Development Assistance for the Trade Sector in the Lao PDR: Evaluations and Future Directions for Korea's Aid for Trade

Yoocheul Song, In Soo Kang, and Hosaeng Rhee

The total size of Aid for Trade (AfT) and the share of AfT in ODA have increased substantially during the past decade. Likewise, Korea now gives greater priority to Aid for Trade in its development assistance program. Currently categorized as one of the Least Developed Countries, Lao PDR is seeking to graduate from LDC status by 2020. In its 7th National Socio-Economic Development Plan, it is outlined that trade has a critical role in developing the country’s economy. Therefore, international organizations and donor countries are making efforts to strengthen trade in Laos through the implementation of AfT programs.

After carefully observing the current domestic situation in Laos as well as aid activities by other donor countries, we have selected the garment industry, trade finance and export promotion services as potential areas of cooperation between Korea and Laos. Korea possesses abundant experience in the above-mentioned areas since it utilized them to encourage trade activities during its development stage during the 1970’s and the ’80s. By reflecting on Korea’s own development experience, the paper aims to provide an analysis of the challenges Laos is currently facing, and seeks to map out plans for future program to promote trade in Laos.

The garment industry is one of the most important exporting industries in Laos. However, its productivity is lower compared to competing countries. Therefore, we chose technical/vocational education and training (TVET) in the garment industry as one of the fields for Korean AfT. The problems regarding TVET in Laos are as follows: difference between demand of the industry amd supply from the TVET institutions, lack of effective participation of the industry and its constituent enterprises, and difficulty in accessibility. Therefore, we recommend development of a systematic support plan for TVET in the Laotian garment industry.

The high interest rates, small amount of loans and vulnerability of the private banking system are reasons why we also selected trade finance and export credit as one of the fields to be improved by Korean AfT. In particular, the efficiency of private banks in Laos is very low and the net interest margin appears very significant. Therefore, utilization of state owned commercial banks in trade financing to lower interest rates should be introduced at the first stage. Because the scale of trade financing is not sufficient to cover all sectors, a specific sector should be chosen to bring about sufficient results. However, Laos should follow the Agreement on Subsidies and Countervailing Measures of the WTO, as it is a member of the WTO.

During the development period, trade promotion service in Korea played a critical role in increasing the amount of exports and diversifying export destinations. Because the private sector in Laos is not big enough to have a specialized ‘section’ for exports, a government-supported trade promotion service can bring new opportunities to the Lao private sector, and especially for small and medium size enterprises. At the first stage, the individual service based on a Trade Portal can be introduced; followed by the establishment of a government-affiliated trade promotion agency, which should be considered the next stage.

The Aid for Trade by the Korean government for improvement of competitiveness of the garment industry, and on trade finance/export credit and export promotion services can help economic development of Laos by increasing trade. Korea has much experience on its implementation from its own development process and Korea also has more than adequate experience in the aforementioned fields, in terms of ODA to help other countries. Therefore, AfT in these three fields can lead to greater effectiveness and efficiency. These fields are also relevant for Laos as the Lao government placed much emphasis on them. If the work programs in this study are created and implemented, it would greatly facilitate and promote trade in Laos.

China and Iran: Current Relations and Implications

Pilsoo Choi, Minkyung Lim, and Jaeeun Park

In response to United Nations Security Council resolution (UNSCR) 1929 in 2010, the United States (U.S.), member states of European Union (EU), Korea, and other countries have imposed strong restrictions on Iran’s nuclear, energy, financial, and other sectors. However, China, the largest trade partner of Iran, only agreed to UNSCR 1929 and it has been criticized for weakening international sanctions against Iran. China has expanded business in Iran by filling the void consequences of that Korea and other participants have been forced to reduce business with Iran. This paper examines current amicable relations between China and Iran in terms of economic, political and diplomatic relations amid international sanctions against Iran. Analyzing current relations, this study provides policy implications for Korea to prepare strategic plans toward Iran.

China-Iran trade had been generally increased even after the adoption on UNSCR 1929 in 2010. Despite the fact that the trade decreased in 2012, China became Iran’s largest export destination and second largest import destination. As many western companies pulled out of Iran, Chinese companies take advantages of sanctions in Iran’s cars, auto parts, steel and iron products markets. Also, the EU ban on purchases of Iranian oil allows China to become the largest buyer of Iranian oil. It implies that China’s role has become more important in Iran’s economy. Moreover, China has expanded its influence in Iran’s energy and infrastructure industries with financing ability. The number of Chinese companies invest in Iran drastically increases from one in 2002 to 14 in 2013.

It needs to explore internal and external environmental factors in order to explain close China-Iran relations amid international sanctions against Iran and critiques of China. China’s internal factor is a tremendous increase in energy demand resulting from rapid industrialization and urbanization. It indicates that China is required to maintain stable relations with oil exporters including Iran, China’s fourth largest oil supplier. Iran’s internal factors are anti-Western sentiment based on guardianship of the Islamic Jurists, and economic difficulties due to 30-year economic sanctions. It leads Iran to build friendly relations with China, a world’s economic power, which could replace Western firms. Furthermore, anti-Western and anti-imperialism sentiment of China and Iran helps improve diplomatic relation and cooperate third-country issues such as Syria conflict. Meanwhile, China-U.S. relations have a constraining effect on China-Iran relations because U.S. is the top priority for China’s diplomatic policy.

