MERCOSUR: Evaluation of Economic Performance and Its Implications for Future
Heon Deok Yoon

Brazil, Argentina, Uruguay and Paraguay agreed to form a customs union called the Mercado Comun del Sur(MERCOSUR). MERCOSUR created an integrated regional market whose members were committed to liberalizing trade with one another while imposing a common tariff on goods imported from nonmembers. Currently the fourth largest integrated market after the North American Free Trade Area(NAFTA), the European Union, and Japan, MERCOSUR has further extended its scope by entering free trade agreements with Chile and Bolivia. MERCOSUR's sheer size gives it considerable market power and influence over trade developments worldwide.

Like other regional trade arrangements that offer preferential terms to member countries, MERCOSUR has generated fair amount of debate on its implications to member and nonmember countries in the region. There are persuasive evidence that MERCOSUR has promoted intra-group trade over outsiders and increased the credibility of the participating governments' committment to trade reforms. In this article, the impact of MERCOSUR on the trade patterns and growth of the participating countries is explored and evaluated its implications for future of MERCOSUR, and considering also Korean perspectives to MERCOSUR.

Taiwan's Entry to WTO and Its Implication
Jemo Koh ·Chai Wook Chun

Taiwans economic strength has already reached that of developed countries and it is expected to enter into the WTO with the conditions set forth by them as well. The U.S. along with most of the Western countries are open to Taiwans entry into the WTO yet due to Taiwans political relationship with China, Taiwans entry into the WTO will not be an easy task.

In preparing to join the WTO, Taiwan is trying to make headway into a gradual reduction of tariffs and market openness along with readjusting and supplementing the existing law in order to relax any sudden percussion in joining the WTO. Even if Taiwan joined the WTO, the impact on each of the domestic industries will not be significant due to the implementation of these prior measures. Though a minor effect is expected in the agriculture industry where the level of protection is comparatively high and a section of the service industry where out-dated management techniques still exist, the impact on the manufacturing sector will not be too great at large.

Taiwans entry into the WTO will influence trade between Korea and Taiwan. Taiwans entry into the WTO does not imply the restoration of the bilateral political relationship. However, Taiwans entry into the WTO may have a symbolic meaning to it. Due to political reasons which have arisen until today, reopening the concrete plan of agricultural products which had been subjected to restriction, increasing the level of tourism and flights, increasing import quotas on Korean automobiles to Taiwan, participating in Taiwans government procurement market and so on will have a positive impact on Korea. The effort of companies and the thorough preparations that the Taiwanese government is showing through this opportunity to enter the WTO are thought provoking.

Especially the establishment of Asia Pacific Regional Operations Center (APROC) which takes on the role of preparing for and collectively analyzing both the domestic and foreign economic conditions makes one realize the degree of preparation being performed by the Taiwanese government. At times, the political instability in Taiwan will have an adverse effect on the Taiwanese economy. Yet the fact that the Taiwanese economy possesses a stable growth potential on the long run is the general consensus. Furthermore, if Taiwan joins the WTO, its economy will become more active.

Some Proposals on New International Financial ArchitectureYunjong Wang· Se-Jik Kim· Doo Yong Yang· Sang-In Hwang
Frequent recurrence of financial crises in emerging markets in recent years has raised a serious question of the adequacy of the current global financial system, and has rekindled enormous public and academic interest in redesigning the international financial architecture. Numerous proposals for reforming the international financial system have been put forward by academics, policy making groups, and financial experts. Among them are included the G-7 Finance Ministers Report, the Meltzer Commission Report, the Report sponsored by the Council on Foreign Relations, and the Financial Stability Forums Reports.

However, these reports are often criticized for not properly reflecting the views of emerging markets. In order to forge a global consensus on the issues of architectural reforms, emerging market economies need to more actively participate in the discussion. By doing so, emerging market perspectives would be incorporated more adequately in the process of designing a new international financial architecture.

