Kei Koreaseconomy Section04

7/30/2019 Kei Koreaseconomy Section04

1/20

KOREAS ROLE IN ASIAN INTEGRATION - 79

FINANCIAL INTEGRATION IN ASIA:

DEVELOPMENT AND KOREAS ROLE

By Park Young-Joon

Abstract

6LQFH WKH$VLDQQDQFLDOFULVLV LQQDQFLDO LQWHJUDWLRQ LQ$VLDKDV EHHQ LQGXFHG E\FROOHFWLYHLQWUDUHJLRQDO LQLWLDWLYHV

,WKDV PDQLIHVWHG LQYDULRXV DVSHFWV LQFOXGLQJJUDGXDO QDQFLDO OLEHUDOL]DWLRQ LQFUHDVLQJ FURVVERUGHU FDSLWDO RZV HVWDEOLVKLQJ

UHJLRQDO QDQFLDO VDIHW\QHWV DQG GHYHORSLQJ ORFDO FXUUHQF\ERQGPDUNHWV:KLOHQDQFLDO GHUHJXODWLRQ DQG FDSLWDO DFFRXQW

liberalization has made progress, Asian countries have experienced sudden stops or sharp capital reversals due to external shocks

DQGFXUUHQF\LQVWDELOLW\7KH&0,0D UHJLRQDOQDQFLDOVDIHW\QHWSOD\V LWVUROHDVDFHQWUDOSODWIRUPIRUPDQDJLQJUHJLRQDO

QDQFLDO DUUDQJHPHQWV ,QDGGLWLRQ WR LWVFULVLVUHVROXWLRQ IXQFWLRQ WKH&0,0FDQ DOVR EHH[SDQGHGE\DXJPHQWLQJD FULVLV

SUHYHQWLRQIXQFWLRQ0RUHRYHUWKH$%0,DQGWKH$%)VZHUH LQWHQGHG WRDFKLHYHDPRUHHIFLHQWUHF\FOLQJRI$VLDQVDYLQJV

into investment in the region by developing regional bond markets. Gathering regional momentum, Koreas role as an honest

EURNHUIRUIXUWKHUQDQFLDOLQVWLWXWLRQDOLQWHJUDWLRQLVLPSRUWDQWHVSHFLDOO\LQDVDFRFKDLUFRXQWU\RI$6($1

KOREAS ROLE IN ASIAN INTEGRATION


2/20

80 - KOREAS ECONOMY 2012

7KH SURFHVVRI$VLDQ QDQFLDO LQWHJUDWLRQ KDV EHHQ LQGXFHG

E\WKHFRRUGLQDWHGUHJLRQDOLQLWLDWLYHVRIQDQFLDOFRRSHUDWLRQ

along with real economic integration through the intra-regional

IUHHWUDGHDJUHHPHQWV8QOLNHLQ(XURSHHFRQRPLFLQWHJUDWLRQ

LQ$VLDHPHUJHGZLWKWKHQHHGIRUFUHDWLQJUHJLRQDOQDQFLDO

VHOIKHOSPHDVXUHVDIWHUWKH$VLDQQDQFLDOFULVLVLQ

6LQFH WKHQ QDQFLDO LQWHJUDWLRQ KDV PDQLIHVWHG LQ YDULRXV

DVSHFWV JUDGXDO QDQFLDO OLEHUDOL]DWLRQ LQFUHDVLQJ FURVV

ERUGHU FDSLWDO RZV HVWDEOLVKLQJ UHJLRQDO QDQFLDO VDIHW\nets, and developing local currency bond markets.

Asian economic regionalism has been driven by market-based

forces, rather than by a grand blueprint of economic integra-

tion. In fact the Asian crisis triggered regional collective initia-

WLYHVWRSURPRWHQDQFLDOLQWHJUDWLRQLQ(DVW$VLD7KHFULVLV

revealed what Asia has been lagging behind in terms of its

QDQFLDOV\VWHPDQGGHYHORSPHQWFRPSDUHGZLWKUHDOVHFWRU

LQWHJUDWLRQ 3RRU SHUIRUPDQFH LQ WKH QDQFLDO VHFWRU ZDV

FDXVHGE\VHYHUDOIDFWRUVVXFKDVKLJKULVNYXOQHUDELOLW\WR

H[WHUQDOVKRFNVKHDY\GHSHQGHQFHRQEDQNQDQFLQJLQVXI-

FLHQW ORQJWHUPFUHGLWV DQGXQGHUGHYHORSPHQWRI UHJLRQDOERQGPDUNHWVZHDNQHVV RI D QDQFLDO VXUYHLOODQFHPHFKD-

QLVP DQG WKH ODFN RI FRPSHWLWLRQ LQ QDQFLDO VHFWRUV DQG

SUHPDWXUHFDSLWDOPDUNHWV7KLVSURFHVVRIUHJLRQDOQDQFLDO

integration has been supported by the rationale that it achieves

EHWWHUDOORFDWLRQRIQDQFLDOUHVRXUFHVDQGEHWWHUULVNVKDULQJ

as well as ultimately promoting regional economic growth.

,QWUDUHJLRQDO LQLWLDWLYHV KDYH VWDUWHG SOD\LQJ D VLJQLFDQW

UROH LQ IRVWHULQJ QDQFLDO LQWHJUDWLRQ$VLDQ SROLF\PDNHUV

realized the absence of regional mechanisms which could

have helped avoid the crisis and be used to prevent future

crises. They also understood the intrinsic weakness of AsianQDQFLDOV\VWHPVDQGWKHLUSRRUGHYHORSPHQWRIERWKUHJLRQDO

DQGGRPHVWLFQDQFLDOPDUNHWV$VDUHVXOWRIH[WHQVLYHGLD-

ORJXH DPRQJ$6($11 countries, they were able to push

forward several initiatives for regional cooperation as part of

QDQFLDOLQWHJUDWLRQ

7KHVXEVHTXHQWVHFWLRQV IRFXV RQQDQFLDO LQVWLWXWLRQDO LQ-

WHJUDWLRQLQ WKHUHJLRQ(DVW$VLDV LQLWLDWLYHVLQ VXSSRUWRI

UHJLRQDO QDQFLDO LQWHJUDWLRQ FDQ EH FODVVLHG LQWR IRXU

SLOODUV WKH &KLDQJ 0DL ,QLWLDWLYH &0, DQG LWV PXOWL

ODWHUDOL]DWLRQ &0,0 DV D FRPPLWPHQW WR SURYLGH 86

dollar liquidity support to member countries through currencyswaps in response to urgent short-term liquidity shortages

DQG EDODQFH RI SD\PHQW GLIFXOWLHV LQ FULVLV WKH HV-

WDEOLVKPHQW RI WKH $6($1 0DFURHFRQRPLF 5HVHDUFK

2IFH $052 DV DQ LQGHSHQGHQW UHJLRQDO HFRQRPLF VXU-

YHLOODQFH PHFKDQLVP QHZ LQWURGXFWLRQ RI UHJLRQDO

FULVLV SUHYHQWLRQ VFKHPH DQG WKH$VLDQ %RQG 0DUNHW

,QLWLDWLYH $%0, DQG WKH $VLDQ %RQG )XQGV $%)V WR

develop local bond markets for recycling regional capital and

to mitigate the double mismatch problem.

Extent of Financial Integration in East Asia

([LVWLQJ OLWHUDWXUH SRLQWVRXW$VLDQQDQFLDO LQWHJUDWLRQ ODJV

behind its trade and real-side economic integration. Asias

LQWUDUHJLRQDOQDQFLDOOLQNDJHLVDOVRZHDNHUWKDQWKHJOREDO

link. This might be attributed to the lack of well-functioning

UHJLRQDO QDQFLDO LQVWLWXWLRQV DQG XQGHUGHYHORSPHQW RI

UHJLRQDO DQG GRPHVWLF QDQFLDO PDUNHWV 6LQFH WKH $VLDQ

FXUUHQF\FULVLVQDQFLDOPDUNHWLQWHJUDWLRQDQGFURVVERUGHUQDQFLDO WUDQVDFWLRQVKDYH EHJXQ WR LQFUHDVH EXWGRQRW \HW

UHHFWFRQYHUJHQFHIRUUHJLRQDOLQWHJUDWLRQ

:KLOH (DVW$VLD KDV IRFXVHG RQ UHDO HFRQRPLF LQWHJUDWLRQ

through regional trade agreements, the region has also begun

ZRUNLQJ WRZDUGV QDQFLDO LQWHJUDWLRQ 7KH $VLDQ

FULVLVUDLVHGDZDUHQHVVRQWZRSRLQWV$VLDQFRXQWULHVQHHG

WR VWUHQJWKHQ WKHLU GRPHVWLF QDQFLDO VHFWRUV IRU PDQDJLQJ

WKH HIFLHQW DEVRUSWLRQ RI FDSLWDO LQRZV DQG WKH QDQFLDO

LQWHUPHGLDWLRQQHHGVDQGWKHUHJLRQQHHGVWRGHYHORSWKH

institutional capacity to resolve cross-country contagion of

FRPPRQQDQFLDOSUREOHPV

,QFUHDVLQJ WKH GHJUHH RI QDQFLDO GHUHJXODWLRQ DQG FDSLWDO

DFFRXQWOLEHUDOL]DWLRQVLQFHWKHVKDVOHGWRDVLJQLFDQW

ULVH LQ FDSLWDO LQRZV WRZDUGV HPHUJLQJ$VLDQ HFRQRPLHV

7KLV VXUJHLQFDSLWDO RZV FRQVLVWVPDLQO\RIIRUHLJQ GLUHFW

LQYHVWPHQW)',RZVSRUWIROLRLQYHVWPHQWVDQGVKRUWWHUP

EDQNLQJ RZV (YHQ WKRXJK&KLQD LV D GRPLQDQW UHFLSLHQW

RI )', LQRZ LQ$VLD WKH JHQHUDO SDWWHUQ RI )', RZV LV

UHODWLYHO\ VWDEOH +RZHYHU SRUWIROLR LQYHVWPHQW RZV DQG

VKRUWWHUPEDQNLQJRZVDUHUHJDUGHGDVSRWHQWLDOVRXUFHVRI

systematic risk to Asian economies. In fact, Asian countries

experienced the risk of sudden stops or sharp capital reversalsdue to external economic shocks, currency instability and the

double mismatch problem.

Recently the ADB warned that government authorities

of emerging Asian economies should be ready to respond

ZKHQ YRODWLOH FDSLWDO RZV WKUHDWHQ WR GHVWDELOL]H WKHLU

QDQFLDOPDUNHWV 6XUJHV LQVKRUWWHUPFDSLWDO LQRZVFRXOG

potentially leave countries vulnerable to sudden reversals

in portfolio investment and to currency instability. The huge

LQYHVWPHQW IURP RYHUVHDV KDV SXW VLJQLFDQW SUHVVXUH RQ

the currencies of emerging economies. Recent surges in

FDSLWDORZVGXULQJDJOREDOQDQFLDOFULVLVKDYHEHHQGULYHQE\SRUWIROLRHTXLW\RZVVKRZQLQ)LJXUHDVLQYHVWRUVWDNH

advantage of earnings differential between emerging Asian

markets and mature markets.

)LQDQFLDOLQWHJUDWLRQLPSOLHVDQLQFUHDVHLQFDSLWDORZVDQG

DFRQYHUJHQFHWHQGHQF\IRUSULFHVDQGUHWXUQVRQWUDGHGQDQ -

FLDODVVHWVDFURVVFRXQWULHV6LQFHWKHVPDQ\(DVW$VLDQ

FRXQWULHV KDYH EHHQ JUDGXDOO\ GHUHJXODWLQJ WKHLU QDQFLDO

PDUNHWV RSHQLQJ QDQFLDO VHUYLFHV WR IRUHLJQ LQYHVWRUVDQG


3/20


OLEHUDOL]LQJFDSLWDODFFRXQWVWRLPSURYHWKHHIFLHQF\RIWKHLU

QDQFLDOPDUNHWVDQGDWWUDFWIRUHLJQFDSLWDO)LJXUHGHSLFWV

the recent trend of the cross-border portfolio investments of

eight emerging Asian countries.2(PHUJLQJ$VLDVIRUHLJQSRUW-folio investments are increasingly being invested in the region,

with intra-regional portfolio holdings rising from 17.8 percent

RI WKH UHJLRQV WRWDO IRUHLJQ DVVHW KROGLQJV LQ WR

SHUFHQWLQ7KLVLPSOLHVDKLJKHUVKDUHRIQDQFLDODVVHWV

has been traded within the region and held by regional inves-

WRUVZKLFKLVHYLGHQFHRIRQJRLQJQDQFLDOLQWHJUDWLRQLQWKH

UHJLRQDOQDQFLDOPDUNHW,QDGGLWLRQWKHFRPELQHGVKDUHRI

WKH8QLWHG6WDWHVDQG (XURSH LQ$VLDQ HPHUJLQJHFRQRPLHV

total foreign portfolio has declined from 47.3 percent in 2004

WRSHUFHQWLQ7KHVHSDWWHUQVLQHPHUJLQJ$VLDVSRUW-

IROLRLQYHVWPHQWVLPSO\DKLJKHUGHJUHHRIUHJLRQDOQDQFLDO

integration and cross-border openness.