China might continue to cooperate with Iran, but not at the expense of relations with U.S. Iran is expected to maintain current amicable relations with China and request brokering Iran and other parties concerned. Considering the close ties between two countries, it is necessary to not only preemptively prepare possible economic cooperation with Iran, but also strengthen cooperation in culture, education, or other non-sanctioned sectors. Moreover, it is helpful for Korea to regard limitations under sanction as usual business environment in weak institutions and resource abundant countries. Based on this experience, Korea will overcome external environment and establish new cooperative partnership with those countries on resources.

This study develops a methodology to assess the potential economic impact of liberalizing FDI as well as trade in goods and services using a computable general equilibrium model. By doing so, it is meant to help find supportive reasons for an FTA and establish proper strategies for the FTA negotiations.

Chapter 2 measures non-tariff barriers (NTB) taking the Novy(2010)’s approach and estimates how much the NTBs can be reduced through an FTA. According to Novy(2010), total trade costs can be divided into three parts: tariffs, transportation, and the rest. The NTBs are measured by the rest of the total trade costs. It turns out that the costs are induced much higher by NTBs than tariffs. For example, the tariff rate on imported electronics is only 1.87% while the tariff equivalent of their non-tariff barriers reaches 42.01% on average. As a consequence, it is expected that the impact of reducing the NTBs through an FTA would be substantially great. The size of NTBs that can be reduced by an FTA is obtained from estimating a gravity model. The estimation shows that an FTA’s effect associated with NTBs is biggest in the automotive industry, followed by chemistry, rubbers and plastics, steel, and food processing.

Chapter 3 calculates a country’s barriers to foreign investment by adopting Gormsen(2010)’s method, and reviews previous studies to explore the impact of FTA on FDI. It is revealed that the U.S., Germany, and U.K have a relatively lower FDI barrier than Korea, China, and Japan. According to previous literature, an FTA would increase FDI between member countries by 27-57%. The measures for FDI barriers are transformed into risk premia as exogenous shocks for the CGE model. Then, it is determined how much the risk premia should be reduced through an FTA based on the relationship between FTA and FDI shown in the previous studies.

Chapter 4 models the Korea’s existing four FTAs, which are the agreements with ASEAN, India, EU, and the U.S., in the recursively-dynamic GTAP framework in order to compare the potential effects on real GDP growth of reductions in tariffs and non-tariffs, and FDI through the FTAs. The FDI scenarios are modeled only for the FTAs with EU and the U.S. as the main sources of FDI. The results of the simulations indicate that the impact of non-tariff reductions would be greater in all the FTAs except the Korea-U.S. FTA, compared to the impact of tariff reductions as expected. The effects of the tariff and non-tariff reductions of the Korea-U.S. FTA would be similar to each other, understandably staying at the lowest level among the FTAs. However, in the Korea’s two major FTAs the potential economic impact of reducing FDI barriers are assessed less than expected. It is estimated that the Korea-U.S. FTA would increase real national GDP only by 0.22-0.24% in the short run. For the Korea-EU FTA it is ranged from 0.09% to 0.178%, which is substantially smaller than the impact of tariff and non-tariff reductions through the FTA.

The Role of International Development Finance Institutions in Financing Infrastructure in Africa and its Implications for Korea

Young Ho Park, Youngki Kim, Jong-Moon JANG, and Hyelin Jeon

Africa, once a land of ceaseless civil wars and abject poverty, is now emerging as a continent of new potentials and opportunities, drawing attention from governments and corporations worldwide. The growing interest in Africa is evident in a recent opinion poll involving construction companies in Korea. The respondents’ interest in Africa was much higher than that in either the Middle East or Asia. It is no exaggeration to say that the sound of bulldozers and hammers are fast replacing the sound of guns on the continent, whose demand for construction is growing explosively. In line with this, however, the backward business environment in general, continuing political instability, and breaches of contracts that are still prevalent throughout the region make Korean corporations reluctant to enter into the African market. Furthermore, these risks limit the amount of financial support that Korean export credit agencies (ECAs) provide. It is believed that one way to overcome this is to foster financial cooperation with policy financing bodies overseas. This study surveys the types and amount of financial resources that overseas policy financing bodies, such as development finance institutions (DFIs), provide for Africa, and makes in‐depth analysis of major projects in Africa financed by them. Moreover, this study explores how Korean ECAs and investors can use partnership with financial institutions worldwide to provide greater finance for Africa.

