Non-Technical SummaryThe Korean government has liberalized its foreign exchange market in early April 1999. The foreign exchange law has been simplified considerably: it transformed from a positive list system―no transactions allowed, apart from certain explicit exceptions―to a negative list system―all transactions allowed, with a few exceptional cases. As a sequel, the second stage of the liberalization is scheduled for January 1, 2001. Both liberalization actions aim at removing unnecessary regulations for transactions related to foreign exchange, either directly or indirectly, as well as at increasing depth and liquidity of the market.

The purpose of this study can be put simply into the following questions: What are the special features in Korea's won/dollar foreign exchange market distinguished from foreign exchange markets of other major currencies? Does foreign exchange liberalization increase the trading volume and enhance market efficiency of the foreign exchange market? We believe that the answers for these questions may be able to provide useful policy guide for the relevant parties.
Participants in the won/dollar foreign exchange market (interbank market) are composed of the central bank, authorized foreign exchange banks (dealers) and two foreign exchange brokers. As of November 2000, there are 73 foreign exchange banks, consisting of 21 domestic banks, 50 foreign bank branches and two development banks. Any financial institution that wants to engage itself in foreign exchange transactions should get permission from the government. They should meet minimum requirements of capital, manpower, and facilities.

Currently, two commercial foreign exchange brokers are competing in interbank transactions, the Korea Financial Telecommunications & Clearing Institute (KFTC) and Korea Money Broker Corporation (KMBC). The commercial foreign exchange broker system was introduced to Korea in January 1999. KMBC, a private organization, was allowed to establish a brokerage firm; KFTC, the public foreign exchange broker that enjoyed a monopolistic position in interbank trading, has became a commercial company. These two brokers play an important role in the market. Of all interbank transactions, 96.9% of spot exchange, 63.8% of forward exchange and 93.7% of swap exchange are conducted through both brokers. These numbers are very different from those of other major currencies of which less than 50% of foreign exchange transactions are executed via brokers. Why is brokered interdealer trading a dominant feature in Korea? Simply put, it could be due to the very small size of the foreign exchange market in Korea. Dealers, not wanting to transact directly with other dealers, avoid revealing any trading-related information since the exchange market amounts to only $3 billion or over a day and less than ten banks handle the share of the order flow.

We investigate whether the liberalization measures have induced the market into a more efficient way based on spirits of two very different existing theories: market microstructure theory and market efficiency hypothesis. To test the first one, we use empirical relations between the exchange rate and the trading volume. We see how the market disseminates and reacts to various shocks including private information shocks before and after the liberalization. If the foreign exchange market becomes more efficient after the liberalization, private information shocks should be short-lived or non-existent. We construct the private information shocks as where the exchange rate and the trading volume move at higher than normal revels, respectively. We implement and interpret the shocks within the framework of noisy trading model by Blume, Easley, and O'Hara (1994). The model postulates that information is diffused and incorporated into exchange rate through the trading of informed investors. The uninformed traders infer a new piece of information via the trading volume.
Therefore, the trading process diffuses information as the new piece of information arrives, resulting in a price movement on higher than normal volume. We also take look into how volume shocks and price change shocks affect both the conditional mean and volatility of a variable before and after the liberalization.

We apply the semi-nonparametric (SNP) nonlinear impulse response analysis proposed by Gallant, Rossi and Tauchen (1993) to see how various shocks including the private information shocks affect the variables. The reason we choose the SNP as an empirical tool is that the SNP family of conditional densities is large enough to encompass almost any conditional density, which will minimize the possibility of wrong interpretation of the liberalization measures on account of a specification error. The SNP technique uses Hermite polynomial expansion to directly approximate conditional density. The leading term of the expansion is an ARCH/GARCH. The higher-order terms in the expansion have coefficients which are functions of the conditioning data. In this manner, the polynomial expansion allows for shape deviations from normality and conditional heterogeneity of unknown form. Nonlinear impulse response functions, summarized in Gallant, Rossi and Tauchen (1994), are the extension of the impulse response function of linear VAR to the nonlinear case. In the nonlinear model, the dynamic properties can be elicited by perturbing the vector of conditioning arguments in the conditional density.