Regional Financial Safety Nets

Overview of CMI and CMIM

$IWHUH[SHULHQFLQJWKHVHYHUHFRQWDJLRQRIWKHQDQFLDOFULVLV

LQWKHUHJLRQ$6($1UHDOL]HGWKHQHHGIRUDUHJLRQDOVHOI

help measure against the recurrence of a similar crisis in the

future. The CMI was designed to address short-term liquidity

GLIFXOWLHV DVDQHWZRUN RIELODWHUDO VZDS DUUDQJHPHQWVDQG

WR VXSSOHPHQW H[LVWLQJ LQWHUQDWLRQDO QDQFLDO DUUDQJHPHQWV

7KH&0,H[SDQGHGWKHH[LVWLQJ$6($16ZDS$UUDQJHPHQW

$6$ZKLFKZDV LQLWLDOO\ HVWDEOLVKHG E\ WKHYH$6($1

FRXQWULHV ,QGRQHVLD 0DOD\VLD WKH 3KLOLSSLQHV 6LQJDSRUH

DQG7KDLODQGLQ+RZHYHU LWVVL]HRIELOOLRQZDV

LQVXIFLHQWWRSURYLGHHPHUJHQF\OLTXLGLW\LQFULVLV

$6($1 KDV H[WHQGHG $6$ WR WKH RWKHU YH $6($1

PHPEHUVDQGWKH3OXV7KUHHFRXQWULHVE\LQFUHDVLQJLWVVL]H

WRELOOLRQ&0,ZDVDJUHHGWRLQ0D\LQ&KLDQJ0DL

7KDLODQG ZLWK WKH REMHFWLYH RI HVWDEOLVKLQJ D QHWZRUN RI

bilateral swap arrangements to address short-term liquid-

LW\ GLIFXOWLHV LQ WKH UHJLRQ DQG WRVXSSOHPHQW H[LVWLQJ LQ-

WHUQDWLRQDO QDQFLDO DUUDQJHPHQWV 7KH$6($1 QDQFH

ministers took the framework of the existing CMI and moved

toward its multilateralization in May 2009, and the CMIMZDVQDOO\PDGHHIIHFWLYHRQ0DUFK7KHPXOWLODW-

eralized CMI provides emergency liquidity support from the

WRWDOIXQGRIELOOLRQ XQGHUD VLQJOH DJUHHPHQW3 Since

WKH&0,0LVQDQFHGLQWKHIRUPRISURPLVVRU\QRWHVWKHUH

is no direct and immediate impact on the member countrys

international reserves.

7KH&0,0UHSUHVHQWVDKLJKO\VLJQLFDQWLQVWLWXWLRQDOGHYHORS-

PHQWIRUUHJLRQDOQDQFLDOLQWHJUDWLRQDVLWQRWRQO\SOD\VWKH

UROHRIQDQFLDOVDIHW\QHWVLQWLPHVRIFULVLVEXWDOVRSURYLGHV

D FHQWUDO SODWIRUP IRU PDQDJLQJ UHJLRQDO QDQFLDO DUUDQJH-

PHQWV,QSDUWLFXODULWHQKDQFHV$6($1LQWHUJRYHUQPHQWDOGLDORJXHIRU IXUWKHUQDQFLDOFRRSHUDWLRQ LQ UHODWHGDUHDVE\

XVLQJ&0,0JRYHUQDQFHLQFOXGLQJQDQFLDOVXUYHLOODQFHDQG

the development of local bond markets. Future progress on its

LQVWLWXWLRQDOVHWXSZLOODOVRVHUYHWRIDFLOLWDWHQDQFLDOLQWHJUD-

tion in the region and contribute to the development of both

UHJLRQDODQGGRPHVWLFQDQFLDOPDUNHWV

CMIM and ESM

,QHDUO\0D\ WKH (XURSHDQ VRYHUHLJQGHEW FULVLV DQG

LWVFRQWDJLRQLQWKHUHJLRQOHG(XURSHDQ8QLRQSROLF\PDNHUV

to approve three lending facilities for euro area member

VWDWHVLQVHULRXV QDQFLDO GLVWUHVV7KH UVW IDFLOLW\ LVD

billion euro support package for Greece, approved on May

UGDQGSURYLGHGMRLQWO\ZLWKWKH,0)7KHVHFRQGIDFLOLW\LV

WKH(XURSHDQ)LQDQFLDO6WDELOL]DWLRQ0HFKDQLVP()604 with

ELOOLRQ HXURV7KHWKLUGIDFLOLW\LV WKH(XURSHDQ)LQDQFLDO

6WDELOLW\)DFLOLW\()6) 5 with an amount of 440 billion euros,

supplemented with a 250 billion euro IMF commitment.

&RPSDULQJ WKH &0,0 ZLWK WKH (XURSHDQ 6WDELOL]DWLRQ

0HFKDQLVP(60ZKLFKFRQVLVWVRI WKH ()60 DQG()6)

Figure 13RUWIROLR,QYHVWPHQW)ORZVLQ(TXLW\ LQ86ELOOLRQV

-80

-60

-40

-20

0

20

40

60

80

100

120

Japan China Korea

Source: International Financial Statistics, IMF

Indonesia

2004 2005 2006 2007 2008

Malaysia SingaporePhilippines Thailand

Figure 2 &URVV%RUGHU3RUWIROLR,QYHVWPHQWLQ86

0

200400

600

800

1000

1200

1400

1600

Source: Coordinated Portfolio Investment Survey, IMF

2004 2005 2006 2007 2008 2009

Emerging Asia and Japan USA Europe Rest of the World


4/20


WKH (60 LV WKH IDFLOLW\ WR FRSH ZLWK GLIFXOWLHV FDXVHG E\

exceptional circumstances beyond the member states

FRQWURO VXFKDVLWVVFDOFULVLV7KH(60SOD\V LWVUROHDVD

crisis resolution mechanism, much like the CMIM. However,

while the purpose of the CMIM is to resolve short-term foreign

H[FKDQJH OLTXLGLW\ FULVLV E\ SURYLGLQJ86GROODUV WKH(60

aims to overcome a solvency crisis by providing euros.

Accordingly, the CMIM conditionality requires no capital

FRQWURO SDUWLFLSDWLRQ LQ WKH (FRQRPLF 5HYLHZ DQG 3ROLF\

'LDORJXH (53' DQG PDLQWHQDQFH RI DQ DSSURSULDWH OHYHO

RILQWHUQDWLRQDOUHVHUYHZKLOHWKH(60FRQGLWLRQDOLW\IRFXVHV

RQVFDODQGHFRQRPLFSROLFLHV,QDGGLWLRQ&0,0VXSSRUWVshort-term liquidity via currency swap arrangements, while

()6)LVDVSHFLDOSXUSRVHYHKLFOH639VHWXSWRPDNHORDQVWR

euro area countries.

New ASEAN+3 Economic Surveillance Mechanism

,Q WHUPVRI UHJLRQDOPDFURHFRQRPLF DQG QDQFLDO VXUYHLO-

lance, innovation was introduced within the CMIM frame-

work by establishing the new surveillance unit AMRO. Its

mandate includes monitoring potential risk vulnerabilities and

Table 1 &0,0&RQWULEXWLRQVDQG3XUFKDVLQJ0XOWLSOH

ContributionsPurchasing Multiple Voting Power (%)

USD (Bil.) Share (%)

China 38.4

Exc. HK

34.2 32.028.5 0.5 25.43

HK 4.2 3.5 2.5 2.98

Japan 38.4 32.0 0.5 28.41

Korea 19.2 16.0 1.0 14.77

Plus Three 96.0 80.0 - 71.59

Indonesia 4.552 3.793 2.5 4.369

Thailand 4.552 3.793 2.5 4.369

Malaysia 4.552 3.793 2.5 4.369

Singapore 4.552 3.793 2.5 4.369

Philippines 4.552 3.793 2.5 4.369

Vietnam 1.00 0.833 5.0 1.847

Cambodia 0.12 0.100 5.0 1.222

Myanmar 0.06 0.050 5.0 1.179

Brunei 0.03 0.025 5.0 1.158

Lao PDR 0.03 0.025 5.0 1.158

ASEAN 24.0 20.00 - 28.41

Total 120.0 100.0 - 100.0

:V\YJL!;OL1VPU[4PUPZ[LYPHS:[H[LTLU[VM[OL[O(:,(5-PUHUJL4PUPZ[LYZ4LL[PUN

NHHSLQJWUDFNRINH\PDFURHFRQRPLFDQGQDQFLDOFRQGLWLRQ

trends, as well as minimizing the moral hazard problem aris-

ing from the crisis resolution function of the CMIM through

short-term liquidity support. It is also important to ensure that

SRWHQWLDO UHFLSLHQW PHPEHUV RI$6($1 PDLQWDLQ SURSHU

FRQGLWLRQV WR UHSD\ ORDQV IURP WKH &0,0 (VWDEOLVKHG LQ

6LQJDSRUHLQ$SULOE\$6($1FRXQWULHV$052LV

expected to perform regional macroeconomic surveillance

activities, supplementing the global surveillance activities

WKURXJKWKH,0)PLVVLRQRI$UWLFOH,9FRQVXOWDWLRQV

$052VUVWGLUHFWRUD&KLQHVHQDWLRQDOZDVDSSRLQWHGLQ

May 2011 and leads the organization for one year of a three-

\HDUWHUP$IWHUKLVWHQXUHDVHFRQGGLUHFWRUD-DSDQHVHQD -

WLRQDOZLOOVHUYHWKHUHPDLQLQJWZR\HDUV7KHUVWGLUHFWRU

was expected to represent Chinas position and to focus on

the IMF link. For example, China proposed that the CMIMs

IMF-delink portion increase to 30-40 percent of its funds from

the current 20 percent. As AMRO becomes effectively opera-

tional, the level of the IMF-linked portion will be reduced.


5/20


AMRO may not be a perfect substitute for the IMF, but

its role in regional surveillance will complement the work

being done by the IMF. As part of becoming a solid and

well-functioning institution, AMRO is expected to introduce

regional policy conditionality in support of the CMIM,

contribute to a membership enlargement, and introduce crisis

a prevention function in the region.

Introducing Regional Crisis Prevention Function'XULQJ WKH JOREDOQDQFLDO FULVLVFDSLWDO RZV KDYH VKRZQ

volatile behavior especially in emerging markets. However,

despite their relatively sound economic fundamentals, Asian

QDQFLDO PDUNHWV DUH YXOQHUDEOH WR H[WHUQDO VKRFNV GXH WR

LQFUHDVLQJFDSLWDORZVIURPDQGWRWKHUHJLRQ7KHUHIRUHLW

is natural to consider a regional crisis prevention function to

VHUYHDVWKHUVWUHZDOODJDLQVWQDQFLDOULVNV 7

In order to design an effective crisis prevention program,

the following key elements should be considered. First, a

crisis prevention function needs to be equipped with ex-ante

TXDOLFDWLRQV ,QPDNLQJ WKH GHFLVLRQ WR SURYLGH OLTXLGLW\

we need to evaluate a countrys economic status and the

V\PSWRPVRIWKHQDQFLDOFULVLV DQGWR PLQLPL]HSRWHQWLDO

PRUDOKD]DUG+RZHYHU LI WKH H[DQWH TXDOLFDWLRQVZHUH

excessively strict, it would lower the chances of using

WKH FULVLV SUHYHQWLRQ IDFLOLW\ &3) WKHUHIRUH PDNLQJ LWV

effectiveness uncertain and eventually eliminating the

demand. Considering the trade-off between reducing moral

KD]DUGDQGFUHDWLQJSRWHQWLDOGHPDQGIRUWKH&3)WKHUHJLRQDO

&3) VKRXOG VWULNH D EDODQFH EHWZHHQ H[DQWH TXDOLFDWLRQV

and ex-post conditionality. Second, once a swap-requesting

FRXQWU\TXDOLHVIRUWKHH[DQWHFRQGLWLRQVLWVGUDZLQJULJKWVshould be guaranteed by an agreement. This automaticity

RI GUDZLQJLV FULWLFDO IRU WKH &3) WRHQVXUH LWV FUHGLEOH

activation. Third, a regional surveillance unit should prop-

erly function to support the two elements mentioned above.

7RVFUHHQH[DQWHTXDOLFDWLRQVDQGJXDUDQWHHDXWRPDWLFLW\

of drawing, a surveillance unit should provide appropriate

analyses on regional economic conditions.

$6($1 FDQ FRQVLGHU D WZRWUDFN RSHUDWLRQ RI WKH

FXUUHQW&0,0DVDEDVLFIUDPHZRUNIRUWKH&3),WVWZRWUDFN

mechanism can be operated as the crisis resolution and crisis

prevention functions.8

That is, the crisis prevention functioncan be augmented to the current crisis resolution function of

the CMIM. If this is the case, a country, showing symptoms

RI D QDQFLDO FULVLV EXW TXDOLI\LQJ H[DQWH FRQGLWLRQVPD\

request liquidity support and its drawing rights are

granted for a designated period of time. According to de las

&DVDVDQG6HUUDWKHXVHRI,0)OHQGLQJZLWKWKHDFWXDO

duration of six months or less was only for three cases out of

SURJUDPVEHWZHHQ DQG 9 In this regard, the

VL[PRQWKDUUDQJHPHQWSHULRGRIWKHUHJLRQDO&3)ZRXOGEH

UHDVRQDEOH EHFDXVH WKH$6($1&3) LVDEOH WRPHHW WKH

corresponding demand for short-term precautionary lending.

,QGHVLJQLQJWKHGHWDLOVRIWKH$6($1&3)PHPEHUVFDQ

refer to the IMF lending facilities for crisis prevention, such as

H[LEOH&UHGLW/LQH3UHFDXWLRQDU\DQG/LTXLGLW\/LQHDQGWKH

+LJK$FFHVV3UHFDXWLRQDU\$UUDQJHPHQWVSURJUDPXQGHUWKH

Stand-By Arrangement.

In addition, regional policy conditionality by the CMIMframework can be imposed with the aid of AMRO or

$6($1 (53' ,Q RUGHU IRU WKLV VFKHPH WR EH HIIHFWLYH

VRPH SUHUHTXLVLWHV VKRXOG EH VDWLVHG )RU H[DPSOH WKH

VXUYHLOODQFH IXQFWLRQ ZLOO KDYH WR EH HQKDQFHG UVW EHIRUH

UHGXFLQJWKH,0)OLQNHGSRUWLRQDQGLWPLJKWEHGLIFXOWWR

ensure market credibility with a limited amount of resources

and a lack of reserve pooling.

