This report reviews discussions about cross-border data flows in international organizations and recent free trade agreements and conducts comparative analysis of data protection regulations among the United States, European Union, China and Korea. It also examines the relationship between cross-border data flows and domestic data protection regulations and quantifies the welfare impact of the EU GDPR and data localization on the global economy.
   In chapter 2, we review from 1998 to present the discussions on electronic commerce in the World Trade Organization (WTO) and examine several obligatory provisions provided at the TPP electronic commerce chapter and the USMCA digital trade chapter. We extend our review to several US FTAs having electronic chapter, for example, the US-Morocco FTA, the US-Chile FTA, the US-Australia FTA, the US-Dominica-Central America FTA, and the US-Korea FTA (KORUS FTA) and also recent Economic Partnership Agreements (EPA) including the Japan-Australia EPA, the Japan-Mongolia EPA, the EU-Japan EPA, the EU-Canada FTA, and the EU-Vietnam FTA. After review, we summarize the core contents of provisions at the electronic commerce chapters in those FTAs and EPAs.
   In chapter 3, we focus on domestic data protection regulations in the United States, the European Union, China, and Korea and compare those data protection regulations in a horizontal manner. We divide the types of restrictions on cross-border data transfer into three subtypes: direct restrictions on cross-border data flows, localization of data storage facility, cross-border data transfer upon consumer consent. We also attempt to qualitatively measure the degree of enforcement when foreign firms violate their trading partner’s domestic data protection regulation. After qualitative analysis, we conclude that Korea has relatively stronger domestic data protection regulations than the United States and the European Union, but relatively weaker than China.
   In chapter 4, we use the gravity model in order to examine the relationship between data protection regulation and cross-border data flows. For the purpose, we reconstruct data trade restrictiveness index provided by ECIPE and use VoIP data as a proxy for cross-border data flows. Our estimation suggests that data regulation has a negative effect on cross-border data flows. As in the usual analysis for goods trade, we find that cross-border data flows are positively correlated with trading partner’s gross domestic product and negatively correlated with physical distance. We also confirmed that economic intimacy or trade openness between two countries has a positive impact on cross-border data flows.
   In chapter 5, we set a quantitative trade model with data protection regulation in order to examine the impact of the EU GDPR and data localization on the global economy. The constructed model comprises many countries and industries with heterogeneous firms in a monopolistically competitive market. Given trading partner’s domestic data protection regulation and product demand, a firm sets an optimal price strategy to maximize its profits. In the system of equations showing changes in trading equilibrium due to changes in data protection regulation, changes in data protection regulation affect trading partner’s optimal behaviors, market entry and exit, export prices, industry-level spending and revenues, and ultimately national prices and consumptions. Using the model merged with the WIOD, we shows quantitatively that the EU GDPR and data localization have negative welfare effects on Korea. We also show that Korea can improve its welfare when it enhances its institutional quality by amending its data protection regulation.
   In chapter 6, this report identifies several data-related pending issues in the wake of recent changes in data protection regulations including the EU GDPR and data localization by China, Russia, India, etc. We seek for possible remedies and provide several policy recommendations in response to changes in trading partners’ domestic data protection regulation and also suggest further considerations in amending Korea’s data protection regulation. 

 

   The Korean government is pursuing a New Southern Policy to diversify its trading partners and reduce US-China risk. This study aims to provide policy implications for promoting cooperation in services sector between Korea and ASEAN in line with such New Southern Policy which is at the stage of establishing implementation strategies.
   Since Korean firms have continued to advance into the ASEAN market, the firms in the services sector such as finance, logistics, construction, distribution, and rental, etc., are also entering the market with the demand of incumbent manufacturing firms. However, due to the lack of relevant data, research on the service sector of ASEAN is insufficient. In addition, an analysis of service trade regulations of ASEAN is difficult because there are cases where the regulations of ASEAN member countries are different or even there is no transparent regulation. Therefore, this report try to analyzes the current status of trade in services and restrictiveness of service trade regulations of ASEAN using various methodologies such as statistical and empirical analysis, related law and literature survey, and field studies considering of the limited data sources and the specificity of ASEAN. Throughout the paper, Cambodia, Laos, Myanmar and Brunei are excluded from the analysis, and only six ASEAN countries are analyzed.
   In Chapter 2, We overview the current status and trends of services trade in ASEAN, and then conduct GVC analysis to investigate the indirectly traded content of services being embodied in exported goods. Lastly, we focuses on the services trade on the basis of mode of supply (Mode 1~4) to capture trade volumes which are not accurately identified in the traditional statistics. According to the analysis, service trade in ASEAN-6 economy is increasing rapidly and it seems to increase faster than world trade trends.  This increase comes from the growth of travel, other business activities and transport sector. By country, Singapore, Thailand and the Philippines led the increase in services export, while Singapore, Malaysia and the Philippines led the increase in services imports. According to the results of Section 2, which analyzes the production networks in which ASEAN-6 are involved, ASEAN and Korea rarely depend on each other’s services sector in their production process. In Section 3, we find that Mode 1 (cross-border trade) and Mode 3 (commercial presence) are the major mode of supply of services from Korea to ASEAN.
   The relatively low services trade between Korea and ASEAN seems to come from the following factors: barriers to trade in ASEAN, restrictive service regulation of the Korea, comparative disadvantage of services sector in Korea. To identify the barriers to service trade between Korea and ASEAN rigorously, we first explore the services trade regulation of ASEAN in Chapter 3 using World Bank’s Service Trade Restrictions Index (STRI). According to World Bank’s STRI, the average STRI of ASEAN-5 in 2012 is 46, which is higher than that of high-income OECD countries (average 20) and still high considering the low income level of ASEAN. Indonesia, the Philippines, Thailand, Malaysia, Vietnam were recorded high STRI, and professionals were the highest sector among others. In transport, air transport were relatively open to foreign supplier, but roads and rail freight transport had relatively restrictive policy. However, even if STRI is lower, it is often found that the authorities restrict foreign entry through limited issuance of licenses. For example, even if full foreign ownership is allowed to foreign investors, new license are not being issued. There are no relevant regulation or policy, but in practice entry of foreign firm is not allowed.
   According to the results of Section 2 of Chapter 3, the services trade regulations permitted by the GATS and DDA is more restrictive than the actual trade regime in ASEAN. The preferential trade agreements signed by ASEAN were considered to have gained additional liberalization than GATS, but it is difficult to say that it gained additional opening of the service market in practice considering the “water.” Above this, ASEAN make an effort to achieve higher service trade liberalization through trade agreement among ASEAN member states, AFAS (ASEAN Framework Agreement on Services). According to the 9th package of AFAS (ASEAN Framework Agreement on Services), which is a service trade liberalization agreement among ASEAN member states, the higher level of liberalization has been achieved in educational, environmental, construction and related engineering services, whereas the lower level of opening have occurred in transport, health related and social services, recreational, cultural, and sporting services. Since the 7-8th package of AFAS is considered to provide the highest committment among ASEAN-signed FTAs, the 9th package of AFAS could be used as a target for negotiating or upgrading FTA with ASEAN. 
   In Chapter 4, we examine the effects of services trade regulations on services trade between Korea and ASEAN using empirical models and case studies. In Section 1, we conduct an empirical analysis on the cross-border service trade (Mode 1) and consumption abroad (Mode 2). Empirical results show that the restrictive regulations of importing and exporting countries discourage the trade in services, and the extent of the negative effects of service regulations on trade varies by sectors. Also, cross-border supply (Mode 1) and commercial presence (Mode 3) appears to be substitute in some sectors, but complement in others. Notable thing is that the coefficients on the STRI of Mode 3 has significantly larger magnitude than those on the STRI of Mode 1. In Section 2~3 , we conduct case analysis to identify the actual service trade barriers of Mode 3~4 (commercial presence, movement of natural persons) in wholesale and retail sector of Vietnam and financial sector of Indonesia. According to the results, the level of commitments provided by ASEAN-Korea FTA and Korea-Vietnam FTA is not higher than the currently applied regulations, and it seems that there are various difficulties besides the notified regulations, such as the ambiguity concerning interpretation of regulations, the practice of demanding bribes, and the obligation to transfer expertise, etc. 
   Based on the analyses of trade in services between Korea and ASEAN, and service trade regulations of ASEAN, Chapter 5 explores ways to improve the international competitiveness of Korean services sector, and strengthen cooperation between Korea-ASEAN in services sector. As presented in the report, we suggests the following recommendations for the growth of trade in services: (ⅰ) making an effort to lower domestic and foreign service trade barriers (ⅱ) seeking to harmonization of regulations with major trading partners of Korea (ⅲ) fostering high value-added services industry (ⅳ) strengthening the linkage between services and manufacturing sectors for efficient functioning of GVC that Korea is involved (ⅴ) building services trade statistics for policy making. Also, we provide the following policy suggestions to strengthen the cooperation of Korea-ASEAN in services sector: (ⅰ) supporting the reform and opening of the ASEAN services industry through Aid-for-Trade (ⅱ) promoting negotiations on upgrading the ASEAN-Korea FTA (ⅲ) collecting the information on difficulties from the business continuously and making effort to reflect the opinions from the consultative groups of business. 

