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7/30/2019 Kei Koreaseconomy Section04
1/20
KOREAS ROLE IN ASIAN INTEGRATION - 79
FINANCIAL INTEGRATION IN ASIA:
DEVELOPMENT AND KOREAS ROLE
By Park Young-Joon
Abstract
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liberalization has made progress, Asian countries have experienced sudden stops or sharp capital reversals due to external shocks
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into investment in the region by developing regional bond markets. Gathering regional momentum, Koreas role as an honest
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KOREAS ROLE IN ASIAN INTEGRATION
7/30/2019 Kei Koreaseconomy Section04
2/20
80 - KOREAS ECONOMY 2012
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along with real economic integration through the intra-regional
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ERUGHU FDSLWDO RZV HVWDEOLVKLQJ UHJLRQDO QDQFLDO VDIHW\nets, and developing local currency bond markets.
Asian economic regionalism has been driven by market-based
forces, rather than by a grand blueprint of economic integra-
tion. In fact the Asian crisis triggered regional collective initia-
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revealed what Asia has been lagging behind in terms of its
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integration has been supported by the rationale that it achieves
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as well as ultimately promoting regional economic growth.
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realized the absence of regional mechanisms which could
have helped avoid the crisis and be used to prevent future
crises. They also understood the intrinsic weakness of AsianQDQFLDOV\VWHPVDQGWKHLUSRRUGHYHORSPHQWRIERWKUHJLRQDO
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ORJXH DPRQJ$6($11 countries, they were able to push
forward several initiatives for regional cooperation as part of
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dollar liquidity support to member countries through currencyswaps in response to urgent short-term liquidity shortages
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develop local bond markets for recycling regional capital and
to mitigate the double mismatch problem.
Extent of Financial Integration in East Asia
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behind its trade and real-side economic integration. Asias
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link. This might be attributed to the lack of well-functioning
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through regional trade agreements, the region has also begun
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institutional capacity to resolve cross-country contagion of
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systematic risk to Asian economies. In fact, Asian countries
experienced the risk of sudden stops or sharp capital reversalsdue to external economic shocks, currency instability and the
double mismatch problem.
Recently the ADB warned that government authorities
of emerging Asian economies should be ready to respond
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potentially leave countries vulnerable to sudden reversals
in portfolio investment and to currency instability. The huge
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the currencies of emerging economies. Recent surges in
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advantage of earnings differential between emerging Asian
markets and mature markets.
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7/30/2019 Kei Koreaseconomy Section04
3/20
KOREAS ROLE IN ASIAN INTEGRATION - 81
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the recent trend of the cross-border portfolio investments of
eight emerging Asian countries.2(PHUJLQJ$VLDVIRUHLJQSRUW-folio investments are increasingly being invested in the region,
with intra-regional portfolio holdings rising from 17.8 percent
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has been traded within the region and held by regional inves-
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total foreign portfolio has declined from 47.3 percent in 2004
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integration and cross-border openness.
Regional Financial Safety Nets
Overview of CMI and CMIM
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help measure against the recurrence of a similar crisis in the
future. The CMI was designed to address short-term liquidity
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bilateral swap arrangements to address short-term liquid-
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ministers took the framework of the existing CMI and moved
toward its multilateralization in May 2009, and the CMIMZDVQDOO\PDGHHIIHFWLYHRQ0DUFK7KHPXOWLODW-
eralized CMI provides emergency liquidity support from the
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is no direct and immediate impact on the member countrys
international reserves.
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the development of local bond markets. Future progress on its
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tion in the region and contribute to the development of both
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CMIM and ESM
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to approve three lending facilities for euro area member
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billion euro support package for Greece, approved on May
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6WDELOLW\)DFLOLW\()6) 5 with an amount of 440 billion euros,
supplemented with a 250 billion euro IMF commitment.
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-80
-60
-40
-20
0
20
40
60
80
100
120
Japan China Korea
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Indonesia
2004 2005 2006 2007 2008
Malaysia SingaporePhilippines Thailand
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0
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600
800
1000
1200
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1600
Source: Coordinated Portfolio Investment Survey, IMF
2004 2005 2006 2007 2008 2009
Emerging Asia and Japan USA Europe Rest of the World
7/30/2019 Kei Koreaseconomy Section04
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82 - KOREAS ECONOMY 2012
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exceptional circumstances beyond the member states
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crisis resolution mechanism, much like the CMIM. However,
while the purpose of the CMIM is to resolve short-term foreign
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aims to overcome a solvency crisis by providing euros.
Accordingly, the CMIM conditionality requires no capital
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euro area countries.
New ASEAN+3 Economic Surveillance Mechanism
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lance, innovation was introduced within the CMIM frame-
work by establishing the new surveillance unit AMRO. Its
mandate includes monitoring potential risk vulnerabilities and
Table 1 &0,0&RQWULEXWLRQVDQG3XUFKDVLQJ0XOWLSOH
ContributionsPurchasing Multiple Voting Power (%)
USD (Bil.) Share (%)
China 38.4
Exc. HK
34.2 32.028.5 0.5 25.43
HK 4.2 3.5 2.5 2.98
Japan 38.4 32.0 0.5 28.41
Korea 19.2 16.0 1.0 14.77
Plus Three 96.0 80.0 - 71.59
Indonesia 4.552 3.793 2.5 4.369
Thailand 4.552 3.793 2.5 4.369
Malaysia 4.552 3.793 2.5 4.369
Singapore 4.552 3.793 2.5 4.369
Philippines 4.552 3.793 2.5 4.369
Vietnam 1.00 0.833 5.0 1.847
Cambodia 0.12 0.100 5.0 1.222
Myanmar 0.06 0.050 5.0 1.179
Brunei 0.03 0.025 5.0 1.158
Lao PDR 0.03 0.025 5.0 1.158
ASEAN 24.0 20.00 - 28.41
Total 120.0 100.0 - 100.0
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trends, as well as minimizing the moral hazard problem aris-
ing from the crisis resolution function of the CMIM through
short-term liquidity support. It is also important to ensure that
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expected to perform regional macroeconomic surveillance
activities, supplementing the global surveillance activities
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May 2011 and leads the organization for one year of a three-
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was expected to represent Chinas position and to focus on
the IMF link. For example, China proposed that the CMIMs
IMF-delink portion increase to 30-40 percent of its funds from
the current 20 percent. As AMRO becomes effectively opera-
tional, the level of the IMF-linked portion will be reduced.
7/30/2019 Kei Koreaseconomy Section04
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KOREAS ROLE IN ASIAN INTEGRATION - 83
AMRO may not be a perfect substitute for the IMF, but
its role in regional surveillance will complement the work
being done by the IMF. As part of becoming a solid and
well-functioning institution, AMRO is expected to introduce
regional policy conditionality in support of the CMIM,
contribute to a membership enlargement, and introduce crisis
a prevention function in the region.
Introducing Regional Crisis Prevention Function'XULQJ WKH JOREDOQDQFLDO FULVLVFDSLWDO RZV KDYH VKRZQ
volatile behavior especially in emerging markets. However,
despite their relatively sound economic fundamentals, Asian
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is natural to consider a regional crisis prevention function to
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In order to design an effective crisis prevention program,
the following key elements should be considered. First, a
crisis prevention function needs to be equipped with ex-ante
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we need to evaluate a countrys economic status and the
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excessively strict, it would lower the chances of using
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effectiveness uncertain and eventually eliminating the
demand. Considering the trade-off between reducing moral
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and ex-post conditionality. Second, once a swap-requesting
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activation. Third, a regional surveillance unit should prop-
erly function to support the two elements mentioned above.
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of drawing, a surveillance unit should provide appropriate
analyses on regional economic conditions.
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mechanism can be operated as the crisis resolution and crisis
prevention functions.8
That is, the crisis prevention functioncan be augmented to the current crisis resolution function of
the CMIM. If this is the case, a country, showing symptoms
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request liquidity support and its drawing rights are
granted for a designated period of time. According to de las
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duration of six months or less was only for three cases out of
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corresponding demand for short-term precautionary lending.
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refer to the IMF lending facilities for crisis prevention, such as
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Stand-By Arrangement.
In addition, regional policy conditionality by the CMIMframework can be imposed with the aid of AMRO or
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ensure market credibility with a limited amount of resources
and a lack of reserve pooling.
