The Korea Times Articles - 2005




Two Stories About Supply and Demand

December 27, 2005
By Chang Se-Moon

Let me tell you a couple of stories about supply and demand. You all know that when the price goes up, people buy less, and when price goes down, people buy more. This is known as the law of demand. You also know that when price goes up, businesses increase the quantity of the product supplied in the market place because they can make more money, and when price goes down, businesses may not supply the product as much as they did in the past. This is known as the law of supply. When price is settled competitively through the supply and demand in the market place, the price is known as the equilibrium price or the market price.

When politicians get involved in the workings of the supply and demand, however, things can be quite interesting often to the detriment of the consumers that they try to help.

The first story relates to gold. The April 2003 issue of the attractive Korean Journal had an interesting article written by Park Kyung-sook. The article is titled the "Price of Gold" or kum-gap in Korean. Park had a family friend in Korea. The friend was so poor that his father took him out of school when he was very young and put him to work as a helper at a gold store, called gold room or geum-bang in Korea. As he was growing up, he became an expert on gold jewelry and finally owned a well-known gold wholesale business located on Jongro 3-ga in Seoul. He was even elected as president of the Jewelers' Association and now publishes a widely respected magazine called the Jewelry.

In 1997, Korea was hit hard by the IMF crisis. I have no idea why it is called the IMF crisis. The real crisis was the inability of Korea's businesses to pay the large amount of foreign debts they owed. All the IMF did was to come to Korea to help solve the crisis. Whatever the reasons may be, it is known as the IMF crisis. Soon after the IMF crisis hit Korea, the then President Kim Dae-jung started a popular movement of collecting gold from Koreans. Many, if not most, Koreans responded to President Kim's call by donating all kinds of family treasures that these families had hidden for many years. Pictures of families donating beautiful pieces of gold jewelry were printed almost daily in Korean newspapers. Everyone felt good. President Kim felt good, I am sure, because he initiated such a noble movement, while average Korean families felt good because they were helping the country when the country was in trouble. Korea sold all the pieces of gold thus collected to foreign markets and earned $2.2 billion.

The problem was that the price of gold per ounce peaked in the mid-1980s at more than $800 and had been declining to a point well below $300 when the Korean government sold the gold to foreigners. Since then, the price of gold has steadily increased to today's price of over $500 per ounce. As recently as in the middle of December 2005, experts were predicting that heavy demand for gold from Russia, China, India, the Middle East and possibly the United States is likely to push its price up to as much as $650 an ounce by the end of 2006. In other words, if the same amount of gold were sold today, Korea would have earned twice the amount that Korea received when Kim Dae-jung was president. Many people wondered at the time and are still wondering whether President Kim's gold collection movement was a good decision. It was a good decision politically, but a dumb decision economically.

The jeweler strongly opposed the movement at the time. According to a long tradition in Korea, when you oppose government policies, the Korean government sends tax auditors to audit your business. He had to go through a nasty tax audit. Not only that, but how do you think President Kim's gold collection movement affected the gold stores on Jongro 3-ga? If you have a problem answering this question, let me ask you this way. How long can you stay in the pizza business if you have no pizzas to sell?

Since I am running out of space, let me tell you my second story rather quickly. Hurricane Katrina hit the U.S. Gulf Coast on August 29, 2005. Before the hurricane hit, price per gallon of gasoline in the Gulf Coast was about $2.10. Hurricane Katrina was so fierce and devastating that when the hurricane hit, most gas stations were closed because of the damage. Early in September, many gas stations began selling gasoline again but the price had increased to about $2.90 and stayed there until the end of September. Many residents started calling the state attorney general's office to complain about price gouging. The state attorney general is the top prosecutor in the state.

Price gouging means that stores are charging unusually high prices to make excess profits when there is little or no competition. Some Gulf Coast states, however, have laws that define price gouging as prices that are 25 percent higher than prices charged three months before prices were raised. The legal definition of price gouging does not take emergency supply and demand conditions into consideration, making the definition just about useless.

The reality is that the state attorney general is elected by the voters. He repeatedly told gas station operators not to raise prices. While gasoline prices remained at about $2.90 in the U.S. Gulf Coast states, the price increased to $3, $4 and even $5 per gallon in the rest of the country where there were no emergencies. So even though gasoline prices were higher in the rest of the country, there was no threat of prosecution for price gouging.

The outcome was predictable. The supply and demand model tells us that product will be shipped wherever owners can make the most profit. Gasoline wholesalers moved gasoline to the rest of the country where there was no threat of prosecution for price gouging, rather than the hurricane-damaged Gulf Coast states that needed the gasoline. Many gas stations in the Gulf Coast states did not have any gasoline until October.

When you try to intervene in the normal function of supply and demand, there are consequences. In the case of hurricane, the threat of prosecution for price gouging worked like a price control. It succeeded in keeping the price relatively low, but led to gasoline shortages. The act of complaining about price gouging of gasoline in the U.S. Gulf states will not attract much sympathy from the rest of the world when you consider the fact that many people in the world, including all Koreans, are already paying more than $5 for a gallon of gasoline.
 


Are Economic Forecasts Bound to Be Wrong?

December 20, 2005
By Chang Se-moon

Bank of Korea Governor Park Seung, left, raised the central bank’s key short-term rate target twice this year and additional hikes are likely next year. Interest rates may negatively affect domestic consumption and weaken economic growth. Finance and Economy Minister Han Duck-soo has said that the economy will recover to a potential growth rate of 5 percent next year, the same growth rate forecast by the central bank. There has been a wide gap between actual growth rates and forecasts made by the government and the central bank for years. Most private economic institutes expect the economic growth to fall short of the government’s target of 5 percent next year.

About this time every year, many economists, business leaders, and government officials want to know what the next year's economy will look like. Will the economy continue to grow at this year's pace? Will it grow faster next year so that more people can have jobs and more money? Will it grow more slowly than this year, forcing people to tighten their belts? Worse yet, will there be a recession?

Government officials want to know the answer because the state of the economy determines tax revenues. Business leaders, including managers of department stores, want to know the answer because they have to decide how much to produce and how much inventory they have to order.

Inventory is the quantity of output that businesses keep in their storage room or on their store shelves for sale. Even business managers in other countries want to know how the Korean economy will do next year because they have to make plans for their exports to Korea.

Likewise, business managers in Korea want to know how the world economy will do next year because they have to make plans for exports to other countries. Stated in simple terms, you lose money if you produce too little when the economy grows fast, and you also lose money if you produce too much when the economy grows too slow.

First of all, let us review how the Korean economy has performed in recent years. We usually measure economic growth in terms of the percentage increase in real gross domestic product. Gross domestic product (GDP) is the value of all goods and services newly produced during a year. Real GDP is the GDP which excludes values that increased due to inflation alone.

Korea's real GDP increased by 9.5 percent in 1999, 8.5 percent in 2000, 3.8 percent in 2001, 7.0 percent in 2002, 3.1 percent in 2003, and by 4.6 percent in 2004. During 2005, the Korean economy is estimated to have grown at an annual rate of about 3.8 percent, although the Korean economy has been growing faster during the last three months of 2005. Here we have a benchmark figure. If the Korean economy grows faster than 3.8 percent next year, that will be an improvement.

According to the Korea Development Institute (KDI), both consumer expenditures and exports will increase, which will lead to increased production in 2006.

These increases will lead to a 5 percent growth rate in 2006. KDI predicts Korea's exports to increase by 10.9 percent and Korea's imports to increase by 10.9 percent in 2006 over the 2005 levels.

KDI predicts the rate of inflation in 2006 to be 3.1 percent, which is slightly faster than the 2005 level at about 2.9 percent. KDI also predicts the rate of unemployment to fall slightly from 3.8 percent in 2005 to 3.7 percent in 2006.

The KDI's optimistic forecasts of the Korean economy in 2006 are echoed by other leading economic research organizations in Korea. According to the Korea Economic Research Institute (KERI), the Korean economy will grow at an annual rate of 4.9 percent, exports will increase by 8.8 percent, and consumer prices will increase by about 2.8 percent during 2006.

Forecasts made by the LG Economic Research Institute are a little lower, but close to those made by KDI and KERI. According to LG Economic Research Institute, the Korean economy will grow at an annual rate of 4.6 percent, exports will increase by 11 percent, and consumer prices will increase by 3.3 percent.

Economic forecasts made by Samsung Economic Research Institute are also optimistic in that the Korean economy will grow at an annual rate of 4.8 percent, and exports will increase by 8.6 percent during 2006.

In brief, the projected growth rate of the Korean economy during 2006 ranges from 4.6 percent to 5.0 percent, while the projected growth rate of Korea's exports to the world ranges from 8.6 percent to 10.5 percent. The projected rate of inflation during 2006 falls between 2.8 percent to 3.3 percent.

Economic forecasting is a costly assignment. It is not something one or two economists can do without organizational support. This explains why economic forecasts are made by economic research institutes such as KDI, KERI, LGERI and Samsung ERI.

It is also important to review different forecasts made by different organizations because forecasts can vary widely depending on assumptions that forecasters make. It is not unusual to observe that some forecast growth while others forecast recession for the same period. Recession means that the real GDP declines. During recession, production, sales, employment and tax revenues all tend to grow very slowly or actually decrease.

For the world economy in general, I usually take a look at the quarterly survey of the world economy made jointly by the University of Munich's Center for Economic Studies and the Ifo Institute for Economic Research.

According to the latest survey, the economic climate in Western Europe and Japan has been improving and will grow robustly during 2006. In fact, the International Monetary Fund (IMF) has projected global growth rate of about 4.3 percent in 2005 and the same rate for 2006 in its latest World Economic Outlook.

The IMF projection is higher than ones published in the Fall 2005 issue of the Journal of Business Forecasting which predict the world output to grow by 3.1 percent during 2006. According to the Journal, Asian countries will grow fastest, followed, in order, by Eastern European countries, South American countries, Middle Eastern countries, North American countries, and finally European Union countries.

Since the U.S. economy is the world's largest and Korea depends on the U.S. economy for a large amount of its exports, let us take a close look at the U.S. economy for 2006.

One of the most popular and least expensive (because it is free) websites that shows U.S. economic forecasts is the website of the U.S. Congressional Budget Office (CBO). Let me first introduce projections of key economic variables for 2006.

To put the numbers in perspectives, figures for the same variables are also introduced for 2004 and 2005. According to the CBO, the growth rate of real GDP was 4.4 percent in 2004, is estimated to be 3.7 percent in 2005 and is projected to be 3.4 percent in 2006.

The rate of inflation was 2.7 percent n 2004, is estimated to be 3.1 percent in 2005, and is projected to be 2.5 percent in 2006. Because the prices of food and energy fluctuate widely, economists also calculate the so-called core inflation rate by excluding prices of food and energy.

The core inflation rate was 1.8 percent in 2004, is estimated to be 2.3 percent in 2004 and is projected to be 2.3 percent also in 2006. Likewise, the rate of unemployment is projected to remain the same in 2006 as it was in 2005 at 5.

Interest rates are of concern to people who have a lot of money because money follows higher interest rates. According to the CBO, the short-term interest rates in the U.S. as measured by the three-month Treasury bill rates averaged 1.4 percent in 2004, are estimated to average 3.0 percent in 2005 and are projected to average 3.7 percent in 2006.

The long-term interest rates in the U.S. as measured by ten-year Treasury note rates averaged 4.3 percent in 2004, are estimated to average 4.3 percent in 2004 and are projected to average 4.7 percent in 2006.

Just in case you are wondering, U.S. Treasury securities have three types: Treasury bills of one year or less duration, Treasury notes of 2 to 10 years of maturity, and Treasury bonds of more than 10 years of maturity.

Now you know almost everything you probably need to know about the economy in 2006. Remember that forecasts are no more than forecasts. Actual numbers are bound to be different from forecasts because there are too many variables that cannot be predicted accurately. Someone once said that if you want to make economic forecasts, give them a number or give them a date, but not both.
 




Eleven Rules of Living by Bill Gates

December 13, 2005
By Chang Se-moon Professor of the University of South Alabama

A recent issue of the New Accountant listed 11 rules of living that, according to Bill Gates of the Microsoft, many high school and college graduates do not learn in school. I want to introduce the Bill Gates' 11 rules as they apply to economic ways of life. Rule 1 is that life is not fair and you may as well get used to it. If you try to correct many wrongs in friendship, family relations, working environment, and society in general, you will become totally isolated if not insane. To a great extent, you just have to accept that life is not fair. Somebody will always make more money than you do, and many good people will go hungry everyday. Somebody will declare bankruptcy because she spent too much using credit cards she did not even order. Bill Gates is correct in that life is not necessarily fair all the time, and good people always try to improve life by helping the poor wherever they live. You may already know that Bill Gates is one of the most generous philanthropists.

Rule 2 is that the world will not care about your self-esteem, but expect you to accomplish something before it respects you. Just think about what Korea has done. The global marketplace is a tough place. Korea has grown to be a major player in the world economy by exporting quality products that have successfully competed against products from other countries. Economists use the term, comparative advantages, to describe products one country can produce more efficiently than other countries. An interesting observation is that comparative advantages of one country change over time and Korea should continue to explore and cultivate new areas of comparative advantages. On a personal note, you should work hard and become successful if you want to help others. The more successful you are, the more opportunities you will have to help others.

Rule 3 is that you will not make $40,000 a year right out of high school. I guess you all know this already.

Rule 4 is that if you think your teacher is tough, wait until you get a boss. Your boss does not have tenure. Tenure is a job security that teachers have. The main difference between a teacher and a boss is that the teacher wants you to work hard and succeed for your own sake, while the boss wants you to work hard and succeed for the sake of the company. Because of this difference, the teacher will still have his or her job even if you fail, while the boss, and more importantly you as well, will not have a job if you fail. How hard you need to work is all a matter of perspective. The harder you work, the easier it becomes to work well. You need to do a thorough job at whatever you do.

Rule 5 is that flipping burgers is not beneath your dignity. Your grandparents had a different word for burger flipping; they called it opportunity. My guess is that flipping burger in the U.S. is comparable to making jjim-ppang or gimbap on the roadside in Korea. Many successful people started from the bottom. If you are lucky enough to be one of the few who were born in a wealthy family, it is very important to truly understand how tough life can be at the bottom.

Rule 6 is that if you mess up, it is not your parents' fault, so do not whine about your mistakes, learn from them. I can tell you the secret of not making a mistake. The secret is not to do anything. You get the message? When you work, you are bound to make mistakes. Mistakes by definition are unintended. They happen when you try to work hard. When you make mistakes, do not dwell on them, correct the mistakes and move on. If your boss or a colleague or a subordinate makes a mistake, try to be understanding and work together to correct it because hard-working people make mistakes.

Rule 7 is that before you were born, your parents were not as boring as they are now. They got that way from paying your bills and cleaning your clothes. So before you save the rainforest from the parasites of your parents' generation, Bill Gates suggests that you try delousing the closet in your own room. Parasite is an animal or a plant that lives on another animal or a plant, while delousing means to get rid of lice. Lice are tiny blood-sucking insects. Again the message is that before you criticize the way the older generation has conducted their business, you should improve your own way of conducting business. Remember that there is always a reason why people do things the way they do.

Rule 8 is that your school may have done away with winners and losers, but life has not. In some schools they have abolished failing grades; they will let you repeat as many times as you want to pass the course. This does not bear the slightest resemblance to anything in life. In the private sector business world, it is a zero-sum game. One cannot win unless there is a loser. You need to be not just hard-working, but also methodical in business decisions because competition is tough. You cannot quit simply because you have lost in the past. One aspect of a business life is that opportunities continue to present themselves. To be successful, you need to accept the fact that you will win some and lose some. The key is not to dwell on losses.

Rule 9 is that life is not divided into semesters as it is in schools. You do not get summers off. If you want to find out about yourself, Bill Gates says that you do it on your own time, because business life has no break that you can take to care for your own personal matters. Talking about no breaks, I remember a very entertaining pop song in Korea, called "Life is a live broadcast" or "In-saing eun saing-bang-song" in Korean. I believe the song was made popular by singer Lee Min-sook. I think the song starts with a life is a live broadcast, a lone drama, a story that you cannot rewind. It is true that you cannot go back to a young age again and take whatever courses you feel you should have taken while you were younger. It is also true, however, that you can always try now whatever you should have tried in the past.

Rule 10 is that television is not real life. In real life, people actually have to leave the coffee shop and go to jobs, so says Bill Gates. You need to know the difference between an illusion and a reality. Most crimes will never be solved within an hour as they are on television. Crime drama is just an illusion. In reality, some crimes will remain unsolved forever. Happy endings in most, if not all, Korean videos are an illusion. In reality, many human relations end more unhappily than happily. Free gifts are an illusion. In reality, you have to pay for them one way or another. Cutting taxes for everyone's benefit is an illusion. In reality, the reduced revenue will lower somebody's earnings at least in the short run. Whatever you do, there is a cost involved. In economics, we often say that there is no such thing as free lunch.

Finally, rule 11 is that you need to be nice to nerds because chances are that you will end up working for one. A nerd is an insignificant student who is ridiculed as being affected or studying excessively, or as a person who lacks social skills or is boringly studious. Nerds are usually less popular with the opposite sex. Let me restate rule 11 this way. If I have to choose between one who is very smart but somewhat lazy and one who is not particularly smart but takes life seriously by working hard and steady, my choice is the second one. Don't you remember the story of a race between a hare and a tortoise?





What Is Wrong With European Economy?

December 7, 2005
By Chang Se-moon

The distance from Seoul, Korea's capital city, to Washington DC, America's capital city is 6,943 miles or 11,174 kilometers. In comparison, the distance between Seoul and Paris is 5,571 miles or 8,967 kilometers, the distance between Seoul and Berlin is 5,050 miles or 8,127 kilometers, and the distance between Seoul and Rome is 5,573 miles or 8,968 kilometers. No matter how you look at it, Europe is closer to Korea than America is to Korea. Europe also has a long and rich cultural history, making it a favorite place for Korea's young generation to visit and study. I think I even saw a couple of Korean videos with streets in Paris as background.

In today's article, we are more interested in the economic health of Europe than its culture or history. Let us see how the three largest countries in Europe are doing in comparison to the U.S. Through this comparison we are hoping to learn what Korea should do in the future.

Luckily for us, Karl Zinsmeister published an article titled "Endangered Europe" in the October-December 2005 issue of American Enterprise. I will describe how the three European countries have been doing on the basis of the article.

Labor productivity measures the amount of product that one worker produces during an hour, a day or a year. Labor productivity, called also output per worker, is one of the key indicators of how efficient an economy is. Assuming that the labor productivity in the U.S. in 1990 was 100, the labor productivity during the same year was 80 in Germany, 78 in France, and 76 in Italy.

Assuming that this year's new X-Box 360 is the only product that the four countries produce. What the numbers mean is that if one American worker can make 100 Xbox 360s each day, workers in Germany, France and Italy can make 80, 76, and 76 each day. In reality, I doubt that Germany, France and Italy can make Xbox since Microsoft just made it available for this year's Christmas.

By 2003, European countries had lost even more ground. Assuming that the labor productivity in the U.S. in 2003 was 100, the labor productivity during the same 2003 was 71 in Germany, 73 in France, and 71 in Italy.