Preface

Contributors

Introduction and Overview
     Lee-Jay Cho

Statements by Country Representatives and Keynote Address

  Country Representative Statement: South Korea
     Kwan-Young Park

  Country Representative Statement: China
     Wang Shuzu

  Country Representative Statement: United States
     George Ariyoshi

  Country Representative Statement: Russia
     Pavel Minakir

  Country Representative Statement: Mongolia
     Ganbold Baasanjav

  Keynote Address
     Nikai Toshihiro

Part I. Building a Northeast Asia Economic Community and Its Extended Regions

  Promoting International Cooperation in Industrial Finance, Propelling High-quality Development of an Asian Economy
     Zhao Xianfeng

  Northeast Asia Economic Community Formation and the Role of the Russian Far East
     Sergei Sevastianov

Part II. Cross-border Infrastructure and Special Economic Zones in Northeast Asia

  Cross-border Infrastructure and Special Economic Zones in Northeast Asia: Politically Holding Hands and Economically Going Underground
     Anthony Michell

  Logistic Connectivity for Northeast Asia
     Inoue Satoshi

  Cross-border Infrastructure in Northeast Asia: Transport and Energy
     Sangmin Nam

Part III. Financial Cooperation in Northeast Asia

  Financial Cooperation in Northeast Asia: Current Trends and Opportunities
     Maeda Tadashi

  A Review of the Asian Infrastructure Investment Bank
     Stanley Katz

  Establishment of the NEADB to Support North Korea’s Economic Development
     Jai-Min Lee

Part IV. Energy and Environment in Northeast Asia

  Trends in Energy Transformation and Policy
     Iinuma Yoshiki

  Perspective from the United States: Update on US Energy Policy and Technology
     Terry Surles

  Perspective from Korea: New Paradigm for Korean Energy Transition and Policy
     Haksik Yoo

  Perspective from Japan: Energy Trends and Policy and Northeast Asia Cooperation
     Tanabe Yasuo

Part V. Tourism Cooperation in Northeast Asia

  Border Tourism in Northeast Asia
     Iwashita Akihiro

  Increasing Tourism through Integrated Resorts—Tourism and Gaming in Northeast Asia
     S. Ray Cho and Brendan Bussmann

  Current Status and Challenges of Japan’s Inbound Tourism Boom: Evidence from Japan’s City-level Data
     Konishi Yoko

  Latest Market Trends: Visitors to Japan
     Tsuboi Yasukiro

Part VI. Panel Discussion on Natural Disaster and Regional Cooperation

  Summary of Panel Discussion on Natural Disaster and Regional Cooperation

Part VII. The Honolulu Ad Hoc Group Meeting on Financial Cooperation in Northeast Asia: Proposal for the Northeast Asia Bank for Cooperation and Development (NEABCD) Revisited

  Review of Current Situation and Recent Developments in Northeast Asia Regional Cooperation Relevant to Financial Cooperation Opening Remarks
     Kwan Yong Park

  Recent Developments and NEABCD
     Stanley Katz

  Perspective from Japan
     Maeda Tadashi

  Perspective from Korea
     Jae Hyung Hong

  Perspective from China
     Liu Ming and Zhang Jianping

  Perspective from the United States
     Mead Treadwell

  Commentary
     Inessa Love

Role and Justification: Why Is the NEABCD Necessary to Meet NEA Financing and Technical Assistance Needs?

  Overview 
     Lee-Jay Cho and Stanley Katz

  A Review of the Ad Hoc Committee on the NEABCD and the Brief on the Establishment of the NEABCD
     Liu Ming

  Recommendations of the Study on the Establishment of the Northeast Asian Development Bank: The Tokyo Foundation Draft
     Chiba Yasuhiro

  Update on Northeast China and Efforts Toward an NEABCD
     Liu Lanbiao

  Strategies, Future Plans, and Activities Establishment of the NEADB to Support North Korea’s Economic Development
     Jai-Min Lee

  Promoting the Northeast Asia Development Bank
     Zou Lixing

  Promoting Financial Cooperation  in Northeast Asia
     Li Zheguang

  The NEADB: Securing the Attention of the United States
     Mead Treadwell

  The NEADB: Considerations and Recommendations for Energy
     Terry Surles

Appendices 

   The risks of political tensions and military confrontation and war in the Northeast Asian region, triggered by North Korea in particular, has been a critical gap in an otherwise productive network of dynamic regional economic growth. However, this year, the milestone summit between US President Donald Trump and North Korean Leader Kim Jong Eun has resulted in a dramatic change on the Korean Peninsular, prompting greater need for the region to strengthen ties and find mutually beneficial ways to handle tasks ahead.
   Toward this end, the KIEP–NEAEF collaborative project seeks to fulfill the need for timely and forward-looking research and meeting activities by focusing on critical issues, such as 1) discussion and emphasis on connectivity in cross border infrastructure developments involving North Korea as an integral part of a broader regional economic community in Northeast Asia, and 2) revisiting the design and establishment of a Northeast Asia Bank for Cooperation and Development (NEABCD) in the context of economic cooperation and integration in the Korean Peninsula.
   This volume in the series of proceedings volumes is titled “Momentum for Building a Northeast Asian Economic Community: Emerging Challenges and Opportunities” and comprises summaries of research presentations and discussions at the planning meeting in Honolulu, at the 27th Annual Conference of the Northeast Asia Economic Forum in Sendai, Japan, and at the Honolulu Ad Hoc Group Meeting on Financial Cooperation in Northeast Asia in 2018. The results of this project represent activities that have been contributing to economic dialogues, interactions, and research on common issues for cross-border future economic cooperation in the region, which involves North Korea.
   KIEP is grateful to Dr. Lee-Jay Cho, Chairman of NEAEF, for his leadership in implementing the project, and to the authors of the presentations, conference participants and discussants who contributed to this volume.
   Drs. Lee-Jay Cho and Hyung-Gon Jeong would like to extend their appreciation to the NEAEF staff for their assistance in the course of the successful implementation of this project, and to Drs. Karla Fallon and Kennon Breazeale for their editorial review and editing of this volume. 