$QRWKHULPSRUWDQWWKLQJWKDW$6($1&3)VKRXOGFRQVLGHU

is to characterize exit strategies from the crisis prevention

function. If a country still requires additional liquidity

VXSSRUW DIWHU H[KDXVWLQJ WKH&3)V DUUDQJHPHQW SHULRG WKH&3)UHTXHVWLQJ FRXQWU\ FRXOG EHGHHPHG WR KDYH VWUXFWXUDO

economic problems, rather than showing crisis symptoms.

If this is the case, the crisis prevention function can be

switched to the CMIMs crisis resolution track or be linked

with the IMF lending facility.

Institutional Integration in Asian

Bond Markets

Overview of ABMI and ABFs

$IWHU WKH $VLDQ QDQFLDO FULVLV (DVW $VLDQ FRXQWULHV SDLG

DWWHQWLRQ WR UHIRUPLQJ GRPHVWLF QDQFLDO PDUNHWV DQGdeveloping regional bond markets. It was widely acknowl-

HGJHGWKDWH[FHVVLYHQDQFLDOGHSHQGHQFHRQWKHEDQNEDVHG

system in the region was a cause of the crisis in 1997. The ABMI

was established in 2003 to develop the Asian bond markets

XQGHUWKH$6($1IUDPHZRUNDQGEHFDPHIXOO\RSHUDWLRQDO

WKDWVDPH\HDU7KH$%0,DLPVWRGHYHORSHIFLHQWDQGOLTXLG

local currency bond markets in Asia through recycling savings

DQGLQWHUQDWLRQDOUHVHUYHVRI(DVW$VLDQFRXQWULHV,WHPSKDVL]HV

the creation of regional bond markets where bonds are denomi-

nated in regional currencies. It was also expected to mitigate

WKHFKURQLFGRXEOHPLVPDWFKSUREOHPLQ(DVW$VLDFXUUHQF\

and maturity mismatch. In this regard, developing local cur-UHQF\ERQGPDUNHWV FRQVWLWXWHV DQRWKHU DVSHFW RI$6($1

QDQFLDOLQWHJUDWLRQ

The main reason behind the establishment of the ABMI and

$%)VZDVWKHLQWHQWLRQWRDFKLHYHDPRUHHIFLHQWUHF\FOLQJRI

Asian savings into investment in the region by developing local

currency bond markets. The 1997-98 crisis was indeed made

more severe by the absence of well-developed bond markets,

which made Asian companies rely on bank loans and borrow


6/20


foreign ones. International reserves and savings in Asia have

EHHQODUJHO\LQYHVWHGLQWKH86DQG(XURSHDQGWKH\DUHWKHQ

re-invested in Asia. It is known that about 80 percent of Asias

SRUWIROLRLQYHVWPHQWWLOWVWRZDUGDVVHWVLQWKH86DQG(XURSH

$VRI0DUFK$6($1IRUHLJQUHVHUYHVDPRXQWWR

percent of the total reserve in the world, but most of them are still

LQYHVWHGLQDVVHWVRXWVLGHRI(DVW$VLD

$V UHJLRQDO QDQFLDO DXWKRULWLHV UHDOL]HG VXFKZHDNQHVV LQtheir domestic systems, they promoted regional initiatives of

the ABMI and ABFs to develop local bond markets. In fact,

WKH VL]HRIERQGPDUNHWVLQFUHDVHG IURPDERXWRQHIWK RI

WRWDOQDQFLDOLQWHUPHGLDWLRQLQ(DVW$VLDQFRXQWULHVLQ

to approximately one-third in 2010. During the same period,

the share of total outstanding local currency bonds issued in

(DVW$VLDLQUHODWLRQWRWKHZRUOGVWRWDOLQFUHDVHGIURPDERXW

WRPRUHWKDQ10

$IWHU WKH $6($1 HQGRUVHPHQW RI WKH $%0, VSHFLF

actions have been taken on particular issues of the initiative.

In particular, bonds were issued in local currencies by multi-

lateral development banks. For example, the ADB issued

VHYHUDOORFDOFXUUHQF\ERQGVLQWKH$'%XQGHUWRRNYH

market-opening transactions in the regions local currency

ERQGVLQ0DOD\VLD&KLQDWKH3KLOLSSLQHV7KDLODQGDQG,QGLD

As well as issuing bonds, the ADB has launched a new and

publicly accessible website, Asian Bonds Online, in 2004 to

share information on regional markets, economies, and compa-

nies. It provides a wide range of information such as taxation,

regulations, bond indices, credit ratings, settlement systems and

secondary market trading.

:KLOH$6($1KDVEHHQLQYROYHGLQGHYHORSLQJORFDOFXUUHQ-

F\ERQGPDUNHWVDORQJZLWKWKH$%0,WKH([HFXWLYH0HHWLQJV

RI(DVW$VLDDQG3DFLF&HQWUDO%DQNV(0($3ODXQFKHGWKH

UVW$VLDQ%RQG)XQG$%)ZLWKDFDSLWDOL]DWLRQRIELOOLRQ

in 2003. ABF 1 was mandated to invest in dollar-denominated

VRYHUHLJQERQGV LVVXHGE\HLJKW(0($3FRXQWULHV11 Howev-

er, due to its small size, ABF 1 was expected to have little ef-

fect on the market for dollar-denominated sovereign bonds in

(DVW$VLD

$%)LQWURGXFHGLQZLWKDFDSLWDORIELOOLRQZDV

implemented to purchase local currency bonds from Asian

FRXQWULHV ,W FRQVLVWV RI ERWK D 3DQ$VLDQ %RQG ,QGH[

)XQG3$,)DQGD)XQGRI%RQG)XQGV)R%)3$,)LVDsingle bond fund index investing in local currency sovereign

ERQGV LVVXHG LQ HLJKW (0($3FRXQWULHV )R%) KDV D WZR

layered investment structure in eight single-market funds,

each of which invests in local currency bonds issued in their

own markets.

The ABMI and ABFs have helped the development of

ERQG PDUNHWV LQ (DVW$VLD DQG KDYH UHGXFHG WKH FXUUHQF\

DQG PDWXULW\ PLVPDWFK SUREOHP $FFRUGLQJO\ (DVW $VLDQ

HFRQRPLHVZHUHDEOHWRZLWKVWDQGWKHJOREDOQDQFLDOFULVLV

showing relatively stronger resilience than the U.S. and

(XURSH$ORWVWLOOUHPDLQVWREHGRQHKRZHYHUWRKDUPRQL]H

rules across the region, strengthen market infrastructure,

overcome remaining market impediments, and tighten legal

and regulatory frameworks. While Asian authorities need to

promote their growth to attract more investment in the

region, domestic reforms and regional cooperation initiatives

are especially needed to improve accounting standards, mar-ket infrastructure, and legal systems.

Credit Guarantee Investment Facility

To develop local currency bond markets in Asia, it is essen-

tial to facilitate issuers access to Asian bond markets. This

might require guaranteed credit ratings for local currency bond

investments. Moreover, local capital in Asia is required to

EHLQYHVWHGLQPHGLXPDQGORQJWHUPLQIUDVWUXFWXUHSURMHFWV

that lead to Asian economic growth.12 Therefore, Asia needs

to use a large amount of savings and international reserves

WROOWKHQDQFLDOJDSVDQGWRRYHUFRPHFRQVWUDLQWVLQORFDO

FXUUHQF\QDQFLQJGXHWRWKHODFNRILQYHVWRUVFRQGHQFHLQAsian bond markets.

Strengthening and deepening local currency bond markets can

GHYHORSGRPHVWLFQDQFLDOPDUNHWVDQGXOWLPDWHO\HQKDQFH

UHJLRQDOQDQFLDOLQWHJUDWLRQDQGHFRQRPLFJURZWK%DVHG

XSRQ WKLVUDWLRQDOHLQ$6($1DJUHHGWRHVWDEOLVK

D &UHGLW *XDUDQWHH DQG ,QYHVWPHQW 0HFKDQLVP &*,0

UHQDPHG DV &UHGLW *XDUDQWHH ,QYHVWPHQW )DFLOLW\ &*,)

in 2009, to provide credit guarantees to local currency bonds

issued in the region and to enable them to raise medium-and

ORQJWHUPQDQFLQJLQVWUXPHQWVE\LPSURYLQJWKHFRQGLWLRQV

for issuing bonds. It is expected to facilitate capital marketGHYHORSPHQWDQGWRPDNHWKHUHJLRQDOQDQFLDOV\VWHPOHVV

YXOQHUDEOHWR H[WHUQDOVKRFNV7KHREMHFWLYHRI&*,)LVWR

support the issuance of local currency denominated bonds

in Asia, so as to contribute to Asian economic development

and prosperity through credit guarantee schemes. It is cur-

UHQWO\LQWKHSURFHVVRIQDOL]LQJLWVRSHUDWLRQDOSROLFLHVDQG

business plan, and is expected to start its operations before

the end of 2012. The CGIF will be established as an ADB

WUXVWIXQGZLWKDQLQLWLDOFDSLWDORIPLOOLRQ130DMRULV-

sues regarding the establishment of CGIF, such as business

scope, leverage ratio and country limit, were discussed at

WKH$6($1)LQDQFHDQG&HQWUDO%DQN'HSXWLHV0HHWLQJin May 2011.

The CGIF is expected to have the following effects. First,

high-rated issuers can seek to lengthen the maturity of their

debt issuance and lower-rated issuers can also issue bonds

with the aid of the credit guarantee scheme. Second, member

countries external borrowing costs can be reduced. Third,

credit guarantees for local currency bonds would help re-

YHUVHFDSLWDORXWRZVDQGPDNHWKHUHJLRQDOQDQFLDOV\VWHP


7/20


sound and resilient. Fourth, supports for infrastructure bonds

can serve to provide regional public goods and ultimately lead

to regional economic growth.14 In addition to credit guaran-

WHHVYLDWKH&*,)VRPHLVVXHVDUHFXUUHQWO\SDUWRI$6($1

dialogue, including establishing a Regional Settlement

Intermediary and Asian Bond Standards among others.

Asian Bond Markets Forum

$W WKH IRXUWHHQWK $6($1 )LQDQFH 0LQLVWHUV PHHWLQJ LQ+DQRL LQ0D\ $6($1 ZHOFRPHG WKH SURJUHVV RI

the Asian Bond Markets Forum with the aim of standardizing

market practices and harmonizing cross-border regulations of

QDQFLDOWUDQVDFWLRQV,WLVDFRPPRQSODWIRUPWRIRVWHUVWDQ -

dardization of market practices and harmonization of regula-

tions relating to cross-border bond transactions in the region.

Since its onset, it has become an important forum for bond

market experts from both public and private sectors in the

region. There also has been progress in the technical working

group on legal and regulatory feasibility assessment of the

5HJLRQDO 6HWWOHPHQW ,QWHUPHGLDU\ 56, $QRWKHU SRVVLEOHdevelopment relates to the enhancement of domestic rating

agencies through capacity building programs, as credit rating

DJHQFLHVRI(DVW$VLDQFRXQWULHVDUHRIWHQUHODWLYHO\VPDOODQG

tend to use non-comparable methodologies and benchmarks

in their rating process, needing therefore some form of

standardization and harmonization across the region.15

Challenges of Financial Integration and

Koreas Role

7RSURPRWH$VLDQQDQFLDO LQWHJUDWLRQDNH\SULRULW\ZRXOG

EH ODLG RQ UHJLRQDO QDQFLDO FRRSHUDWLRQ(DUOLHUGLVFXVVLRQRQSURJUHVVWRZDUGQDQFLDOLQWHJUDWLRQZDVDVVHVVHGLQWHUPV

of regional institutional measures. An even stronger degree of

QDQFLDO PDUNHW LQWHJUDWLRQ LV SRVVLEOH LI VLJQLFDQW HIIRUWV

are made toward regional institutional integration. Since it is

not easy to integrate cross-border markets and harmonize

regulations in the region, regional institutional development

LVQHFHVVDU\WRJHQHUDWHEHQHWVIURPHFRQRPLFLQWHJUDWLRQ

7KH UHFHQW JOREDO QDQFLDO FULVLV DFFHOHUDWHG $6($1

QDQFLDO FRRSHUDWLRQ :LWK WKLV PRPHQWXP .RUHDV UROH

for further regional institutional integration is important,

HVSHFLDOO\ LQ DVD FRFKDLUFRXQWU\ RI WKH$6($1framework. In fact, Korea has been deeply involved in

UHJLRQDOQDQFLDO FRRSHUDWLRQ DQG DOVR VKRZQVWURQJ OHDG-

ership in initiating detailed proposals and cooperative ac-

tions. Many important issues are currently being discussed

DPRQJ$6($1PHPEHUVLQFOXGLQJLQFUHDVLQJWKHVL]HRI

CMIM, increasing the IMF-delinked portion of CMIM,

operational issues of AMRO and surveillance activities,

members opening bank accounts of CMIM in the central

bank, introducing new regional crisis prevention facility,

various issues of Asian bond markets, and regional-global

cooperation with the IMF among others.

7KH $6($1 (53' DLPV WR LGHQWLI\ SRWHQWLDO PDFUR

HFRQRPLFDQGQDQFLDOULVNVSUHYHQWFULVHVPRQLWRUUHJLRQDO

FDSLWDO RZV DQG FXUUHQF\PDUNHWV DQG HQKDQFH VHOIKHOS

VXSSRUWPHFKDQLVPVLQWKHUHJLRQ:KLOHWKH(53'ZDVQRW

VXIFLHQWIRUUHJLRQDOVXUYHLOODQFHDQHZVXUYHLOODQFHXQLW

AMRO, is expected to play an important role towards region-DOQDQFLDOLQWHJUDWLRQ(YHQ WKRXJKWKH (53'EHFDPH DQ

information exchange mechanism on economic conditions

and policies, its non-interference principle was an impediment

to make effective surveillance activities. In general, three

FRPSRQHQWVRI HFRQRPLF VXUYHLOODQFH DUHVXJJHVWHG LQIRU-

PDWLRQVKDULQJSHHUUHYLHZSHHUSUHVVXUHDQGGXHGLOLJHQFH

&XUUHQWO\$6($1 VXUYHLOODQFH LV LQ WUDQVLWLRQ IURP WKH

information sharing stage to the next stage of a more rigorous

scrutiny stage, which must involve due diligence in the future.