Labor productivity is important because the more productive workers are, the more jobs the economy will create. From 1990 to 2003, the number of jobs in the U.S. increased from 119 million to 138 million, representing a 16 percent increase. From 1990 to 2003, the number of jobs in Germany, France and Italy combined increased from 82 million to 85 million, representing a less than 4 percent increase.

When jobs increase slowly, the rate of unemployment tends to be high. The unemployment rates in Germany, France and Italy have remained at about 10 percent or higher, while the unemployment rate in the U.S. has remained at about 5 percent. As you know, Korea's unemployment rate is even lower.

The rate of unemployment measures the percentage of workers without job in relation to all workers who are seeking jobs. If 100 persons look for a job and 5 persons cannot find jobs, the unemployment rate is 5 percent.

Perhaps, more important than the unemployment rate is the nature of unemployment. The percentages of unemployed workers who remained unemployed for 6 months or longer during 2003 were 18 percent in the U.S., 54 percent in France, 65 percent in Germany, and no less than 76 percent in Italy.

This means that the problem of unemployment in European countries is chronic, rather than temporary, making it much more difficult to fix it. Even those who have jobs are working less hours in European countries. The average annual number of hours worked per employee in 2002 was over 1,800 in the U.S., but barely over 1,600 in Italy and less than 1,500 in France and Germany.

By now, it is obvious that European countries are not doing well at least from the economic point of view. What could be some of the reasons? Economists use the term, flexibility.

The economy should be flexible enough to make changes when needed. For instance, businesses should be able to hire workers quickly when sales are booming while businesses should be able to lay off workers quickly when sales are down. If businesses cannot lay off workers when sales are slow, they will try not to hire workers when sales are booming.

Some economists blame the increasing role of the government in Eurpoean countries. Let us see what this means. Gross domestic product (GDP) is the value of all goods and services produced during one year.

One largest component of GDP is government spending. How large a role the government plays in a given economy can be measured by the percentage of government spending relative to the country's GDP. The percentage is 36 percent in the U.S., 49 percent in Italy, 50 percent in Germany, and 54 percent in France.

Another interesting comparison can be made by measuring how much of the government welfare payments go to the poorest 30 percent of the people. An intuitive thinking is that welfare payments should go to the poor, not to the rich or the middle class. It does not always work that way.

The percentage of the government welfare payments that the poorest 30 percent of people receive is 43 percent in the U.S., 35 percent in France, 32 percent in Germany, and no more than 20 percent in Italy.

Would you like to see more comparisons? The average number of births per woman during the woman's entire lifetime is 2.1 in the U.S., 1.9 in France, 1.3 in Germany, and also 1.3 in Italy. Why is this important? If the average number of lifetime births per woman is less than 2, the population of the country declines if there were no in-migration. Countries usually do not want a declining population.

Perhaps, the most telling statistics is the percentage of people who feel that they are very satisfied with their life. The percentage is 57 percent in the U.S., 17 percent in Germany, 16 percent in Italy, and only 14 percent in France.

It appears that Europeans, at least as represented by those in Germany, France, and Italy, expect and receive more from their government, and businesses have less incentive to be efficient because of what many may describe as a welfare state in these countries. Still, they do not seem to be happy.

According to Zinsmeister, "The economic lags and demographic sags in Europe are accompanied by declines in optimism, in personal satisfaction, in belief that life is fair and within an individual control." When people feel this way, they may be tempted to be on drugs as an escape.

It does not say when and where, but German TV reporters recently tested the bathrooms of the European Parliament for signs of cocaine, and allegedly found that 90 percent of them had residue of the drug.





'Bluebirds' of Korea's Young Generation
 

December 1, 2005
By Chang Se-moon

College graduates and other people look at bulletins at a job fair held earlier this year in this file photo. South Korea’s young people have difficulty finding jobs as most companies are not hiring new workers due to the sluggish domestic economy. 

All the young Koreans that I have met seem to be highly motivated and intelligent. I am well aware that these young Koreans are tough enough to get a job in Korea's tight job market. Many of these young Koreans who find a job in Korea, however, either quit their job within a year, or are thinking about resigning soon after finding the job to look for the illusive job that can make them happy.

The Korean Southeast News, a Korean newspaper published in Atlanta, called those intelligent young Korean workers who quit their job shortly after they find their first job ``bluebirds.’’ As you know, bluebirds are lively and energetic, always moving around. People love bluebirds because they also symbolize happiness.

In one survey of 1,939 new workers who recently found jobs, the career.co.kr found that no less than 59.6 percent were thinking of resigning within a year. A different survey was made of 2,451 young workers who resigned their positions to find out why they resigned their jobs.

About 30.1 percent stated that they resigned because the company had no vision; 23.4 percent said that they resigned because the work they performed was different from what they had in mind; 22.7 percent said that they resigned because the salary and fringe benefits were lower than what they expected; and 15.1 percent said that they resigned because their supervisors and co-workers were too difficult to get along with.

An article in the September 29, 2005 issue of the Korean Southeast News also reports that no less than 46.3 percent of Korea's workers quit their jobs and move on to new positions within a year after finding their first jobs.

In economics, we do not call those young workers who change jobs for a better one bluebirds. We call them frictional unemployment. Frictional unemployment refers to those who are in the process of changing jobs. For the sake of convenience and consistency, I will continue to call them bluebirds in this article, however.

How long thebluebirds of the Korea's young generation will be out of work in the process of changing jobs depends on how well the economy is doing. If the economy is growing fast enough and keeps cyclical unemployment low, bluebirds are likely to find new jobs faster.

If the economy is growing too slowly and suffers a high rate of cyclical unemployment, it will take that much longer for bluebirds to find new jobs. While changing jobs, it is important for bluebirds to keep their skills sharpened.

If workers do not possess skills that employers need, we have structural unemployment. Once a person lags in skills or technology, it gets really difficult to jump back into the labor market.

There is not much I or you can do about the working environment of Korea's businesses because the working environment of Korea's businesses has been hardened over many years. To be honest, the working environment is very much controlled by the old generation which has money.

In fact, employees of at least some of the large Korean businesses that are operating in the U.S. are complaining that they have to work well beyond 40 hours a week without overtime pay just as they did in Korea. I know at least one such company, but I do not want to name it because most likely the practice is not that unusual among all Korean businesses operating all over the world.

There are some aspects of being a bluebird that you may want to think about, however. First of all, you may keep in mind that when you resign voluntarily, you become voluntary unemployed as opposed to involuntary unemployed. Government policymakers are usually not concerned too much about the voluntary unemployed.

Secondly, you need to learn to be patient. Quite often, a working environment in which work tempo seems slow and co-workers appear rather ineffective, if not incompetent, can also present an opportunity for you to excel.

Before you resign, you should try to be creative and consider whether there is any way you can take advantage of the poor working environment. It is not an easy decision to make.

If a job is truly a dead-end job, you will probably have to resign eventually. In that case, the only advice is to resign after you find another job. It is easier to find a job while you are holding one, than while you are unemployed.

The other side of the coin is that once you have made up your mind to dislike your job, then you will start hating everything about your it and are likely to miss any opportunities that the job may offer in the future. If you do hate your job, you are likely to make a mistake because you make a decision based on emotion rather than on cool calculations.

When you are in the job market, most likely you will be competing against hundreds of other well-qualified candidates. Somehow, you will have to make yourself visible enough to be selected for the initial screening and the following invitation for interview.

It is not easy, but the minimum you need to do is the homework on what the employer's needs are. Every employer has special needs. If the applicant's skills 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.

When Korean students come to my office, I usually advise them to major in fields that present them the best chance to find jobs. For instance, I usually advise against majoring in English unless they know for sure that they will return to Korea because it is almost impossible for the foreign-born to specialize in English and get a job in the United States.

Would you believe that I once was a bluebird? It was during the 1960s. I found my first job in Seoul after I graduated from college. I did not feel comfortable with the job and I started preparing for studies overseas practically from day one of my first job. It would be more an exception than a rule for people not to change jobs soon after they find their first job.

Talking about bluebirds, there are even associations of bluebird lovers. The North American Bluebird Society, for instance, states that "Once you've caught the 'bluebird bug,' it's difficult to resist these beautiful creatures."

Supposedly, bluebirds became a symbol of happiness when Belgian dramatist and poet Maurice Maeterlinck used the word "bluebird of happiness" in a romantic play that he wrote in 1909. I like bluebirds. In fact, I even have a bluebird pin that I often put on my dress shirt or jacket to convey the feeling that I am happy and I want you to be happy.

You have to be patient and make the best decision that you can based on all the information that you have. This is because once you make a decision, you will have to live with the consequences of your decision for many years to come. You may be a bluebird for a while as I once was, but you cannot stay as a bluebird forever.

 


Conditions for Removing 'Korea Discount'

October 25, 2005
By Chang Se-moon

I do not remember when and where, but let me tell you a story I once heard. On a gloomy morning, a doctor was visiting her patients at the hospital as usual. One patient who looked rather pale asked the doctor: “Doctor, no one wants to tell me what my illness is all about. Could you please be frank with me and tell me what is wrong with me?”

The doctor said: “The survival rate of your type of illness is one out of ten. However, there is no need for you to worry about it because previous nine patients of mine died and you are the tenth and thus should survive.” Well, it does appear that how one views the world depends on how one looks at it. Here is the way I look at the world economy.

You wake up with music from an alarm clock made in Korea and in a house built with Canadian lumber. You throw back your bed sheets made in North Carolina of the United States.

You brush your teeth using a toothbrush made in China. You put on your trousers assembled in the Dominican Republic, a shirt made in China, and shoes made in Italy. You spray on perfume made in France.

Your American coffee maker, made with parts from Mexico and Canada, brews Columbian coffee. You grab an Ecuadorian banana, a Cheju Island orange, and some cold Russian milk. You turn off your TV made by Samsung, broadcasting news announced in three languages in Hong Kong via an American satellite orbiting the earth.

You grab your carrying bag made in Vietnam by a Korean manufacturer and hurry to your Hyundai car made in Korea or to a Japanese car made in Kentucky with parts from who knows where. You check your watch made in Switzerland.

From the moment you woke up until the time you jumped into your car, it only took about one hour but try counting how many countries helped you get ready to go to work. This is the world we live in.

This is all the more remarkable when you consider that only about three or four decades ago, coke was not an illegal drug but a soft drink, pot was not marijuana but something you cooked in, bunnies were not bikini girls but rabbits, and a chip was a piece of wood having nothing to do with a computer.

You do not even have to go that far. Only about 10 years ago, Hyundai cars were known as low quality cars rather than high quality cars as they are known now, and MP stood for military police not for music player.

My point is that you should always keep in mind that unless you prepare yourself to compete in the global world, you will be behind before you even know it.

Comparative Advantage

Let us think about some changes that are taking place while you are reading this article. Global trade is fundamentally based on the theory of comparative advantages.

According to this theory, one country may produce all products cheaper than other countries but global trade will still benefit the country. Consider, for instance, a doctor and her typist. Assume that the doctor can type better than her typist.

The doctor has an absolute advantage in taking care of patients and also in typing. However, the doctor is better off by spending all her time in taking care of patients than spending some time in typing.

The doctor will lose more money by doing the typing duties for herself because she will not be able to take care of patients while she is doing the typing.

The doctor is said to have a comparative advantage in taking care of patients, while the typist is said to have a comparative advantage in typing.

The problem is that comparative advantages change and change quite quickly. During the 1960s and 1970s, Korea’s comparative advantages lied in cheap labor and Korea’s main exports were low-cost textile products.

In the 1990s, cheap labor became China’s comparative advantages and most low-cost textile products are now made in China, while Korea’s comparative advantages shifted to medium to high tech.

Perhaps sooner than later, China’s comparative advantages in cheap labor will seriously be challenged by cheap labor from India and other Southeast Asian nations.

For another example of rapidly changing global economy is the way the rich people invest their money. Due to the computer revolution, money can cross national boundaries quickly.

If I know China’s yuan is appreciating, I would transfer some of my money to China and convert it to yuan. If interest rates in Japan rise, I would transfer some of my money to Japan to take advantage of higher interest rates.

The hypothesis that people move money around to earn higher returns and in the process force interest rates to be more equal is known as the interest parity condition.

We also need to know more about our selves. When you talk to good people, you tend to think that everyone is good.

When you talk to bad people, you feel as if everyone is bad. When you talk to only those Korean leaders who say that we should make Korea a financial hub in Asia, you feel as if Korea is in the best position to become an Asian financial hub.

The problem is that even if Korea’s economy is the 11th largest in the world, Korea was not invited to the latest G7 meeting. G7 is an exclusive group of countries with powerful economies, and is comprised of the United States, Japan, Germany, Britain, France, Italy and Canada.

Korea is 11th largest and G7 has 7 member countries. What is wrong with that? The point is that G7 invited 5 other countries called BRICS. The five countries are Brazil, Russia, India, China, and South Africa.

Economics Is a Social Science

These 12 nations are sometimes called the G12. Many people believe that Hong Kong, Singapore and Shanghai may be in a better position to be an Asian financial hub than Seoul. No one knows for sure because events that favor one city over others can change quickly.

It is important to know that global events can change quickly and be ready to respond positively to these changing global events.

One such event may well be the controversy surrounding the MacArthur statue. If you believe that the U.S. saved South Korea from the North Korean attack in 1950, then you have to agree that General Douglas MacArthur was very much instrumental in Korea’s survival from the Korean War.

For the Korea’s old generation and also from the view of Americans, it is simply unconceivable for South Korea to even think about insulting the statue, let alone calling him a Korean war criminal.

Are you noticing that I said South Korea, not some South Koreans, that were insulting the role General MacArthur played during the Korean War?

Even if only a small number of Koreans are hostile to General MacArthur’s statue, people outside Korea will view that all South Koreans, not just some South Koreans, are hostile to the general’s statue.

All these events will translate into dollars and cents. If the Korean government does not take a strong stand to denounce such acts of betrayal, the impact can be widely spread.

Korean products have been known as the “Korea discount’’ in that prices of Korean stocks are low for the quality of these stocks and that prices of Korean exports are low for the quality of these exports.

The nationwide campaign to turn the Korea discount to the Korea Premium will take that much longer because the strange act of what many consider to be a betrayal on the general’s statue will make western consumers a little weary of buying Korean products.

The September 15 letter from five members of the U.S. House International Relations Committee to President Roh is only the beginning.

The letter stated that the U.S would like to have the statue if it were going to be insulted or toppled in Korea. The true feelings of most Americans appear to be not any anger, but a genuine sadness toward Korean people in general.

The strange act on the general’s statue by some Koreans cannot help Korea’s push toward making Korea an Asian financial hub either because some of the key players may lose the enthusiasm that they had toward making Korea a financial hub in Asia. Economics is a social science that deals with people unlike a natural science that deals with material.

People can be tricky and capricious because human beings have feelings.

Economic acts that ignore human feelings can lead to consequences that are as bad as the diagnosis of the doctor, introduced in the beginning of this article, who said “The survival rate of your type of illness is one out of ten. However, there is no need for you to worry about it because previous nine patients of mine died and you are the tenth and thus should survive.”

 


Economics of North Korean Refugees

October 18, 2005
By Chang Se-moon

Economics is everywhere. If we use our brain a little bit, economics can be a big help in improving the quality of our lives as well as those of North Korean refugees.

The issue of North Korean refugee ranks closely behind North Korea's alleged possession of nuclear weapons among the issues that could potentially derail the snail-paced improvements in the relation between the two Koreas.

Unfortunately, we have been disappointed so many times in the past that even the six-party agreement made earlier in September is accepted by many with skepticism.

The predominant majority of North Korean refugees is believed to have fled North Korea to escape from human rights violations in North Korea that have been well documented in numerous publications.

In the June 23, 2003 edition of the U.S. News & World Report, for example, Thomas Omestad states that ``In the past three decades, some 400,000 North Koreans are believed to have perished in the gulag.

Yet relatively little is known about the camps, which are sealed off from international scrutiny. U.S. News tracked down five former prisoners and guards who managed to defect to South Korea, and they describe a world of routine horror: beatings, crippling torture, hunger, slave-style labor, executions. Fetuses are said to be aborted by salt water injected into women's wombs; if that fails, babies are strangled upon delivery.''

Grace Jang tells us in her November 2004 article in KoreAm Journal more horror stories by former refugees from North Korea who are reported to have stated: ``I saw guards stepping on infants' necks and tossing their bodies into buckets while their mothers screamed,'' and ``The other prisoners and I got a break once when someone was caught trying to escape.

We were all forced to attend the execution. We had to throw stones at the escapee. Our loyalty to the regime was measured by the size of the stone we threw.'' Reports on human rights violations in North Korea continue to be repeated by many defectors, humanitarian workers, and writers familiar with these cases.

As human rights violations persist in North Korea, so does the number of North Koreans who flee to China. The number of North Koreans who fled to China is estimated anywhere from 60,000 to 300,000. Understandably, China became entangled with the problem of North Korean refugees in their land that they did not want, while human rights advocates in and out of China heavily criticize China for mistreating and not protecting North Korean refugees.

Some claim that China is a party to the 1951 UN Convention on the Status of Refugees and its 1967 Protocol, which forbids states to return refugees. According to China, however, North Koreans within its borders are illegal economic migrants, and thus China gives priority to a treaty with Pyongyang mandating their return to North Korea.

There are two key words in the preceding paragraph: economic migrants. Countries are not obligated to accept those who simply try to make more money and improve their economic status. China views North Korean refugees as economic migrants, not as political refugees who try to escape from human rights violations.

Regardless of whether North Korean refugees in China are viewed as economic migrants or human rights refugees, there is one economic fact of life that many people ignore.

The fact is that financial burdens of taking care of North Korean refugees in China should be shared, especially, by South Korea and the United States in which most people who criticize China live. The more South Korea and the U.S. share the financial burden of taking care of North Korean refugees in China, the less China will resist accepting and helping North Korean refugees.

Among all the ideas in helping North Korean refugees, proposals made by the Refugees International appear to be most thoughtful and realistic. The Refugees International suggests that South Korea should increase the number of North Koreans accepted as refugees.

This will lessen the financial burden on China and allow South Korea to ask for more cooperation from China in taking care of North Korean refugees. It is also important for policy makers in South Korea to understand that North Korean refugees in South Korea need a long time to adapt to life in South Korea and thus need a more thoughtful assistance. The Refugees International suggests that North Korean refugees in South Korea need to have more education, learn vocational skills, and study life skills. Remember that fleeing from North Korean to South Korea is not like moving from Inchon to Seoul.

Since we are talking about North Korea, we might as well go one step further on economics relating to North Korea. The topic that I want tell you about is economic sanctions on North Korea.

On July 19, 2005, there was a conference in Washington D.C. on human rights in North Korea. The conference was reported to have cost about $180,000, which came from the $2 million that the U.S. Congress appropriated for such activities under the North Korea Human Rights Act of 2004.

According to Barbara Slavin of the USA Today, organizers of the conference are opposed to economic aid aimed solely at persuading the North Korean regime to abandon its nuclear program without addressing human rights abuses.

North Korean defector and Chosun Ilbo journalist Kang Cheol-hwan was quoted in the daily Chosun Ilbo to have said that ``human rights issue and the nuclear dispute are inextricably linked, and that if North Korea doesn't fundamentally change, the international community needed to put pressure on it by withholding aid,'' suggesting additional economic sanctions against North Korea.

