This study aims to propose negotiation strategies for Korea toward the WTO rules area, focusing on the issues in which major countries have shown deep interest and thus have a high possibility of being placed on the agenda of the WTO New Round. This study covers anti-dumping, subsidies and countervailing measures, rules of origin, Article 24 of GATT (1994), TRIPs and trade facilitation.
It is very hard to predict clearly whether anti-dumping will be included in negotiating agenda of the New Round. While most WTO member countries support the amendment or revision of the current WTO Agreement on Anti-dumping, the United States, the most influential country in the multilateral trading system, strongly opposes it. Nevertheless, considering the increasing trend of anti-dumping initiations since the launch of the WTO, we cannot exclude the possibility of anti-dumping issues being discussed in the New Round negotiations.

When the New Round deals with anti-dumping issues, Korea will have to suggest a strong proposal to restrain the abuse of anti-dumping measures. In that regard, it is important for Korea to lead the negotiation so that the WTO member countries agree on establishing far stricter rules or conditions on the initiation of anti-dumping. Upward adjustments of criteria for de minimis dumping margins and negligible dumped imports as well as clear criteria for the determination of dumping and injury are also expected to have similar effects.

At the same time, the current review system should be redressed so that the extension of anti-dumping actions can be properly restrained. Issues regarding anti-circumvention and retarded establishment of a domestic industry are also important for Korea.

In the area of subsidies and countervailing measures, major issues in the New Round will be: expanding the extent of non-actionable subsidies, granting more flexibility in using export subsidies to developing countries, preventing abuse of countervailing duties as well as subsidies on fishery and investment incentives. Among these issues, it is desirable to put priority issues related to non-actionable subsidies and export subsidies on developing countries. Progress on these issues, in which most developing countries show interest, is helpful for the success of the New Round. In order to prevent negative impact on Korea's exports, the Korean government needs to focus on raising the conditions on de minimis and environmental subsidies. The government needs to be cautious regarding other issues, since they will be dealt with in other areas such as investment, environment and anti-dumping.

The importance of the principles that apply to the origin of products is growing following the current world economic situation, including multinational firms and the outsourcing of materials. The harmonization of nonpreferential rules of origin is under way in the WTO. However, the interests of member countries are very different and the process can not build consensus. Therefore, the conclusion of the process is considered as on the agenda at the WTO New Round. If the harmonized nonpreferential rules of origin are made as the result of the WTO New Round, they will work as the standards of the decision of most favored nation, anti-dumping, safeguard and other important trade- related rules. Therefore, the Korean government should form a task force including experts from the business world to formulate its own position in the negotiation of rules of origin.

The number of regional trade agreement that were notified to the WTO reached 209 as of October 1999 and the amount of trade within RTAs accounts for over 50% of world trade. Therefore, some member countries insist that the revision of WTO rules related to regional trade agreements to improve the transparency and guarantee WTO consistency of RTAs should be included in the WTO New Round. The Korean government should join them to clarify the WTO rules and assure the national interest from the overflow of regional trade agreements.

The built-in agenda regarding the TRIPS Agreement in the New Round consists of issues concerning geographical indications, protection of biological diversity, provision of protection to life forms, and exemption of patent protection for essential drugs. Furthermore, developing countries are likely to raise new issues such as renegotiation to extend the grace period, provision for the protection of traditional intellectual property rights and strengthening of technology transfer as well as technical cooperation. While developed countries are reluctant to renegotiate the TRIPS Agreement, they are interested in its revision to reflect the advancement in areas such as electronic commerce.

In general, the strengthening of intellectual property rights would induce innovation in a country such as Korea, which has achieved some level of technological development. Rather than resisting the implementation of TRIPS, therefore, it would be desirable for Korea to support further innovation and protection of intellectual property rights through various institutional reinforcements. Most importantly, related policy and negotiating strategies must be formed based on solid empirical studies on the effect of the strengthening of intellectual property rights on innovation and the economy, rather than as reluctant response to pressures from major trading partners.

The WTO discussions on the trade facilitation issue, which was initiated at the 1996 Singapore Ministerial Conference, can be characterized by the conflicting positions of two camps. The EU proposes that the WTO establish comprehensive trade facilitation rules, while the US and Japan have put emphasis on revising the existing WTO rules related to trade facilitation. Korea should propose that the WTO establish the rules on trade facilitation covering general principles. However, considering such conflicts and respecting the previous activities of international organizations including the WCO, it would be desirable that the WTO rules not cover all detailed issues that were already prescribed by international conventions, including the Kyoto Convention. New rules on trade facilitation, if agreed to, will have to include the generally-raised issues such as simplification of official procedures and documents, automation and modernization of customs, introduction of Electronic Data Interface, improved transparency of domestic regulations, audit-based customs control, among others.

To summarize, the anti-dumping and TRIPs issues will have the most important effects on the Korean economy. Korea needs to make sure that the basic framework of the rules of origin and trade facilitation be set up to the benefit of Korean exporting enterprises. For the subsidies and countervailing measures and regional trade arrangements, Korea needs to play a bridging role in coordinating the conflicting interests of the developed and developing camps. Korea will have to review the priorities of rules area and decide its negotiation strategies.

This study aims at evaluating the economic effects of the liberalization of trade in services on the Korean economy. Among the various economic effects, it focused on spillover effects of services liberalization on other sectors including manufacturing.

