Since the adoption of the WTO-led Aid for Trade (AfT) initiative in 2005, there has been a steady increase in trade related aid around the world. The share of AfT in total official development assistance (ODA) reached to 31% in 2012. Along with the increase in AfT, there has a slight controversy regarding the impact of AfT on reduction of trade costs and/or expert competitiveness of recipient countries.
The Korea’s volume of ODA has been increasing, with Korea becoming the 8th largest AfT donor country among DAC member countries; Korean ODA comprised 40% of the AfT itself. Interest regarding AfT, however, has mostly been concerned with the volume of AfT and there was relatively less attention toward its effectiveness. Our study, rather, is focused on the qualitative aspect of AfT; we would like to answer the questions on whether Korea’s AfT had positive impacts on recipient countries’ trade capacity - meaning our investigations would concern how the AfT contributed to their economic growth and what will be its impact on the trade between Korea and recipient countries.
We selected three Southeast Asian countries, Vietnam, Cambodia and Lao PDR, who are late-comers among ASEAN (Association of South East Asian Nations) members and also transition countries with a high economic growth. In order to investigate the relationship between AfT and trade capacity of the recipient country, we conducted an empirical estimation. Dividing the AfT by sub-categories and sorting recipient countries according to income level and geographical factors, the empirical results allow us to elicit in-depth and realistic policy implications.
We find that AfT, overall, has a positive impact on export performance of a recipient country. Among the sub-categories of AfT, AfT for economic infrastructure and production capacity were identified as having strong impact on export promotion. When recipient countries are sub-divided by income level, AfT has a positive impact on export promotion for low-middle and upper-middle income countries, whereas for low income countries, AfT turns out to have a negative impact. It is noteworthy that AfT for economic infrastructure and production capacity, which accounts for more than 90% of total AfT, did not have an appreciable impact on promotion of exports among low income countries.
On the other hand, AfT for trade policy and regulation has a significant and positive impact. When the recipient countries are divided geographically, AfT for economic infrastructure and production capacity show a positive impact on their export promotion for Asia and Europe in which countries have a relatively high income level, whereas we fail to find significant impact for the African country group.
From the study and empirical results, we can provide implications for Korea’s AfT policy. First of all, as we have noticed in our empirical estimation, AfT without considering country specific factors would not be an efficient way to enhance the trade capacity of recipient countries. Especially, AfT for economic infrastructure and production capacity did not have an impact regarding promotion of exports for low income countries.
It was rather AfT for trade policy and regulation which actually had a meaningful impact. Considering that about 96% of total AfT is allocated for economic infrastructure and productivity capacity, converting AfT support currently concentrated toward ‘hardware’ to ‘software’ based allocation would improve the effectiveness of AfT for these low income countries. It also implies that in order for AfT for economic infrastructure and production capacity to have significant impacts, it must be preceded by improvement of economic structure and regulation of recipient countries. Improving the effectiveness of aid would also entail taking into consideration the recipient country’s specific factors, including income level, trade structure and/or trade related regulations, followed by determination which supporting field of AfT would have priority.
Secondly, AfT should be treated as a cross-cutting issue in the process of establishment and implementation of Korea’s ODA policy. That is, AfT should be central in consideration for all types of Korean ODA projects. AfT will be a core topic in discussions around the world on how to increase ODA, how to promote its efficiency, and what type of policy project is needed to achieve the new development goal. To take a leading role in this process, Korea needs to take AfT as a core agenda in Korea’s international development model. For this purpose, we have to take an approach to AfT from a more integrated perspective; and development projects should be actively promoted and implemented to achieve comprehensive and sustainable economic development.
Thirdly, the results show that Korean ODA also suffers from excessive segmentalization. Overcoming this problem would require active bilateral and multilateral cooperation. In addition, creation of a permanent discussion channel between donor and recipient states will also enhance international cooperation. Inviting recipient countries into the permanent discussion channel accords with principles of harmonization of aid and aid ownership of recipient country, which was adopted in the Paris Declaration. If participation of the recipient country makes it possible to deliver assistant projects which coincide with its own visions for development, it will satisfy the accordance principle between development vision of recipient country and assistance of donor country. Also, such cooperation will strengthen the sense of mutual responsibility of donor and recipient countries, thus improving the efficiency of assistance.
Fourthly, the results show that assistance on economic infrastructure and productivity capacity failed to have significant impact on exports for low income countries, whereas aid on trade policy and regulation had positive and significant impacts. However, Korean AfT is highly concentrated on economic infrastructure and productivity capacity, in stark opposition to our empirical results. What we suggest for AfT for Vietnam, Cambodia and Lao PDR is that assistant projects to improve the trade system and trade-related regulation needs to come before improvement of economic infrastructure. Assistance in these fields can have significant impact on the improvement of trade capacity for these countries and based on that, assistance regarding economic infrastructure and/or production capacity can have meaningful results in the future. In this regard, reallocation among the field of AfT for these countries should be considered.
Lastly, to improve the efficiency of AfT assistance, a proper understanding about recipient country’s situation and intensive assistance should be achieved. As mentioned already, Korea’s AfT to Vietnam, Cambodia and Lao PDR shows excessive bias towards “hardware fields” of trade, such as economic infrastructure. On the other hand, what is needed and would prove more efficient for these countries is the “software fields” of trade capacity. Given that Korea has advanced software related to cross-border trade, Korea’s experience and technology could have immediate and practical help for these countries. For example, Korea’s UNI-PASS which is designed for automated electric customs procedure and/or consulting service regarding customs procedure and the related systems, can be an effective form of assistance. 