Will additional economic sanctions on North Korea help people in North Korea and North Korean refugees fleeing to China? I doubt it very seriously. Scholars have long found that the adverse economic impact of sanctions is likely to fall predominantly on the poorest and the weakest people in the targeted country, while an authoritarian government tends to hunker down and become even more repressive.

Sanctions are seldom effective in bringing about major changes in the policies of the target country. Of the 30 cases involving high policy goals, Hofbauer, Schott and Elliott in their 1990 book on economic sanctions found only three cases in which economic sanction was effective in changing a major policy of the target country.

We do not even have to go to other countries. We can simply look back economic sanctions imposed on South Korea. It may be difficult to believe for the Korea's young generation that Korea had long been under a political dictatorship.

When former President Park Chung-hee declared martial law in 1972 in Korea to continue his dictatorship, the U.S. imposed an economic sanction on Korea by significantly reducing economic aid that the U.S. had been sending to Korea under P.L. 480.

The sanction lasted until 1977. It would be interesting to see how much of the reduced aid led to personal belt-tightening of Park and his close associates.

Economic sanctions may make people of a stronger nation that imposes the sanctions to feel good. You may feel good by advocating more economic sanctions on North Korea for human rights violations.

The likely consequence of additional economic sanctions, however, is that these economic sanctions will hurt exactly the people whom we all want to help.

They are the poorest and the weakest in North Korea. Life is not simple. Quite often, the noble goals that we want to achieve and what we try to do to achieve the noble goals are exactly the opposite.

 


Economic Growth vs. Income Distribution

October 11, 2005
By Chang Se-moon

Homeless people line up to get free meals provided by a charity organization in front of a subway station in Yongsan, Seoul. Policymakers are tasked to carry out economic policies so as to help improve the living standards of everyone, rich and poor alike. 

Early in September, there was a concert at the Ehwa Womans University in Shinchon, Seoul. This concert was special because it was designed to deliver a message to end poverty in Korea and beyond.

The concert was sponsored by MBC television's music program Wednesday Art Stage and the Korean NGO's Network Against Global Poverty. I am really happy to hear that the concert to end poverty was held at the prestigious Ehwa campus.

During 2004, it was reported that 13,293 Koreans killed themselves. In other words, on any given day last year, 36 people committed suicide, according to the National Police Agency.

From 2000 to 2004, no less than 63,424 Koreans committed suicide. Among the reasons given for suicide, pessimism was cited as the main factor for 43 percent of them, physical illness was cited for 26 percent, mental illness was cited for 6 percent, and poverty was cited as the main factor for 5 percent of all suicides.

I personally believe that the percentage of people who committed suicide because of poverty is much higher than the cited 5 percent. When people do not have money, they become pessimistic. When people do not have money to take care of themselves, they become physically or mentally ill.

In economics, we do care about poor people and take the poverty issue seriously. In fact, economists care so much about the poverty that they have a branch of economics called the economics of poverty.

One of the key issues in the economics of poverty is whether we should increase support for the poor or focus on the growth of the economy. This is the classic debate between economic growth and income distribution.

In the long run, there is no conflict between economic growth and distribution. In the short run, however, a number of economists believe that a greater distribution of income for the poor will slow down economic growth.

What do you think? Before you give your answer, let us clarify what the controversy is all about. No one in a democratic society believes that everyone has to have an equal income.

If we take all income away from hard-working individuals and distribute the money equally among all people in a country, there will be no incentive for people to work hard. This will lead to less production, lower total income, and eventually a lower income for everyone.

When people say that we need a more equal distribution of income, what they mean is that we are not doing enough for the poor at this time and we need to do more.

They do not mean that everyone should be given exactly the same amount of money. On the other hand, when people say that this is not the time to equalize income distribution and we need to be concerned with economic growth rather than income distribution, what they mean is that we should grow the economy faster before we think about increasing support for the poor. They do not mean that we should not help the poor at all.

The best way of looking at the two arguments is to see the present. If you say that we are doing enough for the poor and we need to focus on speeding up economic growth, you are in favor of economic growth over income distribution. If you say that we are not doing enough for the poor now and we need to help them more, you are in favor of income distribution over economic growth.

Having said all that, let us hear what some economists in Korea have been saying about the issue of economic growth versus income distribution. The issue became more intense since President Roh Moo-hyun was elected as an anti-establishment president with the support of many low to middle income voters.

During the 2004 joint conference of the Korean Economic Association and the Korea-America Economic Association, one economist from 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.''

The professor concluded his remarks by stating that the Roh administration had no understanding of how the market economy works and has a tendency to interpret the economy politically.

Later in the year, the president of a well-known economic research institute in Seoul claimed that Korea sank deep into what he called the egalitarian trap. According to him, egalitarianism surfaced under the Roh administration through its preference of distribution over growth by stating 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, 2004 issue of the Chosun Ilbo, by making what I believe to be a wild claim that the per capita GDP should exceed at least $20,000 before the government pursues a greater income distribution policy.

These views were countered by economists working for the Roh administration, who 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," and that "we have to pursue equal opportunity and care for the weak, but not necessarily absolute equality for everyone or equal results.''

Well, what do you think? Would you like to hear what I have to say about the issue?

When you have electricity, you do not appreciate how valuable the electricity is. Without electricity, all the lights are out, subways will stop running and elevators will be stuck between the floors.

When you have water, you do not understand how inconvenient it is not to have water. When the water system is not functioning, you may be able to buy bottled water for drinking, but you cannot use the restroom. I know because I had to do without both during a hurricane season.

When you are rich, you do not know how miserable life is for the poor especially in Korea where poor people are discriminated against in many different ways. Korea is one of the few so-called civilized countries in the world that has no meaningful national program for the homeless.

In Korea, the homeless are called ``nosukja.'' It is important to remember that nosukjas are human beings just like you and me. The only difference is that they do not have enough money to buy a place to live.

Many European nations have a welfare program described as ''from the cradle to the grave.'' Under this program, the government provides basic services to everyone in the country. Korea does not have to adopt such a policy, but it clearly needs to improve services for the poor. Sometimes I feel that the gap between the rich and the poor is too large in Korea.

The belief that human beings have an obligation to help other human beings is called humanism. All of us who study economics need humanism in our hearts. Ultimately, economics as a science can help improve the living standards of all human beings, both the rich and the poor. Just imagine what a wonderful world this would be if all politicians had a little more humanism in their hearts.

We would not have tortured political prisoners. We would not have the human misery we see everyday. We would treasure the lives of other people just as much as our own. Whatever you do in your future, always keep in mind that there are many people less fortunate than you, who need your help.



The Art of Looking For a Job

September 20, 2005
By Chang Se-moon

As Korea's unemployment rate has declined this year, so has the Korea's number of unemployed young people. In May this year, for instance, 345,000 young workers were reported to have been looking for jobs without success. The actual number of young people who are unemployed may be higher because many unemployed high school and college graduates probably have stopped looking for jobs. People who stop looking for jobs are not counted as being unemployed in government statistics. Government statistics, however, may also overestimate unemployment because some young people remain voluntarily unemployed because they do not like the jobs that are currently available. The area of economics that studies job markets is called labor economics.

The issue of job markets can be explored in two different ways. One is the macroeconomic 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. In a positive-sum game, when there is a winner, there does not have to be a loser. The other is the microeconomic analysis in which the focus of discussion is to increase the probability of obtaining a job for individual workers. This is a zero-sum game since when a person is selected to fill a position. This precludes other applicants from filling the same position. In a zero-sum game, when there is a winner, there has to be a loser.

A study by the Korea Labor Institute, which is based on the 3rd Annual Survey of the Korea Labor and Income Panel, compares youth job markets before and after the 1997 financial crisis. Compared to the pre-1997 job market for youth, the study finds in the after-1997 job market that it takes a longer time for young people in Korea to find their first job after they finish school; that young workers change their jobs more often; and importantly that there is a mismatch between education they receive at schools and manpower needs in the economy.

A more recent study by the Korea Institute for Industrial Economics and Trade, titled "Structural Factors behind Korea's Youth Unemployment," also states that the Korea's education system is outdated and over-emphasizes degrees and general knowledge, rather than the technical knowledge and skills that are applicable to today's workplace. This, according to the study, is the primary cause of the growing oversupply of workers who are not compatible with the current manpower needs of Korea's industries.

Today, we look at the microeconomic issues on how one can create a competitive advantage in finding a job. I do not believe anyone who has not been unemployed can truly understand the agony and frustration that unemployed persons go through. Obviously, I cannot tell you where to go to find a job. I can tell you, however, how you can create a tiny competitive edge that may put you in a better position to find a job and keep it.

The first principle of a job search is to understand that employers will hire you only if they are convinced that the benefits of hiring you are greater than the costs of not hiring you. This means that the first priority has to be to find out what you can do to help the company that is considering hiring you. This means that you need to do homework to find out what the employer's needs are. The latest two faculty members we hired in our department knew the existence of and visited my personal website, not listed on the university websites.

Every employer has a special need. If your talent does not meet the needs of the employer, you will not pass the initial screening no matter how good your qualifications may appear on paper. If the company needs someone who can speak Arabic, the company will not hire someone who can speak ten foreign languages fluently but not Arabic. If a school needs a good teacher, the school will not hire someone who has many quality publications but no evidence of good teaching.

The second principle of job search, and keeping the job you have for that matter, is a good attitude. Someone once said, ``He who carefully listens, calmly speaks, coolly answers, and ceases when he has no more to say, is in possession of the best requisites of man.'' In the modern business environment, which has been tilting heavily toward the western style, the above quotation may be the best requisite of man but not necessarily the best requisite of an employee. Stated in simple terms, you have to be positive and pleasant. A degree from a good university will give you an advantage if all other factors are equal among applicants. A degree from a good university, however, is not as important as the applicant's and the employee's attitude toward work. When you have a positive attitude, you tend to have a passion for the work, which may well be the key ingredient for obtaining and keeping a job. When you have a passion for work, it shows. Do not try to figure out how it shows. I can only tell you that it shows.

When I watch successful people, there is a common thread in that they all have a positive attitude. When employees are positive about their work and toward the company, they are usually more energetic, more motivated, and more productive. It is very difficult to maintain a high level of productivity while working next to a person who has a negative attitude. A positive attitude does not mean that a person has to smile all the time. Some people transmit a positive attitude even though they seldom smile. They do this by the way they treat others, the way they approach their responsibilities, and the perspective they take when faced with a problem. Chances are that employees with positive attitude will be more successful with the company.

If you are a female student, the problem of job search may be a little more difficult. According to the Korea's Ministry of Gender Equality and Family, an average 50,000 female college graduates every year become jobless right after graduation. First of all, many female job seekers, regardless of whether they are college graduates or high school graduates, tend to leave the job market too soon after being turned down because females, I think, are more sensitive to the rejection. But the most serious difficulty that these young female job seekers face may well be the male-dominated Korean society. For instance, employers who interview job applicants are supposed to remain neutral to gender. However, many young females have reported that they were asked when they would get married or whether they would continue to work after getting married. Questions of this type should be illegal because I simply do not see any answer to these questions that can help young females who are looking for a job.

Once you have a job, communication becomes an essential component of keeping your job for a long time. When you keep yourself alone and busy doing what you think is important, you may not be a good employee. You need to keep your-self busy doing what your employer believes is important. Remember that your boss has a broader perspective of the entire organization and usually knows more than you. The best way of maximizing the use of your time and talent for the organization is to leave the communication channel open and talk with your supervisor frequently to make sure that everyone in the organization is on the same page.

You also need to be loyal. I have the following reprint on the wall of my office. "Dear Ann Landers: My brother hates his boss and everyone he works with and talks about them constantly. I recall a quote in your column by Elbert Hubbard that had to do with company loyalty. Please run it again. - I Read You in Chattanooga'' This is how Ann Landers answered: ``If you growl, condemn, and eternally find fault, resign your position, and when you are on the outside, damn to your heart's content. But so long as you are part of the institution, do not criticize it or the first high wind that comes along will blow you away and you will never know why.''
 


Prisoner's Dilemma and Game Theory

August 30, 2005
By Chang Se-moon

Have you seen the movie, "A Beautiful Mind"? The movie won an Oscar for the best picture in 2002. The movie depicts the life of mathematician John F. Nash, Jr. Professor Nash was born on June 13, 1928 in West Virginia, was diagnosed with paranoid schizophrenia, but overcame this illness and won the Nobel Prize in economics in 1994 for his development of the game theory.

Let us explore the game theory. Many economists believe that the business strategies of large corporations can be explained by the game theory.

A game is a situation in which two or more decision-makers (called players) pursue objectives usually in conflict (called payoffs) through decisions made on alternative actions (called strategies).

Put differently, a game requires three pieces of information: players (that is, decision-makers) of the game, strategies (that is, alternative actions) available to each player, and the payoff (that is, rewards of conflict) received by each player for each combination of strategies that are chosen by the players.

In game theory, we are not talking about games of chance such as a slot machine or pachinko in which players supposedly do not need skill to play. I have to admit that I have heard many times from people who play the slot machines that they do need some skills such as selecting machines that have not been used or machines that have been used but have not paid any returns.

Games in the game theory are games of strategy in which the outcome varies with the course of action that decision-makers deliberately undertake.

The key assumptions of game theory are: (a) that each player acts rationally in pursuing his or her own interest, and (b) that each player recognizes that competitors also act rationally. Without the assumption that players are rational, game theory doe not work.

One of the most famous games is a prisoner's dilemma. Two criminals committed a crime together and were caught. They were put in separate jail cells so that they could not talk to each other. So we have two players in the game. Strategies available to the two players are either to confess or not to confess. Payoffs are jail time that varies with what prisoner A and prisoner B decide to do.

Assume that if both prisoners confess the crime, both will be sentenced to two years in jail, and if both do not confess and claim innocence instead, both prisoners will be sentenced to only one year in jail over some minor violations.

Finally, assume that if one prisoner confesses and the other prisoner does not confess, the prisoner who confesses will be sentenced to jail for two years and the stubborn prisoner who does not confess will be sentenced to jail for 10 years. Would you confess or not confess if you were one of the two prisoners?

If you confess, the worst case will be two years of prison time. If you do not, it can be one year if his partner also does not confess, or it can be as many as ten years of prison time if his partner confesses.

Prisoners are in a dilemma because it would be best if neither of them confesses but both feel that confession may be the sensible thing to do. We assume that they committed crime together for the first time and thus had not had a chance to promise each other never to confess if caught.

If it is a repeat game, answers may be different. Given this information, both are likely to confess. The dominant strategy is thus confession by both players.

Sometimes, the dominant strategy is referred to as the Nash equilibrium. The Nash equilibrium is a solution in which neither player wants to change his or her choice of strategy, when the other player's choice is revealed.

The Nash equilibrium is said to be a strictly dominating strategy in the sense that the strategy is the same regardless of the action taken by the other player.

Games such as the prisoner's dilemma are called non-sequential games in that one player has to make the decision without knowing what the decision of the other player is.

When a player makes a decision after he or she finds out what the decision of the other player is, the game is called a sequential game. Sequential games are usually explained in terms of a game tree. Let us go over an example of a game tree.

Assume that both Apple and Samsung have been working on the next generation of iPods and that both want to know when they should introduce their new iPods to the market.

We assume that Apple is ahead of the game and thus will be making decision first. Strategies available to Apple are to introduce the new iPod now or to introduce it later.

Depending on what Apple does, Samsung then makes the decision of whether they should also introduce their new iPod now or later. This means that there are four different payoffs or profit potentials that Apple and Samsung need to consider.

The four payoff choices are: (Now by Apple, Now by Samsung), (Now by Apple, Later by Samsung), (Later by Apple, Now by Samsung), and (Later by Apple, Later by Samsung).

Once Apple makes a decision, it has no control over how Samsung makes its decision. Depending on what Samsung decides, however, Apple knows how much profit it will be making.

Assume that if Apple introduces the new iPod now, Samsung will also introduce its new iPod now believing that Samsung can make more money by introducing it also now. In this case of Apple introducing the iPod now, Apple knows how much it will make since it is clear that Samsung will also introduce its iPod now.

Assume, this time, that if Apple introduces the new iPod later, Samsung will still introduce its new iPod now believing that Samsung can make more money by introducing it also now.

In this case of Apple introducing the iPod later, Apple also knows how much it will make since it is clear that Samsung will introduce its iPod now. All Apple has to do is to compare the profits it will make between the two choices and make a decision.

Game theory is valuable because it can be applied to a wide variety of real problems. It can be applied to firms that consider changing prices to deter other firms from entering the market.

It can be applied to the relationship between manufacturers and retailers regarding their options of continuing after-sale services. In all business cases, it is easy to identify players and strategies.

However, I have to admit that it is not easy to identify payoffs, making it difficult to actually make decisions based on game theory. Real problems are not supposed to be easy to solve.

A couple of terminologies on game theory may be of interest to you: zero sum and nonzero sum games. Zero sum game represents a competitive situation of pure conflict in which a player's win is at the expense of another player's loss. All sports are basically zero sum games assuming that there are no ties since if one wins, the other has to lose.

Apartment lotteries in Korea are zero sum games since one person's win results in another person's loss.

A non-zero sum game is characterized by varying degrees of common interest as well as competition.

When workers go on strike and the company shuts its doors as happens so frequently in Korea, the total loss is greater than the combined loss to workers and to the company because there are many other businesses that suffer during the strike.

This is a non zero sum game that may hurt the economy for a long time. When a person quits smoking, he will benefit, but others around him will also benefit.

This is a non-zero sum game in which benefits clearly spill over to others beyond the person who benefits directly.

When negotiations with North Korea succeed through give and take concessions, the combined benefits of the successful negotiation to all parties will be much greater than the monetary value of concessions made during the negotiation. This is a non-zero sum game that will benefit everyone for a long time.

 


Would You Drive Carefully Uninsured?

August 23, 2005
By Chang Se-moon

About five years ago, I studied automobile crashes in Mobile County, Alabama, which has a population of about 400,000. During that year, there were 14,834 car accidents in which 3,270 people were injured and 64 were killed. When I completed my study, I developed a theory on safe driving. My theory is that if you put a greater distance between your car and the car in front of you, the probability of you being involved in a car accident will decrease by about 60 percent.

Ever since I developed the theory, I have told my students to put a greater distance between their cars and the cars in their front. Many of the students thanked me for the advice. Well, you don't have to thank me, but I really want you to try it. In the beginning, you will find it annoying because other drivers sneak in between your car and the car in front of you, but you will start feeling safer.

In the middle of the night while I was trying to figure out why people are driving so dangerously, I thought about the possibility that people may drive that way because they have car insurance. The hypothesis that people change their behavior when they are insured is known as ``moral hazard,’’ or the moral hazard hypothesis.

The moral hazard hypothesis does make a lot of sense. If you do not have home insurance, would you build a home in a flood-prone area? Probably not. If you do not have car insurance, would you drive just as carefully? Probably. Some economists even attempted to explain the 1997 financial crisis as a result of moral hazard.

According to this view, Korean chaebols borrowed more money from overseas than they would normally do because they believed that the Korean government would rescue them if they could not pay back the loan. Until 1997, the Korean government did rescue several large businesses when these businesses were about to go bankrupt. This cozy relation between large businesses and the government is known as crony capitalism.

Moral hazard is not the only concept that crept into many new economics textbooks. Let me introduce some of the more popular concepts that started showing up in textbooks.