The liberalization of services is presumed to bring productivity gains in the service sectors and also in the manufacturing sectors which use liberalized services as inputs. By examining the changes in productivity of the service and manufacturing subsectors in 1970-97, we found that liberalization may have positively contributed to the productivity of the liberalized service subsectors.

The total factor productivity in 'distribution, etc.,' as well as in 'transport and communications' which were liberalized since the mid-1990s improved in 1995-97. In contrast, 'finance, etc.,' which had been nearly closed until the late 1990s, showed negative total factor productivity growth rates throughout the periods studied.

Liberalization of trade in services is also presumed to have a positive impact on macroeconomic variables. Constructing some indices of restrictiveness of trade in each services subsectors, we simulated the effects of services liberalization using the Computable General Equilibrium (CGE) model. The results show that liberalization of trade in services in Korea since the Uruguay Round increases real GDP by 0.79 percent. The consumer price index falls by 1.41 percent. Above all, welfare gain to consumers is a 1.91 percent increase in the total utility. Liberalization of trade in services also increases investment and employment in the manufacturing sector, especially in textile and clothing as well as petroleum and coal.

Considering these positive effects of liberalization of trade in services on the domestic economy, it is in the interest of the Korean economy to continue the liberalization process and refrain from retreating. As entry barriers have been widely removed, most remaining obstacles are the internal barriers faced by both foreign and domestic suppliers. Removing these barriers is more complex because they are part operating practices, part regulation and part cultural.

In particular, the ambiguous tax laws as well as cumbersome regulations are regarded as the most serious impediment to foreign investors. This implies that deregulation should focus not only on reducing the number of regulations but also on enhancing transparent enforcement. In the process of deregulation, the government should also be attentive to reducing the excessiveness of regulations for fulfilling their objectives.

Another important area which has not been adequately addressed is labor market inflexibility. The limitations on layoffs may discourage foreign service suppliers from establishing local subsidiaries, which otherwise can create employment. Establishing an adequate social safety net and effective retraining programs is thus needed not only because it enhances labor market flexibility but also because it enables the government to liberalize mode 4---temporary entry of service providers.

A CGE Analysis of the WTO New Round Market Access Negotiations in Merchandise Trade Based on the Six Scenarios and Korea's Negotiation StrategiesNakgyoon Choi· Myung Heon Lee·Moon Bae Joo

The possible approaches to the WTO market access negotiations in merchandise trade are expected to be the following: (i) an across-the-board cut, (ii) formula approaches including the Swiss formula and the EU tariff harmonization formula, (iii) request and offer, and (iv) zero for zero.

This study sets up the CGE (Computable General Equilibrium) model, analyzing the economic impact of multilateral tariff reductions based on the six possible scenarios. The CGE model covers 8 countries (Korea, USA, Japan, the European Union, Canada, China, ASEAN, rest of the world) and ten industries (agriculture, forestry and fishing, mining, food and beverage, textile and clothing, petrochemicals, steel, electronics and machinery, transport equipment, other manufacturing, services).

The simulation results reveal that Korea, China, ASEAN and Japan will be the winners in the market access areas if the tariff peaks as well as the nuisance tariffs are eliminated in the WTO New Round. The results also indicate that: (i) the Swiss formula to set a to be 10, and (ii) the tariff harmonization to eliminate the international tariff peaks as well as the nuisance tariffs below 3 % will be the best alternatives for the Korean economy.

In this context, the Korean government will be expected to make its best efforts in the WTO's decision-making processes concerning tariff reduction techniques, on which WTO Members economic interests will heavily depend. It will be urgently necessary that WTO Members cooperate with each other to make sure that the target of market access negotiations be the reduction of the average tariff rate, elimination of the tariff peaks and the alleviation of the tariff escalation system. For its part, Korea will have to prepare to revise its domestic nontariff as well as tariff systems. In addition, the Korean government will have to expand domestic support for trade and investment liberalization because the WTO New Round will substantially affect various domestic interest groups.

The Prospects for the WTO New Round Negotiations and Schemes for Improvement of Koreas' Negotiation Stance Wook Chae·Nakgyoon Choi The expectation of a successful launch of the New Round came to a halt due to disagreement of related parties at the Seattle Ministerial Conference(Nov. 30 - Dec. 3, 1999). The efforts to facilitate the initiative of the New Round by WTO and individual members have not yet materialized. As of now, it is expected that the New Round will come to the picture once the fourth WTO Ministerial Conference is held in late 2001. However, it should be noted that the launch of the New Round near the end of 2001 is plausible only under the premise that the gap in interests among the WTO member countries are narrowed. (The rest is omitted.)

Analyses and Policy Implications of the WTO New Issues
Introduction New trade issues are issues, which are not fully specified in the current trade agreements and are currently under discussion, or have a high probability of being included in the agenda for discussion. This report analyzes and draws out policy implications for six new issues: trade and environmental protection; transparency in government procurement; trade and competition policy; multilateral discipline on investment; trade and labor standards; and electronic commerce.

Trade and Environmental Protection During the UR negotiations, the interrelationship between trade and environmental protection became an important issue for the international community. From 1995, trade and environmental protection issues have been discussed in the Committee for Trade and Environment, one of the permanent committees of the WTO. Also, additional liberalization of environmental services has been under discussion since the beginning of 2000 as a part of the built-in-agenda, and Korea needs to develop an appropriate policy position on the matter.

