With the start of the Kim Jong-un regime, North Korea (N. Korea) has actively begun opening its markets to the outside world via SEZs, in efforts to overcome economic issues facing the country. SEZ development has accelerated at the central government level while new EDZs are being established in large numbers at the provincial level, an all-out effort aimed at economic recovery through foreign investment. The South Korean government needs to seek ways to support Pyongyang’s SEZ and EDZ policies to advance inter-Korean relations through the “Trustbuilding process on the Korean Peninsula” and lay the groundwork for national reunification.
This study aims to explore and recommend various measures for support from SouthKorea toward North Korean SEZs and EDZs, to help them achieve their desired outcomes. By doing so, it will provide the basis for North Korea policy of the South Korean government.
The SEZs of the Kim Jong-un regime suggest new possibilities. First, the recently designated SEZs are more open compared to existing SEZs, which may point to greater openness in the future. Second, the North Korean government is promoting diversification and specialization of SEZs and EDZs. Diversification with respect to size (from large SEZs on the national level to smaller SEZs on the provincial level); and specialization in terms of types of SEZ (economic, export processing, industrial, tourism, and agricultural zones). Third, there will be attempts to diversify development methods and developers. On the other hand, limits and challenges still exist.
The measures for South Korean Support of North Korea’s SEZs & EDZs can be classified into ① Building capacity of N. Korean SEZs and EDZs, ② Improvement of conditions at North Korean SEZs and EDZs, and ③ promotion of participation in North Korean SEZs and EDZs.
First, in order to build capacity of North Korean SEZs and EDZs, it is necessary to provide training for the North Korean workforce and share knowledge and experience on attracting foreign investment and operation of SEZs, and facilitate formation of North Korean companies by supporting joint South-North ventures inside the SEZs. Second, in order to improve conditions in North Korean SEZs and EDZs, we must expand access to markets by designating outward processing zones, alleviate economic sanctions, combine infrastructure development cooperation with special zone development, and develop these special zones through international cooperation organizations. Third, it is required that we provide legal and institutional measures for investment in North Korea, expand financial support for S. Korean SMEs in SEZs and EDZs, and support participation in N. Korea’s SEZs and EDZs through multilateral and international cooperation; in order to promote participation in North Korean SEZs and EDZs.
Also, it is important to differentiate in terms of plans for South-North cooperation according to key features of SEZs & EDZs. The list of SEZs & EDZs of North Korea is as follows: Kaesong Industrial Complex (KIC), China-N. Korea Special Economic Zones, Sinuiju International Economic Zone, Agricultural Development Zones, Industrial Development Zones, Hi-Tech Development Zone, and Tourism Development Zones.
In short, it would not be efficient to apply uniformly the model for Kaesong Industrial Complex for different SEZs & EDZs. Of course, as large-scale Special Economic Zones require significant amount of funds for infrastructure development, in addition to extensive intergovernmental negotiations, it is inevitable that the KIC model be considered first. But as for small-scale Economic Development Zones, a variety of approaches are needed with consideration of the nature or area of EDZs.
However, they will require close coordination and cooperation, thus necessitating the participation of various entities such as local government, NGO, industry and business organizations and cooperative organizations, and private enterprises, as well as central government and public authority.
 