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is to characterize exit strategies from the crisis prevention
function. If a country still requires additional liquidity
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economic problems, rather than showing crisis symptoms.
If this is the case, the crisis prevention function can be
switched to the CMIMs crisis resolution track or be linked
with the IMF lending facility.
Institutional Integration in Asian
Bond Markets
Overview of ABMI and ABFs
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system in the region was a cause of the crisis in 1997. The ABMI
was established in 2003 to develop the Asian bond markets
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local currency bond markets in Asia through recycling savings
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the creation of regional bond markets where bonds are denomi-
nated in regional currencies. It was also expected to mitigate
WKHFKURQLFGRXEOHPLVPDWFKSUREOHPLQ(DVW$VLDFXUUHQF\
and maturity mismatch. In this regard, developing local cur-UHQF\ERQGPDUNHWV FRQVWLWXWHV DQRWKHU DVSHFW RI$6($1
QDQFLDOLQWHJUDWLRQ
The main reason behind the establishment of the ABMI and
$%)VZDVWKHLQWHQWLRQWRDFKLHYHDPRUHHIFLHQWUHF\FOLQJRI
Asian savings into investment in the region by developing local
currency bond markets. The 1997-98 crisis was indeed made
more severe by the absence of well-developed bond markets,
which made Asian companies rely on bank loans and borrow
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84 - KOREAS ECONOMY 2012
foreign ones. International reserves and savings in Asia have
EHHQODUJHO\LQYHVWHGLQWKH86DQG(XURSHDQGWKH\DUHWKHQ
re-invested in Asia. It is known that about 80 percent of Asias
SRUWIROLRLQYHVWPHQWWLOWVWRZDUGDVVHWVLQWKH86DQG(XURSH
$VRI0DUFK$6($1IRUHLJQUHVHUYHVDPRXQWWR
percent of the total reserve in the world, but most of them are still
LQYHVWHGLQDVVHWVRXWVLGHRI(DVW$VLD
$V UHJLRQDO QDQFLDO DXWKRULWLHV UHDOL]HG VXFKZHDNQHVV LQtheir domestic systems, they promoted regional initiatives of
the ABMI and ABFs to develop local bond markets. In fact,
WKH VL]HRIERQGPDUNHWVLQFUHDVHG IURPDERXWRQHIWK RI
WRWDOQDQFLDOLQWHUPHGLDWLRQLQ(DVW$VLDQFRXQWULHVLQ
to approximately one-third in 2010. During the same period,
the share of total outstanding local currency bonds issued in
(DVW$VLDLQUHODWLRQWRWKHZRUOGVWRWDOLQFUHDVHGIURPDERXW
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actions have been taken on particular issues of the initiative.
In particular, bonds were issued in local currencies by multi-
lateral development banks. For example, the ADB issued
VHYHUDOORFDOFXUUHQF\ERQGVLQWKH$'%XQGHUWRRNYH
market-opening transactions in the regions local currency
ERQGVLQ0DOD\VLD&KLQDWKH3KLOLSSLQHV7KDLODQGDQG,QGLD
As well as issuing bonds, the ADB has launched a new and
publicly accessible website, Asian Bonds Online, in 2004 to
share information on regional markets, economies, and compa-
nies. It provides a wide range of information such as taxation,
regulations, bond indices, credit ratings, settlement systems and
secondary market trading.
:KLOH$6($1KDVEHHQLQYROYHGLQGHYHORSLQJORFDOFXUUHQ-
F\ERQGPDUNHWVDORQJZLWKWKH$%0,WKH([HFXWLYH0HHWLQJV
RI(DVW$VLDDQG3DFLF&HQWUDO%DQNV(0($3ODXQFKHGWKH
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in 2003. ABF 1 was mandated to invest in dollar-denominated
VRYHUHLJQERQGV LVVXHGE\HLJKW(0($3FRXQWULHV11 Howev-
er, due to its small size, ABF 1 was expected to have little ef-
fect on the market for dollar-denominated sovereign bonds in
(DVW$VLD
$%)LQWURGXFHGLQZLWKDFDSLWDORIELOOLRQZDV
implemented to purchase local currency bonds from Asian
FRXQWULHV ,W FRQVLVWV RI ERWK D 3DQ$VLDQ %RQG ,QGH[
)XQG3$,)DQGD)XQGRI%RQG)XQGV)R%)3$,)LVDsingle bond fund index investing in local currency sovereign
ERQGV LVVXHG LQ HLJKW (0($3FRXQWULHV )R%) KDV D WZR
layered investment structure in eight single-market funds,
each of which invests in local currency bonds issued in their
own markets.
The ABMI and ABFs have helped the development of
ERQG PDUNHWV LQ (DVW$VLD DQG KDYH UHGXFHG WKH FXUUHQF\
DQG PDWXULW\ PLVPDWFK SUREOHP $FFRUGLQJO\ (DVW $VLDQ
HFRQRPLHVZHUHDEOHWRZLWKVWDQGWKHJOREDOQDQFLDOFULVLV
showing relatively stronger resilience than the U.S. and
(XURSH$ORWVWLOOUHPDLQVWREHGRQHKRZHYHUWRKDUPRQL]H
rules across the region, strengthen market infrastructure,
overcome remaining market impediments, and tighten legal
and regulatory frameworks. While Asian authorities need to
promote their growth to attract more investment in the
region, domestic reforms and regional cooperation initiatives
are especially needed to improve accounting standards, mar-ket infrastructure, and legal systems.
Credit Guarantee Investment Facility
To develop local currency bond markets in Asia, it is essen-
tial to facilitate issuers access to Asian bond markets. This
might require guaranteed credit ratings for local currency bond
investments. Moreover, local capital in Asia is required to
EHLQYHVWHGLQPHGLXPDQGORQJWHUPLQIUDVWUXFWXUHSURMHFWV
that lead to Asian economic growth.12 Therefore, Asia needs
to use a large amount of savings and international reserves
WROOWKHQDQFLDOJDSVDQGWRRYHUFRPHFRQVWUDLQWVLQORFDO
FXUUHQF\QDQFLQJGXHWRWKHODFNRILQYHVWRUVFRQGHQFHLQAsian bond markets.
Strengthening and deepening local currency bond markets can
GHYHORSGRPHVWLFQDQFLDOPDUNHWVDQGXOWLPDWHO\HQKDQFH
UHJLRQDOQDQFLDOLQWHJUDWLRQDQGHFRQRPLFJURZWK%DVHG
XSRQ WKLVUDWLRQDOHLQ$6($1DJUHHGWRHVWDEOLVK
D &UHGLW *XDUDQWHH DQG ,QYHVWPHQW 0HFKDQLVP &*,0
UHQDPHG DV &UHGLW *XDUDQWHH ,QYHVWPHQW )DFLOLW\ &*,)
in 2009, to provide credit guarantees to local currency bonds
issued in the region and to enable them to raise medium-and
ORQJWHUPQDQFLQJLQVWUXPHQWVE\LPSURYLQJWKHFRQGLWLRQV
for issuing bonds. It is expected to facilitate capital marketGHYHORSPHQWDQGWRPDNHWKHUHJLRQDOQDQFLDOV\VWHPOHVV
YXOQHUDEOHWR H[WHUQDOVKRFNV7KHREMHFWLYHRI&*,)LVWR
support the issuance of local currency denominated bonds
in Asia, so as to contribute to Asian economic development
and prosperity through credit guarantee schemes. It is cur-
UHQWO\LQWKHSURFHVVRIQDOL]LQJLWVRSHUDWLRQDOSROLFLHVDQG
business plan, and is expected to start its operations before
the end of 2012. The CGIF will be established as an ADB
WUXVWIXQGZLWKDQLQLWLDOFDSLWDORIPLOOLRQ130DMRULV-
sues regarding the establishment of CGIF, such as business
scope, leverage ratio and country limit, were discussed at
WKH$6($1)LQDQFHDQG&HQWUDO%DQN'HSXWLHV0HHWLQJin May 2011.