Recently I met a guy who started a business, called Warranty Corporation, selling car insurance to people who buy used cars that usually do have insurance. What he does is research used cars and select cars that have fewer problems. He purchases lists of people who buy the cars that he selected and sends letters to them offering car insurance. He has confided in me that his business secret is asymmetric information. I responded quickly that you try to avoid an adverse selection. He laughed.

Asymmetric information means that buyers and sellers have different information on the same product. A well-known example, of course, is a used car. Car dealers usually has more information on the used cars that they sell than the buyers of used cars. If a car has been flooded, for instance, the car looks very clean and nice, but starts having problems soon after you buy it. Car dealers most likely know that the car was flooded, but the consumers do not. This asymmetric information leads to an adverse selection, or purchase of the flooded cars by consumers.

Another example of an asymmetric information problem is the rampant corporate scandals of recent years. Corporate leaders of WorldCom, for instance, were accused of inflating profit figures for their short-term benefit. While the alleged fraud by WorldCom leaders was progressing, employees, retirees and stockholders did not know anything about it, and purchased more stocks at inflated prices. There was asymmetric information between WorldCom leaders on the one hand, and employees, retirees and stockholders on the other. This other group of individuals made poor decisions because of asymmetric information or the lack of information on on-going fraud. Eventually, the fraud cost 20,000 jobs and $600 million in pension fund losses. About a month ago, WorldCom's former CEO, Bernard Ebbers, was sentenced to 25 years in prison. He was 63 when sentenced.

Asymmetric information can work the other way around and hurt the company more than the consumers. Consider a small community in which 100 people live. Half of them smoke and drink and thus continue to have health problems, while the other half eats healthy food and exercises and does no drinking and smoking. Let us call the former high-cost consumers and the latter low-cost consumers. High cost consumers spend 1 million won a year on health care, while low cost consumers spend nothing on health care. The average is 500,000 won a year.

Suppose a health insurance company considers insuring the community's residents on a voluntary basis. Believing that those who buy insurance would be representative of the entire community, the insurance company sets the insurance premium at 500,000 won per person plus whatever expenses and required profit margin there may be. What do you think will happen? There is asymmetrical information in that consumers know whether they are high-cost or low-cost consumers, but the insurance company does not. In fact, the majority people who buy insurance will be high cost consumers, bankrupting the insurance company.

Stockholders are the owners of the corporations. The objective of these owners is to maximize profit. Sometimes hired managers of corporations may have different ideas. When the objective of the stockholders as the principal and the objective of hired managers as agents are different, we have a principal-agent problem, which is also known as an agency problem. In 1988, for instance, the hired managers of RJR Nabisco maintained expensive beach homes in Florida and an extensive fleet of corporate jets, among other things. In 1989, Nabisco was taken over by another company that slashed operating expenses and reduced the company's workforce. It is not easy to totally get rid of principal-agent problems. Costs of overseeing hired managers such as hiring internal auditors are known as agency costs. Companies expend agency costs to minimize principal-agent problems.

Bad products are called lemons, while good products are called plums. Many years back, there was a car called Yugo. Everybody knew of Yugos, because they had a lot of problems. Not all Yugos were bad, however. There were plums and there were lemons. In the used car market, however, there were more lemons than plums because owners of plums would keep the cars instead of selling them. Those who sold Yugos were mostly owners of lemons, making the Yugo even more notorious than it probably deserved. In this case, asymmetric information led to a thin market in which most quality Yugos were not in the market for sale and the market for quality Yugos became thin.

Laws that require car dealers to buy back cars that experience frequent problems during the first year of use are called lemon laws. For example, California's lemon law requires auto dealers to repurchase vehicles that have been brought back for repair at least four times for the same problem or have been in the mechanic's shop for at least 30 days in the first year following purchase.

 


Foreign Exchange Rate and Big Mac Index

August 16, 2005
By Chang Se-moon

A Korea Exchange Bank official counts dollars at the bank’s headquarters in this file photo. Knowing foreign exchange rates is not a privilege of the educated, but a requirement for the survival of the average person.

Several years ago when the value of the dollar had been falling, I happened to travel near the historical city, Kyongju. I stopped at a roadside store run by an elderly Korean lady.

After I picked a couple of gift items that I wanted, I asked the lady whether she wanted me to pay in Korean currency or the U.S. dollar. She didn't hesitate and said, ``I want Korean currency.''

We did not say any further, but both of us understood that she wanted the Korean currency because the U.S dollar was losing value at the time. For many countries including Korea, knowing foreign exchange rates is not a privilege of the educated, but a requirement for survival of the average person.

The foreign exchange rate is simply the ratio of the value of one currency to the value of another currency. For instance, $1 = 0.83 euro, $1 = 8.11 yuan, and $1 = 1029 Korean won are examples of exchange rates.

Exchange rates can also be expressed the other way around such as 1 euro = $1.20, 1 yuan = $0.12, and 1 Korean won = $0.00097. Probably because of the dominance of the U.S. economy, many express exchange rates as the price of foreign currency per U.S. dollar such as $1 = 1029 won.

To simplify our discussion, let us assume that the exchange rate between the U.S. dollar and the Korean won is $1 = 1000 won. If you want to buy one dollar, you may have to pay a little more than 1000 won because banks that sell the dollar to you have to make money by charging fees or commissions.

These fees or commissions that incur in the process of buying and selling are called transactions costs. Assuming that transactions costs are zero, the exchange rate $1 = 1000 won means that we can buy one dollar with 1000 won or we can buy 1000 won with one dollar.

If the exchange rate changes from $1 = 1000 won to $1 = 900 won, the won is said to have appreciated since we now pay only 900 won to buy one dollar that we previously paid 1000 won. If the exchange rate changes from $1 = 1000 won to $1 = 1100 won, the won is said to have depreciated since we now have to pay 1100 won to buy one dollar that we previously paid 1000 won.

Two questions are of special interest to us. What determines the exchange rate and what happens when exchange rates change?

Assume that candles are the only product that Korea and the U.S. produce. If the price of a candle is $1 in the U.S. and 1000 won in Korea, then the exchange rate should be $1 = 1000 won.

The hypothesis that the exchange rate is determined by price level differences between the two countries is known as the purchasing power parity. Over time, the purchasing power parity holds true in that as inflation worsens in Korea, for instance, the Korean won loses value and the purchasing power parity tells us that the exchange rate will change from $1 = 1000 won to, say, $1 = 1100 won.

 



Free Trade - Mixed Blessing for Countries

August 9, 2005
By Chang Se-moon

Do you know why countries trade among themselves? The answer obviously is because they benefit from trading. Maybe my question was too easy. Let me ask this way. Assume that there are only two countries in the world: Korea and China. Assume also that there are only two types of products in the world: car and computer. If Korea can produce both cars and computers cheaper than China, should Korea trade with China by specializing in production of only one of the two and importing the other from China? I bet you did not think that far. Believe it or not, the answer is yes.

Let me explain the theory behind the answer by using an example of a medical doctor and her typist. Assume that a doctor in Korea makes 100,000 won an hour. The doctor needs a typist to take care of her patient records and invoices. So she, the doctor, hires a typist. The doctor pays her typist 5,000 won per hour. Now we make an interesting assumption that the doctor can type faster than her typist. In other words, the doctor can take care of patients better than her typist and the doctor can also type better than her typist. Should the doctor hire the typist? Now the answer seems much easier and is obviously yes. What happened?

It all depends on the opportunity cost of the doctor and her typist. The opportunity cost of taking care of typing duties for the doctor is 95,000 won. In other words, the doctor may save 5,000 won by doing the typing duties for her self, but will be losing 100,000 won that she could earn if she takes care of her patients rather than typing during the same hour. The opportunity cost of taking care of typing for the typist is 5,000 won at the most. In other words, it is more expensive for the doctor to take care of typing than it is for her typist to do the typing work. In this case, the typist who can carry out the typing duties cheaper should specialize in typing, while the doctor should specialize in taking care of patients even if the doctor is a better typist.

To summarize our discussion of the doctor and her typist, the doctor is said to have an absolute advantage in both taking care of patients and typing. The doctor, however, is said to have a comparative advantage in taking care of patients, while her typist is said to have a comparative advantage in typing. The theory that countries with different opportunity costs of producing the same products should specialize and trade even if one country can produce all products cheaper than others is known as the theory of comparative advantages.

The credit for originating the theory of comparative advantages has been attributed to several economists, including James Mill (1773-1836) and Robert Torrens (1780-1864). Modern economists have nominated David Ricardo (1772-1823) as the one who developed, if not originated, the doctrine.

The theory of comparative advantages has been the foundation for advocating a free trade for about 200 years, but the real push for free trade began near the end of the World War II. On July 22, 1944, the Articles of Agreement of the International Monetary Fund was adopted at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire (U.S.A.). The Articles took effect on December, 1945. The International Monetary Fund is known as IMF, which helped Korea recover from the 1997 financial crisis. Jokes in Korea during the 1997 crisis included: IMFried.

The General Agreement on Tariffs and Trade (GATT), which provided a forum for the negotiation of tariff reductions on a multinational basis, was adopted by 23 nations on October 30, 1947. The Uruguay Round of 1994, which is the last completed set of GATT negotiations, lowered tariffs by about one-third of the previous level, and led to the establishment of the World Trade Organization (WTO) in 1995 to oversee and enforce international trade agreements as the successor of the GATT. One of the most important provisions of the GATT, and now WTO, is the most favored nation (MFN) provision, which requires a member country that reduces tariffs for one nation must do so for all other members of WTO. The MNF is so widely practiced that some now call it an NTR, meaning normal tariff rates.

Importantly for the global economy, China joined the WTO as its 143rd member on December 11, 2001 after filing a formal petition to join the then GATT in July 1986. China has been lowering tariffs on all imports to China based on WTO rules and at the same time taking advantage of lower tariffs on its exports to all member nations of WTO. The impact on Korea of China's 2001 accession to WTO was not as dramatic as it could have been, because the relations between Korea and China were already normalized in August 1992. Although Korea has not experienced a trade deficit with China since 1992, Korea's concerns over future competition from China as a global exporter have increased in recent years especially in such sectors as machinery, electronics, home appliances, textiles, information technology products, and now automobiles.

Latest trend in global trade has been an elimination of tariffs between two or more specific nations, known as a free trade area or a free trade agreement (FTA). Two well-known FTAs are the North American Free Trade Area that has the U.S., Canada and Mexico as its members, and the European Union that even adopted the same currency called euro. Many countries have also concluded a bilateral free trade agreement, which is a free trade agreement between two nations. Korea has joined the bilateral free trade agreement movement working out free trade agreements with Chile, Singapore, and European Free Trade Association (EFTA). EFTA has four members: Iceland, Norway, Switzerland, and Liechtenstein. Korea is also pursuing free trade agreements with several other countries, which include Japan, Canada, India, Mexico, Russia, China, U.S., and regional free trade areas such as ASEAN, MERCOSUR, and EU.

The process of globalization has been very rapid during the past ten years and the process will continue to unfold toward a greater globalization. This means that you need to be ready to compete, survive and be successful in the global competition. It is important to master one or two foreign languages of your preference and keep track of global events that affect the bottom line of businesses. Businesses will expand to areas where they can produce and sell in a politically safe environment and in places where they can reduce costs. During the past ten years, China is the one where the action has been. India is rapidly chasing China these days and some South American countries such as Brazil may not be far behind.

Before I conclude, let me revisit the theory of comparative advantages, which suggests that free trade will benefit all trading countries. What the theory tells us is true over a long period of time and policy makers of all nations continue to try to reduce tariffs to promote free trade among all nations. In the short run, however, there are conflicting interests and problems. For instance, we do not know whether the theory will help developing countries that are not capable of producing quality products that can compete in the global market place. We also do not know exactly why the volume of intra-industry trade, such as Japan and the U.S. exporting automobiles to each other, increases so rapidly among nations when the theory of comparative advantages suggests a complete specialization.

Finally, even if a country as a whole may benefit from free trade, some within the country who have to compete against rising imports that free trade prompts may lose. This raises serious political problems within the country, which may slow down the process of globalization.

 


Stock Market - Flower of Capitalism

August 2, 2005
By Chang Se-moon

Stock prices in Korea are usually measured by an index called the Korea Composite Stock Price Index (KOSPI) with 1980 as the base year. For instance, assume that the KOSPI is 1,060, where it has been hovering lately. This means that if the price of an average stock was 100 won in 1980, the price of the same stock is 1,060 won now.

Korea's stock prices increased steadily from 1980 to 1997. It averaged 1,027 in 1994, but fell to 376.3 in 1997 because of the financial crisis, but rebounded to around 1,060 nowadays.

When stock prices increase, everybody claims to be an expert. When stock prices fall or fluctuate with no clear direction or movement, suddenly all these experts become quiet.

In fact, it is so difficult to predict stock prices that Professor Burton Malkiel published his famous book, "A Random Walk Down Wall Street," in 1973. Since then the random walk theory has become a classic in investment literature.

The random walk theory hypothesizes that it is impossible to outperform the market on a consistent basis. The theory suggests that a selection of stocks by so-called experts is not any better than a selection of stocks by a blind-folded monkey throwing a dart against a board listed with stocks.

In general, stock prices rise as the economy grows and prices rise. You already know that economic growth is measured by gross domestic product (GDP) and net inflation. GDP is the value of all goods and services produced during one year that has not been resold. What about inflation?

Inflation is usually measured by changes in the consumer price index (CPI). According to the Monthly Statistical Bulletin published by the Bank of Korea, the CPI in Korea was 110.7 in 2003 and 114.7 in 2004.

To calculate the rate of inflation from 2003 to 2004, we divide 114.7 by 110.7. We should not subtract 110.7 from 114.7 because these figures comprise an index. When we divide 114.7 by 110.7, we obtain 1.036, meaning that the rate of inflation from 2003 to 2004 was 3.6 percent.

We do not consider 1 in 1.036 because we always end up with 1 when the two numbers are the same, which means that there is no inflation.

Did you know that right after World War I, inflation in Germany was so bad that people paid before they started eating when they went to the restaurant?

The rate of inflation in Russia was 197.4 percent in 1995, although it cooled considerably to less than 15 percent in recent years. When the rate of inflation is high, it is called a hyperinflation.

When the rate of inflation is low, it is called a creeping or mild inflation. Korea's rates of inflation for many years have been mild.

The primary cause of inflation is an excess demand. If demand is greater than supply, price has to go up. Suppose there is a 1998 Mercedes SLK, which is the first hardtop convertible in the automobile history. I am talking about SLK because I saw an SLK in one of Korean videos. Assume that there is only one SLK in the city and five drivers want to buy it.

Factors Affecting Share Prices In other words, there is an excess demand. Price will then have to rise until four drivers drop out of bidding for the SLK. Excess demand can be caused by too few goods and too many buyers, as well as excess supply of money in the economy.

Inflation may also be caused by wage push and supply shock. If strong unions demand wages higher than what can be justified by increases in productivity and the company accepts the wage demand and raises prices to pay for those higher wages, wagepush inflation will occur.

If terrorists in Iraq blow up oil fields or a major typhoon disrupts a shipping channel that delivers oil, the supply of oil falls and prices rise temporarily.

Strictly speaking, this is also inflation caused by excess demand, which is caused by reduced supply. In these cases, however, economists often say that the price increase is caused by a supply shock.

Unemployment is almost like a twin of inflation. Unemployment refers to a person who is capable of working, is actively seeking employment, but cannot find an employment.

In other words, when a person who is economically active cannot find a job, he or she is said to be unemployed. In 2004, Korea's population was 48,199,000, but the number of people who are economically active was 23,370,000.

Those who are below 16 years old, full-time housewives, and full-time students as well as those who are in prison are not considered economically active. Of the 23,370,000 economically active people in 2004, 22,557,000 were employed. The difference between 23,370,000 and 22,557,000 is the number (813,000) of unemployed people.

When the number of the unemployed (813,000) is divided by the number of the employed (23,370,000), we obtain a 3.5 percent unemployment rate. An unemployment rate of 3.5 percent means that 35 Koreans out of every 1,000 who wanted to work did not have a job in 2004.

Unemployment can be seasonal, for example, farmers during off-season; cyclical, such as people who lose jobs during a recession; structural, for those who are good at abacus in a computer age; or frictional, with those who are unemployed temporarily while they change jobs. Note that those who want to work fulltime but are working part-time because they cannot find fulltime jobs are counted as employed. And note also that those who cannot find a job for a long time and finally give up looking for a job are not counted as unemployed, because as soon as they give up looking for work, they are not considered economically active.

Let us go back to the stock market. Recently, my MBA students and I have reviewed a large number of studies to identify the determinants of stock prices.

Literally, there are hundreds of factors that determine stock prices on any given day. Some factors have a short-term impact while others have a long-term impact. Some are hard facts while others are soft facts.

There are even psychological factors determining stock prices, such as "the herd effect." According to the herd effect, buyers overreact to news that affects stock prices. In other words, I buy a stock solely because my neighbors and friends are buying it.

I honestly believe that no one can predict stock prices on any given day. I certainly cannot. Over a long period, a safe investment in stocks may be to purchase stocks that have a good record of paying dividends.

When stock prices are reviewed from January through November of 2002, which followed the 9-11 attack on the World Trade Center in New York, the 351 stocks in the Standard & Poor's 500 index that paid dividends fell only 8 percent, while the remaining 149 stocks that did not pay dividends lost 26 percent of their value. Furthermore, many large investors, such as growth and income fund managers, are not allowed to invest in companies that do not pay dividends.

 

The Art of Pricing a Product

July 26, 2005
By Chang Se-moon

I have heard so much about eBay but never visited its website until yesterday when I started working on this article. I noticed that the pricing method on eBay was through auction. In fact, the kind of auction that eBay uses is known as the English auction in which the bidding starts from a low price. Although used much less often than the English auction, bidding can be carried out through the Dutch auction in which the bidding starts from a high price. Economists believe that the English auction and the Dutch auction result in the same price.

In bidding of construction projects, it is usually a sealed bid in which all submitted bids are opened simultaneously and the successful bid is the one with the lowest cost. Properties such as precious paintings or mansions can also be sold through a sealed bid in which all submitted bids are opened simultaneously and the successful bid is the one with the highest price.

There is one economic concept that everyone needs to know in pricing a product for maximum profit. The concept is the price elasticity of demand. The price elasticity of demand is the percentage change in sales divided by a percentage change in price. The concept measures how sensitive sales are to changing prices. The law of demand tells us that as a price falls, sales will increase, and as a price rises, sales decrease. The question is by how much. The elasticity concept answers the question.

If the percentage increase in sales is greater than the percentage decrease in price, the demand for the product is said to be price-elastic. If the percentage decrease in sales is greater than the percentage increase in price, the demand is also said to be elastic. If the percentage increase in sales is smaller than the percentage decrease in price, the demand for the product is said to be price-inelastic. If the percentage decrease in sales is smaller than the percentage increase in price, the demand for the product is also said to be inelastic.

Suppose that we reduce the price of a pizza by 10 percent from 1,000 won to 900 won, and sales of pizza increase by 20 percent from 500 pizzas to 600 pizzas per day. The price elasticity of demand is 2, obtained by dividing 20 percent increase in sales by 10 percent cut in price. If the ratio is more than 1, it indicates that sales increase faster than the reduction in price. This is known as an elastic demand. When demand is elastic, we lower the price to increase sales revenue.

