- 

Executive Summary

1. Introduction

2. Literature Review

3. Empirical Analysis
3-1. Variables and Data
3-2. Empirical Specification
3-3. Empirical Results
3-4. Robustness Tests

4. Theoretical Implications

5. Conclusions

References 

  Benefits of financial market integration include cheaper and alternative op-tions of saving and borrowing for households and entrepreneurs. In the global financial market, asset choices for households widen so that individu-als can manage their idiosyncratic income risk more effectively. On the other hand, financial market integration makes investors who hold foreign assets more vulnerable to global financial shocks. In the recent financial crisis, finan-cial market distress which initially arose in the U.S. had an enormous impact on the peripheral countries. This example shows that the strong shock prop-agation occurs via integrated financial markets.
  The existing literature shows that financial market integration has a sizable impact not only on business cycles in the short run, but also on economic growth in the long run. However, there has been little attention to income distribution, specifically in related to the financial market integration. In this paper, we fill the void in the literature by focusing on the following two styl-ized facts: income inequality has been exacerbated in most countries over the past two decades, and the financial market has been integrated across coun-tries during the same period. In particular, we answer three research questions to investigate the relationship between the two facts. First, how does financial market integration affect income inequality? Second, how do financial market integration and financial market development interact to change income ine-quality? Third, what components do theoretical model need to explain the interaction effect of financial market development and integration on income inequality?
  We test hypotheses that the effect of financial market openness on inequality is conditional on the level of domestic financial market development when the financial market opens. An empirical study with panel data comprised of 174 countries for the period 1995-2017 finds that the overall effect of finan-cial integration on income inequality is nonlinear. Financial market integration creates the intensive and extensive margins of credit supply which may de-pend on the development level of financial market disproportionally. This paper uncovers a novel empirical evidence that financial market integration and financial market development interact to change income inequality. When other things are controlled, the effect of financial market integration on in-come inequality depends on financial market development. In a country with underdeveloped financial market, income inequality gets worse as financial market opens. On the other hand, when financial market is highly developed, the effect of financial market openness on income inequality is mostly insig-nificant in a statistical sense. The results are still valid with different measures of financial market development, integration, and income inequality. We check that the results are robust as an endogeneity issue among financial market development and integration is controlled.
  We also suggest some important structures for the conventional economic model to account for our empirical finding as theoretical implications. Based on these implications, extensions of the conventional small open economy model with financial constraints having suggested components such as het-erogeneous holdings of foreign assets across income and asset levels and entrepreneurial shocks will be necessary to understand an interaction of fi-nancial market openness and domestic market development on the distribu-tion of income in a country. Our finding also echoes that studying an eco-nomic mechanism in which economic growth, financial market outcomes, and inequality are endogenously determined.

Keywords: Financial market development, Financial market integration, In-come inequality
JEL Classification: D63, F36, O11, O16 