Unification of the two Koreas will no doubt bring about massive demands for infrastructure investment in the unified Korea. The newly created mass scale investment demand is predicted to provide a new opportunity for South Korea’s economic growth, which is currently facing serious lack of demand due to the 2008 Global financial crisis and China’s economic slowdown. We also predict that this would not only benefit South Korea, but also benefit countries that have close ties with South Korea such as Japan, China, US and Russia.
This research adapts Solow’s neoclassical growth model and inter-industry relationship table and empirically analyzed how fast North Korean economy would grow after unification through infrastructure investment in the North Korean region and how such infrastructure investment would affect not only South Korea but also Japan, China, US and Russia.
The main findings of this research are as follows. First, we found that for rapid economic growth in the North after unification there must be massive amounts of infrastructure investment. Once they begin building infrastructure, the Northern region will be able to catch up to South Korea’s current level of economic development (in 20 years).
Second, the massive demand for funding needed for necessary infrastructure building which is a must in order for unified Korea to achieve economic growth in the Northern region cannot be procured only through domestic savings in unified Korea. To fill this gap we believe Japan has an important role as a provider of funds and technology.
Third, we showed that the massive increase in infrastructure investment in North Korea will bring about big increase in output in not only South Korea but also Japan, China, Russia and the US. Results show that increase in infrastructure demand in North Korea will result in higher output increase effects in Japan, China, Russia and the US than in Korea. In particular, the US was the biggest beneficiary of output increase effects in the service industries. It is evident that economic integration of the two Koreas will not only contribute to economic growth of current South or North Korea, but also to the growth of neighboring countries or the world.
There is no doubt that there are many limitations in this research, as listed in the following. First, the biggest limitation in analyzing the effects of the Korean unification is the lack of North Korea’s economic data. Without exact information on North Korea it is extremely difficult to have a correct estimate of the effects of infrastructure investment. Since it is difficult to obtain accurate data from within North Korea, we need to obtain accurate data through partnerships with international organizations that collect data related to population and health.
We believe that through collaboration with development financial institutions such as the World Bank, we would be able to obtain more accurate information regarding infrastructure building situation used in this research. In particular, data on infrastructure building data related to electricity and transportation is important.
After that, we also need to obtain information on trade between North Korea and its major trading partners such as China and Russia. Import and export data well reflect North Korea’s economic situation and therefore there needs to be cooperative investigation between Chinese and Russian governments and civilian institutions that have access to not only official trade but also unofficial trade statistics.
 In order to accurately understand and analyze North Korean economy through the obtained current data we need to create a detailed database consisting of system of national accounts, inter-industry relation table, and price index categorized by industry and by product. If we are able to create such a database that would enable us to understand North Korea’s current economic situation we will be able to more accurately estimate the effects of infrastructure establishment as well as discuss what kind of policies would be effective.
Second, our analysis assumes that there is no labor movement from the dilapidated North Korea to the wealthy South Korea. In other words, we did not consider any political or social tension rising from inter-Korean economic integration and only analyzed the pure economic aspects. We believe that since political integration or the issue of political structures are beyond the scope of this research, and therefore did not consider these issues.
Considering such limitations the research findings can be considered as analysis of the effects of economic integration such as free trade agreements, since we did not consider free labor movements or tax. In this aspect, the estimates that we drew is a calculation of benefits that free labor movements and trade would entail if current South and North Korea mutually accept the fact that infrastructure investment will bring significant benefits not only to both Koreas but also to Japan, China, Russia, and the US.
We believe that South and North Korea must begin discussing whether to choose an economic integration model that would minimize costs or to choose a unification model that consists of high costs but also have high socio-political benefits, as soon as possible. In particular, it is important to analyze not only the benefits of infrastructure investment which is estimated in this research, but also the social costs of unification.
Since it is evident that free interaction between the two Koreas will bring about great economic benefits not only to the two Koreas but also to all relevant countries, Japan, China, Russia and the US must cooperate to establish a diplomatic environment conducive to a peaceful economic integration of the Korean peninsula.  

The aim of this research is to review strategic policies on creating a logistics hub in the GCC which includes infrastructure and hinterland development, and to suggest government policies to enhance industrial and logistics cooperation between Korea and GCC countries. In particular, logistics hub policies being promoted in Saudi Arabia and UAE are analysed as case studies to elicit implications for future government policies.
To summarize research outcomes produced in each chapter, chapter 2 examines government policies for economic diversification and the background of said policies, along with economic role of the logistics hub. The oil and gas sector in the GCC countries represent about 40% of GDP with the manufacturing sector accounting for about 10%, which shows that GCC economies are highly dependent on the oil and gas sector. Economic diversification policies are designed to reduce the degree of dependence on the hydrocarbon sector.
In other words, they are being implemented to increase production and exports by non-hydrocarbon sectors, and ensure sustainable economic growth and stable employment that provide good income.
It should be noted that a logistics hub with infrastructure and industrial base should be understood as the foundation for economic diversification.
Chapters 3 and 4 examines policies of Saudi Arabia and UAE for promotion of logistics hubs. Competitiveness of the logistics sector of Saudi Arabia is within the average range of GCC countries, and still burdened with inefficient procedures and trade restrictions. Saudi Arabia, however, continued to develop ports, airports and railways with close links to Industrial and Economic Cities.
The government is making efforts to induce foreign direct investment in the logistics hub including promotional incentives for multinational corporations in the Cities.
UAE showed the best performance in terms of logistics among the six countries of the GCC, including trade related institutions and regulations. Although the size of its domestic market is small, UAE became the largest re-exporting country with the help of well-established infrastructure and free trade zones in Abu Dhabi and Dubai.
Chapter 5 suggests government policies to upgrade industrial and logistics cooperation between Korea and the GCC countries. First, the logistics sector should be considered in connection with industrial sectors, as logistics hubs have been developed as tools for economic diversification. In other words, free trade zones and industrial cities should be explored as a productive platform to add value to the products exported from Korea.
Second, logistics hubs in the GCC countries could be used as a base to(re)export Korean products to the Iranian market after international sanctions against Iran are removed. Moreover, Iran can serve as a waypoint to Central Asian countries through Turkmenistan, and the Caucasus region through Azerbaijan, creating more logistics demand.
Third, investment by Korean companies is necessary for the establishment of joint ventures between Korea and GCC countries in logistics-related business activities. They could invest in projects incorporating processing facilities in the free trade zones and logistics infrastructure. For these investment projects, various financial support scheme should be developed by Korean and GCC financial institutions including some sovereign wealth funds for development.
Fourth, logistics information platform should be established in major logistics hubs in the region, for Korean companies seeking information on logistics demand and cooperative partners in the GCC market. This will facilitate, particularly, the entry of small and medium sized enterprises into the market. 