This study finds the following characteristics and attributes in the financial support that DFIs have been providing for Africa. Firstly, DFIs are increasing their support for Africa, particularly prioritizing projects on infrastructure development. The World Bank (i.e., the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)), for instance, allocated 20% of all loans it provided in 2012 on Africa, which was spent on a wide range of development projects, including plant construction, roads, bridges, water resources, and wireless communication networks. International Financial Corporation (IFC), which has traditionally focused on Central Asia and Latin America, has also been increasing its financial assistance for Africa in the recent years. Whereas IFC’s assistance for Africa stood at USD 278 million in 2002, it multiplied by over 13 times to reach USD 3.7 billion by 2012. Much of IFC’s investments and loans for Africa concerns infrastructure development, amounting to over USD 1 billion in 2012. The Multilateral Investment Guarantee Agency (MIGA) encourages and guarantees private‐sector investments in developing countries. It has played a pivotal role in the development of Africa by providing guarantees for multiple projects. MIGA’s attention these days is on assisting postwar reconstruction in countries coping with the aftereffects of civil wars. In 2012, 34% of the number of projects guaranteed by MIGA was allocated to sub‐Saharan Africa, representing 24% of the total value of investments the agency guaranteed.

The European Investment Bank (EIB) is another major source of finance for Africa’s development projects. The EU‐Africa Infrastructure Trust Fund (ITF) which the bank established in 2007, has been crucial to the expansion of infrastructure in Africa. The African Development Bank (AfDB) shows a similar concern for developing infrastructure, which claimed almost half of all the loans and concessions the bank provided in 2012. The AfDB’s goal is to promote market integration across Africa and it prioritizes trans‐Africa infrastructure projects that involve multiple African countries accordingly.

Secondly, the most active bilateral DFIs in Africa today are CDC of the United Kingdom, Proparco of France, and DEG of Germany. These institutions mainly focus on assisting private‐sector projects that aim to achieve significant development impact and financial returns. Although these bilateral institutions count as organizations of official development assistance (ODA) as they support the eradication of poverty and sustainable development in developing countries, they are also akin to commercial banks in their pursuit of profits. These institutions have been successful with the development projects in Africa they have invested in. These projects have yielded much development impact and financial returns, particularly reflecting these institutions’ extensive experience with, and expertise on, the feasibility and analysis of development projects. Another interesting characteristic of these European DFIs is that they mobilize private‐sector capital through proactive investments for risk management. By providing investments, loans, and guarantees for risky private‐sector projects, these institutions serve to catalyze the participation of other investors and lenders. CDC, for instance, has been participating in a broad array of development projects in Africa, making use of the UK‐Africa relations that go back to the colonial days. Having decided to concentrate investments in Africa in 2011, CDC is rapidly increasing its presence on the continent. Its operating policy today requires that 75% of all new investments be made in low‐income countries (i.e., countries with a GDP per capita of USD 905 or less each), and that 50% of those investments be made in sub‐Saharan Africa. Thanks to this change in policy, Africa claimed the majority of investments that CDC made in 2012. Most of these investments have gone into former British colonies, such as Kenya, Nigeria, South Africa, Ghana, Uganda, and Tanzania.

Proparco is similarly active in Africa, with eight of its fourteen overseas offices located on the continent. Proparco’s area of focus is sub‐Saharan Africa, which has taken almost half of all the investments that the company has made so far. On the contrary, Africa is relatively minor in the investment portfolio of DEG, a company based in Germany that has no comparable historical or colonial relations with Africa. Nevertheless, DEG has been steadily increasing its investments in Africa in the recent years, especially in the form of cofinancing with other DFIs.

Thirdly, financial resources of quite diverse natures come together through cofinancing to form financial packages for Africa. Large‐scale projects involving construction and plant development rely primarily on the financial assistance provided by multilateral development banks (MDBs) and bilateral DFIs, with ECAs and commercial banks tending to participate in these projects as latecomers. African projects tend to involve multiple and diverse financial institutions, not only to find sufficient financial resources, but also to distribute and mitigate the risks inherent to those projects. Africa is still home to a wide range of unpredictable risks. Most African states have relatively low credit ratings, making it impossible for financial institutions to fund projects in the region either by themselves or in small groups.

This study develops suggestions on how Korean ECAs and investors can make use of DFIs overseas based on their analysis of these characteristics. First, Korean ECAs need to attempt to broaden the range and scope of cofinancing. As Korean corporations have begun to pay greater attention to construction and plant development markets in Africa, the Export‐Import Bank of Korea, an ECA, has been trying to enlarge the range of export credits and Development Cooperation Fund (EDCF) it provided for projects in Africa. The high business risks and rampant poverty in African states, however, still make it nearly impossible to draw sufficient investments to satisfy Korean developers’ needs. Constructor‐financed projects in Africa crucially impinge upon the developers’ ability to secure financial resources for their success. Korean developers, however, lag behind their competitors overseas in this regard. One way to overcome this shortcoming is to increase cofinancing with DFIs overseas. Cofinancing may serve to anchor the stability of projects and mitigate risks. DFIs and ECAs of advanced countries possess significant negotiating power when it comes to African governments and may effectively provide a bulwark against breaches of contracts, expropriation and foreign exchange control, restrictions on remissions, and other such political risks. Because construction and plant development projects require massive amounts of investments for setting up the necessary equipment and also for operating the projects for relatively long spans of time, effective risk management strategies are essential. The inherent characteristics of these projects also render them riskier than other types of projects. Should the Export‐Import Bank of Korea and other Korean ECAs decide to cofinance these projects in Africa with financial institutions overseas, they will be able to catalyze and encourage other Korean corporations’ investments in Africa as well. To this end, Korean ECAs first need to build and strengthen the network of financial cooperation with DFIs and ECAs abroad and actively seek out measures of multisource financing by combining resources and services with these institutions. Without sharing risks with other ECAs or MDBs worldwide, Korean ECAs would always remain passive in terms of investing in high‐risk regions like Africa. Moreover, Korean ECAs also need to broaden financial partnerships with other types of financial sources worldwide, including ODA institutions of advanced countries, international commercial banks, local financial institutions, investment funds, among others. However, because these financial institutions carry different aims, policies, and terms and conditions of investment, it is important to choose the right type of financial sources and design the financial package strategically. Cofinancing is a great way to enlarge the pool of available capital, share experience and expertise, and mitigate risks. The Export‐Import Bank has worked on six cofinancing projects in Africa so far, with institutions, such as the World Bank and AfDB.

