ⅠIntroductionⅠ

Political Changes on the Korean Peninsula and the Significance of Trilateral Cooperation between South Korea, North Korea, Russia
Lee Jae-Young
President, Korea Institute for International Economic Policy (KIEP)

❙Korean and Russian Perspectives on Trilateral Cooperation between South Korea, North Korea, Russia❙

Korean Perspectives ❚

01 New Opportunities for and Approaches to the Trilateral Cooperation between the ROK, DPRK and the Russian Federation

Kim Seok Hwan
Visiting Research Fellow, KIEP

Park Joungho
Director General, New Northern Policy Department, KIEP

02 Key Challenges of the Trilateral Cooperation and its Action Plan

Kim Seok Hwan
Visiting Research Fellow, KIEP

Park Joungho
Director General, New Northern Policy Department, KIEP

Russian Perspectives ❚

03 North Korea-Russia Relations and Overview of the Prospect of Trilateral Cooperation by Areas

Pavel A. Minakir
Director emeritus, Economic Research Institute, Far Eastern Branch of the Russian Academy of Sciences

04 Interrelation between the North Korea-Russia Cooperation and the Trilateral Cooperation

Vasily V. Mikheev
Vice President, Institute of World Economy and International Relations (IMEMO)

05 New Developments in the North Korean Nuclear Issue and the Trilateral Cooperation between the ROK, DPRK and the Russian Federation

Sergey A. Karaganov
Dean, Faculty of World Economics and International Relations, National
Research University-Higher School of Economics

Natalia Kim
Associate Professor, School of Asian Studies, National Research
University-Higher School of Economics

ⅠConclusionⅠ

Policy Recommendations to Promote TrilateralCooperation between the Two Koreas and Russia
Lee Jae-Young
President, Korea Institute for International Economic Policy (KIEP)

ⅠReferencesⅠ

ⅠAppendixⅠ 
Developments related to Trilateral Cooperation between the Two Koreas and Russia 