  This study examines the experience of transition countries when joining the WTO and suggests implications for the North Korean economy and the economic integration of the two Koreas. The situation on the Korean Peninsula is changing drastically due to the recent inter-Korean summit and the first ever North Korea-United States summit following the disintegration of Korea into two countries 70 years ago. If discussions on the denuclearization of North Korea and an enduring peaceful settlement can be completed to some extent, further discussions on the issue of North Korea’s economic integration into the international market will hopefully follow. Though the incorporation of North Korea into the world trade system is an inevitable development in the process of economic reform and opening up and normalization of foreign relations, there is still little debate on this topic. This study examines the issues that may arise in the process of North Korea’s WTO entry through a review of experiences in transition economies.
  The goals of reforming and opening the North Korean economy should be separated when discussing the economic development in North Korea. Up to now, however, the dialogue has focused on economic reform in North Korea while the issue of opening the North Korea economy has not received sufficient attention. In particular, there has been little research on North Korea’s accession to the WTO. This study addresses this gap in previous research by analyzing the implications of the economic integration of North Korea into international trade through a comparison with the cases of various transition countries and in particular the major issues arising during their accession to the WTO.
  In Chapter 2, the study reviews the economic situation of major transition countries before and after joining WTO. At the time of joining the WTO, these nations suffered from various problems in their domestic economies including low GDP, chronic trade deficit (excluding Russia), and severe inflation. The economic downturn and widening gap between formal and informal trade also weakened the control these countries had over their respective economies. Following the collapse of the Soviet Union in 1991 it became inevitable to normalize foreign relations with market economies, causing the transition countries to reform their domestic economy, improve relations with market economies, expand their markets, and introduce advanced capital and technology. This in turn led to the WTO accession of these countries in an effort to dramatically expand their foreign trade.
  Chapter 3 reviews the major issues for transition economies when joining the WTO. Accession to the WTO ultimately depends on negotiations between the applicant nation and existing WTO members. The prolonged cases of WTO accession negotiations by major transition countries can be attributed to the following reasons: (1) efforts to keep new members in check, (2) the issue of recognizing developing country status, (3) debates on whether the WTO Agreement is compatible with domestic economic and/or trade policies, (4) issues related to non-market economy status and trade normalization, (5) political elements and (6) a lack of negotiation experts. Similar problems may appear as major issues in the process of North Korea’s incorporation into the WTO system. Nevertheless, in some cases the countries have improved access to the international market after joining the WTO and succeeded in attracting foreign capital. On the other hand, however, there are cases where trading company have been overly dependent on foreign capital, like Vietnam. Also there are cases, such as China, which is exposed to trade disputes due to non-market Economy status. Those issues may lead to trade disputes and should be considered prior to and after joining the WTO.
  Chapter 4 examines the implications of the transition countries’ experiences for North Korea and the necessity to discuss its accession to the WTO at this moment. WTO accession is the final stage of transition into a market economy system, as it requires not only trade system reform but also economic reform as a whole. For this reason, it is necessary to carefully consider the appropriate timing of North Korea’s accession to the WTO. A radical and dramatic transition of the economic system would require North Korea to bear the burden of huge social costs and losses from administrative disruption. The public opposition arising during this process could create a social atmosphere against reform and opening. Therefore, the policy requires a grace period of time and system implementation that is socially acceptable. Meanwhile, major countries may be more interested in the prospect of economic cooperation between the two Koreas following North Korea’s WTO entry. Therefore it is important to find a balance between economic integration and segregation between the two Koreas.
  This study is significant in that it is the first study to discuss North Korea’s incorporation into the WTO system. In addition, it contributes to government policies and academic studies as the first study to identify the link between the entire economy of the Korean Peninsula and North Korea’s accession to the WTO, while also providing concrete scenarios. North Korea’s integration into the international trade system should not be pursued as a short-term task but rather as a momentous goal which must be pursued with a national vision. Therefore, further studies must be conducted from a long-term perspective.
  The results of this study could be used as a basis for reviewing various factors that should be taken into consideration in the reestablishment of inter-Korean relations. They could also be used as a reference to resolve conflicts with international trade law arising in the process of conducting inter-Korean trade. Ultimately, the study can be used as a reference for when North Korea begins preparation to join the WTO. 

Real estate prices, which plummeted shortly after the global financial crisis in 2008, have risen sharply to exceed pre-crisis levels, raising concerns about global real estate bubbles. In response, this study diagnoses the bubble risk in the global real estate market and analyzes the impact of real estate bubbles on financial crises and the real economy. In addition, we examine previous bubble-oriented financial crises in the real estate sector and compare them against recent global situations.
This study first examines whether a real estate bubble exists in major global economies, based on two criteria. The first is general indicators such as price to rent ratio (PRR), price to income ratio (PIR), and household credit growth rates, and the other is cointegration tests between real estate prices and fundamentals, and time series analyses like the generalized sup ADF (GSADF) method used by Phillips, Wu, and Yu (2011), and Phillips, Shi, and Yu (2015).