Second, cooperation with financial institutions abroad also enable Korean ECAs to take part in infrastructure projects with great development impact. DFIs prefer projects with high development impact and cross‐border infrastructure development projects that promote regional economic integration, such as energy and transportation projects. The decisive fact about the Kenya‐Uganda Railway Network Project, for instance, that drew DFIs’ support was that it would equip Uganda, a landlocked country, with a logistics network and routes of exports so that it could grow along with the neighboring country of Kenya. Should Uganda have promoted this project solely for its own benefit, it would have failed to mobilize such a massive amount of financial assistance from DFIs.

Third, cooperation with financial institutions abroad will also allow Korean ECAs to make better investment decisions through securing project viability. Projects with poor project viability face considerable constraints in securing the financial resources they need and thus tend to drag on for extensive periods. Even in projects in which Korean companies’ participation is limited merely to construction, these companies will have difficulty receiving payments on time insofar as those projects lack sufficient project viability. Securing project viability is crucial for projects where Korean companies take a lead or participate in.

Thorough analyses of feasibility are important to foster the private sector’s participation and investment in projects. The case studies included in this research all ensured the viability of their projects based on detailed feasibility studies.

Fourth and finally, cooperation with financial institutions abroad will also enable Korean ECAs to make use of the available financial advisory services. Entering the African market entails a wide range of complex risks and requires thoroughgoing preparations for minimizing them. As Korean financial institutions lack experience and capability to advise on development projects in Africa, Korean investors need to seek out help from foreign financial institutions with expertise on financing projects in the region. It is usually investment banks with well‐established international reputation that provide these advisory services. European banks have vast experience in handling financial advisory services for prospective investors in Africa. They do not only possess extensive knowledge on the states and industries of Africa, but also offer expert advice on how to secure investments and minimize risks. These financial advisory institutions of advanced countries can provide a broad array of helpful services, including consultation on project structures, feasibility reviews, financing plans, finance modeling, and contracts. Moreover, they can serve as mandated lead arrangers for securing loans and finding other financial resources. It is thus crucial to make effective use of the services they provide in order to enter the risky African market.

Strategy for Entering China’s Regional and Provincial Domestic Markets

Pyeong Seob Yang, Jihyun Jung, Suyeon No, Furong Jin, Hyunjung Park, Minkyung Lim, Jonghyuk Oh, Hongwon Kim, Jinhee Park and Sanghee Lee



This paper aims to present comprehensive strategies for promoting export and investment and advances in Chinese consumer markets and production bases in response to the new Chinese policy boosting domestic demand and changes in provincial economic climate.

First, by analyzing regional statistics with weighted values and policy papers for 288 Chinese cities, we selected potential consumption and production footholds. Chengdu (成都), Wenzhou (温州), Xian (西安), Wuhan (武汉), Zhengzhou (郑州), Ningbo (宁波), Changsha (长沙), Jiaxing (), Jinhua (金华), and Chongqing (重庆) were selected as top ten consumption bases, and for the top ten production bases, Chengdu (成都), Chongqing (重庆), Tianjin (天津), Wuhan (武汉), Zhengzhou (郑州), Nanjing (南京), Shanghai (上海), Changsha (长沙), Wuxi (无锡), and Qingdao (青岛) were chosen.

In terms of trade, we reconfirmed that Eastern region (华东) is the main destination of Korean exports, regardless of products, 38.5% of all exports to China go to this region. The Bohai economic region (环渤海) receives 27.3%, the Southern region (华南) receives 17.8%, and Shandong province(山东) receives 19.1%. When we break down the transactions between Korea and China, it is clear that import of primary and capital goods in the Northeastern region (东北三省) and the Central region(中部) is greater than in the other regions. In the Bohai economic region, consumer goods, in particular automobiles are heavily imported in comparison with other regions. The Eastern region and the Southern region, which are known as major production bases in China, mostly import goods. We also found that chemical products are primarily exported to the Eastern region, while electronic components and visual and communication equipment are primarily exported to the Southern region and automobiles are primarily exported to the Bohai economic region.

While Korea has a comparative advantage in import markets in Shandong Province, the Eastern region, and the Southern region, its market shares in the Northeastern region, the Central region, and the Western (西部) region are very low. Moreover, the structure of Korean exports is very similar to that of Taiwan in the Eastern region and the Southern region to that of Japan in the Eastern region, the Northeastern region, the Bohai economic region, and Shandong Province and to that of the United States and Germany in the Bohai economic region.