Executive Summary

 
Chapter 1. Introduction

Chapter 2. German Unification: Macroeconomic Consequences for the Country
1. Introduction
2. In a Nutshell
3. A Demand Side Shock
4. Price Reactions
5. Trade and the Balance of Payments
6. The Supply Side: Production Structure,  Labor, Unemployment, and the Capital Stock
7. Distributional Effects: Labor and Capital, the State and the Private Economy
8. Conclusions

Chapter 3. Economic and Social Integration in Germany: Implications for Korea
1. Social Aspect
2. Economic Aspect (German Unification and Progress of Economic Integration)

Chapter 4. Regional Economic Growth of East German States after German Unification and its Policy Implications for Korea
1. Introduction
2. Status of Economic Development in East Germany after Unification
3. Policy for Improving Germany’s Regional Economic Structure
4. Evaluation of Joint Tasks for Improvement of Regional Economic Structure in the West Germany
5. Conclusion and Policy Implications

Chapter 5. Spatial Development Patterns in East Germany and the Policy to Maintain “Industrial Cores”
1. Introduction
2. Spatial Patterns of Manufacturing Activities in GDR – Stylized Facts
3. Spatial Patterns of Manufacturing Activities after German Unification ― An Exploration of Statistical Data
4. Policies to Maintain “Industrial Cores”
5. Five Case Studies on Industrial Cores in East Germany and their Development
6. Preliminary Conclusions

Chapter 6. Decision Making by the Treuhandanstalt on Privatization, Restructuring, or Liquidation of Former State-Owned Firms in East Germany
1. Introduction
2. The Economic Situation of State-Owned Firms Prior to the Monetary Union in July 1990
3. Rules of Privatization Policy
4. Assessment of Restructuring Feasibility
5. Involvement of the East German Federal State Governments and Trade Unions in the Course of Privatization
6. Quantitative Results and Budget of Privatization
7. Interim Conclusions

Chapter 7. Rebuilding SMEs in East German States: Policy Implications for Korea
1. Introduction
2. Policy Measures for SMEs in Eastern Germany
3. Implications for Korea

Chapter 8. A Quantitative Analysis on Development Assistance Policy for North Korea during a Transition Period
1. Introduction
2. Empirical Motivation
3. Model and Equilibrium
4. Policy Proposals 

Contributors 

   The situation on the Korean Peninsula entered a new phase following the 2018 Winter Olympics, further evolving through the April 27 inter-Korean summit and June 12 Singapore summit between the U.S. and North Korea. Expectations are high for new exchanges and cooperation that would potentially lead to peace and prosperity on the Korean Peninsula. This would be a great chance to depart from hostility that has lasted over decades. However, it is expected to take some time until economic cooperation between the two Koreas resumes, as the negotiations for denuclearization still remain unresolved.
   The Korea Institute for International Economic Policy (KIEP) has been working with the Halle Institute for Economic Research in Germany (IWH) on topics related to the economic integration of the two Germanys after unification. This is the second report published by the joint research team. The report consists of eight chapters under the three major themes of macroeconomic impacts and socio-economic changes following unification, policies implemented to improve East Germany’s economic structure, and East Germany’s industrial policies. Chapter 1 provides a summary of the entire report’s contents and describes how they are interconnected.
   Chapters 2 through 5 describe macroeconomic consequences immediately after reunification and the subsequent socioeconomic changes. Here, Dr. Axel Lindner of the Halle Institute for Economic Research (IWH) argues that although many macroeconomic indicators temporarily deteriorated after unification, such as the ratio of investment to GDP and the fiscal deficit, they recovered after a few years. While real GDP growth appears to have damaged the growth potential of the German economy for a certain period of time, he stressed that the time frame was not long and that the benefits of reunification were significant after the early 2000s. In Chapter 3, Dr. Kim Young-chan and Dr. Yoon Deok Ryong pointed out that macroeconomic instability can be a major issue in the early stage of economic integration in the case of a unified Korea, which can be much bigger than that of East and West Germany. The two researchers highlight that in order to minimize post-unification economic impacts, efforts to converge the gap of productivities and develop measures for macroeconomic stability are needed. They also stress the need for integration in terms of social integration, assistance for rapid economic development and job creation in North Korea, expansion of daily exchanges and opportunities to interact, and preparation of institutional devices to represent its interests.
   Chapters 4 and 5 are studies of policies to improve the structure of the East German economy. In Chapter 4, Dr. Jeong Hyung-gon drew policies for economic development in East Germany and implications for the Korean Peninsula after reunification. In this study, Dr. Jeong Hyung-gon constructed panel data on total regional production (GRDP) in Germany from 1991 to 2015, gross regional production per capita, nominal income, household income per capita, support for infrastructure and support to companies. During the analysis period, support for infrastructure projects totaled approximately 23.6 billion euros, while support for enterprises came to a total of 46.5 billion euros. As a result, the total support amount was approximately 70.1 billion euros, among which 62.1 billion euros were provided to the East German region, meaning 89 percent of the total support amount was concentrated in the East German region. The GRDP in all five regions of the world has more than doubled from 1991 to 2015. Since unification, the New Commonwealth of Nations (East Germany) has been accompanied by structural changes such as changes in economic structure, technological improvements, and capital accumulation, and industrial structures have developed similar to those in West Germany. Despite these achievements, however, there is still a wide gap in regional development within Germany. In this study, to analyze the effects of subsidies to improve the German economy, the IWH research team analyzed the growth rate for two periods: the first program period from 2000 to 2006, and the second program period from 2007 to 2013. The results showed a positive impact on the gross value-of-value (GVA) and productivity (GVA per employment) of subsidized companies during the first program period. But during the second period from 2007 to 2013, there was no visible benefit. In this study, Dr. Jeong stresses that the Korean government needs to create a subsidy support standard that divides the country into functional regions, in the manner of Germany’s regional policies (GRW), and calculates regional comprehensive economic indicators based on them. Dr. Jeong also states that infrastructure investment to improve the regional economy is important, but in the early stage of reunification, support for individual companies should be strengthened to help them increase productivity and value added. Another suggestion is that small-scale projects to privatize North Korean companies could facilitate production activities, and that corporate restructuring can promote regional economic growth through increased efficiency in society as a whole.
   In Chapter 5, Dr. Gerhard Heimpold of IWH analyzed the policies of forming industrial cores in East Germany. In this study, he underscored the importance of seasoned corporate restructuring experts to successfully privatize companies after unification, and to apply a proper combination of spin-offs and acquisitions. He also highlights the importance of fostering R&D sections to enhance corporate competitiveness and normalize management, and create jobs for mass unemployment (skilled laborers) generated by corporate restructuring.
   Chapters 6 through 8 focus on industrial policies. Chapter 6 starts with the decision-making mechanism of the trustees, which was put in charge of privatizing the assets of East Germany. We explore whether it is beneficial to restructure state-run companies first or immediately privatize them, or bankrupt them. According to the research, the key criteria for the trustees’ decision to privatize, restructure or liquidate businesses were to conduct a feasibility analysis. In the decision-making process on restructuring or liquidation of individual companies, a panel of consultants or accountants acted as an independent advisor to the board of trustees, which collectively assessed the nature and viability of each company. Highlighting the independence of the decision-making group, Dr. Heimpold claims that close cooperation between the East German state government and labor unions played a significant role in job creation and maintaining social stability.
   In Chapter 7, Dr. Kim Young-Chan and Dr. Yoon Deok Ryong present the policy implications for the reconstruction of SMEs in East Germany after German unification. They assess that Korea’s SME support system is not inferior to Germany in terms of its experience, support schemes of taxation, finance, marketing, technological innovation, entrepreneurship and human resources, however, there are problems in terms of efficiency and effectiveness of support due to the excessive number of agencies, lack of analysis on performance, and evaluation of results. The need to simplify and evaluate the whole system has risen as this will be reflected within the North Korean support scheme once two Koreas are reunified. In addition, they claim that considerations must be made for discrepancies in perception regarding the transition process, meaning that economic development should precede when introducing a support system for the SMEs in North Korea, while acknowledging the constraints of human and material resources available. They also stress the need to establish systemic cooperation between the governments at all levels, policies, commercial and financial institutions, as well as international organizations and chambers of commerce based on an understanding of the North Korean real economy and financial system. It will also be necessary to conduct a comprehensive review of ideas to provide financial support both home and abroad and establish a risk-sharing system.
   The last section of the industrial policy, written by Dr. Han Minsoo of KIEP, focuses on the potential impact that opening the capital market and providing development assistance could have on the North Korean economy where capital markets are immature. The study showed that while opening the capital market in North Korea increases overall productivity, it does not have a significant impact on economic growth. On the other hand, carrying out development assistance policies along with the opening of the capital market can play a significant role in economic growth. He stresses that the government should use microfinance-based development aid rather than free economic aid to boost economic growth. 