The results of the empirical analysis indicate that among the countries where housing prices rose by more than 6.6% in 2016, or those in which housing prices continuously rose by more than 3.6% in the three years from 2014 to 2016, countries with high probability of bubbles forming in their real estate markets are China, Colombia, Hungary, Latvia, Turkey and Slovakia.
Among developed countries, Australia, Austria, Canada, Ireland, Israel, Luxembourg, New Zealand and Sweden have the highest increase rate in housing prices. Among these, Australia, Canada, New Zealand, Israel and Sweden are all at high risk according to the above three indicators. These five countries, for which all three indicators indicate risk, also show the same high bubble risk in our empirical analysis.
In Korea, the housing price index, PRR and PIR have stabilized considerably since the 2000s, and the risk of bubbles forming is also low according to the empirical analysis. However, in 2016 the household-credit-to-GDP ratio in Korea increased by 4.7%p from 2015, showing a remarkable increase similar to China (5.6%p) and Norway (6.2%p). In terms of PIR, Seoul is lower than Hong Kong, Beijing, Shanghai, Sydney and Vancouver, but higher than Los Angeles, London, New York, Tokyo and Singapore. In other words, the risk of real estate bubbles is not high at the national level, but the PIR in some areas such as Seoul is high.
Next, this study uses country panel data to analyze the relationship between the real estate bubble and financial crises. A panel logit with fixed effect model is used to perform the analysis. And the impact of the real estate bubble on GDP growth rate is analyzed using a fixed effect panel model.
The first empirical result shows that the house price bubble (HPB) is highly related to financial crises, as defined by the Jordà- Schularick-Taylor Macrohistory Database. Both HPB and HPB indicators, and the cross term between the two variables, are statistically significant as positive coefficients. At the HPB level, which is about one to two standard deviations above the HPB average, an increase in one unit HPB increases the likelihood of a financial crisis from 3.6% to 4.0%. In Korea, the possibility of a financial crisis is not high because HPB is not far from the long-term trend as of 2016.
Second, our analysis of the relationship between HPB and various types of financial crises, as classified by Reinhart & Rogoff, shows that HPB is more closely related to banking crises and stock market crashes than to currency crashes, sovereign defaults, and inflation crises.
Third, in the fixed effect panel analysis of the relationship between HPB and GDP growth rate, the increase in HPB shows a negative effect on GDP growth rate.
In order to assess the risks of the global real estate market and to obtain policy implications for real estate risk management in Korea, this study also examines the cases of real estate bubble-oriented financial crises such as seen by Sweden, Finland and Japan in the early 1990s and the global financial crisis in 2008. In addition, the risks associated with prospective bubbles in the recent Chinese real estate market have been frequently cited, so we compare the recent Chinese situation with Japan in the mid-1980s and the U.S. real estate bubble in the mid-2000s.
The results of the case analysis indicate a definite risk of a global real estate bubble, albeit to a lesser extent than seen in the past. This is because the monetary easing policies of major advanced economies are far more aggressive than the past. In recent years, however, the strengthening of financial institutions' soundness regulations and risk management, and the implementation of measures to manage capital flows have played a stronger role in mitigating the bubble risk compared to past times.
By region, the real estate bubble pressure seems to be larger in emerging economies than in advanced economies. This is because emerging economies are climbing more steeply than developed countries. In advanced economies, real estate prices have fallen sharply and debt deleveraging has proceeded since the global financial crisis. However, in emerging economies, asset prices have risen and household debt has increased steadily.
In particular, in the case of China, the possibility of a financial crisis due to a plunge in real estate prices is low in the short term. However, Chinese real estate prices are likely to decline modestly, which can slow China's economic growth, and small and medium- sized cities with an over-supply of housing are likely to face a financial crisis.
Finally, this study provides some policy implications for the management of external risks from overseas real estate bubbles and stabilization of the Korean real estate market. In order to improve external risk management, it will be necessary to strengthen monitoring of external environments and global real estate markets, and to prepare countermeasures against financial crisis in economies with high risk in their real estate sectors. It will also be necessary to strengthen international cooperation so that major advanced countries can implement monetary policy normalization measures in an orderly manner.
In order to stabilize Korea's real estate market, it will be necessary to systematically check the bubble risk within the domestic real estate market, and monetary authorities need to consider asset prices in addition to inflation when determining monetary policy. Next, while referring to cases of policies implemented in times of soaring real estate prices, it will be necessary to implement comprehensive measures to suppress demand, expand supply, and manage risk.

  Australia and New Zealand are classified as developed countries, but hitherto they have not been among the primary concerns of the Korean economy, due to their small populations, and the high logistics costs resulting from their isolated geographic location. When considering the areas of politics, diplomacy, and value chains in the Asia-Pacific region, however, Australia and New Zealand are countries that deserve great notice. Australia and New Zealand support the rules-based international order and multilateral trading system, and are key participants in the CPTPP and RCEP. They are among the most important countries that will influence the shape of the regional order. Australia and New Zealand also share a complementary industrial structure with Korea, which can provide mutual benefits through long-term economic cooperations. Therefore, this study examines the economic and strategic importance of Australia and New Zealand, and investigates ways for Korea to strengthen its ties with Australia and New Zealand.
  In Chapter 2, we overview the economies of Australia and New Zealand. In Chapter 3, we conduct a GVC analysis to identify the production networks in which Australia and New Zealand are involved, and then examine the foreign policies of Australia and New Zealand toward ASEAN, China, and Japan. The analysis of the forward and backward linkages shows that Australia and New Zealand depend on Europe and the United States’ value-added in their production process, while products produced in Australia and New Zealand are mainly used in the production process of Asia. According to the GVC analysis, the production network among Australia and ASEAN+3 countries—ASEAN, China, Japan, and Korea―has been developed in recent years, with Australia located at the higher end of the value chain as the main intermediate goods supplier. 