The papers in this volume aim to evaluate whether the current system is adequately designed to prevent future crises and to seek for policy recommendations on rebuilding a better system. They address four essential issues related to the reform of international financial architecture: 1) new international lending facilities; 2) exchange rate regime; 3) external debt management; and 4) private sector involvement.
New Proposals on International Lending Facilities The first paper explores two new proposals on international lending facilities for better prevention of financial crises. First, it makes a proposal on reforming the current CCL (Contingent Credit Line) of the IMF. The key of the proposal lies in the adoption of a dynamic threshold, rather than the current approach of static threshold when determining the eligibility for the CCL. The modified CCL is expected to substantially alleviate the adverse selection problem of the existing CCL. Second, the paper proposes a new international lending facility. Under the new facility, the country first hit by the crisis will not be bailed out under any circumstances, but those hit later will be bailed out. The new facility adopts the timing of crisis as criteria for international bailout, so that it does not have to rely on arbitrary judgment of international financial institutions.

This paper further develops a model which show that the new lending facility is better than the existing ones in resolving the problems of moral hazard and contagion simultaneously. The model suggests that traditional lending facilities of the IMF such as Stand-By Arrangement are effective only in mitigating contagion effects, not in preventing moral hazard. In addition, the CCL may effectively reduce both moral hazard and contagion under information symmetry, but cannot avoid moral hazard problem in the case of asymmetric information. In contrast, it is shown that even under information asymmetry, the new lending facility proposed in this paper can effectively abate both moral hazard and crisis contagion.
Choice of Exchange Rate Regime: Emerging Market Perspectives The issue of choosing an appropriate exchange regime has been actively discussed since the recent Asian crisis. As a lesson from the recent crisis, an argument has arisen that an intermediate exchange regime under the expansion of capital liberalization can set off a crisis for emerging market economies. Accordingly, these countries are forced to adopt two-corner solutions. A counter-argument tries to prove that two-corner solutions apply more to developed countries and less to emerging market economies. The second paper in this volume tries to explain the reason that developed countries and emerging market economies have different degrees of intervention in their own foreign exchange market. Moreover, it shows that free floating regime cannot be applied directly to emerging markets due to the fear of floating.

The financial market structure is to be examined in terms of appropriate exchange rate regime. In the case of Korea, the improvement of infrastructure and efficient risk management in the foreign exchange market are needed for a successful floating exchange rate regime. In addition, this paper emphasizes that the elimination of misalignment through effective market intervention is as much an important policy objective as the successful implementation of inflation targeting. More importantly, the choice of exchange rate regime should be consistent with the macroeconomic policy to prevent future crisis.

External Debt Management: Reducing Double Mismatches The imprudent management of external debt and the deteriorating national balance sheet in Korea prompted a bigger economic crisis than its actual economic conditions would have allowed. The result from a quantitative analysis on the Korean economy suggests that the sizable external debt and mismatched external balance sheet exerted negative effects on the economy. Therefore, it is necessary to manage the risk of external debt structure more cautiously. Since domestic capital markets in emerging market economies, including Korea, are underdeveloped and vulnerable to external shocks, emerging market economies need to manage comprehensively not only the public sector debt but also the private sector debt. Based on a proper portfolio plan of external debt, these economies should manage the actual debt structure in advance. In addition, the risk of external debt should be managed in relation to its composition and maturity structure. For example, it is necessary to increase domestic-currency denominated borrowing and to switch from short-term loans to long-term loans.
International cooperation is also required in reinforcing monitoring process over short-term capital flows in the regional context, because deepening financial market liberalization and deregulation renders no individual country to be solely responsible for monitoring international short-term capital movements. Therefore, channels of information sharing should be established, especially with regard to short-term capital movements such as investment funds and short-term borrowings in the Asian countries.

Emerging market economies already with an efficient debt management system, however, may find difficulty in having stable and long-term borrowing conditions. Despite their necessity and willingness to develop their domestic bond market, it will take a long time. Although limited, one way to improve borrowing conditions in emerging market economies can be the guarantee of sovereign bond issuance of emerging market economies by international financial institutions including multilateral development banks and advanced countries.

The development of long-term bond market through regional bond market can be another suggestion for enhancing their borrowing conditions. Finally, technical assistance from international organizations may contribute to improving the sub-structure of capital market in emerging market economies, thereby allowing more long-term borrowing.
Private Sector Involvement: Constructive Engagement The past few years have shown that creditors and investors tend to underestimate risks when they seek for higher yields. In other words, international lenders have as much responsibility for crisis as emerging market borrowers; for every questionable borrower there is a questionable lender. Efforts to achieve greater private sector burden sharing are motivated by the perception that official assistance to crisis countries creates a source of moral hazard on the part of private sector creditors. If private sector creditors are bailed out through official assistance without bearing any cost of the crisis, their habitual poor lending and reckless investment decisions would not be rectified.