Our empirical findings based on nonlinear impulse response functions are as follows. First, large price and volume movements of private information generate persistent responses before and after the liberalization even if the degree of persistence after the liberalization is much smaller than the degree before the liberalization. The results lead us to conclude that the market becomes relatively more efficient after the liberalization, under the framework often going by the name of noisy trading model. That is to say, informed traders may earn much more at the expense of less informed or noisy traders, but the first can enjoy high profits for relatively short duration after the liberalization. Second, the public information shocks do not affect the volatility of the exchange rate in the short run, but the effects do not dampen for a long term in both periods. The same is true for volatility, even though the result is barely statistically significant. Third, the volume shocks or disparate belief shocks are major sources of price deviation from the average exchange rate and persistence in the volatility before and after the liberalization. Therefore, the trading volume itself generates 'excessive volatility' in the market.

We also investigate how the foreign exchange market has changed after the liberalization through the relationship between the offshore NDF (Non-Deliverable Forward) exchange rate and the domestic spot exchange rate. First, we examine the changes in ex-post profit of NDF rates during the sample period. We find the ex-post profit of NDF rate to be very small before the crisis and negative during the crisis period. However, recently the ex-post profit is fluctuating, showing both positive and negative values. It is believed that this comes from the liberalization measure such that domestic banks were allowed to participate in the offshore market since April 1999. Second, we show the status of market liquidity between the three periods―before, during and after the crisis―and find that the liberalization has increased the market liquidity. To examine the liquidity condition, the difference between bid-price and ask-price is analyzed, since there is no available data on the trade volume of the NDF transaction. Due to the liberalization, the liquidity in the forward exchange market is expected to increase as more participants enter. The liquidity increased as the bid/ask difference has reduced about four times between period 1 and period 3. We find that the forward premium puzzle exists in the domestic foreign exchange market. We also find that the influence of crisis still exists in the foreign exchange market. We also obtain empirical results that the offshore NDF exchange rate is not an unbiased indicator. However, the existence of time-varying risk premium explains the bias in the foreign exchange market of Korea. To find the existence of time-varying risk premium, the ARCH-in-mean model is used. ARCH models capture some important aspects of the risk premium in a foreign exchange market. First, the ARCH model is convenient specification for heteroskedasticity, which is an empirical characteristic of exchange rates. Second, most exchange rate changes exhibit leptokurtosis, and the conditional distribution of the Maximum Likelihood procedure of the ARCH model also shows fat-tailed behavior. Lastly, the ARCH-in-mean model is a suitable econometrical model, such that the time-varying risk premium enters into the regression for the conditional mean.

In addition, forward exchange bias clearly appears in the domestic foreign exchange market, indicated by the fact that it did not have a forward premium bias as seen in the main exchange rates in the free-floating exchange rate system. Thus, while most forward exchange rates are known to have a downward bias, an upward bias is observed domestically. This upward bias is thought to be caused by the system collapse following the shock of the financial crisis. Moreover, the upward bias shows that in Korea the interest rate equilibrium condition is satisfied at least in direction. To make an analogy, the government's interest rate stabilization efforts after the crisis greatly helped the exchange rate's downward stabilization. Bias in the domestic foreign exchange market can be explained by checking for existence of a risk premium or peso problem. This means that the domestic foreign exchange market can be understood as the risk premiums of forward exchange buyers and sellers or the expected excess profits (or losses) from expectations of a regime shift.
Based on our empirical finding, we suggest policy implications for exchange and monetary policy. First, the possibility of excessive volatility caused by noise or bandwagon holds a policy implication for the exchange rate system in Korea. Our results show that the degree of excessive volatility in the market grows weaker after the liberalization or adoption of a flexible exchange rate system. It seems to be very contradictory to the general consensus that the exchange rate would be more volatile under a flexible exchange rate system than a fixed one. The clues on the seeming contradiction can be reconciled with the fact that the absolute magnitude of the estimated conditional volatility decreases by more than ten times. As the volatility of the exchange rate decreases, the risk premium become smaller and the incentive for noise traders to participate in foreign exchange transactions shrinks. If the government's policy objective lies in minimizing the exchange rate volatility, one possible candidate for exchange rate system would be multilateral arrangements in the sense of discouraging noisy traders from participating in the market.

