The Prospect of Japanese Economic Cooperation with North Korea and the South Koreas Preparation
Jiho Shin

Since the inter-Korean summit meeting, which has accelerated bringing about a new order on the Korean peninsula, the South has been showing keen interest in Japans economic cooperation with the North. This is because the economic conditions of the North will be greatly influenced by when and how Japan, the second-largest economy, will pursue economic cooperation with the North. Future South-North economic cooperation strategies will be hugely affected by the outcome of this decision.

Japan has made efforts to improve relationships with the North by gradually and steadily promoting economic exchanges with them. However, Japanese companies have been passive in and even negative toward their cooperation with the North since the mid-1970s, when the North could not repay trade loans to Japan. A series of events during the past ten years, such as suspicions of nuclear arms development and the firing of a Daepo-dong missile, have aggravated Japanese public sentiment toward the North. The only Japanese-North Korean tie has been Japanese food aid for famished North Koreans. In contrast, however, North Korea hopes to revive economic support from Japan.

The economic cooperation between Japan and North Korea will only start in earnest after the normalization of diplomatic relations between these two countries. But it will only be possible when the problems involving the missile firing and the Norths kidnapping of Japanese citizens are resolved.

If the normalization of diplomatic relations between the two countries is realized, Japan will likely provide financial assistance worth USD 5~10 billion to the North in the form of goods and services. No doubt, this will hugely affect the future economy of North Korea, whose economic scale is currently minimal. The Souths role in this is to make preparations in advance to see that these funds are used effectively. First, South Korea should shift its previous view on the economic cooperation with the north from focusing only on bilateral cooperation between the two Koreas to focusing on the economic recovery of the North by cooperating with Japan and international financial organizations. Second, it should ensure that Japanese financial assistance should serve to bring about systemic reforms in the North Korean economy that can lead to the improvement of its efficiency. Finally, the South should seek ways to actively participate in this process.

WTO New Round: Preparing the Negotiation on AgricultureYoo Cheul Song·Ji Hyun Park(KIEP)Jaeok Lee·Myong Keun Eor·Jeong Bin Im(KREI)

Agricultural trade is now under the WTO principles after the Uruguay Round. Each member country has changed its agricultural policy following the result of Uruguay Round. They lowered the average tariff rate on agricultural products in OECD countries to 36%, but it is much higher than the average tariff rate on all products. Developed countries use the specific tariff and mixed tariff, which make their tariff system less transparent and they use a tariff rate quota that prevents imports over a certain level. However, WTO member countries follow their schedules on domestic subsidy reduction.
The negotiations on agriculture are now underway as the built-in agenda in WTO even though the launch of New Round failed at the 3rd Ministerial Meeting. Tariff cuts, minimum market access, special safeguards, blue box, domestic and export subsidies, export credit and genetically modified organism are expected to be on the main agenda of the agricultural negotiations.

Korea has carried out its promise to the WTO after 1995 and the influence of the Uruguay Round on the agricultural sector was not critical because Korea was allowed to have flexibility on major products. However, it is expected that new negotiation on agriculture will have a huge effect on Koreas agricultural sector because it will cause tariff cuts and reduction on domestic subsidies.

Therefore, the Korean government should form a negotiation plan that helps to facilitate structural reforms in the agricultural sector. The Korean government should keep in mind the basic position of maintaining a reasonable time to prevent the collapse of the agricultural sector even though it should open the market eventually.

WTO Negotiation on Trade in Services: Its Impacts and Strategies June-Dong Kim Jang-Yung Lee Han-Young Lee Yong-Kyu Kim Jung-Hee Choe Jang Hur Jang-Won Lee

This study aims at recommending strategies for WTO services negotiation by analyzing the current status of and probable impact on some of the key service subsectors, namely financial, telecommunication, maritime and air transport as well as the movement of natural persons.

Services negotiation has the purpose of liberalizing trade in services and thus will bring economic benefits. For example, it is estimated that liberalization of financial services will increase production by US$80 billion in five years. Similarly, liberalizing telecommunication services will increase GDP by 2.4% and consumer welfare by 2.3% in the next six years.
To ensure these benefits, it is necessary to establish proper strategies for the negotiation. In the financial services, there is likely to be growing pressure to liberalize services in the mode of cross-border supply and consumption abroad as well as in the area of new financial instruments. To lessen the possible side effects of liberalization, some prudential measures on these services must be scheduled.