  Based on the contents of Chapter 3, we can see that Australia and New Zealand have tried to integrate into the East Asian economies by expanding their diplomatic and economic relations with ASEAN+3 countries. Australia and New Zealand have sought to access the East Asian economy by signing FTAs with ASEAN+3 countries, and they have also sought to promote cooperation with the countries through their participation in regional forums such as APEC or the East Asia Summit (EAS). As a result of those efforts, Australia and New Zealand appear to have incorporated themselves into the East Asian economy.
  In Chapter 4, we focus on Australia and New Zealand’s trade and investment relationships with Korea, and then summarize the contents of the Korea-Australia FTA and New Zealand-Korea FTA. In terms of value-added, Australia contributes to the production of Korea and plays an important role in the production of Korean exports. On the other hand, Korea’s value-added contributions to the Australia and New Zealand are relatively low, since the manufacturing industries of these countries are not developed. In the primary, construction, business and personal service sectors, however, there is room for Korea to increase its value-added contribution to Australia and New Zealand. Therefore, we should make an effort to expand cooperation in those sectors. 

  Based on the analysis of Australia and New Zealand’s ties with Asia, especially with Korea, Chapter 5 explores ways to strengthen cooperation between Korea-Australia and Korea-New Zealand in the fields of goods, services and investment, agriculture, finance, and diplomacy. As presented in the report, Korea should make a strategic effort to expand cooperation in these sectors by reducing non-tariff barriers, promoting technological cooperation and joint R&D, supporting logistics and distribution, and supporting service trade and investment. 

Executive Summary

1. Introduction

2. National Competitiveness Framework
2-1. Global Competitiveness Index
2-2. Stages of Development

3. Vietnam’s National Competitiveness in the Global and Regional Context
3-1. Background: Vietnam’s Rising Economy
3-2. Vietnam’s Competitiveness in the World
3-2-1. Vietnam’s GCI Score and Ranking
3-2-2. Ranking of the GCI’s Pillars
3-3. Vietnam’s Competitiveness in ASEAN
3-4. Vietnam’s Stage of Development
3-5. Limitation of WEF’s Approach

4. Causes of Vietnam’s Low Competitiveness
4-1. Factor-Driven Growth Model
4-1-1. Leading Role of Input Factors, Minor Role of TFP
4-1-2. Slow TFP Improvement
4-2. Structural Problems
4-2-1. Domination of Low Value-added Sectors
4-2-2. Exports: High Value but Low Value-added
4-2-3. Domination of FDI in Industrial and Export Sector
4-2-4. Low Investment Efficiency
4-2-5. SOEs’ Growing Size but Poor Performance
4-3. Expansionary Policies to Aid Growth
4-3-1. Expansionary Fiscal Policy to Boost Investment
4-3-2. Easy Monetary Policy to Expand Money Supply and Credit
4-4. Slowly Improved Business Environment
4-5. Low R&D Expenditure
4-6. Higher Education: Fast Rising but Poor Quality
4-7. Under-developed Infrastructure

5. Implications for Vietnam
5-1. Low Productivity
5-1-1. Low Labor Producivity
5-1-2. Slow Rate of Productivity Growth
5-2. Diminishing Growth
5-3. Middle Income Trap
5-4. Macroeconomic Instability
5-4-1. High Growth Accompanied with Macroeconomic Imbalances in 2000-2010
5-4-2. Macroeconomic Stabilization at Reduced Growth in 2011-2017
5-5. Low Business Competitiveness
5-5-1. High Business Costs
5-5-2. Limited Labor and Capital Size
5-5-3. Falling Efficiency
5-6. Low Technology Level
5-7. Low Human Capital Quality
5-8. Environmental Degradation

6. Policy Recommendations
6-1. Central Task: Structural Reforms to Change Growth Model
6-2. Raise Technology Level
6-3. Enhance Human Capital Quality
6-4. Improve Business Environment
6-5. Ensure Macroeconomic Stability
6-6. Upgrade Infrastructure
6-7. Learn from the Experience of Advanced Economies
6-7-1. Competitiveness and Stage of Development: Korea versus Vietnam
6-7-2. Favorable Conditions for Vietnam to Learn from Korea’s Experience
6-7-3. Proposed Areas for Vietnam’s learning from Korea’s experience