The CGIF is expected to have the following effects. First,
high-rated issuers can seek to lengthen the maturity of their
debt issuance and lower-rated issuers can also issue bonds
with the aid of the credit guarantee scheme. Second, member
countries external borrowing costs can be reduced. Third,
credit guarantees for local currency bonds would help re-
YHUVHFDSLWDORXWRZVDQGPDNHWKHUHJLRQDOQDQFLDOV\VWHP
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KOREAS ROLE IN ASIAN INTEGRATION - 85
sound and resilient. Fourth, supports for infrastructure bonds
can serve to provide regional public goods and ultimately lead
to regional economic growth.14 In addition to credit guaran-
WHHVYLDWKH&*,)VRPHLVVXHVDUHFXUUHQWO\SDUWRI$6($1
dialogue, including establishing a Regional Settlement
Intermediary and Asian Bond Standards among others.
Asian Bond Markets Forum
$W WKH IRXUWHHQWK $6($1 )LQDQFH 0LQLVWHUV PHHWLQJ LQ+DQRL LQ0D\ $6($1 ZHOFRPHG WKH SURJUHVV RI
the Asian Bond Markets Forum with the aim of standardizing
market practices and harmonizing cross-border regulations of
QDQFLDOWUDQVDFWLRQV,WLVDFRPPRQSODWIRUPWRIRVWHUVWDQ -
dardization of market practices and harmonization of regula-
tions relating to cross-border bond transactions in the region.
Since its onset, it has become an important forum for bond
market experts from both public and private sectors in the
region. There also has been progress in the technical working
group on legal and regulatory feasibility assessment of the
5HJLRQDO 6HWWOHPHQW ,QWHUPHGLDU\ 56, $QRWKHU SRVVLEOHdevelopment relates to the enhancement of domestic rating
agencies through capacity building programs, as credit rating
DJHQFLHVRI(DVW$VLDQFRXQWULHVDUHRIWHQUHODWLYHO\VPDOODQG
tend to use non-comparable methodologies and benchmarks
in their rating process, needing therefore some form of
standardization and harmonization across the region.15
Challenges of Financial Integration and
Koreas Role
7RSURPRWH$VLDQQDQFLDO LQWHJUDWLRQDNH\SULRULW\ZRXOG
EH ODLG RQ UHJLRQDO QDQFLDO FRRSHUDWLRQ(DUOLHUGLVFXVVLRQRQSURJUHVVWRZDUGQDQFLDOLQWHJUDWLRQZDVDVVHVVHGLQWHUPV
of regional institutional measures. An even stronger degree of
QDQFLDO PDUNHW LQWHJUDWLRQ LV SRVVLEOH LI VLJQLFDQW HIIRUWV
are made toward regional institutional integration. Since it is
not easy to integrate cross-border markets and harmonize
regulations in the region, regional institutional development
LVQHFHVVDU\WRJHQHUDWHEHQHWVIURPHFRQRPLFLQWHJUDWLRQ
7KH UHFHQW JOREDO QDQFLDO FULVLV DFFHOHUDWHG $6($1
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for further regional institutional integration is important,
HVSHFLDOO\ LQ DVD FRFKDLUFRXQWU\ RI WKH$6($1framework. In fact, Korea has been deeply involved in
UHJLRQDOQDQFLDO FRRSHUDWLRQ DQG DOVR VKRZQVWURQJ OHDG-
ership in initiating detailed proposals and cooperative ac-
tions. Many important issues are currently being discussed
DPRQJ$6($1PHPEHUVLQFOXGLQJLQFUHDVLQJWKHVL]HRI
CMIM, increasing the IMF-delinked portion of CMIM,
operational issues of AMRO and surveillance activities,
members opening bank accounts of CMIM in the central
bank, introducing new regional crisis prevention facility,
various issues of Asian bond markets, and regional-global
cooperation with the IMF among others.
7KH $6($1 (53' DLPV WR LGHQWLI\ SRWHQWLDO PDFUR
HFRQRPLFDQGQDQFLDOULVNVSUHYHQWFULVHVPRQLWRUUHJLRQDO
FDSLWDO RZV DQG FXUUHQF\PDUNHWV DQG HQKDQFH VHOIKHOS
VXSSRUWPHFKDQLVPVLQWKHUHJLRQ:KLOHWKH(53'ZDVQRW
VXIFLHQWIRUUHJLRQDOVXUYHLOODQFHDQHZVXUYHLOODQFHXQLW
AMRO, is expected to play an important role towards region-DOQDQFLDOLQWHJUDWLRQ(YHQ WKRXJKWKH (53'EHFDPH DQ
information exchange mechanism on economic conditions
and policies, its non-interference principle was an impediment
to make effective surveillance activities. In general, three
FRPSRQHQWVRI HFRQRPLF VXUYHLOODQFH DUHVXJJHVWHG LQIRU-
PDWLRQVKDULQJSHHUUHYLHZSHHUSUHVVXUHDQGGXHGLOLJHQFH
&XUUHQWO\$6($1 VXUYHLOODQFH LV LQ WUDQVLWLRQ IURP WKH
information sharing stage to the next stage of a more rigorous
scrutiny stage, which must involve due diligence in the future.
7KH(8VUHIRUPRIQDQFLDOVXSHUYLVRU\LQVWLWXWLRQVLQFOXGHV
WKH&RPSO\RU([SODLQSULQFLSOHIRUSROLF\UHFRPPHQGDWLRQV
ZKLFKPDNHVLWDPRUHELQGLQJSHHUUHYLHZSHHUSUHVVXUH,Qthe long-run AMRO should focus on providing the regional
equivalent of IMF multilateral surveillance by moving for-
ward to the effective peer review and pressure stage and due
diligence. This would make AMRO a well-resourced profes-
sional surveillance unit, and introduce a more effective macro-
SUXGHQWLDO VXSHUYLVRU\ IUDPHZRUN IRU QDQFLDO VXSHUYLVLRQ
and integration.
.RUHDKDVWDNHQWKHOHDGLQGLDORJXHZLWKLQWKH$6($1
IUDPHZRUNIRUH[DPSOHLWSURSRVHGWKH$%0,LQ.RUHD
is also expected to exhibit its intellectual leadership in the pro-
cess of establishing a regional crisis prevention mechanism. It
LVSDUWLFXODUO\LPSRUWDQWWRLQWURGXFHWKHUHJLRQDO&3)EHFDXVH
given the stigma from the IMF lending facilities, it would be
SROLWLFDOO\GLIFXOW IRUDQ\JRYHUQPHQWLQ WKHUHJLRQWR VHHN
an IMF program. Moreover, Koreas efforts to coordinate
member opinion on the current issues mentioned earlier will
VLJQLFDQWO\ FRQWULEXWH WR WKHRXWFRPHRI UHJLRQDO QDQFLDO
integration and to continuing its momentum in the future.
In doing so, Koreas role as the honest broker in the
$6($1 IUDPHZRUN LV HPSKDVL]HG )RU H[DPSOH WKH
$6($1 QHJRWLDWLRQ RQ &0,0 FRQWULEXWLRQ VKDUHV ZDV
D HUFH GLSORPDWLF EDWWOH DPRQJ PHPEHU FRXQWULHV ,Q WKHprocess, Korea proposed the mediated settlement on the mem-
bers CMIM contribution shares that became the agreements
QDO RXWFRPH ,W DOVR KDV DQ LPSRUWDQW UROH ZLWK UHJLRQDO
GHFLVLRQPDNLQJ EHWZHHQ &KLQD DQG -DSDQ )RU LQVWDQFH
WKH VHOHFWLRQ SURFHVV RI WKHUVW GLUHFWRU RI$052ZDVLQ-
GHHGDHUFHGLSORPDWLFEDWWOHHVSHFLDOO\EHWZHHQ&KLQDDQG
-DSDQ:KLOH -DSDQSLRQHHUHG WKH LQVWLWXWLRQV GHYHORSPHQW
VHOHFWLQJD&KLQHVH QDWLRQDO DV WKHUVW GLUHFWRUPD\ LPSO\
that China takes the initiative in both establishing AMRO as an
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86 - KOREAS ECONOMY 2012
international institution and setting up its tone and mandate for
future institutional developments. In this regard, Koreas role
in regional cooperation is important for the development of
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instability when domestic markets were opened to foreign
SDUWLFLSDWLRQ7KHJOREDOQDQFLDOFULVLVDIIHFWHG$VLDQQDQ-cial systems in various ways, including a massive decline in
FDSLWDOLQRZV FXUUHQF\YDOXHV DQG DVVHWSULFHV 'HHSHQLQJ
UHJLRQDO QDQFLDO LQWHJUDWLRQ ZLOO SURYLGH PRUH EHQHWV WR
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member countries have to keep their balance between the net
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cost of risk vulnerability and crisis contagion in designing a
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Dr. Park is assistant professor of Economics, College of Social
Sciences at Ajou University.