So far, the discussion of trade and environmental protection in the WTO has concentrated on the following issues: Effects of environmental protection policies on trade; effects of trade liberalization on the environment; and the subsumption of international environmental agreements under the framework of the WTO. The core of the dispute between the WTO members has been the concerns by the developing countries that environmental policies will be used as a protectionist tool, versus the desire of the advanced countries to enforce tougher domestic and international environmental standards. From the standpoint of smaller open economies which have difficulties dealing with the issue bilaterally, it is desirable to include environmental issues in the multilateral trade agenda, since the inclusion will give the smaller economies a larger voice in the discussion.

The additional liberalization of environmental services should be considered favorably since it will allow inflows of advanced environmentally-friendly technologies and foreign capital, which will in turn, help increase the competitiveness of domestic environmental industries. Also, changes in domestic environmental policies, such as introducing new self-regulated environmental standards, and introducing policies which use the market mechanism would increase the positive effects from liberalization. Considering the positive benefits from the domestic market liberalization coupled with more environmental exports abroad, the liberalization of domestic environmental services market should be considered favorably.

Transparency in Government Procurement According to various sources, the size of the government procurement markets for most countries are approximately 10∼20% of the GDP. Despite the size of the market, the multilateral trade disciplines on the government procurement are weak. Four multilateral WTO documents deal with trade in government procurement: GATT, GATS, Government Procurement Agreement (GPA), and the Agreement on Transparency in Government Procurement (Transparency Agreement), which is currently under discussion in a working group. While there has been discussions on the desirability of a multilateral agreement on government procurement, it was recognized that it would be impossible to impose the disciplines of the GPA, currently observed only by a few members of the WTO, on all the members of the WTO. Thus, in order to reduce corruption, the members decided to focus only on the matters concerning transparency. As a consequence, the Transparency Agreement deals only with rules on transparency, and does not deal with market access or market openness. Special advantages for domestic suppliers would be permitted as long as such advantages are acknowledged in a transparent manner.

It is likely that the Transparency Agreement will eventually develop into a multilateral agreement on government procurement, which would include market access and openness. Member countries have taken their positions for or against the position based on this possibility. Currently, there is a high probability that the transparency in government procurement will be chosen as one of the New Round issues. Before the suspension of the Seattle Ministerial Meeting, in the last informal draft of the Ministerial Statement, transparency in government procurement had been chosen as one of the New round topics. However, the inclusion of the issue does not mean that members enthusiastically support transparency in government procurement. Rather, the issue was probably included because, of all the major new issues under discussion, it was one of the least controversial.

As for the actual details of the Transparency Agreement, some members argue that the agreement should specify various requirements in detail to make sure that transparency is maintained, while other members argue that if the Agreement is too detailed, it will reduce the flexibility and responsiveness of the government entities, and so the Agreement should spell out only the ideals and first principles.

Currently, the Korean exports to foreign government procurement markets are low, and are made mostly to governments which are not signatories to the GPA. Because Korea is a signatory to the GPA, Korea already maintains a fairly high standard of transparency in government procurement. Thus, the Transparency Agreement is not likely to impose additional regulatory burdens on the government entities, and government procurement related imports are not likely to increase substantially. However, the increased transparency and access to information for other countries may help Korean suppliers further develop the foreign government procurement markets, especially in the developing countries which are not signatories to the GPA. However, it should be noted that the Transparency Agreement is not likely to have a major effect on Korea's government procurement-related exports. Improvements in technology and competitiveness of Korean exports will be more helpful in increasing Korea's government procurement-related exports much more than the Transparency Agreement.

Trade and Competition Policy While traditional barriers to trade at the border, such as tariffs and quotas seem to be on the decline under the WTO, attention is increasingly focused on internal measures such as competition policy, with the recognition that anti-competitive activities of firms and market concentration may act as trade barriers. The differences in competition laws and policies among different countries, lack of comprehensive competition laws or insufficient enforcement in some countries, and jurisdictional conflicts may all lead to trade frictions, calling for an international regime on competition policy.

At the WTO, discussion on this issue began with the establishment of the "Working Group on Competition Policy" at the First Ministerial (December 1996). Although some members had sought to include competition policy as the new agenda in the New Round, there is as yet, no consensus. EU has been the most enthusiastic. EU proposes that member countries should first agree to a core principle with a minimum of substantive rules in the coming New Round, and then expand the scope of substantive rules in subsequent rounds of negotiations. Critically, US does not agree that a binding multilateral rules under the WTO is an appropriate forum to develop international cooperation on competition policy. In particular, US opposes application of competition rules to anti-dumping measures, which has been the main interest of certain members. US would prefer non-binding rules, under a new international forum which does not particularly focus on trade related issues.

Developing countries, are also unenthusiastic. While acknowledging that an international competition regime would help to regulate antic-competitive activities of multinationals, they are concerned that it may conflict with their development or industrial policies, and that developed countries could use it to mount trade liberalization pressures. However, depending on the special and differential treatment allowed for developing countries, they may support including competition policy as a new issue.

Korea has consistently supported developing an international competition policy agreement within the WTO. At first, Korea's main interest was that a competition agreement will help anti-dumping measures to be considered from competition policy perspective. However, anti-dumping issues should not be emphasized at this point, since it will only provoke US opposition against including competition policy in the new round. Rather, Korea should expend greater energy on developing dispute resolution mechanism suitable for competition policy. Further, Korea should not argue for a too strong agreement; while a competition agreement would not necessitate legislative burdens, an agreement too stringent on enforcement would put Korea in the defensive.

