As the world moves rapidly towards globalization in the 1990s, the movement towards economic cooperation in the Northeast Asian Region steadily gains momentum. Although interest in economic cooperation in the Northeast Asia Region has been elevated due to the rapid progress of regionalism in the world economy, political instability and security issues in the region have impeded the progress of the movement towards actually achieving economic integration on the same level as, and similar to either the EU or NAFTA. However, since the attitude of the Northeast Asian Countries has changed since the coming of the Asian Financial Crisis, it has become necessary to develop a framework for Northeast Asian Economic Cooperation.

This paper searched for economic cooperation strategies with a focus on Investment Cooperation among the Northeast Asian Countries in the context of Economic Cooperation issues.

The first priority of Investment Cooperation in NEA is to enhance intra-regional investment between Korea, China and Japan. Differing from other regional characteristic, of the NEA investment relation, is that a one-way flow has dominated investment. Japan has unilateral relationships with both Korea and China, and Korea's FDI relationship with China is also unilateral. The core issue of the facilitation of intra-regional investment will be to develop a production specialization in the region. This could be realized through transfer of an industry which lost comparative advantages, from Japan to Korea and China, or from Korea to China.

Another objective of Investment Cooperation in NEA is to establish the Northeast Asian Investment Area. With the prospect of NEA economic integration lurking in the future, a cooperative approach towards FDI inducement into NEA will have long lasting individual and common consequences. The concept of the Northeast Asian Investment Area can be designated as the development of a regional production network by multinational corporations.

The third objective of Investment Cooperation in NEA is to develop a framework for the common utilization of resources. A representative example would be a joint investment project involving the construction of intra-regional infrastructure.
Coordinated policy measure need to be develop to enable enhanced investment cooperation in Northeast Asia. Each of the Northeast Asian countries has already adopted many domestic policy measures to support overseas investment as well as to encourage foreign direct investment. By using these measures as a foundation, we may then develop policies along regional lines with regards to investment cooperation. Possible policy measures may include: 1) information and technical support, 2) financial assistance, 3) investment protection, 4) deregulation, and 5) investment incentives.
The policy measures for investment cooperation in NEA may be grouped into short, middle and long-term strategies. The short term(by the year 2000) strategies may include construction of the Northeast Asian Investment Information Network, expanding upon financial support mechanism and further developing protection for investment projects consistent with the objectives of investment cooperation in NEA.

As midterm(by the year 2005) strategies, we suggested drawing up the NEA Investment Protection Agreement, reviewing the current domestic investment barriers as a starting point for investment liberalization in NEA and establishing the NEA Investment Fund to support investment within the region.

The long term (by the year 2010) strategies may include concluding the NEA Investment Cooperation Agreement, which provides 3-party joint incentives to investment projects, establishing the NEA Development Bank and setting up the principles of the NEA Framework on Investment, which assumes a free investment area of NEA. In the long run, the Treaty will be incorporated within the Framework Agreement on ASEAN Investment Area(AIA) to be developed into the East Asia Framework on Investment.

The role and importance of overseas Chinese capitals have attracted more attention in the regional and world business circles since the overall economy in the East Asia has made a remarkable progress and China's economy has rapidly developed in recent years. Especially, the economies in China, Hongkong and Taiwan have attracted even a keener attention as they were able to maintain their traditional stance during the recent Asian economic crisis, which inflicted a sever damage to all the other Asian economies.

Overseas Chinese capitals have steadily grown by positively encountering the ever-changing economic surroundings based on their social, cultural and historical backgrounds. According to their traditional orientation toward safety, they have grown into large business groups through investments focused on real estate and financing business. However, to comply with the recent changes in external economic conditions and internal management environment the pursue diversification of their business lines.

Under these circumstances, Korean business companies should consider the possibility of utilizing the widespread network of business connections and the ability of raising funds on their counterpart overseas Chinese capital.
The best candidates for strategic business alliance with overseas Chinese capital could be selected among the following business lines. First of all, the financing businesses will be able to contribute to Korean Financial businesses, currently under a comprehensive and extensive reorganization. Especially, strategic alliance with overseas Chinese capital in financing business lines will contribute to the successful restructuring of Korean financing sector.

The second candidate will be real estate development business. In the past, the overseas Chinese capital invested in cheap land where they built houses and small towns for immediate profit. In recent years, however, they have switched to long-term investment in social infrastructure. They have actively participated in large-scale construction projects in China. The Korean companies will have more opportunities in entering the Chinese construction market under a consortium with the overseas Chinese capital.