Suppose also that we raise the price of a pack of cigarettes by 10 percent from 5,000 won to 5,500 won, and sales of cigarettes decrease by 5 percent from 1,000 packs to 950 packs per day. The price elasticity of demand is 0.5, obtained by dividing a 5 percent decrease in sales by a 10 percent price increase. If the ratio is less than 1, the demand for the product is known as price-inelastic. When demand is inelastic, we raise price to increase sales revenue because consumers buy almost the same quantity even if we raise price.

So far we have found that when the demand for a product is elastic, we lower price to increase sales, and when the demand for a product is inelastic, we raise price to increase sales. How do we know that the demand for our product is elastic or inelastic? Although we do not know exactly how elastic the demand for our product is, we have some good idea about that because the price elasticity of demand depends primarily on the availability of substitutes.

If a product has many substitutes, demand for the product becomes more elastic and the price has to remain competitive. If the demand for Apple's iPod is elastic by having many good substitutes, Apple cannot raise its price because any increase will cause its sales to fall substantially. If Apple can afford to cut the price of its iPod, on the other hand, its sales can increase substantially. Apple and all other producers of competitive products try to make their products less elastic by differentiating their products through advertising and quality improvement so that they can raise the prices of their products.

Sometimes, the income level of consumers determines the price elasticity of demand for the products that they buy. Consider psychiatric services. For the poor people who cannot afford the fee for psychiatric services, one option is to drink more soju and ``dongdongju'' hoping that the drinking will take care of their mental pains. For those people with a low income, therefore, the price elasticity of demand for psychiatric services is high. Psychiatrists and psychologists know this and usually charge lower fees for those patients with a lower income. For the rich, who can easily afford the fee for psychiatric services, there are not many other options for psychiatric services and their demand for such services is highly inelastic, meaning that they are willing to pay higher prices. Psychiatrists and psychologists are known to charge higher fees for the rich and lower fees for the poor for the same services.

The art of pricing extends beyond the price elasticity of demand. Suppose that you are looking for a tutorial job for a young student. When the student's mother asks you how much you charge for tutoring her child, you may give her a figure you normally charge such as 100,000 won per week. In this case, it is usually better to say that ``I would like to charge 100,000 won and that's what I have been charging, but if there is any problem with the amount, let me know.'' In other words, it is usually better to be given the other side a price with a tone that the quoted price is not the take-it-or-leave-it price. Even in the case where the quoted price is your ``true reservation price'' which is the absolute minimum you will accept, it is better for you to say it mildly in such way that ``I would like to charge 100,000 won per week. If it is below that, I would like to think about it for a couple of days.''

For another example, what would you do if you were asked to write your desired salary in an application form when you look for a job? My suggestion is that you make your answer as flexible as possible. You can give a firm value only if it is your true reservation price and you have no regret if you do not get the job because your high salary expectation. One reason why you need to be flexible is that it is unlikely that your employer will give you a lower salary when hired, because you wrote down a lower salary. Employers, especially large ones, usually have a salary schedule that they follow. The other reason is that your primary objective is to get a job and you can always work hard to receive pay increases to make up for the lower salary that you wrote in your application form.

Being flexible or appearing to be flexible is especially important if you are a sales person or if you are in a consulting business in which you need to negotiate your price. If you are a sales person and the sales opportunity requires a sealed bidding, you have no choice but to submit a bid price that reflects your true reservation price. If you submit a price that is too low, you may have to suffer from a winner's curse. Winner's curse is to win a contract at such a low price that you end up losing money from doing the work.

Finally, in other sales cases or consulting fees that are negotiable, it is very important to leave room for you to change the proposed price or even change you mind later by stating that this is how much I would like to have, but I would be happy to consider any counter-offer from you. If they like your product or your service, they usually pay the price you propose. When the other side starts arguing too much over price, you might as well give them a smile and leave.

Pricing at Restaurants

Professor Lee Kreul of Purdue University's School of Consumer and Family Sciences analyzed pricing practices in the restaurant business. Kreul reviewed 467 prices in advertisements placed by 242 restaurants in 24 newspapers. The review indicates that when a restaurant placed advertisements for meals that cost less than $7, the price usually ended with the number 9, such as the prices $3.99 or $4.99. The review also indicates that when a restaurant placed advertisements for meals costing $7 to $10, the price usually ended with the number 5, such as the prices $7.95 or $8.95. Kreul suggests that the pricing practices of restaurants are intended to provide a discount illusion. Restaurants change the ending number of a price from 9 to 5 as the price of meals increases beyond $7 because more than one cent is required to create the discount illusion for these higher priced meals. Kreul also suggests that patrons interested in meals costing more than $7 might perceive a price ending in the number 9 as indicated.

Source: Jack C. Horn, ``The high-class nickel discount,'' Psychology Today, September 1982, p. 18

 

Why Diamonds Are So Highly Valued

July 12, 2005
By Chang Se-moon

We all know how expensive diamonds are. But do you know that diamonds are more common than any other gem-quality colored stone in the world?

If the supply of diamonds is that large, why are diamond prices higher than prices of many other gem-quality colored stone? Before we answer the question, let us review some of the applications of the supply and demand model.

There is virtually no limit to the use of the supply and demand model in solving real problems. Some even said that if you just say supply and demand to economic questions, you are likely to be correct in most, if not all, cases.

The price of Dubai Light crude oil has recently surged to a record high of around $60 per barrel. This represents an increase of more than 50 percent from last year's average price of $33.64 per barrel.

Dubai Light is the benchmark crude that sets the prices of other Middle East oil, on which Korea depends for more than 80 percent of imports. Why is the price of oil rising?

The answer is supply and demand. The worldwide supply of oil has been fairly steady in recent years, but the global demand for oil has been rising steadily during the same period.

When supply is constant but demand increases, the supply and demand model clearly predicts that price has to increase. In graph, the supply curve remains the same but the demand curve shifts to the right, raising the price.

China Factor

With China growing rapidly and India joining the growing group of economies, the rising trend of oil prices will continue.

The rising price of oil will force countries, including Korea, either to slow down their economic activities or to find alternative sources of energy. Korea is directly affected by rising oil prices because Korea is one of the largest oil importing countries in the world.

One of the consequences of rising oil prices is the rising cost of flying airplanes. In recent weeks, both Korean Air and Asiana increased airfares for international routes.

The increased fare, unless matched by other cross-country airlines, may cause the demand for flight services by Korean Air and Asiana to fall.

Everyone knows that housing prices in Kangnam, southern Seoul, are high. Housing prices in Kangnam are high because more people want to live in Kangnam for many different reasons, causing the demand for houses in Kangnam to increase faster than the supply of houses.

Lately, the same phenomenon has been unfolding in Kyonggi Province and South Chungchong Province because major corporations and new governmental buildings are moving to the area increasing the demand for land while the supply of usable land is pretty much fixed.

Like crude oil, the supply curve of houses in Kangnam increases only a little, but their demand curve increases faster than their supply. The demand curve shifts to the right and pushes the price up in the process.

Speculation can play a big role by arbitrarily creating demand. Because the Kangnam area is so popular that sometimes speculators move into the area to buy houses, hoping to sell them at higher prices later.

If speculation is widespread, and if the increase in housing prices is not as rapid as these speculators expect, there is a good chance that some owners of these speculative houses may try to sell the houses all at the same time.

If this happens, the housing market is said to have its bubble burst. The unreasonably high price of homes is often seen as a bubble that can burst with the slightest touch of its surface.

Korea heavily depends on exports for economic growth. If export prices fall while import prices remain the same, Korea's exporters will lose money and eventually may have to lay off some of their employees to the rank of unemployment.

Since May last year, prices of Korea's exports are reported to have fallen by 10.3 percent. Just imagine that we have been buying something at $18 and selling the same product at $20. If the selling price falls by 10 percent from $20 to $18, we are not making any profits.

Why have prices of Korea's export products been falling? The answer is, again, supply and demand. There has been no change in Korea's supply of export products, but demand for Korea's export products fell owing to increasing global competition in exports.

In this case, the demand curve for Korea's exports shifted to the left unlike demand curves for crude oil and homes in Kangnam that shifted to the right.

Price Control

Summer is a rainy season in Korea. Each year, some villages are so flooded that homes are flushed away and residents have nothing left. What the flood victims need most is water. Unfortunately stores selling bottled water are also flushed away.

Prices of remaining bottles of water rise rapidly. As complaints about the rising prices of bottled water become louder, politicians may get together and make an announcement that the prices of bottled water are fixed at the level prior to the flood.

Well, the results may not be what the politicians and complaining residents had in mind, because the price control will significantly reduce the supply of water.

At the controlled price, not many outsiders will be willing to bring water to the disaster area for sale. For those who can buy water at a controlled price, it is good. For many others, however, they will simply not be able to find water. The supply and demand model tells us that price fixing reduces the quantity supplied and makes the shortage worse.

Supply and demand may work in strange ways, too. Have you heard of Shaquille O'Neal? He is one of the best professional basketball players. Do you know how much he made during this year's basketball season that just ended?

He earned no less than $27.6 million for playing 2,492 minutes of basketball. He earned $11,000 per minute. Why is Shaquille making so much money, while police officers and firemen all over the world who perform much more important work to our lives, are struggling to make a living?

The answer, again, is supply and demand. The supply of potential police officers and firemen is significantly greater than their demand, pulling their wages down.

The supply of talented athletes such as Shaquille is significantly smaller than their demand, pushing their wages up. Is this fair? Probably not. Society tries to make it a little fairer by taxing large earnings more than smaller earnings, but not enough.

By now, it is clear that price goes up when demand is greater than supply and price goes down when supply is greater than demand. If this is true, why diamonds are more expensive than other gem-quality colored stone that is in shorter supply?

Well, the answer is, again, supply and demand. South Africa is the largest producer of diamonds among all continents, but DeBeers Corporation consolidated its purchases of South African diamond mines into a single company in 1889.

Ever since that time, DeBeers waged an effective marketing campaign to create the demand for diamonds while at the same time limiting the quantity of diamonds supplied to the world market. DeBeers increased demand for diamonds and at the same time decreased the quantity of diamonds supplied in the market place.

When the supply curve shifts to the left and the demand curve shifts to the right, higher prices are exactly what the supply and demand model predicts. The diamond is not the only gem stone that lasts forever, but DeBeers has successfully convinced new brides and grooms that diamond is the one that lasts forever.

Demand and Supply Curve

Alfred Marshall (1842-1924) studied mathematics at St. John's College, Cambridge University, and stayed on at Cambridge to teach mathematics.

His strong feelings of compassion toward the poor, however, led him to study economics. Marshall was truly a great economist. Many of the concepts that he developed, including the familiar demand and supply curves, are now taken for granted.

Today's microeconomics courses are said to be three-quarters Marshall, and a thorough examination of Marshallian contributions to economic theory would include nearly all contemporary economic theories. His major publication, Principles of Economics, was published in 1890 after more than 20 years of preparation.

The book was the most dominant economics text until the 1930s. Marshall was quoted as having said, ``The more I study economics the smaller appears the knowledge I have of it … and now at the end of half a century, I am conscious of more ignorance of it than I was at the beginning."

Source: Quotation cited in Joseph A. Schumpeter, ``Ten Great Economists’’ (New York: Oxford University Press, 1965), p. 109.

 

What's Your Favorite MP3 Player?

July 5, 2005
By Chang Se-moon

In today's article, we study two of the most important concepts in economics: supply and demand. In fact, we will study principles of supply and demand today, and then applications of supply and demand next week. Businesses can easily succeed or fail depending on how well businessmen understand the two words.

It is probably a good thing that I do not own an iPod because it is a little too complicated for my aging brain. Since Apple is the world's leading seller of iPod MP3 players, let's talk about Apple products. They have at least five different models: iPod Shuffle for 240 songs, iPod Mini for 1,500 songs, iPod for 5,000 songs, iPod Photo for 15,000 songs or 25,000 photos, and iPod U2 Special Edition for 5,000 songs. Apple expects to sell about 30 million iPods this year worldwide.

Let's consider for a moment what factors determine the number of iPods we buy. These factors are called variables by economists in the sense that these factors can take any value that can vary.

First, it depends on the price of the iPod. The hypothesis is that we buy more, ceteris paribus, as price falls. This hypothesis has been proven true so many times that we even call it the law of demand.

If we have something to sell and no one wants to buy it, the law of demand says that we should cut the price and see what happens. Second, how many iPods we buy depends on how much money we have.

The hypothesis is that the more money we have, ceteris paribus, the more we buy. Just in case you forgot what is meant by "ceteris paribus," which we studied last week, it means "all other things remaining the same." Third, how many iPods we buy depends on the prices of alternatives. Substitutes for a particular iPod, such as iPod Shuffle, include other Apple brands of iPods, such as iPod Mini, and the three popular Korean brands, such as ReignCom's iRiver, Samsung Electronics' Yepp, and Cowon System's iAUDIO.

The hypothesis is that as prices of alternatives to iPods increase, we buy more of the brand that has not changed in price. If prices of Apple iPods rise, for instance, we buy more Korean brands of iPods. Fourth, how many iPods we buy depends on prices of complements.

Complements of iPods are known as accessories, which are almost endless and include armbands, headphones, cables, docks and numerous others. The hypothesis is that as prices of accessories rise, we may buy less iPods. Fifth, the quantity of iPods demanded depends also on how many consumers there are in a given market. There are more determinants of the quantity of a given product demanded than the five that I have listed, but you get the idea of how complex demand can be.

So far, we have discussed demand. Let's now consider what willprompt manufacturers of iPods to make and sell the iPods. The quantityof iPods supplied by manufacturers depends on several factors orvariables.

First, it depends on the price of the iPod. The hypothesis is that manufacturers or suppliers of iPods will make and try to sell more iPods as their prices rise. This hypothesis has been proven true so many times that we even call it the law of supply. Note that in demand we buy less as prices rise, but in supply sellers try to sell more as prices rise.

In other words, the relation between price and the quantity demanded is said to be inverse or negative, while the relation between price and the quantity supplied is said to be direct or positive.

Incidentally, did you see the movie "Catch Me If You Can?" I do not recall the scene, but someone reminded me that Leonardo DiCaprio wound up in a hotel room with a woman he discovered was a very high-priced call girl.

She said, "You can have me for the night... just say the right price." He responded "$300" and then she threw a card at him and said "Go fish!" He then said $500 with the same result.

When DiCaprio finally said $1,000, she allegedly agreed. In this case, the woman is the supplier. The higher price led her to increase (?) her service. Continuing the variables that determine the quantity of iPods supplied, the second variable is the prices of the resources that are needed to make iPods. The hypothesis is that as prices of these resources rise, ceteris paribus, the cost of making iPods increases and manufacturers will find making iPods less profitable.

When producers find products less profitable, they will reduce the supply of the product. The third variable is technology. The hypothesis is that as technology improves and lowers the cost of making iPods, producers will increase the supply of iPods since they find making iPods more profitable.

There are more determinants of the quantity supplied than the three that I have listed, but you get the idea of how complex supply can be.

Let's put supply and demand together. Maybe you should draw a graph by drawing a vertical line and a horizontal line. Go ahead and write "Price of iPod" on the vertical line and "Quantity of iPods" on the horizontal. Since the relation between price and the quantity demanded is inverse, the demand curve slopes downward to the right.

Draw a line that slopes downward to the right and label it "demand." Since the relation between price and the quantity supplied is direct, the supply curve slopes upward to the right. Draw a line that slopes upward to the right and label it "supply." Now we are in business.

The point of intersection between supply and demand is called the equilibrium point. Price and quantity that correspond to the equilibrium point are known as the equilibrium price and the equilibrium quantity.

At the equilibrium price, supply and demand are equal to each other. There are three questions about this supply and demand model that are begging answers, however.

The first questions is: What is the difference between equilibrium price and market price? Both prices continue to change as underlying conditions of supply and demand change. The market price is exactly equal to the equilibrium price only if the market is just about perfectly competitive. In reality, the market is not perfectly competitive and the observable market price continues to chase the unobservable equilibrium price that keeps changing.

Have you noticed how frequently prices of crude oil change? The second question is: What happens when market price moves too much away from the equilibrium price? If the market price is too high, businesses will find their products remaining unsold since the quantity supplied by sellers is greater than the quantity demanded by buyers at such high prices. If the market price is too low, businesses find their products selling out too quickly since the quantity demanded is now greater than the quantity supplied at such low prices.

Prices listed on the Apple Web site, such as $99 for iPod shuffle and $349 for iPod photo, should be close to the equilibrium prices. Otherwise, there will be a shortage or a surplus of the products.

The third question is: What happened to all other variables, such as income, prices of substitutes and complements in demand, and resource prices and technology in supply? Note that in graph, we can only show two variables: price of the product on the vertical axis and quantity demanded and supplied on the horizontal axis.

Remember the Greek words, ceteris paribus? We assumed all the other variables to remain constant. Because these variables other than the price of the product are assumed to be constant and thus are not shown in the supply and demand graph, the supply curve and the demand curve will have to shift when these variables change.

To be honest, I enjoy singing and listening to Korean songs, but I cannot think of more than 20 songs that I really want to sing or listen to. It is beyond my comprehension why people need iPods that can store 5,000 or 15,000 songs.

Prostitutes and Supply Curb

The 2004 Summer Olympic Games were held in Athens, Greece. Prostitution is legal in Greece.

The Greek government expected that the games would bring a huge influx of tourists, spectators, journalists and athletes to Athens.

Because of this temporary boom in the population, the government also expected a big increase in demand for prostitutes.

To meet the increased demand in a country where prostitution is legal, Greek authorities proposed opening 30 new legalized brothels in the Athens area.

Their efforts represent a movement along the supply curve that has been generated by the shift in demand.

Source: Daniel S. Hamermesh, Economics Is Everhwhere, Boston: McGraw-Hill, 2004, p. 24.

 

Do Japanese Women Want to Marry Korean Men?

June 28, 2005
By Chang Se-moon

Have you thought about whether Japanese women want to marry Korean men? Well, let me elaborate on the possibility by stating that for Japanese women who consider foreigners as viable marriage partners, Korean men are their top preference over men from all other countries including America and China. Before I provide you with evidence that may or may not prove the hypothesis to be true, let us work a little on some basics, i.e., scientific methods in economics.

Economics is a science in which we study how to allocate limited resources such as qualified male and female singles among alternative uses such as males and females who plan to marry. To understand what the scientific method is all about, several terms need to be defined. These terms include hypothesis, assumption and theory. In today's article, I will define the terms in such way that you may have little difficulty in communicating with others when using these terms.

Obviously, it is very important to approach economic issues through an objective and scientific analysis rather than biased opinions. Knowing the three terminologies helps us do exactly that.

A convenient place to start is with the term hypothesis. A hypothesis is a proposition tentatively assumed in order to test its truthfulness against facts that are known or may be determined. In the case of hypotheses that explore historical data, it is possible to find facts that retroactively confirm predictions indicated by the hypothesis. Hypothesis can be either a causal proposition or a simple statement. An example of a hypothesis stating a causal relation is that if you drink and drive, you are more likely to be involved in a car accident, while an example of a hypothesis based on a simple statement is that Noah's Arc exists.