Since creditors and debtors is pitted against each other in protecting their own interests, most conspicuous divergences persist in this issue of private sector involvement (PSI). The most unsettled part of PSI would be the question of whether the nature of PSI should be based on predetermined rules or handled on a case-by-case basis. Some want those rules to be very hard and tight, while others desire some degree of flexibility.

Under the broadly defined PSI framework laid out in the 1999 Cologne Summit, the G-7 put forward operational guidelines for PSI at the IMF/WB meeting in April 2000. They distinguished between two different cases. First, PSI could be ensured primarily through reliance on the IMFs traditional catalytic role. Second, more concerted forms of PSI would be required. The official sector will need to insist on appropriate debt restructuring with private creditors, if necessary, as a condition for IMF financial assistance. To make operational guidelines more workable, however, the IMF could act as a crisis lender and manager. Although the IMF stays away from micromanaging the terms of debt restructuring, it could provide bridging loans while negotiations are in progress, provided it is convinced that the crisis country is negotiating with its creditors in good faith. Or if voluntary negotiations are in trouble, the IMF could endeavor to bring the involved players to the negotiation table.

The purpose of this seminar was two-fold. First, it wanted to seek the advice and expertise of the OECD and advanced economies of the world on how Korea should prepare itself for the New Economy and globalization and how it can better managed and complete our economic restructuring efforts which began three years ago.
Second, it wanted to increase the awareness of the Korean public about the economic cooperation and collective discourse taking place among the advanced economies under the auspices of the OECD.

The recent Asian financial crisis which first began in 1997 has raised a critical question on the adequacy of the existing international financial architecture and provided an impetus for discussion on how it can be modified or redesigned.
There have already been many reports and policy recommendations put forward regarding this issue. However, these reports and policy recommendations are frequently criticized because emerging market views are not fully recognized and their concerns are not fully reflected, although emerging markets are most vulnerable to the systemic risks of the global financial system.

For this purpose, an international conference was organized by the Institute for Global Economics and the Korea Institute for International Economic Policy to concentrate on discussing these critical issues among Group members and international experts.

The Cost of Protection in the Agricultural Market in Korea and Its Implication
Yoo Cheul Song·Ji Hyun Park

There are two different views on opening the agricultural market. One is that agricultural market should be opened to improve the consumers welfare. The other is that agriculture needs special protection because it has multi-functionality such as food security. Therefore, we investigated the cost of protection in the agriculture in Korea by using the computable partial equilibrium model. We measure the cost of protection in 12 agricultural goods including rice, beef and pork. The increase in the consumer welfare and decrease in the producers welfare in the case of eliminating protection is about 9 trillion and 73 billion won and 6 trillion and 952 billion won, respectively. It implies that one person in the economically active population bears 420 thousands won. It also implies that maintaining one job in these products costs 17 million and 820 thousands won. We also investigated the cases of agricultural market opening in Korea and find that it has positive effects such as decrease and stabilization in the consumer price.

The United States has been Korea's largest trading partner, and while the two countries have enjoyed substantial benefits from the mutual trade relationship, there has also been some substantial trade friction. Currently, the United States is experiencing record high trade deficits, but unlike the past, such trade deficit has not become a political problem. In fact, most Americans seem to be unconcerned about the trade deficit. The trade deficit has not been emphasized in the 2000 Presidential elections. Such lack of concern is probably due to the extended period of economic growth in the United States, where the unemployment rate is at a historical low, and productivity is increasing steadily.

Due to the lack of general concern about the trade deficit, most of the bilateral trade problems between Korea and the United States have tended to concentrate on certain politically sensitive, or economically strategic industries. In this report, six industries in particular are examined: Distribution of beef, steel, automobiles, semi-conductors, intellectual property rights, and government procurement. At first glance, there is little similarity between the six industries. Problems in the distribution of beef and the automobile industries deal with market barriers in the Korean market; problems in the steel industries deal with American perception of unfair Korean exporting practices and American market barriers; problems in semi-conductors deal with offshore implementation of American anti-dumping laws; and intellectual property rights and government procurement are "new issues" in trade, areas which are only now coming into importance in the trade arena. The report looks at the individual issues in detail. For beef distribution, Korea has maintained separate distribution channels which does not seem justifiable according to the WTO. For steel, the American firms seems to have used the Asian financial crisis as an excuse to lobby for protection and government assistance which it had always wanted. In semi-conductors, the "Big Deal" merger, as well as reduction in production by Korean firms to prop up international prices seems to have gotten the attention of the American anti-trust authorities as being a possible anti-competitive act. In automobiles, the American manufacturers have steadily asked for, and received reductions of market barriers in the Korean market, but the import share of the automobile market have remained below 1%. However, such low market share may be due to the lack of effort by American firms to market their products properly, as well as the ban on the imports of Japanse automobiles which has only recently been lifted.

