The Korea Times Articles - 2004



North Korean Human Rights Act

December 30, 2004
By Chang Se-moon

The year 2004 has been rather slow in terms of the relations between the two Koreas. One of the more significant events that occurred during the slow year was the passage of the North Korean Human Rights Act that President Bush signed into law on Oct. 18, 2004. There are many opponents and proponents of the act.

South Korean politicians from the ruling Uri Party were so concerned about the act that they issued a statement saying ``the act may have dire consequences for peace on the Korean peninsula'' and ``the act is perceived as aiming to overthrow the Kim Jung-il government and will inflame the delicate political balance in the region.''

Even liberal organizations, such as Min Byun (Lawyers for a Democratic Society), People's Solidarity for Participatory Democracy, National Council of Churches in Korea and others, were reported to have issued a joint statement on July 22, 2004, proclaiming ``We are concerned that the bill could negatively affect peace in the Korean peninsula rather than contribute to the improvement of the human rights condition in North Korea.''

Unification Minister Chung Dong-young effectively summarized the feelings of the conservatives upon the signing of the act by Bush when he said ``Human rights problems in communist countries have never been solved by applying pressure.''

But there are also many supporters of the act. Reportedly, these groups gathered at a reception in the Rayburn House Office Building on Nov. 16, 2004, to celebrate its passage.

The reception drew representatives from the Wilberforce Forum, Defense Forum Foundation, Jubilee Campaign, NKP Architects, some members of U.S. congress, the Office of Public Liaison at the White House, North Korea Freedom Coalition, Hana Presbyterian Church and North Korean defectors.

I was not aware of the passage of the act until it was signed into law and widely reported in the Korean media. Because of my curiosity, however, I obtained a copy of the act and reviewed it for myself.

The purposes of the act are stated rather nobly in Section 4 as promoting (a) ``respect for and protection of fundamental human rights in North Korea,'' (b) ``a more durable humanitarian solution to the plight of North Korean refugees,'' (c) ``increased monitoring, access and transparency in the provision of humanitarian assistance inside North Korea,'' (d) ``the free flow of information into and out of North Korea'' and (e) ``progress toward the peaceful reunification of the Korean peninsula under a democratic system of government.'' The tone quickly changes to a confrontational one, however, although the statements are believed to be facts.

In Section 3, ``Congress makes the following findings,'' which include that North Korea:

(a) ``is a dictatorship under the absolute rule of Kim Jong il,''

(b) ``holds an estimated 200,000 political prisoners in camps that its State Security Agency manages through the use of forced labor, beatings, torture and executions and in which many prisoners also die from disease, starvation and exposure,''

(c) has used camp inmates ``as targets for martial arts practice and

as experimental victims in the testing of chemical and biological poisons,''

(d) prohibits ``live births in prison camps'' and more. In Section 103, the

act turns to China and states that China aggressively locates North Koreans who are in China without permission and forcibly returns them to North Korea and that China has detained, convicted and imprisoned foreign aid workers attempting to assist North Korean refugees.

Specific actions proposed in the Act include: increased broadcasting to North Korea (Sec. 103), increased humanitarian assistance through nongovernmental organizations ``conditioned upon substantial improvements in transparency, monitoring and access to vulnerable populations throughout North Korea'' (Section 202) and ``assistance to support organizations or persons that provide humanitarian assistance or legal assistance to North Koreans who are outside of North Korea without the permission of the Government of North Korea'' (Section 203).

Although opponents of the Act focused on the virtually unattainable condition that requires substantial improvements in human rights in North Korea for increased humanitarian assistance, I think a more serious flaw of the Act lies elsewhere.

To be specific, Section 302 of the act attempts ``to ensure that North Koreans are not barred from eligibility for refugee status or asylum in the United States on account of any legal right to citizenship they may enjoy under the Constitution of the Republic of Korea.''

In plain English, this statement appears to mean that North Koreans will be allowed to seek political asylum in the U.S. regardless of whether they are welcome in South Korea.

Realizing that the act is clearly stepping on the authority of South Korea, Section 2 tries to clarify to no avail by making two strange and potentially conflicting statements. One is that ``It is not intended in any way to prejudice whatever rights to citizenship North Koreans may enjoy under the Constitution of the Republic of Korea'' and the other is that ``a national of the Democratic People's Republic of Korea shall not be considered a national of the Republic of Korea.''

The act may make some sense if South Korea refuses to accept North Korean defectors.

To the contrary, South Korea has done an excellent job in welcoming defectors from North Korea and has never refused to accept an honest defector from the North.

I believe that the primary responsibility and authority for improving human rights in North Korea should lie with the South Korean government, mainly because it is South Korea that will suffer most if something goes wrong between the two Koreas.

I have no idea what it is intended to mean when the act states ``a national of the Democratic People's Republic of Korea shall not be considered a national of the Republic of Korea.''

I have long believed that North Korea and South Korea are one nation divided due to international circumstances beyond Korea's control. All Korean-Americans and other Koreans living abroad should support the democratic government of South Korea on its policies toward unification.


Countries Engage in Risk Game Over Weakening Dollar

December 27, 2004
By Chang Se-moon

The U.S. dollar has been weakening steadily during 2004 by 6.3 percent against the euro, 3.8 percent against the yen and a whopping 12.7 percent against the Korean won.

The weakening dollar has been a serious concern to all global economic powers including Korea. Let me try to clarify some issues surrounding the weakening of the dollar that can be quite complicated.

Why is the dollar weakening? The obvious answer is that the dollar is weakening because the U.S. imports much more than it exports. The annual rate of trade deficit in the U.S. current account is over $600 billion, which is the largest in history. When imports exceed exports, the supply of the dollar increases because the U.S. imports are paid for by the dollar.

As the supply of the dollar increases in relation to its demand, the value of the dollar falls.

What happens to international trade when the dollar weakens? When the dollar weakens, say, from $1 = 1200 won to $1 = 1000 won, the U.S. products become that much cheaper since consumers in other countries such as Japan, EU member nations and Korea can have more U.S. dollars with the same amount of domestic currency and thus do not have to pay as much for the same product as they paid before.

At the same time, exports from these countries to the U.S. become that much more expensive

to U.S. consumers. Stated simply, exports from Japan, EU and Korea to the U.S. fall while exports from the U.S. to these countries rise. As exports from these countries fall, production and employment in these countries also fall while production and employment in the U.S. rises.

Japan, EU and Korea will find U.S. tourists declining as well, since it costs more for U.S. travelers to visit these countries with the weakening dollar.

Readers may wonder why I have not mentioned China. This is because China's yuan is pegged to the dollar at $1 = 8.28 yuan. Pegging means that China fixed the exchange rate between the dollar and the yuan. As the dollar weakens against the yen, euro and won, the yuan also weakens against these currencies. This means that China will not experience declining

exports to the U.S. from the weakening dollar, but Japan, EU nations and Korea will experience declining exports not only to the U.S. but also to China, making it more difficult to accept the weakening dollar if it lasts a long time.

Does the U.S. budget deficit have anything to do with the weakening dollar? Yes, it does. The U.S. federal government has been running over $400 billion deficit during the past 12 months. How does the U.S. government borrow such a large amount of money? The U.S. government has been borrowing the money by issuing Treasury securities such as short-term Treasury bills and longer-term Treasury notes that anyone in the world can buy.

Who are rich enough to lend the huge amount of money to the U.S. government? About half of the outstanding U.S. Treasury securities are owned by countries other than the United States.

In fact, the share of money that the U.S. government borrows from foreign sources was small

until about 20 years ago, but increased rapidly to more than half of all borrowing in recent years. The top four holders of U.S. Treasury securities in January 2004 were Japan ($583.8 billion), China ($156.6 billion), United Kingdom ((93.7 billion), and Korea ($59.6 billion). I am sure that these figures have since increased. The Dec. 7, 2004 issue of the USA Today states that Japan's holdings are now $720 billion.

Saudi Arabia's holdings of U.S. Treasury securities, if any, are so well hidden that Saudi Arabia is not even ranked in the top 25 beyond the listing of OPEC that held $43.4 billion in January 2004. Note that these are all U.S. Treasury securities and do not include stocks and bonds of private corporations.

Where do these countries find such large amounts of money that they can lend to the U.S. government? This is where the trade surplus comes into play. Especially, Japan, China and Korea used the trade surpluses that these countries had been enjoying for a long time to purchase U.S. Treasury securities.

One logical question that follows is whether these countries can bring the money back home and spend the money to boost domestic consumption and increase employment. More importantly, does it not make sense for these countries to sell U.S. securities and bring the money home before the value of the dollar falls further? This is where the problem can be risky, if not dangerous.

Suppose that Japan, Korea and other nations that hold U.S. Treasury securities decide to sell a substantial amount of their U.S. Treasury holdings.

Since the U.S. government can no longer borrow money from foreign sources to finance its budget deficit, the U.S. Treasury will have to pay a much higher interest rate to induce the American public to purchase Treasury securities. In other words, there will be a sharp increase in interest rates in the U.S. This sharp increase in interest rates will create a whole new set of problems.

First of all, the higher interest rates in the U.S. will slow down the U.S. economy, which has been an engine for global economic growth for so many years.

As the U.S. economy slows down, exports from Japan, Korea and other nations to the U.S. will also slow down. Policymakers in these countries will then wonder which is worse, suffering from a declining value of the dollar that lowers their exports or selling of U.S. Treasuries that will raise interest rates and possibly lead to a slowdown in the U.S. economy.

Secondly, there is a theory called the interest rate parity condition, which basically predicts that short-term funds will follow higher interest rates.

As interest rates rise in the U.S., global portfolio investors will take their money out of Japan, Korea and EU nations toward the U.S. where they can make more money. Countries do not want to lose portfolio investment because it is one important source of financing domestic investment.

In the third place, the interest rate parity condition also tells us that rising interest rates tend to make the dollar stronger since transferring portfolio investment to the U.S. means that the demand for the dollar increases.

The U.S. Federal Reserve increased short-term interest rates on Dec. 14 for the fifth time during 2004. The rising interest rates in the U.S. will help slow down the fall in the value of the dollar, but are not expected to overcome the impact of the large government deficit that has been largely responsible for the dollar's weakening.

There is a saying that if the amount of the loan is small, the borrower will worry about it, but if the amount of the loan is large, the lender will worry about it.

Clearly the primary cause of the problem is the U.S. budget deficit. In the short run, however, the U.S. is not worrying about the weakening of the dollar and continues to allow the dollar to weaken. It is the lender countries such as Japan, Korea and EU member countries that are worried about the weakening of the dollar.
 

Negative Economic Forecasts

December 20, 2004
By Chang Se-moon

Usually during November, December and January each year, I am invited by many civic groups and business associations who want to hear my assessment of the national and local economy for the coming 12 months. This year is no exception. Organizations where I already made a presentation and am scheduled to make a presentation include: (1) Mobile Area Chamber of Commerce staff members, (2) Downtown Development Authority, (3) Mobile United, a leading civic group, (4) Kiwanis Club, (5) Mobile Area Chamber of Commerce Executive Roundtable, and (6) Mobile County Board of Realtors. In addition, the Mobile Register and the Chamber of Commerce’s monthly magazine carried my economic forecasts as their lead article in the business section. My comments on the economic future were also carried by three TV stations within the past month. I am sure the list will grow before the coming January ends.

Why are they interested in hearing my forecasts?

Let me tell you a real story that happened to me several years ago. One day, a local Oldsmobile auto dealer invited me to lunch. I had never met the gentleman before but he said he heard of my reputation. During our lunch, I suggested that the economy would slow down during the coming months although a recession was not in the cards yet. After lunch, he thanked me very sincerely and we departed. I wondered why he had wanted to meet with me. Sure enough, I was told later that he reduced his order of car inventories to prepare for the slowing demand that I conveyed to him.

What happens when research institutions in Korea are not allowed to release their negative economic forecasts? Inventory control is very important to all businesses since it is costly to carry excessive inventories. If businesses carry too much inventory, they may have to lower prices to sell them. If businesses carry too little, they will not be able to make as much money as they otherwise can.

It is important to understand that economic forecasting is not an exact science. Assume that many expect the Korean economy to continue to slow down. Assume also that the upswing of the Korean economy is around the corner. If producers and retailers are not aware of this turnaround because of the government's policy that prevents research institutions from releasing economic forecasts, the policy may actually slow the economy down because producers and consumers are not prepared for the upswing, and the rising demand will not be met.

Worse yet, when negative economic forecasts are not allowed for release, the public will have less confidence in positive economic forecasts when they are released, suspecting that these institutions may have changed numbers to make them more positive than they actually are.

Inventory control is not the only way of utilizing economic forecasts. Long-term fixed investment of businesses is also affected heavily by economic forecasts, especially those of the long-term variety. Decisions on long-term fixed investment are risky even with all the available economic forecasts. When forecasts are not available, these decisions become even riskier, possibly making decision-makers hesitant.

One interesting question is whether the policy of preventing research institutions from releasing negative economic forecasts will affect all businesses equally. My answer is that no, it does not.

Large corporations such as Daewoo, LG, Hanwha, Samsung and Hyundai have their own research institutions. These corporations will continue to depend on their own forecasts. Even these large corporations will suffer, however, since economic forecasts are inherently an imprecise science and decision makers should always compare several forecasts before they make decisions. It has been my firm belief for a long time that businesses should always review several forecasts before they make their business decisions. Economic forecasts are made by economists who have different perspectives on the same economy. Economists are so notorious in having different opinions that there is a saying that if there are two economists, there will be three opinions.

Businesses that will suffer more than anyone else are the small- and medium-sized ones that cannot afford to have their own research institutions. When these businesses are deprived of the opportunity to read, evaluate and compare economic forecasts made by different research organizations, they will make mistakes in determining the quantity of output that they plan to produce, store and sell.

The Korean economy depends very much on exports for its growth. Just imagine what the consequences would be if these exporters do not know about the health of their export markets. The reason why I have been writing an article or two each year in this column about the U.S. and world economy is to give some idea to Korean exporters of how the export market may look in the coming months. They need all the information that they can have access to.

For readers who are still not convinced of the importance of releasing accurate economic forecasts on a timely basis, I would like to tell one more story. Several years back when the U.S. economy was suffering from both high rates of inflation and unemployment, one student asked me what I, as an economist, would do when these problems finally went away. I still remember my answer. I told the student not to worry about me because there will always be economic problems that will keep me working. When the economy grows slowly, there are problems of unemployment, poverty and falling tax revenues. When the economy grows fast, there are problems of inflation, unequal distribution of income and a bottleneck in the supply chain. Can anyone remember a time when there were no economic problems?

The point is that you cannot just suppress negative economic news, or what government officials consider negative economic news to be exact, for whatever reasons there may be. If you do, few people will believe positive economic news when it is released.


Korean Golfers in LPGA Tournament

November 22, 2004
By Chang Se-moon

The 11th annual LPGA Tournament of Champions was held on Nov. 11 through 14 at the Magnolia Grove Golf Course in Mobile, Alabama. Only those golfers who either won at least once during the past four years or are currently active Hall of Fame players were invited to play. There were six Korean players who were eligible: Ahn Shi-hyun, Han Hee-won, Kim Mi-hyun, Pak Se-ri, Gloria Park and Grace Park. Of the six, Pak Se-ri, who won the tournament in 2001 and 2002, and Kim Mi-hyun were not able to participate. I would also like to add Christina Kim to the list of Korean golfers since many Korean-Americans are affectionately known as Koreans in the United States.

Prior to the Tournament of Champions during 2004, Ahn Shi-hyun earned $611,763, had eight top-10 finishes and was named the LPGA Rookie of the Year. Han Hee-won earned $774,106, had six top-10 finishes this year with a victory in the Safeway Classic, and was named the LPGA Rookie of the Year in 2001. Like Ahn, this is Han's second time participating in the Tournament of Champions. Han was the runner-up last year. Ahn has one career victory while Han has three career victories.

Christina Kim, with two career victories, lives in Santa Clara, California. She earned $611,798 this year prior to the Tournament of Champions, and has six top-10 finishes this year, including one victory. Kim began playing golf when she was 11 years old and holds the USGA's lowest score at 62 in the 2001 U.S. Girls’ Junior Championship. Her father serves as her caddy and coach. Gloria Park, with two career victories, earned $441,310 during 2004, has had six top-10 finishes this year, and ranks eighth on tour in birdies. Grace Park lives in Phoenix, Arizona, earned $1.43 million, has won two tournaments, including her first major at the Kraft Nabisco Championship, finished second six times and finished third three times all during 2004 prior to the Tournament of Champions.

In the absence of Annika Sorenstam, the No. 1 player on the LPGA Tour money list, early attention was paid to Grace Park, who was second, and Lorena Ochoa of Mexico, who was third on the LPGA Tour money list this year. Only $75,512 separated the two prior to the Tournament of Champions. In comparison to Grace Park's earnings of $1.43 million with twelve top-10 finishes, Lorena Ochoa earned $1.42 with eighteen top-10 finishes this year prior to the Tournament. Both Park and Ochoa enjoyed breakout seasons this year. Ochoa led the LPGA in birdies (403), eagles (19), and rounds in the 60s with 48 out of 95 prior to the tournament. Park led in putting average (1.74 per round), was second in rounds in the 60s with 38 of 77, and was third in driving distance prior to the tournament.

The Tournament of Champions began on Nov. 11. After the first round, Grace Park and Christina Kim were two of the four first place finishers at minus 6. Ahn Shi-hyun was 16th at minus 2, Han Hee-won was 23rd at minus 1, and Gloria Park was 31st at plus 2. There were 39 players in the tournament. By the end of the first day, all attention appeared to have shifted to Christina Kim more for her colorful presence on the course than for her excellent score. She wore a green shirt and pants on Thursday with a Kangol cap, which changed to bright red on the last day. Her beaming attitude made everyone happy. According to the Mobile Register, ``She’s an original, and the kind of player who could help boost attention for the LPGA Tour. She’s got game, but she also has something else that's special and doesn't show up among the many categories on the tour’s stat sheet: personality.’’

By the end of the second day of playing, the top position was not as crowded as the first. Laura Diaz, who was among the four top finishers on the first day at minus 6, surged to the top of the leader board at minus 11. Heather Daly-Donofrio, 11th on the first day at minus 3, moved to second place at minus 9. Lorena Ochoa and Christina Kim were at third at minus 8. Han Hee-won moved from 23rd on the first day to 9th on the second day at minus 5. Grace Park fell from the top on the first day to 15th at minus 5. Ahn Shi-hyun fell from 16th to 33rd at plus 4. Ahn shot 78 during the second day. Gloria Park also fell a little to 35th at plus 5.