Finally, Korea should have a clear strategy with respect to what compensation it can negotiate by conceding, in the event competition policy is not included in the New Round.
Multilateral Discipline on Investment In the 1990s, multilateral discipline on investment has become an important topic in the international economy. When the negotiations for MAI broke down in the OECD, attention focused on the WTO discussions on investment. The core of the conflict in multilateral discipline on investment in the WTO lies in the differences of opinion between the advanced and developing countries. In order to establish a multilateral agreement on investment in the WTO, the developing countries which currently oppose the multilateral discipline, must be convinced to change their views.

In the case of foreign direct investment, the views of the advanced and developing countries can be summarized as the views of the countries which invest abroad versus the views of the countries which seek to attract foreign investment. Thus, the interests between the parties naturally differ. However, in order to establish a transparent, stable and predictable international investment environment, conflicts arising from such differences must be resolved. To gain good results from the discussions on multilateral investment agreement, the advanced countries must make sure the developing countries understand the meaning of the agreement, and allow them to fully participate in the discussions and negotiations. Korea should submit to the Working Party on Trade and Investment a concrete proposal detailing the direction and the structure that the multilateral investment agreement should take. Also, in order to facilitate the participation of the developing countries in the discussion, the investment agreement should encourage economic development, and should include provisions on the relaxation of regulations on the part of the investor countries.

Trade and Labor Standards At the Singapore Ministerial in 1996, the WTO member countries reaffirmed that the ILO was the appropriate organization to deal with labor issues, thus more clearly defining the role of the WTO. Currently, the WTO is pursuing no projects dealing with labor. However, in the Seattle Ministerial, the problem of trade and labor standards became one of the main items of attention. The international labor community and the United States has taken the position that WTO should deal with the interrelationship between trade and labor standards as a New Trade Issue. However, the majority of developing countries, as well as user groups in developed countries are opposing the inclusion of labor issues.

The pro-labor groups advocate that the following four labor basic standards be tied to trade: right to form an association and engage in collective bargaining, prohibition of discrimination, prohibition of child labor, and prohibition of forced labor. These four standards are a part of ILO's eight basic labor standards. Korea currently has ratified only three of the eight basic labor standards, lagging substantially behind the rest of the world. Korea is especially weak in the right to form an association and engage in collective bargaining. Because of the political and economic interests among developed and developing countries, the issue of trade and labor standards are not likely to disappear. The WTO Agreements currently contain no provisions on labor standards. A few developing countries argue that as a first step in incorporating labor issues within the context of the WTO, there needs to be studies dealing with the interrelationship between trade and labor standards.

According to these countries, if the labor standards are made a part of the WTO Agreements, they would act as incentives to improve working conditions in the member countries. However, the majority of the developing countries and some developed countries believe that WTO has no jurisdiction to deal with labor issues. According to these countries, labor issues will merely serve as a context for protectionist policies. Developing countries believe that labor issues are merely an excuse for the developed countries to eliminate the comparative advantage of the developing countries, which depends on low wages. Thus, it seems unlikely that the problem of trade and labor standards will be settled quickly.
A possible alternative is for the WTO and ILO to establish a joint permanent forum to examine the relationship between trade and labor standards. Korea should support this alternative. In the examination process, Korea should refrain from advocating direct sanctions against those countries which do not obey the international labor standards, but rather take the middle course, and insist that warnings be issued to the countries which violate international labor standards, and these warnings should be issued in parallel with international aid to improve labor standards.

Electronic Commerce To foster the expected growth of electronic commerce, a WTO agreement should establish a basic legal framework for international transactions to guarantee a stable and predictable environment. However, the members have not yet been able to form a consensus on the definitions, classification, technological neutrality, and domestic regulations dealing with electronic commerce. Problems dealing with electronic commerce using digital transfers, especially classifications of electronic transfers, are the most difficult of the outstanding problems. If digital transfers are classified as goods, then it is subject to the General Agreement on Tariffs and Trade (GATT), whereas if the transfers are classified as services, then it is subject to the General Agreement on Trade in Services (GATS). However, digital transfers share characteristics of both goods and services.

Thus, there is controversy regarding whether electronic commerce should be subject to GATT, GATS or some other WTO Agreement. If electronic commerce is subject to GATS, then the members can regulate electronic commerce according to the provisions of GATS. Thus, based on its provisions on domestic regulations, general exceptions, and concessions of each countries, the members can enforce the MFN and national treatment principles. However, if it is subject to GATT, the members cannot enforce these principles. EU has advocated the position that electronic commerce should be subject to GATS, but the US and Japan argued that electronic transfers of contents which have physical equivalents, such as movies and books, are goods which are subject to GATT.

During the UR negotiations, no one imagined the current on-going expansion of electronic commerce. Thus, there is a question of whether the members must grant the same level of liberalization that they had promised in distribution, financial services, consulting services, and other services based on the principle of technical neutrality, regardless of the means of supply, including when the means of supply is through the internet. Some developing countries have argued that, because the potential effect of electronic commerce is so large, the existing agreements should be re-examined.
The discussions on electronic commerce, which had been on hold after the Seattle Ministerial, is due to begin again in a special working group of specialists from the beginning of 2001. The results of the discussion, as well as recommendations from the working group will be submitted in the next WTO Ministerial.

Korea's use of electronic commerce is growing very rapidly. Infrastructure needed for a digital economy, such as telecommunications services, hardware and software are also developing quickly. The levels of commercial application, and technology are increasing, and the prospects for further development seems bright. Considering such prospects, coupled with Korea's export orientation, Korea should emphasize "free trade in electronic commerce" as a basic policy position, and form policies accordingly.