Second, indirect intervention of the traditional interest rate policy may not be as much effective as the traditional theory expected. This is due to the risk premium in the determination of exchange rates. The traditional interest rate policy on exchange rate states that increasing domestic interest rates induce more capital inflows and in turn the domestic exchange rates appreciate. However, this would happen only if interest rates and foreign exchange risk premiums were orthogonal. In other words, the exchange rate depreciates rather than appreciates in the case that the increasing interest rate influences the risk premium as a sign of weak economic conditions. According to empirical analysis, the changes of exchange rates depend on the interest rate differential as well as the risk premium. Since the forward rate and realized expected spot rate are correlated positively, as the interest rate differential increases, capital outflows occur and the domestic currency depreciates. As the time-varying risk premium is deemed as an important factor in the foreign exchange market, it is better to understand the effect of risk components in determination of the exchange markets.

Development of the domestic bond market is also another important economic objective for the Korean economy. An efficient and active bond market provides not only effective benchmark rates in the foreign exchange transactions, but also alternative financial assets to diversify the risk. This results in a deeper and more efficient foreign exchange market. In conclusion, the development of foreign exchange market requires a more efficient domestic financial market in general.

When East Asian countries came under speculative attacks in 1997, some of these countries were not able to defend themselves and subsequently had to seek the IMF financial assistance and accept its stabilization programs. These crisis-hit countries were criticized for not having restructured their financial, corporate, and public sectors along the lines suggested by the Washington consensus. This failure was singled out as the main cause of the crisis and understandably, these crisis-hit countries were subject to heavy doses of structural reforms. The East Asian crisis became contagious, even threatening the stability of major international financial centers. The severity and contagiousness of the East Asian crisis underscored the importance of and renewed interests in reforming the international financial system.

Numerous proposals have been put forward. The G-7 led reform, however, has concentrated its efforts on reforming the financial and corporate sectors of developing economies, while by and large ignoring the problems of the supply side of international finance.

As was in the Mexican crisis of 1994-95, the appetite for radical reform of the international financial system has receded considerably in the wake of global recovery. The ongoing debate on the future direction of the international financial reform in fact suggests that most of the problems that beset the international financial system are likely to remain unchanged. This pessimistic outlook arouses deep concern in developing countries that they will remain vulnerable to future financial crises even if they faithfully carry out the kinds of reform recommended by the IMF and the World Bank. Given this reality, developing countries may have to develop a defense mechanism of their own by instituting a system of capital control and adopting an exchange rate system that lies somewhere between the two corner solutions.

The 1997 financial crisis in Korea has had a substantial impact on the economy and the society as a whole. Korea's overseas direct investment is no exception. Korea's direct investment abroad, which surged in general from the late 1980s to 1996, has fallen dramatically after the financial crisis. Accordingly, a large number of companies have cancelled or delayed their overseas direct investment plans in the face of a wide range of problems, including liquidity. The financial crisis has prompted the need to reassess Korea's past overall economic development strategy; evaluating the accomplishments achieved through the overseas direct investment by Korean multinationals is now more important than ever.

Since the financial crisis which erupted at the end of 1997, the debates over the effects of overseas direct investment have focused on the soundness of overseas investment rather than its effects on the domestic industry or trade. This paper analyzes the performance of overseas subsidiaries holding outstanding invested amounts of more than $10 million based on the financial statements of overseas subsidiaries in 1997 and 1998, before and after the financial crisis. This study shows the poor business performance of Korea's direct investments abroad. Korean subsidiaries exhibit extreme instability due to capital depletion caused by continuous losses and high debt ratios in 1997 and 1998. Added to this are net losses resulting in profit indexes indicating low earning rates.