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7/30/2019 Kei Koreaseconomy Section04
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KOREAS ROLE IN ASIAN INTEGRATION - 87
KOREA AND ECONOMIC INTEGRATION IN EAST ASIA:
THE WAY FORWARD
By Franoise Nicolas
Abstract
,W LV QRZ DZHOOHVWDEOLVKHG IDFW WKDW LQWUDUHJLRQDO WUDGH KDV EHHQH[SDQGLQJ TXLWH IDVW LQ(DVW$VLD LQ WKH DEVHQFH RI DQ\
LQVWLWXWLRQDODUUDQJHPHQWVWRWKDWHQG.RUHDKDVEHHQDPDMRUEHQHFLDU\RIWKLVRUJDQL]DWLRQRIWKH(DVW$VLDQUHJLRQ,QWKHZDNHRI
WKHUHFHQWJOREDOQDQFLDOFULVLVKRZHYHUDQXPEHURIGHYHORSPHQWVVXJJHVWWKDWWKHUHJLRQPD\EHDWDFURVVURDGDQGWKDW
VXEVWDQWLDOFKDQJHVPD\EHH[SHFWHGLQWKHZD\WKHUHJLRQLVRUJDQL]HG$VDWUDGLWLRQDOSURPRWHURI(DVW$VLDQUHJLRQDOLVPDQG
as one of the best-integrated economies in the region, Korea provides an interesting case study. An analysis of Koreas reactions
to the recent changes suggests that the importance of vertically-integrated production networks is likely to be shrinking in parallel
ZLWKDULVLQJUROHRILQVWLWXWLRQDODUUDQJHPHQWV$OWKRXJK(DVW$VLDQHFRQRPLFLQWHJUDWLRQZLOONHHSLWVVSHFLFLW\WKHGHIDFWRDQG
GHMXUHGLPHQVLRQVDUHOLNHO\WREHLQFUHDVLQJO\PXWXDOO\UHLQIRUFLQJZLWK.RUHDDVDNH\SOD\HULQERWKDUHDV
7/30/2019 Kei Koreaseconomy Section04
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88 - KOREAS ECONOMY 2012
Introduction
It is now a well-established fact that intraregional trade has
EHHQ H[SDQGLQJ TXLWH IDVW LQ (DVW$VLD DOWKRXJK WKLV GRHV
not necessarily mean that the region is getting increasingly
inward-oriented1LQWKHDEVHQFHRIDQ\LQVWLWXWLRQDODUUDQJH -
ments to that end. Dynamic intraregional trade accounts for
the strong rate of economic growth in a number of countries
in the region, with Korea as a case in point. In the wake ofWKH$VLDQQDQFLDO FULVLV LQ SDUWLFXODU WKH.RUHDQ
economy managed to recover swiftly thanks to its exports to
rapidly growing China.
+RZHYHUDZLGHO\KHOGFRQVHQVXVYLHZFODLPVWKDW(DVW$VLD
KDV EHHQ JUDGXDOO\ VKLIWLQJ IURP DPDUNHWOHG de facto WR
DQ LQVWLWXWLRQEDVHG de jure IRUP RI UHJLRQDO HFRQRPLF
LQWHJUDWLRQ 6LQFH .RUHD ZDV DPRQJ WKH UVW HFRQRPLHV WR
SURPRWH(DVW$VLDQ UHJLRQDO de jure integration through its
DFWLYH UROH LQ WKH(DVW$VLD9LVLRQ*URXS LQSDUWLFXODU DQG
since it is one of the best-integrated economies in the region, it
provides an interesting case study.
7KHREMHFWLYHRIWKHSDSHULVWRH[DPLQHWKHFXUUHQWVWDWHRI
play and the future prospects of regional economic integration
LQ(DVW$VLDIURPDde facto as well as from a de jure perspec-
WLYHIRFXVLQJRQWKH.RUHDQFDVH7KHUVWVHFWLRQDVVHVVHV
Koreas participation in the regional production networks
as well as its contribution to the institution-based regional
cooperative efforts. The second section starts by highlight-
ing several developments which are likely to deeply modify
WKHHFRQRPLFHQYLURQPHQWLQ(DVW$VLDEHIRUHDQDO\]LQJWKHLU
impacts on Koreas regional strategy and on the future organi-
zation of the region as a whole.
Koreas Economic Integration in East Asia
Korea is Increasingly Integrated with East Asia
$VLVWKHFDVHZLWKDOORWKHU(DVW$VLDQHFRQRPLHVZLWKWKH
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leading to a sharp decline in the relative importance of its other
WUDGLWLRQDOWUDGLQJSDUWQHUVVXFKDVWKH86DQGWKH(87KH
combined shares of these two partners dropped from close to
40 percent in 1990 to about 20 percent in 2010. In contrast, the
VKDUHRI.RUHDVWUDGHZLWK(DVW$VLDURVHIURPSHUFHQWWR48.2 percent over the same period of time. Its exports to the rest
RIWKHUHJLRQURVHIURPSHUFHQWWRSHUFHQWZKLOHWKH
share of its imports coming from the same partners rose from
33.5 percent to 44.4 percent over the past twenty years.
:LWKLQWKH(DVW$VLDQUHJLRQWKHPRVWGUDPDWLFFKDQJHVDUH
the increase in Chinas share as an export destination as well
DVDVRXUFHRILPSRUWVDQGWKHSDUDOOHOGURSLQ-DSDQVVKDUHDV
DQH[SRUWPDUNHWEXWLQWHUHVWLQJO\QRWDVDQLPSRUWVXSSOLHU
&KLQDLVQRZZHOODKHDGRIWKH86-DSDQDQGWKH(8DPRQJ
.RUHDVWRSWUDGLQJSDUWQHUV)LJXUHVDQG
Trade between China and Korea has been growing at an
astoundingly average annual rate of close to 19 percent over
the period 1993-2010, leading to deepening economic inter-
dependence and the trend is still ongoing, with two-way trade
EHWZHHQ &KLQD DQG.RUHDFURVVLQJ WKH ELOOLRQ OLQH LQ
2011. As a result the share of Koreas exports going to China
more than doubled, rising from about 10 percent in 2000 toclose to 25 percent in 2010, while the share of its imports from
&KLQDGRXEOHGIURPWRSHUFHQW7RGD\&KLQDLV.RUHDV
ODUJHVWH[SRUWGHVWLQDWLRQLWKDVEHHQWKHFDVHVLQFHZKHQ
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DKHDGRI-DSDQVLQFH
The dynamism in Sino-Korean trade has obviously to do with
Chinas stellar economic growth and hence with its rising im-
portance as a trade powerhouse and as an expanding market.
Figure 1.RUHDV([SRUWVE\'HVWLQDWLRQ 1990-2010
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Hong Kong Singapore China Other AsiaJapanEUUS
Source: Authors calculation based on IMF Direction of Trade Statistics
Figure 2Koreas Imports by Country of Origin,1990-2010
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Source: Authors calculation based on IMF Direction of Trade Statistics
Hong Kong Singapore China Other AsiaJapanEUUS
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KOREAS ROLE IN ASIAN INTEGRATION - 89
However, the calculation of Koreas export bias with re-
spect to China2 suggests that exports to this country were
exceptionally dynamic, at least until recently. Although still
high, the indicator has been dropping lately after reaching
a peak in 2005. This suggests that Koreas exports to China
DUHJUHDWHU WKDQH[SHFWHGEXWGHFUHDVLQJO\VR )LJXUH2Q
WKH LPSRUW VLGH WKHELDV LQGLFDWRU LVPXFK ORZHU DOWKRXJK
VOLJKWO\ ULVLQJ DW DERXW7KHVH UHVXOWV UHHFW DQDV\P-
metry in Sino-Koran trade, with greater than expected Kore-an exports to China, while its imports are more or less in line
with expectations.