7. Conclusion

References 

   The WEF’s annual assessment using the GCI index in 2006-2017 shows that Vietnam’s national competitiveness has been low. Globally, Vietnam has ranked in the middle of economies surveyed. Regionally, Vietnam has been in the middle of ASEAN countries. With regard to the level of development, before 2015 Vietnam was in stage 1 (factor-driven), together with Cambodia, Laos and Myanmar. Since 2015 Vietnam has shifted toward a transition to stage 2 (efficiency-driven), which also includes Brunei and the Philippines. The country, however, has lagged behind Indonesia and Thailand (in stage 2), Malaysia (in transition to stage 3) and Singapore (in stage 3, innovation-driven).
  To complement the WEF’s assessment, this study provides an in-depth anal-ysis of main causes of Vietnam’s low competitiveness from the country’s perspective. These are structural problems due to its factor-based growth model, expansionary policies to aid growth, slowly improved business envi-ronment, low R&D expenditure, poorly performing higher education and under-developed infrastructure.
Further, the research examines implications of these shortcomings for Vi-etnam. These are low productivity, diminishing GDP growth, middle income trap, macroeconomic instability, low business competitiveness, low technolo-gy level, low human capital quality and environmental degradation.
  Based on the analysis of the shortcomings and their consequences, policy measures are proposed to improve Vietnam’s competitiveness. Major sugges-tions include structural reforms to change the growth model from factor-based to productivity-based, raising technology level and enhancing human capital quality, improving the business environment, ensuring macroeconomic stability, upgrading infrastructure and learning from advanced economies.

Keywords: Vietnam, Competitiveness, Productivity, Growth model.
JEL Classification: D24, E24, E52, E62, N15, O47, O53, O57. 

  The aim of this research is to suggest a more effective direction for Korea’s gender ODA projects through an analysis of gender-related development cooperation efforts in Cambodia. Based on the Korea- Cambodia Country Partnership Strategy and Cambodia's National Strategic Development Plan, we selected four areas (TVET, rural development, health and public administration) to analyze gender projects in related fields and suggest future directions. 

  The second chapter discusses how a twin-track approach, or a dual strategy of mainstreaming and targeting gender equality, is widely recognized in the international development field. Among the donors in Cambodia, we conduct an overview of the gender strategies and projects of Australia and Japan. We also examine KOICA's gender equality strategy and projects. Finally, Cambodia's gender needs are analyzed through its gender strategic plan, the Fourth Neary Rattanak and Cambodia’s gender ODA statistics.
  The four areas are grouped according to the strategic framework of the Fourth Neary Rattanak, which focuses on women’s economic empowerment and access to social services and projection. In chapter three, gender projects in TVET and rural development, categorized as the 'women’s economic empowerment' framework, are analyzed. Suggestions for future directions are also introduced. The fourth chapter presents projects and future directions in the areas of health and public administration, categorized as the ‘access to social services and protection’ framework. 

  A dual strategy of mainstreaming and targeting gender equality is a common approach recognized by international agencies and OECD DAC member countries. Korea’s gender ODA, on the other hand, comprises 10% of the total ODA amount. With a limited budget, there have not been many opportunities to implement a wide variety of gender projects. Some women-targeted empowerment projects were found in TVET and rural development, but most of them were gender mainstreaming projects in practice. However, gender mainstreaming projects were in fact projects that merely included women among the target group. Other than counting the number of women participants, it was difficult to find other indicators of gender equality. So we suggested factors that are required if a certain project is to be qualified as a ‘gender equality project.’ Suggestions for gender projects geared to the situations and needs in Cambodia are also presented. 

  In the fifth chapter we summarize the findings of the research and derive policy implications. The policy implications are focused not only on improving gender projects in Cambodia, but also on effectively mainstreaming gender in Korea’s ODA in general. First, the dual strategy of mainstreaming and targeting gender equality is a universal approach in the international community which Korea should also consider implementing. Secondly, it should be recognized that since gender projects require changing perspectives and behaviors, it takes time to reap the fruits. From this view, there needs to be a social consensus on the importance of long-term projects over short-term ones. Thirdly, gender indicators should be included from the first stage of project cycles through a PCP format. Fourthly, practitioners, mid- and high-level officials need to increase their awareness of the need for gender ODA. Finally, to promote the success of gender ODA projects in Cambodia, it is recommended that the projects include the Cambodian Ministry of Women’s Affairs as an implementing partner and adopt a programme-based approach (PBA) in their implementation. 