7KH(8VUHIRUPRIQDQFLDOVXSHUYLVRU\LQVWLWXWLRQVLQFOXGHV

WKH&RPSO\RU([SODLQSULQFLSOHIRUSROLF\UHFRPPHQGDWLRQV

ZKLFKPDNHVLWDPRUHELQGLQJSHHUUHYLHZSHHUSUHVVXUH,Qthe long-run AMRO should focus on providing the regional

equivalent of IMF multilateral surveillance by moving for-

ward to the effective peer review and pressure stage and due

diligence. This would make AMRO a well-resourced profes-

sional surveillance unit, and introduce a more effective macro-

SUXGHQWLDO VXSHUYLVRU\ IUDPHZRUN IRU QDQFLDO VXSHUYLVLRQ

and integration.

.RUHDKDVWDNHQWKHOHDGLQGLDORJXHZLWKLQWKH$6($1

IUDPHZRUNIRUH[DPSOHLWSURSRVHGWKH$%0,LQ.RUHD

is also expected to exhibit its intellectual leadership in the pro-

cess of establishing a regional crisis prevention mechanism. It

LVSDUWLFXODUO\LPSRUWDQWWRLQWURGXFHWKHUHJLRQDO&3)EHFDXVH

given the stigma from the IMF lending facilities, it would be

SROLWLFDOO\GLIFXOW IRUDQ\JRYHUQPHQWLQ WKHUHJLRQWR VHHN

an IMF program. Moreover, Koreas efforts to coordinate

member opinion on the current issues mentioned earlier will

VLJQLFDQWO\ FRQWULEXWH WR WKHRXWFRPHRI UHJLRQDO QDQFLDO

integration and to continuing its momentum in the future.

In doing so, Koreas role as the honest broker in the

$6($1 IUDPHZRUN LV HPSKDVL]HG )RU H[DPSOH WKH

$6($1 QHJRWLDWLRQ RQ &0,0 FRQWULEXWLRQ VKDUHV ZDV

D HUFH GLSORPDWLF EDWWOH DPRQJ PHPEHU FRXQWULHV ,Q WKHprocess, Korea proposed the mediated settlement on the mem-

bers CMIM contribution shares that became the agreements

QDO RXWFRPH ,W DOVR KDV DQ LPSRUWDQW UROH ZLWK UHJLRQDO

GHFLVLRQPDNLQJ EHWZHHQ &KLQD DQG -DSDQ )RU LQVWDQFH

WKH VHOHFWLRQ SURFHVV RI WKHUVW GLUHFWRU RI$052ZDVLQ-

GHHGDHUFHGLSORPDWLFEDWWOHHVSHFLDOO\EHWZHHQ&KLQDDQG

-DSDQ:KLOH -DSDQSLRQHHUHG WKH LQVWLWXWLRQV GHYHORSPHQW

VHOHFWLQJD&KLQHVH QDWLRQDO DV WKHUVW GLUHFWRUPD\ LPSO\

that China takes the initiative in both establishing AMRO as an


8/20


international institution and setting up its tone and mandate for

future institutional developments. In this regard, Koreas role

in regional cooperation is important for the development of

QDQFLDOLQWHJUDWLRQ

$QLPSRUWDQWIDFWRUZLWK$VLDQQDQFLDOLQWHJUDWLRQLVWKHIDFW

WKDW $VLDQ HPHUJLQJ HFRQRPLHV KDYH H[SHULHQFHG QDQFLDO

instability when domestic markets were opened to foreign

SDUWLFLSDWLRQ7KHJOREDOQDQFLDOFULVLVDIIHFWHG$VLDQQDQ-cial systems in various ways, including a massive decline in

FDSLWDOLQRZV FXUUHQF\YDOXHV DQG DVVHWSULFHV 'HHSHQLQJ

UHJLRQDO QDQFLDO LQWHJUDWLRQ ZLOO SURYLGH PRUH EHQHWV WR

WKH$VLDQ HFRQRP\ WKURXJK HIFLHQW DOORFDWLRQ RI QDQFLDO

UHVRXUFHV DQG ULVN GLYHUVLFDWLRQ 7KHUHIRUH $6($1

member countries have to keep their balance between the net

EHQHWV GHULYHG IURPQDQFLDO LQWHJUDWLRQ DQG WKH SRWHQWLDO

cost of risk vulnerability and crisis contagion in designing a

UHJLRQDOQDQFLDOLQVWLWXWLRQDOPHFKDQLVP

Dr. Park is assistant professor of Economics, College of Social

Sciences at Ajou University.

17KHWHQ$6($1$VVRFLDWLRQRI6RXWK(DVW$VLDQ1DWLRQVPHPEHUFRXQWULHVDUH

7KDLODQG0DOD\VLD6LQJDSRUH,QGRQHVLDWKH3KLOLSSLQHV%UXQHL'DUXVVDODP

%XUPD/DRV9LHWQDPDQG&DPERGLD7KH3OXV7KUHHFRXQWULHVDUHWKH5HSXEOLF

RI.RUHD-DSDQDQGWKH3HRSOHV5HSXEOLFRI&KLQD

26LQJDSRUHWKH3KLOLSSLQHV0DOD\VLD.RUHD,QGRQHVLD,QGLD+RQJ.RQJ

DQG7KDLODQG

3$6($1KDVDJUHHGWRGRXEOHWKH&0,0UHVHUYHSRROIURPELOOLRQWR

ELOOLRQLQ0D\6RXUFH7KH-RLQW6WDWHPHQWRIWKHWK$6($1)LQDQFH

0LQLVWHUVDQG&HQWUDO%DQN*RYHUQRUV0HHWLQJ

47KH(XURSHDQ&RPPLVVLRQLVHPSRZHUHGWRFRQWUDFWERUURZLQJVRQEHKDOIRIWKH

(8IRUWKHSXUSRVHRIIXQGLQJORDQVPDGHXQGHU()60()60LVDWUHDW\EDVHG

PHFKDQLVPFRYHULQJDOO(80HPEHU6WDWHV8QGHUWKH()60WKH(8FDQERUURZ

XSWRELOOLRQHXURVWROHQGWRDQ$80HPEHU6WDWH8QGHUWKH%DODQFHRI

3D\PHQWVIDFLOLW\VXSSRUWLVDYDLODEOHRQO\WR0HPEHU6WDWHVZKLFKKDYHQRW

\HWDGRSWHGWKHHXURKWWSZZZHIVIHXURSDHX

,QRUGHUWRUHDFKLWVREMHFWLYH()6)FDQLVVXHERQGVRURWKHUGHEWLQVWUXPHQWVRQWKH

PDUNHWWRUDLVHWKHIXQGVQHHGHGWRSURYLGHORDQVWRFRXQWULHVZKLFKVXEPLWDUHTXHVW

,VVXHVDUHEDFNHGE\JXDUDQWHHVJLYHQE\HXURDUHD0HPEHU6WDWHVRIXSWRELOOLRQ

HXURV()6)LVSDUWRIDZLGHUVDIHW\QHW,WVIXQGVDUHFRPELQHGZLWKORDQVRIXSWR

ELOOLRQHXURVFRPLQJIURPWKH()60DQGXSWRELOOLRQHXURVIURPWKH,0)IRUDQ

RYHUDOOUHVFXHSDFNDJHZRUWKXSWRELOOLRQHXURVKWWSZZZHIVIHXURSDHX

6$6($1KDVDJUHHGWRLQFUHDVHWKH,0)GHOLQNSRUWLRQWRLQ0D\

6RXUFH7KH-RLQW6WDWHPHQWRIWKHWK$6($1)LQDQFH0LQLVWHUVDQG&HQWUDO

%DQN*RYHUQRUV0HHWLQJ

7KHFXUUHQW&0,0LVDQDUUDQJHPHQWRIWKHUHJLRQDOFULVLVUHVROXWLRQIDFLOLW\LQWKH

VHQVHWKDWLWLVDVVRFLDWHGZLWKH[SRVWWUHDWPHQWDIWHUWKHWULJJHUHYHQWRIDFULVLVWKDW

PDFURHFRQRPLFIXQGDPHQWDOVKDYHDOUHDG\EHHQGHWHULRUDWHG

$6($1DGRSWHG&0,06WDELOLW$DFLOLW\&0,06)DVWKHQDPHIRUFULVLV

UHVROXWLRQPHFKDQLVPDQG&0,03UHFDXWLRQDU\/LQH&0,03/IRUFULVLV

SUHYHQWLRQIXQFWLRQ6RXUFH7KH-RLQW6WDWHPHQWRIWKHWK$6($1)LQDQFH

0LQLVWHUVDQG&HQWUDO%DQN*RYHUQRUV0HHWLQJ

GHODV&DVDV0DQG;6HUUD6LPSOLFDWLRQRI,0)OHQGLQJ:K\QRWMXVW

RQHH[LEOHFUHGLWIDFLOLW\%DQFRGH(VSDQD

10&DSDQQHOOL*,QVWLWXWLRQVIRUHFRQRPLFDQGQDQFLDOLQWHJUDWLRQLQ$VLD

7UHQGVDQGSURVSHFWV$'%,:RUNLQJ3DSHU1R$VLDQ'HYHORSPHQW%DQN

,QVWLWXWH

11&KLQD+RQJ.RQJ.RUHD6LQJDSRUH,QGRQHVLDWKH3KLOLSSLQHV0DOD\VLD

DQG7KDLODQG

12%KDWWDFKDU\D\HVWLPDWHVWKHQDQFLQJQHHGVIRU$VLDVLQIUDVWUXFWXUHDWDURXQG

ELOOLRQSHU\HDULQHQHUJ\ZDWHUWUDQVSRUWWHOHFRPPXQLFDWLRQVDQGVDQLWDWLRQ

EHWZHHQDQG6RXUFH%KDWWDFKDU\D\%)LQDQFLQJ$VLDVLQIUDVWUXF

WXUH0RGHVRIGHYHORSPHQWDQGLQWHJUDWLRQRI$VLDQQDQFLDOPDUNHWV$'%,

:RUNLQJ3DSHU1R$VLDQ'HYHORSPHQW%DQN,QVWLWXWH

13-DSDQDQG&KLQDDUHWRFRQWULEXWHPLOOLRQ.RUHDPLOOLRQDQGWKH$'%

PLOOLRQ)LYHPHPEHUVRI$6($1LQFOXGLQJ0DOD\VLD7KDLODQG,QGRQHVLDWKH

3KLOLSSLQHVDQG6LQJDSRUHDUHWRFRQWULEXWH86PLOOLRQHDFK%UXQHLSOHGJHGWR

FRQWULEXWHPLOOLRQ9LHWQDPPLOOLRQDQGWKUHHUHPDLQLQJFRXQWULHVRI/DRV

&DPERGLDDQG0\DQPDUHDFKFRQWULEXWLQJ

143DUNDQG5KHHFRQGXFWDTXDQWLWDWLYHDQDO\VLVRQWKHPDFURHFRQRPLFHIIHFWV

RIFUHGLWJXDUDQWHHVLQ$VLDQERQGPDUNHWVE\VLPXODWLQJDYHEORFNYHUVLRQRIWKH

,0)*OREDO,QWHJUDWHG0RQHWDU\DQG)LVFDOPRGHO7KHVLPXODWLRQVFHQDULRVUHYHDO

WKDWHYHQWKRXJK(DVW$VLDQQDQFLDOFRRSHUDWLRQXSJUDGHVVRPHRI$6($1

PHPEHUFRXQWULHVFUHGLWIXQGDPHQWDOVLWKHOSVLQFUHDVHERWKWKHFRUUHVSRQGLQJ

FRXQWULHVUHDO*'3DQGUHJLRQDOUHDO*'3DQGWKLVHIIHFWLVDPSOLHGDVPRUH

PHPEHUFRXQWULHVFUHGLWUDWLQJVDUHXSJUDGHG6RXUFH3DUN


9/20


KOREA AND ECONOMIC INTEGRATION IN EAST ASIA:

THE WAY FORWARD

By Franoise Nicolas

Abstract

,W LV QRZ DZHOOHVWDEOLVKHG IDFW WKDW LQWUDUHJLRQDO WUDGH KDV EHHQH[SDQGLQJ TXLWH IDVW LQ(DVW$VLD LQ WKH DEVHQFH RI DQ\

LQVWLWXWLRQDODUUDQJHPHQWVWRWKDWHQG.RUHDKDVEHHQDPDMRUEHQHFLDU\RIWKLVRUJDQL]DWLRQRIWKH(DVW$VLDQUHJLRQ,QWKHZDNHRI

WKHUHFHQWJOREDOQDQFLDOFULVLVKRZHYHUDQXPEHURIGHYHORSPHQWVVXJJHVWWKDWWKHUHJLRQPD\EHDWDFURVVURDGDQGWKDW

VXEVWDQWLDOFKDQJHVPD\EHH[SHFWHGLQWKHZD\WKHUHJLRQLVRUJDQL]HG$VDWUDGLWLRQDOSURPRWHURI(DVW$VLDQUHJLRQDOLVPDQG

as one of the best-integrated economies in the region, Korea provides an interesting case study. An analysis of Koreas reactions

to the recent changes suggests that the importance of vertically-integrated production networks is likely to be shrinking in parallel

ZLWKDULVLQJUROHRILQVWLWXWLRQDODUUDQJHPHQWV$OWKRXJK(DVW$VLDQHFRQRPLFLQWHJUDWLRQZLOONHHSLWVVSHFLFLW\WKHGHIDFWRDQG

GHMXUHGLPHQVLRQVDUHOLNHO\WREHLQFUHDVLQJO\PXWXDOO\UHLQIRUFLQJZLWK.RUHDDVDNH\SOD\HULQERWKDUHDV


10/20


Introduction

It is now a well-established fact that intraregional trade has

EHHQ H[SDQGLQJ TXLWH IDVW LQ (DVW$VLD DOWKRXJK WKLV GRHV

not necessarily mean that the region is getting increasingly

inward-oriented1LQWKHDEVHQFHRIDQ\LQVWLWXWLRQDODUUDQJH -

ments to that end. Dynamic intraregional trade accounts for

the strong rate of economic growth in a number of countries

in the region, with Korea as a case in point. In the wake ofWKH$VLDQQDQFLDO FULVLV LQ SDUWLFXODU WKH.RUHDQ

economy managed to recover swiftly thanks to its exports to

rapidly growing China.