Such problems in foreign subsidiaries are identified as aggravation of profitability, instability and high dependency on the parent company. This inferiority results from the deteriorated management practice of entering overseas markets for quantitative expansion without sufficient evaluation of business profitability. However, limiting advance into foreign markets on the basis of low business performance is not only unrealistic but also undesirable. Rather, the role of redirecting direct investment abroad toward more profit-based decision making procedures must be left up to the market participants such as creditors and shareholders. In order for market participants to perform their role, openness and easy access to management details must be guaranteed.

This paper provides a theoretical framework to explain why governments seek restrictions on IPR protection and allow R&D subsidies through multilateral trade agreements such as the TRIPS Agreement and the Agreement on Subsidies and Countervailing Measures. After 7 years of discussion, the Uruguay Round extends GATT's trade-liberalizing philosophy to worldwide use of subsidies as a secondary means to intervene in international trade.

Through the Agreement on Subsidies and Countervailing Measures the WTO tries to preserve one of basic principles of GATT's philosophy: Fair Competition. The principle of Fair Competition is of particular importance in understanding the WTO. To harness GATT's trade liberalizing philosophy, the WTO as a successor of GATT takes this principle as objectives that are pursued through the enforcement and implementation of other principles, for instance the non-discrimination and reciprocity. As an example of the fair competition principle, the WTO prohibited any type of export subsidies through the Agreement on Subsidies and Countervailing Measures, but allowed R&D subsidies. The allowance of R&D subsidies by the WTO is a puzzle because it is well known that R&D subsidization forms the prisoners' dilemma when governments are active to set R&D policy.

In order to find any reasonable logic to explain this puzzle, we focus on the interaction between strategic trade policy tools: R&D subsidization and IPR protection. Indeed, at an international level IPR protection has been a major focus of negotiations along with R&D subsidies. The WTO also requires member countries to strongly enforce patent protection through the TRIPS Agreement. In our analysis, it turns out that it is globally optimal to perfectly disseminate knowledge without IPR protection and to subsidize inventive firms by solving a problem that the weak IPR protection damages firms' incentive to invest in R&D activities. However, current trade agreements do not match with our global optimum. We show that exporting countries may benefit at the expense of importers from a trade agreement to demand stronger enforcement on IPR protection because exporting countries experience the prisoner's dilemma problem when both countries free ride on the rival firm's R&D outcome. Therefore we conclude that it is possible to understand the TRIPS Agreement as an inefficient victory of the interests of northern exporting countries over those of southern importing countries.

After joining into OECD, Korea voluntarily adopted IMF programs and additional liberalization measurements, and thereby, the Korean financial and capital markets have been liberalized to a great extent. OECD examines the implement conditions on liberalization which the new member country promised to undertake, after two years later the new member country entered OECD. In February 1999, OECD hosted CIME/CMIT joint meeting, in order to examine the implement condition of the two major commitments that Korea made at the time of its entry. The OECD member countries including United States, Japan, France and the U.K. evaluated highly the Korean efforts to challenge to liberalization, given that Korea was troubled in financial crisis.

However, OECD urged to Korea that the allowance of non-residents' security issuance denominated in foreign currency and the abolishment of overseas' deposit limit of residents should be introduced. For example, domestic security issuance denominated in foreign currency by non-residents was originally scheduled to allow in January 1997. However, this plan was delayed due to the financial crisis and finally implemented in April, 1999 by foreign exchange transaction act. Additionally, the overseas savings limit of the residents was expected to be removed in the late 1998. However, its implementation was postponed until the late 2000. Also, the cross-border-trade in the financial service, as well as asset management service was urged to be liberalized, which is not scheduled yet.

Under the domestic and international market condition, the financial liberalization gives a good opportunity of making available of low-interest capital and improvement of management skill and competition. Yet, it also has a possibility of making the Korean macroeconomic condition unstable by falling into excessive international competition and overly inflow of overseas capital.

Therefore, appropriate efforts should be made in order to promote competition in the financial industry, to operate well-functioning market conditions, and finally to have institutional risk management measurements including early warning system in case of unexpected capital outflow.