  The purpose of this study is to discuss about the economic and financial integration after the reunification of North and South Korea. The discussion mainly focuses on the financial policy tasks and responses the two Koreas should take, presupposing the North Korea’s economic situation at the final stage of the interim separated operation period. The more the economic situations of North and South Korea differ, the higher the cost would be for the integration; because the shock to the two economies will be so asymmetric that policy measures could hardly be unified. Moreover, the use of single currency may cause economic instability and generate loss, since both Koreas will not be able to use the currency that best reflects their own economy and have to abandon the autonomy of monetary policy. Then yet, oppositely remarking: the more the economic situations of the two Koreas resemble, the greater the benefits are from the economic integration and single currency use. Thus, as Optimum Currency Area (OCA) theory suggests, the proper time to terminate the interim separated operation is when the economic similarity of the two Koreas surpasses the threshold where gains and losses from integration coincide.
  In this paper, I propose policy directions and tasks for monetary and exchange rate policies in the period of integration, including the exchange rate policy, monetary policy operation, security of external soundness and foreign exchange prudential, and safeguards against crisis. Looking into detail, the exchange rate of North and South Korea’s currency will be decided upon the arbitrage rate at the termination of the separated operation; however, adjustments should be made considering the economic gap between the two economies as well as their market situations. And in the end, the rate should follow the floating exchange rate system. As for the monetary policy operation, the Bank of Korea should overhaul the correct functioning of the policy paths by taking charge of both economies and use open market operation to set the base rate in a bid to achieve price and financial stability.
  In order to manage the macroprudential risks in the process of integration, it is necessary to strengthen the foreign reserves considering the foreign debt level of North Korea, foreign currency outflow due to integration, and the second-tier foreign reserves. At the same time, we need to keep a keen eye on the moral hazards of financial companies and possibility of deepening risks. As for regulating the foreign exchange soundness of financial institutions, the authorities should impose stricter foreign currency LCR regulations to South Korean banks and non-financial institutions. In case of North Korean financial firms, we need to take a more careful approach in consideration of their financial standings and local economic situation. And since financial market instability and mass capital outflows, resulting from the North Korean financial companies’ insolvency and lack of capital adequacy, may occur at any time during the period of integration, safeguards such as the capital transaction permitting system should also be established.
  In regard of the financial industry integration, I first review the basic policy direction, regulatory supervision system, and regulation method; then discuss about the main policy tasks and responses regarding the financial market and corporate restructuring, policy finance, small loans, and financial consumer protection. The basic policy direction aims to provide efficient financial intermediary services and real support in response to new environmental changes, while building an environment that could effectively overcome potential risks and accumulate financial assets internally. In order to do that, the following should be accompanied: the improvement of regulatory supervision system, internal change by financial businesses, liquidation of insolvent corporates, frameworks for restructuring, and revision of policy financing system. In particular, given that economic participants of North Korea do not have much experience in financial services consumption, policies should concentrate in enhancing the financial accessibility and improving the financial consumer protection.
  No one can be so sure of the economic and financial situation of the two Koreas at the terminating moment of the separated operation. Therefore, the key to the economic integration is to maintain fiscal soundness while eliminating the difference in financial structure between the two Koreas and strengthening the local autonomy. This is also in line with the vision of Decentralization Roadmap as well as that of the federal system, which is currently being pursued for the local autonomy in South Korea. In order to build a comprehensive system for fiscal decentralization and local finance which not only well reflects the regional uniqueness and diversity but also well balances autonomy and responsibility, we need to integrate financial systems, such as taxation and tax administration, and secure financial stability by regulating the public expenditures.
  The local finance system should be operated in a way to give practical support to the local government, not to regulate or control it. This can be accomplished through raising the predictability of local administration; so the central government should induce the local governments to prearrange the financial adjustments plans. Moreover, taking into account the change in public expenditure structure and tax environment, such as social overhead capital investments and social security budgets, we also need disciplinary devices to control the fiscal deficits of North Korea and crisis resolution mechanisms. In case the financial situation of North Korea deteriorates, the central government should shore up funds to improve financial conditions, and there should be disciplines and interventions to reduce fiscal deficits or achieve fiscal balance. Thus, it is necessary to develop guidelines for fiscal rules and financial autonomy of local governments, in relation to financial crisis prevention and crisis intervention. 