The costs of unification involved in Korean unification can be categorized as follows: ① crisis management costs for alleviating economic and social shocks from unification (including costs of institutional integration), ② reconstruction costs for the North Korean economy, and ③ fiscal transfers from the South to the North in the form of income subsidies. We deal with how to secure finances externally for costs of reconstruction for the North Korean economy, which would be financed by the international private sector or through PPP (public-private partnership).
We present three pre-conditions for Korean unification after carefully re-examining the German unification process: ① The North Korean people should want unification with the South, ② the North Korean authorities actually representing the wishes of the North Korean people should be present in North Korea, and ③ the international community, including the US and China, needs to be cooperative (or at least, not get in each others’ way). The main implication of these pre-conditions are that political unification of the two Koreas will not be accomplished within a short period of time. Thus, in suggesting realistic policy recommendations for external financing, we need to look at the entire picture regarding the unification process. After political unification, the Government of a unified Korea will become the subject of external financing, whereas before the unification, North Korean authorities will have the primary role in the northern part of the Korean Peninsula.
As a matter of fact, there likely will not be any major issues left for external financing following a successful political unification of Korea. For the successful achievement of Korean unification, there should be an interim period of negotiation between the two Korean authorities for addressing major concerns after political unification of the two Koreas - a period to be referred to as “the imminent unification period.” During this period, the international investors would be uneasy about what would happen after the Korean unification and associated uncertainties.
How to maintain the soundness of financial markets in the imminent unification period will be the most important issue in the course of Korean unification. We present policy recommendations for it. Extending the analysis to the entire period of Korean unification, the most viable method of financing the reconstruction of the North Korean economy would be private-public partnership (PPP). As time goes by, the financing ability of the international public sector would decline and thus, would warrant an increased role of the international private sector. Especially the period after political unification, greater utilization of public-private partnership (PPP) would be feasible. We also present policy recommendations for the period prior to political unification. After our repeated search for ways to finance unification costs from abroad, we have come unexpectedly to conclude that maintaining the fiscal soundness should be the best way to counter the potential costs of Korean unification.
South Korea ratio of national debt to GDP is already over 30 percent and is expected to exceed 35 percent in the next two years. The ratio for West Germany before the German unification was less than 40 percent. Thus, the most effective way in terms of preparing for Korean unification is to build up South Korea’s economic power to be as powerful as possible, and return the fiscal conditions of the Government of South Korea to soundness, setting a limit on the ratio of the national debt to the GDP. 