 

 In recent years, major Latin American countries, represented by Chile, Colombia and Peru, are actively implementing ‘new industrial policy’ in order to change their economic structures with high dependency on primary goods and then to promote their export competitiveness. One of the reasons that these policies are called new industrial policy is that it characterizes as following: First, they focus more on export promotion unlike the old industrial policy in 1950~1980 whose main focus was an import substitution. Second, the new industrial policies highlights the importance of the innovation. In the industrial policies of Chile, Brazil, Uruguay, and Colombia, the importance of innovation is particularly emphasized. Third, new industrial policies are nowadays backed by sound budget. Last but not least, new industrial policies are aiming at public-private alliances and being more horizontal whereas the old industrial policies are more of a vertical systems presided by the government.
 In this study, new industrial policies of Chile, Colombia and Peru have been analyzed in depth. Also suggestions to the government have been made to enhance cooperation between the two regions and also to the private enterprises to discover their opportunities in Latin America.
 This study has started from the questions of 1) what are the backgrounds for pursuing the new industrial policy of these three countries? 2) what are the differentiated characteristics of these new policies from the old ones? 3) will the sustainable development be possible through these new policies? 4) what are the obstacles for the promoting industrial cooperation between Korea and the Latin American region? 5) how can Korean government and the private enterprises utilize these new industrial policies in order to enhance the industrial cooperation?
 Based on these questions, this study comprises of five chapters. At the introduction, rationale for choosing three Latin American countries for the study, and the concept and the scope of industrial cooperation are described. Recent discussions on the definition and the scope of industrial policy are examined especially focusing on Latin American region.
 The second chapter explains the backgrounds for the three countries implementing the new industrial policies as of year 2000. This study presents the key drivers of implementing the new industrial policy dividing into three parts: necessity of export and economic structure diversification, productivity raising, and competitiveness enhancement.
 In chapter three, each of the three countries industrial policies are analyzed more specifically. For Chile, “Agenda of Productivity, Innovation, and Growth (Agenda de Productividad, Innovacion, y Crecimiento)” is analyzed, which the Bachelet government has been implementing since 2014. For Colombia’s case, “National Development Plan (Plan Nacional de Desarrllo 2014-2018)” and “Productive Transformation Program (Programa de Tranasformacion Productiva)” are studied which President Santos has chosen for his second term. Lastly, Peru’s industrial policy study is conducted based on “National Plan for Productive Diversification (Plan Nacional de Diversificacion Productiva)” which was introduced in 2014 by Humala government. Each country’s case comprises of backgrounds for the new industrial policy, main contents of the policies, and finally the evaluation.
 In the fourth chapter, promising industrial sectors are selected for each coun try and the possibility of cooperation with Korea is evaluated. The selection of promising industrial sectors was made based on policy demands of the country, Korean government’s interest, private companies’ interests, and the result of president Park’s tour to Latin American countries in April. For Chile, “Sart-up Chile Program” is selected as a useful tool for sharing each countries’ experience on SME’s start-up policy and cooperation in innovation sector. For Colombia, automobile/automobile parts, software and IT service, cosmetics/hygienic goods are suggested for the promising sectors as the Colombian government is trying to promote these industries. The selected industries of Peru’s are textile and costumes made of Alpaca, and processing of marine products.
 In chapter five, policy suggestions for enhancing industrial cooperation with these three Latin American countries are made. In order for this, current state of industrial cooperation between two regions is examined and their difficulties are addressed. Based on this survey, basic directions for the enhancement of industrial cooperation were suggested in six points: 1) more share of Korea’s experience of industrialization 2) reciprocal and balanced cooperation 3) triangular cooperation 4) the substantial cooperation through the cooperation choice and concentration strategy 5) customized cooperation strategy 6) proper counter action towards the drastic change of trade environment of these three countries. 
 For the last, four strategies for the industrial cooperation promotion with Chile, Colombia, and Peru were suggested as follows: 1) construction of trade infrastructure, 2) establishment of platform for the SME’s cooperation between the two regions, 3) support for the GVC participation of the three countries, 4) Korea-Latin America Innovation Summit. For more details of the support of GVC participation of the three countries, this study suggests 1) joint advancement to the third market (such as China) through a strategic alliance between Korea and Latin America, 2) encourage the advancement in the sectors of higher potential of GVC. 

 