Due to industrialization that had put priorities to manufacturing at the expense of services, the service sector in Korea was grossly underdeveloped up to the early 1990s. Numerous sector specific regulations and restrictions on FDI prevented competition and impeded the offering of higher value services. In 1990, the labor productivity of the Korean service subsectors was much lower than that of the advanced countries. The labor productivity of 'distribution services, etc.', in particular, was less than one-fifth that of the U.S. in 1990.

Since the mid-1990s, the Uruguay Round negotiations and the OECD accession enabled the Korean government to gradually open its service sector to foreign suppliers. As a result, distribution services, business services, entertainment and recreational services and other personal services, in particular, have been almost completely liberalized.
The financial crisis of 1997 also gave momentum to the elimination of horizontal and sector-specific market access restrictions in the service sectors beyond the commitments made in the WTO and the OECD. The Korean government has accelerated its liberalization schedules for transportation services, financial services and telecommunication services since 1998. As of July 2000, the degree of liberalization of the Korean service sector is comparable to that of the developed countries, with almost all the service subsectors open, with the exception of a few areas sensitive to national security, culture, and political stability.

Thanks to the accelerated liberalization, Korea's trade in services increased rapidly in the 1990s. Trade in services, by the three modes of supply (cross-border supply, consumption abroad and movement of natural persons), except commercial presence, increased from $22.8 billion in 1991 to $49 billion in 1998. More significant increase in trade in services occurred through commercial presence. FDI inflows in services increased from $1.6 billion in 1982-90 to $6.3 billion in 1998-99. In particular, FDI in distribution services and transportation services increased remarkably in 1996-97. FDI in financial services and other services experienced a sharp increase after the financial crisis.

The liberalization of services is presumed to bring productivity gains in the service sector and also in the manufacturing sector which use liberalized services as inputs. By examining the changes in productivity of the service subsectors in 1970-97, we find that liberalization may have positively contributed to the productivity of the liberalized service subsectors. 'transport and communications', which was partially liberalized in the 1990s, showed a gain in total factor productivity growth in the late 1990s, from 2.2 percent in 1990-95 to 4.12 percent in 1995-97. The total factor productivity in 'distribution, etc.', which was almost completely liberalized in 1996, also improved in the late 1990s, from 0.41 percent in 1990-95 to 0.02 percent in 1995-97. Whereas, 'finance, etc.', which had been nearly closed until the late 1990s, showed negative total factor productivity growth rates throughout the periods studied.

The hypothesis that liberalization in services may increase the productivity of the manufacturing subsectors which use liberalized services as inputs is also tested by comparing the growth rates of productivity by manufacturing subsectors and the input coefficients of services to those manufacturing subsectors. However, it seems to be difficult to extract any consistent pattern, possibly due to the relatively small input coefficients of services in the manufacturing subsectors.
Considering the positive impacts of the liberalization of trade in services on domestic economy, it is in the interest of the Korean economy to continue the liberalization process and refrain from retreating. As entry barriers have been widely removed, most remaining obstacles are the internal barriers faced by both foreign and domestic suppliers. These barriers are more difficult to remove because they are part operating practices, part regulation and part cultural.

In particular, the ambiguous tax laws as well as cumbersome regulations are regarded as the most serious impediment to foreign investors. This implies that deregulation should focus not only on reducing the number of regulations but also on enhancing its transparent enforcement. In the process of deregulation, the government should also be attentive to reducing excessive regulations for fulfilling their objectives.

Another important area which has not been adequately addressed is labor market inflexibility. The limitations on layoffs may discourage foreign service suppliers from establishing local subsidiaries, which otherwise can create employment. Establishing an adequate social safety net and effective retraining programs is thus needed not only because it enhances labor market flexibility but also because it enables the government to liberalize mode 4---temporary entry of service providers.