As of 2015, 48 percent of Southeast Asia’s population live in urban areas, which is below the world average of 54 percent. Although starting from a low base, Southeast Asia is urbanizing rapidly. Its urban population will surpass the rural population in 2020 and by 2050 approximately 65 percent of the region’s population will live in urban areas. Urban population, urban land area, and urban population density in Southeast Asia are all increasing at a rapid rate and the levels of urban primacy are high in most countries in the region.
Urban growth in Southeast Asia contributes to economic development and more so at higher levels of urbanization. This implies that urbanization needs to be reemphasized as an engine for economic development, and that policies to stimulate urbanization needs greater support. Yet Southeast Asia is not effectively leveraging urbanization for economic development. Due to high levels of congestion, pollution, and rents, many Southeast Asian cities are growing outward, not upward; failing to take advantage of agglomeration economies.
A timely supply of land and urban infrastructure, both inner-city and intra-city, is critical to the development of productive cities. However, in many Southeast Asian countries, government regulations are not in place and bureaucratic capacity is insufficient to implement effective land acquisition. Similarly, the lack of development finance and poor regulation environment makes infrastructure investment difficult. Land and infrastructure issues need to be addressed more aggressively given the rapid urbanization and the increase in urban density in Southeast Asia.
Decentralization poses another challenge for effective management of urban policy and development. Many Southeast Asian countries have undertaken devolution over the years and now a significant part of national spatial and urban planning and implementation are under the responsibility of local governments.
The poor coordination between national and local governments, low capacity of local authorities, and resulting inefficiency of urban policy have undermined urbanization for productive cities. Since decentralization will likely continue and intensify in the future, urban management must be reformed and the capacity of local governments need to be strengthened.
Focusing on land and infrastructure development, this report offers the following policy recommendations for Korea-Southeast Asia cooperation in urban development. First, Korea can provide technical assistance to Southeast Asia for the creation of a modern land management system including a cadastral system, land registration, and land information system. One fundamental obstacle to land acquisition for urban development in many developing countries is the lack of working cadastral and land registration system to effectively protect property rights. Transforming the legal frameworks for land registration may be difficult to implement due to domestic political economy issues, yet instituting technical foundations for land registration and information system may be more conducive to reform and international cooperation.
Second, Korea can share its experience in land development with Southeast Asian countries. Korea is one of the countries which successfully utilized compulsory land purchase for urban and infrastructure development. Korea’s public land acquisition has been credited with effective infrastructure development and urban and industry zone expansion, yet it has been criticised for infringing on citizens’ property rights. Thus, if Korea offers any lessons regarding its acquisition policy, it should focus on the recent improvements. Land reconstitution, another major type of land development other than land acquisition, should receive greater attention for international cooperation. Land reconstitution is less prone to conflicts than land acquisition and can be utilized for revitalizing inner cities and building new urban areas, which Korea has utilized quite successfully.
Third, Korea can contribute to capacity building of Southeast Asian countries in managing public-private partnership (PPP) for infrastructure development at a time when new opportunities are emerging with new infrastructure funds being launched. The lack of financing has been the major constraint in infrastructure investment in Asia yet the launch of China-led One Belt One Road and Asian Infrastructure Investment Bank, in addition to preexisting ADB-led Greater Mekong Subregional Economic Cooperation Program and ASEAN-led Master Plan on ASEAN Connectivity, is likely to ease this constraint. Cities are poised to benefit disproportionately from the coming Infrastructure boom as they are integral to the transportation networks central to such infrastructure expansion. These infrastructure funds are encouraging private participation and will likely promote PPP investment. Yet even though the funds become available, developing countries are not equipped with regulatory frameworks for effective management for PPP. Strong institutional frameworks to clearly define the role of the government and guarantee investment protection will be needed.
Enhancing government capacity and transparency as well as instituting conflict-resolution mechanism need to be emphasized. Korea’s experience with PPP development and management could provide an insight to Southeast Asian countries. 

