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.

The OECD has engaged in research on regulatory reform since 1995 in the belief that inefficient regulations lower the economic growth of its member countries. In 1997, the OECD issued a report on regulatory reform, and submitted it to the ministers. The report strongly emphasized public sector reforms, competition policy, and market openness, which also reinforce each other through synergy effects. The ministers authorized the OECD to review the regulatory structure and regulatory reform of the member countries, based on the results and the recommendations of the 1997 report. In 1999, the OECD reviewed Korea's regulatory structure and regulatory reform, and their report was published in June 2000.
In the past, Korea's regulatory structure was known to be excessively complex and inefficient. After the Asian financial crisis, the newly elected Kim Dae Jung government targeted regulatory reform as one of the top policy priorities of the government and engaged in a massive regulatory reform program. A comprehensive system for reviewing newly submitted and existing regulations were introduced, and in 1998, 50% of existing regulations were eliminated.
In its report, the OECD generally praised Korea's regulatory reform as being one of the most ambitious reforms among member countries. The report also states that the reforms should vitalize the economy. Among the specific measures praised by the OECD were the establishment of the Regulatory Reform Commission which oversees the regulatory reform process, the introduction of Regulatory Impact Analysis, the establishment of the Financial Superviory Commission which is Korea's first independent and comprehensive regulatory agency, Korea's comprehensive competition policy framework, and the removal of trade and investment barriers.
However, the OECD notes that Korea's regulatory reform is only in its infancy. The problems of chaebol and market competition, the reform of social regulations, as well as the elimination of government intervention in the economy are some of the tasks remaining. The report noted that Korea's tradition of government intervention has its roots in Korea's development process, and it will be difficult to remove the strongly held habit of intervention. Furthermore, the OECD also strongly noted that the reform effort seems to be slowing as the Korean economy recovers from the Asian financial crisis. The report warns strongly that should the reforms slow down, Korea's future growth will be threatened.
The OECD report also states that, while the deregulation drive of 1998 and 1999 did much to help the economy, its overemphasis on numerical targets may have lessened its impact. Thus, Korea must raise the quality of its regulatory reform program, so that the impact of regulatory reform on the economy is maximized.
The OECD report recommended that the authority of the Regulatory Reform Commission be increased so that it can pursue regulatory reform in a more comprehensive fashion. The report also recommends that the results of Regulatory Impact Analysis be made public, and that public organizations and NGOs should be more encouraged to participate in the regulatory review and reform process.
The OECD also criticized the emphasis of Korea's competition policy, which placed too much attention on reducing the powers of chaebols through chaebol-specific policies and measures. The report worries that such specific measures will worsen government intervention in the economy, as well as taking resources away from maintaining competitive market environment, which should be the true focus of competition policy. The report recommends that Korea deal with the chaebols by maintaining a competitive market environment, while enforcing transparency and strong corporate governance rules.
The report emphasized that further opening Korea's markets, as well as letting foreigners participate in the regulatory review and reform process will help increase the transparency of the economy. The report also recommends Korea's technical standards should be conformed with international standards. Korea's past development was largely dependent on increases in production inputs such as labor and capital. However, Korea can no longer count on increases of labor force and capital stock as engines of growth. Thus, Korea must improve its productivity if its growth is to continue into the future, and regulatory reform is a crucial component in the effort to raise the productivity of the economy.

Brazil, the fifth largest nation in the world, and possessing a population of 160 million, is the world's eighth largest economic power and leader of the South American market. During the Cold War, both Brazil and South Korea maintained very cooperative relations in political terms, however, their economic relations were quite limited. Brazil's import-substitution industrialization strategy, from the 1960s through 1980s, and the prevalence of macroeconomic instability there, in the late 1980s, led to protectionist trade measures that hindered both countries' attempts at further developing their economic relations. In the 1990s, however, the reformist governments in Brazil and its neighbors chose to focus on open-regionalism strategies, and established the Southern Common Market (MERCOSUR). While taking advantage of the economies of scale resulting from this regional integration, Brazil has continuously promoted market-oriented economic reforms. As the leader of MERCOSUR, Brazil has forged free trade accords with Chile and Bolivia, as well as with other major South American economies. All this has helped Brazil to emerge as a dynamic force in the world economy. Although Brazil recently suffered from a financial crisis resulting from an overwhelming accumulation of foreign debt and the confidence-loss effect caused by the Asian financial crisis, its economic dynamism was strong enough to allow Brazil a rapid recovery. The annual inflow of more than $20 billion in foreign direct investment firmly indicates that the economic growth of the country has not lost any momentum.