In the telecommunication services, there will be demands to increase foreign equity limits on facility-based service providers. In raising the limits on foreign shares, the public interest of telecommunication services should be taken into consideration. Also, some of the key regulations including those on interconnection need to be reviewed according to the WTO disciplines.

Maritime service is strategically important since future negotiation will expand opening of the foreign market. It needs to focus on countries that are less open and lack transparency in order to upgrade overall openness of this sector.
In air transport service, the issue is whether to include air traffic rights in the GATS. Since the current bilateral system reveals some inefficiencies, it is better to consider some of the air traffic rights multilaterally. Also nonscheduled and freight air transport can be included in the GATS to accommodate their needs.

The issue of movement of natural persons (mode 4) is sensitive but the Korean government needs to be positive in its negotiation. It is an important factor to encourage developing countries to participate in the services negotiation and Korea also can promote exports of her middle-skilled workers.

The government needs to recognize that liberalization of trade in services is in our interests. Hence, it can utilize the WTO services negotiation in promoting further liberalization and deregulation. However, to prepare for the possible side effects such as unemployment due to liberalization of mode 4, it needs to establish proper social safety nets and effective reeducation programs.

Early Policy of Reform and Opening in China and Vietnam and the Direction of Reform in North Korea
Myoung-Chul Cho·Ihk-Pyo Hong

From the late 1980s until the mid 1990s, North Korea experienced a great difficulty with system maintenance, with continuing food shortages, economic deterioration and international isolation in the wake of the breakdown of the socialist bloc. In light of this, there was posed the possibility of an early breakdown of the North Korean system. Kim Il-sung's death in 1994 especially raised such expectations both at home and abroad. However, the North Korean system began to show signs of gradual settlement once over the year of 1998. Based on the confidence in the stability of the system, North Korea has recently begun to pursue external opening and system reform of a North Korean style to show a rather progressive attitude in inter-Korean relations, and also to actively engage in a variety of diplomatic activities on the international scene.

In view of the stabilizing trend and developments in the North Korean system, a great number of studies on South-North Korean integration or on the transformation of the North Korean system, based on the premise of an early breakdown of North Korea and abrupt integration of two Koreas seem to be unable to reflect the various possible processes of integration and the realities of North Korea. North Korea in economic transition is especially likely to look to a reform and opening policy of partially adopting a market economic system while maintaining the socialist framework as in the case of China and Vietnam. Thus, a comparative study of the initial conditions of gradual reform and opening in China and Vietnam and the present realities in North Korea seems to be in order to provide some suggestions on the forecast and prospects for system change and reform directions in North Korea.

This report is designed to delve into the initial conditions and the foci of reform in transition to a socialist market system in China and Vietnam so as to ascertain their differences and similarities with the form, speed and reform policy North Korea can take at present in terms of economic transition. To that end, the policy and process of reform and opening are divided here into three categories: change in proprietorship, liberty of economic activities and construction of market infrastructure.

First, as for the change in proprietorship constituting the core of economic transition, China and Vietnam turned to the method of gradually expanding the non-state sector, allowing the enterprise or economic activities of individuals or foreign investors, recognizing private proprietorship, rather than hurrying to privatize national property in an across-the-board way in the initial reform process. This is in contrast with Eastern European countries, and will provide some suggestions for the North Korean process of reform.

Second, the economic liberalization policy is aimed at departing from the state-run economic plan and establishing as the economic principles the economic activities based on the free will and responsibility of the individuals. The Chinese and Vietnamese policies in this line include mainly: strengthening of independent management rights of individual production units, curtailment or abrogation of production subsidies to companies, gradual liberalization of commodity prices, partial admittance of business establishment and commercial activities, liberalization of foreign trade and expansion of foreign investment.

Third, construction of market infrastructure should go along two lines: financial and monetary. China and Vietnam, aware that these two lines are the most important in economic reform, came up with a variety of active macroeconomic policies. North Korea will also have to carry out radical reform of the financial and monetary systems and thus guarantee the free flow of capital in order for the privatization and liberalization policy to bear fruit in the market.

As mentioned above, China and Vietnam have adopted the gradual step-by-step reform and opening policy under the management of the Party and government while maintaining the basic framework of socialism. This will be a rather probable alternative for North Korea at present. In addition, a comparative study of China and Vietnam, both having experienced territorial division due to ideological differences, though different in characteristics and details from Korea, may also suggest some lessons to Korea in expanding inter-Korean economic relations and constructing a joint economic community. The difference between China and Vietnam on the one hand and North Korea on the other hand lies in that the former two do not have to worry about possible system instability during the process of marketization of the economy owing to the existence of a possible "absorber country," while the latter has to worry about the existence of such a country, which acts as a hindrance on the path of marketization and external opening. Hence comes also the importance of the roles of the South Korean government and neighboring nations in inducing the stable reform and opening policy of North Korea.