 

   With the acknowledgement of the need to approach Africa’s agricultural sector through the lens of a comprehensive value chain approach, this research analyzes the challenges for each stage of the agricultural value chain in Africa and outlines policy recommendations based on Korea’s policy advancements and agricultural sector development since the 1950s when its initial conditions were similar to that of Africa.
   There are arguments to sharing the Korean experience due to its singularity but Korea has encountered and has overcome the same challenges facing Africa today relatively successfully, which makes its experience of value to be shared with Africa. In fact, there is much demand for analyses on Korea’s agricultural development experience as various African countries and leaders, as well as institutions like the AfDB and policy makers have expressed interests in learning from Korea’s agricultural policies. However, their interests go beyond general history as they seek more detailed information; the manner in which policies were implemented, the institutions that supported the policies, measures of financial support, the manner in which (horizontal and vertical) relationships were formed between the various stakeholders in the value chain including the government, agricultural cooperatives, farmers, agricultural processing companies, retailers and others.
   This research identifies and ranks policy areas that can be shared with Africa through interviews with various experts, discussions through an international workshop for agriculturalists and economists, and the use of the AHP model. Policy experiences that are most relevant to the African context are the establishment of a multipurpose agricultural cooperative with financial functions, the supply of agricultural inputs, and policies enhancing processing and quality management. On the other hand, policies on establishing wholesale markets and macro-agricultural policies were found to be insignificant. Though developing wholesale markets were quite significant in the Korean case, it is not so for Africa because of the limited volume of goods traded. Notwithstanding the fast growth of agro-markets in cities as a result of increasing purchasing power and rapid urbanization, most are still subsistent farmers with low levels of trade. The infrastructure is also yet inadequate to support wholesale trade.
   Among policy areas that are of relevance to Africa, the establishment of a multipurpose agricultural cooperative system is of great importance. Considering the structural problems of agricultural cooperatives in Africa, partial solutions such as improving the governance structure or increasing transparency cannot solve Africa’s development challenges. Korea’s multipurpose agricultural cooperative, Nonghyup, was created by the government and it executed projects on behalf of the government under their supervision. Many African countries sympathize with the need for such active government intervention to foster growth of the agricultural sector. Nonghyup, as the leading organization for agricultural development, led the growth of the agricultural sector and rural communities. Nonghyup grew in terms of both size and quality because it not only had functions of marketing and input supply, but because it also had banking capacities. Nonghyup created a virtuous cycle by providing Agricultural Value Chain Finance (AVCF) to input suppliers, farmers, processing companies, retailers and others. This experience corresponds to the demands of African countries that are changing paradigms and are looking for new systems of operating cooperatives, as they understand the need to combine financial functions for the full operation of cooperatives. 
   Increasing agricultural productivity is also of grave importance in Africa where urban areas are expanding and the population is growing at a fast speed. Because the use of fertilizers is key to increasing productivity, this research suggests the establishment of regional fertilizer production facilities to solve the fundamental problems regarding access to fertilizers. Africa is well positioned to produce fertilizers as it is home to a vast amount of raw materials required for fertilizer production. There are pessimistic views to this approach but action is already being taken to establish regional production sites in Africa. The success of developing key fertilizer production facilities depends on the degree of effort invested by stakeholders. For example, the African Development Bank (AfDB) could lead the formation of regional bases for fertilizer production by co-financing their construction and operation with international development financing agencies. The use of improved varieties through seed development is also important in increasing productivity. However, the rate of using improved seeds remains at 10% in Africa, with South Africa as an exception. Unlike the manufacturing sector where R&D can be substituted with technologies developed overseas, the agricultural sector requires the government to take a comprehensive role in facilitating R&D and distribution according to the local climates and environments. Korea succeeded in developing the Tongil rice variety in 1971 after years of research by breeders that were dispatched to the International Rice Research Institute (IRRI) in 1964. Innovations in developing new seeds requires more than building research centers. It requires the formation of intangible infrastructures such as the political and social environment, and laws and regulations, which Korea was able to build through the Korea Seed and Variety Service.
   Regulations on agro-processing and quality control through the post-harvest batch processing system is also applicable to the African environment. The quality of agricultural products depends not only on the seed variety but also on how it is stored and processed. Such facilities and processes are lacking in Africa which hinders market access and utilization of the value chain. Taking such limitations into consideration, this research suggests building Rice Processing Complexes (RPCs) that provide integrated services of post-harvest storage to processing, led by the government or Nonghyup. In view of the challenges of post-harvest storage in Africa, Korea’s experience has many implications because Korea was able to provide high quality agricultural products through the construction of RPCs.
   The research also suggests the creation of small-scale rural by-job complexes that employ farmers and rural residents during the off-season in consideration of the low production levels in Africa, a policy that increased rural income in Korea. The Korean government suggested the use of idle labor during the off-season for side jobs at the complexes to increase rural income and resolve potential unemployment issues in 1968. It was part of a local community development project led by the Rural Development Administration (RDA) initially as a pilot project but was expanded to the national level due to its effects. The government provided financial support (loans) and tax exemptions in creating and operating the complexes and commissioned the RDA to purchase machinery, find markets, manage and provide technical guidance to the rural communities. The complexes, which were designated by the government, were managed and operated by at least 10 households who participated in the entire process from production to sales.
   Africa also needs to take a comprehensive approach in building institutions and strengthening the role of the government. Impediments to the development of Africa’s agricultural sector are extremely complex. It exists across-the-board, in the political, economic, social and cultural spheres, outside the boundaries of the agricultural sector. Various conditions impede agricultural development in Africa that leads to market failure. From a value chain perspective, the absence of a strong link between the supply of inputs, production, storage, packaging, logistics, and retail blocks access to markets for agricultural goods. Therefore, a comprehensive or integrated approach is needed to address these issues, which highlights the importance of the government’s role. Many African countries agree that the state needs to actively address the challenges of developing the agricultural sector because the sector poses greater risks and uncertainties compared to other industries that deters the private sector from taking the initiative. Hence, a government-led agricultural development policy is needed to set the foundations for agricultural development in Africa, although perhaps not to the same degree as that of the Korean government.
   The Saemaul Undong (also known as the New Village Movement) is likewise significant to the African environment. The methods and impacts of the Saemaul Undong are still highly debated in Korea, but considering Africa’s demand for development cooperation and Korea’s rural development situation in the 1960s, there is a need to reassess and utilize the Saemaul Undong in Africa. After discussions with high-level politicians, bureaucrats, policy makers, academia, research agencies, rural communities, the FAO and the AfDB at Senegal and Malawi, and through an international workshop on Africa’s agricultural challenges, the research found a common understanding that Africa’s problem lies not just in production but also in social change. They emphasized the need to create motivations for change as well the need for social capital such as diligence, collaboration and self-reliance. Africa’s agriculture needs more than financial and physical assistance. It needs to adopt the values of self-motivation and voluntary participation, the core principles of the Saemaul Undong. The Saemaul Undong is also in line with the methodologies of institutional capacity building, participatory development and empowerment that are emphasized by the World Bank, UN, OECD and other international agencies. Because it was born in the unique political, social and cultural conditions of Korea, it needs to be tailored to the conditions of each country. Moreover, considering the characteristics of Africa’s rural communities, the Saemaul Undong should be shared first on a tribal level and then be shared to adjacent communities once successfully operated. This is because the African community was built on tribalism, and thus, people trust community leaders through customary law more than legal or political authorities through the state system.
   Although the research suggests in detail, policies to facilitate the growth of Africa’s agricultural sector based on the Korean experience, further work is needed in the following areas. First, it was unable to systematically investigate the dynamic relationships within the value chain; value addition of agricultural goods is created through the close business network of various stakeholders within the value chain. Moreover, it was unable to empirically identify the cost structure of the value chain, although the ultimate purpose of a value chain analysis is to effectively link producers with the market. The research is rather limited to qualitative investigations on the prices and quality of goods, and customer preferences through field surveys to improve market access and find measures to better utilize the value chain.
   To pass on Korea’s policy experience effectively, establishing value chain utilization strategies that are fit to the respective conditions of the different countries through thorough investigation over a long period would be desirable rather than short term seminars or training sessions. Although there are certain programs that share Korea’s experience such as the Knowledge Sharing Program (KSP), studies on the agricultural value chain require understanding of the entire flow from production to retail on specific goods such as rice and corn to be able to suggest policies and alternatives. This entails the participation of agriculturalists, such as sending agricultural policy specialists to the Ministries of Agriculture in Africa for a long period of time to advise the utilization of value chains based on the Korean experience. 