By the end of the second day, media attention appeared shifting toward Laura Diaz and Heather Daly-Donofrio. During the 2003 LPGA Tournament of Champions, Heather Daly-Donofrio began the tournament with 80 and ended the final round with 78. As she admitted, she had ``a horrible history’’ at the course. With the kind of year she has been having, it would be a Cinderella story for her to do well on this course.

When the third day of playing ended, Han Hee-won and Grace Park were tied at minus 8 and ranked at 7th. Christina Kim fell to 14th by shooting 74 in the round. Ahn Shi-hyun was 30th and Gloria Park was 36th. Heather Daly-Donofrio, who was second after the second round, shot the tournament-leading 64 during the third round to move into first place at minus 17. Heather Daly-Donofrio had a three-stroke lead over Sophie Gustafson. Laura Diaz fell from first after the second round to fifth at the end of the third round.

The final day of play was cloudy with occasional sunshine and a little wind. When the final round ended, Han Hee-won was sixth at minus 13 with the day’s best score of 67. Han earned $30,374. Christina Kim and Grace Park were tied at 18th with cumulative score of minus 5. They earned $11,275 each. Ahn Shi-hyun was 30th and earned $7,708. Laura Diaz was second at minus 15 and earned $84,140 and Lorena Ochoa was 12th at minus 6 and earned $14,140, greater than Grace Park's earnings by $2,865 but not enough to take over Grace Park's second position on the year's LPGA Tour money list.

The day belonged to Heather Daly-Donofrio who won the Tournament at minus 19 and earned $130,000, more than her entire earnings during the year. Her winning scores were 69, 66, 64 and 70. She eagled the 352-yard par 4, number 3 hole on Sunday. Daly-Donofrio, a Yale graduate, will become president of the LPGA Player's Executive Committee. For those who struggle on the golf course, you may listen to Heather Daly-Donofrio who is reported to have said after the final round, ``The last couple of years I really struggled with my golf game and struggled to make every cut I made. In particular, this year, I feel like I fought for every dollar that I made. Nothing came easy all year.’’

Incidentally, Gloria Park voluntarily withdrew from the tournament after nine holes on Sunday, forfeiting her guaranteed check of $5,700. Park's sudden withdrawal was the result of an unfortunate misunderstanding of the ``lift, clean and replace’’ rule at the original position. Due to heavy rain, players were allowed to move the ball in the fairway within one club-length of the original position so long as the new position is no closer to the hole during the first three days of play. The rule was changed on the last day of the tournament and was not properly communicated to Park.
 


The US Economy in 2005

November 8, 2004
By Chang Se-moon

David Wyss is managing director and chief economist at Standard and Poor’s. He is known as one of the best economic forecasters and has been a frequent guest speaker at the Association of University Business and Economic Research (AUBER). I heard his assessment of the U.S. economy in 2005 at AUBER’s annual conference on October 18 in Tucson, Arizona, which differed from that of the U.S. Congressional Budget Office (CBO). Knowing how well the U.S. economy does is important because “all countries try to ride on the U.S. economy for growth,” according to David.

Real gross domestic product (GDP) is a good measure of how well a nation’s economy is doing. Growth rate of the second quarter real GDP of the U.S. economy was revised up to 3.3 percent mostly because of better trade numbers, and third quarter growth is now expected to reach 4.5 percent. Due to the strong rebound in the third quarter, both David and the CBO expect growth rate of the U.S. economy to average 4.5 percent for 2004. This is expected to slow down to 3.5 percent, according to David, and to 4.1 percent, according to the CBO.

Wyss also predicts an international slowdown in 2005, except in Europe, where 2004 growth rate of the already low 1.9 percent is expected to change very little to 2.0 percent in 2005. According to him, growth rate in Japan will decrease from 4.1 percent in 2004 to 2.2 percent in 2005, in other Asian countries it will decrease from 7.0 percent in 2004 to 6.2 percent in 2005 and in Latin American countries it will fall from 4.0 percent in 2004 to 3.75 percent in 2005. These predictions, if accurate, will make it somewhat difficult for Korean exporters to increase sales overseas in 2005.

The rate of inflation will decrease from the expected average of 2.6 percent in 2004 to 1.9 percent in 2005, according to Wyss, and to 2.0 percent in 2005, according to the CBO. I personally expect inflation in the U.S. to be higher in 2005 than projected by Wyss and the CBO, due to the falling value of the dollar and high oil prices. He and the CBO agree the job market will continue to improve, lowering the rate of unemployment from about 5.5 percent in 2004 to about 5.3 percent in 2005. Wyss and the CBO also agree that long-term interest rates will go up slightly. The yield on 10-year Treasury Notes will increase from 4.3 percent in 2004 to 5.0 percent in 2005, according to Wyss, and from 4.6 percent in 2004 to 5.4 percent, according to the CBO. Note that 2004 rates are estimates. Because of the falling value of the dollar, Wyss expects U.S. exports to increase by 9.7 percent in 2005, and U.S. imports to increase by 4.6 percent.

Two issues that have a significant impact in the long run are twin deficits and high oil prices.

The current U.S. account deficit for 2004 is estimated at $664 billion, while the U.S. federal government budget deficit for fiscal year 2004 is estimated at $324 billion. Such huge deficits will have to have a measurable impact on the global economy as well as the U.S. economy in the coming years. One such impact is the U.S. dollar will remain weak, if not weaker, against major currencies. This will help increase exports from the U.S. to other countries but casts a shadow on exports from other countries, including Korea, to the U.S. This may help the U.S. economy but that of other countries. The good news is the U.S. economy will continue to grow. Exports from other countries, including Korea, to the U.S. will not decrease, but increase at a slower rate during 2005. A secondary impact of the weak dollar is that it tends to raise import prices and is inflationary in the U.S., but not in Korea if the Korean currency continues to gain against the dollar.

Offsetting the positive impact of the weak dollar on the growth of the U.S. economy is the large budget deficit that will clearly restrain any expansionary fiscal policy. Any major tax cut is just about done for a while and the growth of the U.S. federal government expenditures will have to slow down. The large government deficit may also lead to higher interest rates and a crowding out effect hurting capital investment. This may well be a major reason why next year’s economy is projected to grow at a slower rate than this year.

Finally, there is worldwide concern over rising oil prices. Although the current price per barrel of crude oil fluctuates in the mid-50s, Wyss estimates the average price of crude oil to average $41.14 during 2004 and change little at $40.59 during 2005. The price of oil during the 1980-81 crisis was $75 per barrel at today’s rate, and Wyss speculates high oil prices at the current $54 per barrel are not likely to stall expansion, because the average household in the U.S. spends only 5 percent of its income on energy, compared to over 8 percent in 1981.

A $54 per barrel in crude oil, compared to a decrease to $35, would cut growth rate of U.S. real GDP by a 0.4 percentage point to 3.1 percent in 2005, and by a 0.2 percentage point to 2.8 percent in 2006. With high oil prices, the unemployment rate would end at 5.8 percent instead of 5.4 percent in 2006. Wyss also conjectures that high oil prices may lead to creeping inflation to 2 to 2.5 percent level.

High oil prices have already been responsible for two recessions in 1974 and 1980-81, and were a factor in the 1991 recession. Oil prices have to go higher and stay there to cause a recession, according to Wyss, and said “unfortunately they show signs of going higher and staying higher.”

The U.S. International Energy Agency estimates that demand for oil will rise 50 percent over the next generation, or about 10 million barrels per day. Asia accounts for 85 percent of the expected increase in demand as Chinese demand continues to rise at a double-digit pace with India on its tails. According to the International Energy Agency, today’s top ten oil producers with millions of barrels per day in the parentheses are, in order: Saudi Arabia (10.06), Russia (9.14), the U.S. (8.74), Iran (4.03), Mexico (3.87), China (3.58), Norway (3.30), Canada (3.15), Venezuela (2.84), and the United Arab Emirates (2.80). Top ten oil consumers with millions of barrels of oil per day in the parentheses are, in order: the U.S. (20.42), China (6.29), Japan (5.45), Germany (2.68), Russia (2.65), India (2.35), Canada (2.22), Korea (2.17) and France (2.07).

Korea is one of the top ten consumers of oil with no production of its own. Developing technologies that may lower the consumption of oil without sacrificing economic growth will be a difficult task Korea may be forced to undertake.





Bush Unlikely to Give in to North Korean Demands

Weak Dollar Expected to Slow Korea's Exports to US

November 4, 2004
By Chang Se-moon

MOBILE, South Alabama - President Bush successfully secured his re-election when Senator Kerry called him to congratulate him on Wednesday, the day after the Nov. 2 election day.

Readers may be curious about a number of issues surrounding Bush's re-election.

Those who voted for Bush tend to consider the war in Iraq as part of American efforts to fight terrorism. Many believe we need to fight terrorists overseas so that we do not have to fight them on American soil.

Those who voted for Kerry tend to view the war in Iraq separately from the war against terrorism, and see the war as a misguided issue. During the campaign, Bush promised to stay on course.

Most likely, military confrontation will continue with many more casualties until insurgents are subdued and an elected government takes root in Iraq. Reluctant members of the Coalition Forces, of which Korea is an important one, may have to remain in Iraq for a long time.

The United States is a country that exports rap music, has one of the highest divorce rates in the world and is considered by many to be the birthplace of the sexual revolution.

These observations only describe the surface of the lives of ordinary Americans who work very hard, live a modest life and are very protective of family values.

Many supporters of Bush believe same-sex marriage is simply wrong and the president responded by proposing a constitutional amendment to ban same-sex marriage. However, many Americans believe same-sex marriage is a state issue, including Vice President Cheney, whose own daughter professed to be a lesbian. Not less than 11 states proposed a state constitutional ban on same-sex marriage, and all proposals were approved on Nov. 2 by a wide margin. The 11 states are Arkansas, Georgia, Kentucky, Michigan, Mississippi, Montana, North Dakota, Oklahoma, Ohio, Utah and Oregon. Gay-rights activists hoped to win support in Oregon but to no avail.

Bush's public support of banning same-sex marriage generated many votes but will cause continuing social controversy and division inside and outside the courtroom.

Most people in the world, including in Korea, probably wonder why abortion is such a big issue in the U.S. I had the opportunity to talk to many people, including several Catholic nuns.

Those I spoke to believe abortion should be a woman's personal decision. I have also wondered why so many males in the U.S, who cannot bear children, feel so strongly against abortion that they killed a doctor who performed abortion at a women's clinic in Pensacola, Florida. Opponents of abortion are mostly religious conservatives who proclaim to base their opposition on moral values. About half the country shares this belief.

Bush's re-election just about assures that the issue will resurface because four of the nine members of the U.S. Supreme Court are 70 years old or older and U.S. Chief Justice William Rehnquist is 80 years old and has thyroid cancer. Three other justices have already been treated for cancer.

When the president nominates one or two new members during his term as is likely, the delicate balance of the court will tilt towards a more conservative one that may overturn the Roe v. Wade case in 1973 that legalized abortion in the U.S. If Roe v. Wade is overturned and abortion is banned, the wealthy will fly to Mexico for abortion and the poor will have back-alley abortions with possibly tragic consequences.

Embryonic stem cell research is supported by Nancy Reagan, wife of former Republican President Ronald Reagan, who said in May this year that, ``Ronnie's long journey has finally taken him to a distant place where I can no longer reach him. Because of this, I am determined to do whatever I can to save other families from this pain. I just don't see how we can turn our backs on this.''

Embryonic stem cell research is supported by many politicians such as Gerald Ford, Jimmy Carter, Bill Clinton and more than half of U.S. senators and members of the House of Representatives. It is also supported by many well-known actors such as Brad Pitt and the late Christopher Reeves.

Conservative religious groups in the U.S. believe human embryos, even those just days old, are human beings and thus should not be destroyed to obtain stem cells.

Bush, who was first elected with strong support from the conservative religious groups, made a policy decision on Aug. 9, 2001, that federal funds can only be used for research on stem cell lines that were created before that same day. Interestingly, California Gov. Arnold Schwarzenegger broke with Bush, and persuaded his California constituents to approve his proposal to spend $3 billion on stem cell research on Nov. 2.

Open Trading System

Bush is more open to global trade than Senator Kerry. No major changes in direction are expected on trade policy. However, the large current account deficit estimated at $664 billion in 2004 and the large federal government budget deficit estimated at $324 billion for fiscal year 2004 are likely to slow down Korea's exports to the U.S. market through a continuous weakening of the U.S. dollar against the Korean currency and rising interest rates in the U.S. that may lower domestic demand.

There is one more issue in which Bush's re-election may affect Korea. The president is a man of conviction. Supporters call it strong leadership, while opponents call it self-destructive stubbornness.

Either way, Bush is not likely to give in to North Korea's demands without reciprocal concessions from it. The only danger is any opportunistic provocation by North Korea to take advantage of the struggle in Iraq is probably going to be met by increased use of weapons of mass destruction, which can be catastrophic because of the massive influx of U.S. troops in short supply.

There will be a trial period on North-South relations requiring skillful handling by Korea's leaders.

There is no doubt the United States is deeply divided at this time. I am not concerned, however, because Americans are good at abiding by the law and everyone knows there will only be one president when the election is over.





Intra-Industry Trade

October 28, 2004
By Chang Se-moon

Why do Korea and China trade what appear to be the same products between the two countries? Are they not supposed to specialize and trade only those products that are produced in one country but not in the other? Trading the similar, if not the same, products between two countries is known as intra-industry trade.

When I reviewed COMTRADE data from 1997 to 2002, I noticed that Korea’s exports to China increased significantly during the study period. The increases were primarily in three categories: (a) medium tech _ automotive, (b) medium tech _ engineering, and (c) high tech _ electronic. Remarkably, however, China’s exports to Korea have also increased rapidly in the same product groups during the same period.

In medium tech _ automotive, exports have been increasing in both directions, although Korea’s exports to China have been increasing faster than China’s exports to Korea. In medium tech _ engineering, exports have been increasing in both directions, but China’s exports to Korea have been increasing faster than Korea’s exports to China since 1999. In high tech _ electronic, exports have been increasing both ways although Korea became dominant in exporting this product group to China in recent years.

Why do Korea and China export to each other what appear to be the same products? There are at least seven theories that attempt to explain why there is an increase in intra-industry trade among nations.

The first is the data aggregation hypothesis. According to this theory, United Nations SITC data reflect aggregation of different goods, and disaggregation, if carried down to multiple digits as far as is necessary, will eliminate such intra-industry trade. In other words, they are really different products although they belong to the same product classification.

The second theory is similar to the first one in that small technical differences enable different countries to specialize in different products within the same industry.

The third theory is the increasing returns to scale hypothesis. According to this theory, each nation tends to specialize within the same industry to take advantage of an optimal, not necessarily the largest, scale of plants that can minimize the production cost. This theory allows the same product to be produced in different countries to minimize production costs, but does not necessarily explain why the same products flow both ways.

The fourth theory is the border trade hypothesis. This theory argues that if the suppliers’ network is shorter across the border between two countries than within one country, producers may purchase supplies from suppliers across the border to save transportation costs. This may not apply to Korea since North Korea lies between Korea and China.

The fifth theory is the re-export trade hypothesis. This theory appears to be gaining in importance, and points out the trend of a product entering a country for processing and leaving the country upon completion of the processing for its final destination that can be the country that sent the product in the first place. This practice is also known as entrepot.

The sixth theory is the cyclical trade hypothesis, which explains that certain agricultural products are traded between two countries at different times of the year because of a different growing season.

The seventh theory is the product differentiation hypothesis. This theory has many variations. One variation is that taste differences are greater among countries with similar income levels than between poor and rich countries. These taste differences in, for example, varieties of passenger cars cause intra-industry trade to increase among countries endowed with similar resources and technology. Another variation is a product differentiation by country of origin, suggesting that even if the products are virtually the same, some consumers prefer a product produced in certain other countries such as French perfume or Italian shoes. In fact, the observation that consumers view otherwise identical goods produced in different countries as being different is known as the Armington assumption, named after Paul S. Armington, who suggested the idea in his March 1969 article in the IMF Staff Papers.

I do not know whether any of these theories explains the rising intra-industry trade between Korea and China, and if it does, to what extent. However, lessons that the review of these theories suggests are clear.

First of all, product differentiation is important to the continuing success of Korean firms in the global market, including China. Product differentiation refers to quality improvement and promotion that makes a product attractive to consumers. Funke and Ruhwedel examined the export growth patterns of 10 Asian economies, including Korea and China from 1989 to 1997 and concluded that ``producing highly differentiated export goods gives a competitive advantage which allows to sell more products.’’ Continuing investment in R&D as well as continuing research for product differentiation in these product groups may be essential to maintaining Korea’s export share of these products as well as Korea’s competition against China.

Secondly, it would be interesting to see to what extent the intra-industry trades of the same three product groups, i.e., medium tech _ automotive, medium tech _ engineering, and high tech _ electronic between Korea and China are competitive and to what extent they are complementary.

If intra-industry trade between Korea and China is more competitive than complementary, the long-term outcome could be a zero-sum game in that one country’s success in exporting intra-industry products will eventually reduce the other country’s exports of the same products. If, on the other hand, the intra-industry trade between Korea and China is more complementary than competitive, the long-term outcome could be a positive-sum game in that one country’s success in exporting intra-industry products will also increase the other country’s exports of the same products.

It is clear that we need to know much more about the composition of the intra-industry trade between Korea and China. Such knowledge will allow policymakers to develop effective long-term policies that can assist Korea’s exporters. At least some such knowledge can be acquired from a review of considerably more detailed SITC data or preferably from surveys of Korean exporters of these products. The issue of the intra-industry trade between Korea and China or any other major trading partner of Korea merits added attention from Korea’s scholars in international trade, especially those working at Korea’s leading research institutions.
 

Transparency Key to Success of Redenomination

October 4, 2004
By Chang Se-moon

Someone once told me that the best place to eat the classic style jjajangmyun (bean-paste noodle) is not in Seoul, but in Los Angeles. Sure enough, I had an excellent jjajangmyun in Los Angeles, but had a hard time finding a Chinese restaurant in Seoul that could prepare jjajangmyun the way it was prepared many years ago. As the story goes, the reason why one can taste better jjajangmyun in Los Angeles than in Seoul is that most owners of the old Chinese restaurants in Seoul left to settle in the U.S. when former President Park Jung-hee took all of their hard-earned savings away from them during the 1962 currency redenomination.

