Executive Summary

I. Introduction

II. A dynamic geography model

III. Intermediate Analysis

IV. Centripetal and Centrifugal Forces
1. Growth rate in the steady state
2. Growth effect and specialization
3. Income inequality

V. Stability Analysis

VI. Growth and Income in the Steady States

VII. Economic Integration

VIII. Concluding Remarks

References

Appendix

New economic geography theory predicts a catastrophic agglomeration of economic activities in the sense that income inequality among countries or regions is inevitable. However, such a result relies heavily on the assumptions that economic activities are independent of each other. In this paper, a two-country three-sector model is developed, encompassing new economic geography theory and endogenous growth theory. Unlike the previous economic geography literature, we construct a model in which the three sectors are interdependent. Several interesting results are obtained from small changes in the model setting. (The rest is omitted.)

Executive Summary

I. Introduction

II. Tax Incentives for Foreign Direct Investment in Korea
A. Legal Sources of Tax Incentives for FDI in Korea
B. Contents of Tax Incentives for FDI in Korea

III. Who Gains Benefits from Tax Incentives for FDI in Korea?
A. Greenfield or M&A Investments?
B. Tax Treaty Beneficiary or Not?
C. Investment through Permanent Establishment or Not?
D. Double Taxation Relief on Dividends: Exemption or Foreign Tax Credit?
E. Tax Sparing System Beneficiary or Not?

IV. Conclusions
A. Tax Strategies for Foreign Investors
B. Policy Implications for the Korean Government

References

Tax incentives for FDI in Korea have been extended after the financial crisis of 1997. With the newly implemented tax incentives, foreign investors have been able to reduce the tax burden of their Korean business activities. However, not all foreign investors receive the same level of tax benefits. (The rest is omitted.)

Executive Summary

I. Introduction

II. Empirical Methodology
1. SNP Estimation of the Conditional Density
2. Impulse Response Analysis of Nonlinear Models

III. Data

IV. Main Empirical Results

V. Evaluation of the IMF's High Interest Rate Policy

VI. Conclusion

Reference

The paper evaluates the effectiveness of the high interest rate policy in stabilizing the exchange rate during the Korean crisis, based on a nonlinear impulse response function approach. By tracing impulse responses within an estimated model, we find that high interest rates induce depreciation for a very short period (five days), followed by a substantial appreciation for an extensive period (more than three months). In contrast, a low interest rate policy would appreciate the exchange rate only for a very short period but have little impact afterwards, indicating an asymmetry in the exchange rate response to an interest rate shock. The impulse function analysis also suggests that a cutback of interest rates to the pre-crisis level does not cause serious depreciation. Our findings suggest that the IMF's interest rate policy in Korea, which was characterized by a sharp increase in interest rates at the onset of the crisis followed by a cutback after several months, contributed to the stabilization of the exchange rate.

Executive Summary

I. Introduction

II. Policy Challenges
1. The Current Account, Net Debt and Capital Flows
2. Volatility
3. Exports
4. The Optimal Stock of Gross Reserves
5. A Safety Valve, Concerted Intervention

III Inflation Targeting
1. Overview
2. Credibility and Inflation Targeting

IV Alternative Intermediate Regimes

V. The Currency Board Arrangement
1. Overview
2. Traditional Challenges
3. The Gains from Currency Unions and Boards
4. A Currency Board for Korea?

VI. Recent Experience in Korea and other Emerging Markets
1. Intervention and Policy Objectives

VII. Concluding Remarks

References

Appendix

This paper proposes that interest rate policy be used to attain a flexible inflation target.Flexibility in this context means that the authorities also care about short-run fluctuations in domestic output and employment. The less powerful policy tool, sterilized intervention in the foreign exchange market, would be used to limit day to day changes in exchange rates.
We argue that the government should continue to be an important participant in the foreign exchange market but not attempt to establish a level for the exchange rate. Our proposal will involve intervention that is triggered by exchange rate volatility but constrained by an announced target for the government's overall net foreign asset position. The objective of this regime is to allow the government to participate in the foreign exchange market in a way that contributes to economic stability and promotes the development of the private sector's participation in foreign exchange and financial markets.

Korea adopted free floating exchange rate system after the crisis in 1997, resulting in increased exchange rate risk for small and medium-sized enterprises. A small open economy such as Korea is vulnerable to outside shocks, in particular, world interest rate shocks, exchange rate shocks and foreign productivity shocks. Therefore, this study seeks to help promote the understanding of CEOs on the management of exchange rate risk.