Another way of gauging whether a trade relationship is
greater than expected is to resort to a gravity equation. The
estimation helps determine what can be seen as the poten-
tial trade between a given pair of countries. As a next step,
FRPSDULQJWKHWWHGYDOXHVZLWKWKHDFWXDOYDOXHVLQGLFDWHV
whether there is still an untapped potential or not. The evolu-
WLRQKLJKOLJKWHGHDUOLHULVFRQUPHGE\WKHUHVXOWVRIDJUDYLW\
equation estimated for Koreas exports over the period ex-
tending until 2007.3 The estimation suggests that Korea tendsto over-export to China, while the reverse is not true. These
various elements suggest that the China-Korea trade relation
LVDPDMRUEXLOGLQJEORFNRILQWUD(DVW$VLDQLQWHJUDWLRQ
1H[WWR WKHWZR1RUWKHDVW$VLDQ SDUWQHUV$6($1 FRXQWULHV
LQSDUWLFXODU,QGRQHVLD6LQJDSRUHDQG9LHWQDPKDYHHPHUJHG
DVLPSRUWDQWWUDGLQJSDUWQHUV7RGD\$6($1LV.RUHDVVHFRQG
ODUJHVWWUDGLQJSDUWQHUDIWHU&KLQDDQGDKHDGRI-DSDQDQGWKH
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JUDYLW\HTXDWLRQVXJJHVWVWKDW.RUHDVH[SRUWVWR$6($1DUH
greater than expected with very little untapped potential.
Through Regional Production Networks
A detailed analysis of the structure of Korean exports to, and
LPSRUWVIURP(DVW$VLDLQSDUWLFXODU&KLQDSURYLGHVDFOHDUHU
picture of the way the various economies are interlinked.
8VLQJWKH%URDG(FRQRPLF&DWHJRULHV%(&FODVVLFDWLRQDQG
IROORZLQJ*DXOLHUHWDO4 commodities are aggregated by
VWDJHVRISURGXFWLRQDQGDGLVWLQFWLRQLVPDGHEHWZHHQLSULPDU\
JRRGV>IRRGDQGEHYHUDJHVSULPDU\PDLQO\IRULQGXVWU\
SULPDU\LQGXVWULDOVXSSOLHVSULPDU\IXHOVDQGOXEULFDQWV
@ LL LQWHUPHGLDWH JRRGV >SURFHVVHG LQGXVWULDO VXSSOLHV
SURFHVVHGIXHOVDQGOXEULFDQWVSDUWVDQGFRPSRQHQWV
RIFDSLWDOJRRGVH[FOWUDQVSRUWHTXLSPHQWDQGRIWUDQV-
SRUWHTXLSPHQW@DQGLLL QDOJRRGV>FDSLWDOJRRGVDQG FRQVXPSWLRQ JRRGVIRRGDQG EHYHUDJHV DQG
SDVVHQJHUPRWRUFDUVFRQVXPHUJRRGV@
The bulk of Koreas exports to China are intermediate
JRRGVSHUFHQWLQDQGSULPDULO\IRUSURFHVVLQJ3DUW
of these intermediate products may be used to produce goods to
be sold on the Chinese market, but this share is small.
Most intermediate products are processed in China and
H[SRUWHG WR RWKHU FRXQWULHV DV QDO SURGXFWV :KLOH WKHVH
LQWHUPHGLDWH JRRGV ZHUH LQLWLDOO\ LQGXVWULDO VXSSOLHV
RYHUWLPH WKH VKDUH RI SDUWV DQG FRPSRQHQWV FDWHJRULHV
DQGKDVULVHQVXEVWDQWLDOO\WRDFFRXQWIRUDERXWSHUFHQW
$W WKH VDPH WLPH WKH VKDUH RI FDSLWDO JRRGV KDV
DOVRWHQGHGWRULVHWRDFFRXQWIRUSHUFHQWRIWRWDO.RUHDQ
H[SRUWVWR&KLQD,QFRQWUDVWFRQVXPHUJRRGVRQO\DFFRXQW
for less than 3 percent of Koreas exports to China.
Koreas imports from China also had a large portion of
LQWHUPHGLDWH JRRGV EXW WKH VKDUH RI QDO JRRGV DQG LQ
SDUWLFXODU FRQVXPSWLRQ JRRGVZLWK SHUFHQW ZDV ODUJHU
than what is observed for Koreas exports to China. As a result,
.RUHDKDVDGHFLWLQQDOJRRGVWUDGHZLWK&KLQDDQGDVXUSOXV
in intermediate goods.
.RUHDV H[SRUWV WR$6($1 FRXQWULHV VXFK DV0DOD\VLD RU
9LHWQDP LQ SDUWLFXODU DUH DOVR GRPLQDWHG E\ LQWHUPHGLDWH
SURGXFWVSDUWV DQG FRPSRQHQWV RI FDSLWDO JRRGV DV
ZHOODVSURFHVVHGLQGXVWULDOVXSSOLHV 5 These exports are
PDLQO\VHPLFRQGXFWRUV79VFUHHQVHOHFWURQLFJRRGVYHKL-
FOHVVWHHOFKHPLFDOVUHQHGSHWUROHXPSURGXFWVVKLSVDQG
machinery, while its imports from Southeast Asia are mainly
oil and gas, coal, paper, rubber, wood products and garments.
All these observations suggest that Korea, China and a
QXPEHURI$6($1FRXQWULHVEHORQJWRUHJLRQDOSURGXFWLRQ
networks. The existence of a strong correlation betweenKoreas exports to China and Chinas exports to the U.S.
provides further evidence that Korea and China are parts of
the same production chain.
7KHWLJKWLQWHUFRQQHFWLRQVEHWZHHQ.RUHDDQGWKHUHVWRI(DVW
$VLDDUHDOVRUHHFWHGLQWKHDFWLYHLQYROYHPHQWRI.RUHDQ
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relations in 1992, Koreas FDI to China has grown dramati-
cally. Korea invested massively in China in the early-2000s,
Figure 3 Koreas Trade Bias
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Import Bias
ChinaImport Bias
Hong Kong
Export Bias
China
Source: Authors calculation based on IMF Direction of Trade Statistics
Export Bias
Hong Kong
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90 - KOREAS ECONOMY 2012
making it one of the most important sources of FDI in China.
However, according to the latest Mofcom statistics, Koreas
)',LQ&KLQDSHDNHGLQZKHQLWUHDFKHGELOOLRQ
DFFRXQWLQJIRURYHUSHUFHQWRIWRWDOIRUHLJQLQRZVDQG
has been shrinking ever since to drop below 3 percent of total
IRUHLJQ LQRZV 6LPLODUO\ IURP.RUHDV SHUVSHFWLYH ZKLOH
China accounted for close to 40 percent of Koreas total ODI
RXWRZV LQ LW VWDUWHG GHFOLQLQJ LQ WKH IROORZ-
ing years and accounted for merely 14 percent in 2011. InWHUPVRIVWRFN.RUHDODJVEHKLQG+RQJ.RQJ7DLZDQ-DSDQ
Singapore and the United States. These various observa-
tions suggest that Korea may be losing ground in the com-
petition with other economies in the region which are closely
connected to China, namely Hong Kong and Taiwan.
Next to China, Southeast Asia accounts for a non-negligible
GHVWLQDWLRQRI.RUHDQRXWZDUGGLUHFWLQYHVWPHQWDQG$6($1
as a whole ranks as the second largest investment destina-
WLRQ DIWHU WKH86.RUHDQ2',RZV WRWKH UHJLRQKDYH
been particularly dynamic over the past few years, making
.RUHD$6($1V IRXUWK ODUJHVW LQYHVWRU 0RVW RI .RUHDVinvestments are in labor intensive and export-oriented indus-
tries like footwear, garments, electronic and electrical goods
and chemicals.
With Institutional Arrangements Playing a
Marginal Role
Interestingly Koreas dynamic trade with a number of its
neighbors cannot be accounted for by the existence of prefer-
ential arrangements. As explained, Koreas trade is particular-
ly dynamic with China but the two partners have not engaged
in any preferential arrangement.