  North Korea’s nuclear development plans and missile tests led to a state of acute tension in 2017, escalating the risk of war. The tense situation took a sharp turn following the 2018 Pyeongchang Winter Olympic Games, followed by two inter-Korean summit meetings and the first in history meeting between the leaders of North Korea and the United States. These developments have improved relations between the two Koreas and are leading to substantial talks toward the denuclearization of North Korea.
  On April 27, 2018, the leaders of the two Koreas met for the first summit talks in 11 years, culminating in the Panmunjom Declaration in which they agreed on the dramatic improvement and development of inter-Korean relations, elimination of military tension and mutual non-aggression, and complete denuclearization and establishment of a peace regime on the Korean Peninsula. In the second inter-Korean summit of the year held on May 27, 2018, the two leaders reached a consensus to work closely toward denuclearization of the Korean Peninsula and the establishment of a permanent peace regime. he South and North held inter-Korean high-level talks on June 1, in which it was agreed to establish a joint liaison office in Gaeseong, North Korea, and practical measures to implement the Panmumjom Declaration were discussed. South Korea becoming a full member of the Organization for Cooperation of Railways (OSJD) on June 7, 2018, was an important development as well. Despite seeking full membership to the Organization since 2015, the South had hitherto been blocked by North Korea’s veto votes.
  The virtuous cycle that began with these improvements in inter-Korean relations was continued with the first U.S.-North Korea summit in history. The leaders of North Korea and the U.S. met on June 12, 2018, in Singapore, releasing a joint statement agreeing to establish a new bilateral relationship, build a lasting and stable peace regime on the Korean Peninsula, and to make joint efforts toward the complete denuclearization of the Korean Peninsula. Chairman Kim Jong Un reconfirmed his commitment to the agreements made within the Panmunjom Declaration and pledged to work toward the complete denuclearization of the Korean Peninsula. The historic summit between the two leaders was followed by subsequent measures on the part of North Korea – such as the release of three U.S. citizens, repatriation of U.S. soldiers’ remains, and the closure of its Punggye-ri nuclear test site and dismantlement of the Sohae engine missile testing site in Tongchang-ri – in return for which it called on the U.S. to lift North Korean sanctions and formally end the Korean War. The U.S., on the other hand, is maintaining its position that North Korea must first begin substantial measures toward complete denuclearization, and that the lifting of sanctions can only be considered after major progress has been seen toward denuclearization. The U.S. is particularly keen on securing a list from North Korea outlining its nuclear arsenal, and is yet to make its position clear on the issue of an end-of-war declaration, instead focusing on both talks and pressure tactics toward North Korea.
  When considering the delicate situation currently unfolding between the three nations following the summit meetings, it is clear that the Moon Jae-in government in South Korea must play a crucial role. However, inter-Korean relations are mired in complications caused by North Korea’s nuclear program and U.S. sanctions against North Korea, making it difficult to realize any substantial progress in economic cooperation projects with the North. As of yet, the New Economic Map of the Korean Peninsula and the New Northern Policy, initiatives announced by the Moon administration, remain at the initial stage of planning. But as President Moon stressed in the August 15 Liberation Day speech, peace is vital to economic development on the Korean Peninsula, and the New Economic Map of the Korean Peninsula and New Northern Policy must be recognized as foundation-building efforts to resolve North Korea’s nuclear issue once and for all. In his Liberation Day speech President Moon emphasized that “establishing peace and forming an economic community on the Korean Peninsula is the actual realization of our liberation,” and that “developing relations between the two Koreas is the true driving force behind denuclearization of the Peninsula.” These sentiments carry the message that inter-Korean economic cooperation is an inevitable and essential means to reconstruct the virtuous cycle between the three parties through the third inter-Korean summit in September 2018, followed by nuclear talks between the U.S. and North Korea, and another North Korea–U.S. summit meeting scheduled to take place. During his speech President Moon also proposed an East Asian railway community, demonstrating how the New Economic Map of the Korean Peninsula will lead to economic cooperation with economies toward the north of Korea, strengthening connectivity with the Eurasian continent.
  As such, the New Economic Map for the peace and prosperity of the Korean Peninsula must be accompanied by a recognition for the geopolitical and geoeconomic value of the Russian Far East region. When North Korea begins its process of reform and opening up and economic cooperation projects between the two Koreas resume, the Russian Far East will rise as a key point for economic cooperation between Korea and its neighbors to the north. This would also open up more opportunities for bilateral and multilateral cooperation in hand with Russia’s development strategies in the Far East region, between the two Koreas and Russia. The Russian Far East region is strategically significant in that it connects with the Korean Peninsula, thus serving as a starting point for economic cooperation between Russia and the two Koreas and offering a bridgehead for the Korean economy to extend its growth. The Russian Far East region is also essential for the eastern axis of the New Economic Map for the Korean Peninsula, which involves forming inter-local cooperation in the East Sea region and developing the Northern Sea Route.
  There is no doubt that trilateral economic cooperation projects between the two Koreas and Russia will benefit South and North Korea and contribute to South Korea-Russia relations, while driving the denuclearization of the Korean Peninsula in an irreversible direction. Such cooperation projects would also make it possible to realize peace and mutual prosperity on the Korean Peninsula while strengthening connectivity with Eurasian nations. Ultimately, trilateral cooperation projects will add substantial momentum to Korea realizing its future vision of a “bridge country” that connects the ocean and continent, and to Russia gaining a strategic foothold to develop its Far East region and advance into the Asia-Pacific area.
  Russia is not a major presence in the ongoing talks between South and North Korea, the U.S. and China for the denuclearization of North Korea. However, when we recognize the limitations of producing a solution to the North Korean nuclear issue only within the framework of diplomatic security talks, it becomes clear that the Russian Far East represents great strategic value, and that trilateral cooperation projects between Russia and the two Koreas deserve much more recognition for their significance. On April 29, 2018, Russian President Putin stated the need for the progress realized through the inter-Korean summits to be continued through trilateral cooperation projects with Russia. President Putin also stressed how connecting Russia’s railways, gas pipes and power supply into Siberia through the Korean Peninsula would contribute to the stability and prosperity of the Peninsula. During his visit to Moscow in June 2018, President Moon reached a consensus with President Putin on how trilateral economic cooperation would create a virtuous cycle of furthering peace on the Korean Peninsula and promoting economic cooperation, and how this must be further developed into a multilateral security regime in Northeast Asia. If cooperation between the two Koreas and Russia could vitalize multilateral cooperation schemes with the U.S., China and Japan, this would add crucial momentum to the mutual prosperity and permanent peace of Northeast Asia.
  This volume contains the results of joint research conducted by Korean and Russian experts, focusing on the following objectives. First, we wish to illustrate the need for trilateral economic cooperation within the changing political situation on the Korean Peninsula and the Northeast Asian region, through which it will become possible to pursue mutual prosperity within the region and establish a foundation for permanent peace. Our second goal is to perform an in-depth study of the perceptions and situations on each side in regard to South Korea–North Korea–Russia cooperation, through which we can identify the basic directions, tasks and strategies to promote cooperation between the three parties. This approach is particularly timely and significant on an academic level when it comes to identifying strategic connections between Korea’s New Northern Policy and Russia’s New Eastern Policy, and to realize qualitative development in South Korea–Russia relations. Finally, we wish to offer important policy implications for the Korean government as it implements its New Northern Policy and the New Economic Map for the Korean Peninsula, and help produce measures to expand economic cooperation between Korea and Russia in the Russian Far East. 

Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchange rate helps to boost export growth, we should have observed a sub-stantial increase in export in the EU and Japan. However, the effectiveness of the exchange rates on exports appears to be weak across countries. This anomaly is one of the central puzzles in international macroeconomics: why large movements in the exchange rate have modest effects on the aggregate variables such as import prices, consumer prices, and quantity of exports. 

  In this paper, we examines the role of global production linkages on ex-change rate elasticities by using Korean firm-level data. At firm-level, foreign-owned firms or firms with foreign subsidiaries participated in the Global Value Chains (GVC) play an important role in weakening the effect of ex-change rate movements on firm exports. The empirical results show that the exchange rate elasticity of total export is about -0.64, which implies that 10% appreciation of Korean Won would make a drop in total export by 6.4%. However, the exchange rate elasticities of firms are not the homogeneous across firms. We find that the exchange rate elasticities of firm exports are significant and negative for domestic-owned firms and firms without foreign subsidiary whereas those are insignificant for foreign-owned firms and firms with foreign subsidiaries.

  After controlling exports to foreign affiliates, we still find that the estimated exchange rate elasticities of exports are statistically insignificant, but become negative and relatively larger for firms with global production linkages. More-over, firms with higher GVC integration measure or more imported inter-mediate inputs have the significantly lower exchange rate elasticities of firm exports. It suggests that developments of global production linkages via firm ownership, within-industry or within-firm in the last decade play an essential role in alleviating the effect of exchange rate movements on the firm exports.

Keywords: Exchange Rate Elasticity, Firm Export, Production Linkage, Global Value Chains

JEL Classification: F14, F15, F23, F31

About KIEP

Highlight 2017

Bright 2017

Research-Oriented Activities

General Projects

Appendix 

The year 2017 was a period of escalating external risks for the Korean economy, as advanced economies progressively normalized their monetary policies, the international trend of economic protectionism and nationalistic trade policies continued with the progress of Brexit and the Trump administration’s America First policies, and the North Korean nuclear issue deteriorated into a state of discord among the international parties involved.

To cope with these challenges, we at the Korea Institute for International Economic Policy (KIEP) identified eight major policy directions to focus on as we carry out our fundamental mission as a national research institute. The eight areas KIEP will focus its research capabilities on are: the proposal of coping measures in the face of trade protectionism; promoting strategic economic cooperation; the establishment of a Northeast Asia Plus Community of Responsibility; stronger development cooperation to maximize national interests; pursuing economic unification on the Korean Peninsula; the realization of income-led growth policies; the vision of Innovative Growth; and external risk management.

The global economy continues on the path of recovery from the past crisis, but as of yet we lack clear indications that this trend of growth will continue in the long term. The support of neighboring countries will be essential when it comes to the stable establishment of lasting peaceful relations between the two Koreas. As such, the geopolitical significance of Korea will continue to rise.

