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Internationalization of the Korean Won in the Light of the RMB Internationalization
Despite the fact that China and the United States represent the G2 in terms of economic size, the RMB’s international significance in the existing international financial system is limited. China has made significant progress in ..

Hyo Sang Kim et al. Date 2022.02.25
Financial Liberalization, Exchange Rate China

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Preface

Forward

Contents

Executive Summary

Contributors

Chapter 1. Introduction
1. Background and Motivation
2. The Current Status of the Korean Won Internationalization
3. Contributions

Chapter 2. RMB Internationalization: Development Status, Evolution Logic and Prospect
1. Development Status of RMB Internationalization
2. Evolution Logic of RMB Internationalization
3. Prospect of RMB Internationalization

Chapter 3. Performance of the Shanghai and Seoul Direct RMB-Korean Won Exchange Market
1. Introduction
2. Direct KRW-RMB Exchange Markets in Seoul and Shanghai
3. Empirical Model and Results
4. Conclusion and Policy Implications

Chapter 4. Synchronization of East Asian Currencies: RMB or USD?
1. Introduction
2. Exchange Rate Regime in China
3. Empirical Estimation
4. Conclusion

Chapter 5. Analysis of Factor Determining the Synchronization of RMB and Korean Won
1. Introduction
2. The Currency Co-movements with the RMB
3. Factor Determinants on the RMB Weights
4. Empirical Results
5. Conclusion
Appendix

Chapter 6. Effects of RMB Internationalization on Korean Won
Internationalization
1. Introduction
2. Constructing the Korean Won Internationalization Index
3. Empirical Analysis
4. Conclusion
Appendix

Chapter 7.
Policy Proposals and Conclusion
1. A Policy Framework for Currency Internationalization
2. Review of the Experiences of the Currency Internationalization
3. A Proposal for the KRW Internationalization
4. Agenda for RMB and KRW Cooperation
5. Conclusion

References

Summary

Despite the fact that China and the United States represent the G2 in terms of economic size, the RMB’s international significance in the existing international financial system is limited. China has made significant progress in encouraging RMB internationalization. It has the ability to disrupt the global financial system, dominated by the US dollar. In order to seize chances under such circumstance, Korea must find a new direction for the internationalization of Korean Won.

This collective volume has seven independent papers that investigate the current and future status of the RMB internationalization and its impacts and implications on Korean economy. The summarizations of each paper are as follows: Chapter One explains the background and motivation of this collective volume. Also, it describes the current status of the Korean Won Internationalization. Chapter Two provides detailed descriptions of the current status of RMB internationalization and its future prospects. Chapter Three examines the performance of Shanghai and Seoul RMB-KRW direct foreign exchange markets and figures that such direct FX markets have not been fully developed yet. However, such markets are expected to become more efficient gradually. Chapter Four finds that in the gradual evolution of the RMB internationalization, the KRW is becoming more synchronized with the Chinese yuan. Chapter Five explores the factors for coupling between the RMB and the KRW. Not only trade and finance channels but also policy implementations are important. Chapter Six develops the index for the KRW internationalization in light of the RMB internationalization. This chapter finds that the RMB internationalization may hinder the KRW internationalization. If the Korean government continues to delay the KRW internationalization, the benefit from the currency internationalization will become smaller. In that regard, Chapter Seven emphasizes that at this moment, it is very meaningful to re-examine the long-term strategy for Korea’s won internationalization.

The internationalization of the Korean won provides a new opportunity for the country’s financial development, rather than a disruption to the current global financial system. In the process of the internationalization of RMB and KRW, China and Korea should further strengthen bilateral financial and economic cooperation to push forward the process of RMB and KRW internationalization. Because the RMB or the KRW each have such a small proportion of the global monetary system, it is premature to be concerned about competition. Cooperation should take priority. The key policy suggestions for cooperation between these two currency internationalizations could at the very least include: (1) increasing the bilateral currency swap lines (BSLs) and making them more effective; (2) encouraging more usage of RMB and KRW in bilateral trade and direct investment; (3) encouraging more Chinese investors to hold KRW denominated assets and so does the other party; (4) accelerating the development of offshore RMB market in Seoul while having increasingly important offshore KRW market in China; (5) strengthening the coordination and cooperation in exchange rate policies.
Korea’s Medium- and Long-Term Trade Strategies by Region and International Economic Cooperation Plans
This study seeks to identify Korea’s cooperation directions with major regions and present action plans to implement them in five medium-to long-term trade issues: global supply chains, digital trade, climate change,..