Korea-Chile FTA: Background, Economic Effects and Policy Implications Inkyo Cheong and Kyounghee Lee
Though Korea achieved economic growth under the multilateral system of the GATT/WTO, its reaction to a widening spread and deepening of regional trading blocs has been lukewarm, due to domestic opposition to market opening under regional trading agreements. However, since the financial crisis began, the Korean government has been reevaluating the potential gains to be made by removing trade barriers on a preferential basis, and has decided to pursue the establishment of preferential trading blocs.

Regionalism is one of the most dominant trends in the world economy today. In line with this increasing trend towards regional integration, Korea has altered its past position opposing regional trade blocs and is now cautiously investigating the establishment of FTAs with major trading countries. Koreas new trade policy is aimed at promptly adapting to the changing economic environment, as well as resolving the countrys economic difficulties.

Consequently, an ultimate goal of this policy is to transform Korea into an open trading country, which makes a meaningful contribution to opening up the world economy at the international level, while at the national level the government remains committed to opening its market through parallel development of democracy and a market economy.
In addition, it is recognized that the supplier-oriented trade policy of the past must be changed into a consumer-oriented policy that maximizes the convenience and benefits of the general public. In terms of cost-efficiency, the publics well-being is better served when the majority of consumers can be supplied with low-cost and high-quality goods rather than defending the interests of a minority of producers. Therefore, the government must perform the role of opening up the domestic market, so that its people can enjoy an abundance of low-cost and high-quality goods and services.

This liberalization has been viewed as beneficial by most Koreans, and there is a growing perception that the establishment of FTAs with major trading partners will bring greater welfare gains. Moreover, Korea has recognized the importance of stable export markets; it is thought that the current account deficit that preceded the financial crisis resulted in worsening international confidence in the Korean economy. Another important background factor in the current trend towards regionalism can be found in trade policy makers recognition of the necessity of upgrading Koreas economic system to meet international standards.

Korea chose Chile as its first FTA partner because of high complementarity in trade structure and learning effects from Chiles plentiful experience in regional trading agreements, while Chile chose Korea because Chile highly valued Koreas close linkage with neighboring Asian countries (Chile can take advantage of Koreas trade linkage for widening Chiles market access to other Asian countries), as well as Koreas growth potential through performing strong reforms in several sectors including financial sector.

Cheong (1999) analyzed the economic effect of the potential FTA between Chile and Korea by using a CGE model. The CGE model is a general equilibrium model that has the advantage of determining the re-allocation effects of the resources caused by the cross-sectoral reallocation of production factors, which the partial equilibrium is not able to deal with.
Korea is expected to gain more benefit from the tariff elimination between the two countries. For example, preferential tariffs imposed by Chile on Canadian and Mexican exports through the FTA between two countries are now acting as main barriers for Koreas export products such as automobiles and tire that are highly competitive with those products. In this regard, the conclusion of a Korea-Chile FTA will provide Korean products with price competitiveness, enabling them to better compete with other countries in Chilean market. This inference can be supported in the Mexicos case, which has an industrial structure similar to Korea, taking as an example of the MexicoChile FTA.

Mexican exports to Chile were jumped from 180 million dollars in 1992 to 930 million dollars in 1996. Korea is also expected to enjoy similar level of export expansion effect, if Korea establishes an FTA with Chile. According to authors calculation, the FTA seems to result in Koreas welfare improvement of 960 million dollars. This result, however, does not consider service trade effect and market expansion effect. The actual improvement is expected to be even greater if we include them.

Among Koreas export sectors, some competitive sectors with greater market share in Chile will be particularly benefited from a Korea-Chile FTA. They are automobiles (occupying 18% in Chilean import market), refrigerator (31%), microwave oven (69%), washing machine (65%), tire and automobile battery, textile, elevator and PVC.

As for Korea, among the manufacturing sectors, the copper processing industry will be mostly affected as imports of copper and related products from Chile will increase with the establishment of a Korea-Chile FTA. This is because Chilean copper is leading the first position in the world in terms of exploitable reserves, production and exports volume. The mining sector is the most important and competitive sector in Chilean economy, accounting for more than one half of global exports.