Executive Summary

I. Introduction

II. Conceptual Framework
1. The Rationale for Surveillance and Monitoring
2. Spectrum of Regional Financial Cooperation
3. Monitoring and Early Warning Systems
4. Enforcement Mechanisms: Does Peer Pressure Work?

III. European Experiences
1. Surveillance Mechanisms in the European Payment Union
2. The Bretton Woods System and the Treaty of Rome
3. The Snake System: 1972-1978
4. European Monetary System (EMS): 1979-1992
5. Economic and Monetary Union (EMU): 1993- present
6. Lessons out of the European Experience

IV. IMF's Global Surveillance and Regional Initiatives
1. IMF Surveillance
2. Regional Initiatives

V. Future Challenges
1. Clear Specification of the Objectives
2. Construction of a Surveillance Mechanism
3. The Chiang Mai Initiative and the Surveillance Mechanism
4. Forming a Core Group for Integration
5. Preparing for a Long-Term Vision
6. Building Institutional Arrangements

References

Since the East Asian financial crisis, the need for regional financial cooperation has been greatly emphasized. With integrated markets, financial instability is unlikely to remain within national borders. Indeed, cooperative efforts at both regional and global levels are needed to counter the negative spillovers. In particular, the increased regional economic interaction through both financial and trade channels affords a basis for higher financial cooperation. (The rest is omitted.)

Executive Summary

I. Introduction

II. Capital Account Liberalization and Capital Flows in Korea
1. Liberalization in the 1980s
2. Liberalization in the 1990s Prior to the Crisis
3. IMF Program and Further Liberalization
4. Components of Capital Account

III. Empirical Analysis
1. Vector Auto-Regression Model
2 The Nature of Capital Flows
3 Effect on Macroeconomic Variables
4 Boom-bust Cycles
5 Foreign Exchange Market Intervention and Sterilization Policy

IV. Conclusion

References

The macroeconomic effects of capital account liberalization in Korea are examined. Simple data analysis suggests that capital account liberalization substantially changed the nature and composition of capital flows. Based on the VAR model, we find the following stylized facts: First, after capital market liberalization, capital flows become less driven by current account imbalances and therefore become more autonomous. Second, capital account liberalization significantly changes the effects of capital flows on macroeconomic variables. Third, capital account liberalization is highly related to consumption and investment booms, and subsequent appreciation of nominal and real exchange rates, which leads to the current account worsening. (The rest is omitted.)