June Dong Kim et al. Date 2021.12.31
Economic Cooperation, Trade Policy

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This study seeks to identify Korea’s cooperation directions with major regions and present action plans to implement them in five medium-to long-term trade issues: global supply chains, digital trade, climate change, health, and development cooperation.
In the area of global supply chains, Korea and the U.S. could promote predictability and sustainability through periodic exchanges of information between the respective control towers of supply chains in the two countries, and the utilization of various consultative bodies composed of diverse agents related to supply chains. In the long-term perspective, we need to implement exchange programs of personnel and joint R&D programs in the areas of advanced technologies of the two countries in order to cultivate talented persons in the key industries.
The EU and Korea could reinforce the connectivity of their supply chains through cooperation in the areas of technology and production in such strategic industries as telecommunication infrastructure. In addition, when considering the global expansion of low-carbon economy initiatives, Korea needs to closely cooperate with the EU, which is preemptively adjusting its supply chains under a green economy concept.
With regard to China, it is anticipated that Korea will have no choice but to cooperate in areas where China and the U.S. share values, or in areas where the U.S. does not show interest in, for a considerable period of time. More specifically, cooperation can be possible in the areas of green industries, the health sector, and those with matured technology. Regionally, Korea needs to pursue cooperation with China in supply chains in third countries, rather than within China.
In the New Southern Region, above all, Korea should pursue diversification of supply chains within the ASEAN region by utilizing changes in the trade and investment environment due to the RCEP, the CPTPP, and the ASEAN Economic Community. Korea also needs to upgrade its CEPA with India to secure smooth movement of intermediate goods between Korea and India. Additionally, Korea needs to expand cooperation with India utilizing the EDCF, particularly in light of the demand within India to establish various infrastructure such as renewable energy and roads.
In the area of digital trade, two directions of cooperation with key countries and regions can be outlined as follows. First, Korea should strengthen medium-to long-term cooperation with leading economies such as the U.S. and the EU in digital infrastructure, digital technology, digital technological standards, and data regulation. Second, in places where need for digital infrastructure is increasing, such as China, the New Southern Region, and Africa, unique and specialized digital trade policies should be established.
To be more specific, in order to strengthen cooperation with the U.S. in digital technology, Korea needs to encourage its domestic firms to join in the O-RAN Alliance. Furthermore, in order to foster technological cooperation in the field of AI, Korea should facilitate discussions about the development of international AI standards through the already existing Joint Committee on Science and Technology Cooperation between Korea and the U.S. Korea also needs to begin discussions to maintain technical standards cooperation by forming a Korea-EU Committee on digital technology like Trade and Technology Council between the U.S. and the EU. In terms of data regulation, Korea must take a proactive role together with the U.S. in WTO e-commerce talks. This study also suggests that the e-commerce chapter that was not addressed during the negotiation of the KORUS FTA amendment should be upgraded in the near future. Efforts will also be vital to keep complying with the EU’s GDPR requirements.
Regarding digital infrastructure cooperation with major countries and regions such as China, the New Southern Region, and Africa, Korea should undertake action plans in conjunction with domestic policies such as K-semiconductor strategies and materials, components, and equipment strategies. Meanwhile, it is critical to develop a venue to discuss digital technology and data regulatory cooperation with China and the New Southern Region. Korea could benchmark the cooperation in the area of standards between Japan and China in 2019. This platform can help to improve the compatibility of digital technology and goods in key areas specified by the Northeast Asia Standards Cooperation Forum.
Aside from digital infrastructure, digital technology, digital technological standards, and data regulation, Korea must seek specific cooperation plans for major countries and regions. For example, Korea can develop policies to increase intellectual property protection in relation to China. Furthermore, it can assist domestic digital trade firms in entering the Comprehensive Testing Region for Cross-Border E-commerce designated by the Chinese government. Korea also needs to conduct discussions with China to facilitate customs issues in e-commerce. In the New Northern Region, Korea should maintain cooperation with Russia in the field of digital services and software, with both countries developing research initiatives and expanding training programs for young researchers. In the New Southern Region, Korea can concentrate its capabilities for cooperation on SMEs and workers to strengthen the digital infrastructure. Establishing preemptive collaboration channels for digital trade between Korea and India would benefit both countries. In Africa, Korea should pursue digital trade policies targeted to the growing need for digital infrastructure, digital technology, public services, and labor force development.
In regard to climate change, Korea should promote cooperation in such industries as energy transformation and transportation, areas where the EU is also focusing on within its carbon neutrality policy, as well as facilitate the dialogue channel of cooperation with the EU to back up this promotion. Korea also needs to maintain its position in the follow-up discussions to implement the Paris Climate Agreement while communicating closely with the EU.
In the area of low carbon technology cooperation with the U.S., technological cooperation related to clean energy initiatives, energy efficiency, and carbon removal – which both countries share common interests and are competitive in – could be promoted first. In addition, Korea can also suggest cooperation in areas where the U.S. has global competitiveness, such as adaptation to climate change.
In order to identify cooperation areas and facilitate multilateral cooperation with the New Southern Region, Korea needs to identify the policy interests and current status of dialogue channels in this area. With ASEAN, Korea needs to continue utilizing dialogue channels such as the Korea-ASEAN Dialogue on Environment and Climate Change. With respect to India, Korea needs to establish a regular high-level dialogue channel and identify specific cooperation demands.
In the area of health cooperation, Korea needs to overcome the limits of existing international cooperation systems by establishing new international organizations such as an international pandemic treaty. This new organization will have the function of assisting production of vaccines, therapeutics, and equipment for diagnosis and personal protection as well as establishing more effective distribution systems for medicine and medical supplies.
In order to respond more effectively to the crisis of infectious diseases in the future, it will be necessary to amend the related provisions within WTO agreements, since the production and distribution of medical supplies lies also in the area of international trade. More specifically, particular situations or conditions will have to be defined when the relevant TRIPS clauses can be exempted.
The fundamental solution to the pandemic is technological innovations in the area of medicine manufacturing and increase of production amounts. In this context, Korea should place more of an emphasis on its current project to establish a global vaccine hub. A cooperation system must be established to co-utilize personnel and facilities through a consortium with companies in the U.S. and Europe.
With regard to development cooperation in Asia, the need to differentiate cooperation types, methods and areas has already been pointed out. As a specific action plan, for example, Korea can cooperate with assisting ICT-based hybrid infrastructure projects such as smart city and smart water control to medium-income countries such as Vietnam, Indonesia, and Philippines. Meanwhile, to low-income countries such as Laos and Myanmar, assistance should be provided to establish basic social infrastructure mainly in the form of ODA.
For development cooperation with the African region, systematic cooperation among the ODA-implementing entities is crucial. A good example is the Muhimbili University Hospital project in Tanzania. Korea could also consider promoting utilization of development finance, for the purpose of supporting private sector development in the region.
In the Latin American region, Korea should explore plans to participate in large-sized energy projects by co-financing with the MDBs, since such countries as Columbia, Peru, and Bolivia are currently pursuing energy transformation initiatives.
현안대응자료 요약 모음집(2021 하반기)

KIEP Date 2021.12.31

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Changes, Challenges and Implications of Fiscal and Monetary Policy Directions in the Post Pandemic Era
COVID-19 has changed the way of our lives since it started emerging as a pandemic early 2020. The global public experience of masks and social distancing will leave a trauma, and eventually work as a main driver for us to reconsid..

Sungbae An et al. Date 2021.12.30
Economic Growth, Economic Cooperation

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COVID-19 has changed the way of our lives since it started emerging as a pandemic early 2020. The global public experience of masks and social distancing will leave a trauma, and eventually work as a main driver for us to reconsider and improve our system. The need for change becomes even bigger as the pandemic continues beyond initial expectations. With that, we are now entering the era of the great transformation.