Both hypotheses are testable and will have to be proven to be true. Another example relates to the widely held concern in Korea on the slowing economy and lack of jobs. We may summarize the relation between the slowing economy and the perceived lack of jobs as a hypothesis that if the economy continues to slow down, the rate of unemployment in Korea will increase. Keep in mind that a hypothesis is no more than a proposition that is yet to be proven. It can easily be proven false.

For instance, Korea's economy has been sluggish so far this year, but the jobless rate fell to 3.4 percent in May from 3.6 percent a month earlier, declining for the third straight month, because services and construction industries have hired more workers in recent months. The hypothesis may be true in the long run, but at least not during the first half of this year in Korea.

Still another example may relate to the recent appreciation of the Korean currency and its impact on profits of manufacturing firms in Korea. The hypothesis can be stated as that the rising value of the Korean currency will lower profits of manufacturing firms. This hypothesis is turning out to be true. According to the Bank of Korea, Korea's manufacturing firms that export a large portion of their products to other countries earned 91 won for every 1,000 won sales so far this year in comparison to 137 won for every 1,000 won sales for the same period last year.

As you know, when the Korean won, appreciates against other currencies, prices of Korean exports become that much higher in importing countries, discouraging other countries from buying Korean products. Sometimes, stating assumptions is important in developing hypotheses.

Assumption is an act of taking for granted or something that is taken for granted. Some assumptions are so obvious that they are, for all practical purposes, tautologies, or needless repetitions. Tautologies should not be stated. Examples of such obvious assumptions are that sunrise remains unaffected by changes in daylight saving time and that the definition of the unemployment rate remains unchanged during the time we test the hypothesis between the slowing economy and the rate of unemployment.

Other assumptions are not so obvious and may have to be stated explicitly The number of both obvious and less obvious assumptions that can be stated for a given hypothesis is virtually endless. We in economics, therefore, use a Greek expression, ceteris paribus, in order to hold constant all factors that may affect the test of a hypothesis but are not stated explicitly. Ceteris paribus means "all other things being equal." For example, we may hypothesize that the quantity of ipods that students buy increases, ceteris paribus, as price falls. A theory may be defined as a hypothesis whose truthfulness has already been proven empirically.

This definition of theory clearly requires observation of facts to support the claim made by the hypothesis. In reality, the two terms, hypothesis and theory, are used interchangeably. For instance, people may say that my theory is that Korea's stock prices will increase by 20 percent by the end of the year.

The statement is really a hypothesis since it is yet to be proven. Whether a hypothesis has to be proven empirically to become a theory or the term hypothesis can be used interchangeably with the term theory is not as important as understanding that the whole idea of studying hypotheses and theories is to promote a scientific way of thinking that is needed to extend and analytically refine human knowledge.

In plain English, it is very important to approach economic issues objectively and scientifically rather than emotionally with biased opinions. Proper solutions can be found only if we approach these issues with an objective analysis of the issues by stating these issues as testable hypotheses.

Once hypotheses are proven to be true, they become theories. I feel that it is about time to prove whether the very first hypothesis we stated in this article is true or false. The hypothesis is that for Japanese women who consider marrying foreigners, Korean men are their top preference over men from all other countries.

In Japan, just like Korea, marrying a person from another country is still tinged with exoticism, that is, quite strange and unusual. Still, 8,158 Japanese women married foreign men during 2003.

When Japanese do marry foreigners, however, Shoji Kaori has stated through the author's article in the April 2005 issue of the Japan Journal that for Japanese men, the No. 1 choice of nationality is Chinese, followed by the Philippines, believing that women from China and Philippines are "much warmer, kinder, and more industrious than selfish and arrogant Japanese femme."

For Japanese women, however, Kaori has found that the top preference of Japanese women as a marriage partner are Korean men and the second preference is American men. The logic is that Korean men are, according to Kaori's description, "passionate, faithful, and loyal to their families, compared to the cold, distant, neveraround Japanese male."

Now we have a new, rather serious hypothesis that we need to test. The new hypothesis is that Korean men are more passionate, faithful and loyal to their families than Japanese men. Could this hypothesis be true? Is it possible that Japanese women are simply mistaken?

Perception on Korea, Japan and China

Let us hypothesize that people in Japan feel more friendly toward Korea than toward China. If this hypothesis were proven true, it would provide a good foundation for negotiated settlements of many socio-economic and political issues that are pending between the two nations. In December 2004, the Cabinet Office of Japan published the 2004 edition of the "Opinion Poll on Diplomacy." According to the poll, feelings of the Japanese about China and South Korea have changed dramatically over the past 25 years. In 1978, over 60 percent of Japanese had a favorable view on China and only about 26 percent had a negative view on China. In recent years, Japanese had been split almost equally between favorable view and unfavorable view on China. Last year, however, 58.2 percent of Japanese felt that China was not friendly to Japan and only 37.6 percent felt that China was friendly to Japan. In 1978, only 40 percent of Japanese had a favorable view on Korea and about 45 percent had a negative view on Korea. In recent years, the percentage of Japanese who had an unfavorable view on Korea increased as high as 60 percent, while those who had a favorable view on Korea fell below 40 percent. Last year, however, continuing the trend that began in 1998, no less than 56.7 percent of Japanese felt close to Korea, while 39.2 percent said that they did not feel close to Korea. At least for 2004, the hypothesis that people in Japan feel more friendly toward Korea than toward China was proven to be true. Hopefully, several contentious issues existing between Korea and Japan can be resolved amicably on the basis of this friendly feeling of the Japanese toward Korea. Source: Nakanishi Hiroshi, "Altered Images," The Japan Journal, Volume 1 (April 2005), pp. 4-5.

 

There is No Such Thing as Free Lunch

June 21, 2005
By Chang Se-moon

Sometimes I write TNSTFL on board in the beginning of a class and ask students whether they know what it stands for. Surprisingly, some students answer correctly by saying that there is no such thing as a free lunch. This simple sentence tells a lot about economics. Economists use the term "opportunity cost'' to explain the same message. Just between you and me, I really do not like the term, opportunity cost. In fact, I do not like the Korean word (gi-hoi-bi-yong) for it either. Both the opportunity cost and the gi-hoi-bi-yong seem to convey the impression that it is a complicated economic concept. Actually, it is not. All the opportunity cost, or TNSTFL, means is that there is a real cost involved for whatever decisions you make in business and economics or in personal life for that matter. Let me give you some examples.

Consider cash held at home. An economic cost incurs in keeping cash at home since the opportunity of earning interest on the cash is forgone. The opportunity cost of holding cash at home is the interest that you could have earned if the cash were deposited at one of local banks in your neighborhood. Well, that's easy enough.

Consider, for another example, a self-employed lady who spent 4 million won during a particular month to run her clothing business including the cost of goods that she sold. There are 4 million won worth of resources used by the lady that could have been employed to produce other products. Suppose that total sales revenue to the store during the same month is 5 million won. The business lady made a profit of one million won according to her accountant. The opportunity cost of running her business, however, is likely greater than 4 million won since the money value of her time is not counted as cost. Assuming that she could easily have made 3 million won during the same month if she had worked elsewhere, the opportunity cost of running her business would have been 7 million won, not 4 million won. The 3 million won represents the business lady's time and effort used to run the self-employed clothing business. Economically speaking, she lost 2 million won, rather than made one million won from running her business. Don't you think it makes sense to look at the way economists do?

You often hear politicians advocating for a tax cut. It should be nice to pay less tax. Why would anyone oppose? The opportunity cost can answer the question. According to the concept of the opportunity cost, there is a cost involved. If taxes are cut, one of two follow-up measures will have to be considered. One is to cut back some of existing governmental programs since tax revenues are falling, and the other is to raise taxes somewhere if all existing public sector programs are to be preserved. The opportunity cost of cutting a particular tax is either the elimination of programs supported previously by the tax revenues that are no longer collected, or higher taxes someplace else. Clearly, there is no such thing as a free lunch.

Let us consider daylight saving time (DST). Some countries such as the U.S. have adopted DST, while others such as Korea either have not adopted DST or are on DST throughout the year. Even within the U.S., some places such as the city of Indianapolis have not adopted DST while the state of Indiana adopted DST. According to DST practices in the U.S., clocks are changed forward at 2 a.m. on the first Sunday of April and moved backward during the last Sunday of October. According to DST practices in the European Union, they change clocks forward at 2 a.m. on the last Sunday of March and move clocks backward during the last Sunday of October. Supporters argue that "Just as sunflowers turn their heads to catch every sunbeam, so too have we discovered a simple way to get more from our sun.''

We talk about DST for two reasons. One reason is that DST can affect your timing when you try to talk to someone in other countries. During the winter time, for example, Korea is ahead of the U.S. Eastern Standard Time (EST or time in New York and Washington by 14 hours. During summer when DST is in effect in the U.S., Korea is ahead of the U.S. EST by 13 hours. It can be a problem unless you are aware of DST, since so many Korean businesses have to talk to customers in other countries that are not only in different time zones but may also practice different DSTs.

The other reason for talking about DST is that DST is an economic issue because there is not enough daylight time to make everyone happy. Do you remember that scarcity is the reason why economics exists as a science since scarcity forces choice? Daylight time is a scarce product. According to the Daylight Saving Time Coalition, when in 1987 the U.S. congress made a change in the starting day of DST from the last Sunday of April to the first Sunday of the same month, the sporting goods and leisure product industries were anticipating as much as $4 billion in added sales. The American Association of Nurserymen estimates that beginning DST earlier by about seven weeks might increase the industry's sales by as much as $315 million per year, since people may start buying plants when DST comes, feeling that spring has arrived. If sales of goods increase, more goods will be produced. If more goods are produced, more jobs will be created and more tax revenues will be generated. Why not extend DST for several more weeks, or for the entire year for that matter, and make everyone happy while helping the economy at the same time?

Again, the concept of opportunity cost enables us to see the whole picture. The opportunity cost of generating additional sales activities by extending DST for several more weeks is not zero. People who buy more sporting goods and plants early in spring will have fewer dollars to spend later in spring. Economic benefits from extending DST, therefore, may be smaller than the proponents of additional DST claim that they will be. Interestingly, the U.S. congress is currently considering an extension of DST to the first Sunday of March from the first Sunday of April and to the last Sunday of November from the last Sunday of October.

To summarize, the lesson from studying the concept of opportunity cost is that when a course of action is considered, the full impact of the action should be evaluated carefully. Few, if any, goods or services that satisfy our wants are completely free, because there is no such thing as free lunch.

Opportunity Cost of Cohabitation

Alimony refers to the payment made to a former spouse upon divorce. Palimony is a payment of support to a former cohabitant, called also a live-in, to whom one was not married. Palimony is a judicial term that recognizes modern practices of cohabitation and attempts to deal with parties equitably. In the U.S., the legal recognition of palimony varies with individual states. In 1985, for instance, the Superior Court of New Jersey ruled that a woman could sue her deceased lover's estate for posthumous palimony by allowing Ms. Giammarco to present evidence to prove her allegation that Mr. Carroll promised to support her the rest of her life, and give her his home and 40 percent of his business.

In 1984, however, the Mississippi Supreme Court declined to recognize palimony for Margie who had lived with Sam over 33 years and buried him on her mother's lot. The Mississippi Supreme Court offered the following seven reasons for the denial of palimony: The parties could have drawn a deed or will; cohabitation is looked upon with disfavor; cohabitation is against public policy; the acts performed by the person seeking the support payment were done gratuitously; to allow palimony would be to revive common law marriage in Mississippi; in effect, Margie was a mistress not a spouse; and the legislature, not the court, should decide the issue.

Recognizing or declining to recognize palimony is an issue that is more judicial than economic. It suffices here simply to point out that cohabitation without marriage or prenuptial agreements incurs an opportunity cost that can be measured by the amount that the surviving partner could have received if she or he were married to the deceased partner or made a prenuptial agreement with the deceased partner.

When two of you decide to live together without the blessing of a marriage, I seriously doubt that you two will think about opportunity cost. It is there, however, regardless of whether you think about it or not.

Source: Adapted from Ernest W. King, "Posthumous palimony: New Jersey takes the next step; Will Mississippi take the first step?" in Business Insights 6(Fall 1986), pp. 5-6.

 

Are You Liberal or Conservative?

June 14, 2005
By Chang Se-moon
Professor of the University of South Alabama

I understand that most of you enjoyed watching the KBS drama, "I am sorry, I love you." I am quite sure that you also enjoyed listening to the drama's theme song, "Snowflake" that made Park Hyo-shin very popular.

Because of the enormous popularity of the drama, many of you wanted a CD containing the song. Since we are talking about music, we might as well talk about another popular singer, Cho Sung-mo.

Cho sang two of the most popular songs in recent weeks: "Tears Fall" and "One Thing I Couldn't Say." Again, because of the popularity of these songs, many of you wanted CDs that contains these songs, causing the prices of these CDs to increase.

In reality, their prices did not go up that much, if at all. Prices in the market place depend on supply and demand. Demand for the song "Snowflake" increased, but demand for CDs containing the song did not increase as much as their producers hoped because many of you downloaded the music from the Internet.

Even if the demand for the music increased, the availability or supply of the music increased also, keeping the prices of CDs containing the music from rising substantially. Can we generalize this a little bit? Price depends on supply and demand. When demand is greater than supply, price increases.

When supply is greater than demand, price decreases. All prices in the market place are determined by supply and demand.

When prices are determined by supply and demand, prices are said to be flexible. You already know all about this, don't you?

When prices are flexible, they can do a miracle to the economy. Suppose that the economy is so slow that we are about to go into a recession.

When there is a recession, sales of many goods and services such as the Snowflake CDs slow down, more CDs remain on the shelves unsold, and the Snowflake CD makers will make fewer CDs.

The slowed production of CDs will cause some people to lose their jobs. If prices are flexible, however, CD makers and CD stores will lower their prices until all CDs are sold. This, in turn, leads CD makers to make more CDs and workers will be able to hold onto their jobs. In other words, when prices are truly flexible, the economy may slow down occasionally, but any lasting recession is highly unlikely.

Prices can take many different forms. Do you know that wages are also prices? Wages are the price of our work.

When wages are flexible, they can also work miracles on the economy. Assume that you are paid one million won a month by working at a factory making cell phones.

Assume also that there are many people who have no jobs, but are willing to work at the same cell phone factory at wages less than one million won a month.

Have you thought about the possibility that if wages were truly flexible, your monthly wage would decrease from one million won since the supply of workers is greater than the demand for workers?

In fact, if wages are truly flexible, wages will continue to fall so long as there are unemployed workers who are willing to do the same work at lower wages.

When wages fall substantially, managers of the cell phone factory will hire more workers. In other words, when wages are truly flexible, all workers who are willing to work at lower wages will be able to find jobs.

The economy will be fully employed and anyone who is unemployed is not working because he or she is not willing to work at prevailing wages.

About 250 years ago, there were many scholars who believed in flexible prices and wages. If prices and wages were truly flexible, there would be no need to worry about a lasting recession or a massive unemployment.

If we do not have to worry about recessions and unemployment, what is there for the government to do?

The belief in flexible prices and wages, therefore, led to another popular way of thinking called "laissez faire" meaning "let it be" or "leave us alone." The laissez faire philosophy says that the government should stay away from the economy and should allow the market to work problems out. Doesn't this sound familiar in Korea these days?

These thoughts, culminated through the publication of "The Wealth of Nations" by Adam Smith in 1776, are collectively called the classical economics. In contemporary terms, these thoughts are called monetarism in economics, and conservative ideas in politics and society in general.

The conservative approach is closely associated with the political party GNP in Korea and the Republican Party in the United States.

Well, time moves on. On October 27, 1929, the stock market crashed in the U.S., signaling the beginning of the world-wide Great Depression that lasted all the way until 1941 when the World War II broke out.

In many of the then advanced countries, the rate of unemployment reached 30 percent, prices fell, and movement toward a dictatorship began to spread.

According to the classical economic ideas, recessions are not supposed to last long and unemployment is not supposed to be massive. It was about time for new economic ideas to appear that can counter the classical economic ideas.

Let us go back to the cell phone factory. When unemployed people want to take your job at lower wages, are you willing to lower your wage to hold onto your job?

Not likely. In other words, today's wages are not as flexible as classical economists believed. So long as wages stay where they are, managers of the factory have no incentive to hire more people.

When the number of unemployed persons is large, the public outcry is directed not at lower wages, but at why the government is doing so little to provide jobs to the unemployed persons.

Isn't it interesting that this opposing view also sounds familiar in Korea these days?

In any case, these new ideasare summarized in "The General Theory" that John M. Keynes published in 1936.

The ideas of advocating increased the government role in the economy because the market economy is inherently not capable of solving economic problems are known as Keynesian economics or new economics, and also as liberal ideas in politics and society in general.

The liberal approach is closely associated with the Uri Party in Korea and the Democratic Party in the United States.

Let us summarize. The belief that the market economy can take care of itself and the government should leave the private sector of the economy alone with minimal regulation is known as the classical economics or conservative economic ideas.

Conservative policy ideas usually include reduced government spending, less government regulation, and greater individual choices free of government regulation.

The belief that the market economy cannot take care of itself and the government should actively solve economic problems such as unemployment and monopoly is known as Keynesian economics or liberal economic ideas.

Liberal policy ideas usually include increased government role, greater welfare payments for the poor, and greater governmental guidance in individual choices.

Well, are you a conservative or a liberal? If you are not sure, think about this. How many conservatives who advocate the market economy will be willing to accept falling wages so that the market economy can provide more jobs to the unemployed? Or, how many liberals who advocate a greater role of the government in solving social problems will be willing to pay more taxes so that the government can actually carry out many programs that they want the government to undertake?

Just in case you are still thinking about downloading your favorite songs from the Internet without paying for it, the free downloading is an issue not of being liberal or conservative, but of protecting intellectual property rights that is supported by both conservatives and liberals.

Life is not simple, neither is economic decision-making. What is important is to understand that good people can have opposing views and the art of policy-making is to search for the best compromise without being stuck with one or the other ideology.

 


Impact of Yuan’s Revaluation

This is the fourth in a series of articles on the possible revaluation of the Chinese yuan and its impact on the Korean economy. _ ED.

June 1, 2005
By Chang Se-moon

Only about six years ago, economists were predicting that China would devalue, not appreciate its currency.

According to the January 28, 1999 report by Andrea Ricci of Indian Express Newspapers, a Reuters poll of 22 economists in Asia, Europe and North America taken over the preceding two days found 11 economists had forecast devaluation by the end of 2000, 6 economists saw devaluation likely, and the remaining 5 economists stated yuan devaluation was unlikely.

The rumor of yuan devaluation late in January 1999 is believed to have caused Singapore stock prices to fall by 5.50 percent, Hong Kong's Hang Seng index to fall by 2.58 percent, and Korea’s composite stock index to also fall by 5.12 percent.

These days, no one expects China to devalue the yuan. Just about everyone expects the yuan to be appreciated soon.

China may appreciate its currency by lowering its pegged value to the dollar, by re-pegging it to a basket of several leading currencies, by freely floating the currency leaving its value to be determined through supply and demand or by a combination of the three methods.

China has been under heavy pressure from the United States, Japan, and the European Union to appreciate its currency over the past two years.

The pressure from the U.S. is due to the $162 billion trade deficit the U.S. incurred through 2004 with China. The pressure from other nations resulted from the devaluation of the yuan in recent years as the yuan has been pegged to the dollar, which has been falling in value.