As our economy navigates these multiple challenges, KIEP will contribute to the establishment of sustainable cooperation strategies through research on the government’s New Southern Policy and New Northern Policy; we will guide the national execution of the New Economic Map of the Korean Peninsula, based on reconciliation and cooperation between the two Koreas; we will explore international economic and trade policies that can support the vision of inclusive growth; and we will identify promising new industries to concentrate our national resources in line with the Fourth Industrial Revolution unfolding around us. The research findings we provide will serve as a guide to formulate policy decisions that can drive national development.

On behalf of KIEP, I wish to extend my deep gratitude and appreciation for the interest and support you lend toward our progress. KIEP will continue its work in the areas of regional studies, trade investment, and international macrofinance, earning the trust of the people as we fulfill our mission as a responsible research institute and a national leader of sustainable growth and innovation through policy research. 

About KIEP

Highlight 2017

Bright 2017

Research-Oriented Activities

General Projects

Appendix 

The year 2017 was a period of escalating external risks for the Korean economy, as advanced economies progressively normalized their monetary policies, the international trend of economic protectionism and nationalistic trade policies continued with the progress of Brexit and the Trump administration’s America First policies, and the North Korean nuclear issue deteriorated into a state of discord among the international parties involved.

To cope with these challenges, we at the Korea Institute for International Economic Policy (KIEP) identified eight major policy directions to focus on as we carry out our fundamental mission as a national research institute. The eight areas KIEP will focus its research capabilities on are: the proposal of coping measures in the face of trade protectionism; promoting strategic economic cooperation; the establishment of a Northeast Asia Plus Community of Responsibility; stronger development cooperation to maximize national interests; pursuing economic unification on the Korean Peninsula; the realization of income-led growth policies; the vision of Innovative Growth; and external risk management.

The global economy continues on the path of recovery from the past crisis, but as of yet we lack clear indications that this trend of growth will continue in the long term. The support of neighboring countries will be essential when it comes to the stable establishment of lasting peaceful relations between the two Koreas. As such, the geopolitical significance of Korea will continue to rise.

As our economy navigates these multiple challenges, KIEP will contribute to the establishment of sustainable cooperation strategies through research on the government’s New Southern Policy and New Northern Policy; we will guide the national execution of the New Economic Map of the Korean Peninsula, based on reconciliation and cooperation between the two Koreas; we will explore international economic and trade policies that can support the vision of inclusive growth; and we will identify promising new industries to concentrate our national resources in line with the Fourth Industrial Revolution unfolding around us. The research findings we provide will serve as a guide to formulate policy decisions that can drive national development.

On behalf of KIEP, I wish to extend my deep gratitude and appreciation for the interest and support you lend toward our progress. KIEP will continue its work in the areas of regional studies, trade investment, and international macrofinance, earning the trust of the people as we fulfill our mission as a responsible research institute and a national leader of sustainable growth and innovation through policy research. 