Against this backdrop, this study focuses on examining the policy environment changed by the COVID-19 pandemic and analyzing the point to be considered when implementing future fiscal and monetary policies.

By examining the similarities and differences in fiscal and monetary policies compared to the 2008 global financial crisis, the path of recovery after COVID-19 can be understood. The characteristics of major countries’ policy responses to this crisis are that short-term responses were quickly introduced, and mid-tolong-term responses for economic structural change are being made in various ways.

The initial economic downturn caused by the COVID-19 pandemic did not stem from the frictions in demand, but rather the impact on the supply side, such as labor supply restrictions due to regional blockades. Responding to supply shocks with only accommodative monetary policy can lead to stagflation. Meanwhile, as the demand for services such as tourism sharply decreased due to the local lockdown, the economic damage was aggravated. Fiscal expenditures to relieve the economic damage followed in this situation. Disaster subsidies and selective support for small and medium-sized businesses were quickly implemented.

The mid- to long-term response in major countries is focused on investment in physical and human infrastructure for digital transformation and green transformation. A large-scale longterm investment plan of a decade is being drawn up among concerns over financial soundness. Thus, the political controversy can be expected to continue until public investment schemes are confirmed.

The effects of fiscal spending by major countries are analyzed using the time-varying structural vector autoregressive (TVSVAR) model. Using quarterly data from 14 countries since 2000, we examined how the multiplier effect of net tax and government consumption on gross national product changed over time, comparing before and after the COVID-19 crisis.

The effectiveness of fiscal policy was found to vary by country and by means of fiscal policy. This means that careful consideration of national characteristics and policy measures is necessary for efficient fiscal execution. When examining the additional effects of fiscal policies during the COVID-19 crisis, an additional stimulus effect of net taxes, that is, a relatively low crowding out effect, was found in most countries. On the other hand, there was no additional stimulus effect evident in government consumption. It seems that the transfer payments as part of net taxes such as disaster relief funds have been effective. On the other hand, it was also found that the multiplier effect of fiscal expenditure decreases when a quarantinetype policy that restricts face-to-face economic activities is implemented. Therefore, when introducing a policy that strengthens the quarantine level, it is necessary to consider a more active fiscal policy.

Unconventional monetary policy has been introduced following the global financial crisis. The policy goal of economic stimulation could not be attained despite continual policy rate cuts, which were eventually limited by the zero lower bound. In such a situation, an alternative measure to tuning the short-term interest rate was introduced. Managing quantity variables rather than a price variable became more popular. Such measures include asset purchase, simultaneous engagement of long- and short-term markets, the preemptive announcement of future rate targets without spot market intervention, and direct interventions on targeted markets. More specifically, these non-traditional monetary policy measures were implemented as negative interest rates, forward guidance, yield curve management, quantitative easing and credit policies. These policies implemented after the global financial crisis turned out to be effective and significant.

As the pandemic shock involves both supplyside and demand-side elements and an unprecedented scale of fiscal expenditure has been implemented, assertions are raised that the central bank should consider more aggressive policies such as helicopter money schemes or monetary financing. The United States is expected to achieve a fast recovery through vaccination and large-scale fiscal spending, and then take a path to normalize its differentiated monetary policy in order to respond to inflation. On the other hand, there still remains a possibility that additional policy measures will be required with limited policy space due to the prolonged pandemic.

Changes in the monetary policy framework, such as the introduction of the average inflation target (AIT), have a long-term effect on the expectation formation of market participants and are reflected in economic activities, so it is necessary to understand and forecast these trends.

When uncertainties increase in major advanced countries such as the United States, capital flows and macroeconomic variables of neighboring countries are affected. In a situation where omni-directional policies are implemented in response to the spread of COVID-19 and economic slowdown, expectation shocks such as elevation of policy and financial uncertainty are highly likely to intensify and generate a riffle effect on capital flows.

Based on the finding of this study, the following policy suggestions can be delivered.

First, it is necessary to consider strengthening inclusiveness in short-term policy measures. Major countries have introduced liquidity assistance programs that encourage selective lending to small and medium enterprises (SMEs). In Korea, a wide range of financial support for self-employed and SMEs has also been introduced, but the predetermined amount of funds is distributed through financial institutions whose incentives are vague. In the case of Japan and China, a price-based approach is employed so that individual financial institutions are given incentives, such as interest rate subsidies to secure funds through the market. In order to strengthen inclusiveness, it is necessary to consider introducing incentive-based policies reflecting market functions.

Second, the timeliness and effectiveness of investment for structural improvement should be considered. Globally, the mid- to long-term restructuring is focused on digital and green transformations. The Digital New Deal and Green New Deal, which are the focus areas of the Korean New Deal, are in line with global trends, and it is necessary to refer to the lessons learned from past policy experiences. As expectations on digital transformation emerge, an asset price bubble forms, especially among major tech companies. Therefore, policy makers should be careful when sending out signals to the market on their evaluation of current market conditions and future policy directions. In addition, risk management for moral hazard related to government support on venture enterprises is also required.

Green transformation lies in the growing public interest in environmental issues and the growing awareness of the need to respond to climate change. The starting point is slightly different from digital transformation, which uses new technology to enhance convenience and productivity in life. Green transformation is motivated by the fear of a major disaster in the future. As such policies are unlikely to receive long-term attention, as is the case with awareness and response to crises in general, the policy authorities need to pay special attention to achieve apparent goals.

There is great uncertainty about government investment in a period of new technology transition, and at the same time, it is highly likely to cause moral hazard in the market. Rather than providing direct support to businesses and universities, the government R&D might be used to fund research infrastructure on a scale that the private sector cannot. In the case of direct investment and support in the private sector, it is necessary to evaluate the timeliness of projects and closely monitor effectiveness.

Third, a plan for medium-term fiscal consolidation should be prepared for sustainability. Although the pandemic is prolonged and uncertainty remains about the arrival of the postcoronavirus, the fiscal burden aggravated as a result of the short-term response may be normalized through fiscal consolidation in the future. However, it is worth noting that concerns about an increase in national debt have been raised in Korea even before the COVID-19 crisis. There is a structural effect where the proportion of the welfare budget increases due to increasing inequality and aging population. Of course, it would not be difficult for Korea to secure fiscal soundness as it has a low tax burden compared to major countries, and thus has sufficient fiscal space. However, in order to secure fiscal soundness, it is necessary to expand the tax base, which could invoke strong tax resistance and requires a political solution.