Despite the formal launch of ASEAN Economic Community (AEC) in December 2015, it is debatable whether the Community will work well. Instead, it is more appropriate to view the launch of the AEC as an opportunity to align the efforts in integrating the ASEAN and to identify its strengths and weaknesses. Therefore, the impact of the AEC on regional trade and investment is likely to be minimal or even not visible at all in the early stage immediately following the launch. However, the Nay Pyi Taw Declaration on the ASEAN Community's Post-2015 Vision in 2014 is a display of the ASEAN's willingness to advance the AEC as a long-term vision. When standardized institutions and policies are implemented in the member states, the AEC will be able to successfully integrate the ASEAN economy.
This study begins with an overview of the progress in ASEAN economic integration and responses from surrounding nations. At its establishment in 1967, the motivation for ASEAN was mainly political, not economic. It was only in the late 1970s when the ASEAN started to express interest in economic integration and cooperation. In 1992, economic integration within the ASEAN fully emerged as a topic due to the ratification of ASEAN Free Trade Agreement. Unprecedented growth of Chinese and Indian economy had pulled foreign investors away from ASEAN. Thus, a strong sense of economic integration and cooperation to foster investment conditions in the region had emerged. The ASEAN also pursued synergy by connecting their electronics and automotive industrial network with the East Asian production network.
In other words, the urge for AEC, that is, economic integration in the ASEAN, emerged voluntarily to maintain competitiveness in the global market and to secure regional order in the division of labor. The Community also implies the willingness to participate in the global value chain and to advance into the global economy while maintaining ASEAN Centrality. Thus, the Community is significant as an open economic community.
Major economies in the Pacific region, namely the United States, China and Japan have not expressed official response to the launch of the AEC. The abovementioned countries consider the matter merely as an extension of their current policy towards the ASEAN. Guided by their Asia pivot policy, the United States has expressed no objection. This is mainly because the U.S. seeks to restrain the rise of China with the new Economic Community. In addition, Japan has traditionally maintained strong relationship with countries in the Southeast Asia region, and many Japan-based multinational companies possess production facilities and sufficient supply chain in the region. Such activities suggest that Japan will become the largest beneficiary of the AEC. Finally, China seeks to connect the ASEAN region in their One Belt One Road initiative. China views the possibility in the ASEAN as their off-shore 'Silk Road' and will pursue mutual benefit.
 As for Korea, it will approach the launch of the AEC in a comprehensive way that encompasses political, social and cultural aspects. Considering the strong ties between Korea and ASEAN in terms of trade and investment, the launch of AEC has to be observed more from an economic perspective than other perspectives. In the second chapter, we conduct in-depth survey to review the awareness of Korean businesses regarding the establishment of the AEC and to see if the response to the launch of the AEC has been prepared. Survey questionnaires were distributed to both companies based in Korea as well as those based in the ASEAN region.
 The results showed low level of awareness regarding the launch of the AEC. Companies also struggled in obtaining information regarding the Community. Information disparity existed between large and medium-sized companies. Nonetheless, despite the low level of awareness, responses showed high expectation for the AEC in terms of improving business. Regardless, roughly 5% of the respondents had a prepared strategy or plan regarding the AEC, 41% answered that they are in the process of preparing for the AEC, and the remaining 55% of Korean companies did not recognize the need for a strategy at all.
 In sum, we conclude that the lack of strategies or plans is a result of an absence of understanding on the AEC. Disseminating information regarding the AEC and encouraging companies to prepare a plan is highly desirable; so that the companies are able to benefit from the launch of the AEC.
In the third chapter, the study categorizes the progress of the establishment of the AEC into three stages. The first stage begins in 1993 when the member states began to recognize the need for economic integration. The second stage is when initiatives took place between 2002 and 2007.
In the third stage, detailed efforts were made regarding the integration of the ASEAN economy. This study reviews the features of and transitions involved in that integration process. Despite some fluctuations, the share of regional trade displayed a constant increase since the 1990s. However, the figures of intra-ASEAN trade became stagnant in the third stage due to the significant rise in trade with major countries out of the region namely, the U.S., Japan, China and Korea since ASEAN+1 FTA. Foreign direct investment soared in the third stage (2007-2015) mainly due to the ‘ASEAN+1 FTA’ than regional integration. The study also finds that there were insignificant changes in the trade structure of intra-ASEAN trade. The trade pattern also showed heavy focus on certain type of goods. The change of export items within the ASEAN is due to the dispersion of production network within the region, which is significantly related to the influx of inward FDI. The FDI had increased except during the economic crisis in 1998 and global financial crisis in 2008. Direct investments from major economies have consistently increased during the second and third stage of economic integration, except for global financial crisis.
Japanese multinational companies pursue efficiency by establishing production networks between ASEAN member countries, through minimization of risk by considering country specific characteristics. With the AEC in consideration, a large number of Japanese firms have newly invested or expanded their investment to ASEAN during 2012 and 2013.
Therefore, it is probable that Japan will benefit the most when the ASEAN economy is integrated. China's investment to ASEAN was due, in fact, to both the changes of the government's industrial policy to lower the share of the labor intensive industry and the private firms' interest to avoiding high labor costs; and not to a response to the ASEAN economic integration.
The increase in direct investment from Korea, China and Japan is reinforcing the production network within the ASEAN region. Vertical trade which deals with raw materials and intermediary goods is relatively small in intra-ASEAN trade compared to trade with major investors such as Japan, the U.S. and Korea. With that fact considered, trade within the region will increase only when major foreign investors strengthen the regional production network. In other words, because ASEAN participation in a global value chain is more likely to occur with foreign direct investment, regional trade will only increase when the investors adjust their investment within the ASEAN region.
Through a comprehensive observation, the study confirms that there is very little shift in intra-ASEAN trade and investment structure without the flow of foreign direct investment. Under such circumstances, it is doubtful that there will be changes to the structure with the launch of an economic community. The following chapter (chapter 4) experiments with the change in regional trade, investment and industrial structure assuming the launch of AEC through dynamic CGE models. According to the findings, GDP change in each ASEAN country was nominal. Little change was observed in net export composition and intermediary material input by each industry. Considering the previous findings that there was little change in intra-ASEAN trade structure throughout the history of ASEAN integration, the results were predictable. Therefore, it is difficult to conclude that economic integration will lead to trade and investment adjustment within the ASEAN region.
Also, as the member countries’ autonomy remains intact within the AEC, extensive amount of time is required with the coordination of different rules and institutions. However, as economic integration progresses, the rules and institutions will sooner or later be adjusted in a coordinated manner within the Community since investment decisions of multinational firms are more likely to depend on the changes of industrial policy. That is, each ASEAN member country will transform industrial policy in order to induce foreign company investments. Chapter Five seeks to compare different industrial policy as well as economic development strategy of ASEAN members.
Considering the study results, the final chapter provides policy implications for Korea regarding the launch of AEC. First of all, the AEC must be observed and analyzed in the context of international politics and economy, for the U.S.-China-Japan triangular relations can affect the progress of the AEC integration. Therefore, the politics and economic relations among major countries including the U.S., China and Japan should be carefully observed and measures should be arranged accordingly. Second, there is a strong need to monitor the shifting industrial policy and institutions of individual ASEAN countries during the economic integration. In the process of regional consolidation, such change in policy and institutions is likely to impose both challenges and opportunities to Korean firms. Third, it is worth considering the development of a regional production network between local firms and Korean firms based in the region. Due to the high dependency of regional trade and investment structure on multinational firms' investment decisions, local firms were indeed neglected from the scene. If there is a way to consider a measure to strengthen the relationship between local companies and Korean companies in the region with special attention paid to creating shared value, it may assist Korean companies expanding their footing in the region.
Finally, the AEC response to Trans-Pacific Partnership and the One Belt One Road initiative should be observed very closely. Since the TPP is heavily influenced by the U.S., there exists a potential destruction of the ASEAN Economic Community when the TPP and OBOR clash with one another. In addition, we have to consider the fact that foreign investor will determine the formation of production network within the ASEAN region. If the investors determine that the establishment of new supply chains of electronic components should take place in TPP member countries such as Vietnam and Malaysia, it is highly likely that Cambodia and Laos would be isolated from this kind of industry.  