 

   FinTech is a combination of the words finance and technology, signifying innovation in existing financial businesses using information and communication technology (ICT). China is making remarkable progress in the mobile payment sector, especially in the various fields of FinTech. There are also predictions that China’s mobile payment platform will lead China to become the world’s first “cash-free society” by integrating on-line and off-line payments and quickly replacing existing payment methods such as cash and credit cards. On the other hand, mobile payment services in Korea show a relatively low penetration rate. According to a survey, as of November 2017, only 26.1% of mobile payment services enable the use of mobile devices to purchase products, which is much lower than in China.
   Therefore, this study analyzes the development status of mobile payment platforms in China and suggests policy suggestions for the improvement of mobile payment services in Korea. The platform for mobile payments in China is driving the development of the FinTech industry, creating a variety of innovative business models that span both offline and online payment alternatives. In this way, we sought to gain implications for Korea by identifying the factors behind China’s rapid development, obstacles it is encountering, and future prospects of China’s mobile payment platform, which is developing at the fastest rate in the world.
   Chapter 2 summarizes the current status and characteristics of the mobile payment market in China. The mobile payment market in China has grown rapidly in both the banking and non-bank payment markets, while the growth rate of payments conducted through the Internet has been curbed sharply. In particular, mobile payment services provided by non-bank payment companies showed more rapid growth than mobile banking payment services provided by banks. The reason for this rapid growth in non-bank payment companies’ mobile payment services is related to how in 2000, with the rapid growth of its wireless communication base, China’s online shopping sector rapidly shifted from PC internet shopping to mobile shopping, while the settlement systems of non-bank internet electronic commerce companies such as Alibaba have expanded significantly due to the lack of online payment systems at Chinese banks. In addition, Alifaba’s AliPay is not just a means of online settlement, but a financial account that can be used for various financial activities such as active asset management, online insurance, and stock trading, and various financial services such as cultural contents, education, medical care, beauty, and O2O (Online to Offline) services. In other words, it has gained a superior advantage over existing Internet payment systems and banks’ mobile payment systems, while securing diverse business models connected with financial services and O2O services for everyday use, extending beyond payment financial services.
   Chapter 3 focuses on the development of business models for mobile payment platforms in China, centering on the case of AliPay. Unlike Korea, the AliPay payment platform has a business model at every stage of the payment system, from payment to clearing and settlement. Thanks to the huge customer base that uses the Alibaba e-commerce platform, AliPay was able to negotiate with individual banks and develop various financial services connected with the banks to provide them to customers. Unlike Korea, this was the background of the development of various business models centered on mobile payment platforms. AliPay has introduced a mobile asset management fund, YueBao, and other financial services to broker loans, and established a mobile-based online bank MyBank, which provides comprehensive financial services. In addition, Alibaba launched a personal credit rating business (Sesame Credit) utilizing personal transaction information and financial information obtained through the Alibaba Online e-commerce Alipay payment platform, which become a “credit evaluation ecosystem” centered on Alibaba. In the offline payment market, Alibaba realized cost advantage by enabling QR code-based easy payment and various O2O (Online to Offline) services to financial customers. Finally, Alibaba is also contributing to the development of China’s shared economy by promoting the creation of a “FinTech settlement ecosystem” by providing an open settlement platform that encourages the development of diverse business models by individual businesses.
   Chapter 4 analyzes how the non-bank payment platform of China is expanding into the international payment system. First, the increase in the personal income level in China is leading to an increase in overseas travelers and overseas purchases. Second, the Chinese government’s policy to allow non-financial companies to engage in international settlement business has contributed to growth in the sector. Third, various measures were taken by Alibaba, such as providing overseas shopping tax refunds and overseas shopping O2O services, actively forging alliances with local financial institutions in third countries, and the advancement of overseas mobile remittance services. China’s entry into international mobile payment systems is particularly meaningful when linked to the Belt and Road Initiative. The new international financial system driven by China is challenging the existing international financial system centered on the US and the dollar. However, problems are also arising as the Chinese mobile payment sector undergoes rapid international expansion. As seen in Vietnam, which recently banned Chinese mobile payment systems, the biggest problem is that the payment system can be used illegally for P2P transactions. If China is to further expand the international scope of its payment systems, it must resolve these issues with urgency.
   Chapter 5 suggests policy recommendations to Korea based on an analysis of the development of mobile payment platforms in China. Unlike China, growth in the FinTech sector is centered on mobile-based non- bank payment companies in Korea, meaning the sector is subject to various restrictions posed by regulations such as the Electronic Financial Transactions Act. While China has no divisions between the various forms of electronic payment, making it possible to develop diverse business models while expanding into various business areas such as money transfers, direct debit payment, prepayment and electronic payment, and payment settlement services, Korean non-payment companies are limited to the area of payment orders, i.e. the earliest stage of the payment process, and it is impossible to offer a wider range of services because the clearing and the settlement stages are defined as the domain of financial corporations. Therefore, as long as no serious threat is posed to the stability of the overall financial system, it would be desirable to encourage the development of new industries through deregulation, while adopting an active negative regime or allowing pilot projects. Second, in contrast to China, Korea has difficulties in developing various business models for its non-banking mobile payment companies because of regulations on loans or asset management by financial legislations. Thus, as in the case of China’s AliPay, easing regulations to allow new FinTech providers to operate based on mobile payment services and develop various financial services could be a good way to promote development in the FinTech industry. From the same perspective, it would also be worth considering the deregulation of sales of asset management financial products by non- financial companies in Korea. Finally, we should pay close attention to the trend of internationalization of mobile payment systems taking place in China and determine how this phenomenon is affecting the internationalization of the yuan, and the existing international financial order centered on the US and the dollar. Through this process we can identify potential opportunities and risks for Korea, and identify countermeasures for Korean financial companies to properly respond to these changes. 