Fourth, it is necessary to pay attention to the path to normalization taken by U.S. monetary policy. The Federal Reserve is expected to actively use forward guidance in the process of normalization in the future. Moreover, policy uncertainty has increased due to the lack of details on operation plans for the newly introduced AIT. When implementing monetary policy in Korea, it is necessary to reflect the impact of the policy uncertainty of the United States on neighboring countries. Monetary policy normalization requires close monitoring, as the financial imbalance may increase through the asset market channel.

Meanwhile, asset prices have risen sharply due to abundant liquidity supplied globally during the pandemic. As the real estate market overheated in Korea, mortgage loans increased rapidly, which led to a sharp rise in household debt and regulations on total loan volume to limit the growth of household loans. Above all, it is necessary to prepare policy measures to maintain the soundness of the loan itself and, in particular, keep the volatility of collateral assets low.

Fifth, efforts for international cooperation are anticipated in relation to infectious diseases and the great transformation. At this point, the need for international cooperation on infectious diseases cannot be overemphasized. In particular, all parties must work together to prevent short circuits at nodes on the global supply chain by increasing vaccine penetration in emerging countries. Securing financial resources is not the problem of a single country, but a global one. While many agreements have been reached as the Biden administration returns to international cooperation, concerns remain about the continued leadership of the United States. In particular, as the pattern of the U.S.-China conflict has become more sophisticated and the embers of national priority remain, this can act as a negative risk. The Korean government should clearly recognize the uncertainty in international cooperation and prepare an external strategy.
Major changes in economic system in the post-corona era: Focusing on climate crisis, digital platform, human resources and fiscal sustainability
This study reviewed what kind of institutional improvements are needed in the following four areas amid the changes in economic conditions that are accelerating due to the COVID-19 crisis.First, theoretical analysis was carreid ou..

Deokhyeon Ryu et al. Date 2021.12.30
Economic Reform, Economic Development

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This study reviewed what kind of institutional improvements are needed in the following four areas amid the changes in economic conditions that are accelerating due to the COVID-19 crisis.

First, theoretical analysis was carreid out to reflect the principle of equal rights and historical responsibility in the allocation of obligations between countries to reduce greenhouse gas emissions, which is likely to become a fundamental constraint on future economic activities. Specifically, four apporached were reviewed and compared with the Kyoto Protocol: equal distribution per capita (EPC), historical equal distribution per capita (HEPC), proportional distribution (EPE), and proportional distribution (HEPE) per capita. As a result, a large gap between Kyoto Protocol and the HEPC principle, which is satisfies the principle of minimum equality (‘if historical and BAU responsibilities are the same, everyone should be guaranteed equal rights to common resources regardless of their country of origin’) and historical responsibility (‘standard that all countries are free from historical responsibility’). Existing international agreements such as the Kyoto Protocol were found to be most similar to the EPE, which respects vested interests and does not consider historical responsibility. Korea, which achieved rapid growth in a short period of time, has a very low historical responsibility compared to other advanced countries. Therefore, it is between the position of a developing country that demands historical responsibility and the position of a developed country that demands vested interests, and there is an advantage of being able to adopt a flexible strategy between the two sides in the climate agreement.

Second, we reviewed how to establish competition rules in the field of online platforms, whose importance in economic activities has dramatically increased during the COVID-19 crisis. It was concluded that ex post regulation on a case-by-case is desirable considering and that ex-ante and non-discriminatory regulation can hinder competition and innovation activities. Online platforms have the characteristics of a multi-faceted market that can lead to a winner-takes-it-all market, but in reality there are factors that can offset such a tendency. In order to effectively implement such regulations on a case-by-case basis, it is necessary to revise the review guidelines reflecting the characteristics of the online platform and to upgrade the economic analysis method. To this end, it is necessary to actively refer to the economic analysis methodologies developed for online platforms, in particular, academic studies and judgment cases on market definition methods, and the price increase pressure analysis method, which is measures competition restrictions in business combinations. In addition, measures such as disclosure of data for pre-monitoring or shifting the burden of proof may be considered in order to perform monitoring and regulation more effectively.

Third, taking into account the accelerated spread of new technologies due to Corona 19 crisis, the necessary policy tasks were reviewed to respond to the advancement and fluctuations in skills required in the labor market due to the progress of the 4th industrial revolution. The conclusion of a comparative review of the current system of Korea and major foreign countries is as follows. ① Administrative, financial, and integration of the higher education and lifelong education functions of the Ministry of Education and the vocational training functions of the Ministry of Employment need to be integrated. Also in major foreign countries, government agencies in charge of adult competency development are dispersed among the Ministry of Education, the Ministry of Employment and the local government. However, it is observed that there is a key institution that plays the role of a control tower for adult competency development policies. ② The academic system should become more permeable so that universities can play a key role in the lifelong competency development system. Currently, the university’s undergraduate system is mainly designed for full-time students in their mid-20s. It is necessary to reorganize the university’s academic system so that universities can expand from educational institutions for full-time students in their 20s to lifelong educational institutions that cover the needs of adults for lifelong ability development. ③ A personal learning account system that financially supports people’s lifelong ability development should be introduced. Personal support for skill improvement has been focused on low-skilled workers so far, but in the era of the 4th industrial revolution, the need for skill development will expand to middle-skilled workers and above. Therefore, it is necessary to devise a personal learning account that accumulates a certain amount of support for individuals to use for skill development throughout their lifetime. ④ Labor reform that strengthens the upward mobility of the labor market is necessary.

Fourth, an international comparison was made on the ability to bear national debt and its implications were drawn. It is important to check whether the debt is repayable with revenue, that is, the condition that it is sufficiently possible to repay interest through revenue so that it is not necessary to cover it with another debt to pay interest. Considering this, the credit default swap spread (CDS) was selected and analyzed as an indicator of fiscal sustainability. The estimation of regression models to explain CDS as a function of various variables showed that, in addition to the ratio of national debt to GDP, the maturity structure of government bonds, the ratio of short-term government bonds, and the ratio of foreign government bonds were important factors. The result implies that the national debt-to-GDP ratio is one of the important indicators to be considered in fiscal management, but it is not appropriate to overly emphasize the ratio or insist on a specific level of it.
Moderately Prosperous Society in All Respects: An Economic Study of Chinese People’s Quality of Life
China’s per capita GDP surpassed $10,000 in 2020 as a result of its rapidly conducted 40 years of opening and reform (gaige kaifang). The Chinese government emphasized that Chinese people all moved above the “absolute poverty le..