A redenomination of Korea's currency has again been proposed by top officials of the Bank of Korea and the Korea's Ministry of Finance and Economy, attracting numerous views from the experts and concerns from the general public. In this article, I will summarize the various issues relating to the proposed redenomination of Korea's currency.

What is currency redenomination?

Currency redenomination is simply a process of changing the unit of measurement of a currency. For instance, a 1,000 to 1 redenomination of Korea's currency means that 10,000 won before change becomes 10 won after the change, while a 100 to 1 redenomination means that 1,000 won before change becomes 10 won after the change. Sometimes the name of the currency may also be changed when there is a currency redenomination. There is no reason why the name has to change, however, since the new currency will have a different design to avoid any possible confusion over the conversion from the old currency.

Has Korea ever redenominated its currency before?

Yes, twice. In February 1953, Korea's won was redenominated by 100 to 1 and was renamed as hwan. In June 1962, Korea's hwan was redenominated by 10 to 1 and was renamed as won. Remember the saying by Alphonse Karr that ``the more things change, the more they remain the same’’?

In 1962, individuals were able to receive new currency only after they deposited the old currency at the bank. In addition, an individuals' ability to withdraw money in new currency from the bank was severely restricted. According to Professor Choi Ho-jin's article in the June 18, 1962 issue of the Seoul Kyungje Shinmun, the amount of frozen deposits was approximately 10 billion won. The primary objective of the 1962 redenomination was to direct privately circulating money toward industrial development. The privately circulating money was comprised of funds that were borrowed by small and medium-size enterprises without going through commercial banks, funds that were borrowed among individuals with high interest rates, and funds that were simply kept at home by many who were suspicious of any government action against their savings or against them personally.

How does the proposed redenomination differ from past redenominations?

The main objective of the proposed redenomination is to simplify transactions and reduce transactions costs by allowing individuals to convert unlimited amount of money to new currencies without requiring any exposure of their identities or the sources of their money. This is in stark contrast to the 1962 redenomination that was intended to convert funds that were circulating among individuals through the private loan market to funds that could be used for industrial development through commercial banks. Another difference is that the 1962 redenomination was announced with little, if any, advance warnings to prevent individuals from converting the funds to other assets, while the proposed redenomination is considered with full disclosure to the public and ample advance warnings.

Have other countries redenominated their currencies?

Yes. Other countries have redenominated in the past for many different reasons. These countries include Brazil (five times), Argentina (four times), Bolivia, Brazil (five times), China, Finland, France, and Indonesia.

Why are Koreans so concerned about the proposed redenomination?

There are several reasons why many Koreans are worried about the proposed redenomination. One of the reasons is the claim that the redenomination will increase corruption.

This is probably the worst argument against redenomination. It is simply ludicrous to assume that the redenominated currency will increase bribery simply because 1,000 new won is smaller and lighter than 1,000,000 old won and thus easier to bribe someone. If bribery can be carried on in such an ingenious way that cash for bribery changed hands in apple boxes and golf bags in the past, nothing will stop bribery. Overall, I think bribery has been on the decline ever since the Kim Young-sam's civilian government succeeded the military regime.

Another reason for concern is a possible inflation. There will be a minor inflationary tendency on goods and services that cost less than 1,000 won if the won is redenominated by 1,000 to 1, and on goods and services that cost less than 100 won if the won is redenominated by 100 to 1, for sheer convenience if nothing else. Others may argue that there will be a monetary illusion in that the redenominated currency may feel so small that businesses will raise prices and consumers will spend the new money more easily. No one knows how significant this impact is going to be. It is highly unlikely that the redenomination will cause any major inflation since inflation depends ultimately on supply and demand.

Perhaps, the most important reason why many Koreans worry about the proposed redenomination is the fear that they may be forced to identify the sources of their old money or lose their control over their new money. Underlying this worry is the mistrust that many Koreans have in the government through the 1962 experience.

How will the redenomination affect the economy?

Obviously, there will be a decrease in transaction costs since consumers and businesses do not have to carry large amounts of cash for daily transactions, while banks, accountants and check-balancing housewives do not have to punch as many zeroes as they did under the old denomination.

Some manufacturing industries will have a big boost. For instance, all machines, equipment and office papers that are based on many zeroes that the current denomination requires will have to be either replaced or adjusted. These machines include all electric calculators, accounting software, restaurant menus and many more. Also, printing new currency will increase demand for currency papers as well as color printing equipment.

Some may argue that there is also a benefit from improved prestige in the foreign exchange market, but I am not so sure whether this will be much of a factor.

Perhaps, one of the most interesting impacts of the proposed redenomination, if finalized, may well be on the demand for real and financial assets. Those individuals with a lot of cash that they want to keep undisclosed will purchase real estate properties and financial assets such as stocks and bonds rather than submitting the large sum of cash to commercial banks.

Others may purchase U.S. dollars and look for opportunities to invest overseas. If the redenomination process is a long one as proposed, this speculative impact on real estate and other financial assets will spread over several years with minimal damage.

Should Korea's currency be redenominated?

Currency redenomination in Korea is not one of the urgent tasks that need to be completed any time soon. If redenomination is agreed upon, it is important to convince the public that there are no hidden agenda and no one should be required to identify him or her-self or the source of the currency when the old currency is converted to the new one. Done properly, I do not see any compelling reason for not pursuing the redenomination. In fact, I would like to commend policymakers for their initiative to redenominate Korea's currency in such an open way.




Hurricane Ivan


September 20, 2004
By Chang Se-moon

Early in September, the weather channel in the U.S. reported a new tropical wave just off the African coast moving slowly toward the west, but added a note that it was unusual for a tropical wave to begin its journey so low in latitude in the Atlantic Ocean. Millions of people who live along the Gulf of Mexico knew that the low latitude might have meant Ivan’s intention to enter the Gulf of Mexico. Soon the tropical wave became a tropical depression and was given the name Ivan when its sustained wind speed exceeded 39 miles (62.8 kilometers) per hour. Ivan kept its name when its sustained wind speed exceeded 74 miles (119 kilometers) per hour and became a hurricane.

Ivan gradually grew into a monster with a sustained wind speed of 165 miles (265.5 kilometers) per hour and was inching toward small Caribbean islands. By the time Ivan crossed such Caribbean islands as Barbados, Grenada, Jamaica and the Cayman Islands, it had already killed at least 68 persons and had flattened many of the islands that were not much greater in size than the eye of the hurricane itself.

On Sept. 13 (Monday), Ivan passed between the western end of Cuba and east of Mexico’s Yucatan Peninsula and entered the Gulf of Mexico with no other place to go except hitting somewhere along the northern Gulf of Mexico. Late on September 13, a hurricane watch was issued for coastal counties of Louisiana, Mississippi, Alabama and Florida in the northern Gulf of Mexico, indicating that a hurricane force wind may reach the area within 36 hours. On Sept. 14, a hurricane warning was issued for the 350-mile coastal area from New Orleans (Louisiana) to the west and Panama City (Florida) to the east, indicating that Hurricane Ivan will reach the area within 24 hours although its sustained wind speed was lowered a little to 130 to 140 miles per hour. The target area is the home of many Koreans.

New Orleans, a well-known tourist city, has about 800 Korean residents. The Biloxi area in Mississippi with its 11 casinos and $1.2 billion annual casino revenues, the active Keesler Air Force base and the nation’s largest Navy ship builder also has hundreds of Koreans as its permanent residents. The Mobile metro in Alabama, although a good size metro with 560,000 residents, has a relatively small number of Korean residents at about 200, but has been the host of Korea’s lady golfers through its annual LPGA Tournament of Champions. The famous Eglin Air Force base is located in Fort Walton that has well over 1,000 Koreans living in its surrounding areas, which include Pensacola, Destin and Panama City.

The Gulf beaches from Gulf Shores of Alabama to Panama City of Florida are believed to have the best sands in the world. Also, the area is not new to hurricanes. The area has been hit by 25 hurricanes during the past 120 years. It is rare, however, for the area to be threatened by a hurricane of Ivan’s force with the notable exception of Camille that hit Biloxi in 1969.

On Sept. 14, the target area for Ivan’s eye is identified as Mobile, Alabama. The Mobile metro has two counties; Mobile County, with its commercial and industrial base in the west, and Baldwin County, with its tourism and numerous vacation homes in the east. Gulf Shores and Orange Beach in Baldwin County have more summer visitors than most other coastal communities along the entire Gulf of Mexico. Located east of Baldwin County of Alabama is the Escambia County of Florida in which Pensacola is the largest city with about 60,000 residents.

On Sept. 14, all school systems and local governments in the three county areas announced they were closed for the rest of the week. All barrier island residents were evacuated, and hundreds of thousands of residents in the three county areas left town toward the north and west to stay away from the Ivan’s direct hit. All four lanes of the interstate highway were used for one-way traffic to the north to speed up the evacuation. No hotel room was vacant within 150 miles (241 kilometers) of the three counties. Emergency shelters at local public schools were filled to their capacity and a special shelter for those with medical needs was also filled to its capacity by noon of Sept. 15. By early afternoon, bridges connecting to the barrier islands were closed for traffic, and just about everything was closed. Everyone stayed tuned to the television to keep track of the unwelcome visitor from the Gulf.

Wind started blowing strong early Wednesday evening and many started losing their electricity. Some communities turned off their water to prevent water contamination. All the national news media were strategically positioned to put a live broadcast of the Ivan’s visit on line. The first ominous sign of Ivan’s visit came early in the evening when Ivan’s feather band spurned tornadoes and killed at least four people in Panama City, nearly 200 miles (322 kilometers) away from Mobile where Ivan’s eye was projected to land.

By 10 p.m., virtually everyone lost electricity and the hurricane force wind started blowing with trees screaming to fight off the fierce wind. About 15 minutes before most people lost their electricity, the weather channel reported a slight change in the direction of the landing of Ivan’s eye from the mouth of the Mobile Bay to Gulf Shores, located about 30 miles east of the mouth of Mobile Bay. The last minute shift saved Mobile County from Ivan’s devastation, which instead was directed toward Gulf Shores of Alabama, Orange Beach of Alabama and Pensacola of Florida, all located within about 50 miles from each other.

By 7 a.m. on Sept. 16, Ivan’s eye crossed over Gulf Shores and was moving north about 60 miles away from Gulf Shores where it landed. As everyone suspected, the northeastern quadrant, called the right-side in Korea, of Ivan’s eye that passed through Gulf Shores, Orange Beach and Pensacola caused the greatest destruction. More than 24 hours passed since Ivan’s visit. Two barrier islands were still closed for traffic. Thousands of permanent residents of the two islands cannot take a look at the destruction of their homes. Aerial pictures of the islands suggest that they may be better off not looking at their homes. Boats, some as long as 35 feet, were tossed over a four-lane road from a marina that is nearly a half-mile away from the Gulf. A four-lane road leading to the beaches was still under the salt water. A 12-foot (3.657 meter), 1,000 pound (454 kilogram) alligator was missing from the zoo and was still roaming around. A bridge on Interstate 10 on which about 50,000 vehicles travel each day lost some of its concrete panels and the heavy interstate traffic will have to be diverted many miles at least for several months. So far over 80 lives are believed lost in the U.S. due to Ivan. A number of families braved staying in their homes at barrier islands during Ivan’s visit and their fate is unknown. Hundreds of thousands of homes will not have electricity for weeks, and many will have no running water or telephone service for several days. A palm tree was imbedded in the windshield of a sunken white sedan. Insurance experts estimate Ivan has caused something on the order of $10 billion in damage. I, for one, will be working at least for several days on removing debris from the backyard of my home that is one of the luckier ones.


Tax Cut or Increased Spending

September 16, 2004
By Chang Se-moon

Mr. Bernstein says that words ending in the suffix ``-ics’’ (acoustics, politics, tactics, gymnastics, etc.) are regarded as either singular or plural, depending on the context. When the word is being treated as a subject or science, it is construed as singular. For example, tactics is one of the subjects taught at West Point. When the word denotes practical activities or qualities, it is construed as plural. For example, the tactics of the Battle of Gettysburg are studied at West Point. Incidentally, economics is almost always construed as singular, perhaps because it is difficult to think of it in the sense of practical activities. The on-going debate between tax cuts and increased government spending as a policy to move the sluggish Korean economy forward is waged in such general terms that the debate is not likely to make economics any more plural than it is now.

First of all, I do not believe that the Korean economy is in crisis. The Korean economy is growing at an annual rate of nearly 5 percent with only a 3 to 3.5 percent annual rate of inflation. In addition, the business debt to equity ratio was over 400 percent when the infamous financial crisis hit Korea in 1997, but has decreased to a healthy 120 percent these days, which is even lower than the U.S. economy’s 150 percent average. Unlike the late 1990s, Korea is also sitting on a large surplus in the current account balance. Credit card debts of the household sector decreased by 50 percent over the past 12 months, increasing the possibility that domestic consumption will bounce back during the coming months. Although the high oil prices are also siphoning potential domestic consumption expenditures off the Korean economy toward oil-exporting nations, they are likely to be lowered at least for a while in the near future as the world economy adjusts to high oil prices.

By all accounts, the Korean economy should be the envy of the rest of the world. Many agree, however, that there are problems in the Korean economy.

Perhaps, the most important problem facing the Korean economy these days is weak domestic consumption and investment. Park Seung (President of the Bank of Korea), Lee Joung-woo (economic advisor to President Roh), and Minister Lee Hun-jai all agree that Korea has enjoyed booming exports this year, but the revenues from increased exports were used to pay off corporate debt without generating domestic demand or being kept as retained earnings without being invested for future production.

Problems facing the Korean economy can be divided into two categories: short-term problems and long-term problems. Most economists agree that the long-term problems include: high labor costs, competition from China, militant labor unions, global competition in the export market for high-tech products, continuing reform in the business and financial sectors, identifying promising industries for future growth and a secure environment conducive to foreign direct investment. The main differences in opinions exist in what Korea should do to improve the economy in the short run.

The key difference in opinions relates to fiscal policy. Initially, the two main political parties in the National Assembly suggested conflicting fiscal policy measures, with many economists also being split between the two approaches. The ruling Uri Party has proposed a steep increase in government expenditures as a means to rejuvenate the economy, while the opposition GNP has raised concern over the deficit and instead suggested sweeping tax cuts to boost household consumption and corporate investment. Late in August, the Uri Party revised its stance by proposing a one percent cut in income tax rates to go with increased government spending for 2005.

The Roh administration already cut taxes on a number of products. For instance, the Finance Ministry announced earlier in March this year that excise taxes on cars, air conditioners, projection televisions and other luxury items would be reduced until the end of the year. The Roh administration also announced a cut to be effective from Sept. 1 this year in basic monthly fees of cell phones from 14,000 won to 13,000 won, and a cut in telephone tax by 2.2 percent for calling a wireless phone from a land phone. Further, effective as of November this year, poor families defined as a four-member family earning 1,500,000 won or less per month can buy government supplied rice at half the market price.

The main difference between the two parties then lies in whether the emphasis should be on a cut in income tax rates or on an increase in government expenditures. Let us look at the reality. According to Minister Lee Hun-jai, 70 percent of individuals in Korea pay little or no income tax and 25 percent of businesses pay little or no income tax. If these figures are accurate, about 70 percent of households and 25 percent of businesses will benefit little, if any, from the tax cut.

The effectiveness of the tax cut approach depends on how much of the increased income the high-income households will be spending when they receive tax cuts. Economists use the term ``marginal propensity to consume’’ to describe the portion of increased consumption expenditure when consumers’ income rises. In general, the marginal propensity to consume is higher for low-income households than for high-income households, suggesting that targeted government expenditures are likely to be more effective than general cut in income tax rates in boosting domestic consumption in the short run. As for domestic investment, increased investment tax credits should have a more direct impact than a tax cut on business incomes especially since many businesses are believed to already be sitting on profits.

This discussion is based on the assumption that we have to choose one between tax cuts and increased government spending. In reality, there is no reason why a combination of the two cannot be adopted as a comprehensive policy package for boosting domestic demand.

Finally, there is a problem of the prosperity of the export sector not being spread to the depressed economy in the non-export sector. The problem is essentially long-term in nature as economists in international trade have known for many years and as pointed out correctly by Park Seung. According to the Stolper-Samuelson theorem, workers in the export sector gain when exports increase while workers in the non-export sector lose so long as these factors in the non-export sector cannot move from the non-export sector to the exporting sector. Workers in the non-export sector are usually low-skilled and low-income workers. Economic theory tells us that the loss to low-skilled workers during an export boom is permanent, not temporary, suggesting the importance of long-term government policies that may include training of workers so they can be employed in the export sector.
 



Growth-Distribution Debate

August 30, 2004
By Chang Se-moon

Somehow, I have a feeling that in order to become a popular economist in Korea these days, one needs to criticize the Roh administration for being egalitarian, promoting an equal distribution of income at the expense of growth, and harshest of all for harboring left wing values. These criticisms have been boiling under the surface for some time, but appear to have exploded during the Aug. 12-13 joint economic conference of the Korean Economic Association and the Korea-America Economic Association at Yonsei University.

On the first day of the conference, for instance, Ahn Kook-shin of Chungang University said that ``the incumbent government is a leftist regime and is caught in a trap of leftist values,’’ and that ``we cannot improve our national competitiveness when policymakers are oriented toward fairness and equality rather than efficiency and growth.’’ Ahn concluded his remarks by stating that the Roh administration has no understanding of how the market economy works and has a tendency to politically interpret the economy. The Roh administration’s preoccupation with political interpretation of the economy was agreed by many, including Minister of Finance and Economy Lee Hun-jai who voiced concern during the same conference about what he called ``growing anti-market and fundamentalist voices’’ among some aides to President Roh.

Through a local newspaper on Aug. 16, Jwa Sung-hee, president of the Korea Economic Research Institute, claimed that Korea sank deep into what he called the egalitarian trap. According to Jwa, egalitarianism surfaced under the Roh administration through its preference of distribution over growth by in that ``if everyone is to have an equal share of the economic pie, one may ask how this affects the incentives of those that have worked hard to create the pie.’’ Incidentally, during the conference, one professor has quipped with a friendly smile to Jwa that his last name means ``left’’ [in Chinese characters if written as pronounced], but he keeps moving to the ``right’’ all the time.

