of creative economy through promotion of industrial linkages and integration between Korean and the MENA healthcare sectors’ as a policy vision of their bilateral medical cooperation. Policy goals and actions are proposed in the division of three areas: industrial linkages and integration, professional manpower capability building and localization of Korea-based technology and hospital management systems.

First, government policies should be implemented so that the healthcare sector could enhance industrial synergies between medical service sectors and manufacturing sectors including medical devices and pharmaceutical products. The healthcare sector should also increase integration effects with other enabling industries including consulting services, ICT, finance, etc. Korean hospitals and manufacturers should strengthen cooperative relations with global top hospitals and enterprises to penetrate into the MENA markets utilizing global brands.

Second, lack of professionals like nurses, medical device engineers, ICT programmers etc. could prevent the MENA countries from developing the healthcare sector even though advanced facilities are established. Thus, vocational education and training program should be promoted with establishment of medical colleges and training centers. Exchange of professionals between Korea and the MENA could enhance mutual understanding of differing institutions, policies and markets.

Third, medical aid to public healthcare system in the rural areas could increase brand values of Korean medical technology and products. Small and medium sized hospitals specialized in chronic diseases in the region have favourable conditions in publicizing new brands in the initial stage of localization. Also, cultural and religious factors should be emphasized including food and prayer facilities. In the longer term, joint manufacturing projects could be considered a key policy tool to create jobs and strengthen industrial cooperation in the private sector.