In the spirit of continued cooperation, the Korea-Brazil 21st Century Commission, created as a result of President Kim Yong Sam's visit to Brazil in 1996, during its first four meetings and parallel academic conferences, held alternately in Korea and Brazil, decided on a number of fields to be jointly developed by both countries. Notable progress has resulted from the Commission's coordination of the exchange of intellectuals and experts from a vast array of fields of mutual interest. The proposed science, technology and industrial cooperation fund, visa exemption accord, and summit meeting are already in sight.

This book is a compilation of numerous papers and presentations submitted by Korean and Brazilian scholars, and discussed by the Korea-Brazil 21st Century Commission members. Several new articles have been added, and others have been re-edited and updated since their initial presentation. We would like to give our special thanks to the esteemed members and coordinators of the Korea-Brazil 21st Century Commission for their insightful, wise and expert contributions, through all stages of this project, and to all those who put a great deal of effort into this book. It is my sincere hope that this publication provides both useful information and ideas that will assist in the building of further mutually cooperative and rewarding relations between Korea and Brazil, while also serving as a valuable academic resource.

After the recent global financial crisis, the international community has endeavored to strengthen the international financial architecture.

International financial and standard-setting institutions such as the IMF, the World Bank, the Basle Committee, the OECD, the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), and the International Accounting Standards Committee (IASC) have developed numerous international standards and codes in such areas as data dissemination, fiscal transparency, transparency in monetary and financial policies, banking supervision, corporate governance, securities market regulation, insurance regulation, accounting and auditing. However, most importantly, every country will need to follow these international standards and codes. In following these standards and codes, policy-makers will enhance their responsibility, which will lead to more skillful policy design.
Furthermore, market participants including investors will have access to accurate country specific information on the economy. The information will not only be helpful to investors, but ultimately lead to the stabilization of international financial markets and the improvement in the international financial architecture.

However, due to the disparity in the economies of various countries, a unified set of international standards and codes applicable to every country will be difficult to develop. International standard-setting organizations are in the process of developing such general standards and codes, yet whether every country will be able to comply is questionable. Therefore, rather than forcing every country to follow these standards and codes, the new financial architecture must devise an inducive alternative based on market pressures and see to it that international standards and codes are evaluated regularly, accurately reflecting market. Countries will then find it easier to observe the set of standards and codes.

The IMF is currently preparing the Reports on the Observance of Standards and Codes (ROSC) based on countries willing to participate. According to two case studies conducted by the IMF on 10 countries in 1999, some countries such as the United Kingdom, Australia, and Argentina actively participated in the evaluation of their observance of international standards and codes. However, the majority was apprehensive of participating in such practices. This is because some countries regard the IMF's evaluation on standards and codes as an opportunity to enhance their transparency, while a lot more countries are still afraid to disclose to the public their economic situation. Korea has acknowledged its willingness to participate in the preparation of the ROSC by the IMF in the first G-20 meeting held in December 1999. Korea has realized the importance of transparency through its currency crisis experience.

Consequently, Korea has applied the BIS capital adequacy ratio to banks, and EU solvency margin to insurance firms. Accounting and auditing standards have also followed international standards and codes. Such reform, accompanied with participation in the preparation for the ROSC will improve Koreas transparency, and furthermore, enhance Koreas credibility in the international community.

This paper reviews and evaluates Individual Action Plans (IAPs) of the non-OECD member economies of APEC. APEC adopted a unique modality of trade and investment liberalization and facilitation, called IAPs. Individual member economies announce their liberalization plans unilaterally and voluntarily.

Then, they jointly review the IAPs and their implementation to encourage the member economies to achieve measures to be carried out over the immediate, medium and longer term in fifteen specific areas.