Conclusions and Policy Implications Korea, EC, Japan along with other member countries support comprehensive negotiations, dealing not only with market access, but also with legal issues. Agricultural exporters such as Australia and the rest of the Cairns Group are placing their main emphasis on agricultural negotiations, and the developing countries are placing importance on implementation of provisions on special and differentiated treatment in current WTO agreements. India, Egypt, Malaysia and other large developing countries have placed more importance on the implementation of current WTO agreements than on the New Round, and are maintaining their position against the inclusion of environmental, labor, investment, and competition policy issues in the New Round negotiations.

On the other hand, the US has advocated the inclusion of only the core issues of market access and a few particular issues of interest to the US such as labor and environment. It has opposed the renegotiation of the Anti-dumping treaty which most members favor. However, the new Bush administration may bring changes in the US position. Since the Bush administration is more flexible with respect to labor and environment issues in the New Round, these issues are not likely to be included, and the formal start of the New Round is more likely. Transparency in government procurement and electronic commerce in services seem very likely to be included in the New Round. The US, EU and Japan support the inclusion of electronic commerce. Competition policy, multilateral discipline on investment and other new issues do not seem likely to become formal topics for the New Round, and will probably remain as areas for continuing studies. No matter which new issues are selected as topics for the New Round, Korea needs to act flexibly to make sure its voice and reasoning is heard, and reflected in the final agreements.

Trade and Divestment profiles in the ASEM Process: Issues and ProspectsChong -Wha Lee

Since its inception, the ASEM process has achieved considerable success with a host of ministerial meetings, senior officials' meetings, and a plethora of activities. The 3rd ASEM Summit in Seoul laid a solid foundation for moving the ASEM process forward, adopting the Asia-Europe Cooperation Framework 2000, a blueprint for future ASEM meetings and several new initiatives for forging ahead towards the information age. However, when the actual achievements of the meeting are examine[1, they show that ASEM has made little progress, especially in strengthening the open multilateral trading system embodied in the WTO. (The rest is omitted.)

Environmental Measures of Major Advanced Countries and Their Impact on Korea
Currently, trade-environment discussions in OECD countries are relatively slow as PPMs based trade measures seem to be rejected by the Multilateral Trading System. However, environmental measures with impact on trade are becoming more stringent so Korea's export competitiveness in international markets are eroding. (The rest is omitted.)

Agenda for International Cooperation on Mobilizing Development Assistance for North KoreaHyoungsoo Zang and Young-Gon Park
The economic integration of the two Koreas will inevitably induce an additional fiscal burden for South Korea. The relentless trend of the severe economic conditions in North Korea, since 1990 - including the shortages of food, raw materials, and foreign exchange - is likely to continue in the short to medium-term, at the very least. South Koreas economy has also recently been challenged by its own financial crisis and, as a consequence, the weight of the burden has become relatively heavier.

The motivation of this study comes from the fact that South Korea, unfortunately, does not have enough financial resources to support rehabilitation of the North Korean economy. It is obvious that North Korea needs substantial amount of foreign funding for the rehabilitation and reconstruction of its economy, and it is also obvious that South Korea is not rich enough to cover all of the expenses. Thus, the financing needs stemming from Korean economic integration should be satisfied by foreign financing on a much larger scale than in the German unification case. In this regard, there is a need for creating a framework for initiating multilateral international cooperation.

Once North Korea joins the international financial institutions (IFIs), it will be able to receive financial assistance on concessional terms as well as various technical assistance from the IFIs. Helping North Korea to join these international financial institutions would be the first step in laying the foundation for a practical framework for international cooperation. However, the process of North Korea gaining membership in the key IFIs needs some time in order to clear all the hurdles. Therefore, it is equally important to discuss what other modes of support are available to North Korea in the context of its current non-member status.

This study puts forward two conceivable proposals in this regard. One is the creation of the Interim North Korea Development Assistance Group (INKDAG) through which financial, as well as technical assistance to North Korea will be channeled and a multilateral policy dialogue with North Korea will be maintained. Participants of the group could comprise major donor governments, major IFIs, UNDP, Non-Governmental Organizations (NGOs), and international aid agencies. In the early stages of its operation, South Korea would need to take a central role in one way or another. As North Koreas involvement in the international community deepens, and finally, as major IFIs are allowed by major stakeholders to participate more intensely in the Group, INKDAG could incrementally transform itself into a formal Consultative Group (CG) led by the World Bank with Banks financial allocations.

The benefits of INKDAG are the following. First, assistance through multilateral mechanism is less susceptible to political concerns than bilateral channels, for both donor and recipient countries. Second, a collective approach of coordinating resource mobilization is cost-effective and also compensates for the recipient country's lack of diplomatic capacities to reach out to many donors. Third, from the donors point of view, a multilateral policy dialogue mechanism is better suited for preventing aid duplication and for assuring transparency of the economic assistance provided. Fourth, but not the last, development assistance needs a more sophisticated policy coordinating mechanism among donors than humanitarian aid does.

The mechanism need not involve substantial financial assistance from major IFIs so that it would be able to evade the domestic legal problem of a major stakeholder. This is also needed for the swift provision of needed financial and technical assistance to North Korea. Even though all hurdles inhibiting North Koreas admission to international financial institutions are cleared, actual disbursement of substantial financial assistance would take some more time. The mechanism could act as an interim assistance mechanism during the transition period.