+RZHYHUDZLGHO\KHOGFRQVHQVXVYLHZFODLPVWKDW(DVW$VLD

KDV EHHQ JUDGXDOO\ VKLIWLQJ IURP DPDUNHWOHG de facto WR

DQ LQVWLWXWLRQEDVHG de jure IRUP RI UHJLRQDO HFRQRPLF

LQWHJUDWLRQ 6LQFH .RUHD ZDV DPRQJ WKH UVW HFRQRPLHV WR

SURPRWH(DVW$VLDQ UHJLRQDO de jure integration through its

DFWLYH UROH LQ WKH(DVW$VLD9LVLRQ*URXS LQSDUWLFXODU DQG

since it is one of the best-integrated economies in the region, it

provides an interesting case study.

7KHREMHFWLYHRIWKHSDSHULVWRH[DPLQHWKHFXUUHQWVWDWHRI

play and the future prospects of regional economic integration

LQ(DVW$VLDIURPDde facto as well as from a de jure perspec-

WLYHIRFXVLQJRQWKH.RUHDQFDVH7KHUVWVHFWLRQDVVHVVHV

Koreas participation in the regional production networks

as well as its contribution to the institution-based regional

cooperative efforts. The second section starts by highlight-

ing several developments which are likely to deeply modify

WKHHFRQRPLFHQYLURQPHQWLQ(DVW$VLDEHIRUHDQDO\]LQJWKHLU

impacts on Koreas regional strategy and on the future organi-

zation of the region as a whole.

Koreas Economic Integration in East Asia

Korea is Increasingly Integrated with East Asia

$VLVWKHFDVHZLWKDOORWKHU(DVW$VLDQHFRQRPLHVZLWKWKH

QRWDEOHH[FHSWLRQRI&KLQD.RUHDKDVEHHQWUDGLQJPRUHDQG

PRUHLQWHQVLYHO\ZLWKWKHUHVWRI(DVW$VLDVLQFHWKHPLGV

leading to a sharp decline in the relative importance of its other

WUDGLWLRQDOWUDGLQJSDUWQHUVVXFKDVWKH86DQGWKH(87KH

combined shares of these two partners dropped from close to

40 percent in 1990 to about 20 percent in 2010. In contrast, the

VKDUHRI.RUHDVWUDGHZLWK(DVW$VLDURVHIURPSHUFHQWWR48.2 percent over the same period of time. Its exports to the rest

RIWKHUHJLRQURVHIURPSHUFHQWWRSHUFHQWZKLOHWKH

share of its imports coming from the same partners rose from

33.5 percent to 44.4 percent over the past twenty years.

:LWKLQWKH(DVW$VLDQUHJLRQWKHPRVWGUDPDWLFFKDQJHVDUH

the increase in Chinas share as an export destination as well

DVDVRXUFHRILPSRUWVDQGWKHSDUDOOHOGURSLQ-DSDQVVKDUHDV

DQH[SRUWPDUNHWEXWLQWHUHVWLQJO\QRWDVDQLPSRUWVXSSOLHU

&KLQDLVQRZZHOODKHDGRIWKH86-DSDQDQGWKH(8DPRQJ

.RUHDVWRSWUDGLQJSDUWQHUV)LJXUHVDQG

Trade between China and Korea has been growing at an

astoundingly average annual rate of close to 19 percent over

the period 1993-2010, leading to deepening economic inter-

dependence and the trend is still ongoing, with two-way trade

EHWZHHQ &KLQD DQG.RUHDFURVVLQJ WKH ELOOLRQ OLQH LQ

2011. As a result the share of Koreas exports going to China

more than doubled, rising from about 10 percent in 2000 toclose to 25 percent in 2010, while the share of its imports from

&KLQDGRXEOHGIURPWRSHUFHQW7RGD\&KLQDLV.RUHDV

ODUJHVWH[SRUWGHVWLQDWLRQLWKDVEHHQWKHFDVHVLQFHZKHQ

&KLQDRYHUWRRNWKH86DQGDOVR LWVODUJHVW LPSRUWVXSSOLHU

DKHDGRI-DSDQVLQFH

The dynamism in Sino-Korean trade has obviously to do with

Chinas stellar economic growth and hence with its rising im-

portance as a trade powerhouse and as an expanding market.

Figure 1.RUHDV([SRUWVE\'HVWLQDWLRQ 1990-2010

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Hong Kong Singapore China Other AsiaJapanEUUS

Source: Authors calculation based on IMF Direction of Trade Statistics

Figure 2Koreas Imports by Country of Origin,1990-2010

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0


Hong Kong Singapore China Other AsiaJapanEUUS


11/20


However, the calculation of Koreas export bias with re-

spect to China2 suggests that exports to this country were

exceptionally dynamic, at least until recently. Although still

high, the indicator has been dropping lately after reaching

a peak in 2005. This suggests that Koreas exports to China

DUHJUHDWHU WKDQH[SHFWHGEXWGHFUHDVLQJO\VR )LJXUH2Q

WKH LPSRUW VLGH WKHELDV LQGLFDWRU LVPXFK ORZHU DOWKRXJK

VOLJKWO\ ULVLQJ DW DERXW7KHVH UHVXOWV UHHFW DQDV\P-

metry in Sino-Koran trade, with greater than expected Kore-an exports to China, while its imports are more or less in line

with expectations.

Another way of gauging whether a trade relationship is

greater than expected is to resort to a gravity equation. The

estimation helps determine what can be seen as the poten-

tial trade between a given pair of countries. As a next step,

FRPSDULQJWKHWWHGYDOXHVZLWKWKHDFWXDOYDOXHVLQGLFDWHV

whether there is still an untapped potential or not. The evolu-

WLRQKLJKOLJKWHGHDUOLHULVFRQUPHGE\WKHUHVXOWVRIDJUDYLW\

equation estimated for Koreas exports over the period ex-

tending until 2007.3 The estimation suggests that Korea tendsto over-export to China, while the reverse is not true. These

various elements suggest that the China-Korea trade relation

LVDPDMRUEXLOGLQJEORFNRILQWUD(DVW$VLDQLQWHJUDWLRQ

1H[WWR WKHWZR1RUWKHDVW$VLDQ SDUWQHUV$6($1 FRXQWULHV

LQSDUWLFXODU,QGRQHVLD6LQJDSRUHDQG9LHWQDPKDYHHPHUJHG

DVLPSRUWDQWWUDGLQJSDUWQHUV7RGD\$6($1LV.RUHDVVHFRQG

ODUJHVWWUDGLQJSDUWQHUDIWHU&KLQDDQGDKHDGRI-DSDQDQGWKH

(XURSHDQ8QLRQ$VLQWKHFDVHRI&KLQDWKHHVWLPDWLRQRID

JUDYLW\HTXDWLRQVXJJHVWVWKDW.RUHDVH[SRUWVWR$6($1DUH

greater than expected with very little untapped potential.

Through Regional Production Networks

A detailed analysis of the structure of Korean exports to, and

LPSRUWVIURP(DVW$VLDLQSDUWLFXODU&KLQDSURYLGHVDFOHDUHU

picture of the way the various economies are interlinked.

8VLQJWKH%URDG(FRQRPLF&DWHJRULHV%(&FODVVLFDWLRQDQG

IROORZLQJ*DXOLHUHWDO4 commodities are aggregated by

VWDJHVRISURGXFWLRQDQGDGLVWLQFWLRQLVPDGHEHWZHHQLSULPDU\

JRRGV>IRRGDQGEHYHUDJHVSULPDU\PDLQO\IRULQGXVWU\

SULPDU\LQGXVWULDOVXSSOLHVSULPDU\IXHOVDQGOXEULFDQWV

@ LL LQWHUPHGLDWH JRRGV >SURFHVVHG LQGXVWULDO VXSSOLHV

SURFHVVHGIXHOVDQGOXEULFDQWVSDUWVDQGFRPSRQHQWV

RIFDSLWDOJRRGVH[FOWUDQVSRUWHTXLSPHQWDQGRIWUDQV-

SRUWHTXLSPHQW@DQGLLL QDOJRRGV>FDSLWDOJRRGVDQG FRQVXPSWLRQ JRRGVIRRGDQG EHYHUDJHV DQG

SDVVHQJHUPRWRUFDUVFRQVXPHUJRRGV@

The bulk of Koreas exports to China are intermediate

JRRGVSHUFHQWLQDQGSULPDULO\IRUSURFHVVLQJ3DUW

of these intermediate products may be used to produce goods to

be sold on the Chinese market, but this share is small.

Most intermediate products are processed in China and

H[SRUWHG WR RWKHU FRXQWULHV DV QDO SURGXFWV :KLOH WKHVH

LQWHUPHGLDWH JRRGV ZHUH LQLWLDOO\ LQGXVWULDO VXSSOLHV

RYHUWLPH WKH VKDUH RI SDUWV DQG FRPSRQHQWV FDWHJRULHV

DQGKDVULVHQVXEVWDQWLDOO\WRDFFRXQWIRUDERXWSHUFHQW

$W WKH VDPH WLPH WKH VKDUH RI FDSLWDO JRRGV KDV

DOVRWHQGHGWRULVHWRDFFRXQWIRUSHUFHQWRIWRWDO.RUHDQ

H[SRUWVWR&KLQD,QFRQWUDVWFRQVXPHUJRRGVRQO\DFFRXQW

for less than 3 percent of Koreas exports to China.

Koreas imports from China also had a large portion of

LQWHUPHGLDWH JRRGV EXW WKH VKDUH RI QDO JRRGV DQG LQ

SDUWLFXODU FRQVXPSWLRQ JRRGVZLWK SHUFHQW ZDV ODUJHU

than what is observed for Koreas exports to China. As a result,

.RUHDKDVDGHFLWLQQDOJRRGVWUDGHZLWK&KLQDDQGDVXUSOXV

in intermediate goods.

.RUHDV H[SRUWV WR$6($1 FRXQWULHV VXFK DV0DOD\VLD RU

9LHWQDP LQ SDUWLFXODU DUH DOVR GRPLQDWHG E\ LQWHUPHGLDWH

SURGXFWVSDUWV DQG FRPSRQHQWV RI FDSLWDO JRRGV DV

ZHOODVSURFHVVHGLQGXVWULDOVXSSOLHV 5 These exports are

PDLQO\VHPLFRQGXFWRUV79VFUHHQVHOHFWURQLFJRRGVYHKL-

FOHVVWHHOFKHPLFDOVUHQHGSHWUROHXPSURGXFWVVKLSVDQG

machinery, while its imports from Southeast Asia are mainly

oil and gas, coal, paper, rubber, wood products and garments.

All these observations suggest that Korea, China and a

QXPEHURI$6($1FRXQWULHVEHORQJWRUHJLRQDOSURGXFWLRQ

networks. The existence of a strong correlation betweenKoreas exports to China and Chinas exports to the U.S.

provides further evidence that Korea and China are parts of

the same production chain.

7KHWLJKWLQWHUFRQQHFWLRQVEHWZHHQ.RUHDDQGWKHUHVWRI(DVW

$VLDDUHDOVRUHHFWHGLQWKHDFWLYHLQYROYHPHQWRI.RUHDQ

UPV LQ WKH UHJLRQ 6LQFH WKH HVWDEOLVKPHQW RI GLSORPDWLF

relations in 1992, Koreas FDI to China has grown dramati-

cally. Korea invested massively in China in the early-2000s,

Figure 3 Koreas Trade Bias

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Import Bias

ChinaImport Bias

Hong Kong

Export Bias

China


Export Bias

Hong Kong


12/20


making it one of the most important sources of FDI in China.

However, according to the latest Mofcom statistics, Koreas

)',LQ&KLQDSHDNHGLQZKHQLWUHDFKHGELOOLRQ

DFFRXQWLQJIRURYHUSHUFHQWRIWRWDOIRUHLJQLQRZVDQG

has been shrinking ever since to drop below 3 percent of total

IRUHLJQ LQRZV 6LPLODUO\ IURP.RUHDV SHUVSHFWLYH ZKLOH

China accounted for close to 40 percent of Koreas total ODI

RXWRZV LQ LW VWDUWHG GHFOLQLQJ LQ WKH IROORZ-

ing years and accounted for merely 14 percent in 2011. InWHUPVRIVWRFN.RUHDODJVEHKLQG+RQJ.RQJ7DLZDQ-DSDQ

Singapore and the United States. These various observa-

tions suggest that Korea may be losing ground in the com-

petition with other economies in the region which are closely

connected to China, namely Hong Kong and Taiwan.

Next to China, Southeast Asia accounts for a non-negligible

GHVWLQDWLRQRI.RUHDQRXWZDUGGLUHFWLQYHVWPHQWDQG$6($1

as a whole ranks as the second largest investment destina-

WLRQ DIWHU WKH86.RUHDQ2',RZV WRWKH UHJLRQKDYH

been particularly dynamic over the past few years, making

.RUHD$6($1V IRXUWK ODUJHVW LQYHVWRU 0RVW RI .RUHDVinvestments are in labor intensive and export-oriented indus-

tries like footwear, garments, electronic and electrical goods

and chemicals.