One of the main reasons why Korea selected Chile as its first FTA partner is that the negative economic effect will not be so great on Korea agricultural sector. Agricultural imports from Chile was only 26 million dollars in 1997, 6 million dollars in 1998 and 15 million dollars in 1999, accounting for only 0.09% and 0.22% of Koreas total agricultural imports, respectively.

In Korea, main agricultural imports from Chile are confined to some fruits such as fresh grape, kiwi and tomato paste. As for grapes, however, Chiles marketing season is very different from Koreas due to the reverse geographical location (South and North Hemisphere).

Korean government, in any way, should take a deliberate stance against the potential industrial damage on sensitive sectors by carefully examining economic effect of a Korea-Chile FTA. To minimize severe restructuring cost, Korea can also consider the partial exclusion of the most affected sectors from the FTA or demand the provision of transition period for the sensitive sectors.

The government officially decided to negotiate an FTA with Chile in December 1999 and currently, the two economies finished the 4th round of negotiations December 2000. The successful conclusion of the first FTA will be of special importance for Korea because other potential FTAs will heavily depend on the first model. Most likely, negotiations will last one to two years. However, talks regarding sensitive areas of trade could potentially prolong the conclusion of the negotiations. Korea's manufacturing sector favors a Korea-Chile FTA, as most of Korea's exports to Chile consist of such manufactured goods as automobiles and electronic goods, while the agricultural sector, fearing an increase of such Chilean exports as grapes and kiwi, and the fisheries industry are deeply concerned about a Korea-Chile FTA.
Beyond the sensitive nature of various trade items, there are a number of other issues of concern surrounding Korea's FTA policy. The first issue to be considered is the need for public awareness for the potential benefits of preferential FTAs. One of main obstacles to gaining consensus for pursuing FTAs is the lack of public knowledge or a negative attitude towards trade liberalization. Most people think that trade liberalization will only contribute to the growth of imports. Some fear that the complete elimination of tariffs will be applied as soon as an FTA comes into effect, thereby requiring huge adjustment costs in some sensitive sectors in the short-term.

The drawbacks of trade liberalization are usually exaggerated, while the benefits are often underestimated. Some even consider that an FTA with large economies will be a form of economic subordination. Therefore, the government should strengthen the publicity activities on the pros and cons of preferential trade liberalization.

The second issue is the harmonization of multilateralism and regionalism. As discussed earlier, Korea has been one of the most active supporters of the GATT/WTO system. Developing countries such as Korea, Taiwan, and Singapore, have benefited from the more liberalized global trading environment under the present multilateral system. The significance of free trade under the multilateral system will not be diminished, even Korea pursues the conclusion of FTAs. The government should continue to take full advantage of the WTO, with actively participating in the framework-building processes of international trade organizations, including the WTO and the OECD, to ensure that trade rules are fair and favorable to weaker countries.

This study aims at recommending strategies for WTO negotiation on GATS rules, including emergency safeguards, subsidies and government procurement. The discussion on these GATS rules has gained a momentum since February 2000 when the WTO services negotiation restarted as a built-in agenda.

Among the three items, emergency safeguards has been the most widely discussed. The key issues are the definition of domestic industry and the scope of acquired rights of foreign service suppliers. It is desirable to include foreign service suppliers as domestic industry not to interfere with the current policy of promotion of foreign investment. Yet, it can be considered not to entitle them to invoke dispute settlement procedures.

In regard to subsidies in services, the definition can draw from the Agreement on Subsidies and Countervailing Measures (ASCM) on trade in goods. The specific characteristic of services trade can be incorporated in remedies. For remedies on trade distorting subsidies, we can consider the method used in agriculture agreement, which is committed to reducing a certain amount of subsidies. Alternatively, we can use the dispute settlement procedures employed in ASCM.

The rules on government procurement is weak in the WTO system. The Government Procurement Agreement has weaknesses since it is plurilateral. Even though there is a possibility that this item will be handled in other working groups such as Working Group on Transparency in Government Procurement, it is in our interest to pursue the liberalization of government procurement in the GATS context. It is because Korea has already implemented liberalization in this area and can enjoy benefits from opening foreign markets, especially in government procurement of construction.

Among these three items, it is desirable to focus on the emergency safeguard, since it is in this item that most developing countries show interest. The government should be attentive not to obstruct the whole services negotiation due to the delay in talks on subsidies and government procurement.