 

The Fed's exit from the unconventional monetary policy it has implemented since 2008, is imminent. To combat the Great Recession, the Fed lowered its policy rate to 0~0.25% range and through Large Scale Asset Purchase(LSAP), acquired substantial amount of long-term government bonds and Mortgage Backed Securities(MBS). As U.S. economy is showing signs of recovery from the deepest recession since the Great Depression, these unprecedented policy measures are expected to be normalized soon. The normalization process will begin with raising the federal funds rate that has been kept near the zero lower bound for more than 5 years. Equally important component of the exit process is the normalization of the balance sheet.
Not only the scale of the asset purchase was huge but also asset classes that the Fed bought through LSAP were not conventional. Traditionally the Fed, through the Open Market Operations, has been buying and selling short-term government bonds but LSAP bought mostly long-term government bonds and MBS. The normalization process will involve rate-raising and scaling down the balance sheet as well as returning SOMA portfolio back to the pre-crisis statue.
This paper explores the exit strategy that the Fed is planning in order to normalize the monetary policy and possible problems that it would face in implementing these strategies. It also estimates the effects of raising the federal funds rate and normalizing the balance sheet(by selling assets), using econometric tools. Without understanding of these tools and procedures in details any further analysis on the effects of U.S. monetary policy normalization on Korean economy would be superficial. In Chapter 2, we go back in time and investigate the monetary policy conducted during the Great Depression. By examining the monetary policy in the past one can draw lessons from history. From 1932 to 1936 the Fed conducted the monetary policy similar to the Quantitative Easing. But the Fed prematurely ended this as worries about inflation resurfaced. This premature withdrawal resulted in the Recession of 1937-1938. Many blame this as the main contributing factor that prolonged the Great Depression.
This is why the current authority is so hesitant and cautious about normalizing the unconventional monetary policy even as the economy is showing clear signs of recovery. In Chapter 3, we analyzed the exit tools for normalizing the monetary policy and their possible impacts. First in regards to raising the rate, interest paid on excess reserves(IOER) is likely to be used. The Fed has been paying IOER since 2008 and this tool helped keep the excess reserves that banks possess within the reserve system. With the low interest rate and the economy still in fragile state, banks did not have better and safer outside investment opportunities than keeping their cash in the Fed's vault and receiving interest income. As a result, the excess reserve increased exponentially to a level that has never been before. As the Fed is planning the exit, it is working as a big inflationary pressure. This is because as the Fed raises its policy rate, the economy's overall interest rates would increase as well and that means better outside investment opportunities for banks. If the spread between IOER and the federal funds rate widens it would be possible that substantial amount of the excess reserves are withdrawn from the reserve system and create an inflationary pressure. A solution to prevent this scenario is to raise IOER in line with the federal funds rate so that the spread between them is maintained. This, actually is what the Fed's Forward Guidance is suggesting to do.
Meanwhile, the normalization of the Fed's balance sheet is another aspect of the exit. The size of the balance sheet increased more than five-folds due to LSAP and the composition of the asset changed as well. The balance sheet normalization has two components; first reducing the size, and second, eliminating the assets - long-term government bonds and MBS - that the Fed unconventionally possesses. The Fed suggests that this process will take place very gradually. One possibility is to wait until they mature and let them roll-off from the balance sheet. Another possibility is to sell them before they mature. If the Fed chooses to wait then the balance sheet normalization process will be very slow that the size and the composition of the balance sheet won't be normalized until 2020.
The fact that unconventional monetary policy is almost unprecedented puts us in a situation where there is not enough data or theory to infer the impacts of the unwinding. But we can at least narrow our analysis down to a few seemingly important variables and focus on them. We think that some of these variables are long-term interest rate and the yield curve because the main purpose of the QE was to influence them and it is reasonable to focus our interests on these variables when unwinding of the QE takes place.
First when the Fed begins to raise the federal funds rate, it is possible that something similar to 2013 Taper Tantrum can happen where U.S. long-term rates rose substantially and created a huge instability in the global financial market. This actually is the part where most worries arise regarding the rate-increase. Meanwhile, the increase in the long-term rate can also negatively affect the domestic economy. It might depress the aggregate demand, curbing the ongoing recovery of U.S. economy.
On the other hand, something exactly opposite can happen. The long-term rate would not react to the policy rate increase and the spread between long and short rate narrows. In the extreme case the yield curve can be inverted. This is exactly what happened in 2005 when the Fed increased its policy rate. This can also create problems because it will intensify investors' risk-taking and reaching for yield behavior.
In Chapter 4, we estimated the VAR model to forecast the impacts of the rate-rise and the balance sheet normalization(asset sales). In response to the 0.5 percent point increase in the short-term interest rate, the amount of excess reserves declined. This result suggests that without the IOER, substantial amount of the excess reserves would be withdrawn from the reserve system, posing a possible threat to inflation. It also seems that, as expected, capital inflows from the rest of the world to the U.S. is inevitable. Somewhat surprisingly, the response of the long-term interest rate is minimal. According to this picture, we would have to worry about the possible effects arising from the reduced spread between long and short-term rate, namely, reaching for yield behavior and the instability in financial market cause by this. The increase in the Dow Jones Index can be interpreted to be caused by the capital inflow and the reaching for yield behavior.
The results when we applied the asset-sales shock(selling 5% of the long-term bond that the Fed currently possesses), suggest that the balance sheet normalization by asset sales would intensify the effects from the rate-rise.
The rest of the world, especially the emerging countries, is keen on knowing the impacts of the normalization. Their interests focus mainly on how much they would be affected by the capital outflow. Korea is not an exception. Taper Tantrum incidence tells us that at least within a short time span there would be substantial capital outflow from Korea. But Korea currently has significant amount of foreign reserves and well-designed macro-prudential policies. This suggests that the negative impacts that Korea would have from the normalization of U.S. monetary policy would be limited. 

 