 

   The Republic of the Union of Myanmar (hereinafter Myanmar) is one of Korea’s priority partner countries for official development assistance (ODA), mainly focused in the four sectors of public administration, rural development, transportation and energy, based on the Korean government’s Country Partnership Strategy (CPS). As of 2015, the country’s total population has risen to almost 51 million, among which the urban population accounts for 30.0% and rural population 70.0%. Although the urban population is increasing rapidly, the majority of Myanmar people reside in rural sectors and engage in agriculture and forestry, utilizing the abundant natural resources of land, water, grass, trees, and mountains. Land use by these primary industries remains high in proportion.
   This research studies Korea’s agricultural and forestry development cooperation with a focus on rural development, which is one of the focal areas approved by Korea’s CPS with Myanmar. Our study begins with current agricultural and forestry development and future needs for Myanmar, scheduled in particular within its agricultural development strategy for the next five years (ADS 2018-19~2022-23) recently approved by the Ministry of Agriculture, Livestock, and Irrigation (MOALI) in 2018, as well as the national forestry master plan (2001-02~ 2030-31) approved in 2000 by the Ministry of Forestry. We examine in detail agricultural and forestry programs in Myanmar supported by other countries or international organizations such as Japan, Germany, the UK, USA, Australia, Asia Development Bank (ADB), World Bank Group (WB), Livelihoods and Food Security Fund (LIFT), and Food and Agriculture Organization (FAO), to identify possible avenues for cooperation and draw significant implications for promising agricultural and forestry programs. Meanwhile, Korea’s agricultural and forestry capacities are essential for implementing programs suitable to Myanmar, meaning that Korea’s agricultural and forestry programs currently being implemented offer valuable lessons. Both grant and loans are studied for a better understanding of the bottlenecks or challenges in Myanmar. Based on agricultural and forestry needs in Myanmar and Korea’s capacity in the same sector, our findings suggest several promising agricultural and forestry programs.
   Myanmar’s ADS (2018-19~2022-23) has three objectives: 1) enhanced governance and capacity of institutions responsible for agricultural development, 2) increased productivity and farmers’ income, and 3) enhanced market linkages and competitiveness. The target rate for agricultural growth in five years is 4.0%, aiming to double the current 2%. The target for land and labor productivity in five years is to realize 50% increase compared to the current $1,200/ha and $1,600/labor, respectively. The target for agrifood exports is $3,865 million in five years against the current $2,400 million. Under the first objective of governance, there are nine outcomes (needs), including: 1) planning, 2) policy, 3) monitoring and evaluation, 4) statistics, 5) associations and groups, 6) land rights, 7) coordination and participation, 8) food and nutrition security, and 9) MOALI restructuring. There are nine outcomes (needs) in the second objective, productivity, as well: 1) research, 2) extension, 3) education, 4) irrigation and water management, 5) crop inputs, 6) mechanization, 7) livestock and fishery, 8) good agriculture practices, and 9) resilience. Finally, the third objective of competitiveness aims to achieve the following nine outcomes: 1) Business Environment, 2) Intellectual Property Rights, 3) Quality System, 4) Participatory Planning for Rural Development, 5) Rural Infrastructure, 6) Agro-enterprise Development, 7) Food Quality and Safety, 8) Financial Services, and 9) Trade Facilitation and Export Growth.
   Myanmar received a total of almost $1.5 billion in 2016 from international societies, of which agricultural and forestry ODA account for only 5.9%. Japan ($235 million) is the biggest donor country, followed by the USA ($183 million), Korea ($124 million), Germany ($72 million), France ($48 million), UK ($46 million) and Australia ($46 million) in 2016. The World Bank ($300 million) and Asian Development Bank ($263 million) also support many programs in Myanmar. Technical cooperation programs with Japan, including the private sectors, are most dominant in Myanmar, indicating there will be an increase in private sector investment in Myanmar from Japan. Germany focuses on environmental and forestry development by advocating for human rights and the wellbeing of minorities residing in remote areas. The USA has engaged in agricultural development projects to support small farmers’ production and marketing capabilities in response to climate change. The Australia Center for International Agricultural Research (ACIAR) has been conducting research in collaboration with Myanmar experts, making much scientific information available within ACIAR’s networks. The ADB’s strategy focuses on enhancing agricultural value chains, technical cooperation for rural development, and natural resources. The WB supports Myanmar by providing agricultural package programs in the areas of finance, urban and rural development, and environment management. LIFT has helped farmers and their families to generate more income, maintain the environment in their village, and ensure that children and women are getting enough nutrition. The FAO has focused on enhancing the food value chain through mitigating natural disasters and coping with climate change.
   Korea is an important donor in Myanmar which has provided many projects such as technical assistance through the Korea Program on International Agriculture (KOPIA) center of Rural Development Administration (RDA), rural development projects that focus on Korea’s New Village Movement, post-harvest research center, and enhancing agricultural marketing ability with wholesale market through KOICA, consulting agricultural policies through the Korean Agricultural Policy Experiences for Food Security (KAPEX) program at the Korea Rural Economic Institute (KREI). Future activities should be more aligned with each other to increase aid effectiveness in Myanmar.
   In conclusion, the future direction in agricultural and forestry development cooperation with Myanmar should first of all focus on sustaining the agricultural policy framework, by continuing current programs such as the KAPEX, KSP, CPS, and other ODA policy research, leading to the initiation of pilot programs for good agricultural and forestry policies in Myanmar for mutual recognition. There should be additional discussion on the aid effectiveness of the pilot program currently being conducted with rural community development projects, supported by a total of $22 million by 2019. Second, facilitating and implementing agricultural policies in Myanmar should be supported by Korean government programs in areas such as technical assistance, capacity building, and agricultural value chains in order to create a good business environment in the private sectors. Third, agricultural and forestry development programs should be linked with current frameworks such as the Korea-Mekong Initiative, Korea-ASEAN cooperation projects, and the Korean government’s New Southern Policy. Fourth, incorporating private sectors and/or non-government organizations (NGOs) throughout the programs is important for sustainable agricultural and forestry development activities in the long run. These programs should contribute to the social and economic growth for Myanmar to grow into a middle-income country in the near future. 