The Chinese economy has moved away from its past high speed growth rate of 10% per year, and begun to grow at a more moderate rate between 6 and 7%. This slowdown in the growth rate is due to changes in the domestic and international economic environment, which have led to weaker contribution from manufacturing industries, exports and investment, elements that drove China’s economic growth in the past. However, China is actively pushing for a shift in the growth paradigm by responding swiftly to the new economic environment, and continues to show growth in the middle range. In particular, due to the policies for fostering the service sector, the service sector is rapidly replacing the status of the manufacturing sector, and thus the growth speed, economic structure, growth engine, employment and overall economy are being driven by the service sector.
  The Chinese government is pushing for the opening of the service sector and fostering the producer service industry through its 13th Five-Year Plan. Aiming to realize these goals, this China emphasizes a high level of open market and external cooperation, and focuses on the development of the service industry and the expansion of the service trade as it did in the past by opening policies.
  China’s service trade volume was estimated to reach $657.1 billion in 2016 and exceed $1 trillion in 2020. Among Korean exports to the mass market, the share of service exports is growing from 9.7% (2011) to 14.5% (2016), and China has emerged as Korea’s largest service market and largest service trade surplus country since 2013. The fact that China’s service trade and Korea’s exports of services to China are both expanding rapidly should serve as an opportunity to increase the role of Korea’s services trade with China in the future.
  This study seeks to explore new export engines that can boost trade in the services sector. To this end, the study examines ways to boost services trade with China based on an analysis of industries and regions with good prospects.
  In Chapter 2, a statistical analysis was performed along with an analysis of major policies to study the development of Chinese service trade at various degrees. China has announced its plans to operate a Service Trade Innovation pilot area. Together with the 13th Five-Year Plan for Service in Trade Development, these measures designate key regions that can lead service trade development and carry out pilot policies. It has also introduced a “catalogue for guidance of foreign investment” and free trade zone policies to identify China’s diverse policies and systems reforms.
  Statistics show that China’s service trade has increased 13.6 percent per year, far exceeding global service trade growth and the rate of growth for Chinese commodity trade. Korea’s exports of services to China are also growing amid China’s rapid rise in imports of services, suggesting that services cooperation with China could be a new opportunity for Korea. An analysis using the global input-output table showed that China was rapidly expanding its demand for knowledge-based services and producer services. However, since Korea is yet to secure comparative competitiveness in businesses other than wholesale and retail and real estate, it will urgently need to nurture such industries and secure comparative advantage.
  In Chapter 3, the status and policies of service trade, major barriers to trade and the levels of opening were analyzed for the medical, cultural contents and logistics industries. Foreign investment in health care is weak at 0.1%, but policies are being implemented to encourage foreign medical institutions to advance into China amid growing demand for medical services. In Korea, cosmetic surgery and dermatology have garnered high recognition, but future advances in medical care, internal medicine, examination centers and orthopedics need to be reviewed first. In the medical services sector, the China-Hong Kong CEPA has the highest level of openness.
  The market demand cultural contents is enormous in China but cannot be satisfied by China’s own ability to produce contents. Korea could consider moving ahead of the average growth rate of its cultural content market, such as for movies, animations, knowledge information, and music. However, since the Chinese government is very strict in its regulations on foreign cultural contents entering the market and the area is very closed to foreign direct investment, there are many restrictions on entering the market. Most of the services related to culture contents are classified as prohibited businesses in the “catalogue for guidance of foreign investment” and also in a separate positive list within the China-Hong Kong CEPA. In particular, it has recently been revealed that it is necessary to pay attention when entering the China market as it is widening the scope of its monitoring and standards for entry regulations, such as those regarding Internet contents services and mobile games.
  China’s logistics service trade has been growing at double-digit rates for several years, and is eager to invite foreign logistics businesses, occupying nearly 25 percent of China’s total service trade. The Chinese government is now emphasizing international cooperation in the field of advanced technology to modernize the logistics industry, especially since more detailed ways to facilitate exchanges of related technologies, products, standards and human resources have become necessary through intergovernmental cooperation. The areas with the highest demand for external cooperation to promote modernization of the logistics industry include cold-chain systems, logistics warehouses, transportation of chemicals and hazardous items, and e-commerce. In particular, although some local companies dominate the local logistics market in western China, the level of modernization is very low, so the initial focus should be for Korean companies to enter into the market and promote cooperation in the region.
  Chapter 4 analyzes the development of service trade, policy objectives in this sector, and major fostering areas in Guangdong Province, Beijing, Shanghai and Shandong, and analyzes the contents of overseas cooperation and opening policies customized to each region. First, Guangdong Province serves as a test bed for the opening of the service sector through the CEPA between China and Hongkong, and is an important benchmarking area for Korea. The original plan for Guangdong was to transition into a service-oriented industrial structure based on economic cooperation with its neighbor Hong Kong, but its focus has recently shifted to strengthening manufacturing competitiveness. As such, the area is highly likely to suggest to Korea that it is promoting the development of the producer service industry. Guangdong Province used the CEPA, free trade zones, economy cooperation platforms to push for the opening of China’s highest level of service to finance, cultural, and industrial R&D and design and professional services.