2015 marks t he 1 3th year s ince t he i mp lementation of t he ‘ July 1 st Economic Management Improvement Measure (2002~2003)’. Although the ‘July 1st Measure’ was the most radical reform package in the history of North Korea, it has been estimated that the North Korean regime sought to abolish the Measure during the reactionary anti-reform period (2006~2009). However, the North Korean regime revived the reform package beginning in the second half of 2010 following the establishment of the Kim Jong-un regime.
To understand the exact nature of the ‘New Measure for Improving Economic Management’ and predict its future direction, it is necessary to grasp the correlation between the strategic f ields (defense industry and core heavy industry) driven by the government plan and non-strategic fields (light industry and local industry) driven by the market. This research considers ‘Military-First Economic Policy’ as the determinant of this correlation. It reassesses the North Korea’s economic reforms of the 2000s by analyzing its achievements and limitations, and provides forecasts on the direction of economic policy of the Kim Jong-un regime.
The July 1st Measure represents a core policy for the support of the ‘Military-First Economic Policy’ which is Kim Jong-il’s long-term strategy for rebuilding the economy(‘Building the Strong and Prosperous State’). In other words, to concentrate insufficient resources to the strategic field, North Korea could not help increasing autonomy of non-strategic fields not to commit additional resources there; also, the Measure was implemented to move surpluses occurring in the non-strategic field to the strategic field. In this sense, the July 1st Measure can be characterized as two-tracking of the economy involving reinforcement of planning mechanism in strategic fields and marketization in non-strategic fields.
The July 1st Measure and successive radical reform experiments of the Park Bong-joo cabinet (2004~2005) intensified the marketization of the North Korean economy by combining institutionalization of the market mechanism with autochthonic marketization from the ‘grassroots.’ However, this led to a problem where, at one point, the marketization exceeded the scope initially intended by regime. Especially, the capital of the so-called donju(capitalist) was spread throughout the state enterprises, leading to widespread, de-facto privatization. This prompted the North Korean regime to constrain implementation of the July 1st Measure during 2006~2009. Also, Currency Reform was promoted at the peak of this anti-reform period, in late 2009. However, it was actually not an attempt at abolition of the market. Instead, it should be regarded as an attempt for restoring a situation where the market would be more manageable. The basic framework of the July 1st Measure including reduction of the planning mechanism and expansion of market mechanism, especially in company management, remained intact. Coexistence of planning and the market is an inherent demand of the Military-First Economic Policy. In this sense, the move toward preparations for ‘New Measures for Improving Economic Management’ immediately following the failure of Currency Reform was the logical conclusion.
Yet, the outcome of the July 1st Measure was decidedly negative, as it only led to side effects. First, there was almost no improvement of productivity in both strategic and non-strategic fields save for the defense industry; mainly due to the excessive exploitation of the non-strategic field by the strategic field. More specifically, surpluses from the former were siphoned off to the defense industry. In addition, the excessive supplying of currency prompted an inflation tax which meant a penalty for those held on to their cash during high inflation. As a result, a vicious circle of ‘rapid increase of money supply →inflation →rise of exchange rate →inflation’ became entrenched.
In this respect, one can infer that the stabilization of market price and exchange rate after 2/4Q of 2013 is related to the change of North Korea’s currency policy. It appears that North Korea has been reluctant to artificially increase currency supply since the failure of its Currency Reform. Moreover, the dollarization seems to contribute to the stability of exchange rate and price level ironically. However, as dollarization also means the weakening of government authority over the economy, it is more likely to pose a threat for the stability of the regime in the long run.
Kim Jong-un regime has promoted economic reform package (‘New Measures’) from the beginning of 2012. The measures include downscaling businesses operated by the party and the military, and transferring them to the cabinet; thus strengthening the cabinet’s authority for economic control. It also bolstered the autonomy of factories, company and collective farms (plan mechanism is downscaled and market mechanism expanded), and newly established a number of special economic zones/local development zones. In particular, the increased autonomy of factories, comp anies, a nd collective f arms c an b e regarded a s a revival of Park Bong-joo’s radical experiment from 2004 to 2005. Some suggest that the new reform measures are similar to past reform and opening up policies of China in early 1980s’.
At present, the main problem of the reform lay in financing. In order to avoid another inflation, there is no other way but earnest financial reform and North Korean authorities seemed to have understood the fact very well. The regime is trying to centralize the accumulated capital by developing financial instruments and encouraging credit cards. However, these measures have proven inadequate in resolving the people’s distrust of the financial system with those limited attempts.
For successful economic reform, North Korea has no alternative but to implement full-scale financial reform including establishment of a commercial bank. However, financial reform cannot be promoted simply by establishing commercial banks and introducing interest rates. Although the speed of reform could be controlled, it would mean abolition of current dual price system corresponding to market supply-demand. In this regard, the current system of cashless distribution also needs to be abolished. In other words, the regime has to implement fundamental reforms in the financial sector and of the price system to the point of actually decentralizing the planned economy. As the dual track strategy is an inherent condition of the Military-First Economy, the future of new reform policies depend on how far the Kim Jong-un regime can move beyond the strictures of a military-first economy.
At this point, it is worth paying attention to the Policy of Parallel Development of Economic Development and Nuclear Arming (hereafter Byungjin Line) that the Kim Jong-un regime adopted on April of 2013. North Korean authorities assert that this policy is designed to concentrated resources to the civil economic sector freezing defense budget. In this sense, Byungjin Line has possibility of either relaxing or abolishing the Military-First Economic Policy.
The relaxation or abolition of the Military-First Economic Policy, however, has an important precondition: North Korea’s international security environment must be improved. Because of unstable external security situation, North Korea’s nuclear ‘deterrent’ actually has a chance to spark an arms race, which would demand even more investment in national defense. So, the Byungjin Line does not necessarily mean North Korea would promote nuclear armament unilaterally, but likely is an ‘open-ended policy’ with the possibility of freezing nuclear development if the international community accepts their requirements (to accept North Korea as a nuclear power; official diplomatic relations and peace treaty between North Korea and the U.S.)
The problem is that the international community demands that the nuclear issue should be resolved first before international relations as it relates to North Korea can be improved. As for North Korean regime, they insist on improved relations before resolution of the nuclear issue. Therefore, North Korea’s developmental strategy and concomitant reform policy seem to depend on how this chicken-and-egg dilemma can be solved. 

 