  This paper examines the current situation of the US-China current account imbalances and the development of trade disputes. This paper also empirically analyzes the short and long-term causal relationship between current account imbalances and real exchange rates and the relationship between the current account persistence and exchange rate regime.
  In Chapter two, we study the current account imbalance between China and the U.S. in terms of trade structure. We find that China’s trade surplus with the U.S. is concentrated in a few specific items, including cell phones, automatic data processing machine and monitors and projectors. Looking at the processing stage of the trade between China and the US, China’s trade surplus with the U.S. has mostly come from the final goods. In particular, the surplus in capital goods trade has begun to surpass the surplus in consumer goods trade, in 2016. We also find that the surplus in high-technology manufacture exceeds that in low-technology manufacture. Meanwhile, China has run a deficit in the service trade with the U.S. and the deficit has surged since the global financial crisis.
  In Chapter three, we examine the development process of the dispute over the yuan exchange rate and the trade disputes after the Trump administration. Analyzing the existing research results on the misalignment of RMB exchange rate, we find that it is difficult to make a consistent conclusion according to the methodology and analysis period. However, the U.S. Treasury Department maintains its position that the RBM should be appreciated to resolve the trade imbalance. After the launch of the Trump Administration, the government is taking hard-line trade sanctions in addition to exchange rate pressures. In 2017, the Trump Administration increased the number of anti-dumping and countervailing duty investigations for import goods from China by 59% year-on-year, and the US Department of Commerce, for the first time in 26 years, exercised anti-dumping and countervailing duties investigation on Chinese aluminum alloy sheets. In addition, it is considering imposing tariffs based on Articles 201, 232 and 301. In response to these U.S. sanctions, China expressed its strong condemnation through government statements and countered in the same way as the United States.
  In Chapter four, we examined the relationship between the current account balance and the exchange rate in two ways. First, we analyzed whether the RBM exchange rates is a significant factor in determining the current account balance between China and the U.S.. In the long term, China’s US current account is affected not only by the real exchange rate but also by the difference in the real GDP growth rate, the difference in the financial account balance of two countries, the financial deeping of China. In the short term, only changes in trade openness have a significant positive effect on the current account. The change of the real exchange rate does not seem to lead to the short-term adjustment of the current account. Second, we study the relationship between the persistence of the current account and the Chinese exchange rate regime. The results implies that current account imbalance between the two countries is adjusted faster after the global financial crisis and China’s exchange rate system reforms contributed to current account adjustment.
  The empirical results provide that the RMB exchange rate only affects trade balance between China and U.S. in the long term, and China seems to contribute to the adjustment of trade imbalance through the exchange rate system reform. However, considering the global value chain of China and emerging Asian economies, it is unclear whether the RMB exchange rate adjustment alone will resolve the trade imbalance. Instead, structural rebalancing such as the U.S. fiscal deficit reduction, the increase of private savings, and the development of financial market in China can fundamentally solve current account imbalance. Although the Trump Administration has not yet designated as a currency manipulator, the U.S. government still suspects the foreign exchange market intervention and the undervaluation of the RMB. It is possible that the pressure of the U.S. on RMB appreciation would direct at KRW exchange rate. On the other hand, considering the dependence of intermediate goods trade between China and Korea, deepening trade disputes between China and the U.S. may cause China to shrink its exports to the U.S., resulting in a slowdown in Korea’s intermediate exports to China. In addition, with the spread of protectionism, there will be a possibility of trade disputes including the subsidy problem between Korea and China due to Korea’s continuous surplus with China. 

- 

Executive Summary

1. Introduction

2. Literature Review

3. Empirical Analysis
3-1. Variables and Data
3-2. Empirical Specification
3-3. Empirical Results
3-4. Robustness Tests

4. Theoretical Implications

5. Conclusions

References 

  Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets.
  The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality?
  We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled.
  We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.

Keywords: Financial market development, Financial market integration, In-come inequality
JEL Classification: D63, F36, O11, O16 