In contrast, Korea has an FTA with its second largest trading
SDUWQHU QDPHO\$6($1 +RZHYHU WKH.RUHD$6($1)7$
has only been in effect since 2007 for goods and 2009 for
services and the sharp rise in bilateral trade predates the signing
of the agreement and cannot thus be accounted for by the FTA.
The logic underlying Koreas FTA strategy is pragmatic.
7KH FRXQWU\ KDV FKRVHQ WR QHJRWLDWH )7$V ZLWK LWV PDMRU
trading partners, be they neighbors or not. Today, Korea has
)7$V LQ IRUFH ZLWK WKH (8 WKH 86 &KLOH WKH (XURSHDQ
)UHH 7UDGH $VVRFLDWLRQ ()7$ 3HUX 6LQJDSRUH $6($1
and India. It has also been trying to reach an agreement with-DSDQ IRU D QXPEHURI \HDUV .RUHD PD\ WKXV EH VHHQ DV D
champion of bilateral agreements rather than a champion of
regional trade agreements.
So far, there has been a proliferation of FTAs in the region
EXWQRPDMRUDWWHPSWDW FUHDWLQJD IRUPDOWUDGHEORFN0RUH
SURJUHVV PD\ EH REVHUYHG LQ WKH QDQFLDO DUHD ZLWK WKH
establishment of the Chiang Mai Initiative in 2000 followed
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RSHQLQJRIQHJRWLDWLRQVIRUWKHHVWDEOLVKPHQWRIDQ(DVW$VLDQ
Free Trade Area for instance is still to take place.
Looking Ahead: Changing Conditions and
Their Implications for Korea
,QWKHZDNHRIWKHJOREDOQDQFLDOFULVLV*)&DQXPEHURI
developments are likely to impact the economic environment
LQ(DVW$VLDDQGFKDQJHWKHFRQGLWLRQVIRUUHJLRQDOHFRQRPLF
integration and the way Korea interacts with its regional part-
ners, in particular China. The following section examines three
VXFKGHYHORSPHQWVLQWXUQ&KLQDVVKLIWLQHFRQRPLFVWUDWHJ\
the full implementation of the economic partnership agree-
PHQW EHWZHHQ &KLQD DQG 7DLZDQ DQG WKH QHZ SURMHFW RI D
7UDQV3DFLF3DUWQHUVKLS733
Major Factors of Change
Chinas Economic Strategy Shift
In China, the GFC has led to the conclusion that the devel-
RSPHQWVWUDWHJ\ IROORZHGVRIDUZDV GHHSO\DZHGDQG WKDW
it was as a result necessary to reduce the economys vulner-ability to external demand shocks and to move away from too
exclusive a strategy of export-orientation by rebalancing
growth, especially through the promotion of domestic
consumption. Although the awareness of the need to enhance
the expansion of domestic consumption is nothing new in
China and although it had already inspired the eleventh
)LYH
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KOREAS ROLE IN ASIAN INTEGRATION - 91
PHQW(&)$VLJQHGEHWZHHQPDLQODQG&KLQDDQG7DLZDQLQ
-XQH7KHREMHFWLYHRIWKH(&)$LVWRQRUPDOL]HWUDGH
across the straits, in particular by putting an end to the numer-
ous restrictions imposed by Taiwan so far on imports from the
mainland. As the name indicates the agreement merely provides
a framework that outlines the main content of the future FTA,
EHIRUH LQGLYLGXDO DJUHHPHQWV DUH VLJQHG RQ VSHFLF LVVXHV
6RIDUWDULIIVZHUHORZHUHGIRUSURGXFWVFRYHUHGLQWKH(DUO\
+DUYHVW3URGXFW OLVW(+3ZLWKHIIHFWIURP-DQXDU\DQG WKH\ DUH VFKHGXOHGWREHIXOO\HOLPLQDWHGRQ-DQXDU\
2013. Further follow-up talks are expected in the coming
years. For the time being, the liberalization has been rather
asymmetrical with higher commitment level on the part of
mainland China. This agreement is no doubt of importance to
Korea since Taiwan and Korea share a number of similarities
in their specialization patterns and in particular in their export
structures to China. The two countries are export competitors in
China which is their largest export market. Although the agree-
ment is far from being complete, rising competition may be
H[SHFWHGIURP7DLZDQZLWK7DLZDQHVHUPVDEOHWRH[SRUWRQ
more favorable terms.
TPP Project
/DVWO\DUHFHQWLQLWLDWLYHWKH7UDQV3DFLF3DUWQHUVKLS733
is likely to bring about further changes in the way the region
LV HFRQRPLFDOO\ RUJDQL]HG 7KH 733 LV D WUDGH DJUHHPHQW
currently under negotiation between nine countries in three
continents, including Australia, Brunei, Chile, Malaysia, New
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,Q ODWH WKUHH DGGLWLRQDO FRXQWULHV-DSDQ &DQDGD DQG
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aims to establish an ambitious high-quality trade agreementencompassing issues which are not often part of a FTA, such
as intellectual property rights, government procurement,
environmental protection regulations, labor issues as well as
small and medium enterprises.9
$W WKLV VWDJH LW UHPDLQV WREHVHHQZKHWKHU WKLV SURMHFWZLOO
go ahead and whether it may sideline other competing
schemes. From Koreas perspective the importance of the
733OLHV LQ LWV EHLQJ GHVLJQHG WRDOORZ IXUWKHU PHPEHUV WR
MRLQ$VDUHVXOWWKH733FRXOGYHU\ZHOOEHFRPHWKHFRUHRID
IXWXUH JUDQG$VLD 3DFLF WUDGH DJUHHPHQW ,W PD\ WKXV EH
SHUFHLYHG DV D FRPSHWLWRU WR WKH &RPSUHKHQVLYH(FRQRPLF3DUWQHUVKLSLQ(DVW$VLD&(3($RUWKH(DVW$VLDQ)UHH7UDGH
$JUHHPHQW($)7$
Koreas Renewed Contribution to East Asian Integration
6RIDUUHJLRQDOLQWHJUDWLRQLQ(DVW$VLDKDVEHHQSULPDULO\RI
the de facto kind rather than de jurebecause the need for trade
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have reached its limits. China is seeking to develop its own
market rather than being exclusively a production base. This
poses a challenge for its trading partners which need to
DGMXVW WKHLU HFRQRPLF VWUDWHJLHV DFFRUGLQJO\ EXW WKLV PD\
also require a change in the institutional setting with better
structured regional trade liberalization. Korea has to face these
two challenges.
Koreas Approach to China Revisited
If China manages to reduce its dependence on the exportmanufacturing sector and increase its domestic consumption
LQ OLQHZLWK WKH REMHFWLYHV RI WKH WZHOIWK)LYH
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92 - KOREAS ECONOMY 2012
PHQW($)7$DQG&RPSUHKHQVLYH(FRQRPLF3DUWQHUVKLSLQ
(DVW$VLD&(3($ZLWKLQWKHQH[WIWHHQ\HDUV)RUWKHWLPH
being, opening such an ambitious negotiation still seems to
be out of the question. However, the aforementioned develop-
PHQWVPD\KHOSJLYHQHZPRPHQWXPWRWKHSURMHFW
The establishment of a trilateral agreement between China,
-DSDQ DQG .RUHD RU DW OHDVW D ELODWHUDO DJUHHPHQW EHWZHHQ
Korea and China may contribute to pave the way to a broader(DVW$VLDQ)7$EXWDOVRIDFLOLWDWH.RUHDVSHQHWUDWLRQRIWKH
expanding Chinese market. Korea may thus emerge as an
LPSRUWDQWFRQWULEXWRULIQRWWKHPDMRUGULYHURIIXUWKHUde jure
HFRQRPLFLQWHJUDWLRQLQ(DVW$VLD
In the wake of the GFC, Koreas attitude toward a Korea-
China FTA has indeed changed and it is seriously considering
pushing for such an FTA11 in order to move into the Chinese
domestic market further, improve the trade structure, and
establish a stable framework for economic cooperation.