For investment feasibility analysis, we conducted a survey and case study on Korean businesses in China from September to October 2013. The results show that these companies have made progress in localizing procurement since previous investigations.

Korean manufacturers seem to be more competitive than local Chinese companies in terms of quality, technology, and design. However on service sector, they valued similar to or lower than their foreign competitors in China. Korean entrepreneurs indicated that they selected locations by considering local market potential; this has been successful, as sales have taken place on site. In terms of bottleneck factors, personnel problems were considered as the main regardless of the region and business. Too much competition in the local Chinese markets and the collection of payments are also mentioned as problems.

Based on this analysis, this paper suggests methods for advancement in regional Chinese domestic markets and considers the competitive composition of the Chinese import market as a strategy for FTA negotiation further market access. Also, it recommends Chinese efforts to reduce non-tariff barriers and legal discordance between central and local governments and between local ones. In addition, it urges the Korean government to build support systems for small and medium enterprises (SMEs), renew the current export support programs, and provide specialized information on local markets.

China’s Long-Term Economic Reform: Perspectives and Implications

Pyeong Seob Yang and Suyeob Na ed.

This report examines the content and prospects of Chinese economic reforms in finance, fiscal systems, taxation, SOEs, market, pricing, labor/hukou, and international economy; followed by proposed implications and responses for Korea.

According to the analyses of this report, the direction of the Chinese economic reforms is as follows. The main theme in the SOE reform, for example, is diversification of ownership. Financial reforms include abolition of limits to market access, interest rate marketization, capital market reforms, and reforms related to RMB internationalization. For fiscal systems and taxation, an appropriate reform in accordance with the transformation of economic development mode will be adopted; and in order to establish the price mechanism determined by the market, government intervention in the price-decision process will be reduced. In terms of rural-urban integration, land reform and hukou reform will be promoted and a variety of demonstrative actions will be undertaken to expedite domestic reform following opening-up policies. In addition, to improve people's livelihood, social reforms such as increased distribution to laborers and resolution of the income inequality issue will be enacted.

China's economic reform have important implications not only for Korean enterprises in China but also for Korea's external trade with China. Foremost, China’s economic growth rate is expected to be slowed due to extensive economic reforms. At this point, Korea is noticing a marked slowdown in the rate of increase of its exports to China. Moreover, Korea should be prepared as the reforms in China may become a double-edged sword in terms of investment and export to China. On one hand, the Chinese market will provide more opportunities in new fields, in case the reform leads to improved investment systems and enhanced level of openness. On the other, increased factor-price could develop into a big threat for Korea.

It is necessary for the Korean government to concentrate efforts on creating an institutional framework to improve the environment for economic cooperation with China in order to counteract the effects of extensive economic reform policies of the new Chinese government. In this context, the Korea-China FTA will become key and during the negotiation, Korea should seek ways to take advantage of the progress from China's long-term economic reform and changes in international economic policy.

Analysis on the Expansion of Financial Opening and Changes in the Effects of Exchange Rates

Deok Ryong Yoon, Su Bin Kim and Sammo Kang

Five years have passed since the onset of the global financial crisis, and yet the world economy has not regained its normal state. Each country has been implementing the policies for its own domestic economy, such as the quantitative easing. Considering these circumstances, we cannot rule out the possibility of the currency war. In fact, if the world economy turns into such situations, the impact on South Korea, an open and small scale economy, would be significant. South Korea, whose degree of dependence upon foreign trade reaches over 100%, will face the current account deficit resulting from the acceleration of appreciation of the Korean Won. Also, the price fluctuation will be worsened and overall macroeconomic variations will become unstable. Besides, judging from the current state of Korea’s economy, which is experiencing continuous expansion of financial opening and is prone to changes in the financial environment, if the macroeconomic environment were to deteriorate, it is possible that South Korea will experience a sudden stop in foreign capital inflows.

If we take those points into account, it is necessary to take a close look at changes in the system and policies regarding the exchange rates and the deregulation process of foreign exchange dealings, along with the financial opening that has occurred since the currency crisis in 1997. Also, the necessity to conduct studies which examine the changes in the effects of exchange rates on main economic indicators is being brought up. This study was conducted based on these demands, and its main contents are explained as follows.

In chapter 2, it examines the exchange rate system and policies that were implemented in South Korea, and then it introduces and analyzes the characteristics of the regulatory scheme that was carried out after the 2000s to minimize the side effects of rapid financial opening and analyzes its characteristics. It can be said that South Korea’s foreign exchange system has been developed in a way that it adapts to changes in both the domestic and overseas financial environment and to policy issues of the time. In addition, advanced economies’ policies concerning the QE since the global financial crisis are significantly affecting not only the South Korea’s foreign currencies market but the increasing volatility in capital flows. This paper argues that long-term plans and concrete actions are required to reduce the volatility in capital flows resulting from the changes in the QE policies.