  This study examines the experience of transition countries when joining the WTO and suggests implications for the North Korean economy and the economic integration of the two Koreas. The situation on the Korean Peninsula is changing drastically due to the recent inter-Korean summit and the first ever North Korea-United States summit following the disintegration of Korea into two countries 70 years ago. If discussions on the denuclearization of North Korea and an enduring peaceful settlement can be completed to some extent, further discussions on the issue of North Korea’s economic integration into the international market will hopefully follow. Though the incorporation of North Korea into the world trade system is an inevitable development in the process of economic reform and opening up and normalization of foreign relations, there is still little debate on this topic. This study examines the issues that may arise in the process of North Korea’s WTO entry through a review of experiences in transition economies.
  The goals of reforming and opening the North Korean economy should be separated when discussing the economic development in North Korea. Up to now, however, the dialogue has focused on economic reform in North Korea while the issue of opening the North Korea economy has not received sufficient attention. In particular, there has been little research on North Korea’s accession to the WTO. This study addresses this gap in previous research by analyzing the implications of the economic integration of North Korea into international trade through a comparison with the cases of various transition countries and in particular the major issues arising during their accession to the WTO.
  In Chapter 2, the study reviews the economic situation of major transition countries before and after joining WTO. At the time of joining the WTO, these nations suffered from various problems in their domestic economies including low GDP, chronic trade deficit (excluding Russia), and severe inflation. The economic downturn and widening gap between formal and informal trade also weakened the control these countries had over their respective economies. Following the collapse of the Soviet Union in 1991 it became inevitable to normalize foreign relations with market economies, causing the transition countries to reform their domestic economy, improve relations with market economies, expand their markets, and introduce advanced capital and technology. This in turn led to the WTO accession of these countries in an effort to dramatically expand their foreign trade.
  Chapter 3 reviews the major issues for transition economies when joining the WTO. Accession to the WTO ultimately depends on negotiations between the applicant nation and existing WTO members. The prolonged cases of WTO accession negotiations by major transition countries can be attributed to the following reasons: (1) efforts to keep new members in check, (2) the issue of recognizing developing country status, (3) debates on whether the WTO Agreement is compatible with domestic economic and/or trade policies, (4) issues related to non-market economy status and trade normalization, (5) political elements and (6) a lack of negotiation experts. Similar problems may appear as major issues in the process of North Korea’s incorporation into the WTO system. Nevertheless, in some cases the countries have improved access to the international market after joining the WTO and succeeded in attracting foreign capital. On the other hand, however, there are cases where trading company have been overly dependent on foreign capital, like Vietnam. Also there are cases, such as China, which is exposed to trade disputes due to non-market Economy status. Those issues may lead to trade disputes and should be considered prior to and after joining the WTO.
  Chapter 4 examines the implications of the transition countries’ experiences for North Korea and the necessity to discuss its accession to the WTO at this moment. WTO accession is the final stage of transition into a market economy system, as it requires not only trade system reform but also economic reform as a whole. For this reason, it is necessary to carefully consider the appropriate timing of North Korea’s accession to the WTO. A radical and dramatic transition of the economic system would require North Korea to bear the burden of huge social costs and losses from administrative disruption. The public opposition arising during this process could create a social atmosphere against reform and opening. Therefore, the policy requires a grace period of time and system implementation that is socially acceptable. Meanwhile, major countries may be more interested in the prospect of economic cooperation between the two Koreas following North Korea’s WTO entry. Therefore it is important to find a balance between economic integration and segregation between the two Koreas.
  This study is significant in that it is the first study to discuss North Korea’s incorporation into the WTO system. In addition, it contributes to government policies and academic studies as the first study to identify the link between the entire economy of the Korean Peninsula and North Korea’s accession to the WTO, while also providing concrete scenarios. North Korea’s integration into the international trade system should not be pursued as a short-term task but rather as a momentous goal which must be pursued with a national vision. Therefore, further studies must be conducted from a long-term perspective.
  The results of this study could be used as a basis for reviewing various factors that should be taken into consideration in the reestablishment of inter-Korean relations. They could also be used as a reference to resolve conflicts with international trade law arising in the process of conducting inter-Korean trade. Ultimately, the study can be used as a reference for when North Korea begins preparation to join the WTO. 

Real estate prices, which plummeted shortly after the global financial crisis in 2008, have risen sharply to exceed pre-crisis levels, raising concerns about global real estate bubbles. In response, this study diagnoses the bubble risk in the global real estate market and analyzes the impact of real estate bubbles on financial crises and the real economy. In addition, we examine previous bubble-oriented financial crises in the real estate sector and compare them against recent global situations.
This study first examines whether a real estate bubble exists in major global economies, based on two criteria. The first is general indicators such as price to rent ratio (PRR), price to income ratio (PIR), and household credit growth rates, and the other is cointegration tests between real estate prices and fundamentals, and time series analyses like the generalized sup ADF (GSADF) method used by Phillips, Wu, and Yu (2011), and Phillips, Shi, and Yu (2015).