With Institutional Arrangements Playing a

Marginal Role

Interestingly Koreas dynamic trade with a number of its

neighbors cannot be accounted for by the existence of prefer-

ential arrangements. As explained, Koreas trade is particular-

ly dynamic with China but the two partners have not engaged

in any preferential arrangement.

In contrast, Korea has an FTA with its second largest trading

SDUWQHU QDPHO\$6($1 +RZHYHU WKH.RUHD$6($1)7$

has only been in effect since 2007 for goods and 2009 for

services and the sharp rise in bilateral trade predates the signing

of the agreement and cannot thus be accounted for by the FTA.

The logic underlying Koreas FTA strategy is pragmatic.

7KH FRXQWU\ KDV FKRVHQ WR QHJRWLDWH )7$V ZLWK LWV PDMRU

trading partners, be they neighbors or not. Today, Korea has

)7$V LQ IRUFH ZLWK WKH (8 WKH 86 &KLOH WKH (XURSHDQ

)UHH 7UDGH $VVRFLDWLRQ ()7$ 3HUX 6LQJDSRUH $6($1

and India. It has also been trying to reach an agreement with-DSDQ IRU D QXPEHURI \HDUV .RUHD PD\ WKXV EH VHHQ DV D

champion of bilateral agreements rather than a champion of

regional trade agreements.

So far, there has been a proliferation of FTAs in the region

EXWQRPDMRUDWWHPSWDW FUHDWLQJD IRUPDOWUDGHEORFN0RUH

SURJUHVV PD\ EH REVHUYHG LQ WKH QDQFLDO DUHD ZLWK WKH

establishment of the Chiang Mai Initiative in 2000 followed

E\WKHPXOWLODWHUDOL]DWLRQRIWKHPHFKDQLVPLQZKLOHWKH

RSHQLQJRIQHJRWLDWLRQVIRUWKHHVWDEOLVKPHQWRIDQ(DVW$VLDQ

Free Trade Area for instance is still to take place.

Looking Ahead: Changing Conditions and

Their Implications for Korea

,QWKHZDNHRIWKHJOREDOQDQFLDOFULVLV*)&DQXPEHURI

developments are likely to impact the economic environment

LQ(DVW$VLDDQGFKDQJHWKHFRQGLWLRQVIRUUHJLRQDOHFRQRPLF

integration and the way Korea interacts with its regional part-

ners, in particular China. The following section examines three

VXFKGHYHORSPHQWVLQWXUQ&KLQDVVKLIWLQHFRQRPLFVWUDWHJ\

the full implementation of the economic partnership agree-

PHQW EHWZHHQ &KLQD DQG 7DLZDQ DQG WKH QHZ SURMHFW RI D

7UDQV3DFLF3DUWQHUVKLS733

Major Factors of Change

Chinas Economic Strategy Shift

In China, the GFC has led to the conclusion that the devel-

RSPHQWVWUDWHJ\ IROORZHGVRIDUZDV GHHSO\DZHGDQG WKDW

it was as a result necessary to reduce the economys vulner-ability to external demand shocks and to move away from too

exclusive a strategy of export-orientation by rebalancing

growth, especially through the promotion of domestic

consumption. Although the awareness of the need to enhance

the expansion of domestic consumption is nothing new in

China and although it had already inspired the eleventh

)LYH


13/20


PHQW(&)$VLJQHGEHWZHHQPDLQODQG&KLQDDQG7DLZDQLQ

-XQH7KHREMHFWLYHRIWKH(&)$LVWRQRUPDOL]HWUDGH

across the straits, in particular by putting an end to the numer-

ous restrictions imposed by Taiwan so far on imports from the

mainland. As the name indicates the agreement merely provides

a framework that outlines the main content of the future FTA,

EHIRUH LQGLYLGXDO DJUHHPHQWV DUH VLJQHG RQ VSHFLF LVVXHV

6RIDUWDULIIVZHUHORZHUHGIRUSURGXFWVFRYHUHGLQWKH(DUO\

+DUYHVW3URGXFW OLVW(+3ZLWKHIIHFWIURP-DQXDU\DQG WKH\ DUH VFKHGXOHGWREHIXOO\HOLPLQDWHGRQ-DQXDU\

2013. Further follow-up talks are expected in the coming

years. For the time being, the liberalization has been rather

asymmetrical with higher commitment level on the part of

mainland China. This agreement is no doubt of importance to

Korea since Taiwan and Korea share a number of similarities

in their specialization patterns and in particular in their export

structures to China. The two countries are export competitors in

China which is their largest export market. Although the agree-

ment is far from being complete, rising competition may be

H[SHFWHGIURP7DLZDQZLWK7DLZDQHVHUPVDEOHWRH[SRUWRQ

more favorable terms.

TPP Project

/DVWO\DUHFHQWLQLWLDWLYHWKH7UDQV3DFLF3DUWQHUVKLS733

is likely to bring about further changes in the way the region

LV HFRQRPLFDOO\ RUJDQL]HG 7KH 733 LV D WUDGH DJUHHPHQW

currently under negotiation between nine countries in three

continents, including Australia, Brunei, Chile, Malaysia, New

=HDODQG 3HUX 6LQJDSRUH WKH 8QLWHG 6WDWHV DQG 9LHWQDP8

,Q ODWH WKUHH DGGLWLRQDO FRXQWULHV-DSDQ &DQDGD DQG

0H[LFRDQQRXQFHGWKHLULQWHQWLRQWRMRLQDVZHOO7KH733

aims to establish an ambitious high-quality trade agreementencompassing issues which are not often part of a FTA, such

as intellectual property rights, government procurement,

environmental protection regulations, labor issues as well as

small and medium enterprises.9

$W WKLV VWDJH LW UHPDLQV WREHVHHQZKHWKHU WKLV SURMHFWZLOO

go ahead and whether it may sideline other competing

schemes. From Koreas perspective the importance of the

733OLHV LQ LWV EHLQJ GHVLJQHG WRDOORZ IXUWKHU PHPEHUV WR

MRLQ$VDUHVXOWWKH733FRXOGYHU\ZHOOEHFRPHWKHFRUHRID

IXWXUH JUDQG$VLD 3DFLF WUDGH DJUHHPHQW ,W PD\ WKXV EH

SHUFHLYHG DV D FRPSHWLWRU WR WKH &RPSUHKHQVLYH(FRQRPLF3DUWQHUVKLSLQ(DVW$VLD&(3($RUWKH(DVW$VLDQ)UHH7UDGH

$JUHHPHQW($)7$

Koreas Renewed Contribution to East Asian Integration

6RIDUUHJLRQDOLQWHJUDWLRQLQ(DVW$VLDKDVEHHQSULPDULO\RI

the de facto kind rather than de jurebecause the need for trade

OLEHUDOL]DWLRQZDVQRWSHUFHLYHGDVYHU\KLJKJLYHQWKHW\SH

RILQWUDUHJLRQDOWUDGHEXWWKLV IRUPRILQWHJUDWLRQ VHHPVWR

have reached its limits. China is seeking to develop its own

market rather than being exclusively a production base. This

poses a challenge for its trading partners which need to

DGMXVW WKHLU HFRQRPLF VWUDWHJLHV DFFRUGLQJO\ EXW WKLV PD\

also require a change in the institutional setting with better

structured regional trade liberalization. Korea has to face these

two challenges.

Koreas Approach to China Revisited

If China manages to reduce its dependence on the exportmanufacturing sector and increase its domestic consumption

LQ OLQHZLWK WKH REMHFWLYHV RI WKH WZHOIWK)LYH


14/20


PHQW($)7$DQG&RPSUHKHQVLYH(FRQRPLF3DUWQHUVKLSLQ

(DVW$VLD&(3($ZLWKLQWKHQH[WIWHHQ\HDUV)RUWKHWLPH

being, opening such an ambitious negotiation still seems to

be out of the question. However, the aforementioned develop-

PHQWVPD\KHOSJLYHQHZPRPHQWXPWRWKHSURMHFW

The establishment of a trilateral agreement between China,

-DSDQ DQG .RUHD RU DW OHDVW D ELODWHUDO DJUHHPHQW EHWZHHQ

Korea and China may contribute to pave the way to a broader(DVW$VLDQ)7$EXWDOVRIDFLOLWDWH.RUHDVSHQHWUDWLRQRIWKH

expanding Chinese market. Korea may thus emerge as an

LPSRUWDQWFRQWULEXWRULIQRWWKHPDMRUGULYHURIIXUWKHUde jure

HFRQRPLFLQWHJUDWLRQLQ(DVW$VLD

In the wake of the GFC, Koreas attitude toward a Korea-

China FTA has indeed changed and it is seriously considering

pushing for such an FTA11 in order to move into the Chinese

domestic market further, improve the trade structure, and

establish a stable framework for economic cooperation.

In October 2009, the Ministers of Trade of the two countries

signed an agreement to increase bilateral economic cooperation,DQG6HRXO EHJDQ WRFRQVLGHU VHULRXV WDONVZLWK%HLMLQJDERXW

negotiating a FTA.12$PDMRUUHDVRQIRUWKHFKDQJHLQ6HRXOV

position is the need to respond to Chinas FTA activism, as

H[HPSOLHG E\ WKH IXOO HQWU\ LQWR IRUFH RI WKH &KLQD

$6($1)7$ DV RI -DQXDU\VWDQG RIWKH(FRQRPLF

&RRSHUDWLRQ )UDPHZRUN$JUHHPHQW (&)$ EHWZHHQ &KLQD

DQG7DLZDQDVRI-DQXDU\$VH[SODLQHGHDUOLHU.RUHD

is in direct competition with Taiwan on the Chinese market;

ZLWKWKH(&)$OLNHO\WR LPSURYH7DLZDQVFRPSHWLWLYHQHVVLQ

the China market possibly at Koreas expense, the case for a

China-Korea FTA is made more compelling than ever.

It is worth stressing at this stage that an FTA with China was

so far not really deemed necessary because the level of tariffs

LPSRVHG RQ LQWHUPHGLDWH JRRGV WKHPRVW LQWHQVLYHO\WUDGHG

JRRGVZDVTXLWHORZDWOHDVWPXFKORZHUWKDQRQQDOJRRGV

in particular consumption goods. Going ahead with tariff

liberalization will thus facilitate the further expansion of

ELODWHUDO WUDGH DQG WKH GLYHUVLFDWLRQ RI VXFK WUDGH EH\RQG

intermediate goods.

1H[W WR WKLV ELODWHUDO PRYH D SRWHQWLDO WULODWHUDO )7$ LQ-

YROYLQJ&KLQD-DSDQDQG6RXWK.RUHDLVDOVRLQFUHDVLQJO\

being envisaged. The three Northeast Asian countries agreed

in October 2009 to examine the feasibility of a trilateral

)7$DQGFRPPLWWHG LQ0D\WRFRQGXFWDMRLQWVWXG\

on this issue.13 The feasibility study was completed by the

end of 2011. On May 14, 2012, the three parties concluded

WKH )LIWK 7ULODWHUDO 6XPPLWPHHWLQJ LQ %HLMLQJ E\ VLJQLQJ

WKH7ULODWHUDO$JUHHPHQWIRUWKH3URPRWLRQ)DFLOLWDWLRQDQG

3URWHFWLRQRI,QYHVWPHQWDQGDJUHHGWRODXQFKQHJRWLDWLRQV

for a three-way FTA by the end of the year. Chinas deter-

mination to go ahead with this trilateral FTA has no doubt to

GRZLWK -DSDQV LQWHUHVW LQ MRLQLQJ WKH86VSRQVRUHG733

which involves a number of countries on both sides of the

3DFLFZLWKWKHH[FHSWLRQRI&KLQD

A trilateral agreement is widely believed to be instrumental

in strengthening trilateral relations, hence contributing to the

RQJRLQJSURFHVVRIHFRQRPLFLQWHJUDWLRQLQ(DVW$VLDVXFKDV

$6($1RU$6($1$&-.)7$ZRXOGEHUHJDUGHGDVD

milestone in regional integration, fostering prosperity not onlyfor the region but for the world as a whole. According to some

estimates, a trilateral deal may be the most promising scenario

in terms of gains, but as it is certainly not the easiest one to

negotiate it is not the most likely.

Whatever the means, Korea can be expected to play a key role

and contribute to the deepening of economic integration at the

(DVW$VLDQOHYHO

Concluding Remarks

8QWLOUHFHQWO\.RUHDKDVEHQHWHGHQRUPRXVO\IURP&KLQDV

opening up strategy and this explains to a large extent theGHHSHQLQJ RI LWV LQWHJUDWLRQ ZLWK (DVW $VLD 6LPLODUO\

.RUHD KDV DOVR EHQHWHG E\PRYLQJ SDUW RI LWV SURGXFWLRQ

capacities to China, also contributing to the tightening of

regional production networks. Recent developments call for

changes in this so far successful strategy. The challenge for Ko-

UHDLVWRDGMXVWLWVSROLF\

Korea is probably illustrative of the possible changes in the

ZD\WKHZKROHRI(DVW$VLDZLOOEHLQWHJUDWLQJLQWKHFRPLQJ

years, with a shrinking importance of vertically-integrated

production networks and a rising role of institutional arrange-

PHQWV7KHHPHUJHQFHRI(DVW$VLDDVDPDUNHWUDWKHUWKDQas a production base requires substantial changes in the

specialization and trade patterns of the countries in the region

EXWLW DOVRUHTXLUHVLQVWLWXWLRQDODGMXVWPHQWVDQGLQSDUWLFXODU

DEURDGHUOLEHUDOL]DWLRQPRYH$OWKRXJK(DVW$VLDQHFRQRPLF

LQWHJUDWLRQZLOONHHSLWVVSHFLFLW\ WKHde facto and de jure

dimensions are likely to be increasingly mutually reinforcing,

with Korea as a key player in both areas.

Franoise Nicolas is the Director of the Ifri Center for Asian

Studies (Paris) and assistant professor, Paris-Est University

(Marne-la Valle).