 

   This paper investigates the path of knowledge diffusion into China. While economic development occurs at multiple levels of technology, we are primarily interested in China as a emerging innovating nation, and as such, focus on how China has been absorbing frontier technologies from abroad.
   To this end, we consider utility patents granted by US patent office (USPTO). As observed by Kwon, Lee, and Lee (2017), Lee, Lim, and Jung (2018), and others, China's patent production in the US has been rapidly increasing since the turn of the century. This pattern is similar to patenting activities of Korea and Taiwan in the 1990s, two neighboring countries that recently graduated from followers to leaders in the global technology ladder. Analyzing Chinese patents granted by the USPTO offers a potential barometer for predicting the role of Chinese economy in the years ahead.
   This paper adopts the framework of Hu and Jaffe (2003) and study the geographic patterns of patent citations by Chinese inventors. Japan, Korea, and Taiwan are all global innovation leaders and compete in similar industries. Also, they are located in similar proximity to China, which allows us to  abstract from the effects of distance in knowledge spillovers.
   Controlling for the size of citable patents across countries, our main finding shows that Chinese inventors are most likely to cite Taiwanese patents followed by Korean and then Japanese patents. The reliance on Taiwan was particularly dominant in the early years of Chinese patenting growth. Korean technologies became more important over the recent years but the gap against Taiwan continues to remain.
   Taiwanese impact on Chinese knowledge production has been particularly important in electrical/electronics and machinery sectors. Korean patents have been frequently cited by Chinese inventors in chemical and computers/communications sectors, while the impact of Japanese patents has been generally limited.
   We also compare the market structure of patenting activities in China with the other countries. Specifically, we calculate the modified Herfindahl-Hirschman Index proposed by Hall, Jaffe, and Trajtenberg (2001) across (i) technology classes and (ii) patent assignees. It turns out that Chinese patenting has been highly concentrated in terms of technological spectrum, similarly to both Korea and Taiwan, but the ownership of Chinese patents are much more dispersed. The latter observation presents another close connection between Chinese and Taiwanese innovation sectors. 

 

   The aim of this research is to suggest policy proposals to enhance bilateral cooperation for SMEs(small and medium sized enterprises) between Korea and the Middle East through an examination of case studies of Saudi Arabia, UAE, Egypt and Tunisia.
   Chapter 2 examines the background and characteristics of measures to foster SMEs in the Middle East, going on to analyze the business environment in the region. SMEs are expected to play an important role in sustainable economic growth in the future, for instance by contributing to diversity in the economy and creating jobs in the Middle East. While the contribution that SMEs make to GDP is relatively low in the region compared to that of developed countries, SMEs account for the majority of all firms and contribute largely to employment. Amid the growing need for economic diversification and private sector development following the drop in oil prices that started from the second half of 2014, oil-producing countries in the Middle East have become more active in promoting SMEs to achieve their goals. Governments have expanded their support programs and investments for corporate development, which has led to an increase in local startups. While the growth potential of SMEs in the region is assessed to be quite high, there is still a need to improve the environment for fostering businesses. The Middle East ranked low overall on the Ease of Doing Business Index, Global Competitiveness Index, and Global Innovation Index, all of which evaluate business environments and competitiveness of countries. Notwithstanding differences among countries, SMEs in the Middle East struggle with limitations in financial access, lack of legal institutions, and poor efficiency in the labor market, problems which must be addressed with priority. Another challenge in the Middle East is the high preference for public sector jobs, and the lack of human resources to meet demands in the private sector. While job seekers generally avoid taking jobs in the private sector, which tend to pay lower wages for relatively heavy workloads, there is an urgent need to foster the private sector through SMEs in order to develop the economy and resolve unemployment issues in the future. Under these circumstances, labor productivity should be improved through education reform and vocational training, and efforts must be made to improve the public perception of employment in the private sector.
   Chapter 3 touches upon major policies and cases of inter-government cooperation related to the development of SMEs in four Middle Eastern countries — Saudi Arabia, UAE, Egypt and Tunisia. Saudi Arabia has recently presented its vision and detailed strategies for SMEs through the announcement of the “Saudi Vision 2030” and the “National Transformation Program 2020.” The Saudi Arabian government is providing credit guarantees and long-term financing to SMEs through the Saudi Industrial Development Fund, and promoting SMEs’ technological innovation by operating technology incubators, technology transfer programs and so on. The UAE has also shown strong interest in promoting SMEs by introducing new legislation for the small and medium enterprises sector(the SMEs Law) in April 2014. Through the Khalifa Fund for Economic Development, the UAE government offers various financial programs for SMEs based on their size, characteristics and the urgency of their financial needs, and promotes technological start-ups by holding contests for business ideas in the area of technology and technology commercialization programs.
   Egypt has outlined six strategies for promoting SMEs through the announcement of its “Industrial and Trade Development Strategies 2016-2020” in 2016 and established the Micro, Small and Medium Enterprise Development Agency(MSMEDA) in the following year to enhance the efficiency of its support policies. The Egyptian government has shown relatively high interest in promoting start-ups, but its policy on SMEs innovation seems somewhat lacking compared to the other three countries. Egypt has pushed for a total of four projects with the Canadian government in the SMEs sector. Tunisia reorganized its existing Ministry of Industry into the Ministry of Industry and Small and Medium Sized Enterprises in December 2017, and established a new department within the ministry to oversee matters related to SMEs. To promote technological innovation for SMEs, the Tunisian government emphasizes the importance of clusters such as technology parks. Policies for vitalizing start-ups in Tunisia are being implemented, together with the creation of business incubators and efforts to streamline business establishment procedures. Tunisia has recently stepped up its cooperation with the EU and German governments in areas such as financial and technological support for SMEs.
   Chapter 4 analyzes current trends of Korean SMEs in the Middle East and the Korean government’s support programs for them, also examining the difficulties and policy demands through survey data as well. From Korea’s perspective, the Middle East is a region where SMEs account for a larger portion of exports into the region than large corporations, and SMEs also show less volatility in their export volumes than conglomerates. The major export destinations for Korean SMEs in the region are Iran, UAE, Saudi Arabia and Egypt. Foreign direct investment in the region by Korean SMEs remains relatively low. Major investors in the region include Saudi Arabia, UAE, and Egypt, with the construction and real estate sectors accounting for the largest proportion of this investment. The biggest difficulties of Korean companies in the Middle East are caused by the unique laws and regulations in the region, including the sponsorship and workforce nationalization policies in private companies. According to the survey, most of the Korean companies in the region have worked out their business difficulties on their own or through help from private institutions and only 16.7% of the companies have utilized the Korean government’s support programs. In addition, Korean companies’ awareness and satisfaction of the Korean government’s policies to support overseas companies were not that high. Regarding policy demand, Korean companies in the Middle East wish for an easing in trade finance/insurance support requirements, increasing funding for overseas investment, and the provision of more detailed and reliable information on local investment conditions and the sponsorship system.
   Chapter 5 suggests three basic policy schemes based on the research results in the previous chapters. First, financial assistance is necessary to increase joint ventures and M&A in the region. Second, systems to share information with businesses operating in the region should be strengthened. Toward this, a Korean team network between embassies, public institutions and companies could be established to share information on business opportunities and cases of dispute. Third, intergovernmental programs should be expanded to establish a cooperation partnership and network between Korean and Middle Eastern governments. These programs could be divided into human exchange programs and institutional improvement programs. 