The second proposal concerns North Koreas external debt problem. Without the initiation of debt relief talks on rescheduling or reductions, North Korea is, for all intents and purposes, out of the international financial market. Because of North Koreas default history, without collateral or guarantees international financial community does not normally provide new loans until North Koreas debt overhang problem should be cleared. Practically, without initiating debt relief talks on rescheduling or reductions, North Korea will be out of the international financial market, not receiving any commercial bank loans, and so the burden of official donors will be heavier. It is time to think about bailing-in of the international private sector creditors to North Korea, let alone Paris Club official creditors participation in the debt relief negotiation process.

Furthermore, even with North Korea still not having been introduced into the international financial community, utilizing non-governmental organizations (NGOs) in dealing with North Koreas commercial debt overhang, could be of some practical use. The following proposal could be considered as a complement to straightforward debt relief.

Nowadays, there are increasingly many cases in which economic assistance funded by donor governments, but delivered through NGOs. Greater participation by NGOs in aid operations would be more acceptable to North Korea than would explicit provisions by the donor governments. An interesting example of the utilization of NGOs in the course of clearing the insolvent debts of heavily indebted countries through debt-for-equity swaps need to be examined.

A debt-for-equity swap is a deal converting debtor country's foreign debt into foreign equity in domestic asset. Lets assume that a country defaults on a payment to its external debt with a face value of one dollar. Due to the default, the market price of the debt would drop to 10 cents in the secondary market. Then, the debt relief required for clearing all the debts of the country would cost only 10 cents. Now, suppose that a donor country makes a contribution of 10 cents, buys the debt in the secondary market and gives it to an NGO. The NGO goes to the debtor country and swaps the (foreign exchange denominated) debt for local currency, with some degree of discount being applied (e.g. equivalent of 5 cents). With the local currency, the NGO conducts projects to meet its own objectives. The idea of swapping debt for some kind of domestic asset that provides a guarantee that the NGO will be able to protect the debtor country's natural resources may be termed debt-for-environment or debt-for-nature. If the objective of the NGO is the provision of development assistance, then we may call the scheme debt-for-development or debt-for-aid.

The donor community does not lose too much since the debt is already in default and 10 cents is the prevailing price on the secondary market. The debtor country ends up by clearing its debt of one dollar by paying only 5 cents in local currencies and also receiving either environmental or developmental assistance. The debtor country's central bank, however, ends up with domestic monetary liabilities or domestic debt. We think that North Korea may very well be interested. The task would be made more feasible under a multilateral coordination mechanism, such as INKDAG, in which policy dialogue among major donors as well as with the recipient country is well coordinated.

An important task is that South Korea should consider taking the lead in organizing an international coordination mechanism comprised of major donor governments, major international financial institutions, UNDP, NGOs, and international aid agencies, to develop a framework for international cooperation on the Korean peninsula. Under the umbrella of the mechanism, it is time to consider the possible debt negotiation process of Paris Club official creditors. Debt-for-equity swaps, especially through utilizing NGOs, would be a good starting point. On the other hand, the international community will recognize the economic benefits of an increasingly stable and secure Korean peninsula as the North-South dialogue progresses, and be ready to make due contributions. It should be noted, however, that North Korea needs to request on its own the international community of any conceivable support.

Transformation of the Economic System in the Central and Eastern European Countries and its Implications for the North Korean Economy
Yeo-Cheon Jeong

In the early 1990s, every Central and Eastern European country (CEECs) which belonged to the former Eastern Bloc started transforming from a socialist planned economy to a capitalist market economy. This was made possible by the preceding revolutionary political changes in CEECs in the process of which old socialist ideology was discarded. As every CEEC pursued the same goal - establishment of a market economy - the basic directions of economic transformation consisted of the same elements: liberalization of economic activities, macroeconomic stabilization, privatization of state enterprises, and introduction of a market infrastructure. However, the strategies and concrete policy measures applied differed from country to country, reflecting each individual country's political and economic situation.

Although evolution of CEECs' economies under central planning had been tightly interwined due to structural and systemic factors, and the basic direction of economic reform was the same in every country, the outcomes of 10 years of economic transformation in CEECs during the 1990s show a considerable discrepancy among regions and countries of Central and Eastern Europe. On the whole, it could be said that Central European countries such as Hungary, Poland and the Czech Republic show better achievements in market institutionalization and macroeconomic performance than countries of the former Soviet Union.

Differences in policy measures and initial conditions are regarded as two key factors which caused discrepancies in the outcomes of economic transformation among CEECs. Yet, as policy measures applied in CEECs reflected their initial conditions, the initial condition is the most fundamental factor which affected processes and outcomes of economic transformation in CEECs. Taking the experiences of Asian socialist countries such as China and Vietnam into account, the influence of initial conditions on the processes and outcomes of economic transformation becomes more clear.
Defects inherent to the socialist planned economic system and the structural dependency on imported energy resources are two basic obstacles hampering North Korea's economic growth. Therefore, it seems inevitable for North Korea to reform its economy sooner or later, if it could be normalized and grow. In any case, the direction of economic reform in North Korea will be bound to introduce market elements into its planned economy. However, prospect for the regime's stability will play a decisive role in choosing concrete reform measures in North Korea.