Wonho Yeon et al. Date 2021.12.30
Labor Market, Chinese Social Structure

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China’s per capita GDP surpassed $10,000 in 2020 as a result of its rapidly conducted 40 years of opening and reform (gaige kaifang). The Chinese government emphasized that Chinese people all moved above the “absolute poverty level” in 2021 and announced that it has achieved a Moderately Prosperous Society in All Respects (quanmian xiaokang shehui). In contrast to Deng Xiaoping’s original proposal, which sought to escape absolute poverty. the proposal to build a Moderately Prosperous Society in All Respects, set forth in 2002, aims to resolve both absolute poverty and relative poverty for social cohesion. This is also evident from the Chinese government’s official checklist.

In light of this, Chapter 2 examines the definition, indicators, conceptual change, and development of the Chinese government’s “moderately prosperous society,” and evaluates China’s moderately prosperous society in all respects by comparing the quality of life in various nations. In particular, from the perspective of China, this research investigated the change in the quality of life of Chinese people using the white paper “China’s Epic Journey from Poverty to Prosperity.” Also, from a global perspective, we compared the quality of life in China and major countries with the UNDP’s Human Development Index (HDI) and the UN’s Happiness Index (HI). In terms of eradicating poverty, the quality of life for Chinese citizens appears to have been improved in general. However, China is still yet to reach its target in some areas, including the average number of years of education and productivity per capita. In addition, in terms of social integration, the gap in Chinese society has widened further. Based on the analysis framework presented by the OECD’s Better Living Index (BLI), in terms of income inequality, wealth inequality, and fertility rate, it is hard to conclude that China has achieved its own set of goals.

Within the general framework laid out in Chapter 2, Chapter 3 investigates the quality of life of Chinese people by analyzing the Chinese Family Panel Survey (CFPS) data from 2012 and 2018. Our study discovered that the rapid income growth of the Chinese people has raised life satisfaction, solved fundamental concerns of livelihood, and lowered the Engel’s coefficient in China. However, this has also made Chinese people become more interested in social problems. Today, Chinese people worry about China’s difficulties with education, environment, healthcare, and social security far more seriously than they did in 2012. In fact, during this time, the gap in personal income between urban and rural areas, the eastern coast and the western interior, males and women, and those with high and low levels of education expanded. Our research also revealed that the income disparity below the median income level has been getting worse in terms of household-level income and consumption. Additionally, the cost of housing more than quadrupled between 2012 and 2018, which makes the problem highly likely to aggravate in the future. Assortative matching between people whose incomes are homogeneous has been proven to occur in cities, where the level of inequality is further exacerbated. The situation in which increasing inequality and assortative matching among households occur simultaneously is a serious social problem in that the gap between the rich and the poor can be transferred to the next generations.

The intergenerational study we conduct in Chapter 4 reaffirmed the likelihood that China’s inequality problem will be passed down from generation to generation. In particular, not only the inheritance of tangible assets like wealth but also the inheritance of intangible investments like education are expected to worsen China’s inequality issue. In addition, in Chapter 4, we developed a new economic model to analyze and explain the conflicting phenomenon of improving income inequality in cites at individual level and the expansion of income inequality at household level. Household level inequality appears to be growing as a result of the assortative matching, which refers to the marriage among similar income and educational attainment levels. This suggests that, from a dynamic perspective, the passing down of wealth and education between generations may cause China’s inequality problem to worsen and eventually develop into a permanent problem.

The final chapter, along with the overall summary of this report, provides key implications. In particular, based on our findings presented in previous chapters, we tried to explain why the Chinese government took “common prosperity (gongtong fuyu)” as a new task after the declaration of achieving a moderately prosperous society in all respects, what “common prosperity” actually means, and predict the major tasks for the Chinese government. The Chinese government aims to address the problem of relative poverty by resolving the economic and social inequality that has accumulated since reform and opening up (gaige kaifang), and furthermore, to improve the quality of life at a higher and multidimensional manner. In August 2021, the Chinese government announced the six major directions for common prosperity: improving balanced, harmonized, and inclusive development; expanding the middle and upper-middle-income class; strengthening basic public services; tightening regulations for overly high incomes; promoting spiritual prosperity; and promoting the common prosperity particularly in rural areas. From now on the Chinese government’s policies can be expected to focus on the areas of: ① forming a middle class by resolving inequality, and ② improving the quality of life by solving social problems such as medical care, education, marriage, and childbirth.

When considering the difficulties associated with resolving inequality in China, the Chinese government is likely to tighten regulations to protect the relatively weak. For example, in 2021, the Chinese government implemented a series of regulations on internet platform, real estate, private education, and entertainment businesses.These regulations seem to be highly related to keywords such as “relative inequality” and “common prosperity.” As the recovery trajectory from the COVID-19 pandemic appears to be K-shaped, it is believed that aforementioned industries are taking unfair profits by putting pressure on households and became the subject of government regulations. While various regulations are expected to be implemented when “common prosperity” policies are fully promoted in the future, we will be able to predict the areas of interest and regulation of the Chinese government based on an objective understanding of the current Chinese society. This is why we have conducted this research, which can help us to understand changes in the Chinese government’s policy stance, to analyze opportunity and threat factors, and to establish a new strategy for China.
Development of the IT Industry and Structural Transformation: Focused on IT Cooperation with Russia, Kazakhstan and Uzbekistan
This study is designed as a primary study to objectively analyze the economic meaning and potential of digital sector cooperation with Russia, Kazakhstan and Uzbekistan to derive implications for presenting new directions for prom..