 

   During the global financial crisis, the US monetary authority (Fed) reduced the benchmark interest rate to 0% and provided massive liquidity through three quantitative easing measures. As a result, the US Fed balance sheet expanded five times ($ 4.5 trillion) from September 2008 ($ 0.9 trillion). Much of the increased global liquidity flowed into emerging economies. The influx of capital contributed to the growth of emerging economies, leading to new credit increases such as bank loans. Emerging markets, which supported 63% of global GDP, served as an engine of the global economy at a time when the growth in the US and Europe were subdued.
   While capital inflows have a supporting role in contributing to economic growth, they have also been a potential prompting factors to systemic risk in emerging countries and Korea. Emerging economies actively responded to systemic risks from foreign capital inflows. With the introduction of macro-prudential policy measures, emerging economies have been striving to maintain an external balance by responding to the surge in domestic credit and restraining excessive capital inflows. In order for emerging countries to adopt measures to curb inflows of capital, persuasiveness and legitimacy are secured only if external influences are triggered by external factors.
   Most previous studies have shown that push factors have had a greater impact on capital outflows in emerging economies than in pull factors. Raghuram Rajan, former central bank governor of India, has pointed out that the monetary policy impact of the US Fed and the developed country central bank is a major external factor (push factor). Meanwhile, in May 2018, the US Federal Reserve Chairman Jerome Powell addressed the controversy over capital movements to emerging economies after the global financial crisis. Powell said the inflows of capital into emerging economies is unlikely to have been caused by the Fed’s interest rate policy.
   According to the study, the US Fed’s quantitative easing has had the effect of lowering the Fed base rate by a further 4%. This means that normalization of the quantitative easing policy will lead to a policy rate hike of 4 percentage points. This is the reason why the normalization of US monetary policy will have a negative impact on the global economy. At the same time, the squeezing on capital outflows in emerging economies is increasing.
   Powell’s speech contains “implied” warnings that the US monetary policy is not a triggering force of a capital outflow in emerging economies. That’s why Powell’s speech is adding to the difficulty of policy responses in emerging countries. This suggests that it is necessary to check the determinants of global capital flows. In addition, the impact of US monetary policy on Korea's financial markets and capital outflows needs to be analyzed in depth.
   In this context, Chapter 2 introduced the progress of normalization of US monetary policy and recent issues. In Chapter 3, the discussion of push vs. pull factors in cross-country capital flows were examined using panel data of 47 countries including emerging and developed countries. Empirical results show that the external/ internal factors determining capital flows in developed and emerging countries is different.
   In developed countries, both internal and external factors play an important role in determining capital inflows and outflows. However, in emerging economies, external factors were found to be a major determinant. We also found that the patterns of capital flows among the four sub-groups in emerging countries are quite different.
   For emerging Asian economies, both internal and external factors are main determinants. However, external factors in Eastern Europe and internal factors in emerging Latin America are key determinants. In addition, capital inflows into emerging economies increased from the next quarter after US interest rates were cut first. This suggests that Powell’s argument (“Large capital inflows into emerging economies begins before the Fed’s rate cuts”) need to be reevaluated.
   Chapter 4 analyzes the impact of the normalization of US monetary policy on the domestic financial market and foreign exchange market by using the TVP-VAR model. In TVP-VAR model, the volatility of the economic structure and shock varies with time. Analysis shows that US credit spread shock, which is an indicator of uncertainty in international financial markets, has had a negative impact on domestic financial markets and capital inflows. On the other hand, the impact of the US policy rate hike after 2015 was limited.
   This study also practiced a simulation based on the assumption that the US policy rate, term-premium, credit spread are all rise at the same time. The shock caused domestic long-term interest rates, credit spreads, and won/dollar exchange rates to rise. However, residents’ overseas investment funds were returned while the foreigners’ investment funds flowed out. Chapter 5 summarizes the cases of macro-prudential policy measures of major countries that responded to the capital outflow situation.
   Based on the analysis of this report, Chapter 6 presents the five policy implications. First, it is necessary to respond appropriately to an ‘externality’ such as capital outflow caused by normalization of monetary policy in developed countries. Through the G20 platform, the Government could put international institutions like IMF, OECD, BIS in doing an objective analysis of the adverse effects of capital flows between “source countries” and “recipient counties”.
   Second, when operating domestic monetary policy, Bank of Korea is necessary to consider a pattern of capital flows that have changed from the past. In the meantime, there was a concern that the expanded gap between the domestic and US interest rates would lead to capital outflows. However, the capital outflows risks from the interest rate gap is expected diminished from the two reasons. ① The capital flow pattern of 「residents’overseas investment > foreigners domestic investment」 is settled down after 2014. ② Residents’ overseas investment could return in the crisis time.
   Third, the establishment of a virtuous cycle structure of 「current account surplus ⇆ residents’overseas investment」 is key to the balance in the external sector. If current account surplus does not stay in Korea but leads to overseas investment of Korean investors, the income generated in the form of dividend income etc. will be linked to next round current account surplus and will ease the pressure on the Korean Won appreciation.
   Fourth, there is a need to increase the foreign currency deposits of residents which act as ‘the second’ foreign exchange reserves securing foreign currency liquidity. Fifth, it is time for Bank of Korea to double its efforts to communicate with the financial markets on the policy rate path. It is a good case in point for the Fed to persuade market sentiment by strengthening its communication efforts through ‘forward guidance’ vehicle, which announced the path ahead of the expected rate hike.