 At the United Nations Sustainable Development Summit 2015, the Member States unanimously adopted seventeen Sustainable Development Goals. Among them, SDG 7 calls for substantial increase of renewable energy use. In addition, under the UN Framework Convention for Climate Change, individual countries - developed and developing alike ？ will work to further encourage and disseminate the use of renewable energy in order to meet their commitment on greenhouse gas reduction. Especially for developing countries, renewable energy development will become a key for sustainable growth for they now face a dual challenge of pursuing economic development while reducing greenhouse gas emission.
 Since participation from various stakeholder is imperative for sustained yet sizable investment, Korea must seek a proactive strategy in pursuing renewable energy projects in developing countries. In doing so, collaborating with various partners, especially the private sector, is extremely important. This study focuses on mobilizing private sector resource for renewable energy projects in Korea’s priority partner countries. While a number of Korea’s priority partners possess considerable potential in renewable energy development, the lack of institutions, market and awareness have hindered development. The study highlights the fact that renewable energy investment is shifting towards the global South and that the main cause of such transition is the favorable regulatory and institutional environment along with significant demand.
In several emerging economies with the highest amount of renewable investment - namely, China, India, South Africa and Brazil - such transition was coupled with governments’ support for technology R&D and subsidies. On the other hand, Vietnam and Indonesia are in the process of actively developing a more conducive environment. That is, laws and regulations, market readiness and awareness regarding renewable energy are being developed. Therefore, we expect rapid progress in relevant investment, development and deployment in these countries in terms of renewable energy in the near future.
 In the following chapters, the study reviews some examples of international support for private sector participation in renewables in the developing countries and makes comparisons with Korea’s experience in supporting renewables. Multilateral and bilateral international development organizations are currently seeking various measures to stimulate investment in renewable energy. One example of the support is that for early stage development of a project. By providing public resource to investigate laws and regulations, market readiness, and other factors related to economic viability of a certain country or region in the very early stage of development, a project developer spends less money on securing a feasible project with which they can appeal to private investors and reach financial closure. The study surveyed the UNEP Seed Capital Assistance Facility and the Scaling-up Renewable Energy Program under the Clean Investment Funds as successful prototypes.
Another line of support can be provided at stage of financial closure, by presenting guarantees or subsidies on renewable energy projects. The study conducts a review of Germany’s Global Energy Transfer Feed-in Tariff (GET FiT) as well as the Accelerating Renewable Energy Investments in Central America and Panama (ARECA) as successful cases of guarantee and subsidies support.
According to our review, all of the examples combined various support measures, such as grants and concessional loans, rather than relying on a same kind of source. The examples also included a wide array of support tools from technical assistance, financial consultation, and capacity building.
 On the other hand, Korea’s experience in official development assistance for renewable energy remains at a basic level, support being given in a rather random and sporadic manner. Therefore, there has not been an overarching program or project aimed at mobilizing private participation. Upon a formal request from the recipient country, the Economic Development Cooperation Fund (EDCF) supports power generation project which mainly comprises of facility construction with some capacity building depending on the project. Korea Energy Agency (KEA) also provides financial support to private energy companies for feasibility studies in developing countries. However, in many cases, projects fail to achieve financial closure despite financial viability due to the lack of financial structure and track-record of companies, most of which are small-to-medium-sized. The lack of mid-to-long-term expectations of financial intermediaries and investors also create barriers for financial closure of projects.
 Reflecting on the experiences of international development organizations and Korean support in renewable energy, this study presents a set of suggestions for renewables investment catalyzed for Korea’s priority partner countries. The first is to enhance overseas profiles of energy companies. Such profiles will include companies’ track-record, financial soundness, as well as utilization of human capital. One concrete example in terms of developing overseas project profile will be to provide financial incentive for companies that partners with SMEs when applying for a project funded by the government, that is, EDCF and KEA. On the other hand, energy companies can take advantage of the networking opportunity provided by public organizations such as the KEA. KEA hosts a regular networking program where the Agency invites government officials from developing countries to participate in networking sessions with Korean energy company representatives.
 Secondly, establishing a consultation facility specializing in overseas renewable energy financing - or infrastructure, in general - can be highly beneficial. Deploying its financial expertise, the facility can run programs to foster financial know-how for energy companies. The facility can also provide consultation on structuring finance models for renewable energy projects, and on reaching financial closure by blending various financial tools and funds. The facility can also host general information sessions and tailored advising events to inform companies about ways to access international funds. In doing so, the facility can utilize accumulated knowledge and network from the EDCF, KOTRA, KITA, Small & Medium Business Corporation, and so on. Consultation on accessing international funds and creating advanced finance structure, as well as fostering financial capability of pioneer energy companies, can bolster successful financial closure for companies and leverage private resource for renewable energy projects in developing countries.
 The third suggestion for catalyzing investment in renewable projects is to create a favorable environment by concentrating official development assistance in related infrastructure and institution. Based on the survey results in Chapter Two, additional study can be conducted regarding the elements for successful resource mobilization. Korea’s development assistance and cooperation can be guided towards a given direction, based on the results. For instance, there can be additional support and attention given to specific areas such as institutional development, power grid connection, and/or capacity development for government officials. With increased capability and financial expertise, the private sector will be able to participate more actively in renewable projects in the global South. It is needless to mention that the possibility of resource mobilization will increase even more with the enabling environment and network in place. 

Contents

 

Contributors

 

I. Introduction

 

1. The current status of bilateral trade between China and Korea
2. Degree of integration, trade combined index, and trade structure between China and Korea
3. Problems of the bilateral trade between China and Korea
4. Overview of China’s international capital flow
5. Overview of Korea’s international capital flow

 

II. Empirical Study of China and Korea’s International Capital Flow and Impacts of Federal Funds’ Rate

 

1. Background and overview
2. Decomposition of equity flow return
3. Data and description
4. Benchmark model
5. Extended model

 

III. Effects of USD Appreciation on Bilateral Trade between China and Korea

 

IV. Effects of the U.S. Monetary Policy on China’s Capital Market Stability

 

V. Policy Implications and Concluding Remarks

 

References

 

Executive Summary 

This paper first reviews the trade structure between China and the Republic of Korea (hereafter referred as Korea) and the two countries' international capital flow. Then it discusses the effect of the Federal Reserve rate on UIP in both China and Korea, which turns out to be uninfluential through our analysis. Then we use VAR model and the extended model, the multivariate GARCH-DCC model to examine interaction between different factors.
The result shows that positive-legged equity return would induce outflow and flow positively affects equity return. Sharp offshore RMB devaluation would cause domestic market plummets and higher legged spread means higher carry trade return. Besides, in the respect of capital control effects, offshore RMB devaluation would cause spread to be wider because of inelasticity of the onshore RMB rate. Carry trade return has positive and significant intercept.
Finally, we argue that although the appreciation of USD has little impact on bilateral trade between China and Korea in short time, in long run, currency risk exists and it may cause significant fluctuations in the trade. We suggest that China and Korea should gradually use local currency to price their trade. 