North Korea’s financial system is based upon the mono-banking system centered around the Central Bank of the DPRK. The Central Bank of the DPRK serves diverse functions - aside from financial activities, it also acts simultaneously as a central bank and a commercial bank.
Such framework, however, underwent considerable changes with events such as the Arduous March and the monetary reform in 2009, along with weakening of state control and increase in marketization. The Central Bank’s function of providing capital has attenuated, with private finance filling the gap. Especially, the 2009 monetary reform triggered a spike in both the price level and exchange rates, sparking the disbelief towards the North Korean won and financial institutions as well as worsening the dollarization trend.
North Korea is facing challenges in utilizing domestic and foreign capitals to foster economic growth. The financial sector which is supposed to channel private saving into investment through financial institutions is malfunctioning, and North Korea’s nuclear issues makes it incapable of accessing the foreign finance market.
North Korea seems to know the significance of domestic finance in stimulating the economy, and is seeking to foster savings and absorb foreign capitals. The Central Bank Act or the Commercial Banking Law also indicates the nation’s willingness to move towards the two-tier banking system. However, North Korea’s current situation cannot be resolved merely through a partial change in operational methods nor through institutional adjustments and therefore a fundamental change is necessary in order for the financial system to fulfill its role as a catalyst for economic progress.
This research aims to use China and Vietnam’s experience of financial reforms to draw out implications for North Korea’s financial reform. Along with an analysis about current North Korea’s situation, we focus on China and Vietnam’s reform process, specifically from pre-reform to early institutional settlement phase.
Firstly, China had favorable economic conditions in 1978, at the beginning of the reform: stable price levels and growth rate, high savings rate with a strong government control. While The People’s Bank of China initially performed as a commercial bank before the reform, a switch to two-tier system and enactment of the Central Bank Law led to the establishment of policy banks, commercial banks and other financial institutions.
The savings rate was already high before the reform, and the government worked to guarantee the effective interest rate after the reform. There were policy efforts to increase the accessibility of banks such as depositing of wages into accounts, and there were few issues with the withdrawal. Extensive low-interest funds were provided to state enterprises at the initial phase of reform, which triggered large scale Non-Performing loans (NPLs). The NPLs were cleared out in 1999 with the formation of Asset Management Corporation, before the listing of National Commercial Bank.
Since the issuance of long-term treasury bond in 1981, measures such as the diversification of bond maturity and sales method or the permission of re-trading helped invigorating the loan market. After certain periods, the stock exchange market was established in the early 1990s with few listed companies. It initially experienced stock index spike and bubble burst, which led to the founding of a supervisory institution.
A dual exchange rate system separating the trade exchange and non-trade exchange rate was implemented, yet the official rate significantly diverged from the market rate. However, the two rates eventually converged, following the shift to a single exchange rate system in 1994. This was also the period when the inter-bank foreign currency market was set up.
Private loans emerged at some regions at the early phase of reform, but it was soon suppressed and merged into the system. Likewise, there were no noteworthy instances of dollarization.
Unlike China, Vietnam was having several difficulties ？ low growth rate, international isolation, hyperinflation as a repercussion of the failed 1985 monetary reform - when it took its first step towards reform.
To overcome such problems, the Vietnamese government adopted an openness policy called Doi Moi in 1986 which included financial reforms. The reform meant a change towards the two-tier financial system, and financial institutions such as joint banks, commercial banks, policy banks, and a number of credit cooperatives were established.
Vietnam’s savings rates were initially low, which can be attributed to distrust towards domestic currency and financial institutions due to experiences of hyperinflation and bankruptcy of rampant credit cooperatives (1991). After its relationship with international financial institutions normalized, financial support from such institutions and expansion in FDI were instrumental in securing the necessary financial resources. The government took various measures to mitigate distrust, such as stabilizing inflation, betterment of rural · provincial financial systems that replaced credit cooperatives, guaranteeing of real interest rates by gradually liberalizing interest rates, and improving of payment and settlement system. Besides, dollarization (foreign currency deposit / total currency deposit) worsened at the incipient phase of reform. Such phenomenon was eased by the stabilization of price level and currency, convergence of market and official exchange rate, and maintenance of the interest rate difference between domestic and foreign currency deposits.
Loan to state enterprise was a problem in Vietnam as well. While Asset Management Corporation was set up in 2013 to address the issue, its effects are not very clear.
In 1992, dong and foreign currency denominated treasury bonds with 1 to 3 year maturity were first issued, and maturity diversification and opening of circulation market (1995) followed. The stock exchange market opened in 2000 with 5 listed companies.
The discrepancy between official and market exchange rates resolved relatively quickly. In 1985, just before the onset of the reform, market exchange rate was almost 8 times the official rate, but the two rates converged in 1992. The foreign currency market was established in 1991.
From the experience of China and Vietnam’s financial reform, we derive several implications for North Korea.
With the enactment of the Law on Central Bank and Law of Commercial Bank, North Korea already has institutional foundations for financial reform. What matters is to draft and carry out specific plan for implementation, create an environment conducive to its enforcement, and to continuously practice the plan. It is imperative to ensure the explicit prohibition of financial asset provisions via central bank, guarantee smooth operation of commercial banks taking the primary role in savings and deposit, acquire substantive tools for currency and foreign exchange market operation, and stimulate both the capital and foreign currency market.
In order for the banking system to smoothly operate, one should first secure deposits as the main source of assets. This requires proper compensation for real interest rates, along with assuring the withdrawal of deposits, alleviating fear towards exposure of accumulated assets, and increasing familiarity with financial institutions such as depositing wage into accounts. This is especially the case for absorbing foreign currency deposits, and the issue of converting foreign currency deposits to won deposits should be a subsequent matter. NPLs are likely to occur at the initial stage of reform, which demands stringent supervision from the start, provision of mortgage system, and establishment of supervisory institution.
Considering the financial situation and the need to prohibit currency issuing for the purpose of financial funding, an early issuing of treasury bond seems to be desirable. Combined with foreign currency denominated treasuries, it should serve as a useful tool to absorb foreign currency. As the discrepancy between market · official exchange rates is much severe than China and Vietnam’s case, the problem of dual exchange rate needs to be urgently addressed. Also, there needs to be a foreign exchange market which all exchange banks participate. Accessing international financial market would cause desirable effects, such as the procurement of foreign assets, enhancing trust towards financial institutions by the operation of foreign institutions, learning from advanced financial techniques, and fostering the transparency of accounting system.
In conclusion, North Korea’s current situation involves myriads of system-wide problems that cannot be eased by a fragmentary approach. Overall reform in the financial sector that parallels marketization is crucial, and favourable environment for implementing reform should be created.
In order to normalize deposit and savings within the banking sector, private finance should be incorporated into the system. Donju’s experiences may come handy in managing financial institutions. Also, overcoming dollarization necessitates comprehensive and long-term approach along with consistent policymaking in order to recover from the mistrust. This should be accompanied by forestalling currency evaporation and ensuring reliable supply of foreign currency and resources.
Moving towards a market-based financial system demands a lot of experience and know-hows, thus one can make use of foreign capital and the entrance of foreign financial companies through an open-door policy. The experience of its Southern neighbour ？ which underwent rapid development not only in the economic but also in the financial sector ？ would be beneficial. Moreover, it is imperative to recognize such reform plans are conditional upon remedying the distrust towards the government and meeting the terms required to lift the sanctions against North Korea. 