In the third chapter, it examines whether there were any changes in the relationship between the financial accounts and reserve assets that were caused by the exchange rates, current account and capital transactions after the currency crisis in 1997. Since the currency crisis, the financial opening and the liberalization of capital transactions turned financial transactions itself into the autonomous ones. This has caused changes in the structure of foreign exchange supply and demand, and as a result, not only the volume of transactions in foreign exchange market but the volume of capital flows have been increased. Therefore, it can be said that the new policy tools need to be developed to minimize the artificial market interventions by the smoothing operation. Also, from analyzing the relationship between the current account and the financial accounts, this paper was able to identify their gradual co-movement. We observed that, when you have a current account surplus, a financial account also turns to surplus and when you have a current account deficit, a financial account also turns negative after a certain period of time. We were able to see that, after the 2000s, the financial accounts have greater direct impacts than current accounts. However, current account is still the main factor in determining exchange rates, while the effect of financial account surplus on determining exchange rates is increasing. From these observations, this paper suggests alternative measures that can continuously manage the current account and expand tools that ease the volatility in capital inflows for the foreign exchange market stabilization.

Chapter 4 conducts the VAR shock reaction analysis and the variance decomposition analysis on the effects of exchange rates on inflation and current account. Results show that the changes in exchange rates increase import prices and consumer prices while the changes have relatively minor negative effects on the economic growth rates and the trade balance. Thus, it is necessary to consider the introduction of measures to prevent rapid fluctuations in exchange rates for the price stabilization, and foreign exchange hedging measures to prevent the financial market’s exchange risk. In addition, the results of the empirical analysis show that urgent attention on yen exchange rate is required as the effects of the yen exchange rate from Japan, a trade rival, are seem to be as significant as that of the dollar exchange rate.

This report’s overall conclusion and policy implications based on the above materials are as follows; first, the government needs to establish the long-term plans for the institutional development. The long-term plans can be established with the agendas such as, making Korean won as the key currency through the internationalization of Korean won, and market development through diversification of participants in the foreign exchange market and enhancement of influence of the private sector. These agendas can be carried out through the institutional development; second, we need to seek for tools that can reduce volatility within the market, and measures that enable economic agents to cope with the volatilities and to hedge risks. This can be viewed in the same context of capability strengthening in private sector for coping with the foreign exchange market, and it is essential to improve this particular area in order to bring efficiency of the market functions; third, continuous political efforts are required to manage the current account. As it can be seen from the results of this study, it is true that the current account determines the direction of investment funds within the financial accounts. Thus, until the Korean won gains international compatibility through its internationalization, we need to prepare a foundation to stabilize the foreign exchange market while maintaining current account surplus. Although, we need to take caution as the excessive amount of surplus can rapidly turn into a deficit; fourth, as capital inflows from the financial markets, especially the portfolio funds which aim to gain the short-term profits, can cause a sudden stop, tools that can be activated in an emergency to secure the stability in foreign exchange market are required; lastly, efforts to reduce possible excessive fluctuations in prices resulting from the exchange rates changes are required. Rapid changes in exchange rates directly affect import prices and consumer prices, and consequently put overwhelming amount of pressure on consumers. Therefore, it is necessary to find various ways to alleviate such impacts. Although the government does intervene the foreign exchange market for fine tuning to avoid rapid exchange rates changes, it is advisable to set up a new system that can be used by the other economic agents.

If there are various options that can be implemented to relieve the volatility in exchange rates and capital flows, there will be less necessity of market intervention, and more chance of implementing appropriate policy tools that are adequate to the time and the conditions.

The Educational Development and Cooperation Plan in Vietnam: Focusing on Vocational Education and Training

Jae-Eun Chae and Myung-Suk Woo

This study aims to present the goal and strategies in plans of the Korean government for educational development and cooperation in Vietnam, focusing on vocational education and training (VET). The study focused on VET because Vietnam has set VET as a main strategic area in terms of becoming a modernized industrial country which was stipulated in its Socio-Economic Development Strategy 2011-2020. Besides, Korea has much experience in cooperation with Vietnam in the field of VET since its education ODA programs in Vietnam are mostly related with VET. In this context, this study has reviewed issues of education development and cooperation in Vietnam and then suggests a range of policy options to improve education ODA programs.

The study consists of six chapters. Chapter I depicts the background and purpose of this study. Chapter II describes Vietnam’s development plans and related demands. Since the initiation of Doi Moi (Vietnam Economic Reform) in 1986, Vietnam showed annual average economic growth rate of 7% during 2000-2008 and thus was able to join the Lower Middle Income Country Groups in 2010. Vietnam has since drawn up a series of plans, including the Socio-Economic Development Strategy 2011-2020 and the Socio-Economic Development Plan 2011-2015. In order to achieve the goals set in these plans, Vietnam needs to invest highly on VET which will help produce skilled workers. Many evidence such as statistics on education and industry, educational development plans, previous research, and the interview results in Vietnam showed that VET is the area most in demand with respect to education ODA.

Chapter III analyzes educational ODA in Vietnam by major donors such as the World Bank and Asia Development Bank, and advanced countries including Japan, Germany, and Australia. The World Bank and Asia Development Bank has simultaneously supported VET of Vietnam despite some differences. In addition, Japan, Germany, and Australia have all jointly supported programs for development of highly skilled workforce of Vietnam in common.