In October 2009, the Ministers of Trade of the two countries
signed an agreement to increase bilateral economic cooperation,DQG6HRXO EHJDQ WRFRQVLGHU VHULRXV WDONVZLWK%HLMLQJDERXW
negotiating a FTA.12$PDMRUUHDVRQIRUWKHFKDQJHLQ6HRXOV
position is the need to respond to Chinas FTA activism, as
H[HPSOLHG E\ WKH IXOO HQWU\ LQWR IRUFH RI WKH &KLQD
$6($1)7$ DV RI -DQXDU\VWDQG RIWKH(FRQRPLF
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is in direct competition with Taiwan on the Chinese market;
ZLWKWKH(&)$OLNHO\WR LPSURYH7DLZDQVFRPSHWLWLYHQHVVLQ
the China market possibly at Koreas expense, the case for a
China-Korea FTA is made more compelling than ever.
It is worth stressing at this stage that an FTA with China was
so far not really deemed necessary because the level of tariffs
LPSRVHG RQ LQWHUPHGLDWH JRRGV WKHPRVW LQWHQVLYHO\WUDGHG
JRRGVZDVTXLWHORZDWOHDVWPXFKORZHUWKDQRQQDOJRRGV
in particular consumption goods. Going ahead with tariff
liberalization will thus facilitate the further expansion of
ELODWHUDO WUDGH DQG WKH GLYHUVLFDWLRQ RI VXFK WUDGH EH\RQG
intermediate goods.
1H[W WR WKLV ELODWHUDO PRYH D SRWHQWLDO WULODWHUDO )7$ LQ-
YROYLQJ&KLQD-DSDQDQG6RXWK.RUHDLVDOVRLQFUHDVLQJO\
being envisaged. The three Northeast Asian countries agreed
in October 2009 to examine the feasibility of a trilateral
)7$DQGFRPPLWWHG LQ0D\WRFRQGXFWDMRLQWVWXG\
on this issue.13 The feasibility study was completed by the
end of 2011. On May 14, 2012, the three parties concluded
WKH )LIWK 7ULODWHUDO 6XPPLWPHHWLQJ LQ %HLMLQJ E\ VLJQLQJ
WKH7ULODWHUDO$JUHHPHQWIRUWKH3URPRWLRQ)DFLOLWDWLRQDQG
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for a three-way FTA by the end of the year. Chinas deter-
mination to go ahead with this trilateral FTA has no doubt to
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which involves a number of countries on both sides of the
3DFLFZLWKWKHH[FHSWLRQRI&KLQD
A trilateral agreement is widely believed to be instrumental
in strengthening trilateral relations, hence contributing to the
RQJRLQJSURFHVVRIHFRQRPLFLQWHJUDWLRQLQ(DVW$VLDVXFKDV
$6($1RU$6($1$&-.)7$ZRXOGEHUHJDUGHGDVD
milestone in regional integration, fostering prosperity not onlyfor the region but for the world as a whole. According to some
estimates, a trilateral deal may be the most promising scenario
in terms of gains, but as it is certainly not the easiest one to
negotiate it is not the most likely.
Whatever the means, Korea can be expected to play a key role
and contribute to the deepening of economic integration at the
(DVW$VLDQOHYHO
Concluding Remarks
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opening up strategy and this explains to a large extent theGHHSHQLQJ RI LWV LQWHJUDWLRQ ZLWK (DVW $VLD 6LPLODUO\
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capacities to China, also contributing to the tightening of
regional production networks. Recent developments call for
changes in this so far successful strategy. The challenge for Ko-
UHDLVWRDGMXVWLWVSROLF\
Korea is probably illustrative of the possible changes in the
ZD\WKHZKROHRI(DVW$VLDZLOOEHLQWHJUDWLQJLQWKHFRPLQJ
years, with a shrinking importance of vertically-integrated
production networks and a rising role of institutional arrange-
PHQWV7KHHPHUJHQFHRI(DVW$VLDDVDPDUNHWUDWKHUWKDQas a production base requires substantial changes in the
specialization and trade patterns of the countries in the region
EXWLW DOVRUHTXLUHVLQVWLWXWLRQDODGMXVWPHQWVDQGLQSDUWLFXODU
DEURDGHUOLEHUDOL]DWLRQPRYH$OWKRXJK(DVW$VLDQHFRQRPLF
LQWHJUDWLRQZLOONHHSLWVVSHFLFLW\ WKHde facto and de jure
dimensions are likely to be increasingly mutually reinforcing,
with Korea as a key player in both areas.
Franoise Nicolas is the Director of the Ifri Center for Asian
Studies (Paris) and assistant professor, Paris-Est University
(Marne-la Valle).
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KOREAS ROLE IN ASIAN INTEGRATION - 93
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7/30/2019 Kei Koreaseconomy Section04
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7/30/2019 Kei Koreaseconomy Section04
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KOREAS ROLE IN ASIAN INTEGRATION - 95
REGIONAL INTEGRATION IN EAST ASIA:LESSONS FROM EUROPE
By Kim Heungchong
Abstract
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regional integration deserves careful consideration, as it can contribute to extricating economies from worldwide recession,
ZKLOHKROGLQJWKHSURPLVHRIFUHDWLQJDELJJHUPDUNHWDQGOHDGLQJDQHFRQRPLFUHFRYHU\(XURSHUHPDLQVDPRGHOIRUUHJLRQDO
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tells us that creating blueprints and taking another step for regional integration even in the worst of situations is very important
LQPDNLQJFRQWLQXHGSURJUHVV7KLUGWKH(XURSHDQLQWHJUDWLRQSURFHVVSURYLGHVDPSOHH[DPSOHVRIWKHUROHVSOD\HUVLQWKH
QHJRWLDWLRQSURFHVVKDYHSOD\HGIRULQWHJUDWLRQ7KHVHFDQSURYLGHJRRGOHVVRQVIRU(DVW$VLDQFRXQWULHVLQDWLPHRIJURZLQJ
LQWHUQDWLRQDOWHQVLRQDQGFRQLFWVDVZHOODVGLIFXOWLHVLQWKHLQWHJUDWLRQSURFHVVLWVHOI7KHOHVVRQVIURPWKH(XURSHDQLQWH-
JUDWLRQSURFHVVFDQEHJURXSHGLQWRWKHIROORZLQJFDWHJRULHVWKHGHYHORSPHQWRIDUHJLRQDOLGHQWLW\DKLJKGHJUHHRIHFRQRPLFLQWHJUDWLRQDQGPDWXULW\RIFRQVXPSWLRQZLWKLQWKHUHJLRQWKHHPHUJHQFHRIDYRZHG(XURIHGHUDOLVWVWKH
LQWUDUHJLRQDOPRYHPHQWRISHRSOHWKHGHYHORSPHQWRIDQDGYDQFHGEOXHSULQWRUYLVLRQIRUUHJLRQDOLQWHJUDWLRQWKHQHHG
IRUH[SRVXUHWRELQGLQJQHJRWLDWLRQRQUHJLRQDOLVVXHVWKHQHHGWRFRPSHQVDWHWKRVHGLVDGYDQWDJHGE\LQWHJUDWLRQDQG
the need for a core group to drive the integration process.
7/30/2019 Kei Koreaseconomy Section04
18/20
96 - KOREAS ECONOMY 2012
The world economy is still shrouded in a fog of uncertainty,
HYHQDIWHUJRYHUQPHQWVRIWKHPDMRUHFRQRPLHVKDYHFRQGXFW -
HGDQXQSUHFHGHQWHGFRRSHUDWLYHQDQFLDOHDVLQJVLQFH
The world economy has shown neither a conspicuous rebound,
nor cleared out the many chronic problems in banking sectors,
government budgets, and household sectors of the respective
economies. Furthermore, the 2008 crisis seems to have devel-
RSHGLQWRDQRWKHUUHFHVVLRQMXVWDVVOXJJLVKJURZWKRI&KLQD
LQFLSLHQWUHFRYHU\LQWKH86DQGWKHFDWDVWURSKHLQ(XURSHplague the world economy.
In hard times, it may be absurd, or at least anachronistic, to argue
for regional integration, as economic recession has always gone
hand in hand with the emergence of chauvinistic nation-states and
protectionism in trade. It would be even more out of point to argue
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is now the center of the global economic crisis and many of the
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case casts a fundamental doubt on regional integration.