The results of the empirical analysis indicate that among the countries where housing prices rose by more than 6.6% in 2016, or those in which housing prices continuously rose by more than 3.6% in the three years from 2014 to 2016, countries with high probability of bubbles forming in their real estate markets are China, Colombia, Hungary, Latvia, Turkey and Slovakia.
Among developed countries, Australia, Austria, Canada, Ireland, Israel, Luxembourg, New Zealand and Sweden have the highest increase rate in housing prices. Among these, Australia, Canada, New Zealand, Israel and Sweden are all at high risk according to the above three indicators. These five countries, for which all three indicators indicate risk, also show the same high bubble risk in our empirical analysis.
In Korea, the housing price index, PRR and PIR have stabilized considerably since the 2000s, and the risk of bubbles forming is also low according to the empirical analysis. However, in 2016 the household-credit-to-GDP ratio in Korea increased by 4.7%p from 2015, showing a remarkable increase similar to China (5.6%p) and Norway (6.2%p). In terms of PIR, Seoul is lower than Hong Kong, Beijing, Shanghai, Sydney and Vancouver, but higher than Los Angeles, London, New York, Tokyo and Singapore. In other words, the risk of real estate bubbles is not high at the national level, but the PIR in some areas such as Seoul is high.
Next, this study uses country panel data to analyze the relationship between the real estate bubble and financial crises. A panel logit with fixed effect model is used to perform the analysis. And the impact of the real estate bubble on GDP growth rate is analyzed using a fixed effect panel model.
The first empirical result shows that the house price bubble (HPB) is highly related to financial crises, as defined by the Jordà- Schularick-Taylor Macrohistory Database. Both HPB and HPB indicators, and the cross term between the two variables, are statistically significant as positive coefficients. At the HPB level, which is about one to two standard deviations above the HPB average, an increase in one unit HPB increases the likelihood of a financial crisis from 3.6% to 4.0%. In Korea, the possibility of a financial crisis is not high because HPB is not far from the long-term trend as of 2016.
Second, our analysis of the relationship between HPB and various types of financial crises, as classified by Reinhart & Rogoff, shows that HPB is more closely related to banking crises and stock market crashes than to currency crashes, sovereign defaults, and inflation crises.
Third, in the fixed effect panel analysis of the relationship between HPB and GDP growth rate, the increase in HPB shows a negative effect on GDP growth rate.
In order to assess the risks of the global real estate market and to obtain policy implications for real estate risk management in Korea, this study also examines the cases of real estate bubble-oriented financial crises such as seen by Sweden, Finland and Japan in the early 1990s and the global financial crisis in 2008. In addition, the risks associated with prospective bubbles in the recent Chinese real estate market have been frequently cited, so we compare the recent Chinese situation with Japan in the mid-1980s and the U.S. real estate bubble in the mid-2000s.
The results of the case analysis indicate a definite risk of a global real estate bubble, albeit to a lesser extent than seen in the past. This is because the monetary easing policies of major advanced economies are far more aggressive than the past. In recent years, however, the strengthening of financial institutions' soundness regulations and risk management, and the implementation of measures to manage capital flows have played a stronger role in mitigating the bubble risk compared to past times.
By region, the real estate bubble pressure seems to be larger in emerging economies than in advanced economies. This is because emerging economies are climbing more steeply than developed countries. In advanced economies, real estate prices have fallen sharply and debt deleveraging has proceeded since the global financial crisis. However, in emerging economies, asset prices have risen and household debt has increased steadily.
In particular, in the case of China, the possibility of a financial crisis due to a plunge in real estate prices is low in the short term. However, Chinese real estate prices are likely to decline modestly, which can slow China's economic growth, and small and medium- sized cities with an over-supply of housing are likely to face a financial crisis.
Finally, this study provides some policy implications for the management of external risks from overseas real estate bubbles and stabilization of the Korean real estate market. In order to improve external risk management, it will be necessary to strengthen monitoring of external environments and global real estate markets, and to prepare countermeasures against financial crisis in economies with high risk in their real estate sectors. It will also be necessary to strengthen international cooperation so that major advanced countries can implement monetary policy normalization measures in an orderly manner.
In order to stabilize Korea's real estate market, it will be necessary to systematically check the bubble risk within the domestic real estate market, and monetary authorities need to consider asset prices in addition to inflation when determining monetary policy. Next, while referring to cases of policies implemented in times of soaring real estate prices, it will be necessary to implement comprehensive measures to suppress demand, expand supply, and manage risk.