1+DPDQDND6KLQWDUR,V7UDGHLQ$VLD5HDOO\,QWHJUDWLQJ"$'%ZRUNLQJSDSHU

VHULHVRQ5HJLRQDO(FRQRPLF,QWHJUDWLRQ1R-DQXDU\

27KHH[SRUWELDVLVFDOFXODWHGDVWKHUDWLRRIWKHVKDUHRIFRXQWU\VLH[SRUWVWRFRXQWU\

MLQFRXQWU\LVWRWDOH[SRUWVWRWKHVKDUHRIWKHZRUOGVH[SRUWVWRFRXQWU\MLQWRWDO

ZRUOGH[SRUWV

37KHHVWLPDWHGPRGHOPDNHVXVHRIWKH$571HWJUDYLW\PRGHOLQJDQDO\VLVWRRO

GHYHORSHGE\WKH81(FRQRPLFDQG6RFLDO&RPPLVVLRQIRU$VLDDQGWKH3DFLF

KWWSZZZXQHVFDSRUJWLGDUWQHWDUWQHWBDSS

4*DXOLHU*XLOODXPHHWDO&KLQDV,QWHJUDWLRQLQ(DVW$VLD3URGXFWLRQVKDULQJ

)',DQGKLWHFKWUDGH&(3,,ZRUNLQJSDSHUV1R


15/20


&KHRQJ-DHZRQ.RUHDV,QWHUPHGLDWH*RRGV7UDGHZLWK$6($1LQ.DJDPL

0LWVXKLURHG,QWHUPHGLDWH*RRGV7UDGHLQ(DVW$VLD(FRQRPLF'HHSHQLQJ

7KURXJK)7$V(3$V%5&5HVHDUFK5HSRUW1R%5&,'(-HWUR%DQJNRN

6,QRUGHUWRUHDFKWKHODWWHUREMHFWLYH&KLQDLVWDUJHWLQJVHYHQHPHUJLQJVWUDWHJLF

LQGXVWULHVHQHUJ\FRQVHUYDWLRQDQGHQYLURQPHQWDOSURWHFWLRQQHZLQIRUPDWLRQ

WHFKQRORJ\ELRWHFKQRORJ\KLJKOHYHOHTXLSPHQWPDQXIDFWXULQJDOWHUQDWLYHHQHUJ\

DOWHUQDWLYHPDWHULDOVDQGQHZHQHUJ\YHKLFOHV

6KLP6DQJ+\XQJ5DSLGO\&KDQJLQJ'LYLVLRQRI/DERULQ(DVW$VLD3265,

&KLQGLD4XDUWHUO\$XWXPQ

7KHDJUHHPHQWEXLOGVXSRQDQRWKHUDJUHHPHQWUHDFKHGE\IRXU$VLD3DFLF

HFRQRPLHV36LQJDSRUH%UXQHL1HZ=HDODQGDQG&KLOH

&DSOLQJ$QQDQG-RKQ5DYHQKLOO0XOWLODWHUDOLVLQJ5HJLRQDOLVP:KDW5ROHIRU

WKH7UDQV3DFLF3DUWQHUVKLS$JUHHPHQW"7 KH3DFLF5HYLHZ YRO1R

(OPV'HERUDKDQG&//LP7KH7UDQV3DFLF3DUWQHUVKLS$JUHHPHQW

7331HJRWLDWLRQV2YHUYLHZDQG3URVSHFWV56,6ZRUNLQJSDSHU1R

)HEUXDU\

10&KXQJ:KDQ:RR7KH'HFUHDVHLQ6RXWK.RUHDV,QYHVWPHQWLQ&KLQDDIWHUWKH

*OREDO)LQDQFLDO&ULVLV3265,&KLQGLD4XDUWHUO\6XPPHU

117KHWZRSDUWLHVODXQFKHGDMRLQWVWXG\RQWKHIHDVLELOLW\RIDELODWHUDO)7$LQ

DQGHYHQWXDOO\XSJUDGHGLWWRJRYHUQPHQWLQGXVWU\DFDGHPLDUHVHDUFKLQ

EXWWKHGHFLVLRQWRJRDKHDGZLWKQHJRWLDWLRQVGLGQRWPDWHULDOL]HXQWLO

12=KDQJ-LDQ9LJRURXV:DYHVRI(DVW$VLD(FRQRPLF,QWHJUDWLRQDQGWKH6LQR

6RXWK.RUHD7UDGH5HODWLRQVKLSPLPHR%URRNLQJV&HQWHUIRU1RUWKHDVW$VLD

3ROLF\6WXGLHV-DQXDU\

13$PDMRUDGYDQWDJHRIVXFKDWULODWHUDOVFKHPHLVWRKHOSGHIXVHELODWHUDOWHQVLRQV

LQSDUWLFXODUEHWZHHQ-DSDQDQG.RUHDDVZHOODVHDVH&KLQDVVXVSLFLRQVYLVjYLV

-DSDQVDQG.RUHDVDWWHPSWVDWFRQWDLQLQJLWVULVHDVH[SODLQHGLQ%\XQ6HH:RQ

7KH&KLQD-DSDQ6RXWK.RUHD7ULDQJOH7KH6KDSHRI7KLQJVWR&RPH$VLD

3DFLF%XOOHWLQ1R-XQH


16/20


17/20


REGIONAL INTEGRATION IN EAST ASIA:LESSONS FROM EUROPE

By Kim Heungchong

Abstract

:KHQFRQVLGHULQJ(DVW$VLDQLQWHJUDWLRQWKHUHDUHYDOLGUHDVRQVWRH[DPLQHWKHKLVWRU\RI(XURSHDQLQWHJUDWLRQ)LUVWRIDOO

regional integration deserves careful consideration, as it can contribute to extricating economies from worldwide recession,

ZKLOHKROGLQJWKHSURPLVHRIFUHDWLQJDELJJHUPDUNHWDQGOHDGLQJDQHFRQRPLFUHFRYHU\(XURSHUHPDLQVDPRGHOIRUUHJLRQDO

LQWHJUDWLRQLQVSLWHRIUHYHDOHGGHIHFWVLQWKHPRQHWDU\LQWHJUDWLRQPHFKDQLVP6HFRQGWKHKLVWRU\RI(XURSHDQLQWHJUDWLRQ

tells us that creating blueprints and taking another step for regional integration even in the worst of situations is very important

LQPDNLQJFRQWLQXHGSURJUHVV7KLUGWKH(XURSHDQLQWHJUDWLRQSURFHVVSURYLGHVDPSOHH[DPSOHVRIWKHUROHVSOD\HUVLQWKH

QHJRWLDWLRQSURFHVVKDYHSOD\HGIRULQWHJUDWLRQ7KHVHFDQSURYLGHJRRGOHVVRQVIRU(DVW$VLDQFRXQWULHVLQDWLPHRIJURZLQJ

LQWHUQDWLRQDOWHQVLRQDQGFRQLFWVDVZHOODVGLIFXOWLHVLQWKHLQWHJUDWLRQSURFHVVLWVHOI7KHOHVVRQVIURPWKH(XURSHDQLQWH-

JUDWLRQSURFHVVFDQEHJURXSHGLQWRWKHIROORZLQJFDWHJRULHVWKHGHYHORSPHQWRIDUHJLRQDOLGHQWLW\DKLJKGHJUHHRIHFRQRPLFLQWHJUDWLRQDQGPDWXULW\RIFRQVXPSWLRQZLWKLQWKHUHJLRQWKHHPHUJHQFHRIDYRZHG(XURIHGHUDOLVWVWKH

LQWUDUHJLRQDOPRYHPHQWRISHRSOHWKHGHYHORSPHQWRIDQDGYDQFHGEOXHSULQWRUYLVLRQIRUUHJLRQDOLQWHJUDWLRQWKHQHHG

IRUH[SRVXUHWRELQGLQJQHJRWLDWLRQRQUHJLRQDOLVVXHVWKHQHHGWRFRPSHQVDWHWKRVHGLVDGYDQWDJHGE\LQWHJUDWLRQDQG

the need for a core group to drive the integration process.


18/20


The world economy is still shrouded in a fog of uncertainty,

HYHQDIWHUJRYHUQPHQWVRIWKHPDMRUHFRQRPLHVKDYHFRQGXFW -

HGDQXQSUHFHGHQWHGFRRSHUDWLYHQDQFLDOHDVLQJVLQFH

The world economy has shown neither a conspicuous rebound,

nor cleared out the many chronic problems in banking sectors,

government budgets, and household sectors of the respective

economies. Furthermore, the 2008 crisis seems to have devel-

RSHGLQWRDQRWKHUUHFHVVLRQMXVWDVVOXJJLVKJURZWKRI&KLQD

LQFLSLHQWUHFRYHU\LQWKH86DQGWKHFDWDVWURSKHLQ(XURSHplague the world economy.

In hard times, it may be absurd, or at least anachronistic, to argue

for regional integration, as economic recession has always gone

hand in hand with the emergence of chauvinistic nation-states and

protectionism in trade. It would be even more out of point to argue

WKDWZHQHHGWR WKLQNDERXW(XURSHDQ LQWHJUDWLRQZKHQ$VLDQV

DUHHDUQHVWO\GUDZLQJXSDPDSIRUUHJLRQDOLQWHJUDWLRQ(XURSH

is now the center of the global economic crisis and many of the

FXUUHQWGLIFXOWLHVLQ(XURSHDUHEHOLHYHGWREHGXHWRWKHV\VWHP

RI(XURSHDQPRQHWDU\LQWHJUDWLRQWKHHXUR]RQH7KH(XURSHDQ

case casts a fundamental doubt on regional integration.

Nevertheless, we have valid reasons to think things over re-

JDUGLQJ(XURSHDQLQWHJUDWLRQ)LUVWRIDOOUHJLRQDOLQWHJUDWLRQ

does still deserve careful consideration, as it can contribute to

extricating economies from worldwide recession, while hold-

ing the promise of creating a bigger market and leading an

HFRQRPLFUHFRYHU\(XURSHUHPDLQVDPRGHOIRUUHJLRQDOLQWH -

gration in spite of revealed defects in the monetary integration

PHFKDQLVP6HFRQGWKHKLVWRU\RI(XURSHDQLQWHJUDWLRQWHOOV

us that creating blueprints and taking another step for regional

integration even in the worst of situations is very important

in making continued progress. Figuratively speaking, as the

QLJKWLVDOZD\VGDUNHVWMXVWEHIRUHGDZQZHQHHGWRSUHSDUH

ourselves for another heyday instead of bracing for gloom

DQGGRRP7KLUGWKH(XURSHDQLQWHJUDWLRQSURFHVVSURYLGHV

ample examples of the roles players in the negotiation process

have played for integration. These can provide good lessons

IRU(DVW$VLDQ FRXQWULHV LQD WLPHRIJURZLQJLQWHUQDWLRQDO

WHQVLRQDQGFRQLFWVDVZHOODVGLIFXOWLHVLQWKHLQWHJUDWLRQ

process itself.

:KDWNLQGRI OHVVRQVFDQ(DVW$VLD OHDUQIURPWKH(XURSHDQ

integration process? Foremost, there is the intangible, creatingDUHJLRQDO LGHQWLW\(DVW$VLDKDV WRFRQWLQXHLWV LQVWLWXWLRQDO

HIIRUWVWRIRUPDQ(DVW$VLDQLGHQWLW\$SHUVRQVLGHQWLW\PD\

be composed of different layers. We identify ourselves at the

individual level through our families, friends, and the society

to which we belong. Cities where we live are another larger

category which we use to distinguish ourselves from other city

dwellers. Nation-states and perhaps the global village would

be the biggest categories with which we identify ourselves.

7KH(XURSHDQLQWHJUDWLRQSURFHVVVKRZVWKDWWKHIRUPDWLRQRI

a supranational layer, beyond the national level, is crucial for

achieving peace and prosperity in the region.

,DPQRWVXUHZKHWKHU(DVW$VLDQVWKLQNRIWKHPVHOYHVDV(DVW

Asian or Asian. Creating regional perception ahead of visible

UHJLRQDO LQWHJUDWLRQ DFKLHYHPHQWV LV WKH UVW VWHS WRZDUGV

integration. This can provide a buffer for toning down the

H[KDXVWLQJ FRQLFWV DQG GLVSXWHV LQ (DVW$VLD DQG QHJDWH

chauvinistic behaviour which the political leaders are easilytempted to adopt.

7RDFKLHYHDIRUPDWLRQRIDUP(DVW$VLDQLGHQWLW\LWLVYHU\

LPSRUWDQWWKDW(DVW$VLDQFRXQWULHVFDUU\RXWYDULRXVSURJUDPV

DQGDFWLRQVXQGHUWKHEDQQHURIWKH(DVW$VLDQFRPPXQLW\UDWK -

HUWKDQWKDWRILQGLYLGXDOFRXQWULHV3HRSOHPD\SHUFHLYH(DVW

Asia through a regional scholarship program from which both

WKHSUHVHQWDQGIXWXUHJHQHUDWLRQVPD\EHQHW3HRSOHPD\DS-

SUHFLDWH(DVW$VLDIRULWVFRQWULEXWLRQWREXLOGLQJEULGJHVPX-

seums, concert halls, etc., in their hometowns. Disadvantaged

people in the region would not be easily tempted to be chauvin-

LVWLFLIWKH\EHQHWIURPGHYHORSPHQWDLGSURJUDPVLQWKHQDPHRIWKH(DVW$VLDQFRPPXQLW\7DNLQJWKHLQLWLDWLYHLQUHJLRQDO

integration would assuage the publics irrational fear of market

opening and globalization, if a regional identity is to form.