The structure of the North Korean economy is heavily distorted. First of all, disproportionate emphasis is placed on heavy industry, and the price structure is more seriously distorted than in CEECs at the beginning of 1990s. Taking these structural distortions into account, an overall economic transformation a la CEECs will definitely lead the North Korean economy into a chaotic situation. On the other hand, North Korea's agricultural sector is more tightly planned and organized, and accounts for a much smaller share of the national economy than in China. Therefore, the Chinese reform strategy of the early 1980s which promoted light industry by using unemployed and chief human resources in the agricultural sector doesn't seem to fully fit North Korea.

Economic reform in North Korea is expected to begin with restructuring heavy industry and promoting light industry, especially in export-oriented sectors. In order to meet these goals, the North Korean government could allow individual state-owned enterprises in heavy industry more initiative in their activities. As a further step, black market activities in the service sector and light industry which are known to have been flourishing in North Korea since the mid-1990s, could be officially allowed. If these reform measures prove to be unharmful to the regime's stability, the North Korean government could take bolder measures in liberalizing economic activities and correcting macroeconomic disequilibrium than have been taken in China since the late 1970s.

As long as reunification through gradual system convergence between the two Koreas remains a basic principle of North Korean policy, the South Korean government's economic policy toward North Korea should focus on marketizing and restructuring the North Korean economy. Measures such as direct investment in North Korea in the field of export-oriented light indusry and multi-party cooperation projects among South and North Korea and China, Russia or Japan to modernize North Korea's industrial facilities are advisable.

Non-Technical SummaryThe Korean government has liberalized its foreign exchange market in early April 1999. The foreign exchange law has been simplified considerably: it transformed from a positive list system―no transactions allowed, apart from certain explicit exceptions―to a negative list system―all transactions allowed, with a few exceptional cases. As a sequel, the second stage of the liberalization is scheduled for January 1, 2001. Both liberalization actions aim at removing unnecessary regulations for transactions related to foreign exchange, either directly or indirectly, as well as at increasing depth and liquidity of the market.

The purpose of this study can be put simply into the following questions: What are the special features in Korea's won/dollar foreign exchange market distinguished from foreign exchange markets of other major currencies? Does foreign exchange liberalization increase the trading volume and enhance market efficiency of the foreign exchange market? We believe that the answers for these questions may be able to provide useful policy guide for the relevant parties.
Participants in the won/dollar foreign exchange market (interbank market) are composed of the central bank, authorized foreign exchange banks (dealers) and two foreign exchange brokers. As of November 2000, there are 73 foreign exchange banks, consisting of 21 domestic banks, 50 foreign bank branches and two development banks. Any financial institution that wants to engage itself in foreign exchange transactions should get permission from the government. They should meet minimum requirements of capital, manpower, and facilities.

Currently, two commercial foreign exchange brokers are competing in interbank transactions, the Korea Financial Telecommunications & Clearing Institute (KFTC) and Korea Money Broker Corporation (KMBC). The commercial foreign exchange broker system was introduced to Korea in January 1999. KMBC, a private organization, was allowed to establish a brokerage firm; KFTC, the public foreign exchange broker that enjoyed a monopolistic position in interbank trading, has became a commercial company. These two brokers play an important role in the market. Of all interbank transactions, 96.9% of spot exchange, 63.8% of forward exchange and 93.7% of swap exchange are conducted through both brokers. These numbers are very different from those of other major currencies of which less than 50% of foreign exchange transactions are executed via brokers. Why is brokered interdealer trading a dominant feature in Korea? Simply put, it could be due to the very small size of the foreign exchange market in Korea. Dealers, not wanting to transact directly with other dealers, avoid revealing any trading-related information since the exchange market amounts to only $3 billion or over a day and less than ten banks handle the share of the order flow.

We investigate whether the liberalization measures have induced the market into a more efficient way based on spirits of two very different existing theories: market microstructure theory and market efficiency hypothesis. To test the first one, we use empirical relations between the exchange rate and the trading volume. We see how the market disseminates and reacts to various shocks including private information shocks before and after the liberalization. If the foreign exchange market becomes more efficient after the liberalization, private information shocks should be short-lived or non-existent. We construct the private information shocks as where the exchange rate and the trading volume move at higher than normal revels, respectively. We implement and interpret the shocks within the framework of noisy trading model by Blume, Easley, and O'Hara (1994). The model postulates that information is diffused and incorporated into exchange rate through the trading of informed investors. The uninformed traders infer a new piece of information via the trading volume.
Therefore, the trading process diffuses information as the new piece of information arrives, resulting in a price movement on higher than normal volume. We also take look into how volume shocks and price change shocks affect both the conditional mean and volatility of a variable before and after the liberalization.

We apply the semi-nonparametric (SNP) nonlinear impulse response analysis proposed by Gallant, Rossi and Tauchen (1993) to see how various shocks including the private information shocks affect the variables. The reason we choose the SNP as an empirical tool is that the SNP family of conditional densities is large enough to encompass almost any conditional density, which will minimize the possibility of wrong interpretation of the liberalization measures on account of a specification error. The SNP technique uses Hermite polynomial expansion to directly approximate conditional density. The leading term of the expansion is an ARCH/GARCH. The higher-order terms in the expansion have coefficients which are functions of the conditioning data. In this manner, the polynomial expansion allows for shape deviations from normality and conditional heterogeneity of unknown form. Nonlinear impulse response functions, summarized in Gallant, Rossi and Tauchen (1994), are the extension of the impulse response function of linear VAR to the nonlinear case. In the nonlinear model, the dynamic properties can be elicited by perturbing the vector of conditioning arguments in the conditional density.