This paper focuses on competition policy and deregulation. Competition policy is included in IAP to enhance the competitive environment in the Asia Pacific region through the review of respective competition policies, implementation of technical assistance, and establishment of appropriate cooperation arrangements. Deregulation in IAPs is to promote transparency of regulatory regimes in APEC member economies and eliminate the distortion arising from domestic regulations. In particular, the focus is on the trade and investment effects of domestic regulations.

There is a growing consensus that competition oriented policy framework would be instrumental in achieving the Bogor goal of trade and investment liberalization. But at the same time, there is no consensus on the specific goals or scope of competition policy among member economies because they are at various stages of industrialization, and have different institutional, legal and cultural heritages. This is evident in the IAPs submitted by member economies. To partly resolve the problem of lack of a common principle in the area of competition policy among APEC member economies, the APEC Principles To Enhance Competition and Regulatory Reform was adopted in September 1999 at the Auckland APEC Leaders Meeting.

Similarly, IAPs for deregulation is limited in advocating comprehensive regulatory reform in the economies studied under the current APEC charter. While many countries carry out comprehensive program of regulatory reform, including deregulation, to improve efficiency of business and government, and raise consumer welfare, APEC's deregulation deals mostly with market opening deregulatory measures. Thus, APEC overlooks some of the most important aspects of regulatory reform such as reforms of public administration, or the possibility of systematic adoption of tools to examine usefulness and efficiency of regulations (e.g. regulatory impact analysis). Part of the problem is that there is no clear definition of "deregulation" for IAPs. The deregulation component acts as a "catch-all" listing of various deregulation measures which are not listed in many other, better defined areas of IAPs (eg. customs procedures, technical standards and conformity, sectoral regulations) which have not been covered in this paper. Consequently, deregulation process in these economies can seem incoherent and haphazard, if only looked at through the IAP for deregulation.

This paper reconsiders the well-worked topic of strategic trade policy, but we approach the topic from a novel and important perspective. We observe that previous work on strategic trade policy with regard to R&D subsidies, starting with the seminal paper by Barbara Spencer and Jim Brander (1983), has proceeded under the implicit assumption that firms have perfect property rights to the results of their R&D investments. In reality, of course, the protection of intellectual property rights (IPRs) is not perfect. So it is natural to consider optimal choices for these policies in tandem rather than examining R&D subsidy policy in isolation.

We show that the level of IPR protection can have important implications for a government's incentives to intervene in the R&D decisions of domestic firms.We treat the level of IPR protection as exogenous, and consider how weak IPR protection may affect the case for an R&D subsidy in an international duopoly setting. When IPR protection is perfect, the model is identical to the original Spencer and Brander setup, and exhibits its well-known features. A firm's profits rise when its rival undertakes smaller amounts of R&D, and so governments seek to reduce the R&D levels of rival firms with their R&D policies. As a firm's best response to an increase in R&D by its rival is to reduce its own R&D (i.e., R&D reaction curves slope down), the domestic government will wish to subsidize R&D because, in providing the domestic firm with an incentive to do more R&D, the government is able to discourage R&D activity be the foreign rival firm.

However, in the presence of imperfect IPR protection, a novel force comes into play in determining government incentives to intervene in firm R&D choices: a rival's R&D now directly reduces one's own costs as well. If IPR protection is sufficiently weak, we show that R&D reaction functions will in fact slope up, so that a prediction of R&D subsidies will again obtain. But now it is fore precisely the opposite reason found in the original Spencer and Brander logic: the domestic government will wish to subsidize its firm's R&D in the presence of sufficiently weak IPR protection, because in providing the domestic firm with an incentive to do more R&D, the government is able to encourage R&D activity by the foreign rival firm, and the greater R&D investments of the foreign rival increase the profits of the domestic firm.This paper is useful in that it succeeds in identifying and characterizing the interesting effects that exogenous variation in the degree of IPR protection can have on standard strategic trade policy arguments. In pointing out the importance of the IPR regime for understanding the incentives to subsidize R&D, and even for predicting the sign of the optimal strategic R&D policy, we also set the stage of future research, which models the joint determination of R&D subsidies and IPR regime.