6HFRQG(DVW$VLDVKRXOGQRWLFHWKDWWKHUHZDVDUHODWLYHO\KLJK

GHJUHHRIHFRQRPLFLQWHJUDWLRQLQ(XURSHHYHQDWWKHYHU\UVW

VWDJHRI LQWHJUDWLRQ LQWKHV(DVW$VLDQHHGVWRHPXODWH

(XURSHLQWHUPVRIWUDGHDQGHFRQRPLFLQWHJUDWLRQE\HQFRXUDJ-

ing intra-industry trade and building an exchange rate mechanism,

ZKLFKVHHPV WREH DFOLFKpDVLW KDVEHHQUHSHDWHGVRRIWHQ,

believe, however, more emphasis has to be given to the fact that

(XURSHZDVDFRPPXQLW\LQWHUPVRIFRQVXPSWLRQDVZHOODVLQWUDUHJLRQDOSURGXFWLRQ(DVW$VLDVKRXOGPRYHEH\RQGWKH)7$DQG

production network formation, and form a consumption network

LQRUGHUWRUDLVHLWVVWDWXVDVDVHOIVXIFLHQWHFRQRPLFHQWLW\,W

PD\ WDNHWLPHEXW(DVW$VLDQ FRXQWULHV VKRXOG FRQFHQWUDWHRQ

boosting their domestic consumption in spite of adversities within

the region.

Figure 1 and Figure 2 reveal some striking facts on vulnerability

RI(DVW$VLDQHFRQRPLHVUHODWHGWRFRQVXPSWLRQ7KHUVWLPSRU-

WDQWQGLQJIURPWKHJXUHVLVWKDWLQVSLWHRIGL]]\LQJHFRQRPLF

JURZWKDPRQJ$VLDQHFRQRPLHVWKH86DQGWKH(8VWLOOGRPL-

QDWHRWKHUFRXQWULHVDVWKHODVWGHVWLQDWLRQRIQDOJRRGV7KLVLVnotably true if we compare the trends of China manifest in two

JXUHV&KLQDKDVFDXJKWXSZLWKWKH86LQWHUPVRILQWHUPH -

GLDWH JRRGV WUDGHEXWQHYHULQ WKHQDO JRRGVPDUNHW &KLQD

stood as the second biggest intermediate goods market, but was

IRXUWKDVDQDOJRRGVPDUNHW7KHVHFRQGQGLQJWKDWZHQHHG

WRSD\DWWHQWLRQWRLVWKDWWKHQDOJRRGVPDUNHWLVPRUHUHVLOLHQW

to the economic shock than the intermediate goods market. Fig-

XUHVKRZVPLOGHU9VKDSHWKDQ)LJXUHLQWKHHUDRIDJOREDO

HFRQRPLFFULVLV:KDWWKHWZRQGLQJVWHOOXVLVWKHUHIRUHWKDW


19/20


Figure 1Import of Immediate Goods in6HYHUDO(FRQRPLHV

$1,600,000,000,000

$1,400,000,000,000

$1,200,000,000,000

$1,000,000,000,000

$800,000,000,000

$600,000,000,000

$400,000,000,000

$200,000,000,000

$0

USA ChinaEU

Source: Authors calculation from BEC dataset

Korea

2001 200920062002 2005 20072003 2004 2008 2010

Japan India

building intra-industry and intra-regional production networks

LVDPDMRUVRXUFHRI$VLDQFRXQWULHVHFRQRPLFPLUDFOHDQGWKLV

production network is very vulnerable to external shock. To bor-row the words of a certain politician; its the consumption, stupid,

not the production!

To complete a consumption network in the region, a rise in

consumption in the region is vital, but there are limitations for

developing countries of the region in increasing their spending

LQWKHVKRUWWHUP,WFRXOGEHWUXHWKDWWKH(DVW$VLDQJRYHUQ -

ments export-driven policy may lead to weakening domestic

consumption, but it may be the result of widening income

disparities in the region. Widening income disparity prevents

consumption growth from keeping pace with income growth,

and the gap between consumption and income has openedup as the income gap increased. Asia has become increasingly

dependent on exports as a source of economic growth in the

IDFHRIDJJLQJFRQVXPSWLRQ

Also, different consumption patterns between generations may

weaken the regions consumption as a whole, and the under-

GHYHORSHGQDQFLDOLQGXVWU\FRXOGFDXVHYXOQHUDELOLW\DPRQJ

consumers in the region. Due to a very rapid change in the

income level, the generational gap in consumption behavior

varies much more among Asian countries than in other econo-

mies in the world. Let me explain this with an example. Korea

UHDFKHGLQSHUFDSLWDLQFRPHLQWKHPLGVWZHQW\

\HDUVDIWHUPRVWZHVWHUQ(XURSHDQFRXQWULHV'HVSLWHWKHVLPL -

ODUOHYHORILQFRPHEHWZHHQFRQWHPSRUDU\.RUHDDQG(XURSH

in the 1980s, older generations in Korea consume much less

WKDQ WKHLU(XURSHDQFRXQWHUSDUWV LQ WKHV DVWKH\ZHUH

PXFKSRRUHUWKDQWKHSUHYLRXV(XURSHDQJHQHUDWLRQZKHQWKH\

were young. Therefore, old frugal habits die hard. If rapid eco-QRPLFJURZWKLVWKHUHDVRQIRUZHDNFRQVXPSWLRQWKHQ(DVW

Asian countries need to develop a policy initiative to strengthen

QDQFLDOLQWHUPHGLDWLRQDQGVHFXUHOLTXLGLW\EDFNHGE\DVVHWV

in bilateral, regional or multilateral arenas.

Moreover, we must remember that corruption in the region has

negative impacts on vulnerable segments of the population.

While these problems cannot all be resolved in a short period

RIWLPH(DVW$VLDPXVWEHJLQWRVWUHQJWKHQLWVUHJLRQDOHIIRUWV

WRH[SDQGFRQVXPSWLRQ7KLVLVDQRWKHUOHVVRQWKDW(DVW$VLD

VKRXOGOHDUQIURPWKH(XURSHDQLQWHJUDWLRQSURFHVV

Third, we need to pay attention to the emergence of the

(XURSHDQVLQWKHSURFHVVRI(XURSHDQLQWHJUDWLRQ(XURSH -

DQVZKRPRUHRU OHVVWHQGWREHDYRZHG(XURIHGHUDOLVWV

have formed a strong and loyal base of support for the inte-

JUDWLRQSURFHVV$VLVWKHFDVHIRU(XURSHKRZFDQZHWKHQ

WUDLQ RU QXUWXUH WUXH (DVW $VLDQV" %HIRUH WKLQNLQJ DERXW

nurturing, however, we need to pay attention to the Asian

diaspora living in Asia and other parts of the world. Over-

VHDV &KLQHVHPLQRULWLHV LQ(DVW$VLD .RUHDQ-DSDQHVH DQG

etc. may not have properly been provided with supranational

playgrounds or institutional set-up where they could contribute

WRWKHEXLOGLQJRIWKH(DVW$VLDQFRPPXQLW\,WPD\EHHDVLHUIRU WKHP WR DFFHSW WKH (DVW$VLDQ LGHQWLW\ WKDW , KDYH MXVW

PHQWLRQHG (DVW $VLD QHHGV WR PDNH HIIRUWV WR SURYLGH D

supranational frame to the people of the region for formation

of multiple nationalities and identities.

Fourth, after WWII, intra-regional movement of people in

(XURSH VXEVWDQWLDOO\ LQFUHDVHG DQG WKLV WUHQG KDV EHHQ

VWUHQJWKHQHG DIWHUZDUGV ,Q WKH FDVH RI $6($1 WKH GH-

gree of labor mobility in the region is far lower than that of

(XURSH 0RUH LPSRUWDQWO\ ODERU PRELOLW\ RQFH VKRZLQJ

VWHDG\LQFUHDVHKDVVWDJQDWHGRYHUIWHHQ\HDUV,WLVLPSRUWDQW

to encourage intra-regional labor mobility through employmentin foreign countries, but that is not the whole story. Short-term

visits, study abroad, tours and other types of intra-regional

PRYHPHQWRISHRSOHFDQFRQWULEXWHWRPDNLQJDUPEDVHIRU

regional integration.

Fifth, creating an advanced blueprint or vision report for region-

DOLQWHJUDWLRQLQ(DVW$VLDZRXOGSURYHGHFLVLYHIRUWKHHQWLUH

SURFHVV7KH:HUQHUUHSRUWKDVLQXHQFHGWKHWKLQNLQJRIDORW

people concerning the integration process, and subsequently,

Figure 2Import of Final Goods in6HYHUDO(FRQRPLHV

$600,000,000,000

$400,000,000,000

$500,000,000,000

$300,000,000,000

$200,000,000,000

$100,000,000,000

$0

USA ChinaEU

Source: Authors calculation from BEC dataset

Korea

2001 200920062002 2005 20072003 2004 2008 2010

Japan India


20/20

WKHVKDSHRIWKHUHJLRQDOLQWHJUDWLRQLQ(XURSHDOWKRXJKLWZDV

not immediately implemented. Drawing up a future with a pre-

cise plan, communicating the dream to other people, discussing

WKHSODQZLWKH[SHUWVLQWKHHOGDURXQGWKHZRUOGFRPPHPR -

rating the date when the blueprint was published, is all very

important for the work towards future integration.

6L[WK(DVW$VLDQ FRXQWULHV QHHG H[SRVXUH WR ELQGLQJ QHJR-

tiation on regional issues, and accumulate ample experiencein solving the issues. It is important to create various forums

GLVFXVVLQJUHJLRQVSHFLFEXWFRPPRQLVVXHV VXFKDV LQWUD

regional trade, intra-regional investment, environmental issues,

development, gender issues, human security, etc. within our

RZQFDSDFLW\ ,W WRRNPDQ\\HDUV IRU WKH(XURSHDQPHPEHU

states to acquire negotiation skills, and to reach the stage of

mutual understanding.

Seventh, a varied policy mix is required for supporting the pos-

sible losers of regional integration. It is important to compen-

sate losers during the integration process, as it can encourage

them to keep engaged in the process. The Common Agricul-WXUDO3ROLF\LQWURGXFHGLQWKHHDUO\VDQG6WUXFWXUDO)XQGV

UHQHGLQWKHVSOD\HGNH\UROHVLQWKLVUHJDUGLQ(XURSH

although the programs were not originally created for that pur-

SRVH2Q WRSRIWKRVHLQLWLDWLYHV(DVW$VLDFDQ LQLWLDWHRWKHU

schemes such as funds for green ODA and womens develop-

ment. In the process, all countries including LDCs in the region

should contribute to the creation of such funds, as it leads to

enhancement of responsibility and self-motivation.

(LJKWKLWLVUHFRPPHQGHGWKDWDNLQGRIFRUHJURXSEHIRUPHG

so as not to lose the momentum for integration. Germany and

France have maintained a key bilateral relationship during the

FRXUVHRIWKH(XURSHDQLQWHJUDWLRQSURFHVV,Q(DVW$VLD-DSDQ

and China are expected to play such a role, but if the case does

not hold for the two countries, Korea is advised to initiate a

type of trilateral relationship. Korea, unique in being a divided

country, also needs to recognize that it should take the moral

responsibility to disseminate ideas and action plans for peace-

keeping, and to advocate peace and prosperity in the region. It

can play an important role in initiating and leading the whole

process of peace and prosperity through economic and mone-

tary integration. In this sense, the role of Trilateral Cooperation

6HFUHWDULDW7&6EDVHGLQ.RUHDLVZRUWK\RIQRWH

7KH UHJLRQDO LQWHJUDWLRQPRYHPHQW LQ(DVW$VLDKDVWDNHQD

long time and faced adversities, but the process is still at a rudi-

mentary stage. We need to recall that the original six countries

LQWKH(XURSHDQ(FRQRPLF&RPPXQLW\((&ZKLFKZHUH -

JDUGDVPRUHRUOHVVKRPRJHQHRXVHFRQRPLHVZHUHLGHQWLHG

DVJHQXLQHO\KHWHURJHQHRXVZKHQWKH((&VWDUWHGVRPHIW\

years ago. In those days, they recognized so many differences

DPRQJVWHDFKRWKHUWKDWLWZRXOGKDYHEHHQGLIFXOWIRUWKHP

to think about integration of these heterogeneous economies.

(YHQZLWKRXWIRFXVLQJRQWKHGLIIHUHQFHVEHWZHHQ(DVW$VLDQ

countries, it would be important to do something immediately

for regional cooperation in order to bring about solid progress

LQUHJLRQDOLQWHJUDWLRQ$QDGGLWLRQDOLPSOLFDWLRQRIWKH(XUR-

pean integration process is to keep the momentum of the pro-

cess for cooperation by creating teams of enthusiastic policy

entrepreneurs who are eager to make efforts to bring about re-

JLRQDOLQWHJUDWLRQLQ.RUHDDQG(DVW$VLD7KLVLVWKHODVWEXW

not the least point that I would like to raise.

Dr. Kim Heungchong is the Director for Planning and

Research Coordination for the Korea Institute for Interna-

tional Economic Policy. The views reproduced here are the

authors and do not necessarily represent those of the Korea

Institute for International Economic Policy.

17KLVSDUDJUDSKDQGQH[WRQHDUHPDLQO\DGDSWHGIURP+HXQJFKRQJ.LPS

.LP+HXQJFKRQJ$VLDDQGWKH(8/RRNLQJIRUD:D\LQ&UHDWLQJ6KDUHG

9DOXHLQ7KH$VLDQ(XURSH$JHQGD,GHDVIRU&ULVLV3UHYHQWLRQDQG(IIHFWLYH&RRSHUD

WLRQ(XURSHLQ'LDORJXH_%HUWHOVPDQQ6WLIWXQJSS

2/HVVRQVIWKWKURXJKHLJKWKDUHVXEVWDQWLDOO\UHYLVHGDQGXSGDWHGIURP.LP+6

3DUN7KH3ROLWLFDO(FRQRP\RIWKH(081HJRWLDWLRQDQGLWV,PSOLFDWLRQVWR(DVW$VLDQ0RQHWDU\,QWHJUDWLRQ3ROLF\$QDO\VLV.RUHD,QVWLWXWHIRU,QWHUQD

WLRQDO(FRQRPLF3ROLF\

Kei Koreaseconomy Section04

Documents

Transcript of Kei Koreaseconomy Section04