Reported also on Aug. 16 in The Korea Times, Min Kyung-kuk of Kangwon National University stated that ``The philosophical foundation of economic policy [of the Roh administration] was formally declared to be a social market economy, an economic ideology emphasizing left wing values. It places greater emphasis on the equal distribution of wealth rather than growth.’’ Min further states that the Roh Moo-hyun administration has systemized the role of left wing values of the economy by pursuing such policies as ``the relocation of the administrative capital, public concept in land ownership, expansion of the government-management-union Tripartite Commission, realization of a labor union organization at the industry level, union participation in management, and participatory democracy.’’

By now, the criticism of the Roh administration for being left wing seems to have acquired a life of its own by claiming that the Korean economy has not grown enough to be concerned with income distribution. Jwa, for instance, states that ``it seems a little too early for Korea to pour its energies in addressing redistribution issues over economic growth.’’ Several economists went further, as indicated in the Aug. 14 issue of the Chosun Ilbo, by making what I believe to be a wild assumption that the per capita GDP should exceed at least $20,000 for the government to pursue an income equalization policy.

Well, what does all these mean?

I am not a political scientist, but I do feel that the Roh administration undertook some actions that made them look suspicious of being left wing. An apparent tacit approval of forgiving Korean-German Professor Song Doo-yul on his deep involvement in the politics of North Korea; initial indifference toward anti-American movement; floating an idea of closing top universities; and a talk of revising, if not abolishing, the National Security Act without reciprocal action from the North clearly made many ordinary Koreans as well as investors feel uneasy and uncomfortable.

To the credit of the Roh administration, the Roh government stood firm by dispatching troops to Iraq even if it was an unpopular act, started applying laws to illegal strikes by labor unions, succeeded to some extent in isolating an anti-American movement, and accepted hundreds of North Korean defectors this year alone fully knowing that the North would strongly oppose the action.

From the view of economic policies, however, I am not so sure whether the Roh administration deserves the labeling of being left wing. Let us go over what Lee Joung-woo, the chairman of the presidential commission on economic policy and one of the closest aides to President Roh, said during the conference.

According to Lee, the Seoul metropolitan area has 23 million residents, meaning that 47.6 percent of Koreans live in or near Seoul. In addition, the Seoul area population increases by more than 200,000 each year. Clearly, something needs to be done. Moving the capital to Yonggi-Kongju may not be a good idea, but the opposition needs to propose an alternative that is acceptable to the majority of Koreans. According to Lee, Korea’s welfare budget is only 10 percent of the total budget, which I personally believe is shameful for a rich country like Korea. I see nothing in these ideas that suggests that the economic policies of the Roh administration are left wing. Every time I visit Korea, I often stop and watch street vendors of very small businesses. Many of these vendors are middle-aged females who have no facial expression, show no emotion, and just look tired of struggling to survive.

I agree with Lee Joung-woo when he said that ``many people [wrongly] believe that an emphasis on the equal distribution of wealth hinders growth, saying that it should be pursued only after satisfactory growth has been achieved.’’ We should not wait to help the weak and the poor. One cause of this wasteful controversy may well be the careless usage of the term ``equal distribution.’’ What I thought Lee Joung-woo meant was a ``more equal’’ distribution of income from the big gap between the rich and the poor that currently exists in Korea. This point was echoed by Minister Lee Hun-jai, who said that ``we have to pursue equal opportunity and care for the weak, but not necessarily absolute equality for everyone or equal results.’’ So far as I can tell, neither Chairman Lee nor Minister Lee advocated an absolutely equal distribution of income among all Koreans.

I don’t see how any caring person can oppose policies that can improve the living conditions of those Koreans who struggle to make daily living at meager or no wages. In fact, I wonder what the Roh administration has actually done to help these voiceless people who truly need help.

 



Export Patterns of Korea, China

August 11, 2004
By Chang Se-moon

Many have pointed out the importance of exporting technology-based products in the global market place. For instance, the 2002 World Investment Report of the United Nations, published in June 2003, states ``sustained export growth tends to involve a move up the technology ladder _ from simple to complex products _ in addition to upgrading quality and efficiency in existing exports.’’ The report also states that when trade competitiveness is measured by shares in world exports, Korea ranked 12th in 2000 behind the United States, Germany, Japan, China, France, Canada, United Kingdom, Italy, Netherlands, Taiwan and Mexico. When trade competitiveness is measured by gains in market share during 1985-2000, Korea ranked 3rd in 2000 behind only China and the U.S.

Claude Barfield in an August 2003 publication by the Korea Economic Institute states that in 1985, Korea’s exports were in the order of low tech, medium tech and high tech. By 2000, however, the order was completely reversed. Clearly, significant changes impacting Korea’s high-tech exports are taking place in world trade, and Korea has done well up until now. The changing environment of the global market place poses a serious challenge to Korea especially since there is a significant parallel between the export patterns of Korea and China. Reviewed in today’s article are the comparative export patterns between Korea and China.

I collected information from the United Nations Commodity Trade Statistics Database (COMTRADE) and Standard Industrial Trade Classification (SITC) Rev. 2 at the 3-digit level data from 1997 to 2002 for Korea, China, Japan and the U.S. These 261 industrial groups are then classified into ten categories based on the level of technology as suggested by Sanjaya Lall for OECD.

The ten categories are (1) ``primary products’’ which includes fresh fruit, meat, rice, cocoa, tea, coffee, wood, coal, crude petroleum and gas; (2) ``resource _ agro-based’’ which includes prepared meats/fruits, beverages, wood products and vegetable oils (3) ``resource _ other’’ (4) ``low tech manufactures _ textile/fashion cluster’’; (5) ``low tech manufactures _ other’’ (6) ``medium tech manufactures _ automotive products’’; (7) ``medium tech process industries’’ which includes synthetic fibers, chemicals and paints, fertilizers, plastics, iron and pipes/tubes; (8) ``medium tech engineering industries’’; (9) ``high tech manufactures - electronic and electrical’’; and (10) ``high tech _ other’’ which includes pharmaceuticals, aerospace, optical/measuring instruments and cameras. Note in this classification that in general, higher group numbers represent higher technology-based products.

I found the following trends of exports from Korea to China, Japan and the U.S. combined. First, two categories of products that exhibit rising trends are (6) ``medium tech _ automotive’’ and (8) ``medium tech _ engineering.’’ Second, product group (9) ``high tech _ electronic and electrical’’ also has a strong showing toward an increasing trend. Third, product groups (2) ``resource _ agro-based’’ and (10) ``high tech _ other’’ appear to be holding on. Fourth, all other product groups show a declining trend as a share of total exports, although product group (4) ``textile, garment and footwear’’ is the only one that declined in an absolute amount.

It is interesting to note that product groups (6), (8), and (9) represented 46.93 percent of Korea’s total exports to the three key partner countries in 1997 but the percentage increased to 58.17 percent in 2002. All three product groups require heavy investment in R&D as well as strong product differentiation, most likely indicating the maturity of Korea’s manufacturers of these exports.

I found the trends of exports from China to Korea, Japan and the U.S. combined to be remarkably similar to those of exports from Korea in that the same three categories of products, (6) ``medium tech _ automotive,’’ (8) ``medium tech _ engineering,’’ and (9) ``high tech _ electronic and electrical’’ exhibit increasing trends. The only difference between Korea and China is that China also had an increasing trend in product group (7) ``medium tech _ process’’ that decreased in Korea. Product groups (6), (7), (8), and (9) represented 29.32 percent of China’s total exports to the three key partner countries in 1997 but the percentage increased to 41.26 percent in 2002.

The real question relates to whether China is becoming a technology superpower. If it is, the adverse impact of China’s high-tech exports on Korea’s exports of the same products will become that much greater. Not everyone agrees on this issue, however. Some argue that China’s technology base remains limited and the capital infrastructure needed to produce advanced, high-tech goods is largely absent. For instance, China’s high-tech exports are mostly mature commodities, such as DVD players and laser printers, but the semiconductor chips that run these commodities are almost all imported or produced in China in chip plants controlled by foreigners. A Dec. 20, 2003 article in The Economist blames the slow growth of high-tech industries in China on poorly managed state-owned enterprises as well as a ``dysfunctional financial system.’’

There are indications that changes are coming in China. One such indication, according to Khermouch, Einhorn and Roberts in their April 7, 2003 article in Business Week, is that several Chinese manufacturers are starting to spend advertising dollars to differentiate their products in the global market. These firms include the Legend Group, the largest PC maker in China; appliance maker Haier Group; cell phone maker China Kejian; Beijing Yanjing Beer Group, which is “paying $6 million over five years to sponsor the Houston Rockets, where hoopster Yao Ming has made things Chinese hyper-cool,” and more.

Another example is that Chinese automakers such as Great Wall Automobile Holding, China Zhejiang Geely Group and Hebei Zhongxing Automobile Manufacturing are about to export their cars to the U.S. market. In his June 1, 2004 article in USA Today, Eldridge reports that the vehicles targeted for export include ``subcompact sedans called Solo and Merrie, compact pickups called Sailor and Deer and compact SUVs called Safe and Sing’’ that are currently built and sold in China for $9,000 to $15,000.

I see two choices for Korea’s high-tech exporters. One is to continue and put R&D in a higher gear for high-tech products and also in product differentiation as Korea’s high-tech exporters have done so successfully in the past. The other is for Korea’s high-tech firms to branch out to China. The presence of Korean businesses in China is already significant. According to a March 29, 2004 article in Business Week, LG Group’s investment is so large that Nanjing named a street LG Road; in 2003, Korean businesses invested more ($4.4 billion) in China than the U.S. companies did ($4.2 billion); about 25,000 Korean companies manufacture in China, and a dozen or so new ones make deals everyday; the northern coastal city of Qingdao, the home of Tsingtao beer, is home to 4,000 Korean companies and 70,000 Korean nationals with three daily flights to Seoul; and, since 1992, Korea lost 770,000 manufacturing jobs but Korean firms created well over 1 million jobs in China.

As the article aptly describes, Korea’s problem on China is how to profit from it, how to grow with it and how to survive with it. This may not be easy. According to Korea's National Science & Technology Council, Korea was only 1.7 years ahead of China in the sophistication of its technology as of December 2003, and the gap could shrink to zero within five years. Korea’s high-tech exporters deserve all the support that Korea can provide.

 



Crazy Import-Export Data

July 30, 2004
By Chang Se-moon

According to the United Nations Comtrade data, the amount of Korea’s imports from China in 2002 was $17,399,662,592. This means that the amount of China’s exports to Korea in 2002 should also be $17,399,662,592. But it was not. The amount of China’s exports to Korea during the same year was $15,534,542,848.

Let us try again. The amount of China’s imports from Korea in 2002 was $28,567,973,888. This means that the amount of Korea’s exports to China in 2002 should also be $28,567,973,888. But it was not. The amount of Korea’s exports to China during the same year was $23,753,207,808.

What is going on?

The accuracy of imports and exports data is important for many reasons. For example, all countries try to increase exports more than their imports because exports create employment in exporting countries. Without accurate trade data, countries will not be able to determine whether their export-based growth strategy works or not. For another example, a country may adjust their exchange rates against certain countries depending on the country’s trade balances against these countries. If a country such as the U.S. experiences chronic trade deficit against another country such as China or Korea, the U.S. trade officials may put pressure on Korea and China to open up their markets more or re-value the exchange rates as happened many times in the past.

The problem is that the trade balance reported by one country may not, and usually is not, equal to the trade balance reported by the other country even if the trade balance under consideration is one between the two countries. For example, the amount of Korea’s exports to China for a particular year as reported by Korea is not equal to the amount of China’s imports from Korea as reported by China. For another example, the official cumulative trade balance between the U.S. and China from 1995 to 2002 was $518.6 billion against the U.S. according to the U.S. data, but only $179 billion against the U.S. according to the Chinese data.

Why are there such significant differences in bilateral trade data? There are several reasons for the discrepancy.

First of all, some countries include the cost of freight and insurance while others do not. Imports are generally reported on the basis of Cost, Insurance and Freight (CIF), while exports are reported on the Free On Board (FOB) basis. For this reason, import values tend to be higher than export values. Secondly, territories such as Hong Kong, Puerto Rico or Guam may be included as part of a country by some and treated as separate entities by others. Thirdly, shipments may be exported late in one year and imported early in the following year, thus being reported as exports of a given year by the exporting country but reported as imports in the following year by the importing country. Fourthly, some countries do not report the value of imports and exports that fall below some threshold value while others do. In the fifth place, some differences may be discrepancies based on differences in the classification of goods or in how they are reported. In the sixth place, some differences can be the result of reporting errors. Finally, perhaps most complicated, are the re-exports/entrepot trade and price markups. The importing country may be the final destination or an intermediary country, and the value may be increased to reflect price markups or further processing of goods.

One of my MBA students and I had an opportunity to compare trade data between the U.S. and Australia. In 2002, the United Nations trade data indicate that the U.S. exports to Australia were $13,083,522,048, but the Australia’s imports from the U.S. during the same year were $12,573,206,528. The difference is $510,315,520, which can be explained by several reasons.

These reasons include that Australia values its exports on the FOB basis but values its imports on the “adjusted version of FOB transactions value” basis, while the U.S. values its exports on the “free alongside ship” (FAS) basis but values its imports on the “FAS transactions value” basis. Reasons also include that in Australia, certain materials under inter-governmental agreements for defense are excluded from trade figures while in the U.S. all military sales are included; that Australia’s trade figures exclude repair trade, but the U.S. includes the value of repairs net of the goods that are repaired; and that in Australia custom entries are not required for the sale or acquisition of certain ships intended for use on overseas routes while all sales and purchases of marine vessels are included in the U.S. trade figures.

Reasons for the discrepancy also include that in Australia individual transaction lines within an export consignment where the value of the goods is less than 500 Australian dollars are excluded, but in the U.S. customs data exclude export shipments valued less than 2,501 U.S. dollars; and that in Australia import entries for values not exceeding 250 Australian dollars are excluded but in the U.S. custom data exclude imports valued under 1,251 U.S. dollars.

Another reason relates to re-exports. When Australia imports U.S. goods that originate from another country, Australia includes these goods as imports from the U.S., but the U.S. does not include these goods as exports to Australia so long as the U.S. is unaware of the re-export from the third country to Australia. Still another reason is that the U.S. customs boundary includes Puerto Rico and the Virgin Islands, but Australia treats Puerto Rico and the Virgin Islands as being separate from the U.S. for the purposes of identifying the country of origin or final destination for goods.

Interestingly, the Organization for Economic Co-operation and Development (OECD) states that import data are of better quality than export data since import data are reported in sufficient detail to allow customs administrations to apply duties, taxes or other regulatory controls.

Returning to the 2002 trade balance between Korea and China, traditional calculation of the Korea’s trade balance against China is the difference between Korea’s exports to China ($23,753,207,808) and Korea’s imports from China ($17,399,662,592), which is a surplus to Korea of $6,353,545,216. If we follow OECD’s recommendation, the Korea’s trade balance against China is the difference between China’s imports from Korea ($28,567,973,888) and Korea’s imports from China ($17,399,662,592), which is a surplus to Korea of $11,168,311,296.





Resurging Anti-Americanism

July 15, 2004
By Chang Se-moon

Recent public opinion surveys in Korea have indicated that young Koreans consider the United States, not North Korea, to be Korea’s number one enemy. A 2004 survey by Research & Research, for instance, is reported to have found that Koreans in their 20s to 40s picked the U.S. as Korea’s biggest enemy, although Koreans over 50 still believe North Korea to be the key enemy. In fact, the survey found no less than 57.9 percent in their 20s, 46.8 percent in their 30s, and 36.3 percent in their 40s to believe that the U.S. is Korea’s number one enemy.

The latest survey may reflect a more deep-rooted anti-Americanism than the one that prevailed in 2002. The 2002 anti-Americanism may be blamed for the June 13, 2002 accident in which two 14-year-old schoolgirls were killed by a 45-ton U.S. mine-clearing vehicle on a training exercise. No such immediate incident can be blamed for this year’s resurgence of anti-Americanism. Leaders in Korea have in the past assured me that anti-Americanism is more an expression of assertive nationalism by young Koreans than a movement against the United States. I am no longer sure whether this is a correct assessment.

The problem is that every act is followed by its consequence. I am wondering what the resurging anti-Americanism in Korea means and how it will affect Korea. As usual, I am writing this article from the view of a Korean-American who makes a living in mainstream America.

To state it bluntly, anti-Americanism will lead to, or at least make it easier, for U.S. policymakers to reduce, if not totally withdraw, the U.S. troops stationed in Korea. I have a special feeling for Korean soldiers because I was one of them during the early 1960s. I also have a special feeling for U.S. soldiers because I teach young Americans as a classroom teacher and know some people, including an attorney and local police officers, who were sent to Iraq. Ever since the Soviet Empire disintegrated and China became friendly to the U.S., Korea is no longer as important to U.S. security as it had been during the cold war years. At this juncture of history with resurging anti-Americanism in Korea, I simply do not believe that the U.S. will be willing to sacrifice tens of thousands of American lives to protect the South in case there is an invasion from the North.

The other side of the coin is that Koreans in their 20s to 40s may be right in believing that the North is a friendly country to the South and there is no way the North can be a threat to the South. I agree with young Koreans in believing that the North will not invade the South but for different reasons. One important question is whether the continuing dialogue with the North through the sunshine policy can replace the U.S. military presence as an assurance of Korea’s national security.

The Mutual Defense Treaty between the Republic of Korea and the United States of America was signed by Korea’s venerable Pyun Young-tae and America’s John Foster Dulles in Washington on October 1, 1953 and became effective on November 17, 1954. Article 6 of the Treaty states that ``Either party may terminate it one year after notice has been given to the other Party.’’ Apparently, revising the Treaty has not been as far away from the minds of policymakers of both countries as many in Korea may believe. As recently as June 2, 2004, Korea’s Foreign Minister Ban Ki-moon stated ``there is no need for Seoul to revise its mutual defense treaty with Washington.’’ Seoul may not see any need for revision of the Treaty, but Washington may see it differently with resurging anti-Americanism in Korea.

No one in his or her right mind expects any military confrontation between the two Koreas. To this extent, young Koreans are correct in believing that the North is not a threat or at least not a great threat to the South. My point is that the South will pay dearly for its national security in the absence of the U.S. military presence.

Even these days with the U.S. military presence, the North demands economic assistance from the South as if it has the right to demand such assistance. When there was an explosion in Ryongchon on April 22, 2004, killing 160 and injuring 1,300 people, the North demanded construction materials more than medical supplies. If the South responded to this inhumane demand of the North’s with the U.S. military present, I wonder how the South would respond to the North’s demand for sharing the South’s wealth when there is no U.S. military presence in the South. The North may not be an enemy, but the South may not like the cost of keeping the North as a friend.