In the past, China has been reluctant to revalue the yuan upward, as a currency appreciation will lead to slower export growth and a higher rate of unemployment. China has also been concerned about the possibility of declining foreign direct investment and the potential for capital flight, which may follow a yuan revaluation.

As the yuan appreciates, world prices of products exported from China would become higher, and production in China less profitable.

Lately, however, China’s economic reality became more conducive to the yuan’s revaluation.

The growth rate of China’s real GDP that averaged between 7.1 percent and 8.8 percent from 1997 to 2002 accelerated to over 9 percent during the last two years. Such high rates of economic growth are clearly inflationary and may lead to a hard landing, which is an economists’ term for a recession.

An appreciation of the yuan will slow down the growth rate since China’s exports will grow more slowly.

The slower growth of exports and lower prices of imports that result from yuan’s revaluation will lower the rate of inflation in China, thus making the China’s economic growth a little more sustainable. At least, this is what policy makers around the world hope to see happening.

Looking at the problem another way, a large amount of foreign capital has been flowing into China from trade surplus, foreign direct investment and speculative portfolio transfers aimed at profiteering from real estate deals and, especially, from pending revaluation of the yuan.

In order to defend the pegging of the yuan to the dollar, the People's Bank of China was reported to have bought dollars to recycle some $32 billion worth of export earnings, $65 billion worth of foreign direct investments, and about $100 billion of speculative inflows during 2004.

The purchase of the large amount of dollars reportedly led to an increase in China’s money supply by approximately 20 percent in 2003 and 16.2 percent in 2004. No matter how one looks at it, this is clearly inflationary and cannot be sustained for long without a hard landing.

When the yuan is revalued, exports from the world to China will increase because they become cheaper to China’s consumers and China’s exports to the world will slow down because China’s exports become more expensive. There are some complications, however.

Consider that about half of China’s exports are believed processing trade, meaning that materials are imported, labor is added, and then final products are exported. Stated in simple terms, many foreign businesses that are already in China will find prices of their exports to increase and thus suffer from reduced sales and profits.

For instance, no less than 70 to 80 percent of Korean goods shipped to China are believed processed and re-exported to other countries. If the yuan is appreciated, Korean companies that export goods from their production facilities in China will experience a decline in exports because their export prices will be higher as yuan appreciates.

Consider also that China has been held partly responsible for the steadily rising oil prices in recent years because of China’s increasing demand for oil to meet the needs for its rapid economic development.

When yuan appreciates and oil prices become relatively cheaper, China will most likely increase its importation of oil, thus pressuring world oil prices even higher unless oil supply is increased proportionately which is highly unlikely.

And as the yuan appreciates, there is a possibility that the currencies of other Asian nations, such as Korea, may appreciate, at least slightly, because exports from these other Asian countries to China will increase. This will negate some of the benefits that these Asian countries are expected to reap through increased exports.

This may lead to another unintended consequence.

If the Japanese yen and the Korean won appreciate, for instance, it would hurt oil-producing Gulf states that peg their currencies to the dollar and import a large amount of goods and services from Japan, Korea, and China since they will have to pay more for them, as their currencies lose value in relation to the Asian currencies.

What will these oil-exporting Gulf countries do to recover the loss from the appreciating Asian currencies is, at best, uncertain.

Like other economic issues, there are costs involved in the appreciation of the yuan.

But the benefits from revaluing the yuan upward to all countries involved outweigh costs. Policy makers of all of China’s trading partners, including Korea, will just have to deal with post-revaluation problems as they cross the bridge.

 

Hyundai Creates Major Economic Impact on Alabama

May 22, 2005
By Chang Se-moon

Interstate 65 starts from Mobile, Alabama in the south and ends in Chicago, Illinois in the north.

Around the 160 mile-mark of I-65 from Mobile, there is a sign, Hyundai Blvd. that one cannot miss. Hyundai’s new automobile assembly plant is not visible from I-65 because it is hiding behind a gentle hill, but its economic impact on the region has been the talk of the town ever since Hyundai announced its plan to build the assembly facility on April 2, 2002.

About 50 Hyundai executives settled in Montgomery with many family members joining them every month.

To assist the Korean families of Hyundai employees, the city of Montgomery hired the city’s program coordinator specifically for Hyundai family support. Ms. Jeanne Charbonneau, who is a retired lieutenant colonel in the U.S. Army stationed in Korea from 1983 to 1984, has the pleasant assignment of assisting Hyundai executives by gathering and providing information on schools, housing, medical care and other necessities for settling into the area.

According to Ms. Charbonneau, the number one priority of Hyundai executives is the education of their children.

Hyundai provided more than the impetus for economic growth in the region according to Lynn Beshear, executive director of Envision 2020, which is a civic organization for future planning. Ms. Beshear is reported to have said that Hyundai’s selection of Montgomery affirms Montgomery as a nice place to live, and that Hyundai has given Montgomery ``a sense of itself.’’

When economic planners of the area known as the River Region met in Montgomery in April this year to discuss smart growth, the main topic of conversation reportedly was Hyundai and how Hyundai was going to affect the region’s economic growth. When the Alabama Automotive Manufacturers Association met in Mobile in February, Hyundai was a popular topic of discussion.

When the American Council of Engineering Companies of Alabama met in Montgomery in February, Ellen McNair, the vice president of corporate development for the Montgomery Area Chamber of Commerce, delivered a keynote address describing Hyundai's impact on the Montgomery community and on the state.

Tiffany Ray of the Montgomery Advertiser, the area’s leading newspaper, summarized Ms. McNair’s presentation in its Feb. 27 issue as follows.

``Since Hyundai chose Montgomery for its first U.S. auto plant, 41 tier one, tier two and tier three suppliers have announced decisions to locate facilities in the state, and most of those have settled in central Alabama,”McNair said.

Those suppliers have brought with them more than 5,000 new jobs and more than $700 million in capital investment.’’

According to the latest reports in the monthly Business Alabama magazine, there are 23 Tier 1 suppliers that followed Hyundai’s new plant in Alabama and six Tier 2 suppliers that followed Hyundai’s Tier 1 companies.

These 29 suppliers are projected to employ about 4,000 workers in total. Including the 2000 new workers that Hyundai Alabama is hiring now, the total direct employment impact of Hyundai on Alabama will be about 6,000.

Manufacturing jobs are well-known for their large multiplier effect in that all the materials that the suppliers as well as Hyundai Alabama use will have to be produced, and the 6,000 workers will spend their earnings, generating new rounds of sales and jobs in the retail and service industry.

The total employment impact of Hyundai Alabama on the Alabama economy may well exceed 10,000 in years to come.

I was contacted by Korean War veterans living in the Gulf Coast area of Alabama to see whether they could make a special presentation of a military salute during the Hyundai plant’s opening ceremony. This is another indication of how warmly the Hyundai-Alabama has been received by people in Alabama.

Unfortunately I was not able to help them beyond giving them a couple of telephone numbers. Although I met officials of Hyundai-Alabama about three years ago when they attended the 16th joint conference of Korea and the seven U.S. southeastern states in Savannah, Georgia, I have not had any more direct contact with people at Hyundai-Alabama.

Although most of the Hyundai-Alabama suppliers are located within an hour’s drive from Montgomery, some of them are located in small cities and towns with population less than 10,000.

These places are often known as the hearts and souls of Alabama. Because of the large number of jobs these supplier firms create, the response of these cities and towns has been very warm and friendly.

To attract suppliers of Hyundai-Alabama, these small cities and towns spent tens of thousands of dollars, a large sum for the size of the cities, to hire public relations firms and prepare documents that were used to impress Hyundai officials.

Not only Hyundai, but many other names of Korean supplier firms also will soon become household names in Alabama towns. These names include Dongwon, Halla, Hwashin, Kyung Shin, Samlip, Shin Young, Hisan, Daehan, Sejong and more.

The fact that so many of these suppliers are located in small towns with no more than a few thousand residents raises an interesting question as to how Korean employees will adapt to Alabama's rural life in the Deep South.

How well employees of these Korean businesses adapt to rural life in America will go a long way toward determining the success of these businesses and future investors from Korea.

It is very important for all Korean employees of Hyundai-Alabama and its suppliers to consider these cities and towns as their new hometowns, not just as places to stay temporarily.

They need to make charitable contributions to the local United Way and other charitable organizations. They need to participate in local festivals by organizing Korean dancing teams.

They need to respond when the community and its schools need volunteers. They need to join local Kiwanis Club, Rotary Club and Lyons Club just as they did in Korea. They need to go to American churches as well as the Korean ones.

When Korean employees start thinking and treating their new towns as their newly adopted hometown, not just as a stopover, both local residents and Korean employees will be able to maintain a friendly and happy relation for many years to come.

 

Why Chinese Yuan Revaluation Is Likely?

This is the second in a series of articles on the possible revaluation of the Chinese yuan currency and its impact on the Korean economy. _ ED.

May 20, 2005
By Chang Se-moon

The yuan has been tightly pegged to the U.S. dollar since 1994 at a rate of about 8.28 yuan to the dollar. The yuan, however, is widely believed to be undervalued.

The yuan's undervaluation makes China's exports relatively less expensive for other countries, and foreign products relatively more expensive for Chinese consumers.

The result is a significant subsidization of China's exports and a virtual tariff on foreign imports. Many countries are running a large trade deficit against China.

The U.S. trade deficit against China for the latest 12 months is estimated at $175 billion, accounting for about 25 percent of the total trade deficit of the United States.

China already holds 5 percent of U.S. Treasury securities. In recent years, the U.S., Japan and many European countries have repeatedly asked China to revalue the yuan to no avail. An April vote in the U.S. Senate may change all that.

Early in September 2003, the U.S. requested China to unpeg its currency to the dollar and allow the yuan to float but China refused to do it.

Following China's refusal, a bipartisan group of U.S. Senators comprised of Charles Schumer, Jim Bunning, Lindsey Graham, Elizabeth Dole, Richard Durbin and Evan Bayh unveiled a new legislation on Sept. 9, 2003 that would have imposed an across-the board tariff of 27.5 percent on Chinese imports in an effort to reduce China's undervalued currency.

The legislation would have allowed a grace period of 180 days to ensure that U.S. Treasury officials have adequate time to work with the Chinese government to institute reforms. At the time, the Senators stated that the yuan's undervaluation played a major role in the loss of 2.6 million U.S. manufacturing jobs since March 2001 and was contributing to the migration of service and engineering jobs to China.

No further action was taken on the proposed legislation.

That was in 2003. The Washington front had remained relatively quiet until early this year when in February U.S. Senator Lindsey Graham (R-South Carolina) joined with Senator Charles Schumer (D-New York) to introduce legislation placing the same 27.5 percent tariff on all Chinese goods entering the U.S.

The Graham-Schumer bill specifies that after a six-month negotiation period between the U.S. and China, if such negotiations were not successful, a 27.5 percent tariff would be levied on all China's exports to the U.S. that is symmetrical to China's currency advantage.

Many economists estimate that China's currency is undervalued between 15 percent and 40 percent with 27.5 percent being the midpoint of that range.

This tariff would apply across the board to all products imported from China and would lay on top of any current tariffs that may apply.

If the President of the United States determines after six months of enactment that China is making significant progress towards revaluing its currency, the president may delay imposition of the tariff.

The president can also remove the tariff once he certifies to Congress that China has agreed to substantially revalue its currency upwards to ``at or near its fair market value.''

The legislation does not require a freely floating yuan. It simply requires an adjustment to revalue the yuan near the ``fair market'' level.

Senator Graham said, ``We've talked this issue to death. It is now time to act.''

China's response was equally harsh. ``This is an old trick of the United States to make currency politicized,'' said Li Yang, head of Institute of Finance of Chinese Academy of Social Sciences.

Qin Gang, spokesman of the Foreign Ministry said, ``If push came to shove and a tariff of this magnitude were actually enacted, it would be a major lose-lose for both China and the US. We question the wisdom of threatening to shoot a guy when the bullet that kills him will kill you too.''

U.S. Treasury Secretary John Snow also spoke out against the legislation and asked Congress to leave the problem to ``financial diplomacy.''

Early in April this year, Graham and Schumer tried to improve its chances of passage by attaching their bill to foreign affairs legislation as an amendment.

Within minutes, a motion was on the floor to kill the amendment. Graham and Schumer figured they might be able to attract 40 senators to their side for support and defeat the motion to kill their proposed amendment. However, the motion was denied and the bill survived. In fact, the motion was denied by such a large margin, 67-33, that nobody looked more shocked than Senator Graham himself.

Because of the widespread support, the bill is likely to come before the U.S. Senate as a free-standing bill before July 27 for final resolution.

If the bill comes as a free-standing bill and passes as is likely, it is difficult to predict what will happen and how the forced negotiation will progress beyond that it will not be pretty.

There is no doubt that China will eventually have to act like a major economic power that it is by moving away from the tight pegging to the U.S. dollar.

However, no one including Senators Graham and Schumer, let alone China, wants it to happen under the gun. There are too many important issues riding on the friendly relation between China and the U.S. Late in April, top-ranked Chinese trade officials asked a meeting with Sen. Graham. Although the meeting has not yet been set, it is expected to take place within the next several weeks and pave the way for a peaceful revaluation of the yuan.

 

The Salary Peak System

May 3, 2005
By Chang Se-moon

The Korea Labor Institute publishes what I consider to be a very good journal, the Quarterly Journal of Labor Policy. The latest issue, published this spring, contains an interesting article titled ``Alternative Retirement Plans and the Salary Peak System in Korea.''

According to the article, Germany is the birthplace for the state-run retirement system. In 1889, the German government designated the age of 70 as the official retirement age. In 1916, the age was lowered to 65. The retirement age in the United States was created in 1935 when the Committee on Economic Study decided to use 65 as the retirement age for the new Social Security System. In 1967, the Age Discrimination in Employment Act (ADEA) prohibited employers from discriminating against workers on the basis of ages up to 65. In 1978, the ADEA was amended to provide protection against employment discrimination for ages up to 70. In 1983, Social Security laws were changed to raise gradually the age at which full benefits are available to age 67 for workers born in 1960 or later. Effective January 1, 1987, an Amendment of the ADEA eliminated the age 70 cap on workers 40 years and older, thus removing mandatory retirement age in the U.S.

In comparison, private sector retirement ages in Korea are usually set by companies according to agreements with their employees with the average mandatory retirement age in 2004 being 57. Most government workers are to retire early at the age of 60, with the exception of professional government workers like teachers (62 years) and professors (65 Years). There is a term ``saojong'' in Korea, which means that the normal retirement age in Korea is 45, reflecting the widely spread practice of forced early retirement since 1997.

Korea became an aging society as of July 1, 2000 with the number of people aged 65 or older having reached 3.4 million or 7.3 percent of the total population of 46.1 million. Korea is expected to become an aged society by 2019 when 14.4 percent of its population are expected to be 65 years or older. The number of Koreans under the age of 15 fell to 20.6 percent of the total population in 2000 from 34.0 percent in 1980 and 25.6 percent in 1990. The population aging in Korea is due to the decreased fertility rate and the increased life expectancy. The population aging raised the level of concern over the belief that it will, if not already, slow economic growth, and led Korea's policymakers to re-examine Korea's retirement system as well as its mandatory retirement age.

From the view of the Korea's private sector, however, the issue was more about what to do with aged workers than how aged workers could be utilized to promote economic growth. To be specific, the Korea Chamber of Commerce and Industry (KCCI) proposed the salary peak system to handle aged workers. The salary peak system provides aged workers with an opportunity to work past their retirement age for a salary less than their peak salary. The system as proposed appears to allow employers to determine details of its operation. According to the KCCI, the salary peak system has been adopted in Japan by 77.5 percent of corporations with 5,000 or more employees, 69.2 percent of corporations with 1,000-4,999 employees, 69.0 percent of employers with 300-999 employees, 70.8 percent of employers with 100-299 employees, and 66.0 percent of employers with 30-99 employees. A number of Korean companies have also adopted the salary peak system. The Korea Credit Guarantee Fund with mandatory retirement age of 58, for instance, pays 75 percent of the peak salary from age 55 to 56, 55 percent at age 57, 35 percent at the age 58. After 58, the company allows employees to work as temporary contractors.

Before the salary peak system is adopted, however, it is important to understand that the salary peak system is related directly to the pension system. Broadly classified, there are two types of pension systems: defined benefit plans and defined contribution plans.

In defined benefit plans, each employee's benefit is predetermined by a specific formula. Usually, the promised benefit is tied to the employee's average earnings, length of service, and the employee's earnings during the last years of service. In defined benefit plans, the plan sponsor assumes an obligation for paying a stipulated future benefit. Examples of defined benefit plans include the Korea's National Pension Scheme that began in 1988 and the America's Social Security System that began in 1935.

In defined contribution plans, employers contribute to the individual employees' retirement accounts with contributions from the employees being added as a variation. Employers' contributions are usually determined by a percentage of each employee's earnings. The benefit payable at retirement is based on money accumulated in each employee's account. Such accumulated money will reflect employer contributions, employee contributions (if any) and investment gains or losses.

Note that a typical defined benefit pension plan specifies the annual flow of pension benefit. It is the employee's benefit that is defined, thus called defined benefits. A typical defined contribution pension plan specifies the payments or contributions made by the employer into a fund, which is invested in securities. With a defined contribution plan, it is the employer's contributions that are defined, thus called defined contributions.

The key point is that the impact of the salary peak system on the aged workers varies with the type pf pension plans. Under the traditional defined benefit retirement plans that depend heavily on salaries of last years of employment, the aged workers will have an incentive to retire when their salary peaks before the salary peak system becomes effective. If defined benefit plans were changed in such ways to allow employees to formally retire at an earlier age and be re-hired under the salary peak system, this change would raise whole new critical issues. One such problem would be that the change may provide an incentive for employers to force aged workers to retire early and rehire them at a lower salary with or without any contribution to the workers' retirement funds. More importantly, the change may simply provide a legal avenue for employers to retire their aged workers early. These critical issues can be minimized, if not avoided, if the salary peak system is adopted after all retirement plans of the private sector are converted to defined contribution retirement plans away from defined benefit plans.

To summarize, defined benefit retirement plans are not compatible with the salary peak system since the pension amount under defined benefit plans tends to vary with the employee's salaries during the last years of service which may include the employee's post-peak salaries. Even the voluntary phased retirement program in which workers work less hours at reduced pay prior to the normal retirement age is generally not a good fit with defined benefit plans since defined benefit payouts are linked to final average salary. Defined benefit retirement plans may be made to allow employees to formally retire with the peak salary at an earlier age and be re-hired under the salary peak system. This alternative, however, raises new critical issues. The salary peak system is likely more acceptable to workers without any negative impact on employers under defined contribution retirement plans than under defined benefit retirement plans.



Grocery Giants Battle in Atlanta Koreatown

April 14, 2005
By Chang Se-moon

Gwinnett County in Atlanta, Georgia, is rapidly developing into Atlanta's new Koreatown. In fact, the development has been so rapid that three large ethnic grocery stores opened since November 2004 and two more are scheduled to open this year.

The potentially fierce competition among these ethnic grocery giants has attracted mainstream media attention. Brian Feagans of the Atlanta Journal-Constitution wrote an informative piece in the Dec. 17 issue of the popular daily newspaper, entitled ``Grocery chains to battle for Asian and Latino customers.''