Dr. Jong-Il Kim, a professor of economics at the Dongguk University, earned his Ph.D. at Stanford University. He specializes in productivity and economic growth. Address: Department of Economics, Dongguk University, Pil-Dong, Jung-Gu, Seoul 100-715, Korea: (Tel) 82-2-2260-3274; (Fax) 82-2-2260-3684; (E-mail) jongil@dgu.ac.kr
Dr. June-Dong Kim, a research fellow at the Korea Institute for International Economic Policy (KIEP), earned his Ph.D. in Economics at the University of Chicago. He specializes in international trade policy and direct investment. Address: 300-4 Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea; (Tel) 82-2-3460-1129; (Fax) 82-2-3460-1077; (E-mail) jdkim@kiep.go.kr

For over three years, the East Asian crisis countries, other than Malaysia, have dutifully followed the IMF structural programs to make their corporate and financial sectors more transparent, efficient and resilient to financial market instability. The reform processes in these countries are far from over, yet there is already a growing concern that they will remain vulnerable to future financial crises even with faithful execution of reforms. The domestic economic reforms alone may not safeguard them against future crises, so long as the reform of the international financial system is deferred or pushed forward without due consideration of the institutional and structural characteristics of the emerging market economies.

The reform led by the G-7 countries has been losing steam and from the viewpoint of emerging market economies does not adequately address the supply side problems. In particular, the small and medium-sized open economies in East Asia, on their own, may not be able to fend off rapidly globalized and virtualized speculative attacks. For these reasons, there has been increasing support in East Asia for developing a regional mechanism of defense in the form of financial cooperative arrangements. This support has culminated in the Chiang Mai Initiative of ASEAN+3 to create currency swap arrangements among thirteen countries in East Asia. The initiative is widely perceived as a major step toward strengthening financial cooperation among East Asian countries.

Details of the swap arrangements among the ASEAN+3 countries will need further elaboration; however, at this stage it is too early to tell whether they will be able to successfully negotiate the creation of such arrangements, given the different interests of different countries in the region. As was the case of the Asian Monetary Fund proposed by Japan when the crisis touched off in July 1997, the idea of a regional monetary fund or regional lender of last resort still faces strong opposition by the United States, European countries and, of course, the International Monetary Fund (IMF) for a number of reasons. Many western scholars dismiss the contention that an East Asian regional fund may have a comparative advantage in diagnosing regional economic problems and prescribing appropriate solutions on the basis that it will increase competition in the market for ideas. A more serious argument is that East Asians are not ready or capable of creating and managing an effective regional monetary fund. Compared to European countries, East Asia lacks the tradition of integrationist thinking and the web of interlocking agreements that encourages monetary and financial cooperation.
Nevertheless, regional financial arrangement could be structured and executed so as to be complementary to the role of the IMF. For example, a regional financial arrangement could provide additional resources to the IMF while joining forces to work on matters related to the prevention and management of financial crises. Furthermore, the East Asian countries' joint efforts to monitor economic and financial market developments in the region will support the IMF's global surveillance activities. In this regard, an East Asian regional financial arrangement, along with a regional surveillance process, can be explored while avoiding institutional duplication and reducing operational costs as well.

Beyond the Chiang Mai Initiative, the Asian Arrangements to Borrow (AAB) would build a strong foundation for committed financial cooperation in East Asia. The AAB shall be activated as the first line of defense for a country faced with a temporary shortage of foreign exchanges before officially requesting emergency loans from the IMF. The AAB would not require the establishment of a formal institution. The AAB would be based on the credit arrangements among participants, as in the case of the credit mechanism under the European Monetary System (EMS). However, the AAB should be distinguished from the facilities to maintain the par value system among participating countries under the regional monetary system.

To avoid or mitigate the moral hazard problem embodied in the automatic lending system of the AAB, it would be desirable to link the limit of borrowing assigned to each participant with its credit commitments. In addition, a penalty rate should be applied to borrowing countries. The AAB could become the next initiative by developing the network of bilateral swap arrangements, currently discussed under the Chiang Mai Initiative, into a truly multilateral scheme. If carefully designed and implemented, the AAB may serve as a milestone for closer and deeper financial cooperation in East Asia.
As the East Asian countries become more regionally integrated, the next agenda for the regional financial cooperation would be to search for a means to stabilize exchange rates among regional currencies. An even higher level of concerted cooperation would be required to establish appropriate monetary arrangements at the national as well as regional dimensions. As seen in the ERM crisis of 1992-93, however, even this EMS institutional framework would not be sufficient to ward off speculative attacks. An Asian currency unit or a single currency could be further explored over a longer term, if regional political consensus emerges along with deeper regional economic integration.