Suppose that you are the owner or strategic planner of a business in Korea that is globally competitive. Suppose also that the Mutual Defense Treaty is terminated and the U.S. troops withdraw from Korea in response to resurging anti-Americanism. What would you do? My guess is that you would be looking more actively for new locations for your business in China, India, Canada, and, yes, the United States. No one should question your patriotism, because your search for a foreign direct investment site is due to anti-Americanism that drove the U.S. troops out of Korea, not due to any lack of patriotism on your part. In fact, your efforts to keep your business prospering may well be a patriotic act. Jobs will decrease in Korea with the relocation of your business to overseas but jobs will disappear if your business cannot survive.

Now, suppose that you are a foreign investor. What would you do if all U.S. troops were pulled out of Korea and Korea is still divided with no prospects of a peaceful unification in the immediate future? My guess is that you would think twice before you set up a plant in Korea and will limit your purchase of Korean stocks to those Korean businesses with heavy foreign operations. This will have a dampening effect on stock prices and slow economic growth further.

It is very important for young Koreans as well as Korea’s policymakers to understand that pro-Americanism does not necessarily mean anti-North Korea. If young Koreans truly care about North Korea, they need to promote more friendship, not less friendship, with the U.S. so that businesses in Korea can continue to grow. The more the South Korean economy grows, the more help the South can give to the North. American soldiers serving, and sometimes dying, overseas all have families and friends just like Kim Sun-il who died in Iraq. When Koreans say again and again that Korea does not want American soldiers, family members and friends of these American soldiers feel hurt and will eventually accept the fact by demanding their withdrawal from Korea.

Most importantly, the Roh administration needs to do its best to create an environment of improved friendship between Korea and the United States. Any statements by Korea’s policymakers less than completely and unequivocally supportive of the friendly relations between Korea and the United States will be perceived by young Koreans to mean support and corroboration of their anti-Americanism.

 



Economies of Korea's Traders

July 1, 2004
By Chang Se-moon

Korea’s heavy dependence on global trade makes it important for Korea’s business leaders as well as economic policymakers to know how the economies of Korea’s key trading partners are doing and are expected to do in the immediate future. The World Economic Survey (WES) assesses worldwide economic trends by making a quarterly polling of international economists on current economic developments in their respective countries. The WES is conducted by the Ifo Institute for Economic Research in Germany in cooperation with the Paris-based International Chamber of Commerce.

Somehow, I was fortunate enough to join 1,203 other economists in 91 countries in providing quarterly economic assessments to the WES. I would like to summarize the April 2004 WES survey that has recently been released. Major points include: the world economic climate remains favorable with an average growth rate of 3.4 percent during 2004; inflation will remain moderate; a moderate rise in interest rates is expected; and currency mismatch is softening a little. Country-specific assessments vary, however.

In China, the overall economy is continuing to grow with moderate improvements in capital expenditure and private consumption. During the next six months, China’s economic growth is expected to slow down; capital expenditure and private consumption will continue at current levels; both exports and imports will increase, but imports more than exports; both short-term and long-term interest rates will increase a little; no changes are expected in exchange rates against the dollar, euro, British pound or yen; and stock prices are expected to increase moderately. Many panelists pointed to a high rate of unemployment as one economic problem facing China.

In Japan, the overall economy is maintaining recent trends with no major changes in capital expenditure but with falling private consumption. During the next six months, however, Japan’s economic growth is expected to improve; capital expenditure and private consumption will also improve; both exports and imports will increase a little; short-term interest rates will not change much but long-term interest rates will increase a little; little change is expected in exchange rates against the dollar, euro, and British pound; and stock prices are expected to increase moderately. Economic problems facing Japan include a lack of confidence in government policy, insufficient demand, unemployment, and public deficit.

In India, the overall economy is currently doing very well with improving capital expenditure and private consumption. During the next six months, India’s economic growth is expected to continue to improve; both capital expenditure and private consumption will improve; both exports and imports will increase; interestingly, both short-term and long-term interest rates are not expected to change; the Indian currency is undervalued against the pound and the yen but on par against the dollar and the euro; and stock prices are expected to increase moderately. Economic problems facing India are few and only the high public deficit was cited widely among the panelists. Other Asian economies that are also expected to grow fast during the next six months are Hong Kong, Malaysia, Singapore and Taiwan.

In the United States, the overall economy is doing well with increasing private consumption. During the next six months, the U.S. economy is expected to continue to improve; both capital expenditure and private consumption will increase; both imports and exports will increase although exports are expected to increase a little faster; both short-term and long-term interest rates will increase although short-term interest rates are expected to increase a little more; the dollar is overvalued against the euro and the British pound but on par against the yen; and stock prices are expected to increase moderately. There are two problems that may cast shadows on the long-term prospects of the U.S. economy. They are government budget deficits and current account trade deficits. Both will have an effect on inflation as well as the value of the dollar, which may weaken further. For the remainder of this year, however, it appears the economy will grow with no immediate problems. Prices and interest rates will continue to increase slowly during the year.

Now we will combine other countries and review economic prospects of each region. In Western Europe, which excludes former Eastern bloc countries, economies are rather weak and both capital expenditure and private consumption are falling. Exceptions are Denmark, Iceland, Ireland, Norway, and the United Kingdom, which are all growing moderately. During the next six months, Western European economies are expected to improve; both capital expenditure and private consumption will increase; both imports and exports will increase; short-term interest rates will change little, but long-term interest rates will increase; their currencies in general are undervalued against the dollar; and stock prices are expected to increase moderately. The only problem cited widely in Western Europe is unemployment.

In comparison, Eastern European economies, i.e., former Eastern bloc countries, are expected to improve although not as much as other European economies; both imports and exports will increase; and stock prices are also expected to increase moderately. Three problems are cited in Eastern Europe: lack of confidence in government economic policy, unemployment and public deficits.

Economies in Latin America and Africa are currently not doing with the notable exceptions of Chile, El Salvador and Peru in Latin America and Tunisia in Africa. Both regions are expected to improve during the next six months with moderately rising imports and exports. Unemployment and a lack of international competitiveness are cited as problems in both regions. Latin American countries also have the problem of a lack of confidence in government economic policy.

There are wide variations among Near East countries. The United Arab Emirates, Kuwait and Saudi Arabia are doing well, but Israel, Lebanon and Jordan are not. All countries in Near East are expected to improve during the next six months with rising imports and exports and no changes in interest rates. Stock prices are also expected to increase across the region except in Jordan, Lebanon and Turkey. Like all other regions, the biggest problem in Near East countries is unemployment.

There were 10 panelists who provided information on the Korean economy. (Incidentally, I am not one of these because I provide information on the U.S. economy.) According to the 10 panelists who provided information on Korea, the Korean economy is currently not doing well with low domestic private consumption. Panelists point out, however, that the Korean economy will improve during the next six months with increasing capital expenditure, private consumption and exports. Stock prices are also expected to rise moderately. The biggest problem facing Korea is cited as the lack of confidence in government economic policy.
 

Stem Cell Research

June 22, 2004
By Chang Se-moon

This past May, Nancy Reagan said at the Juvenile Diabetes Research Foundation dinner that ``Ronnie’s long journey has finally taken him to a distant place where I can no longer reach him. Because of this, I’m determined to do whatever I can to save other families from this pain. I just don’t see how we can turn our backs on this.’’ The former First lady was

referring to stem cell research. Well-known figures such as Gerald Ford, Jimmy Carter, Bill Clinton, 58 current U.S. senators and 206 members of the U.S. House of Representatives support research in this area. However, controversy continues.

Political aspects of the issue were vividly described in a May 18, 2004 article in USA Today by Jonathan Turley, a professor at George Washington University whose father suffering from Parkinson’s disease. What are the issues and why should it matter to readers of The Korea Times? Let me answer these questions step by step.

What are stem cells? According to the U.S. National Institutes of Health, stem cells are cells that have the potential to develop into many different cell types and thus can serve as a repair system for the body. Although there is no guarantee, advances from stem cell research have the potential for treating, if not curing, cancer, heart disease, diabetes, Parkinson’s disease, Alzheimer’s disease, multiple sclerosis, and other diseases.

Where are stem cells coming from? Research with human embryonic stem cells began in 1998, when a group led by Dr. James Thompson at the University of Wisconsin developed a technique to isolate and grow the cells. Stem cells are isolated from human embryos that are only a few days old. A remarkable feature of stem cells is that once a stem cell line is established from a cell in the human embryo, it is essentially immortal and can be grown in a laboratory indefinitely. Cells generated from a cell line can then be frozen for storage or distribution to other researchers.

Why is it controversial? The political power of fundamentalists and conservative religious groups is very powerful in the United States and they believe that human embryos, even if they are only days old, are human beings and thus should not be destroyed to obtain stem cells from them. President Bush, who was elected with strong support from the fundamentalists and conservative religious groups who steadfastly oppose abortion, made a policy decision on August 9, 2001, that federal funds can only be used for research on stem cell lines that were created before that same day. President Bush added that stem cells must be protected as potential human life. This decision, however, appears to be purely political. As stated by Professor Turley, ``if the microscopic cells are `human beings’ in their embryonic stage, it should hardly matter whether they were created before or after August 2001."

To be fair to supporters of President Bush’s decision, Eric Cohen, who is a consultant to President Bush’s Council on Bioethics, stated in the June 8, 2004 issue of USA Today that frozen embryos might not look human but ``What else can they be?’’ and that ``for those who see the ethical and political complexity of the stem cell question ... the Bush policy remains both principled and prudent.’’

Why is the decision so important? The decision is significant because about 400,000 existing human embryos that have already been developed and remain frozen at numerous fertility clinics since 2001 will have to be destroyed. This has led many to wonder why it is humane to destroy these embryos but inhumane to use them for research to cure human diseases.

Why does it matter to Korea? The issue can be important for Korea because Korea is believed to be one of a few countries in which significant stem cell research is underway. Other nations include Japan, Israel, Singapore, Australia, and the U.S. in which private sector research is about to take off even without federal funds that President Bush restricted.

How will successful research affect the economy? Stem cell research is an infant industry. For instance, if Korea becomes one of the leading nations on stem cell research that can transform research into medical practice, treating patients of which the potential number is literally hundreds of millions world-wide could have an enormous economic impact.

Realistically, what will happen? The passing of former President Ronald Reagan from Alzheimer’s disease is expected to turn the tide of public opinion in the U.S. towards more support for stem cell research. Since the Aug. 9th decision was seen as quite political, it

is possible that the decision may be reversed with increasing support for federal funding of stem cell research in the U.S. If this assessment is true, President Bush’s 2001 decision would provide only a small window of opportunity for reduced competition for researchers in Korea. Private researchers have already begun their research on stem cells, albeit with limited private funding. For instance, research organizations have been created recently at Harvard University, Stanford University, the University of Wisconsin, and the state of New Jersey.

As an economist who always bears in mind that both human and financial resources are quite limited in Korea in comparison to the U.S., it may make sense for researchers in Korea to specialize in certain aspects if such specialization is possible. Such specialization, if possible, may eventually allow Korea to capture a segment of the large patient market if and when such research succeeds and is thus transformed into medical practice of treating many types of diseases. In the meantime, policymakers of the Korean government should consider strong financial support for stem cell researchers in Korea since the economic payoff to Korea is potentially huge.


Post-Impeachment Agenda

May 27, 2004
By Chang Se-moon

The March 12, 2004 impeachment of President Roh by the National Assembly threw Korea into a state of uncertainty and confusion. The May 14, 2004 rejection of the impeachment by the Korea's Constitutional Court appears to have created a new set of uncertainty and confusion rather than to create a unified Korea for hope and optimism for the future.

My views on the election of Roh as president and the post-election developments all the way through the rejection of Roh's impeachment by the Constitutional Court are rather straightforward. I firmly believe that Roh was elected as president by a much broader support than that of the so-called 386 generation alone. Koreans with lower incomes who were disgusted with the crony and dirty relation between the rich and the powerful supported reform-minded Roh regardless of their ages. This is an important point because President Roh owes nothing to the 386 generation but owes everything to the nation that elected him as president.

I also believe that President Roh is a brilliant political tactician. When he was about to be impeached, he probably foresaw what its outcome was going to be, including the Uri Party's victory in the National Assembly's elections. Somehow, President Roh was portrayed as a victim and drew a huge support from all segments of Korean society. It is important to understand where the support came from and what the support really means. Much of the support came from people who opposed the impeachment process against minor infractions that fell far short of measuring up to the impeachment. Their opposition to the impeachment did not necessarily mean that they supported President Roh's performance as president. In fact, both President Roh and all members of the opposition parties who voted in favor of the impeachment should share the responsibility for having led, or at least allowing, Korea to go through the undeserved and wasteful crisis.

What remains to be seen is whether President Roh's newly gained political power can be transformed into successful socio-economic reforms that many Koreans expected from him when they elected him as president. The second half of this year is a very important period. Depending on how President Roh and the Uri Party proceed with their reform agenda, Korea can be better off by laying a solid reform foundation for continuing peace and prosperity, or worse off by fighting over trivial issues and thus digging a deeper hole from which it may have to pay deeply for generations to come to recover.

President Roh may want to pay attention to how fast time passes. It has been a year and a half since Roh was elected as president. What has the Roh administration achieved during the one and a half years of his administration? There is no sense of blaming opposition parties because what matters to the ordinary people is what has been achieved to improve their daily lives. With the victory by the Uri Party, President Roh clearly has a political muscle to push through his reform agenda. To be successful, the agenda need to be firmly in place within the next six months. Specifically, these are what I would like to see happen from now to the end of this year.

First of all, continuing peaceful overtures to the North are good and should continue. However, the Roh administration should be patient and demand that the North respond positively by pulling troops away from the front line and by becoming more cooperative toward resolving the nuclear issue. Further, the National Security Law should be strengthened, not abolished, so long as the North does not ease the military tension. When the Pyongyang government had expressed reluctance to let South Korea transport the aid supplies to Ryongchon overland through the DMZ, it became abundantly clear, again, that we work with the North not because we want to but because we have to.

Secondly, the fight against corruption has been one of the major achievements of the Roh administration and should continue. Corruptions are like cancer cells. If left untreated, they undermine the entire foundation of Korea's society.

Thirdly, please do not try to regulate the press. Without the freedom of the press, the fight against corruption cannot and will not succeed. Without the freedom of the press, democracy and the market economy cannot thrive. The Roh administration should spend its energy on improving the relation with the press, not on regulating it. If the press is regulated, it effectively represents the end of all reform movements that President Roh has initiated.

Fourthly, the most sensitive economic issue that the Roh administration has to deal with may well be corporate reforms involving chaebols. Regardless of what each side may have said, both sides need each other. The future economic growth and job creation requires chaebols that are profitable and successful in the global marketplace. Healthier and fairer chaebols, on the other hand, require a successful completion of many of the reforms that President Roh has proposed. These needed reform ideas include transparency in corporate governance, complete ban of illegal and under-the-table transfers of money, complete ban of illegal contributions to politicians and political campaigns, allowing class action lawsuits against illegal acts of corporate governance, protection of the rights of all shareholders, and complete ban of illegal strikes and violence by workers.

In the fifth place, policies on job creation should be developed for their long-term benefits, not their short-term benefits. Permanent jobs are created by the private sector. The government can help the private sector in creating jobs by providing a healthy environment in which the private sector can compete and grow. Proposals such as mandatory hiring of the unemployed by the private sector and mandatory conversion of part-time and out-sourced workers to regular full-time workers may benefit workers in the short run, but eventually hurt them. These policies will force businesses not to hire workers during good times so long as they cannot lay workers off during bad times.

Finally, one of the more tricky reform issues relates to tax reform for a more equal distribution of income. I do feel the same way as President Roh does in that the rich are too rich and the poor are too poor. A more equal distribution of income is a noble goal that needs to be pursued. What I do not know is whether the root cause of the unequal distribution of income is the illegal circulation of untaxed earnings or the income tax rate structure that favors the rich. If the cause is the former, it is more a law and order issue and a tax hike for the rich will have little, if any, impact. If the cause is the latter, an increase in income tax rate for the rich will be an important step toward a more equal distribution of income. The issue of income distribution brings us back to the fight against corruption. Until corruption is cleared, we do not know how unequal the income distribution truly is because measured earnings do not include unmeasured earnings.





Asia Lagging in Regional Trade Agreements

May 14, 2004
By Chang Se-moon

MOBILE, SOUTH ALABAMA----By some estimates, there are as many as 250 regional trade agreements (RTAs) in the world, although most of them are bilateral in nature. Of the 250 or so RTAs, approximately 170 are currently in force while the remaining are believed to be operational although not yet officially ratified. Globalization came a long way and the pace of globalization appears to be accelerating, endangering those countries who are slow to act to fall further behind.

Movement toward freer global trade began slowly in 1944 when 23 countries signed the Bretton Woods agreement to negotiate 45,000 tariff reductions and create the International Monetary Fund and the International Bank of Reconstruction and Development.

Most post-1944 agreements on reduction of trade barriers were achieved through the eight multilateral negotiations. The first five trade negotiations attracted a small number of nations: 23 for the 1947 negotiations; 13 for the 1949 negotiations; 38 for the 1951 negotiations; 26 for the 1956 negotiations; and 26 for the 1960-61 negotiations called the Dillon Round.

The number of participants significantly rose at last three negotiations. The 1964-67 Kennedy Round attracted 62 countries; the 1973-79 Tokyo Round attracted 102 countries; and the 1986-94 Uruguay Round attracted 123 countries and created the World Trade Organization (WTO) that replaced the 1946 General Agreement on Tariffs and Trade as the multinational organization designed to deal with rules of trade among nations.

One issue that may be of special interest to leaders of the Asian economies may well be the emergence of the two super regional trade agreements: The North American Free Trade Agreement (NAFTA) and the European Union (EU).

NAFTA was created in 1994 among Canada, Mexico and the United States. NAFTA is a free trade area in which there are no tariffs and quotas among the three nations although it does not necessarily allow absolute free trade.

Since the U.S. and Canada already had a free trade agreement at the time NAFTA was signed, its primary impact was on relations between the U.S. and Mexico. Currently, a discussion is under way to form a free trade area of the Americas, which may include many central and south American nations including the four Mercosur nations of Brazil, Argentina, Uruguay and Paraguay. Mercosur is a customs union, which is a free trade area with common external tariffs, unlike NAFTA which does not require them.