Our empirical findings based on nonlinear impulse response functions are as follows. First, large price and volume movements of private information generate persistent responses before and after the liberalization even if the degree of persistence after the liberalization is much smaller than the degree before the liberalization. The results lead us to conclude that the market becomes relatively more efficient after the liberalization, under the framework often going by the name of noisy trading model. That is to say, informed traders may earn much more at the expense of less informed or noisy traders, but the first can enjoy high profits for relatively short duration after the liberalization. Second, the public information shocks do not affect the volatility of the exchange rate in the short run, but the effects do not dampen for a long term in both periods. The same is true for volatility, even though the result is barely statistically significant. Third, the volume shocks or disparate belief shocks are major sources of price deviation from the average exchange rate and persistence in the volatility before and after the liberalization. Therefore, the trading volume itself generates 'excessive volatility' in the market.

We also investigate how the foreign exchange market has changed after the liberalization through the relationship between the offshore NDF (Non-Deliverable Forward) exchange rate and the domestic spot exchange rate. First, we examine the changes in ex-post profit of NDF rates during the sample period. We find the ex-post profit of NDF rate to be very small before the crisis and negative during the crisis period. However, recently the ex-post profit is fluctuating, showing both positive and negative values. It is believed that this comes from the liberalization measure such that domestic banks were allowed to participate in the offshore market since April 1999. Second, we show the status of market liquidity between the three periods―before, during and after the crisis―and find that the liberalization has increased the market liquidity. To examine the liquidity condition, the difference between bid-price and ask-price is analyzed, since there is no available data on the trade volume of the NDF transaction. Due to the liberalization, the liquidity in the forward exchange market is expected to increase as more participants enter. The liquidity increased as the bid/ask difference has reduced about four times between period 1 and period 3. We find that the forward premium puzzle exists in the domestic foreign exchange market. We also find that the influence of crisis still exists in the foreign exchange market. We also obtain empirical results that the offshore NDF exchange rate is not an unbiased indicator. However, the existence of time-varying risk premium explains the bias in the foreign exchange market of Korea. To find the existence of time-varying risk premium, the ARCH-in-mean model is used. ARCH models capture some important aspects of the risk premium in a foreign exchange market. First, the ARCH model is convenient specification for heteroskedasticity, which is an empirical characteristic of exchange rates. Second, most exchange rate changes exhibit leptokurtosis, and the conditional distribution of the Maximum Likelihood procedure of the ARCH model also shows fat-tailed behavior. Lastly, the ARCH-in-mean model is a suitable econometrical model, such that the time-varying risk premium enters into the regression for the conditional mean.

In addition, forward exchange bias clearly appears in the domestic foreign exchange market, indicated by the fact that it did not have a forward premium bias as seen in the main exchange rates in the free-floating exchange rate system. Thus, while most forward exchange rates are known to have a downward bias, an upward bias is observed domestically. This upward bias is thought to be caused by the system collapse following the shock of the financial crisis. Moreover, the upward bias shows that in Korea the interest rate equilibrium condition is satisfied at least in direction. To make an analogy, the government's interest rate stabilization efforts after the crisis greatly helped the exchange rate's downward stabilization. Bias in the domestic foreign exchange market can be explained by checking for existence of a risk premium or peso problem. This means that the domestic foreign exchange market can be understood as the risk premiums of forward exchange buyers and sellers or the expected excess profits (or losses) from expectations of a regime shift.
Based on our empirical finding, we suggest policy implications for exchange and monetary policy. First, the possibility of excessive volatility caused by noise or bandwagon holds a policy implication for the exchange rate system in Korea. Our results show that the degree of excessive volatility in the market grows weaker after the liberalization or adoption of a flexible exchange rate system. It seems to be very contradictory to the general consensus that the exchange rate would be more volatile under a flexible exchange rate system than a fixed one. The clues on the seeming contradiction can be reconciled with the fact that the absolute magnitude of the estimated conditional volatility decreases by more than ten times. As the volatility of the exchange rate decreases, the risk premium become smaller and the incentive for noise traders to participate in foreign exchange transactions shrinks. If the government's policy objective lies in minimizing the exchange rate volatility, one possible candidate for exchange rate system would be multilateral arrangements in the sense of discouraging noisy traders from participating in the market.

Second, indirect intervention of the traditional interest rate policy may not be as much effective as the traditional theory expected. This is due to the risk premium in the determination of exchange rates. The traditional interest rate policy on exchange rate states that increasing domestic interest rates induce more capital inflows and in turn the domestic exchange rates appreciate. However, this would happen only if interest rates and foreign exchange risk premiums were orthogonal. In other words, the exchange rate depreciates rather than appreciates in the case that the increasing interest rate influences the risk premium as a sign of weak economic conditions. According to empirical analysis, the changes of exchange rates depend on the interest rate differential as well as the risk premium. Since the forward rate and realized expected spot rate are correlated positively, as the interest rate differential increases, capital outflows occur and the domestic currency depreciates. As the time-varying risk premium is deemed as an important factor in the foreign exchange market, it is better to understand the effect of risk components in determination of the exchange markets.

Development of the domestic bond market is also another important economic objective for the Korean economy. An efficient and active bond market provides not only effective benchmark rates in the foreign exchange transactions, but also alternative financial assets to diversify the risk. This results in a deeper and more efficient foreign exchange market. In conclusion, the development of foreign exchange market requires a more efficient domestic financial market in general.