Nevertheless, we have valid reasons to think things over re-
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does still deserve careful consideration, as it can contribute to
extricating economies from worldwide recession, while hold-
ing the promise of creating a bigger market and leading an
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gration in spite of revealed defects in the monetary integration
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us that creating blueprints and taking another step for regional
integration even in the worst of situations is very important
in making continued progress. Figuratively speaking, as the
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ourselves for another heyday instead of bracing for gloom
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ample examples of the roles players in the negotiation process
have played for integration. These can provide good lessons
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process itself.
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integration process? Foremost, there is the intangible, creatingDUHJLRQDO LGHQWLW\(DVW$VLDKDV WRFRQWLQXHLWV LQVWLWXWLRQDO
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be composed of different layers. We identify ourselves at the
individual level through our families, friends, and the society
to which we belong. Cities where we live are another larger
category which we use to distinguish ourselves from other city
dwellers. Nation-states and perhaps the global village would
be the biggest categories with which we identify ourselves.
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a supranational layer, beyond the national level, is crucial for
achieving peace and prosperity in the region.
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Asian or Asian. Creating regional perception ahead of visible
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integration. This can provide a buffer for toning down the
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chauvinistic behaviour which the political leaders are easilytempted to adopt.
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Asia through a regional scholarship program from which both
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seums, concert halls, etc., in their hometowns. Disadvantaged
people in the region would not be easily tempted to be chauvin-
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integration would assuage the publics irrational fear of market
opening and globalization, if a regional identity is to form.
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ing intra-industry trade and building an exchange rate mechanism,
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believe, however, more emphasis has to be given to the fact that
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production network formation, and form a consumption network
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PD\ WDNHWLPHEXW(DVW$VLDQ FRXQWULHV VKRXOG FRQFHQWUDWHRQ
boosting their domestic consumption in spite of adversities within
the region.
Figure 1 and Figure 2 reveal some striking facts on vulnerability
RI(DVW$VLDQHFRQRPLHVUHODWHGWRFRQVXPSWLRQ7KHUVWLPSRU-
WDQWQGLQJIURPWKHJXUHVLVWKDWLQVSLWHRIGL]]\LQJHFRQRPLF
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QDWHRWKHUFRXQWULHVDVWKHODVWGHVWLQDWLRQRIQDOJRRGV7KLVLVnotably true if we compare the trends of China manifest in two
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stood as the second biggest intermediate goods market, but was
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to the economic shock than the intermediate goods market. Fig-
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7/30/2019 Kei Koreaseconomy Section04
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KOREAS ROLE IN ASIAN INTEGRATION - 97
Figure 1Import of Immediate Goods in6HYHUDO(FRQRPLHV
$1,600,000,000,000
$1,400,000,000,000
$1,200,000,000,000
$1,000,000,000,000
$800,000,000,000
$600,000,000,000
$400,000,000,000
$200,000,000,000
$0
USA ChinaEU
Source: Authors calculation from BEC dataset
Korea
2001 200920062002 2005 20072003 2004 2008 2010
Japan India
building intra-industry and intra-regional production networks
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production network is very vulnerable to external shock. To bor-row the words of a certain politician; its the consumption, stupid,
not the production!
To complete a consumption network in the region, a rise in
consumption in the region is vital, but there are limitations for
developing countries of the region in increasing their spending
LQWKHVKRUWWHUP,WFRXOGEHWUXHWKDWWKH(DVW$VLDQJRYHUQ -
ments export-driven policy may lead to weakening domestic
consumption, but it may be the result of widening income
disparities in the region. Widening income disparity prevents
consumption growth from keeping pace with income growth,
and the gap between consumption and income has openedup as the income gap increased. Asia has become increasingly
dependent on exports as a source of economic growth in the
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Also, different consumption patterns between generations may
weaken the regions consumption as a whole, and the under-
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consumers in the region. Due to a very rapid change in the
income level, the generational gap in consumption behavior
varies much more among Asian countries than in other econo-
mies in the world. Let me explain this with an example. Korea
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in the 1980s, older generations in Korea consume much less
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were young. Therefore, old frugal habits die hard. If rapid eco-QRPLFJURZWKLVWKHUHDVRQIRUZHDNFRQVXPSWLRQWKHQ(DVW
Asian countries need to develop a policy initiative to strengthen
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in bilateral, regional or multilateral arenas.
Moreover, we must remember that corruption in the region has
negative impacts on vulnerable segments of the population.
While these problems cannot all be resolved in a short period
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Third, we need to pay attention to the emergence of the
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have formed a strong and loyal base of support for the inte-
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nurturing, however, we need to pay attention to the Asian
diaspora living in Asia and other parts of the world. Over-
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etc. may not have properly been provided with supranational
playgrounds or institutional set-up where they could contribute
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supranational frame to the people of the region for formation
of multiple nationalities and identities.
Fourth, after WWII, intra-regional movement of people in
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gree of labor mobility in the region is far lower than that of
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to encourage intra-regional labor mobility through employmentin foreign countries, but that is not the whole story. Short-term
visits, study abroad, tours and other types of intra-regional
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regional integration.
Fifth, creating an advanced blueprint or vision report for region-
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people concerning the integration process, and subsequently,
Figure 2Import of Final Goods in6HYHUDO(FRQRPLHV
$600,000,000,000
$400,000,000,000
$500,000,000,000
$300,000,000,000
$200,000,000,000
$100,000,000,000
$0
USA ChinaEU
Source: Authors calculation from BEC dataset
Korea
2001 200920062002 2005 20072003 2004 2008 2010
Japan India
7/30/2019 Kei Koreaseconomy Section04
20/20
WKHVKDSHRIWKHUHJLRQDOLQWHJUDWLRQLQ(XURSHDOWKRXJKLWZDV
not immediately implemented. Drawing up a future with a pre-
cise plan, communicating the dream to other people, discussing
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rating the date when the blueprint was published, is all very
important for the work towards future integration.
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tiation on regional issues, and accumulate ample experiencein solving the issues. It is important to create various forums
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regional trade, intra-regional investment, environmental issues,
development, gender issues, human security, etc. within our
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states to acquire negotiation skills, and to reach the stage of
mutual understanding.
Seventh, a varied policy mix is required for supporting the pos-
sible losers of regional integration. It is important to compen-
sate losers during the integration process, as it can encourage
them to keep engaged in the process. The Common Agricul-WXUDO3ROLF\LQWURGXFHGLQWKHHDUO\VDQG6WUXFWXUDO)XQGV
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although the programs were not originally created for that pur-
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schemes such as funds for green ODA and womens develop-
ment. In the process, all countries including LDCs in the region
should contribute to the creation of such funds, as it leads to
enhancement of responsibility and self-motivation.
(LJKWKLWLVUHFRPPHQGHGWKDWDNLQGRIFRUHJURXSEHIRUPHG
so as not to lose the momentum for integration. Germany and
France have maintained a key bilateral relationship during the
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and China are expected to play such a role, but if the case does
not hold for the two countries, Korea is advised to initiate a
type of trilateral relationship. Korea, unique in being a divided
country, also needs to recognize that it should take the moral
responsibility to disseminate ideas and action plans for peace-
keeping, and to advocate peace and prosperity in the region. It
can play an important role in initiating and leading the whole
process of peace and prosperity through economic and mone-
tary integration. In this sense, the role of Trilateral Cooperation
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7KH UHJLRQDO LQWHJUDWLRQPRYHPHQW LQ(DVW$VLDKDVWDNHQD
long time and faced adversities, but the process is still at a rudi-
mentary stage. We need to recall that the original six countries
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JDUGDVPRUHRUOHVVKRPRJHQHRXVHFRQRPLHVZHUHLGHQWLHG
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years ago. In those days, they recognized so many differences
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to think about integration of these heterogeneous economies.
(YHQZLWKRXWIRFXVLQJRQWKHGLIIHUHQFHVEHWZHHQ(DVW$VLDQ
countries, it would be important to do something immediately
for regional cooperation in order to bring about solid progress
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pean integration process is to keep the momentum of the pro-
cess for cooperation by creating teams of enthusiastic policy
entrepreneurs who are eager to make efforts to bring about re-
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not the least point that I would like to raise.
Dr. Kim Heungchong is the Director for Planning and
Research Coordination for the Korea Institute for Interna-
tional Economic Policy. The views reproduced here are the
authors and do not necessarily represent those of the Korea
Institute for International Economic Policy.
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