When NAFTA was signed, the average wage rate in Mexico was about 14 percent of the rate in the U.S., prompting the U.S. to lose many labor-intensive jobs to Mexico. Because of the transportation cost and, to a lesser extent, costs of parts and components, the difference in the total cost of many manufactured goods is not believed to be that large.

In automobile assembly, for instance, the labor cost favors Mexico by a large margin at $700 per car for the U.S. and $140 for Mexico. For total cost in the U.S., however, some give the edge to the U.S. at $8,770 per car for the U.S. in comparison to $9,180 in Mexico when costs of components and transportation are taken into consideration. For areas outside NAFTA countries, the difference in the total cost may vary with the location of these countries.

The long-lasting process of integration of European countries into a single market was achieved in 1992 when the European Union was born. The European Union is a customs union with common external tariffs.

The single currency euro was introduced on January 1, 2002. Sweden and the United Kingdom have yet to adopt the euro as their currency. On the first day of May this year, eight former Soviet-bloc countries and two Mediterranean island nations joined the 15 existing member countries to make the European union truly super.

The 10 new members are the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, and Slovakia. Bulgaria, Romania and Turkey will join the EU in 2007 or later, while three more transition economies have their applications pending. It is important to understand that the 15 existing member countries were gracious enough to accept five of the new member countries as they have unemployment rates of 10 to 18 percent.

What about Asian countries?

ASEAN was established in 1967 among Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei, Vietnam, Myanmar, Laos and Cambodia joined later. ASEAN nations have long tried to establish a free trade area called AFTA (ASEAN Free Trade Area). Asian nations have two problems. One is that AFTA is not yet a free trade area, and the other is the role of the three East Asian powers, namely, China, Japan and Korea.

ASEAN claims that the ``ASEAN Free Trade Area has now been virtually realized,'' by pointing out the substantial reduction in tariffs on all products listed in their 2002 Inclusion List (IL) to 0-5 percent. The newer members of ASEAN still have to reach the 0-5 percent tariff for intra-ASEAN trade by as late as 2010. The objective of these nations is to completely eliminate tariffs by 2010 for ASEAN-6 and 2015 for the newer members with flexibility on some sensitive products until 2018. Their vision is to establish an ASEAN Economic Community by 2020.

ASEAN also has a big problem of resolving its relations with other Asian powers. Or it might the other way around in that Asia's non-ASEAN powers have a problem of resolving their trade relations with ASEAN nations. China is ahead of others by working on the ASEAN-China Free Trade Area. Japan is closely behind by exploring the ASEAN-Japan Comprehensive Economic Partnership. Korea is barely in the game by becoming one of the three in the ASEAN+3. India is trailing Korea for ASEAN membership.

Clearly, one of the most important events among Asian nations was China's accession to the World Trade Organization (WTO) that was unanimously approved on November 10, 2001, at the WTO Ministerial Conference in Doha, Qatar.

China became the 143rd member of the WTO on December 11, 2001. Their accession to the WTO was so significant that even the downing of a U.S. spy plane in April 2001 by the Chinese military did not derail these negotiations. Both President Bush and Premier Jiang Zemin agreed to separate all trade activities and agreements from any ensuing diplomatic measures relating to the spy plane.

Because the diplomatic and economic relations between China and Korea were normalized on August 24, 1992, and a trade agreement between the governments of China and Korea was signed on September 30, 1992 long before China joined the WTO, the effect of China''s accession to the WTO on Korea has not been as dramatic as it could have been. But the changes will come and will come rapidly because the open economic relations that China maintained with Korea since 1992 are now made available to all other member countries of the WTO.

Do Asian economies lag behind RTA movement?

There is one overriding question that needs to be considered first before answering the big question and that may play an important role in formulating policies by the leaders of the Asian economies. The question is: What will be the long-term effect of NAFTA or FTAA (free trade area of the Americas) and the expanding EU have on Asian nations that are still struggling to identify an optimal trade area that can be the basis of organizing a truly free trade area of the Asian economies? I honestly do not know the answer to this question. All I know is that the longer it takes for Asian economies to counter the two super RTAs, the more likely it is that at least some of these Asian economies will lag behind the globalization process and its benefits.





Monument for Comfort Women

May 6, 2004
By Chang Se-moon

A considerable number of articles have been written, numerous lawsuits have been filed, and countless hours have been spent shedding tears over the comfort women forced into sexual slavery by the Japanese military until the end of World War II.

The first formal comfort stations under direct Japanese control were allegedly operated in Shanghai in 1932, although informal comfort stations may have been in operation before then. Lieutenant General Okamura Yasuji of the Shanghai campaign confessed in his memoirs that he was the original proponent of comfort stations for the military. Women were recruited by force, coercion, or deception into sexual slavery for the Japanese military through the comfort women system. Although the exact number may never be known, the number of comfort women is estimated at 200,000. Approximately 80 percent came from Korea, and the remaining from China, the Philippines, Burma (now Myanmar), Indonesia, and the Netherlands.

Japan has steadfastly denied the existence of comfort women although the inhumane system was widely spoken of during and after the war in Korea. The issue began to emerge only in the late 1980s and the early 1990s. On Aug. 14, 1991, a South Korean woman named Kim Hak-sun became the first former rape victim to give public testimony. Since then, many more women came forward to provide public testimony. The international community began to hear about Japan's state-sponsored rape victim issue from December 1991, when a number of Koreans, including three former comfort women, filed a class action suit against the Japanese government.

Japanese soldiers referred to these women as ``comfort women,'' implying they were women who followed and comforted Japanese soldiers. A true definition of a comfort woman is a female who was raped repeatedly _ by some accounts by 30 or 40 men each day _ by Japanese soldiers and authorities. At the end of the war, retreating Japanese soldiers killed many comfort women. Those who survived suffered sexually transmitted diseases, drug addictions, permanent damage to their reproductive organs and urinary tracts, sleep disorders, and other serious health effects as a result of their war time torture.

When Prime Minister Miyazawa Kiichi visited Seoul in January 1992, he expressed his regret and apologies over the state-sponsored rape victim issue, but still ruled out any compensation for these victims. On Jan. 8, 1992, a weekly vigil to remind the public of the atrocity began in front of the Japanese Embassy in Seoul. Earlier this year, the Wednesday vigil marked its 600th week anniversary and still continues. Some reports indicate that only 131 former Japan's state-sponsored rape victims are alive today in South Korea.

In a related issue, Korean-American Jeong

Jae-won filed a lawsuit in California against Onoda Cement for compensation of his war-time service to Onoda Cement as a forced worker. California Civil Code section 354.6 was enacted in July 1999 to allow the U.S. forced labor victims during World War II or their heirs to bring a lawsuit against firms that abused these victims. When Onoda Cement asked Los Angeles County Superior Court Judge Peter D. Lichtman to dismiss Jeong's lawsuit against the firm, their request was denied. Onoda Cement changed ownership to Taiheiyo Cement, which in turn appealed Judge Lichtman's ruling to the Second District of Appeals Court. On March 30 of this year, Taiheiyo Cement succeeded in its appeal.

The problem is that the individual rights of the comfort women and forced laborers were not protected in post-war treaties. One such treaty is the 1951 Peace Treaty, which spelled out the rights of the Allied Powers against Japan. Korea did not benefit from the reparations clause in the 1951 Peace Treaty because Korea was not considered a member of the Allied Powers. Instead, Korea's claims are stipulated in the treaty to be subject to separate negotiations with Japan. This leads to the 1965 Korea-Japan Agreement.

Korean plaintiffs and Japanese defendants have interpreted the Korea-Japan Agreement in opposite ways. Korean plaintiffs have argued that the 1965 Agreement covered claims between the two governments, but not claims from individual victims. If this interpretation were correct, the Agreement should allow Korea's individual victims to pursue compensation through the legal process. Japanese defendants, however, have used the same Agreement to reject any and all claims against them, including claims made by the former state-sponsored rape victims as well as forced laborers. The Japanese interpretation of the 1965 Agreement prevailed in most, if not all, lawsuits filed in Japan by the former Korean victims.

Should we continue to work towards and wait for Japan's support or for any cooperation between political leaders of Japan and Korea over the issue? I would not wait. It is nearing 60 years since the end of the war and the issue is far from being resolved to the victims' satisfaction or to the satisfaction of the Korean people.

Two years ago, compensation for victims was an issue. When so few victims are alive today, Korea's National Assembly should simply legislate to make sure that the remaining days of the rape victims are comfortable without any delay. Beyond the unilateral compensation by the Korean government, I propose that Korea build a historic monument to honor the rape victims and forced laborers and gather information on their suffering so that we can remind future generations of the barbaric acts that should never have happened in the first place and must never happen again. When Korea's leaders who have so cowardly and cruelly ignored these issues finally make the decision to build the monument, we will be able to move on and start living for tomorrow.

 

Can We Change 'Outsource India' to 'Outsource Korea?'

April 29, 2004
By Chang Se-moon

Economic theory tells us that trade among nations helps both trading partners to realize higher overall output by redirecting labor force to those industries in which they are more efficient than their counterparts in other countries. When we think about trade, the first product that comes to mind is merchandise such as cars and clothing while the second product that comes to our mind are services such as shipping, insurance, and legal assistance. The latest product that has been added to the list of traded products is skilled white-collar work, known more commonly as outsourcing. Outsourcing occurs when a business transfers some of its tasks to an outside supplier rather than doing them with its own employees.

The rapid phase of globalization during the past ten years led to two concurrent developments in international trade. One is that global competition placed an unprecedented pressure on businesses to reduce costs to remain competitive, while the other is that globalization made it much easier for businesses to outsource by easily crossing national boundaries for production activities. An article by Thomas Siems and Adam Ratner in the November/December 2003 issue of the Southwest Economy by the Federal Reserve Bank of Dallas states that ``it is not uncommon for companies to realize net cost savings of 30 to 50 percent by outsourcing some of their tasks. In today's global competition, outsourcing is not a luxury. It has become a necessity.

Key global players have also been changing. During the 1950s and 60s, it was Japan. During the 1970s and 80s, it was Korea and other Asian tigers. During the 1990s and 2000s, it has been China. Also, in these past few years, India is joining the exclusive club of key players in global trade. Unlike China that established itself as a global player through production based on low wages, India is establishing itself by providing many different services to global companies that outsource their operations. The article by Siems and Ratner indicates that in the U.S., an estimated 60 percent of these outsourced jobs went to India.

There are several reasons why India has emerged as the most appealing country for outsourcing. One is that production and labor costs are low in India. But that alone is not sufficient enough to make a place appealing for outsourcing. India also enjoys such business-friendly factors such as ``the number and quality of skilled workers, maturity of the outsource market, government support, the legal system, political stability, location and accessibility, education, time differential, technological modernity and English language skills.

Other sources such as www.outsource2india.com stress the rich pool of IT talent in India by stating that (1) India exports software to 95 countries around the world; (2) 82 percent of U.S. companies ranked India as their first choice for software outsourcing; (3) Indian-Americans run more than 750 companies in America's Silicon Valley; (4) India has a stable government with 50 years of democracy and is one of the world's 10 fastest-growing economies; and (5) India ranked third in Asia, just after Japan and China, in terms of investment potential for the next 10-year period in a study by the Export-Import Bank of Japan. The point is that India's appeal as the most popular place for outsourcing is based on many factors, not just low wages.

There are many tasks that can be outsourced. They include: (a) IT services such as software development and data warehousing/mining; (b) data entry or dispatch; (c) call centers such as help desks, bookkeeping or clerical support, e-mail services and telemarketing; (d) office operations such as processing accounts payable or receivable, general ledger, payroll and health claims administration; (e) communications and messaging; (e) order processing; (e) system maintenance; (f) media and entertainment including advertising; (g) web development services; (h) relationship management such as customer care services; (i) manufacturing of parts and components; and more. There is virtually no limit to individual tasks that can be outsourced. Note, though, that when an entire production is outsourced, it is called foreign direct investment.

Outsourcing is a problem because it exports jobs that can be held by citizens of the country from which companies outsource. Recently, Dr. Greg Mankiw, who is Chairman of the Council of Economic Advisors to President Bush, has said that outsourcing U.S. service jobs overseas is just a new way to do international trade. Dr. Mankiw drew numerous criticisms from Democrats and union leaders for the comment, including Robert Reich, the Secretary of Labor under President Bill Clinton, who responded through the radio program, Marketplace, on February 18, 2004, by saying that ``when the public gets heated up, they want practical solutions, not economic theory.  The point is that outsourcing may be a new way of doing business but it may lead to massive job losses in the home country.

Despite booming exports in Korea in recent months, it is well known that Korean exporters outsource the bulk of their parts and components outside Korea under the so-called global outsourcing program. Because of the outsourcing, Korea's booming exports are not generating as many jobs as reflected by the increasing amount of exports. In recent weeks, a new Samsung Electronics Anycall commercial targeting overseas consumers featured Canadian beauty Estella Warren and attracted curious, if not concerned, attention from Koreans. Ms. Warren is a Chanel No. 5 model, and starred in such movies as Planet of the Apes and Kangaroo Jack.  In addition to outsourcing the model, the filming of the commercial was also outsourced to the Czech Republic.

How can Korea's policymakers promote Korea as an appealing place to outsource? As long as there are workers in other countries who are willing and able to do the same work for less pay, and as long as Korean businesses feel that outsourcing is more productive even if the cost may not be lower, Korean businesses will increasingly consider outsourcing as an option to cut costs and improve productivity. The question is: What should Korea's policymakers do to keep Korean businesses from outsourcing and at the same time to attract foreign businesses to outsource Korea rather than outsource to India or China?

Important factors that will make Korea an attractive place for outsourcing by foreign firms and in-sourcing by Korean firms include: low labor cost in relation to labor productivity, availability of skilled workers, political stability, government support, English language skills, and effective promotion of Korea as a place for outsourcing. The proposal of the English-only villages is one of such efforts that can help Korea become a better place for outsourcing. Comparing Korea's labor costs and labor productivity with those of competing nations and making needed adjustments are another of such efforts, as well as learning to work together especially among opposing political parties on matters such as outsourcing that have a long-term impact on the future of the Korea Inc. Most importantly, we need to recognize that all these factors that make Korea a more attractive place for outsourcing require long-term planning and continuing efforts.

 

Korea Needs to Prepare for US Presidential Election

By Chang Se-moon
April 6, 2004

President Bush identified Iraq, Iran and North Korea as an axis of evil in his State of the Union speech on Jan. 29, 2002. The following year President Bush announced that he was ready to attack Iraq without a U.N. mandate. The war against Iraq began at 5:30 a.m. Baghdad time on March 20, 2003 when the U.S. launched Operation Iraqi Freedom. On April 9, Baghdad fell to U.S. forces and on April 14, the Pentagon declared that major fighting in Iraq was over.

Little did we know that the war was far from being over. The exact cost of the war remains a mystery, although a $180 billion figure is frequently mentioned. No one knows how long the killings will continue despite the deaths of nearly 600 U.S. soldiers and injuries totaling over 3,000. The number of Iraqi civilian casualties is unknown. It appears that the global impact of the war will play a key role in determining the next president of the United States.

It is widely conjectured that about 40 percent of American voters will cast their ballots for Bush and about 40 percent for Kerry, despite facts or future plans of the candidates. It is the remaining 20 percent who will decide the outcome of the November election. Let us take a look into the logic of the median voter, the head of the 20 percent who will decide the election. The median voter is desperately seeking answers to two main questions: why we started the war in Iraq and what's next.

Why did we start the war? According to President Bush, the war was a preemptive strike to reduce threats to the U.S. interests since Iraq was about to develop weapons of mass destruction that might be used against the U.S. By now it has become clear to the median voter that Iraq did not have, nor was it developing, weapons of mass destruction. Nor did Iraq have direct ties to al-Qaeda who carried out the World Trade Center bombings on September 11, 2001.

The median voter is struggling to figure out the real reason for starting the war. Was it the lack of accurate intelligence made available to President Bush whose only objective was to protect U.S. interests? Or was the war merely an outlet of personal vengeance for President Bush against an Iraqi leader's attempted assassination of former President Bush? The median voter tries to give President Bush the benefit of the doubt when trying to understand his decision to go to war. However, the issue still exists of whether or not it was a good decision, even if his sole objective were to protect U.S. interests, when in fact the consensus enemy was al-Qaeda, not Iraq.

The median voter began to have some doubts when former Treasury Secretary Paul O'Neill stated last year that President Bush's only real agendum during the president's first National Security Council meeting in early 2001 was Iraq. O'Neill, best known for the revival of the U.S. Steel prior to his appointment as Treasury Secretary by President Bush, has suggested that President Bush appeared obsessed with attacking Iraq. The median voter felt that this criticism of President Bush could be attributed to bitterness on O'Neill's part following dismissal from his cabinet post. When Richard A. Clark, former NSC counter-terrorism official, stated in March of this year that President Bush's team was partly at fault for the World Trade Center bombings and that he was outraged with President Bush's re-election campaign based on the claim of a job well done in the fight against terrorism, more unanswered questions began to give the median voter second thoughts.

If President Bush decided to go to war based on incomplete intelligence, would he make the same hasty decision during his second term if elected? If the Iraq war made our fight against al-Qaeda in Afghanistan less effective, what was the reason compelling enough to compensate for reduced efforts in the fight against terrorism in Afghanistan? Why have officials of the Bush administration been so reluctant to assist the investigation by the National Commission on Terrorist Attacks Upon the United States, known as the 9/11 Commission? When President Bush responded to nagging questions about whether the war was worth undertaking by saying ¡°ask Iraqi people,¡± is he implying that we are fighting the war for Iraqi people rather than for the U.S. interests? Giving the full benefit of doubt to the President, was the war part of a grand scheme to plant democracy in the Middle East?

It is highly unlikely that the median voter will be able to gather answers to all these questions. This means that the median voter will have a little bit of confusion when election time comes in November. The fact that the median voter would know someone who was killed or injured in Iraq should hold a heavy weight in their decision. Every state except Alaska suffered a soldier fatality and every state without exception suffered numerous soldier injuries. Since all these questions relate directly to the main theme of President Bush's re-election campaign, which is that President Bush is more effective in fighting terrorism and thus protecting Americans from terrorists. The bottom-line is that President Bush's re-election is not guaranteed. Polls measuring public opinion will fluctuate and the outcome of the election will be unclear until the last minute of election night.