 

At the 2015 Paris Climate Conference (COP21), the Parties to the UN Framework for Convention on Climate Change (UNFCCC) will reach an agreement on a new global climate regime. The agreement, which will come into effect in 2020, is the first agreement with a legally binding character since the Kyoto Protocol. For this reason, the Paris Conference will provide additional momentum for global climate change negotiations. The essence of the new climate regime is that all countries, developed and developing alike, are responsible for reducing greenhouse gas emissions to mitigate climate change. As the first step,
the Parties have submitted voluntary reduction targets to the UNFCCC, formally called the “Intended Nationally Determined Contribution (INDC).” Climate finance is deemed as the key for the successful launch of the new climate regime. As mentioned above, while participation from both developed and developing country Parties is absolutely essential, developing country Parties demand, as preconditions, that developed country Parties provide substantial financial support for climate action. In fact, the global community has agreed on mobilizing 100 billion dollars in climate finance by year 2020. However, actually meeting the goal seems uncertain at the moment.
Korea is now facing a new challenge: to minimize the greenhouse gas reduction burden imposed on the private sector, and to meet global expectations as a member of the G20. Furthermore, Korea as a member of the OECD Development Assistance Committee (DAC) is expected to provide substantial support to developing countries in order for them to tackle climate change. Also, as the host country of the Green Climate Fund (GCF) Secretariat, Korea shall seek mid- and long-term strategy that will contribute to the progress of the Fund.
In this regard, this study seeks to provide policy direction for Korea in resolving global climate challenge, in consideration of our role as the bridge between countries of the South and the North. The results of the study can be utilized in development of a logical framework for Korea's climate change negotiation strategy. The study first analyzes the level of emission reduction and financial contribution that is deemed appropriate for Korea, and compares them with other countries. To derive a level of GHG reduction and climate finance burden-sharing for major countries from years 2020 to 2050, the study utilized three indices - historical responsibility (aggregate GHG emission), equality (GHG emission per capita), and capability (GDP per capita).
By differentiating the weight on each indices, the study sought to deduce levels of GHG reduction by countries and compared them to the level stated in their INDC. Reckoning the possibility of increased donors for climate finance, the analysis considered potential donors in addition to the countries included in Annex II of the Convention. The analysis revealed that developed countries bear the most GHG reduction burden when historical responsibility is highlighted, whereas developing countries are obligated to most GHG reduction when participation from all Parties is requested.
Korea's quota for GHG reduction is estimated to be between 1.0~1.6% of the total global reduction. By year 2030, it implies that Korea should reduce at least 330 million to 410 million tons of greenhouse gas, which is a figure larger than the level suggested in its INDC (310 million tons). Furthermore, Korea's burden for climate finance is estimated to range between 1.6 to 4.5 percent when all the OECD DAC members are assumed as donors.
The study also provides an analysis of the traits and determinants in climate support of a number of donors. The regression results revealed that, in the case of Japan and Germany - the two largest donors in climate change, a positive link between climate change ODA and bilateral economic relationship exists. On the other hand, results of the analysis on France, Norway and Korea did not uncover significant contributing factors besides the recipient country's population.
Moreover, the estimation model showed low explanation power. The study suggests the followings as the causes of unsuccessful identification of climate support factors. First of all, while donors have channeled their financial support on the basis of a policy, it is unclear whether the actual disbursement or implementation followed certain standards/criteria. Secondly, there are limits to the DAC's climate change marker data which was used as a dependent variable. Donors submit their own marker data after screening individual projects according to the rough guideline provided by the DAC. Therefore, we speculate that there are limits to accurately providing what factors influence an individual donor's climate change support with such limited data available.
The study presents the following policy implications. Firstly, a more ambitious effort on GHG reduction is required. Korea's INDC states that the country will reduce 37% of GHG compared to BAU by 2030. Nonetheless, this figure is not sufficient when compared to the study results as previously mentioned. Korea's INDC also indicates that a third of the emission reduction will come from the international carbon market. Regardless, a clear agreement on the new market mechanism in the post-2020 climate regime has yet to be finalized.
Therefore, such a statement is actually accompanied by substantial uncertainty. Developing a domestic policy framework for GHG reduction is absolutely urgent for Korea. Secondly, Korea must be prepared to join as a donor of climate finance. It is difficult to refute that Korea's stance has shifted between developed and developing country Parties. Under the new climate regime, more countries will be obligated to provide support. Since Korea is among the potential donors, an adequate and timely plan regarding financial support is required. As the host country of the Green Climate Fund Secretariat and a member of the G20, Korea needs to develop a strategy/plan which will fulfill international expectations. For instance, Korea may suggest that while meeting the current goal of mobilizing 100 billion dollars by 2020 is an obligation that must be fulfilled by developed countries, developed as well as potential donors should equally bear the burden for any additional finance required.
Thirdly, Korea shall seek participation in the process of improving climate finance monitoring. Climate finance monitoring is an integral procedure that is necessary for verifying the effectiveness and implementation status of globally promised finance targets. Presently, there is no globally agreed measure other than the climate policy markers announced by the DAC. Individual organizations have been reporting different figures for public finance in leveraging private finance because of the lack of a clear terminology. Korea has suggested the use of the term "Green ODA." However, it has yet to receive sufficient attention from the international community. OECD is currently working on improving measures for tracking climate finance. It is imperative that Korean experts take a meaningful part in the various efforts and contribute to the process.
Lastly, a strategy is required on how Korea would mobilize climate finance. Korea is entirely dependent on the ODA budget for its support of developing countries. However, current global discussions repeatedly mention that ODA should mainly focus on poverty reduction while the support on climate change should be facilitated with private finance elicited through various public measures. Namely, Germany and France are major actors who pursue mobilization of additional finance by utilizing various public financial tools such as guarantees, equity investment, mezzanine financing and so on, aside from concessional loans. Korea should carefully analyze such examples and advance its own framework for scaled-up climate finance which suits its purposes.
That is, ODA funds shall be directed to awareness and capacity development regarding climate change. On the other hand, the government should be able to provide financing tools to the private sector so that private participants would be able to reduce investment risk and improve financial viability in massive projects, for instance, infrastructure development in developing countries. A precondition for the above-mentioned suggestion is a re-adjusted institutional arrangement enabling the use of financial tools for the private sector. 

 

This paper examines the short and long-term causes of current account deficit in India. This paper also investigates key determinants of current account for India.
The findings from impulse response functions show that oil price has effect on current account only and the effects of other factors, such as exchange rate, growth, and fiscal balance, are minimal. An analysis of forecasting error variance decomposition suggests that the problem of current account deficit in India be systemic rather than short-term.
The results from an empirical investigation of determinants of current account provide that current account in India is negatively correlated with real GDP, openness and net foreign assets. In accordance with the analysis of short-term effect, no relationship between fiscal balance and current account is detected.
In a long-term perspective, long lasting current account deficit in India looks structural phenomenon. It is an outcome of greater domestic demand than production. Greater amount of outflow of foreign investment than inflow has also contributed to current account deficit. Moreover, structural change in population toward higher proportion of working age population is one of the key factors to give rise to current account deficit in this country and it is inevitable for a fairly long time.