The third promising area for collaboration is the IT industry. Considering the IT industry has a very strong growth potential, Korean companies should do feasibility study for strategic business alliance with overseas Chinese capital. Most of all, it would be quite feasible for us to participate in wire and wireless telecommunications projects in China by forming a consortium with the overseas Chinese capital. Especially, When our technical experiences are coupled with ample funding capacities of the overseas Chinese capital, we could accomplish bigger economic achievement.

As mentioned above, the strategic business alliance with overseas Chinese capital such as Hongkong, Taiwan and Southeast Asian's Chinese capital, will be a effective method to enter Chinese market.

Two years have passed since the Korean government agreed on the structural adjustment program with the IMF on December 3, 1997. As a sequel to 'Adjstment Reforms in Korea since the Financial Crisis: Volume I,' this volume analyzes the road which the Korean economy has followed, during the past two years, on the basis of the IMF Letters of Intent, from the second half of 1998 to the end of 1999. However, our efforts are not merely record keeping. We explore the future policy direction in which the Korean economy should move forward by thoroughly evaluating the policy measures actually employed under the IMF program.

The policy consultations with the international financial institutions such as the IMF and the World Bank, were extremely valuable to the containment of the crisis and to the improvement of economic fundamentals. However, it should not be overlooked that the Korean government sustained its ownership of the program since the 6th letter of intent in May, 1998. The Korean government clearly recognized the currency crisis stemmed, in large part, from the structural problems, whether government-induced or not, which were not on par with market disciplines. In this regard, the Korean government made serious efforts to revamp the Korean economy and to recover the soundness of the economic fundamentals.

In the new millennium, we should not allow the recurrence of economic crisis. We have already paid too high a cost in lessons learned from the crisis. However, we still have many grave challenges to cope with. While Korea's sovereign credit rating has been upgraded beyond the investment grade, private commercial banks still remain below that level. The potentially damaging assets of the investment and trust companies were not sufficiently cleaned up. In conclusion, Koreans should not give in to any sense of euphoria or self-complacency, again, the reforms are not yet complete. Rather, they should look into ways through which the economic participants - consumers, producers, businesses, labor, and the government - can come together to create the very foundation of a more dynamic and competitive economic system. Thus far, the Korean people and the government have demonstrated that they are serious about economic reform. Koreans should take this one step further and find ways to advance to the level of an advanced economy.

A New Strategy for Northeast Asian Economic Cooperation

This study proposes the formation of the Northeast Asian Economic Cooperation Council to discuss comprehensive economic cooperation and major economic issues between Korea, Japan and China.

In order to meet the challenge of rising regionalism, it is imperative that the central governments of the region involve themselves more actively in Northeast Asian Economic Cooperation. Given the diversity of Northeast Asian countries, it seems to be more realistic to begin with the central governments of the three major countries in terms of economic size.
However, even among these three countries, the prospects for reaching a regional trade agreement such as the North American Free Trade Agreement (NAFTA), let alone a more advanced economic integration type like the EU, are quite dim in the foreseeable future. Thus, Korea, Japan and China must try to gain as many benefits of economic integration as possible through the formation of a regional economic cooperation body.

Some people might argue the usefulness of the Council, because basically it does not go beyond APEC where all three countries are already members. Indeed, this Council would not produce any legally binding decisions. Rather, it would be a loose economic cooperation entity like APEC, or even a more informal forum than APEC. However, unlike APEC, which has 21 members and covers diverse geographic areas, it can function more effectively concentrating on the regional issues that all three countries are interested in. In this sense, the Council will play a supplementary role to APEC.
It seems to be appropriate that the Korean government propose the formation of the Council. Among the three countries, Korea is positioned in the intermediate position both in terms of geography and economic development. Moreover, unlike Japan and China, nobody would suspect that Korea might seek hegemony in the region.

Prior to the launching of the Council, it is necessary to develop an awareness of the need for, as well as a consensus with regard to the establishment of, the Council. In order to attain these goals, a joint study conducted by the research institutes of the three countries, on Northeast Asian Economic Cooperation, seems to be in order.

The type of exchange rate regime in emerging economies has been at the center of economic debate since the Asian crisis. The choice of exchange rate regime has been regarded as critical for emerging economies to achieve sustainable economic growth, and also has important implications for the world economy. In principle, the most appropriate regime for any given economy may differ, depending on the particular economic circumstances, such as the degree of integration into the world economy. Since economic circumstances vary over time, the most appropriate regime for any given country may also change over time.