Since the 1990s, the international financial environment has changed fast in terms of globalization, diversification, deregulation and innovation. The development of information and telecommunications technology has led banking institutions to shift from the traditional lending and borrowing activities to multi-financial projects and development of new financial products. Financial engineering has generated various derivatives and international financial transactions have, thereby, been diversified, with the various loosening restrictions on the financial industry.

On the 21st century, the financial industry will have achieved a unified international financial market, due to international financial liberalization and cross-border services under the WTO New Round. With more competition and removal of entry barriers in the international financial market, developed countries have promoted M&As in the financial industry and universal banking system.

After financial crisis, important steps were taken to increase foreigners' access to the banking sector in Korea such as subsidiary and ownership of banks. The benefits of liberalization in banking sector is as follows: to facilitate the exchange of goods and services; to facilitate risk management; to mobilize resources; to obtain information, evaluate firms, and allocate capital; and to provide corporate control. However, there are possible negative effects such as increase in unemployment, higher foreign capital occupancy of the local market, more influence of foreign capital on domestic market and intervention in domestic corporate. Also, freer capital flows have the effect of smoothing consumption over time, and it has to be recognized as the benefit of the liberalization.

We investigated the trend in penetration of foreign banks into the Korean market. Given the regulatory restriction, it has been confirmed that the extent of the penetration remained limited. Foreign banks in Korea have been engaged in foreign currency lending business to Korean corporations and banks, which was funded by their parent offices. Since the share of foreign bank has been too minor to bring about serious changes in charter values of Korean banks and the competitive environment of the Korean banking sector, we focused on their behavioral patterns. We found that their foreign currency lending was neither pro- nor counter-cyclical in contrast to their Korean currency lending which was pro-cyclical. Also interestingly, foreign currency lending of Korean banks turned out to be pro-cyclical.

Foreign banks in Korea were able to provide rather stable foreign currency lending service irrespective of macroeconomic fluctuation of the Korean economy. Foreign banks have more cushions to absorb cyclical shocks specific to the Korean economy than Korean banks. Hence, we argue that allowing commercial presence of foreign banks should be expected to be beneficial in this regard.

It is too early to make a comprehensive assessment of the impact of the liberalization of banking service. However, we conjecture that the ongoing restructuring and entry of foreign banks will make the domestic banks more competitive. In order to survive, management should be independent and efficient. In other words, The Korean banking services should establish the responsible management system and asset soundness. Also, financial infrastructure should be established through improvements in accounting, credit ratings and payment system. The range of banking services needs to be enlarged through development of various products and management skills, along with M&As and joint business with other banks. Consistent market liberalization will more rapidly drive financial globalization. This will lead to the advanced financial institutions as in developed countries.

Effects of NAFTA on US, Canada, and MexicoWon-Ho Kim·Moonsung Kang·Suyeob Na·Jin O Kim

The structure of the economic environment in North America has changed markedly over the last decade. Canada, which had long avoided free trade with the United States, pushed for the Canada-U.S. Free Trade Agreement (CUSFTA) which came into effect on January 1, 1989. In addition, the North American Free Trade Agreement (NAFTA) went into effect on January 1, 1994. The NAFTA has become one of the world`s best-known free trade agreements. It is also significant on the reason that for the first time ever, a dveloping country sat down with two industrialized countries and created an agreement that opens its economy to the challenges and opportunities of the North American marketplace. Seven years ago, three countries were in the midst of vigorous debate about the economic future of their own country. They debated whether they should open their economy to greater competition and secure a new set of rules to govern their trade relations with each other. The purpose of this research is to compare the real effects of the NAFTA with the economic outlook proposed before the NAFTA.

As a result of the NAFTA, trade volume in North America has incredibly increased. This feature is compatible with the main purposes of the NAFTA: (1) elimination of barriers to trade and (2) promotion of fair competition. The trade pattern in this region indicates that Canadian and Mexican trade-dependence on US is increasing in the recent years. Thus we expect that a rise or fall of US economy would directly affect Canadian and Mexican economies.

Fighting Against Laundering and Illegal Captial Flight in Korea-Case Study of FIUs and Policy Directions -
Hyungdo Ahn et al.

For the last 10 years, major countries around the world have endeavored to establish money laundering prevention system domestically on the one hand, and to pursue mutual cooperation by launching international fora on money laundering and encouraging other countries to adopt FIU system on the other. International fora such as UN, OECD, and Egmont Group have recommended the nations to introduce money laundering prevention system through the legislation of Anti-Money Laundering Act and the establishment of a Financial Intelligence Unit. In particular, OECD had set up the Financial Action Task Force on Money Laundering(FATF) in 1989 and all the OECD member countries except Korea and Poland have been participating in the activities. In 1995, Egmont Group has been formed to boost the cooperation among FIUs around the globe.