The American government and businesses have also asked for stricter intellectual property rights and protection of such intellectual property rights. While the Koreans have strengthened the intellectual property laws, and have improved enforcement of these laws, Americans are still not satisfied with various specific areas of these laws, as well as what they perceive are still "too-weak" levels of enforcement.

Finally, in government procurement, the Americans have recently accused the Inchon International Airport Corporation (IIAC) of discriminating against foreign firms, arguing that IIAC was effectively a part of the Ministry of Construction and Transportation(MOST), thus bound by the non-discrimination obligation of the WTO Government Procurement Agreement. The WTO dispute settlement panel found that, because IIAC is not a legal sub-entity of MOST, it is not subject to the provisions of WTO GPA.

As seen, the problems in each industry seems distinct and separate. However, there are some common threads linking these disparate problems. Lurking in the background of all these issues is the American perception of collusion between the Korean government and businesses. In some industries, the two agents collude to keep Americans out of the Korean market, in some industries, the two agents collude to give unfair advantages to Korean exports in the US markets. In intellectual property rights, the Korean government sometimes bend the rules to give unfair advantages to Korean businesses. These perceptions are sometimes worsened by the opaque relationships between the Korean government and businesses. Thus, in order to reduce bilateral trade friction between Korea and the United States, one of the primary tasks of the government must be to counter the American perception that the Korean government and businesses are engaged in collusive acts against American firms, and make as transparent as possible, the relationships between the Korean government and businesses.

AFTA-CER Linkage and Koreas Policy Options
Yongkul Won

Despite the continuing efforts for trade and investment liberalization on a multilateral level by the GATT/WTO, regional trade agreements (RTAs) shows no sign of diminishing all over the world. Rather, the world has witnessed rapid expansion and deepening of major RTAs. Having recent development in the global trading environment in mind, this study traces and examines the dialogue process to make a formal linkage between ASEAN Free Trade Area (AFTA) and Australia-New Zealand Closer Economic Relations Trade Agreement (CER). In particular, the study is to critically evaluate the possibility of a free trade agreement (FTA) between them and its implications on regional as well as global trading environment. In doing so, the study intends to provide some policy suggestions for Korean government that has recently changed its policy direction on regionalism toward a positive way.

Formally started in 1995, AFTA-CER linkage dialogue has successfully identified and widened cooperation areas, especially in trade facilitation area. Based on the recommendation by the High-level Task Force established in 1999 to look into the possibility of an AFTA-CER FTA, ASEAN and CER economic ministers recently agreed to work towards a Closer Economic partnership (CEP), a similar concept to FTA. The CEP between AFTA and CER is intended to strengthen the international bargaining position of both regions and send a positive signal to investors of both regions commitment to continuing liberalization. While the linkage dialogue apparently looks smooth, there are several obstacles to overcome to proceed further and bring concrete results such as lack of mutual confidence and starkly different stages of economic development among participating countries. AFTACER FTA has multi-faceted implications on regional and global trading environment. First of all, the FTA may cause another blow to the APEC that has already been stumbling since its failure to implement both Early Voluntary Sectoral Liberalization (EVSL) and Accelerated Trade Liberalization (ATL) initiatives. The FTA is also believed to take an effect on agricultural sector negotiation in the coming WTO new round. Considering that many of the proposed FTAs member countries have participated in Uruguay Round as a member of Cairns Group, the FTA may well act an aggressive role for liberalization in agricultural sector. On the other hand, the FTA may trigger another round of regionalism waves all over the world in case that multilateral trade liberalization talks led by the WTO stall.