What should Korea do? Korea has more than a passing interest in the way these issues unfold since the American resolve to defend the South against the unlikely but possible invasion from the North will weaken considerably if President Bush's claims are not exonerated. This may also be a pressing factor in the minds of Korean-Americans who vote in the November election. Korea may not be alone. Most, if not all, reluctant members of the war coalition will likely wonder what they should do to prepare for the presidential election in the United States.

Korea did its job as a close military ally of the U.S. by sending its troops to Iraq even though it was not a popular decision. What Korea needs to do is to convince both parties of the U.S. that Korea continues to be a vital interest to the United States. This can be done many different ways, including a public relations campaign stressing the importance of the deep relation between the two countries. We need to understand that no matter how foolish the Korean National Assembly's impeachment of President Roh may have been, Korea is fortunate that the impeachment did not shake the foundation of Korea's national security, nor its economic vitality, because of the U.S. military's commitment to defend the South.

 

Violence Among Family Members

By Chang Se-moon
March 18, 2004

Early in March this year, Melanie Bankhead, a professional trainer on domestic violence, was telling a story to her listeners who were anxiously paying attention to everything she was saying to them. One day, according to the story, Melanie was in a shelter taking care of a woman who ran away from her abusive husband who regularly beat her up. The woman had with her 18-month old Johnny who had no place to go. When Johnny became thirsty and wanted milk, he yelled at her mother saying, “milk, bitch!”

When Johnny became 18, he met Suzie, a pretty and attractive girl who grew up in a family that had no domestic violence. Johnny wanted Suzie so badly that Johnny became like a Prince Charming toward Suzie. Finally, Johnny and Suzie got married and a clear bond was established between the two. Before long, Johnny became possessive and started asking Suzie where she had been while they were not together, where she spent her money, whom she met while she was out, and more. Suzie was a little puzzled to find Johnny acting like a controlling freak, but tried to please him by being careful, but also believing that it may have been her fault. This is known as the first stage of domestic violence.

No matter how careful Suzie was, she could not satisfy Johnny’s appetite for control. Johnny became physical by pushing, shoving, hair grabbing, and other relatively minor physical contact. Suzie became scared and confused. She still was not able to put all the past acts together and make some sense out of Johnny’s possessive behavior. Professionals call this the second stage of domestic violence. Minor physical contact became more physical and violent. Johnny started hitting Suzie and injured her several times. The injuries were so bad that Suzie had to call for help more than once. Suzie wondered what she did to provoke Johnny’s beating. This is the third stage of progressively worsening domestic violence.

When domestic violence reaches the fourth stage, violence becomes serious through forced sex, the use of weapons of all kinds, with psychological threats involving the sharpening of a knife or wielding of a gun in front of the victim. The last stage involves permanent injuries on the victim or separation of partners that may lead to even more violence, which includes murder of the victim. If this is not enough, 50 percent of domestic violence is found to spillover to child abuse. Although either gender can be an aggressor in domestic violence, studies in the U.S. indicate that females are victims in 95 percent of the cases and males are victims in the remaining 5 percent.

Why is there domestic violence? The ultimate cause of domestic violence is one person’s desire to have power and control over another person. It may be by husband over wife, by a male partner over his live-in partner, and by husband over his children or even his elderly parents. Acts of domestic violence are not continuous. There may be a calm and perfectly normal period, which is followed by tension building over trivial matters. Violence may erupt following the build up of tension and the violence may be followed by the aggressor’s nice behavior toward the victim. Every time the cycle repeats, however, it may intensify and make subsequent violence more dangerous. Drugs and alcohol are not the causes of domestic violence, although they may play the role of triggering domestic violence. The root cause of domestic violence is a possessive husband’s desire to control his wife or his partner.

Some people may ask why wives do not leave their abusive husbands. One reason is the fear of more violence. Homicide often follows separation. Another reason is a lack of resources because a possessive husband may not allow his wife to have any financial means. With no money, where can battered wives go? Some battered women still run away from home out of desperation. Another reason is the lack of a secure, anonymous shelter. In Korea, many battered women run away to their friend’s home or relative’s home only to be found by their husbands. Still another reason is that battered wives simply do not want to leave for whatever reasons they may have.

Because of the male-dominated history of Korean society, it would be a safe assumption to make that there are many, perhaps too many, domestic violence incidents that are not reported. We hear stories of a housewife running away from home but never hearing why. Traditional thinking is that the runaway housewife is a bad woman. We never think of the possibility of a husband abusing her so cruelly that running away becomes the only option the housewife has left with. I would call Korea’s victims of domestic violence the silent victims. They are silent because they know little about an alternative life; have few choices if any, and their fights are likely futile. Even if legal action is successfully undertaken against the abusive husband, the battered wife is faced with a number of unanticipated problems such as what to do when he is released, where to go, what to tell the children, how to support herself if she leaves, what to tell the system if she doesn't want to leave, and more.

What can be done?

I suggest that the Korea’s reform-minded government appoint a special commission to explore ways to assist victims of domestic violence. In the United States, Duluth in Minnesota, Ann Arbor in Michigan, and Santa Barbara in California, such places are known to have the most progressive programs on domestic violence. All three programs stress a community-based approach with the emphasis on early intervention to keep the progression of domestic violence from getting worse.

Let me illustrate a possible community-based approach toward domestic violence. First of all, there has to be a telephone number that potential victims can easily remember and call. When a victim calls the number, a police officer is dispatched usually with back up because an angry husband may attack a police officer. The police officer immediately notifies a “personal advocate” who can also come to the scene and try to help by explaining to the victim her rights as well as any follow-up procedures. There has to be a permanent shelter for victims and the shelter’s address should be confidential so that angry husbands cannot find the place. If there is an arrest of the abusive husband, a legal advocate follows up on the personal advocate. The legal advocate may transport the victim and accompany her to court hearings if desired. These advocates will take the victim to the shelter or another location if she wishes to leave her home. If the victim decides to obtain a civil protection order, the legal advocate assists her in obtaining the order quickly so that the order can be served on the respondent before he is released from jail. The shelter may also maintain a resource advocate to make sure that the victim and the aggressor husband receive the needed counseling and training, although not together. It is important to authorize the police officer to make an arrest of the abusive husband without the consent of the battered wife. Many progressive places in the U.S. make it mandatory for police officers to arrest the aggressor without the approval of the victim.

To summarize, Korea’s long history of a male-dominated family structure makes it important for the government to take the initiative of assisting these silent victims by appointing a female dominated commission on domestic violence. The process may take a long time but these efforts will be valuable because it will help those who have no power and no voice of their own.

 

Declining Manufacturing Jobs

By Chang Se-moon
March 5, 2004

Jobs have been a hot topic recently in Korea. Overall, the news has not been encouraging. Reports indicate that the jobless rate for the 15-29 year olds hit a 34-month high of 8.8 percent in January and the rate will go higher because of the large number of college graduates this Spring. The National Statistical Office reported that the overall unemployment rate increased in January to an 11-month high at 3.7 percent. Interestingly, the National Tax Service has decided to exempt companies that hire more than 10 percent of employees than those hired last year from regular tax audits for up to five years. The National Tax Service will also exempt new venture start-up companies from tax probes until 2006. These rather strange but popular measures, the tax office said, apply to local as well as foreign firms.

According to the Monthly Statistical Bulletin of the Bank of Korea, the manufacturing employment in Korea was 4,537,000 in 1997, which decreased to 3,917,000 in 1998 following the 1997-98 financial crisis but increased to 4,293,000 in 2000. The December 2003 figure was 4,257,000. In other words, manufacturing employment has been declining even if the economy has been growing. A recent report by the Korea Development Institute depicts a gloomy picture about the future of Korea’s manufacturing jobs by stating that with the exception of a few flagship industries, Korea’s manufacturing industry is likely to lose global competitiveness.

Since manufacturing jobs usually have a large multiplier effect by creating many more jobs in other supporting industries, it is important to know what has been happening to Korea’s manufacturing jobs. Although reasons for the loss in manufacturing jobs are not necessarily identical, exactly the same problem is sweeping the issues of the U.S. presidential election slated later this year. Manufacturing jobs in the U.S. decreased from 17.3 million in July 2000 to 14.3 million in January 2004.

Let me speculate on the reasons for the declining manufacturing jobs in Korea, and possibly in the United States as well. My analysis is based in a large part on the February 18, 2004 report by the U.S. Congressional Budget Office titled ``What Accounts for the Decline in Manufacturing Employment?’’

First of all, the manufacturing sector has experienced a severe downturn since 2001 but only a modest recovery to date. The recent decrease in manufacturing employment reflects a weak demand for capital goods, for example, low manufacturing investment, as well as the recession-induced weak demand for consumer goods among Korea’s major trading partners. Standing alone, this particular reason for the declining manufacturing jobs is not a major concern since the global economy is expected to continue to improve and thus revive manufacturing industries.

Secondly, there has been an historical shift in consumer expenditures from manufactured goods to services such as health care. According to the CBO report, "Likely factors contributing to that shift are an increase in the value of time resulting from rising real (inflation-adjusted) wages and married women's increased participation in the labor force, which has led households to substitute some purchased services for tasks formerly performed in the home." As the rights of Korean females improve, more females in Korea are likely to join the labor market and this trend will continue to divert consumer expenditures away from manufactured goods toward more services. This factor, however, is a long-term shift and cannot explain why manufacturing jobs have been decreasing in Korea in recent years.

In the third place, labor productivity in the manufacturing sector has increased faster than labor productivity in non-manufacturing sector. In the U.S., for instance, the productivity of manufacturing workers has grown at an average annual rate of 3.3 percent since 1979, while the labor productivity in the non-farm business sector has increased at an average annual rate of 2.0 percent. In view of the rapid increase in Korea’s exports of manufactured goods in recent years, the difference in labor productivity between the manufacturing sector and non-manufacturing sectors in Korea is believed to be even greater than it is in the United States. When productivity in the manufacturing sector increases faster than the demand for manufactured goods in general, there is likely to be a surplus of manufactured goods, which leads to lower prices of manufactured goods and thus a lower demand for workers in the manufacturing sector. This is another long-term trend more likely beyond the control of Korea’s policymakers.

In the fourth place, manufacturing employers increasingly depend on outsourcing their needs not by adding permanent staff but by hiring temporary workers through agencies and by contracting with outside firms to provide certain support services. These structural shifts are one of many ways through which manufacturing industries try to become more efficient in an increasingly competitive global market. This is another trend that is likely beyond the control of Korea’s policymakers.

Finally and perhaps most importantly, the world economy has been rapidly globalized since the completion of the Uruguay Round in 1993. One of the most intriguing aspects of the rapid globalization of the world economy is the lack of knowledge on what industries may represent a country’s comparative advantages in the long run. Some may argue, for instance, that Korea has comparative advantages in memory semiconductors, digital appliances, mobile handset sectors, computers, home appliances, telecom equipment, and automobile industries. My hypothesis is that comparative advantages as a determinant of manufacturing investment are not stable but vary with a number of market-driven factors.

Examples of such factors include fluctuating foreign exchange rates that may adversely affect foreign direct investment if their directions are uncertain; the rising value of Korea’s currency that may prompt more Korean and foreign businesses to consider facility investment in other countries; changing patterns of the demand for Korea’s exports in major trading partners that may lower the demand for manufactured goods from Korea; wage increases that are faster than manufacturing productivity as announced by Korea’s Ministry of Commerce, Industry and Energy for the third quarter of last year; agglomeration benefits through knowledge spillovers and pool of skilled labor that can quickly change the status of comparative advantages; and the increasing amount of intra-industry trade that further muddles the concept of comparative advantages.

Unfortunately, there is no magic wand that can quickly increase manufacturing jobs in Korea or in any other country for that matter. Korea’s policymakers should continue to make sure that investors feel secure in Korea and assist Korea’s globally competitive firms to remain competitive. Korea’s policymakers should also work with these firms for their facility investment in Korea, and carry out proposed incentives that can encourage facility investment in Korea by foreign as well as Korean businesses. In a sense, Korea’s conglomerates may have been ahead of Korea’s policymakers and researchers for the simple reason that their very own survival has been at stake.

I do not know whether these are enough to keep Korea’s manufacturing jobs from falling further behind. I do know that Korea’s business community sorely needs policies that will have positive impact in the long run and stepped-up research that can help the business community to stay ahead of global competition.

 

Economic Reform Slowly But Steadily Moving Ahead

By Chang Se-moon
February 17, 2004

On December 19, 2002, President Roh Moo-hyun was elected owing, in large part, to his effective communication with the Korean people of the importance of carrying out many reforms that would open the door to opportunities for many Koreans, not just a select few. Thus was born Roh’s participatory government.

The tenets of President Roh’s participatory government are four-fold: principles & trust, fairness & transparency, dialogue & compromise, and the decentralization of power & autonomy.

Twelve road maps were spelled out to achieve the goals of the participatory government. Summarized briefly, they are: (1) To build a firm foundation for peace in Korea; (2) To ensure a corruption-free society; (3) To promote concurrent development in all regions; (4) To ensure the transparency of political funds; (5) To guarantee free and fair market; (6) To develop Korea as an economic hub of Northeast Asia; (7) To build a science/technology-centered society; (8) To assist agricultural and fishery community; (9) To improve participatory welfare and quality of life especially for senior citizens and the handicapped; (10) To achieve a more equal distribution of income and enhanced female representation in the government; (11) To carry out educational reform; and (12) To build a healthy labor-management relationship and create more jobs.

Roh’s participatory government is important in that unlike all Korea’s post-war presidents who grabbed the presidency more for personal power than for ideals to improve Korean society, "Roh’s victory signaled an unprecedented opportunity for a new generation of politicians to put their stamp on South Korean politics" as stated by Kirk W. Larsen. Put differently, President Roh’s inauguration represented idealism that appears missing in previous administrations.

To President Roh’s credit, many positive changes have been made during the past 12 months. The anti-American movement that had been destructive to the business environment subsided; a greater female participation was carried out at the cabinet level; violent confrontations between labor and management have decreased at least for now; various reform measures benefiting the working class such as a five-day workweek and class action lawsuits have been proposed if not initiated; numerous measures including tax incentives were initiated to attract foreign investment; steps were undertaken to move toward establishing regional business hubs through establishment of free economic zones in Inchon, Pusan and Kwangyang; active participation in globalization was pursued through participation in numerous regional meetings and free trade agreement (FTA) negotiations with Chile, Japan, Singapore, and other nations.

Because many of President Roh’s reform ideas are new, there are bound to be trials and errors. Nowhere is this experiment more conspicuous than in policies relating to chaebols, North Korea, and corruption.

President Roh’s policy on chaebol is to reduce the power of the conglomerates without hurting economic growth. This is clearly easier said than done. On the one hand, chaebol are influencing every segment of Korea’s society through their financial power, corrupting many politicians to the extent that Korea is accused of being ridden with crony capitalism.

On the other hand, chaebols are so efficient as business entities that they have been highly successful in global competition, making major, if not critical, contributions toward the miraculous growth of the Korean economy.

Roh’s government has to work with chaebols. Future policies on chaebol, therefore, require a thoughtful approach that encourages chaebol to make a greater contribution to the Korean economy in the highly competitive global environment, while making it clear that law does apply to them just as it does to all other citizens in Korean.

NK Policy

The sunshine policy is replaced by President Roh’s policy of peace and prosperity, although the scope of the new policy is yet to be defined. Carrying out a well-calculated policy toward the North is crucial because a miscalculation can easily disrupt the Korea’s financial market overnight and damage the Korea’s economy for years to come.

It is important to understand that Korea is only a piece in a large puzzle that determines the future of the North-South relations. North Korean leaders have different agendas than President Roh’s and have no second thoughts in not reciprocating President Roh’s good intentions. Policy toward the North needs to be patient and requires thoughtful analyses. Just as important is to try to forge a policy consensus within the South. One flaw with Kim Dae-jung’s sunshine policy was the absence of domestic consensus building measures (CBM) that could have generated more support toward the policy.

As stated clearly in Chong Wa Dae’s Web site, ``Corruption is one of the most serious problems in our society,’’ and ``Laws and regulations are of no use unless they are equally applied on everyone, fair and square.’’

Only days after President Roh was elected in December 2002, I told my golfing buddies to just wait and see that it would be a matter of time before some of President Roh’s assistants would accept bribes and get caught. It did not take long. Power corrupts people. Corruption has been so imbedded in Korean society that it became a way of life. In fact, all past presidents were so corrupt that they probably did not know that they were corrupt.

Although suspicions will also involve President Roh in such issues as illegal campaign funds, President Roh may well be making the greatest contribution toward fighting against corruption by allowing prosecutors to do their job without pressuring them one way or another. Past presidents either pressured prosecutors to investigate only their political opponents, or transferred them to other lesser positions when their investigations approached them too close for comfort, or gave total amnesty to those convicted as if Korea’s justice system was their toy.

When former President Chun’s second son was summoned allegedly for hiding millions of dollars that his father gave him, someone asked me ``Didn’t the Kim Young-sam’s administration investigate all of former President Chun’s illegal kickbacks?’’

That is precisely the point. What started out as former President Kim Young-sam’s courageous fight against corruption when former Presidents Chun and Roh were put on trial turned out to be nothing more than a political grand-standing by Kim Young-sam. President Roh Moo-hyun has been different and I am hoping that he remains different. I firmly believe that President Roh’s participatory government demands nothing but the truth and appropriate punishment from prosecutors who are uncovering the rampant corruption ever since President Roh was inaugurated early last year.

Overall, President Roh deserves more credit than what is given to him. We can disagree with him but need to support him when decisions are made. One mistake that people in democratic countries make is to start criticizing the president soon after the president is elected fairly and squarely through the voting process.

A certain amount of criticism is inevitable since the president has to make many important decisions and all-important decisions have supporters and opponents. Once decisions are made, however, both supporters and opponents need to support the president for democracy to work the way it is supposed to work.

For President Roh and his assistants, I suggest that they set aside time to think, and think again, because their actions affect so many lives and their future. I also suggest that they continue to refine and push their reform policies because all Koreans home and abroad truly want President Roh to be successful.

 

Some Suggestions for Job Seekers

By Chang Se-moon
February 10, 204

Recent reports by the state-run Korea Labor Institute indicate that 20 percent of college graduates in their 20s are unemployed in Korea. Many of these unemployed college graduates may not be counted as being unemployed in government statistics since those graduates who give up searching for a job are no longer counted as unemployed. Further, statistics released by Korea’s Labor Ministry indicate that fewer than 1,000 companies out of about 4,400 surveyed had plans to hire new employees during the first three months of this year, while no less than 64 percent of the businesses in Korea have no plans to hire new workers at this time. The National Statistical Office also reports that about half of the workers in their 20s were employed as temporary workers in Korea last year.