Russia, Belarus and the three Central Asian countries of Kazakhstan, Kyrgyzstan, and Tajikistan laid the groundwork for a higher level of economic integration among the former Soviet Republics in June 2001 by declaring the official launching of the Eurasian Economic Community (EEC). Presidents of the five member countries had already signed a new customs union treaty based on the now antiquated CIS Customs Union during summit talks in Astana, the capital of Kazakhstan, in October 2000. The purpose of this regional report is to review the economic background of the EEC and discuss the prospects for its enlargement as well as the possibility of a large-scale economic integration encompassing all CIS countries.
With the breakdown of the Soviet Union in 1991, the 12 newly independent states (NISs) developed the idea of forging a single economic space as many of them were confronted with severe economic difficulties that demanded immediate attention. This was based on the perception that their continued economic downfall was attributable to the weakening trade relations between the former Soviet republics. In the early 1990s the inter-regional supply linkage under the Soviet planned economy was abruptly dissolved and each NIS began to establish independent trade barriers, hampering what had been a system of virtual free transactions linking republics in the Soviet era. Policy makers began to assert the need for restoring intra-CIS free trade as a solution to economic recession. This was the motivation underlying the formation of the CIS Economic Union in 1993, the first futile attempt to bind the economies of former Soviet republics together.
These most recent efforts to realize economic integration in the CIS through the EEC have sprung from a growing awareness among the transition economies that it was time for them to be integrated into the international economy. Quickly recovering from the shock of economic crisis since 1998, the transition economies are no exception to the rush to ride the wave of globalization. As regional trading blocs have been successively created across continents since the 1990s, countries in the CIS were also pressed to draw appropriate responses to the upswing of regionalism in the international economy. Moreover, Central and Eastern European countries have been in negotiations to gain membership into the European Union (EU) and will enter into the single market en masse in the near future.
This report assesses the pattern of trade relations between the five countries participating in the EEC customs union focusing on changes in the direction of trade and commodity structure. Products traded in the EEC market can be grouped into four categories according to their place of origin as follows: products from Russia, from EEC countries excluding Russia (EEC-4 hereafter), from the seven CIS countries that have not joined the customs union (CIS-7, hereafter) and, lastly, external countries. The web of trade relations between these groups of products in the intra-EEC market is described as follows: first, EEC-4 countries tend to sell primary goods and maintain complementary relations with Russia. Second, Russia is in competition with CIS-7 for greater market shares in the entire EEC market, as Russia and CIS-7 have similar trade structures in terms of commodities. Third, products of external origin complement the commodity structure of trade within the EEC and consist of high value-added products and capital goods backed by the higher comparative advantage over domestic products.
However, trade relations are expected to undergo the following changes when the customs union, currently in the take-off stage, is fully implemented. First, imports to the EEC will begin shifting to consist largely of cheaper intra-EEC products instead of goods from the CIS-7, which are not EEC members. The high demand for Russian products in the EEC-4 will continue but prices will go down as trade barriers between the EEC-4 and Russia are gradually removed. Therefore, the position of the CIS-7 in the EEC market will weaken due to the effects of trade diversion from external to intra-regional trade. Second, trade reorientation toward western economies, on the other hand, will remain a dominant economic trend in the EEC market despite the gradually tightening ties within the customs union. The westward trade reorientation or diversification towards Western Europe has been compelling since CIS countries began to pursue trade liberalization. This trend is not likely to dissipate but will escalate even more for the time being if the customs union raises the income level of the participating economies and the income effect is translated into a rising demand for products made in non-member countries.
Despite the expectations of rising intra-regional trade under the customs union, it is not likely that the EEC countries will adopt discriminatory and protective measures. For one thing, there is little chance that the EEC will agree to apply extremely high common external tariffs (CETs) on products from non-member countries. Member countries, rather than confining external ties within the 5-country group, want to expand bilateral economic ties with a variety of countries in Asia and North America as well as Western Europe. Some countries' bids for WTO membership will also prevent them from showing protectionist tendencies, because greater trade liberalization is one of the WTO's accession conditions. Higher CETs are also against WTO rules. The WTO recommends that the customs union set its CETs below the average tariff rates that individual member countries had imposed before the enforcement of the customs union. Meanwhile, accession negotiations can possibly delay the acceptance of the common trade policy by the EEC members if countries fail to agree on a common approach for collective accession to the WTO and place greater priority on negotiations with the WTO than on talks for a common EEC trade policy.
Many CIS countries wish to be free from the umbrella of Russian influence and to establish more independent external relations, economically and politically. Still, Russia is indisputably an opinion-leading country in the CIS, though sometimes elusively. Since his inauguration, Russian President Vladimir Putin has stressed the growing importance of a partnership with the CIS countries within the entire foreign policy framework. Considering the nature of CIS politics, the configuration of the EEC will have the following implications for the future political and economic landscape of the CIS. One possible outcome is that the EEC will contribute to enabling individual members to develop robust economic ties with Russia and promote plurilateral and balanced cooperation among members alike, materializing equitable economic development. Then, the EEC will become large enough to act as the seed for a large-scale united market in the CIS, similar to the single market in the EU. Or, the EEC may fail to end the pattern of hub-and-spoke trade relations, which means intra-EEC trade will remain highly concentrated on exclusive bilateral exchanges between Russia and individual countries. Provided that the hub-and-spoke pattern continues under the EEC, further enlargement is less likely as CIS countries seem unwilling to tolerate Russia's predominance. Hence, the CIS will be broken down into several plurilateral trade agreements, which will not necessarily include Russia, but rather be oriented towards the pursuit of mutual interests between regional partners.
As many CIS countries register a faster-than-expected recovery from the economic crisis, external economic relations will see subsequent changes. Recognizing the optimistic economic forecast, South Korea must prepare by collecting updated information concerning the changing business climate in the CIS. As greater economic integration in the CIS is targeted at boosting the income level and expected to prompt a growing demand for non-CIS products, it is necessary to watch for new business opportunities with the CIS.

China's Attitude toward Regional Economic Cooperation and the Possibility of Northeast Asian Economic Integration
With the end of the Cold War, the world economy is pivoted on globalization and regional economic integration. Accordingly, each nation is adopting regional economic integration as a key strategy in order to heighten regional cooperation in the global stages, by eliminating uncertainty and expanding the system of specialization within the region. However, as of now, the economic cooperation in Northeast Asia fails to reach the level of regional economic integration, and moreover, the nations in the region have yet to even agree upon a long term economic integration goal or the possibility of some form thereof. (The rest is omitted.)

The purpose of this paper is to first make a comprehensive analysis of the Russian development strategy of Siberia and the Far East in the 21st century and then deduce specific business opportunities and methods of cooperation on territorial development between Korea and Russia. (The rest is omitted.)