East Asia has a long way to go before formalizing and putting into effect the Chiang Mai Initiative, and launching further cooperative initiatives. In this respect, China and Japan should be able to provide leadership in leveling out the differences among the East Asian countries that are likely to surface during the negotiation process.

A total of 14 agriculture-related rules in OECD consist of 11 Decisions and 3 Recommendations, out of which South Korea only joined the rule of official inspection of tractors in December, 1995.

In March 30th, 1999, the OECD announced a final report examining Korean agricultural policy. Actually, it has been publishing each member's report on agricultural policy in order to evaluate whether their agricultural policy are consistent with agricultural reform principals of OECD. This report recommended that Korean agricultural policies should encourage direct income payment system, pursue environment-friendly agricultural policy, expand open market, promote sustainable agricultural development, improve infrastructure, continue to restructure agricultural industry, and enhance transparency in implementing regulatory reform policies. Furthermore, it recommended that transparent, targeted, tailored, flexible, equitable application of standards in practice will excessively contribute to attain OECD members' goals in agricultural sector and overall economy.

In making a decision whether to accept or reserve certain rules, those rules that are viewed to benefit domestic agriculture come first. In doing this, it is important to collect the opinions from institutions or experts with accumulated professional knowledge and experience regarding to the rules. In addition, a member country should listen to voices from various fields through a public hearing.

On the other hand, it is not quite easy to evaluate the implementation of other recommendations that are not rules because those recommendations are not specifically designed to suggest totally new measures or to scrap existing ones. Rather, they require overall improvement in agricultural structure and comprehensive agricultural policies to facilitate trade of agricultural products. However, as shown in the OECD report on Korean agriculture, OECD evaluated that Korean agricultural policies are being improved. Nevertheless, we should continue our efforts to reform agricultural policies in due consideration of hereafter agricultural situations.

Ministers outlined a set of Shared Goals. There was a broad consensus that OECD Member governments should provide on appropriate framework to ensure that the agro-food sector: is responsive to market signals; is efficient, sustainable, viable and innovative, so as to provide opportunities to improve standards of living for producers; is further integrated into the multilateral trading system; provides consumers with access to adequate and reliable supplies of food, which meets their concerns, in particular with regard to safety and quality; contributes to the sustainable management of natural resources and the quality of the environment; contributes to the socio-economic development of rural areas; contributes to food security at the national and global levels.

In line with those policy goals of OECD, we should improve our competitiveness in agricultural industry to cope with changes of international situation by successfully carrying out "Rural Development Plan and Agricultural Reform Policy", which has been implemented as a basic moto of agricultural administration toward 21th century. Especially, we must go ahead with reforms under operation such as reforming cooperative associations, innovating distribution systems and restructuring agricultural production systems.

Moreover, we should accelerate the expansion the direct payment system promoted in OECD members in supporting agriculture, while reducing the support market price and stimulate agricultural policy reform in an attempt to reorganise more easily.

In addition, Korea should make efforts to achieve the improvement of overall agricultural policies such as reducing trade-distortive policies, narrowing government assistance(the assistance with agricultural inputs), recommending environment-friendly agricultural policies, facilitating regulatory reforms, developing agricultural village, and restructuring agricultural industry.With regard to Korea's accession to OECD rules, we should take a forward-looking stance based on our agricultural outlook, rather than just being content with status quo of current agricultural situation.

Given the idea from my previous research that the R&D subsidy issue must be considered with IPR protection, we examine policy choices when a government chooses both R&D subsidies and IPR protection levels simultaneously. Under the circumstance, it will choose a sufficiently weak level of IPR protection that its optimal R&D policy choice will be a subsidy. Hence when both IPR protection and R&D policy choice are modeled, the case for an R&D subsidy remains, but for very different reasons than those of the original strategic R&D subsidy logic.