Korea will enforce the second-stage foreign exchange liberalization beginning January 2001. The former 'Foreign Exchange Management Act' took the role of preventing the flow of 'bad' money originated from the crimes and illegal capital flight. However, the implementation of the second-stage foreign exchange liberalization meausures would ease the manipulation resulting in the increase of money laundering and illegal capital flows. Therefore, Korea is in urgent need to introduce the FIU system.

This report intends to draw the blueprint for the Korean FIU system. The report surveys the current status of 21 FIUs around the world and proposes the FIU system which is appropriate to Korean society. Besides the enactment of Anti-Money Laundering Act, Korean should introduce three elements. First, a Financial Intelligence Unit(FIU) should be established to collect, analyze, and provide information on illegal financial transactions. Second, Suspicious Transactions Reporting System(STRS) should be introduced to require financial institutions to make reports on suspicious transactions. Third, financial institutions should establish internal reporting systems and training programmes to encourage and facilitate the reporting.

Since the South-North Summit, financing North Koreas economic development has become a major issue for the future of economic cooperation between the two Koreas. In order to tackle more systematically the problem of financing the expenses and draw implications for Korea, this study analyzes the experiences of the countries that have attempted a transition to the market economy system such as China, Vietnam and East European countries. Having explored the possibility of applying the lessons from the cases, this study suggests concrete plans for North Korea based on its realities and circumstances.

In the case of China in raising economic development expense, it analyzes Chinese policies toward the introduction of foreign capital, focusing on the interactions and linkages among foreign capital, the reform and open-door policy, and development strategies during different periods. The analysis of foreign investment in China examines the degree of its influence on Chinese economic development. China's reform and open-door policies were promoted fradually, unlike the countries of the former Soviet Union and Eastern Europe and succeeded in inducing foreign capital by establishing the special economic zones and open economic areas mostly in costal areas.

In the case of foreign capital importation in Vietnam, it begins with an examination of Vietnam's foreign capital inducing strategy, focusing on the reform process and policies on foreign capital, and analyzes the actual cases of foreign investment in Vietnam. Vietnam has promoted a positive policy for foreign investment since the adoption of the reform and open-door policy in 1986. However, there are still many constraints on improving relations with international financial institutions and Western countries, especially because of the US-led economic sanctions. With Vietnam's withdrawal from Cambodia in 1989, however, the Western countries began their advance into Vietnam in earnest, and the United States resumed dialogues with Vietnam for a peace settlement in Cambodia and Indochina in August 1990. The level of economic sanctions has been lowered as the United States offered a timetable for the normalization of diplomatic relations with Vietnam under the condition that the American MIA issue be settled.

East European countries pursued an aggressive transition to a market economy in the late 1980s and have achieved positive results in economic reforms since the mid 1990s. In the cases of East European countries, it first examines the process and characteristics of the economic reforms in East European countries, and makes a generalization about the foreign capital importation policies adopted and carried out to finance the expenses for economic development. Based on the categories of foreign investment, foreign capital importation in each country is analyzed in a concrete way.
The countries in transition undergo a comparable process of economic transformation. The directions of reform, however, vary according to the specific conditions such as industrial structures and international dependency. There are also differences in the methods to attract foreign investment required for the economic transition. China, characterized by a low level of industrial development and abundant resources, pursued an aggressive policy to attract foreign capital by establishing special economic zones and open economic areas. In contrast, the resource-poor countries in Eastern Europe which had attained a high level of industrialization, attracted international public funds from the early stage by implementing the IMF restructuring programs. The cases suggest policy directions for North Korea regarding how it should finance the development funds needed for economic recovery or possible reform and opening.

The policy that North Korea currently employs in order to induce foreign investment is based on the establishment of special economic zones where the rules of a market system are allowed. The outcome, however, has been deplorable for the last eight years since the adoption of the policy. Considering the limited scope of overseas national capital inflows, in contrast to the large inflow of overseas Chinese capital invested in Chinas special economic zones, it is not advisable for North Korea to finance its development expenses through the special economic zones. It is more realistic to attract international public funds in the process of restructuring North Koreas overall economic system and establishing and applying nationwide the rules of a market economy.