Minhyeon Jeong et al. Date 2021.12.30
ICT Economy, Economic Cooperation

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Summary

This study is designed as a primary study to objectively analyze the economic meaning and potential of digital sector cooperation with Russia, Kazakhstan and Uzbekistan to derive implications for presenting new directions for promising cooperation. With the advent of the so-called “fourth industrial revolution era” just around the corner, the goal of the study is to discuss what the development of the digital industry means to the economies of the three countries, examine the characteristics of individual countries, and get policy clues on how cooperation with Korea should proceed in the future. To this end, this study performs the following four main analyses. First, the economic meaning of IT technology cooperation with three countries, Russia, Kazakhstan, and Uzbekistan, is viewed from the perspective of industrial transformation. Second, the effect of IT technology cooperation between Korea and Russia on the Russian economy is quantitatively estimated through the analytical framework of the structural transformation. Third, to supplement the limitations of theoretical discussions and derive customized cooperation directions for each country, we examine the current status and policies of the IT industry in the three new northern countries in detail. Fourth, we identify as objectively as possible which IT technology will have a high cooperation effect between Korea and Russia.

Chapter 2 is the first chapter of the main topic and was conducted to achieve the first and second research objectives. Section 1 briefly discusses the traditional characteristics of the structural transformation based on the experience of high-income countries. Section 2 discusses why the traditional structural transformation is not well represented and often delayed, centering on the recent middle-income countries’ experiences. Section 3 examines the structural transformation of the three countries in the New Northern Region. Section 4 examines how IT technology innovation can play a role in solving the delay in the structural transformation. In order to analyze this economically, a theoretical model is constructed based on the intuition that IT technology innovation has a positive effect on improving productivity in the service sector. Furthermore, by numerically approximating the theoretical model for Russia with available data, we quantitatively estimate how helpful IT technology innovation can be to the problem of delay in the structural transformation that Russia has to solve.

The conclusion of the analysis is positive. This is because the economy can naturally move from the “bad equilibrium” to the “good equilibrium” through technological innovations in the IT sector. According to the new structural transformation model considered in this paper, we can theoretically prove that the proportion of production in general manufacturing, including the IT sector, increases when IT technology innovation helps improve service industry productivity. Here, the increase in productivity of the service industry with advances in IT technology is based on the intuition that IT technology innovation can alleviate search and matching friction existing in the service industry. The quantitative analysis of how positive IT technology cooperation with Korea affects the long-term growth rate of resource-dependent middle-sized countries showed that if the positive effect of current productivity improvement in the Russian manufacturing sector rises by 173%, Russia’s long-standing delay in industrial structure can be resolved.

Chapter 3 is the second chapter of the main topic and was prepared to achieve the third purpose of this study. In other words, it is a chapter prepared to compensate for the limitations of generality and universality of the theory. The individual characteristics of the three New Northern countries dealt with in this paper are analyzed in-depth. In the last section, by briefly comparing and analyzing the status of IT industry development and the governments’ development strategies, we derive the individual characteristics of these countries in the IT industry and development strategies as much as possible.

As a result of comparing and reviewing the current status of the IT industry in the three countries using the best data available, we conclude that the level of development in the IT industry is similar to that of Russia and Kazakhstan, while Uzbekistan is relatively lagging. These differences in industrial development are reflected in differences in transition strategies to the digital economy and IT industry development strategies of the three countries. In particular, Russia and Kazakhstan, which are highly dependent on natural resources, are considered to be more interested in transforming the economic structure through the development of the IT industry. Specifically, Russia’s policy focus is on improving existing IT infrastructure and related systems and enhancing the practical competitiveness of the Russian IT industry in the global market. On the other hand, Kazakhstan has a policy focus on improving existing IT infrastructure and related systems, but no specific policy has been prepared to develop the IT industry. Finally, in Uzbekistan, the establishment of IT infrastructure should be prioritized, and accordingly, this becomes the most important policy goal. There is still no national policy for developing the IT industry like Kazakhstan. Both Kazakhstan and Uzbekistan have yet to have IT companies to secure competitiveness in the global market, so national strategies and policies for developing the IT industry are expected to differ from Russia’s.

In Chapter 4 we objectively identify which IT technology field can maximize the effectiveness of cooperation between Korea and Russia. We statistically analyzes technology patent data registered by Korea and Russia over the past five years. Chapter 4 examines which technological cooperation has a strong synergy effect and a positive propagation effect, and infers the immediate “need for technological cooperation” based on this. As a result of patent citation analysis, we find that the cooperative synergy between Korea’s semiconductor-related technologies and Russia’s digital computing or data processing will be prominent, reflecting each country’s technological comparative advantage. In addition, when using the network analysis method, we find that such technological cooperation has a high scope of the propagation effect and immediate influence of cooperation as well as synergy effect of cooperation.
Ten Years of Korea-EU FTA: Achievements and Way Forward
The year 2011 marked the 10th anniversary of the free trade agreement (FTA) between Korea and the European Union (EU). The Korea-EU FTA was Korea’s first FTA with a major trading partner and the first case of the EU’s “next gen..

Dong-Hee Joe et al. Date 2021.12.30
Economic Relations, Economic Cooperation

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The year 2011 marked the 10th anniversary of the free trade agreement (FTA) between Korea and the European Union (EU). The Korea-EU FTA was Korea’s first FTA with a major trading partner and the first case of the EU’s “next generation”FTAs.At the 10th anniversary of its entry into force, this report looks back on the meaning of the Korea-EU FTA and analyzes its impact on the bilateral economic relationship between the two economies.

Followingthe entry into force of the FTA, Korea’s export to the EU stagnated, while Korea’s import from the EU increased, particularly during the eurozone crisis in 2011-2013. Among the EU member countries, Korea’s major export partners include not only large Western European countries such as Germany, United Kingdom and the Netherlands, but also the Central and Eastern European Countries (CEECs) such as Poland, Slovakia and Czech Republic.In particular, Korea’s export to the latter countries increased substantially after the FTA enteredinto force.Also, Korea’s import from the CEECs more than tripled after the entry into force of the FTA, though Western Europe’s share still remained much larger. Industrial products take a large share both in Korea’s export to and import from the EU, while consumer products and high-tech equipment also take a big share in Korea’s import from the EU. Both Korea’s export to and import from the EU diversified after the entry into force of the FTA.