This paper examines a measure of productivity, the total factor productivity (TFP) growth rate, for both major Korean industries and disaggregated manufacturing sectors. Initially, focus is placed on attaining credible estimates of the productivity measure by using consistent data. Next, interpretation of the estimates are given in an attempt to find a relationship between TFP growth rate and other factors related to production function and industrial structure change. It is followed by an analysis to verify if any differences in TFP growth rate exist among various manufacturing sub-sectors as well as among major industries. Subsequently, this paper attempts to explain why such differences in TFP growth rate, if any, arise. Finally, the relationship between TFP growth rate and export growth rate is examined.

The annual average rates of change in the TFP were calculated as having been relatively high in industries such as (4) Electricity, gas and water (4.89%); (2) Mining and quarrying (3.10%); and (7) Transportation, storage and communication (0.70%). These three sectors have shown relatively rapid increases in investment. In contrast, TFP growth rates were calculated as having negative values in (1) Agriculture, forestry and fishing (-6.62%); (5) Construction (-6.17%); (8) Finance, insurance, real estate and business services (-3.31%); (6) Wholesale and retail trade, restaurants and hotels (-1.86%); and others. Among disaggregated manufacturing sectors, TFP growth rates were calculated as having been relatively high in (h) Electric and electronic products (7.24%); (g) Metal products and machines (5.18%); and (i) Transportation equipment (5.02%). The common characteristics of these sectors were that they were capital and/or knowledge intensive sectors. On the contrary, TFP growth rates were calculated as having low and even negative numbers in labor-intensive traditional manufacturing sectors with low value added. In sum, the high growth rates of TFP in most of the manufacturing sectors were attributed to the fast increase in investment.

TFP growth rates and structural changes seem to have been closely inter-related. Resources, the factors of production, had moved from the primary sectors to the manufacturing sectors of traditional labor-intensive industrial goods and then to the manufacturing sectors of chemical & heavy industrial goods.

The correlation coefficient between the TFP growth rates and the adjusted export growth rates was calculated as being 0.93, which suggests that the two variables were highly correlated. With that result, we might conclude that TFP growth rates had a close relationship not only with technological factors, as denoted in the production function, but also with market demand conditions, especially for exports, for East Asian emerging economies with relatively restricted domestic market demand. Therefore, in order to formulate more complete industrial policies, not only technological characteristics but also market demand conditions should be fully considered.

The type of exchange rate regime in emerging economies has been at the center of economic debate since the Asian crisis. The choice of exchange rate regime has been regarded as critical for emerging economies to achieve sustainable economic growth, and also has important implications for the world economy. In principle, the most appropriate regime for any given economy may differ, depending on the particular economic circumstances, such as the degree of integration into the world economy. Since economic circumstances vary over time, the most appropriate regime for any given country may also change over time.

The Korean government responded to the currency crisis by adopting a free floating exchange rate regime and by more actively pursuing capital account liberalization. As a natural consequence, we may expect that the foreign exchange market is more likely to be linked to other financial markets, such as stock and bond markets. The empirical methodology to uncover inter-relationships among three variables is Granger causality tests and variance decomposition. Empirical results are, however, different from our conjecture: any statistically significant empirical relations are not found among three variables after the crisis. The foreign exchange market has been relatively stable during the post-crisis period, while the stock market has been quite volatile. Since the bond market in Korea is not fully developed and credit risks of corporate bonds are still high, foreigners are rather reluctant to participate in the domestic bond market. One important indication, to support our presumption that the Korean government has intervened in the foreign exchange market, is the stability of exchange rates relative to that of stock prices.

Under the free floating exchange rate regime with free mobility of capital flows, why has the Korean government intervened in the foreign exchange market? We would like to focus on two reasons. One is related to the vulnerability of financial markets in Korea. In order to build a buffer to this vulnerability, the Korean government continued to accumulate foreign reserves even during the post-crisis period. While financial and corporate restructuring were still underway, events of Daewoo's bankruptcy and resultant ITC troubles increased the vulnerability in Korea's financial markets. To counter the financial vulnerabilities, the Korean government has undertaken various measures. Also recognizing the fact that the currency turmoil resulted in financial panic in Korea just two years ago, the Korean government is now endeavoring to strengthen the ex ante defensive measures.

A certain level of foreign reserves can be geared into a set of ex ante defensive measures. However, the recommended level of foreign reserves, which is equivalent to the value of three month imports, will not be adequate in times of free capital mobility. Taking short-term capital movements and possible reversals into account, it can be suggested that a minimum level of foreign reserves, which can finance short-term external liabilities plus capital outflows, should be maintained.