Chapter IV examines education ODA to Vietnam provided by Korea. The findings showed that the total ODA to Vietnamese education by Korea amounted to 231 million dollars as of 2013. The education ODA to higher education was the largest, amounting to 669 million dollars (70.6%). Most of the educational ODA to higher education was used to establishing vocational colleges. Secondary education and VET were the second largest, amounting to 225 million dollars (23.7%). Despite the contribution of Korea to Vietnam, there is still room for improvement. First, educational ODA programs were not based on the investigation of demand of Vietnamese themselves for the development of education nor thorough examination results of Vietnamese educational infrastructures. Rather, they were formulated without a systematic plan when the Korean president made an official visit to Vietnam. And when the program was designed, it did not include evaluation and follow-up management, which often resulted in inefficiencies in the ODA. In addition, even though many Korean companies do business in Vietnam, they did not establish any connections with Vietnamese vocational institutions.

Chapter V describes the objective and strategies, and program areas of educational development and cooperation in Vietnam based on the findings. This study suggests that Korea’s objective in educational development and cooperation in Vietnam is to support a modern industrialization of Vietnam through development of a highly skilled workforce. The directions should be toward enhancement of efficiency, expertise and accountability in educational development and cooperation. The strategies are as follows: 1) target for educational ODA support should be strategically determined; 2) educational ODA programs should be improved qualitatively; 3) partnerships in educational ODA should be strengthened; 4) the implementation of educational ODA programs should be efficient; and 5) performance management system of educational ODA should be enhanced.

Based on these criteria, this study suggests five education ODA programs related to VET in Vietnam. In developing these programs, it adopted three criteria. First, they should contribute to the realization of the Vietnamese government’s goal of becoming a industrialized country. Second, the programs should address the ODA areas where Korea has accumulated expertise and know-how through the previous VET projects both at home and abroad. Third, they should be implemented in partnership with multi-donor agencies, and private entities such as NGOs and private companies. Based on these criteria, the study suggests the following programs: 1) VET programs in economic zones, 2) Public Private Partnership VET for increased employment, 3) Transforming vocational colleges into four-year university programs, 4) Science and technology scholarship programs in Vietnam; and 5) the Korea-ADB Vietnam VET program.

Chapter Ⅵ summarizes the findings and suggests policy implications for the Korean government in conducting educational ODA programs.

International Cooperation for Industrial Development in Indonesia


Jongil Kim and Mikyung Yun



Industrial development is crucial for creating employment and income growth in developing countries. Since the recognition of the importance of development effectiveness in addition to aid effectiveness at the recent G20 Seoul Summit and Busan High Level Forum on Aid Effectiveness, development cooperation in the field of industrial capability enhancement has received increasing attention from the international development community. As a country which achieved rapid development based on industrial competitiveness, Korea is now facing high demand from developing countries for development cooperation in building industrial capabilities.

Against this background, the present study has selected Indonesia, with which Korea is increasing economic cooperation, for the country case study in order to undertake an analysis of desirable forms of development cooperation in industrial capability enhancement. The study first explores general economic conditions and the level of industrial development in Indonesia, and Indonesia’s Masterplan for development. Then, the study examines how Korean ODA to Indonesia is currently conducted, especially with respect to industrial capability enhancement, and evaluates its performance. On the basis of such analysis, the study proposes possible development cooperation programs between Korea and Indonesia in the field of industrial capability enhancement. The reason for selecting Indonesia as a cases study is that, above all, Indonesia is one of the core countries that has received the largest proportion of Korean ODA. This trend has continued, with the total amount of Korean ODA going to Indonesia increasing even more during the 2000s. Not only that, increasing comprehensive economic cooperation between the two countries after 2012 is brightening the prospects for even greater industrial development cooperation between the two countries in the future.

Chapter 2 looks at Indonesia’s macroeconomic performance in general, explores the level of its industrial development and related policies, and critically examines its overall economic development Masterplan as to appraise Indonesia’s demand for ODA in the field of industrial development. Indonesia has successfully overcome the economic and political crisis caused by the Asian financial crisis, through democratization and sustained growth. It has achieved middle income country status in 2012 when it attained GDP per capita of more than 3,500 dollars. Despite bright prospects for growth in the long run, Indonesia has at present a great deal of structural problems to solve, before turning that prospect into reality. Deficient social infrastructure and private sector development, slow growth of the manufacturing sector and rising economic inequality along with issues of corruption, are among the most serious problems. Since the focus of this study lies in private sector development and strengthening industrial capability, when analysing the Indonesian economy, Chapter 2 devotes most of its effort on understanding the industrial structure and related policies.

In Chapter 3, the study looks at development cooperation in Indonesia in general, and then evaluates the performance of Korean ODA to Indonesia. Although Indonesia has attained middle income country status, ODA to Indonesia showed an increasing trend during the 2000s. Important bilateral donors in terms of total ODA amount are Japan, Australia, US, and Germany. Compared to those countries, Korea’s ODA in terms of absolute size is miniscule, for example, only 1/40th of Japan’s total ODA. Nevertheless, Indonesia is the fourth largest recipient of Korean ODA, and Korea’s share of total ODA going to Indonesia has continued to increase over the past ten years. Governance, energy and health sectors received the most ODA. Despite rising comprehensive economic cooperation between the two countries, development cooperation in the field of industrial sector has been minimal. According to Korea’s CPS for Indonesia, the three fields selected as the core focus of Korean ODA, considering Indonesia’s development needs and Korea’s comparative advantage, are public administration, economic infrastructure and management of environment and natural resources.