That is, we show that it will be optimal for the domestic government to adopt IPR protection which is sufficiently weak that, in light of this weak IPR protection, it will also want to subsidize the R&D investments of the domestic firm, so as to induce R&D investment of the foreign rival firm to rise as well, which in turn increases the profits of the domestic firm.
Like the original Spencer-Brander result, the R&D incentives that we identify lead governments to set positive R&D subsidies in the non-cooperative equilibrium. However, we find that if exporting governments could cooperate over their policy choices they would continue to subsidize R&D, rather than agreeing to tax R&D as in the original Spencer-Brander setup. The reason is that under cooperation they will also agree to share perfectly the results of R&D investments (i.e., eliminate IPR protection), and R&D subsidies are then required to maintain appropriate incentives for firms to engage in R&D investments. This last result is interesting for two reasons, both of which point to the importance of examining R&D subsidies and IPR policies in tandem as we have done rather than in isolation as has heretofore typically been done.
First, by this result we show that the case for strategic R&D subsidies is more robust than previously thought, as it applies whether exporting governments are acting cooperatively or non-cooperatively, once their equilibrium choices of IPR protection are taken into account as well. And second, by this result we identify a puzzle as to why governments might wish to agree to jointly eliminate, rather than tighten, their levels of IPR protection, given that they have at their disposal R&D subsidy policies to offset the disincentive effects of agreements to share R&D outcomes. We show that the flavor of these findings extend as well to the case in which governments also have export policies at their disposal. In the original Spencer-Brander setup, the addition of export policies leads governments to tax R&D and offer export subsidies, pointing to another way in which the case for strategic R&D subsidies appears to be fragile. But again our results imply that this fragility disappears in a setting in which the choice of IPR protection is modeled as well.

The scheme of Northeast Asian economic cooperation is a major variable to diminish the deterrent potential of the powers against the economic integration as well as the unification in the Korean Peninsula. In view of the current Northeast Asia's political and economical power relations, however, there seems to be no way to attain either two Koreas' economic integration or their unification. As the economic integration or national unification is delayed, the chance of the Korean integrative development will be farther away and their unification cost will be larger. It is why the Korean themselves must positively search for ways of their economic integration and national unification.
A model of "pervasive bases-linking and development" suggested in this paper is a way of starting for two Koreas' economic integration, which is approached by three stages. At the first stage, North Korea's open districts and its counterpart areas in South Korea are to be designated as bases for the partial integration. In the second stage, these bases are developed as the central zones of growth in the scheme of Northeast Asian economic cooperation. And finally, such zones are to be increased in number.
The unification should be attained with minimizing the deterrent potential of neighbor countries as well as minimizing its cost. To suffice these conditions, it seems desirable for the unification to begin with the model of "one-country two-system" and then to be developed step by step.
The integrative development of the unified peninsula should be pursued so as not only to complete the economic, social and land integrations but also to harmonize the internationalization or globalization with localization. The designing of four outward development zones and one inland axis are needed in this context. Four outward development zones are the Northern area toward Eurasia, the Pan-Yellow Sea area toward China and Southeast Asia, the Pan-East Sea area toward Japan, the Far East of Russia, and the South Sea-Jeju area toward the Pacific Ocean.
According to it, a Five-Ju System is suggested as a new great-administrative partition in the unified peninsula. The five Ju's are Guanseo Ju linking the Pan-Yellow Sea economic sphere with Eurasia, Guanbuk Ju linking the Pan-East Sea economic sphere with Eurasia, Giho Ju as a central area of the Pan-Yellow Sea economic sphere, Taebaek Ju as a central area of the Pan-East Sea economic sphere, and Namhae Ju linking both the economic spheres of the Pan-Yellow Sea and the Pan-East Sea with the Pacific Ocean area. And the unified peninsula would have a firmer ground for integrative development as each Ju's development plan is implemented for the purpose of strengthening nucleus management functions of local mega-cities to fit this spatial framework.