The EU is the second largest (about 14 percent) foreign investor in Korea and the largest destination (about 41 per cent) of Korea’s investment abroad. The EU’s investment in Korea was larger than investment the other way around before the FTA, but the opposite becametrue after the FTA. Western Europe receives most of Korea’s investment in the EU, but Poland and Hungary’s share is rapidly increasing in recent years. The EU’s investment in Korea comes mostly from Western Europe and Malta. While Korea’s investment in the EU is concentrated in services (about 62 per cent), manufacturing’s share is rapidly increasing in recent years. The EU’s investment in Korea is more balanced between services (about 53 per cent) and manufacturing (about 44 per cent).

This report’s econometric analyses show that the FTA increased Korea’s aggregateexport to and investment in the EU, especially in the CEECs. The FTA is estimated to have reduced Korea’s export to the EU in some industries, which can be explained by Korean manufacturers’ relocation abroad, including to the EU.As for Korea’s import from the EU, the FTA is estimated to have increased the volume from western Europe and diversity from the CEECs. This latter effect is likely to have lowered the import price and strengthened the supply chain of Korea.

This report presents four industries as showcases of the FTA’s role in strengthening the bilateral economic relationship between Korea and the EU, namely the automotive, battery for electronic cars, semiconductor and pharmaceutical industries. In the automotive industry, intra-industry trade has increased substantially after the FTA. Korea’s import of final products (e.g., cars) has increased, and Korean car makers’ production in the EU, especially in the CEECs, has increased, which is reflected in the increase of Korea’s intermediate goods, resulting in an increase of Korean car makers’ market share in the EU. In the electronic-car battery industry, where the rapidly increasing demand and short supply in the EU leaves a substantial excessive demand, Korean manufacturers fill the gap, not only by exporting the final product, but also building production facilities in the EU. This likely contributes to the European Green Deal. In the semiconductor industry, where Korea’s sourcing of capital goods and inputswas heavily concentrated, suppliers from the EU helped Korea to diversify its supply chain. In pharmaceuticals, Korea’s fast reaction to the surge in demand for the necessary equipment in the EU during the COVID-19 pandemic helped the EU’s fight against the pandemic.

To shed some light on the future development of the Korea-EU FTA, this report analyzes three recent trade agreements entered into bythe EU, namely the EU-Canada Comprehensive Economic and Trade Agreement (CETA), EU-Singapore FTA and EU-Japan Economic Partnership Agreement(EPA). CETAtook a balanced approach in market liberalization in agriculture, abolished tariffs on manufactured goods and liberalized services and public procurement. Unlike in Canada’s other trade agreements which adopted investor-state dispute settlement(ISDS) clauses, CETA adopted the EU’s Investment Court System (ICS) as its investment dispute settlement mechanism. During the ratification process of the EU-Singapore FTA, the European Court of Justice decided that investment is a shared competence, not the EU’s exclusive competence. This led to separate agreements for trade and investment. The EU-Singapore FTA allows for cumulation of ASEAN in its rules of origin. It is also the first of the EU’s FTAs to include provisions on corporate social responsibility (CSR).The main interest of the EU in the EU-Japan EPA was to lower the non-tariff barriers (NTBs) withinJapan.The EPA took a gradual approach in market liberalization in agriculture, abolished tariffs on manufactured goods and substantially reduced the NTBs. It is also the first trade agreement to incorporate the Paris Agreement. As for investor protection, it failed to come to an agreement due to the difference in preference between the EU (ICS) and Japan (ISDS). The two parties also agreed to continue discussion on digital trade and data protection. Considering the features of these agreements, the Korea-EU FTA may, in the future, include more normative features such as the Paris Agreement, CSR and ESG (Environment, Social, Governance). Also, the EU is likely to push for the ICS as the investment dispute settlement mechanism.

This report also analyzes some of the EU’s requests for revision of the FTA, namely on direct transport and re-entry after repair. On direct transport, the EU requested to change the current, single consignment criterion to non-manipulation criterion to allow separate transport from third countries. The EU requested to abolish tariffs on goods re-entering after repair, especially for aircrafts. The EU argues that Korea will benefit from the increased competition in the market for such services. These issues are likely to be raised again in the future.

Within the framework of the TSD chapter of the FTA, the EU argued that Korea’s domestic legislations violated the ILO principles and that Korean government did not makedue efforts to ratify the ILO core conventions. The two sides started official discussions on this issue in January 2019, and an expert panel was requested in July 2020. To resolve this issue, Korea made major changes in the corresponding legislations and ratified the ILO core conventions.

This report finishes with proposals infour areas for further deepening the economic cooperation between Korea and the EU beyond the FTA, namely hydrogen economy, digital economy, start-up and audio-visual co-production.

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New International Tax System and its Impact on Investment of MNE
As digitalization of the economy accelerates, tax avoidance by multinational enterprises (MNEs) becomes a more serious and sophisticated issue to address. The issue can be attributed to several characteristics of firms in the digi..

Sangjun Yea et al. Date 2021.12.30
Tax, Overseas Direct Investment

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As digitalization of the economy accelerates, tax avoidance by multinational enterprises (MNEs) becomes a more serious and sophisticated issue to address. The issue can be attributed to several characteristics of firms in the digital economy, these being: discrepancy between the permanent establishment where the corporate income tax is levied and the location where substantial business activity is performed, high reliance on intangible assets in production that are movable across jurisdictions, and the intricacy of applying transfer pricing rules to new business activities. Due to these features, MNEs have been able to easily shift earned income from a country with high corporate income tax (CIT) rates to one with low CIT rates and lessen their tax burdens by taking advantage of extant principles of the international tax system and bilateral tax treaties between countries.

In order to tackle the base erosion and profit shifting (BEPS) issue of MNEs under the digital economy, the OECD and G20 launched an inclusive framework (IF) joined by 141 countries and has conducted discussions on a new international tax system. As a result, in October 2021, two major revisions on the current international tax system – the Two-Pillar solution on BEPS – were agreed upon by 139 IF member countries, including G20 members, to take effect in 2023.