I do not believe anyone who has not been unemployed can truly understand the agony and frustration that unemployed persons go through.

The issue of job markets can be explored in two different ways. One is the macro analysis in which the focus of discussion is to search for policies that can create more jobs. This is a positive-sum game since the creation of more jobs does not lead to a decrease in existing jobs. The other is micro analysis in which the focus of discussion is to obtain employment when the hiring process begins for a limited number of existing or new jobs. This is a zero-sum game since when a person is selected to fill the position, this precludes other applicants from filling the same position.

In today’s article, I would like to discuss the second issue on how one applicant can create a competitive advantage in securing employment for an existing job.

The university where I am teaching is probably considered a mid-level university. It has such professional schools as a medical school and a school of engineering, but the economics department has no graduate program beyond the MBA program in which the department participates. When we announced one vacancy in the economics department late in 2002, we received over 300 applications. When we announced another vacancy late in 2003, we received about 250 applications. All applicants either have a Ph.D. or have promised to earn a Ph.D. before they join us in August if hired. The process of hiring begins with an internal review of all applications to narrow the list down to about 15 to 20 for an interview during the early January meetings of the American Economic Association. We then invite three finalists to campus for interview by all department faculty. We vote to rank the three after the campus interview and contact them for hiring in order of the rank.

In each of the two years, we received about 30 applications from Korean students who were completing their graduate work at U.S. universities. I noticed several Korean applicants graduated from top universities in Korea and worked on their Ph.D. degrees at Ivy League schools such as Yale and Brown. In each of the two years, I made sure that at least one or two Korean applicants be included in the first batch who would be interviewed during the January meeting. Even with the glowing resumes that they submitted, none of the Korean applicants was invited to campus for an interview as one of three final candidates. To my disappointment, my colleagues who interviewed the candidates told me that the English ability of the Korean candidates was not good enough for classroom teaching, although they told me that they liked the Korean candidates.

Perhaps, the toughest assignment for any candidate who applies for employment against hundreds of other well-qualified candidates is how to make himself or herself visible enough to be selected for the initial screening and the following invitation for campus interview. My first advice is to do the homework on what the employer’s needs are. Every employer has a special need. If the applicant’s talents do not meet the needs of the employer, the applicant will not pass the initial screening no matter how good the applicant’s qualifications may appear on paper. If the school needs a good teacher as well as a researcher, the applicant needs to show in the very beginning of the resume that the applicant is a good teacher or at least has the potential for being a good teacher. Evidence such as a student evaluation of teaching performance while working for a graduate degree usually attracts special attention. I have no doubt that paying attention to what the employer needs is just as important in Korea as it is in the United States.

My second advice is also to do the homework, this time, in gathering information about the people who actually make the hiring decision. The faculty we hired last year and the faculty we just hired this year both did an extensive web-search to find out research and other interests of the department faculty who vote on hiring. In addition to my usual website through the university, I have a personal website (semoonchang.com) that I use to assist people who want to know more about Korea as well as people who need local data not available elsewhere. I was pleasantly surprised to hear that both candidates we hired searched my personal website before they came to campus for an interview. Their knowledge of my personal interest led to a pleasant beginning of our interview process. Keep in mind that in a tight job market, you as an applicant are the one who needs the employer, not the other way around.

The Mobile County Sheriff may be the only sheriff in the U.S. who has an economist as a continuing consultant. The story I am about to tell you is to stress the importance of doing homework in job search. The sheriff who initially hired me as a consultant was a Democrat. A few years ago, the sheriff was defeated by a Republican sheriff. Under usual circumstances, this should be the end of my consulting work for the Sheriff’s Office. When my contact successfully persuaded the new sheriff to at least see me, I had a different idea. I knew that the new sheriff was a successful boxer in his youthful days. I thus went to the library and found a piece of an early 1970s New York Times article with a picture of the new sheriff who was holding his North American Boxing Federation (NABF) championship belt. I copied the article, framed it and gave it to the new sheriff when we met the first time. The sheriff still believes that I am the greatest.

I am aware that there are many other factors that job applicants will have to keep in mind. These include making sure that the resume has no typing errors or bad grammar, being there before the appointment time, showing some passion for the work, maintaining eye contact during the interview process, being positive throughout the interview, sending a post-interview thank-you letter to express a continuing interest in the position, and more. These factors, however, become important only if an applicant passes the first hurdle of being selected for interview. My advice to do homework regarding the needs of the employer and also the personal profile of interviewers who later make decisions on hiring is intended to help the applicant get over the first hurdle of initial screening.

I do not want applicants to be disappointed too much even if you fail to get the job you applied for. Although you may be terribly disappointed, think about the reality. When only one person is selected from hundreds of applicants, there is no assurance that the person selected is the most qualified candidate or more qualified than you are. People who make hiring decisions do so for all kinds of reasons. Some want to hire those workers who appear less threatening to them, while others are too lazy to review all the files carefully, especially when there are many applications for a small number of openings. The worst thing that you can do to yourself is to lose confidence. All those who are successful in their lives share the common thread of perseverance.

Do Attorneys Need Economists?

By Chang Se-moon
January 28, 2004

The rapid growth of the Korean economy over the past four decades has been greatly assisted by a rapid development in the three industries of manufacturing, construction and shipbuilding. On the other hand, these three industries are the most likely to experience relatively a large number of workers who are injured or killed on the job.

Lawsuits relating to these workers are known as personal injury or wrongful death cases. Stated more directly, one of the inevitable byproducts of a growing economy is a rising trend in lawsuits. Business lawsuits extend well beyond the three industries and arise from breach of contracts that lead to business losses, airline crashes resulting in multiple deaths, and automobile accidents that result in severe injuries.

Most, if not all, of these cases are civil cases and plaintiffs go after compensation for present and future lost earnings and sometimes punitive damages. Through the years, I have assisted private, state and U.S. attorneys on more than 120 cases, most of which were settled out of court while others went to trial during which I testified as an economic expert. In the United States, economists who work with attorneys on civil lawsuits are collectively called forensic economists. Many forensic economists are members of the National Association of Forensic Economics, which strives to promote objectivity in the role that forensic economists play.

The majority of these cases are personal injury cases. Typical work of an economist in personal injury cases involves estimation of the present value of future lost earnings. The usual process is to determine (a) the plaintiff’s work life, which measures how many more years the plaintiff would work without the injury, (b) the plaintiff’s earnings history that can be used to project the plaintiff’s future earnings capacity, (c) income tax rates that would apply to the plaintiff’s projected future earnings since income taxes should be subtracted from any damage awards, (d) fringe benefits such as the value of the plaintiff’s insurance, retirement contributions and other benefits that the plaintiff would lose because of the injury, (e) the discount rate at which future earnings are discounted to the present value since awards are made now not in the future, and (f) the extent of the injury through review of reports of a vocational expert that may determine the extent of the plaintiff’s loss in access to the job market, which in turn affects the amount of lost earnings caused by the injury.

The estimated value of the plaintiff’s lost future earnings at this juncture is based on the assumption that the accident is the fault of the employer. This obviously may or may not be true. Sometimes during trial, the economist’s report becomes totally irrelevant because the accident that caused the plaintiff’s injury is judged entirely the fault of the plaintiff, not the employer.

Cases on business losses vary widely and can be quite complicated. In one case on the employee stock ownership plan (ESOP) of a large dairy farm company in which I assisted the plaintiff’s attorneys, attorneys of the U.S. Department of Labor eventually became involved for the workers before the case was resolved. In another case on Blockbuster Video, I assisted attorneys who defended the company against customers who filed a class action lawsuit alleging that the late-fee penalty, higher than the initial rental fee, for returning the rented video late was illegal. Sometimes, I simply play the role of an interpreter when Korean seamen are involved in a lawsuit.

By now it is obvious that attorneys need an economist to more accurately measure the personal loss from injury or wrongful death and the business loss from various breaches of contract or alleged fraud. The usual practice is both the plaintiff’s attorney and the defendant’s attorney hire two different economists. The plaintiff’s attorney hires an economist to obtain an estimate of loss, while the defendant’s attorney hires an economist to make sure that the estimation made by the plaintiff’s economist is accurate. In many cases, economists on the two sides have significantly different estimates of the alleged loss. The question is what qualifications attorneys should look for when they hire an economist to assist them.

One of the important qualifications is that the economist should have worked in the past for the plaintiff as well as for the defendant. When an economist works solely for the plaintiff or the defendant, it is highly likely that the estimation is biased and the report tends to be written in a more complicated manner than necessary, perhaps to hide the bias. The true role of a forensic economist is to find and present the facts. In an ideal situation, the estimated amount of loss should be identical regardless of whether the economist works for the plaintiff or the defendant. On more than one occasion, both sides accepted my estimation, which was commissioned by one of the two sides for being fair to both sides.

Another important qualification is that the economist has recent publications in well-known journals, preferably in the area of forensic economics. Even the methodology of calculating the present value of lost future earnings that I described earlier can be quite complicated, especially in the selection of a discount rate and in tackling reports that may contain the value of pain and suffering known as hedonic damages. Litigation is not an act of a friendship. It is a zero-sum game in which one party wins only at the expense of the other party.

Still another important qualification is the economist’s experience in court testimony. An economist can jeopardize a case merely because he or she uses inappropriate terminology, such as speculation. I personally have never been disqualified as an economic expert at both the state and federal courts. Once, however, the other side wanted the judge to rule that I be disqualified as an economic expert because I did not subtract social security taxes the plaintiff would pay on damage awards. The judge overruled the motion upon hearing my testimony that different courts had ruled differently on the issue. The common practice is that only the income tax is subtracted. The motion to disqualify me was a surprise tactical move to keep me from testifying.

There is one interesting issue in Korea. So far as I can remember, there has been an endless supply of corruption cases in Korea in the form of bribery and illegal campaign funds. Bribery cases range from low-ranking public officials of small towns all the way to past presidents and their sons. I am quite sure that Korea’s prosecutors who prosecute corruption cases hire accountants and accounting firms to trace illegally obtained funds that are hidden sometimes on both sides of the Pacific Ocean. One interesting question relates to whether these prosecutors should hire forensic economists to calculate the exact amount of illegally procured funds. My answer is yes.

Let me illustrate why. Suppose that a former president of Korea or a CEO of a large corporation is found guilty of illegally accepting $1 million in 2003, and that the president will have to pay the amount back in 2004. The amount that the president has to pay back in 2004 should be greater than $1 million because the value of the currency is not the same in both years. Assuming that the annual rate of interest is 5 percent, the amount that the president has to pay back in 2004 is $1 million plus interest earnings of $50,000, which is 5 percent of the principal amount. Assume that the amount of bribe is $10 million, which appears rather common in Korea’s corruption cases, and that the bribery occurred five years ago. At the 5 percent annual interest rate, the amount that needs to be returned becomes $12,762,815, not $10,000,000. If not, one can take $10 million, be caught five years later, pay back $10 million, and still enjoy a windfall income of $2,762,815.

Let me provide another illustration why prosecutors may need an economist. Unlike personal injury and wrongful death cases, Korea’s corruption cases are mostly criminal cases. The monetary penalty that alleged law violators will have to pay belongs to Korea as a nation, not any particular individual. This means that the penalty should include the amount of damages that the illegal act may have caused to the economy. In other words, the true penalty associated with Korea’s corruption cases should be comprised of the actual amount of illegal funds, interest earnings lost on the amount, and the negative economic impact that the illegal transaction has had on the Korean economy. Calculating the first two components is tough enough. Calculating the third component would be anything but easy but certainly merits consideration.

 

Pegging Asian Currencies

By Chang Se-moon
January 12, 2004

The 2004 annual meetings of the Allied Social Science Associations (ASSA) were held on Jan. 3-4 in San Diego. As usual, I attended several sessions in which the Korean economy was either the primary topic or mentioned directly and indirectly through discussion of Asian economies in general. In today’s article, I would like to convey current thoughts related directly to the Korean economy as expressed by economists who made a presentation at these sessions.

One of interesting topics involves foreign exchange rate system. Ronald McKinnon of the Stanford University states that East Asian nations such as Indonesia, South Korea, Malaysia, the Philippines, and Thailand maintained a soft pegging system to the dollar prior to their 1997-98 financial crisis and now again practice soft pegging.

Soft pegging means that a country does not fix its exchange rate to the dollar such as 1,100 won to the dollar, but allows a small band of fluctuation without freely floating the currency according to the market forces. McKinnon claims that the East Asian dollar pegs are entirely rational and these countries are better served by providing certainty for investors and businesses by pegging their currencies to the dollar at least in the near term.

Kim Yoon-bai of the University of Kentucky agrees that the floating exchange rate system is not necessarily the best for East Asian nations. Takatoshi Ito of the Tokyo University and the Hitotsubashi University opposes soft pegging to the dollar by East Asian nations claiming that it has caused a loss of global competitiveness and an excessive inflow of foreign capital to East Asian nations. Ito favors a wide banding of fluctuations of exchange rates based on a combination of several currencies instead of the dollar alone.

In recent years, most East Asian economies have run trade surpluses and thus became dollar creditors. These countries include Japan, Singapore, Taiwan, China, South Korea, and Thailand. With large current account surpluses over time, two events are likely to unfold. One is that foreign counterparts such as the U.S. start complaining that the trade surpluses are unfair and thus demand an appreciation of currencies.

This is exactly what is happening to South Korea and China, for instance. The other is that holders of dollar assets in East Asian nations become concerned about the possible appreciation of East Asian currencies and start converting dollars into local currencies, forcing an appreciation of the local currencies such as Korean won or China’s yuan.

As more people convert their dollar holdings to local currencies, local currencies will be appreciated and the appreciation of local currencies could induce deflation with near-zero interest rates. These are the developments the East Asian governments do not want to happen to their countries, leading to the argument that soft-pegging is rational. Note that deflation is usually associated with a recession and that near-zero interest rates suggest impotence of monetary policy. In the long run, McKinnon proposes an “Asian euro,” common currency among East Asian nations.

Discussion quickly turned to regional cooperation, supported by most economists. Since 1980, the amount of intra-East Asia trade increased dramatically with more than half of all current trade of these nations being with other East Asian countries. The United States now accounts for only 23.1 percent of all exports from East Asian economies and for only 14.4 percent of their imports. In addition, Ito claims that the success of NAFTA, FTAA, EU and the dollarization of Latin America provides a strong motivation for regional cooperation among East Asian economies. Ito also states that Japan and Korea have been slow in free trade arrangements. Japan’s FTA with Singapore and South Korea’s FTA with Chile are the first FTAs for both countries.

According to Hiro Lee of the International Center for the Study of East Asian Development, there were 40 FTAs in 1991 in the world, and the number increased to 190 in 2003. Lee reminds the audience that some economists do not like bilateral FTAs because they tend to impede development of a multilateral or regional trade agreement. Kang H. Park of the Southeast Missouri State University cites interesting data in support of a regional cooperation among East Asian countries. From 1980 to 2000, Park states that the share of East Asian nations relative to the world output increased from 14 percent to 23 percent, the share of intra-East Asian exports increased from 31.2 percent to 48.4 percent, and the share of intra-East Asian imports increased from 30.7 percent to 52.6 percent.

Ah n Choong-yong of the Chung-Ang University and the KIEP also stressed the importance of a regional cooperation among East Asian countries. Ahn expressed his preference of a large area FTA such as the combination of the existing AFTA and the big three _ Japan, Korea and China. Ahn also speculated the possibility of developing an FTA led by Japan or China and of persuading North Korea to join the future development of an East Asian FTA. He mentioned the danger of ending up with a Spaghetti Bowl or Noodle Bowl type of regional cooperation with no clear hub or hubs.

Citing China’s reluctance to free yuan from its pegging to the dollar and Korea’s ambitious pursuing of becoming a regional hub in East Asia, Choi Kwan of the Iowa State University states somewhat cynically that China does not realize that it is a big country and Korea does not realize that it is a small country. Min Sang-ki of Seoul National University was also cynical by stating that Korea tries to develop herself as an East Asian financial hub whereas foreign financial hubs are named after cities such London and Tokyo rather than countries.

How does the Korean economy look in the near future? According to Kim Choong-soo of the Korea Development Institute (KDI), the Korean economy appears bottoming out by experiencing a decreasing inventory and a rapid increase in exports in recent months; job recovery has been delayed because production in the service sector has been depressed; the economy measured in real GDP will grow 5.3 percent in 2004 in comparison to 2.3 percent in 2003; the rate of unemployment will fall to 3.3 percent in 2004 from 3.4 percent in 2003; and the rate of inflation will fall from 3.5 percent in 2003 to 2.8 percent in 2004. Overall, Kim is optimistic of the Korean economy in 2004.

Jwa Sung-hee of the Korea Economic Research Institute (KERI) suggested 15 challenges by identifying 15 mysteries or ironic developments in Korea. These mysteries as pointed out by Jwa include that income distribution has widened through the egalitarian and distribution conscious policies; that policy to harmonize labor and capital under the ideals of egalitarianism has worsened relations between the two camps; and that uniform education based on equal opportunity for education has led to the increased number of students seeking education abroad. As usual, however, he is also optimistic about the future of the Korea’s economy.

T.N. Srinivasan of the Yale University made a sobering presentation on comparison of India and China. According to Srinivasan, China’s per capita GDP in today’s prices was $600 in 1700, $893 in 1973, and $3,117 in 1998, while India’s per capita GDP in today’s prices was $550 in 1700, $853 in 1973, and only $1,746 in 1998. In other words, China and India were about same until 1973, but China has grown much faster than India during the latest 30 years. China’s share of world exports was 0.9 percent in 1948 but increased to 5.0 percent in 2002, while India’s share of world exports was 2.2 percent in 1948 but decreased to 0.8 percent. Perhaps most interesting is the comment he made in that India was a founding member of the WTO and has been a democratic country, whereas China joined WTO late in 2001 and is still not a democratic country. Korean business leaders may note that the growth rate of the Chinese economy in 2003 is estimated at 8 percent and the growth rate of the India’s economy in 2003 is not much lower at 7 percent.

** Chang Se-moon is an economics professor at University of South Alabama and is also a member of the Korea Times
     Economic Editorial Board.

     e-mail:    schang@jaguar1.usouthal.edu

 

back to articles   |  home