 

 

Along with the rapid process of trade liberalization, developed and developing countries began to put forth a multilateral effort into promoting foreign direct investment (FDI) for the purpose of capital inflows, technology transfer, and job creation. By implementing FDI promotion policies such as providing investment incentives and lowering investment barriers, global FDI inflows have increased constantly over time. In case of Korea, the size of FDI inflows and number of foreign invested companies dramatically increased after the government implemented foreign investment promotion policy to overcome the Asian financial crisis in 1998 and reached its highest peak in 2014. While FDI inflows became an essential part of domestic economy, they are still considered to be marginal when compared to those of developed and also developing countries. Taking into account of the importance of FDI inflows in Korean economy yet marginal FDI performance with respect to its potential, therefore, it is important to acknowledge the determinants that promote and hinder the FDI in Korea. This report analyzes and evaluates the determinants of FDI by investigating prior foreign and domestic trade studies and by performing the empirical analysis. In particular, we estimate for the determinants of FDI by dividing the analysis based on FDI patterns (Greenfield FDI and M&A FDI). In particular, based on the results from analyzing the changes in investment barrier across domestic industries over time, we derive FDI openness index for each industry sector and estimate its effects on different patterns of FDI inflows into domestic industries by using Korean industry-level FDI data.
Investigating for global and domestic FDI trends from the statistical and institutional perspective indicates that while FDI inflows were restricted and strictly regulated at the individual country-level before 1980s, countries began to promote FDI competitively as positive perception on FDI expanded across the globe along with the Uruguay Round Agreement and WTO establishment. Recently, it is observed that countries are amending regulation systems to promote FDI strategically by putting more weights on its quality than quantity. Consistent with institutional trends, the size of global FDI inflows began to increase after 1980s, with having its rapid growth between late 1990s and early 2000s, and had a stable growth after late 2000s. The most distinguishable feature of global FDI trend is the emergence of developing host countries and an increase of M&A FDI share. In particular, FDI inflows into developing countries have constantly increased over time and accounted for 55% of global FDI inflows in 2014, which surpasses that of developed countries. While M&A FDI inflows, on the other hand, is smaller than greenfield FDI in terms of its size and share, it constantly increased over time and recorded an increase of 28% in 2014 compared with the previous year.
Consistent with global FDI trends, Korea was reluctant to implement FDI promotion policies before 1980 and instead, relied heavily on a foreign loan to develop its economy. After the Asian financial crisis in late 1990s, however, the government began to remove all of M&A investment barriers to recover the economy in short time. Recently, the government is implementing FDI promotion policies strategically and selectively that can coincide with its goal of advancing certain domestic industries. In terms of FDI size, Korea experienced a rapid growth in M&A FDI after 1997 and it showed a constant increase over time. Investigating Korean FDI inflows by taking into account of source countries and FDI patterns, we find that while prior FDI inflows were concentrated in greenfield FDI form, mostly from industrialized countries such as European countries and United States, recent FDI inflows are concentrated in M&A form, mostly from Asian countries.
Examining the changes in investment barrier across domestic industry sectors, we find that most of manufacturing sectors were fully liberalized in 1990s and except for few sectors, all manufacturing sectors were liberalized after 2000. Service sectors, on the other hand, showed a lower level of investment liberalization relative to manufacturing sectors. In particular, sectors that include public services and transportation services showed the lowest level of investment liberalization. After analyzing the changes in investment barriers, we computed for the FDI openness index for each industry sector by using the methodology from Hoekman (1995). Taking into account of prior results that examined the determinants of FDI, we performed an empirical analysis on the determinants of different patterns of FDI. In particular, we used country-level and Korean industry-level FDI data to estimate the determinants of greenfield FDI and M&A FDI. Examining the determinants of country-level FDI by decomposing the sample based on the income-level of host countries, the estimation results showed that GDP per capita has significant effects on greenfield FDI, while inflation rates, real exchange rates, and financial market development have significant effects on M&A FDI across developed countries. Across developing countries, on the other hand, GDP growth, inflation rates, and country risk indices had significant effects on greenfield FDI, while real exchange rates, financial market development, country risk indices, and number of investment treaties with other countries had significant effects on M&A FDI.
Examining the determinants of domestic industry-level FDI by dividing the sample on the basis of time periods, we found that greenfield FDI is likely to increase among industry sectors where firms can use high-skilled labor by bearing higher wages and where FDI openness is high during the earlier sample period, while it is likely to increase among industry sectors where FDI openness is small over the recent sample period. M&A FDI, on the other hand, is likely to be associated with R&D investment and FDI openness during the earlier sample period, while it is significantly affected by the number of labor-management dispute cases over the recent sample period. These results imply that while FDI openness previously had a large impact, investment environment is becoming more effective on promoting M&A FDI.
This report provides important policy implications on promoting FDI in Korea. First, the estimation results on FDI openness having a significant effect on both greenfield and M&A FDI imply that investment liberalization policy is effective on promoting FDI and that additional investment liberalization on service sectors that showed the smallest FDI openness would be more effective on promoting FDI in the future. However, it should be noted that Korean government have already adopted and made much improvement on legal systems to promote FDI.
To make more practical progress, therefore, we need to focus on improving business and investment environment, such as “regulation free zone” that is currently being considered for the promotion. Amending numbers of FDI promotion systems that are already being implemented in correspondence to policy objectives would also make practical progress on promoting FDI in the future. Second, the estimation results on country’s financial market development showing significant and positive effects on M&A FDI across developed countries where Korea is included imply that advanced financial market is essential to promote FDI in the future. In particular, implementing policies that can promote more financial companies and produce professional manpower can strengthen the competitiveness of financial systems and can lead to promote more M&A FDI in the future. Furthermore, high-skilled labor and numbers of labor-management dispute cases having significant impact on greenfield FDI indicate that the government should support training programs that can produce professional manpower who can fit into interests of foreign firms and need to put forth additional efforts on improving labor-management relations.