  Beijing is an area with a service-oriented economic structure and large service market, giving it an edge in the Chinese service sector and service trade in the area. In recent years, it has been nurturing service businesses that match the direction of development in Beijing and the strategic role assigned by the central government, such as culture, information technology and tourism. In particular, Beijing is pushing for a positive list of opening policies with the entire city as a service opening zone, rather than limiting this to specifically designated locations, such as free trade zones. In addition, the cultural service FDI is concentrated, and foreign investment characteristics in creating cultural contents have been allowed for the first time in China.
  Shanghai is China’s largest market for service trade and China’s first free trade zone test bed. Shanghai is well developed in logistics and transportation businesses to handle the world’s largest volume of commercial traffic, and it maintains an excellent level of corporate support and advanced management models. Shanghai manages the highest level of openness measures among Chinese free trade zones, focusing on finance, shipping, business, cultural, information technology and professional services, and has established a service trade system (service supervision and management, imports and exports, customs). New services such as in the areas of medical tourism, online education, e-commerce and remote traditional Chinese medicine services, have also been actively developed recently.
  Shandong Province has developed commodity trade at the three largest manufacturing bases in China, while service industries and service trade have been relatively delayed. Shandong Province has emphasized the development of new industries and service industries to improve labor-intensive manufacturing businesses, but still has a strong dependence on traditional service industries such as tourism, construction, logistics and transportation. However, recently, Shandong Province is considering Korea as an important partner for advancement of the regional industrial structure and development of the service industry. Shandong Province is a promising area for bilateral service cooperation in the medical, cultural and tourism sectors, for instance between Incheon and Weihai, which are presented in the Korea-China FTA regional cooperation chapter.
  Chapter 5 presents the policy implications and measures for expanding the service trade by compiling previous analyses.
  As for cultural contents, Korea’s level of openness is higher than that of China, meaning the Korean government should seek further concesions through negotiations. Currently, the BIT negotiations between the United States and China are underway with cultural contents and the Internet included on a negative list. This is the first time that China has chosen to classify cultural contents in the form of a negative list. Korea deserves to take a look at the examples provided by the U.S., especially when it comes to cultural contents, as it prepares to negotiate Korea-China FTA services. More specifically, Korea needs to closely examine the conditions cited by the United States as prerequisites for opening, and the reasons for its insistence on easing trade barriers, including opening measures accepted by China and infringing on intellectual property rights.
  China’s logistics industry is still experiencing high barriers to entry by specific business, such as air transport, water transportation, and passenger transportation; however, the CEPA concession is highly open and allows for independent or joint ventures in the Chinese market for some services that lack in supply. Shipping services have opened in the areas of ship management and inspection, container terminal services, port cargo handling, while air transport services have allowed a limited amount of independent investment for sales agents, arrangements services, handling and communication services, and the container facility management services, passenger and luggage services, luggage and friendship services, and apron services.
  Hong Kong has allowed joint ventures in some areas of inland water transportation services. In addition, in terms of road transportation services, China has refused to allow Korea to provide independent services for passenger transportation, but Hong Kong has eliminated all restrictions. Therefore, the above-mentioned application of the opening areas can be considered during the Korea-China FTA service and investment negotiations.
  It will be difficult to expect for the Korea-China FTA negotiations to lead to further opening in their respective medical service sectors, as China’s medical sector is more open than Korea and Korean medical service providers are opposed to the opening of the market. But Korea can request for China to apply the level of openness it allows to other countries. As China has allowed concessions for Hong Kong under the CEPA, Korean medical institutions can reduce their minimum investment in China from 20 million yuan to 10 million yuan, and Korean doctors can extend their short-term medical practice licenses in China for up to 6 years.
  It is necessary to take into consideration the negotiation system utilized for the China-Hong Kong CEPA when engaging in additional negotiations of Korea-China FTA services. The CEPA presents a pattern of implementing the best service opening measures for Hong Kong companies in Guangdong Province on a trial basis, after which the U.S. and China discuss whether to incorporate these opening measures into their bilateral investment treaty (BIT), followed by an opening throughout all of China. Also, the CEPA has recently been negotiating areas that are more effective, such as interconnection standards and laws in the service sector, negotiation mechanisms for resolving disputes and conflicts, and negotiation methods and plans in the Korea-China FTA service industry.
  In addition, the CEPA designates Guangdong as a test area, with a limited set of opening measures being implemented first. This opening method involves less risk than opening the entire Chinese market, allowing pilot projects to be carried out in various fields. Therefore, it is possible to consider taking preliminary test measures in certain areas of the two countries with the Korea-China FTA as well. In this case, the areas currently listed in the economic cooperation chapter of the Korea-China FTA, such as Saemangeum, Yantai, Yancheng, Huizhou, Incheon Free Economic Zone and Weihai, will be designated as the test areas.