The Korean government is keenly aware of the important lesson from the recent crisis that, in the age of global financial integration, the financial sector is increasingly as important as the real sector. Based upon this recognition, the Korean government will pursue financial sector restructuring on a continuous basis. However, it will take several years to develop healthy financial institutions and markets such as those in industrial countries. A more flexible exchange rate system will definitely reduce the required level of foreign reserves, only if Korea has much sounder financial systems. The other important justification for the government's intervention in the foreign exchange market can be found in the vulnerable and underdeveloped infrastructure of the foreign exchange market. As the free floating exchange rate regime was introduced, the Korean government also endeavored to develop the infrastructure of the foreign exchange market through various means. First of all, policy makers pointed out the problem that market participants are limited in Korea's foreign exchange market.

In order to broaden the foreign exchange market, the government has lifted various regulations on the speculative trading. If the foreign exchange market operates freely from any intervention, volatility will increase and the necessity of hedging and speculative demand will increase. Volatility may be a necessary evil so as to induce more market participants. In this regard, it might be argued that the government should allow for some degree of volatility as a natural outcome of the free floating exchange rate regime, since foreign exchange market intervention seems truly inconsistent with the government's plan for foreign exchange market development. Nevertheless, there are many other obstacles in developing a more liquid foreign exchange market. That is to say, the government's non-intervention exchange rate policies will not sufficiently increase the volume of daily turnovers in Korea's foreign exchange market.

The basic transaction fees in the interbank market are surprisingly cheap: only KRW 4,000 per USD one million for spot, forward, and swap (beyond one month). The major factor restraining the market access of domestic banks into the interbank market is the inadequate provision of credit lines. While foreign branches play a role as market makers, domestic banks as foreign exchange traders do not receive enough credit from those foreign branches because the credit ratings of most domestic banks are still below non-investment grade. This limited access of domestic banks to interbank forward or swap transactions has even aggravated foreign exchange trading in the customers markets. Since domestic banks have to square the foreign exchange positions through, such as, swaps, they have been reluctant to provide forward contracts to domestic companies. Most companies should provide some form of guarantee such as deposits or securities. This extremely limited accessibility to the currency hedging markets has obliged the government to intervene in the foreign exchange market to stabilize exchange rate fluctuations. Nevertheless, the volume of transactions in the third quarter of 1999 has increased almost twice as much as that in the same quarter of 1998. This partly reflects the improvements in the creditworthiness of domestic companies.

Dr. Yung Chul Park is a professor of economics at Korea University. He previously served as the chief economic advisor to President of Korea, as president of Korea Development Institute, as president of the Korea Institute for Finance, and as a member of the Bank of Korea's Monetary Board. (ycpark@soback.kornet21.net)

Dr. Chae Shick Chung, associate research fellow at Korea Institute for International Economic Policy, earned his Ph.D in Economics from Duke University. His field of concentration mainly covers empirics of foreign exchange markets and foreign exchange regulations. (cschung@kiep.go.kr)

Dr. Yunjong Wang, Director of Department of International Macroecnomics and Finance at Korea Institute for International Economic Policy, earned his Ph.D from Yale University. His field of concentration mainly covers liberalization of trade, foreign direct investment, and capital markets in Korea. (yjwang@kiep.go.kr)

The main purpose of this study is to review the recently established Koeln Debt Initiative and to draw policy implications for the Korean government. The Koeln Debt Initiative, initiated by the G-7 in June 1999, extends and deepens in many important respects the HIPC (Heavily Indebted Poor Countries) Debt Initiative launched by the Bretton Woods institutions, the World Bank and IMF, in 1994. The Koeln Initiative is very likely to be a main framework for future debt relief mechanism of the Paris Club.

Under the Koeln Initiative, Korea would share the burden of debt relief in accordance with the amount of previous lending to the eligible poor countries. According to our estimates, the total amount of debt relief expected by Korea under the Initiative would amount to at most US$ 6 million in net present value terms. In addition to the burden, Korea has pledged to contribute US$ 20 million to the HIPC Trust Fund at the World Bank and to the special account at the IMF. Although, depending on possible change in cut-off dates for eligible debts, the amount of Korea's burden may change, it should not be too much for the world's 12th biggest economy to pay for good reason.

The study concludes that rather than passively following or seeking to evade the international trend of alleviating debt burden of heavily indebted poor countries, the Korean government should proactively approach the issue. It should actively consider participating in the Paris Club on a permanent basis.