Executive Summary

I. Background

II. Overview of Macroeconomic Environment, SME’s Financing and Financial Markets in APEC

1. Macroeconomic Overview
2. SMEs and SME Financing Policies
3. Financial Market Conditions in APEC
4. Financial Integration and SME Financing

III. SME Financing in EU

1. Characteristics of European SME Support Policy
2. SME Financing through Bank Loans and Capital Market
3. EIF for SME Financing Support
4. Lessons from the EU

IV. Policy Suggestions and Conclusion

1. The Necessity of Financial Support Policies for SMEs at the APEC level
2. Issues to be Discussed
3. Suggestions and the Way Forward

References

Appendix

Annex: List of Acronyms 

The recent downturn in the global economy is demanding new growth models from APEC members, and SMEs are expected to play a crucial role in raising productivity and in sustaining economic growth by facilitating technological advances, as well as in job creation. Given that SMEs have generally limited access to finance due to information asymmetries and the riskiness of their businesses, public support by government such as credit guarantee schemes (CGS) are a very important tool for supporting SMEs. SMEs at early stages of development (or startups) have risk profiles that favor equity financing or financing through the capital market.
For this to work, however, the large-scale financing is required. Therefore it will work best in a developed equity market such as that of the US. When the condition above does not hold, two alternatives are possible. The first option is to realize the large-scale funding in an inter-temporal way. This gives rise to the need for a policy lending program (or government credit) resembling a typical European-style policy financing scheme. Second option is to expand the financial market. For this to work, establishing universality of contracts through economic integration is necessary. Universality of contracts means equal protection of property rights for incoming foreigners who enter into contracts in the host country. In this case, capital inflow is also needed from countries outside the integrated economic bloc.
EIB (European Investment Bank) aims to implement the EU’s SME Initiative through its SME support programs. The European Investment Fund is responsible for allocating SME capital to stimulate the SME sector, on behalf of the EC. The experience of the EU points to the necessity of non-bank financing programme to add to bank financing for SMEs. Thus EIF is also shifting its focus from provision of early-stage guarantees to development of various capital market-based instruments for SMEs.
This study ends with suggestions for APEC regarding SME financing policies. First, PCGS (public credit guarantee system) is better in the very early stages of financial cooperation. Second, SME financing policy should include both CGS-style and market-based financing. Third, it is necessary to settle on a definition of SMEs based on unified criteria. Fourth, a PCGS-style support scheme is needed to develop within the APEC framework. Lastly, an equity market-based support system specialized for SMEs should be established. This report also suggests action plans to make an investment fund centered on SMEs.
 

This paper investigates the short-term and long run co-movement of key economic indicators in the South Asian countries: real GDP, exports, imports, openness, exchange rate. This paper performs Johansen’s co-integration test to detect long-term stochastic time trend and Vahid and Engle’s common feature test to examine the existence of short-run common cycles. The results show that the co-movement of the South Asian countries is very weak not only in the long run but also in the short run. Regional conflicts and low degree of intra-trade and intra-investment have led to weak co-movement in this region. Especially tensions between India and Pakistan make barriers in most areas, including trade and investment. The weak co-movement means that the economic integration of South Asia continues to be delayed and the spillover effect of the rise of the Indian economy will be limited. Therefore, it is suggested that both firms and the government have to make differentiated and specialized strategies and policies for each South Asian country.  

Preface

Contributors

Introduction and Overview

Part 1. Regional Integration in Northeast Asia: Status and Potential

A Northeast Asian Economic Community: A Korean Perspective
Chang Jae Lee

Introduction
Recent Trade Situations of China, Japan, and Korea
China-Japan-Korea FTA (CJK FTA)
Conclusion
References

A Northeast Asian Economic Community: A Chinese Perspective
Fu Jingyun

Evolution of China’s FTA and Regional Economic Integration Policies
Overview of China’s FTA Network
Characteristics of China’s FTA Policies
Prospects of China’s FTA Policies and Their Implications for the Region

A Northeast Asian Economic Community: A Japanese Perspective
Yasuo Tanabe

A Northeast Asian Economic Community
An Asian Energy Partnership
Japan-China Energy Conservation Forum
Conclusion

A Northeast Asian Economic Community: A Russian Perspective
Sergei Sevastianov

Introduction
Past and Present Russian Regional Policy in the Far East
Development of Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Russian View and Possible Role in NEA Integration
Subnational Models of Economic Cooperation in NEA
Conclusions and Recommendations:

Toward a Northeast Asia Economic Community: Lessons from the European Union (EU), Good and Bad
Glyn Ford