The IF’s final agreement on the Pillar 1 and Pillar 2 is as follows. Pillar 1’s scope is limited to a group of MNEs whose annual revenues exceed 20 billion euros with above 10% profitability. This allows market countries to levy a portion of MNEs’ profits net of the 10% of the revenues, in proportion to each country’s size of revenues sources. The tax base alloted to eligible countries is called “Amount A.” Pillar 2 intends to impose global minimum CIT rates above 15%, under which MNEs’ affiliates are obliged to pay top-up taxes up to 15% if affiliates in other jurisdictions pay low taxes that amount to the effective CIT rates in short of 15%. Pillar 2 applies to a group of MNEs whose annual revenues exceed 750 million euros. The introduction of this new international tax system will clearly have a major impact on MNEs’ investment and value chain decisions.

This study mainly focuses on the Two-Pillar solution on BEPS, exploring how this affects the investment and production decisions of MNEs, and provides implications on Korea’s FDI policy.
In Chapter 1, we briefly explain the background of the OECD BEPS projects and the main schemes of the Two-Pillar solution finally agreed upon by the IF.

In Chapter 2, we identify which MNEs are encompassed within the scope of Pillar 1 and Pillar 2, and look at the firms’ locations and distributions across industries. Using Orbis financial data on MNEs, we find that Pillar 1 applies to MNEs whose headquarters and affiliates are located mostly in the US, China, and the UK. Also we find that the MNEs in the scope of Pillar 1 are distributed among varied industries uniformly. It also features that more consumer facing businesses are included in the scope of Pillar 1 than automated digital services companies. In the case of Pillar 2, we find that MNEs in the scope of Pillar 2 are located in broader jurisdictions including the US, China, Japan, the UK, Cayman Islands, British Virgin Islands, Hong Kong, and the UAE. We also show that MNEs in the scope of Pillar 2 are distributed among various industries uniformly.

In Chapter 3, we document the evidence of MNEs’ profit-shifting through intangible assets by testing empirical models with Orbis financial data. Our findings indicate that, firstly, as subsidiary companies face higher CIT rates in their jurisdictions, they tend to have less amounts of intangible assets; secondly, in jurisdictions with low CIT rates, the subsidiaries are more likely to have a higher level of profits than those with high CIT rates; thirdly, companies’ profits are likely to be more responsive to the difference between the CIT rates of a parent company and its subsidiary when the industry relies more on intangible assets in production; and lastly, MNEs’ profit-shifting occurs more in the service industry and tax havens than in the manufacturing industry and non tax havens.

In Chapter 4, inspired by Wang (2020)’s profit-shifting model, we newly develop a multi-country general equilibrium model featuring firms’ decisions on profit-shifting to minimize tax burden, as well as making location choices for multinational production and exports given the Two-Pillar solution on BEPS. We consider three scenarios where either Pillar 1 or Pillar 2 are introduced or where they are both introduced to disentangle the economic impacts of Pillar 1 and Pillar 2, separately. From these exercises, we find that CIT rates and an increase in IFDI (OFDI) due to introducing the Two-Pillar solution are positively (negatively) correlated. Korea is expected to benefit from introducing Pillar 1 because MNEs with conduit firms located in other jurisdictions with low CIT rates for tax-planning might relocate their production sites to Korea when the tax advantages are partially offset by Amount A. However, these benefits may be diminished when Pillar 2 is introduced because setting global minimum CIT would increase the overall tax burden of MNEs and thereby reduce the return on R&D investment, FDI incentives for production, and exports. For the case of Korea, the former effect slightly dominates the latter effect; thus, the IFDI in Korea increases after the Two-Pillar solution is introduced.

Based on these results, in Chapter 5, we suggest unleashing regulatory interventions in FDI policy could be more effective than reducing CIT rates to attract foreign investment. Also we suggest the Korean government may play a supportive role in MNEs’ reorganizing value chains when Pillar 2 is introduced and the tax burden imposed on MNEs harms their competitiveness.
The Internationalization of SMEs via Digital Platforms: Findings and Policy Implications
The global e-commerce market has been rapidly expanding due to the development of digital platforms. When compared to traditional methods, internationalization via digital platforms has significantly reduced the cost of entering o..

Kyong Hyun Koo et al. Date 2021.12.30
Trade Policy, Electronic Commerce

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The global e-commerce market has been rapidly expanding due to the development of digital platforms. When compared to traditional methods, internationalization via digital platforms has significantly reduced the cost of entering overseas markets, which is expected to open up new opportunities for small- and medium-sized enterprises (SMEs) with limited capital or manpower. However, few studies have been conducted on domestic SMEs internationalization via digital platforms. Furthermore, little is known about the effects of relevant policies on SMEs’ use of digital platforms and internationalization.

Aiming to fill this research gap, this study collects data on Korean SMEs’ online exports (i.e., exports via e-commerce), the most representative type of SMEs’ internationalization through digital platforms, establishes stylized facts, and investigates the effects of Korean SMEs’ online export support policies. Based on the findings, we also provide policy implications.

In Chapter 2, we first conduct a survey on domestic SMEs’ online exports using a sample representing domestic SMEs registered as official e-commerce firms as of June 2021. Based on survey results, we document basic descriptive statistics on SMEs’ online exports behavior and investigate their main issues and policy demands.

Chapter 3 outlines Korea’s online export support policies for SMEs and explores the effects of five major online export assistance programs on SMEs’ online exports. For the estimation of the effects, we combined the survey data from Chapter 2 with information on the firms participating in the programs, which are provided by the Ministry of SMEs and Startups and Korea Enterprise Data (KED).

Chapter 4 analyzes the characteristics of the e-commerce market and major digital platforms for major partner countries of Korean online exports. Furthermore, the characteristics and challenges of SMEs who export online are investigated in greater depth per partner country. The United States and China are the first countries to be studied, respectively representing developed and developing countries with substantial domestic online markets and super-sized digital platform firms. Among the emerging countries in the ASEAN region, Vietnam and Indonesia are chosen since the former has the highest imports from Korea and the latter has the largest population in that region.

Lastly, we provide policy implications in Chapter 5 based on the findings above, such as assisting SMEs in improving their online export capability, removing new-type trade barriers arising from cross-border e-commerce activities, protecting domestic SMEs from abuse of major foreign digital platforms’ monopoly status, and so on.

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