Even though the possibility of the AFTA-CER FTA seems not so high for now, Korean government needs to be prepared for each and every possibility. As a long-term response, regional studies on ASEAN and CER area should be encouraged. It should also be considered whether Korea is to join the AFTA-CER FTA when realized. It may be advisable to form a FTA with influential countries to raise bargaining power in the coming global trade negotiations. But for now, it is most important to have closer relationships with AFTA and CER in private as well as governmental levels so as for them not to evolve an exclusive FTA.

The Role of IT and Financialization in the Recent American Growth
Young-Soo Lee and Hwanjoo Seo

The upswing in the US economy since the early 1990s has provided researchers with interesting topics. For example, topics like the economic effect of information technology, financialization, volatility of the stock market, changing corporate governance, and income inequality have been extensively studied. This study places emphasis on how information technology (IT) and the prosperous stock market created a structural change in the US economy rather than examines the recent change in the US economy overall. In other words, it is mainly studied how the spread of IT and advance in the financial system have affected the 1990s, named New Economy. The studies with focus on new production paradigm or digital economy argue that the US economic boom is ascribed to static and dynamic economies of scale resulting from industrialization of information and informatization of industries. Consequently, it is assumed that the development and diffusion of IT transformed the US economy into the regime of high growth and productivity. On the contrary, from the views that stress financialization especially in households, the US economic boom is compounded of changes in labor market and corporate governance alongside in financial market, and increase in consumption. That is, they argue that the US economic boom or demand expansion is attributed to a mixture of the flexible labor market, boost of the stock market through maintaining low interest rates, and increase in consumption of durable goods.

This study tests variously these two hypotheses for structural change. To begin with, the dynamic characteristics of IT and financial sector are inspected using the database of Bureau of Economic Analysis and Board of Governance of Federal Reserve System. After that, to examine the long-run features of related time series, unit root test and cointegration test are conducted, which are followed by cusum test, F-test, and test with dummy variables for structural change finally. The results are as follows. First, it is observed that IT has enhanced efficiency of non-information capital and also contributed increasingly to growth of labor productivity since the early 1990s. Second, the influence of financial assets in a form of stock has swollen on consumption since 1993. It is examined that the expanding consumption are associated with increasing stock possession of households by investing funds including pension funds. Although the clear conclusions are not achieved regarding time division and structural change, the results indicate that the contribution of IT to labor productivity growth and the influence of wealth in a form of stock on the consumption have been rapidly expanded since the early 1990s, especially 1993.

The Expansion of Global Conglomerates into Asia after the Economic Crisis and Its ImplicationsYoungho Park

With the spreading phenomenon of the so-called globalization, western conglomerates have accelerated in expanding into the Asian region because they considered the changing investment environment had resulted from extensive restructuring and market liberalization after the economic crisis.

While in the past, overseas direct investment of western conglomerates had focused on North America and Europe owing to the relatively high entry barrier of the Asian region, after the crisis, they turned towards the Asian region, observing the region's dynamic economy based on the market liberalization and the huge market size. To respond to this new circumstance, Japanese companies are also seeking new strategies to penetrate into the Asian market along side their own difficulties of domestic economic recession and business restructuring. Thus, the competition between developed countries is intensifying to grasp the Asian market.

One of the most striking patterns which emerged in the investment behavior of western conglomerates in Asia following the economic crisis is enlargement of mergers and acquisitions (M&A) between borders. Before the crisis, the greenfield investment was a major pattern of investment because of Asian countries' restrictions on acquisitions with foreign capital. However, following the crisis, market liberalization expanded and M&A type direct investments are still rapidly growing. This is due to perfect harmony of the interests of countries concerned to overcome the crisis by attracting foreign capital and the interests of foreign companies preferring M&A.

It is predicted that the investment of western conglomerates will continue to grow due to Asian countries successfully handling and overcoming the crisis. Moreover, due to the ongoing process of financial reform and greater market liberalization in the sector of information telecommunication (IT) and distribution, western conglomerates with competitiveness will increase their investment in those particular sectors.

It could be possible to interpret these phenomena, the rapidly growing expansion of western conglomerates, as one of the tactics for strengthening the control in Asian market and further, taking the leadership in the international economy. It will lead to new competition and change in the cooperative structure of the Asian region.

Consequently, this changing situation provided us with both opportunities and challenges at the same time. We cannot ignore the significance of expansion of western conglomerates into the Asian region since Korean companies had focused traditionally on investment in the Asian region. We need to seek new Asian investment strategies through continuous monitoring and benchmarking on global conglomerates into Asia.