EU lessons for Northeast Asia

Potential for Connectivity in Northeast Asia: Energy and Transport Infrastructure in Eastern Siberia and the Russian Far East
Dmitry Reutov

Energy Projects
Transportation Infrastructure
Conclusion

Part 2. Renewable Energy in Northeast Asia and Prospects for the Region

China Renewable Energy Development and Future Prospects for Cooperation
Shi Dinghuan

History and Mission of the China Renewable Energy Society
Renewable Energy in China
Prospects for Northeast Asia Cooperation

Status of Renewable Energy Development―Toward a Low Carbon Society
Yoshiki Iinuma

Hawaii’s Clean Energy Transformation
Mark Glick

Introduction
Renewable Energy and Energy Savings
Tackling Transportation
Reducing Energy Demand
Hawaii: A Clean Energy Test Bed

Part 3. Financial Cooperation in Northeast Asia

Financing the Asian Infrastructure Investment Bank (AIIB):
Issues for Further Discussion
S. Stanley Katz

Development Bank Objectives
AIIB Financial Arrangements and Parameters

Creating a Multilateral Development Fund for Financial Cooperation in Northeast Asia
Jai-Min Lee

Recent Developments Impacting the Northeast Asian Development Bank Proposal
Creation of NEA Fund
Role of the Greater Tumen Initiative (GTI)
Conclusion

Establishing a Northeast Asian New Financial Institution to Promote Regional Economic Cooperation and Development
Zou Lixing

Strategic Value of and Market Demand for a Northeast Asian New Financial Institution
The Relationship between a New Northeast Asian Financial Institution and
the Asian Infrastructure Investment Bank (AIIB)
Basis and Path to establish a New Northeast Asian Financial Institution

Financial Cooperation in Northeast Asia: Japan’s Perspective
Hideo Naito

The Potential of Northeast Asia
Recent Trends in Financial Cooperation in Northeast Asia
Partnership for Quality Infrastructure
Japan and NEA Potential
Public Private Partnership (PPP) Readiness in Asia-Pacific

The Belt and Road Initiative: Ambition and Reality of China’s “Go Global” Strategy
Liu Ming

Background of the Belt and Road Initiative
Belt and Road Initiative: Challenges
Conclusion

Appendix
 

The Northeast Asia Economic Forum (NEAEF) is a regional nongovernmental organization created in 1991 to sponsor and facilitate research, networking, and dialogue relevant to the economic and social development of Northeast Asia. The Forum is also committed to promoting understanding and relations among the peoples of Northeast Asia, North America, and Europe.
 The main objective is for NEAEF to conduct research and conference activities aimed at functional economic cooperation such as cross-border energy, transportation and logistics infrastructure development, and capital mobilization. The Forum holds annual conferences, workshops, and seminars for planning, facilitating, coordinating, and implementing international and interdisciplinary solutions to common policy problems. It is the only nongovernmental regional organization in which all the nations of Northeast Asia and the US are consistent and active participants.
 In collaboration with the Korea Institute for International Economic Policy (KIEP), in 2015 NEAEF carried out activities on building a Northeast Asian Economic Community based on lessons learned from NEAEF’s previous work on financing cross-border functional economic cooperation. For the first year of this collaborative project the focus was on regional cooperation and strategies in Northeast oriented toward North Korea―this work focused on functional economic cooperation in cross-border resources, energy supplies, infrastructure construction, capital mobilization, and institutional development.
 This volume is the first part in a series of proceedings titled Building a Northeast Asian Economic Community. It contains presentations and summaries from the NEAEF Beijing Special Meeting and the related activities that took place under this project. The aim of the project is to contribute to and encourage activities and efforts toward regional economic integration in Northeast Asia. 