Chapter 4 continues with a more detailed study of specific development cooperation projects undertaken in the industrial sector by Korea’s three major ODA organizations: KOICA, EDCF, and KSP. Korean ODA organizations seemed to have specialized by concentrating their projects in the fields of information & telecommunication, and industrial energy, which are believed to be areas where Korea has a competitive edge. However, the strategy of specialization was not fully successful in that each of these projects were small grant aid, unrelated with each other in project substance. Such fragmented character of aid has greatly impaired development effectiveness. Whether Indonesia, already a high middle income country, should continue to receive grant aid predominantly should also come under review. For Korean ODA to become more effective in supporting industrial capability and infrastructure development in Indonesia, Korea must consider increasing the size of its aid in the form of loans, and integrating various small scale industrial projects into a closely-related, sector-based programs. KOICA’s technical cooperation in the textile industry, and industrial park feasibility study, if placed under an overall industrial sector development program, would be promising projects. They point to the right direction in the way of designing appropriate, specific development cooperation projects that can support strengthening the industrial capability of Indonesia.

Chapter 5 proposes new directions for Korea’s development cooperation in the industrial sector by suggesting four promising types of aid programs for industrial sector development: enhancing business development service (BDS) provision for SMEs, building global business partnership programs which embraces corporate social responsibility (CSR)-related activities to foster cooperation between large and small firms, assisting human resources development through connecting training programs with migrant labor programs, and supporting development of industrial parks. The programs proposed here are only rough schemes, requiring detailed feasibility studies and specific implementation plans or strategies. If the Korean ODA organizations decide to adopt the proposals made here and apply it to specific industrial sectors and regions in Indonesia, appropriate implementation plan for the sector or the region will need to be fully developed. The most important thing is not to lose sight of 1) making use of Korea’s comparative advantage in successfully implementing industrial capability enhancing policies in designing sufficiently specialized programs; 2) merging various small projects into a single, adequately-sized aid, linking loans and grants if necessary; and 3) complying with the overall development Masterplan and specific industrial policies of Indonesia.

Environmental ODA to Africa: Policies, Determinants and Implications

Sungil Kwak and Hyelin Jeon

We explore the trends and policies of environmental ODA and empirically analyze the determinants of Japanese and Swedish environmental ODA for Africa. We choose two countries, Japan and Sweden; Japan is the largest donor of environmental ODA, and Sweden is a role model of this type of ODA provision. From the CRS data, we find that many major donors have expressed interest in environmental ODA as time passes. However, each country has its own environmental ODA policies.

The Japanese environmental ODA determinants and its policies can be summarized as follows. First, whereas Japan is the world’s largest donor of environmental ODA, the amount of giving to Africa has been relatively small. That is, Japan has not been interested in the environmental issues in Africa for years. Second, the amount of trade significantly affects the decision to grant environmental ODA for Africa. This implies that the economic relationship between Japan and its recipient countries is a major factor in determining whether Japan provides environmental ODA or not. Third, recently Japan seems to have changed its environmental ODA policy for Africa. For example, Japan announced that it would increase the amount of environmental ODA for Africa at the 3rd and 4th TICADs. Fourth, Japan provides environmental ODA for resource-poor rather than resource-rich African countries. For instance, Nigeria, a major oil exporter, got relatively little environmental ODA from Japan, while it is the number 1 recipient country in Africa of ODA from Japan.

On the other hand, the Swedish environmental ODA determinants and its policies can be summarized as follows. First, Sweden, with extensive experience providing ODA, has focused on environmental mainstreaming, even though the size of ODA is relatively small. Second, the Swedish environmental ODA has been meeting the needs of recipient countries. To investigate their individual needs, Sweden often holds a policy dialogue with recipients. Fourth, the ratio of the total amount of ODA to environmental ODA continues to maintain a certain level and converges to a small number. However, Japan’s number does not; this number is stable due to the fact that Sweden many times has held policy dialogues to persuade the recipient countries to satisfy their needs.

Our findings give the following implications. First, Korea has to reflect the issues of the environmental mainstreaming to the ODA policy. By doing so, Korea can grow to become one of the significant donors in this field. In particular, Korea must note that Japan has expressed the will to take part in environmental mainstreaming through the announcement at the 4th and 5th TICADs. Second, Korea has to hold more policy dialogues with recipient countries. Policy implementation is a totally different process from policy making. When the Korean government determines that it will give environmental ODA to African recipients, the distinct features of Africa should be understood. In particular, the causes of environmental deterioration differ across regions, as the poor in Africa have different reasons that they remain poor across residential regions. Hence, the causes should be explored in a dynamic view to provide suitable treatments, rather than in a static view. To do so, more policy dialogues with African recipient countries are required.