As China emphasizes the role of service sectors in achieving medium-to-high level of economic development, and as the bilateral free trade agreement (FTA) between Korea and China comes into effect in December 2015, the Korean government and companies expect increased opportunities to enter the domestic service market of China. This study deems that the market-opening strategy for China’s service sectors has been changing during the 12th Five-year Plan period (2011 to 2015). Based on the results from the case study of the Shanghai Pilot Free Trade Zone (PFTZ), the study evaluates the level of market openness of China’s service sectors and provides suggestions for furthering Korea-China cooperation in the service sectors.
 The primary findings of this study can be summarized as follows. In Chapter 2, we analyze the current state of the Chinese service industry and major related policies, and explain why a change in the strategy for opening the markets for China’s service sectors is necessary. The importance of Chinese service sectors rose substantially during the 12th Five-year Plan period. The share of the tertiary industry in China’s GDP surpassed that of the secondary industry for the first time in 2012, and steadily increased to reach 48.1% of GDP by 2014. Since 2011, the share of the tertiary industry in China’s total workforce was first among the three industries; the same has been true of FDI since 2010. During the course of the 12th Five-Year Plan, the Chinese government has also announced for the first time a development plan that focuses on the service sector. In 2014, the Chinese government emphasized the role of service sectors in the “Made in China, 2025(中？制造 2025)” development plan and announced a policy that specializes in nurturing the producer service industry. But the service sector still needs to be opened further in order for China to gain a competitive edge in the global market.
 In Chapter 3, we evaluate the level of market openness in China’s service sector and analyze the changes in the market opening strategy, focusing on six industries in the service sector: finance, health, law, education, tourism, and culture. China’s service industries have opened up substantially after joining the WTO in 2001, but no significant change was made in the DDA initial offer, revised in 2005. Similar trends can be seen in finance and cultural industries; some areas in health, law, education and tourism, however, show a higher level of openness than corresponding markets in Korea. A comparison of the Service Trade Restrictiveness Index (STRI) in 2015 revealed that China still shows a lower level of openness in all 18 sectors when compared to other countries, and an overall higher level of restrictiveness than Korea.
 The Chinese government’s market-opening strategy for its service sectors has taken a different turn since 2011. First, the basic framework for market-opening for service sectors changed from stimulating influx of capital and technology by attracting foreign investments to driving forward structural reforms in the domestic economy and easing the country’s adaptation to global changes. Second, the target beneficiary group for the opening policy has expanded from foreign companies to China’s privately-owned companies. Third, the government is attempting to apply the development strategy of so-called “Points-Lines-Surfaces (点-？-面)” to open up specific industries in the service sector within a specific geographical area. Fourth, the government’s attitude has shifted from perceiving the opening process as an obligation mandated by the WTO, to active pursuit of opening procedures to prepare for the age of multilateral cooperation, epitomized by the TPP or the RCEP. Fifth, the government has been pursuing changes in the market-opening method, such as discontinuing incentives to foreign companies, adopting a negative list, and encouraging overseas expansion of Chinese domestic companies.
 In Chapter 4, we conduct an analysis using Shanghai PFTZ as the representative case of the market-opening strategy introduced in Chapter 3, and analyze the specific market-opening policies of six service industries that was implemented in the Shanghai PFTZ. As a result, we found out unconventional measures were generally avoided in Shanghai PFTZ until presently. In addition, the marketopening policy of legal service industry has not been effective enough, because openings as a result of the new policy were not as palpable as the foreign law firms expected; case in point, allowing the establishment of Sino-foreign joint ventures and employment of Chinese lawyers. In the health services, the establishment of wholly-foreign-owned medical institutions was allowed in 2013, but the market-opening policy has been discontinued recently. Shanghai PFTZ also seems to be very cautious in the opening of the cultural service market, allowing only the sales of video game consoles (which has low market share in the game industry) and the establishment of wholly-foreign-invested entertainment artist agencies to provide services in Shanghai.
Other cultural sectors such as film, broadcasting, and online games were excluded from market-opening. In the education service sector, it is encouraging that establishing both educational training institutions for profit and wholly-foreign-owned vocational skills training institutions were allowed, but under the new policy no company has established a presence in the Shanghai PFTZ till now. Financial service sector is not an exception, and most of the market-opening policies are, as of yet, merely an expanded version for areas that have already been opened.
 In Chapter 5, we discuss the implications for the Korean government and companies to expand cooperation with China in the service sectors. While the essence of Shanghai PFTZ’s is institutional reform rather than market openness, and while there certainly are limitations for local governments to enforce the market opening policy aggressively; it is the conservative attitude of the Chinese government regarding market-opening for service sectors constituting the primary reason why the market openness of service sectors in Shanghai PFTZ is delayed. The PFTZ project and market-opening policy may be expanded throughout China in the future, but the Chinese government will likely continue to be cautious regarding their pace and scope.
 The Korean government should utilize the market-opening policies of Shanghai PFTZ as well as collect information on ‘bottleneck’ problems which the Korean companies have experienced entering the service sectors in China during the course of post-FTA negotiations with China. The monitoring system also needs to be established to provide Korean service companies with guidance related to PFTZ policies. The opening of finance, law, housekeeping, and pension service markets might take place prior to all other service sectors, and Korea can cooperate with China in those sectors especially. Moreover, the Korean government should establish a mentoring system enabling Korean service companies to exchange experiences in the Chinese service market.
 With regard to Korean companies, we suggest that they use the Shanghai PFTZ as a platform and source of funding, to ask for exclusive benefits by appealing that they can provide advanced management knowhow to the Shanghai PFTZ, and use the simple incorporation procedure in Shanghai PFTZ. In addition, they should strengthen cooperation with privately-owned Chinese companies and carve out new service markets, while considering local demand.