Factual information about the five grocery stores in this article is based largely on Feagans' summary in the Atlanta Journal-Constitution.

The 60,000 square-foot Super H Mart is owned by New York-based HanAhReum Asian Mart Corp., a wholesaler with groceries along the East Coast of the United States.

Super H. Mart opened on Nov. 6, 2004, and carries high-end Asian imports with Western goods in kiosks from specific countries such as Japan, Korea and China.

Super H. Mart also carries Korean furniture, kimchi, refrigerators and other Asian specialty items. The Park Village in which the Super H. Mart is located will eventually have about 90 businesses including a Chinese acupuncture clinic and a Vietnamese noodle shop.

The 89,000 square-foot Mercado del Pueblo is owned by the Washington, D.C.-area chain Grand Mart International Food. It opened in an old K-Mart store on Dec. 2, 2004, and carries a wide array of fresh vegetables, meats and fish from Latin America and Asia.

The massive 110,000 square-foot Namdaemoon, also called Gwinnett International Farmers Market, is owned by Chicago-based Kipyo Hong, owner of two Chicago Foods markets, who has teamed up with local Korean businessman Charlie Yang, a veteran of the Buford Highway's Farmers Market in Doraville.

Namdaemoon is scheduled to open in 2005 in a former Pro Bass Shop and will carry a 50-50 mix of Asian and Latino products. Namdaemoon has more than 1,000 parking spaces.

The 65,000 square-foot Assi Plaza International Food-Sugarloaf is owned by the Maryland-based Rhee Bros. Inc. that also owns markets in Los Angeles, Maryland, New York, Philadelphia and suburban Washington D.C. The Assi-Sugarloaf opened on March 22 this year and carries both Asian foods and mainstream American food.

Interestingly, Assi Plaza also purchased a 65,000 square-foot warehouse about eight miles away from the Sugarloaf site to promote Assi's wholesale line of business in the southeast United States.

The 90,000 square-foot Assi Plaza International Food-Pleasant Hill will be located inside the 160,000 square-foot shopping plaza and will be the second Assi store in the area, owned also by the Rhee Bros. Inc.

The Assi-Pleasant Hill will carry a mix of Asian and Latino foods. The Assi Plaza shopping center will also include about 40 other stores under the same roof. Philip Ahn, the project manager, stated that the stores would include restaurants, including a Mexican grill, a Korean sushi joint, a Spanish bakery, cell phone store, barbershop, wedding gown store, hair salons and more.

In addition to these five mega grocery stores, there is another huge one, Changgo Sikpoom, called Farmer's Market in English, on Buford Highway in the old Koreatown about 10 miles west of the new Koreatown.

Chango Sikpoom has 140,000 square-foot of space and has been the largest ethnic food store for about 30 years. The owner of Chango Sikpoom is Shin Young-kyo, who worked very hard with his wife at an Alabama chicken farm in their early years, leaving for work at about 3 a.m. in the morning every day.

I think one question everyone wants the answer to is whether all these mega grocery stores can survive in the same area. Feagans characterizes the emergence of these mega stores as early signs of an international grocery war brewing in western Gwinnett County.

``And it's about to get hotter than a bowl of kimchi _ or jalapenos, if that's your taste,'' while Jae Shim, a grocery consultant, is quoted as having said, ``I've never seen anything like this.''

Clearly, prices are lower and shoppers benefit greatly from the inevitable cutthroat competition. Many shoppers have marveled at the low prices even before all stores are open. It still begs the question; can all these stores survive?

Local Korean newspapers have criticized what appears to be an over development through their editorials. Chul Lim, who is the public relations manager at the Buford

Highway Farmers Market (Changgo Sikpoom) in Doraville is quoted as having said ``there simply aren't enough customers to support all the markets.''

This is the way I see the development. There are some positive factors that support the potential success of these stores. First, these stores target more than Koreans.

The stores carry food for all Asian nationals, Mexicans and to a great extent the mainstream Americans. Second, although the Korean population is rather limited in the area and the number varies between 40,000 to over 100,000 depending on who is counting, there are probably at least as many Koreans living in nearby places as there are in the Atlanta area.

Although smaller cities within about 500 miles of Atlanta have their own small grocery stores, many of these stores depend on Atlanta wholesalers for their supply.

How well these stores will do and how many of these stores survive in the long run depends on several factors, First, it depends on how successfully these stores can attract non-Korean customers.

Second, it depends on how successfully these stores can achieve ``product differentiation,'' which refers to many non-price factors such as the quality of the products or services, the produce's freshness, shopping environment, types of brand names or products they carry, and more.

Finally, it also depends on how far the wholesale line of these businesses extends beyond the Atlanta area. Only time will tell.

On Feb. 23, 1997, Elizabeth Kurylo of the daily Atlanta Journal- Constitution described the Korean community in Atlanta in her local news section as follows.

In 1970, there were about 300 Koreans in Atlanta, and the number increased to 13,000 by 1997.

In 1982, there were 326 businesses owned by Koreans or Korean-Americans, and the number increased to more than 1,000. There are three locally produced Korean-language newspapers, four local bureaus of national Korean dailies, a Korean-language radio station and a Korean TV station.

Koreans worship in more than 100 Korean-American churches in the metropolitan area. They even have their own beauty pageant. For the first time in 1996, local Koreans sent their Miss Atlanta to Seoul, South Korea, to compete in the Miss Korea pageant.

A cluster of Korean businesses on Buford Highway became known as Koreatown, featuring offices, restaurants, gift shops, video stores, groceries and other retail shops that cater to Koreans.

The Korean Directory of Atlanta _ with the title printed on the cover in Korean and English _ is a 500-page, bilingual tome that lists everything from wedding photographers to real estate agents and includes a full-page ad for local golf clubs that welcome foreigners.

The directory reflects the growing influence of immigrants in Atlanta. Koreans are one of Atlanta's most established immigrant groups, with a business community that has grown explosively since they started moving here more than two decades ago.

By 2003, the Korean population increased dramatically and the center of gravity of Koreatown has been moving from Buford Highway in DeKalb County, northeast of Atlanta, to Gwinnett County, east of DeKalb County, all in the Atlanta metropolitan area.

On April 4, 2003, Rick Badie of the now Atlanta Journal-Constitution described the Korean community in Atlanta in his Gwinnett section as follows. The six-mile stretch of the Buford Highway that winds through Doraville and Chamblee is known as the international corridor with the ``greatest concentration of ethnic-owned businesses in the Southeast.''

About 50,000 to 70,000 Koreans flocked to Gwinnett County, north of Buford Highway, that had long been the epicenter of Asian and Hispanic retailers. Mrs. Misun Kim and her husband own Koreana Pharmacy on Buford Highway but opened Koreana Pharmacy No. 2 and a grocery store in Nukoa Plaza in Gwinnett County that they built by themselves.

Ms. Kim Bodor, a Korean-American real estate salesperson, was quoted as having said that the Gwinnett area ``is unbelievably popular'' among Koreans.

Hyungho Lee is building a $20 million Asian-themed upscale mall, called Park Village, just north of the Kims' Nokoa Plaza. Lee was quoted to have said, ``We are right at the starting point of a new Koreatown.''

James Kim, unrelated to Misun Kim, owns Lotte Market No. 1 on Buford Highway, but plans to spend nearly $2 million to transform the 20,000 –square-foot space into an Asian market.

With all of the developments in Gwinnett County, Blade quotes Sunny Park, a Korean developer whose specialty is office parks, as saying that ``Buford Highway won't become economically obsolete.''

Developments in Gwinnett County are so brisk that Rick Badie wrote another article on September 2003 in the Gwinnett section of the Atlanta Journal-Constitution.

According to Badie, the HanAhReum Asian Mart Corporation operates 16 Korean grocery stores on the East Coast. A new HanAhReum grocery store in northern Virginia near Washington, D.C. carries a non-Korean name, Super H. Mart.

Hyungho Lee, a developer who was introduced earlier in Blade's April 3, 2003 article, was able to attract Super H. Mart as a main attraction in his $20 million Park Village.

The 60-tenant Park Village and the 14-tenant NuKoa Plaza are located within a 3-mile radius near the Gwinnett Place mall corridor called New Koreatown.

This article by Badie was printed again in the Oct. 16, 2003 issue of the Atlanta Journal-Constitution in its North Fulton County section. Incidentally, the Super H. Mart opened in the Park village on Nov. 6, 2004, offering products from Korea, Japan, Vietnam, China and other Asian countries.

As developments by Koreans quickened, so did articles on Atlanta's Korean community. The April 15, 2004 article by Krista Reese in the ``accessAtlanta'' section of the Atlanta Journal-Constitution introduced a Korean restaurant named ``So Kong Dong'' on Buford Highway.

I personally have never been to the restaurant, but Reese lists the names of dishes offered at So Kong Dong, which include: arrowroot starch vermicelli noodles in cold beef broth, raw fish in spicy sauce, sliced octopus, acorn noodles in cold soy milk and pork, beef and oyster tofu soup, whole fried fish (yellow croaker), sliced cucumber with hot sauce, bean sprouts, sliced fish cake, a raw cabbage salad with spicy soy dressing, bibimbap, and of course, Korean beef barbecue and kimchi.

Not all reporting has necessarily been positive. On Oct. 20, 2004, Teresa Borden wrote in the ``Atlanta & the World'' section of the Atlanta Journal-Constitution about the controversy that arose when hundreds of people marched in the Buford Highway area in favor of driver's licenses for illegal immigrants.

Although the March was organized by leaders of the Hispanic community, some lumped all protesters together as immigrants. The protest also attracted a number of anti-immigration protesters. A city councilman of Doraville in which a long portion of Buford Highway is located, called immigrants ``freeloaders.''

Borden reports that ``Over the past 10 years, more and more homeowners have moved out of Doraville, Mayor Ray Jenkins said. Many of the houses became rental properties, and the new residents often didn't know local rules.

Resentment festered over seemingly small problems: cars parked in front yards, loud music, large families crowded into small houses.'' Signs are unmistakable that Atlanta is experiencing a second wave of in-migration of Koreans and Korean-Americans within the past three years.

According to the local Korean newspaper, The Korean Southeast News, many of these new Koreans are coming from New York, Virginia and Chicago.

I might add that Atlanta is not an attractive town in terms of natural beauty or cultural quality. Atlanta, however, is one of the most important transportation hubs in the nation. There is a saying that even the dead will have to go through Atlanta before they reach heaven.



Hiroshima Ruling

March 7, 2005
By Chang Se-moon

Meaningful victories by Korea’s WWII victims against Japan or Japanese businesses are rare to say the least. Maybe this explains why the Jan. 19, 2005 ruling by the Hiroshima High Court that ordered the Japanese government to pay 48 million yen in damages to 40 South Korean plaintiffs (about $11,665 per person) was such a joyful occasion for the victims, and to everyone who has worked hard on behalf of these victims inside and outside of Japan.

The plaintiffs were conscript laborers during World War II forced to work for Mitsubishi Heavy Industries. They were injured when the atomic bomb was dropped on Hiroshima on Aug. 6, 1945. When the suit was filed originally in December 1995, there were only six plaintiffs but 40 more victims joined the suit as plaintiffs in August 1996. When the Hiroshima District Court rejected the suit in March 1999, however, six of the 46 plaintiffs decided not to go through with the appeal, leaving 40 plaintiffs when the Hiroshima High Court made the ruling. About 2,800 Korean workers had been conscripted to work in Hiroshima alone.

There are several issues surrounding this ruling. First is the issue of jurisdiction. The Hiroshima District Court, one of 50 in Japan, is the court of general original jurisdiction. It acknowledged that Koreans were forced to work under the state’s authority, but ``the state does not have a responsibility to pay compensation for events committed under the prewar Constitution even if an individual suffers injuries as a result of the actions of the state.’’ Regarding the suit against Mitsubishi as a firm, the Hiroshima District Court ruled that the statute of limitations had expired for the right to compensation for lost wages. Plaintiffs demanded 440 million yen.

The ruling by the Hiroshima High Court, which is one of eight High Courts in Japan with jurisdiction over appeals from District Courts or Family Courts, is rather narrow. In 1974, the Health and Welfare Ministry of Japan issued a decree that limited the range of survivors eligible for governmental support to only those who lived in Japan, excluding Korean victims who returned to Korea.

The key of the Jan. 19 ruling by the Hiroshima High Court is that it is illegal to exclude atomic bomb survivors from compensation on the basis of where they lived, domestic (Japan) or abroad (Korea). The Hiroshima High Court did not rule on whether or not unpaid Korean victims should receive unpaid wages by Japanese firms that hired these victims during World War II. Public reaction in Japan to the Jan. 19 ruling by the Japanese High Court has been quite negative at least according to public comments made in Japan Tuesday.

One asked whether the High Court knew that Korea and Japan agreed to settle the issue of compensations once and for all when they signed the 1965 Agreement. Another argued that by ``awarding’’ the Korean victims, Japan was selling itself out to Korea's mistake since Japan already compensated Korea with the 1965 Agreement. Still another asked whether Korea apologized and compensated Vietnam and Vietnamese people ``massacred’’ by Korean soldiers during the Vietnam war in the areas of Quang Ngai, Quang Nam and Binh Dinh. The Hiroshima High Court called the payment an allowance, perhaps a humanitarian term from the judge, rather than compensation for damages in unpaid wages as claimed by the plaintiffs.

This is different from the 2004 ruling by the same Hiroshima High Court that awarded compensation for damages in full to former Chinese slave workers. Like the Korean workers case, the High Court overturned a July 2002 ruling by the Hiroshima District Court that rejected the lawsuit brought by five Chinese plaintiffs who were forced to work for Nishimatsu, a Tokyo-based construction firm. This is believed to be one of the rare cases in which a Japanese High Court made a ruling in favor of the slave labor plaintiffs. Even here, the ruling is a partial victory for forced laborers since the High Court said that the 10-year statute of limitations for the company's liability was not applicable, but the 20-year statute of limitations for the illegal act of forcibly bringing the workers to Japan was in effect.

Most cases of this nature, including the case of the Chinese workers, has been appealed as if the victims of the inhumane acts by Japan during World War II will live forever. In fact, at least 19 of 44 Korean plaintiffs involved in the Jan. 19 ruling are reported to have passed away. There are approximately 40 civil lawsuits pending throughout Japan that are related to wartime incidents. I do not want to underestimate the importance of the ruling by the Hiroshima High Court that ordered the Japanese government to pay former Korean slave workers.

The Japanese judges were courageous in making the ruling that for the first time the High Court recognized the responsibility of the central government. At the District Court level, the Niigata Court was reported to have ordered the central government compensate former Chinese laborers for the first time. Japan has been trying hard to secure a permanent seat on the U.N. Security Council.

What has puzzled me for so many years is why Japan does not complement its efforts to be a world leader by officially apologizing and resolving all the remaining issues over well-documented crimes that Japan committed during World War II such as comfort women, forced labor, the Bataan Death March, germ warfare experimentation in China, and vivisection by the Japanese Imperial Army Unit 731 that killed many Chinese. If Japan’s official policy is to outlast all surviving victims, they are in for a surprise.

That is not likely to work because a worldwide signature campaign to reject Japan’s bid for a permanent UN Security Council seat is underway through the efforts of many worthy organizations including Historical Justice Now, Alliance to Preserve the History of World War II in Los Angeles, and Washington Coalition for Comfort Women Issues.

 

Confrontation and investment

February 25, 2005
By Chang Se-moon

On Feb. 10, North Korea made a strongly worded announcement that it already possessed nuclear weapons and would make more for self-defense. North Korea then declared an indefinite postponement of the six-party talks aimed at ending the North's nuclear program. The announcement understandably dashed cold water on the future of the multilateral dialogue and prompted hectic diplomatic efforts to restart the talks that began in 2003, but have been stalled ever since the North refused to attend the latest scheduled meeting in September 2004.

The announcement also revived the unthinkable possibility of military confrontation on the Korean Peninsula to the surface. General Richard Myers, chairman of the Joint Chiefs of Staff of the U.S. military, for instance, mentioned on Feb. 16 that ``the timeliness of our response might not be totally consistent with what the combatant commander wants,'' if the U.S. got involved in a full-blown conflict in Iran or North Korea at this time. General Myers added, ``We can still do that,'' meaning that the U.S. can simultaneously fight and swiftly defeat two enemies in two different parts of the world. There is no question that clouds of confrontation are thickening again in Korea, especially when the heightened tension can lead to so many misunderstandings and miscalculations that can be considered hostile to the other side.

Many brush aside the North's announcement as another negotiation ploy to raise the stake and attract the attention of the U.S. for more concessions, while others argue the announcement is an attempt to force the U.S. to a bilateral negotiation table that the North wanted even before the six-party talk began in 2003.

I am not so sure. In fact, a Feb. 19 report from China's official news agency states that North Korea does not want direct meetings with Washington, at least not right now. On Feb. 19, U.S. Secretary of State Condoleezza Rice, said, ``It really is time for North Korea to take seriously the concern of the international community'' and return to the negotiation table. Rice sounds like a broken record, if not hollow, although I have no doubt that she meant what she said.

So many acts of North Korea do not make sense to outsiders. This does not mean that North Korean leaders are totally irrational. We simply do not know exactly what they consider to be rational. Consider the fact that the Feb. 10 announcement has deep roots.

In 1993, the North shocked the world by saying it would quit the Nuclear Non-Proliferation Treaty. In 1994, the North signed an agreement to eventually dismantle its nuclear weapons program in exchange for international aid to build two power-producing nuclear reactors. In August 1998, the North fired a multistage rocket that flew over Japan and landed in the Pacific Ocean. In September 1999, the North pledged to freeze testing of long-range missiles and then President Clinton eased economic sanctions against the North, which was followed by a $4.6 billion contract to build two light-water nuclear reactors in the North in December 1999.

In July 2000, the North renewed its threat to restart its nuclear program if Washington did not compensate for the loss of electricity caused by delays in building nuclear power plants. In June 2001, the North warned it would reconsider its moratorium on missile tests if the Bush administration did not normalize relations. On Oct. 16, 2002, the U.S. officials publicly revealed discovery of the North's on-going nuclear weapons program, violating the 1994 agreement. From then on, it has all been downhill. On Dec. 21, 2002, the North began removing monitoring seals and cameras from its nuclear facilities. In September 2004, the North refused to attend the six-party talks in Beijing, demanding bilateral talks with the U.S.

The North's behavior during the past 10 years seems fairly consistent. We simply do not know for sure what comes next and how it all will end.

According to a Feb. 14 article by David Sanger in the New York Times, the Bush administration began to ``choke off its few remaining sources of income'' of North Korea several months before it made the Feb. 10 announcement. Through the U.S. initiative of multilateral efforts, for instance, a Japanese law that requires all ships visiting Japan to carry liability insurance against spills and other accidents go into effect on March 1 of this year. Since none of the North Korean vessels are believed to carry such insurance, the law may halt shipping traffic between Japan and North Korea.

According to Sanger, the U.S. is also working on a list of global banks and companies that North Korea has been using in order to keep track of the North's financial transactions. Terms such as quarantine and naval blockade have resurfaced more frequently. Drug trafficking and counterfeiting are felonies in the U.S. punishable with a heavy jail sentence. When a person commits both crimes, he or she is likely to be sentenced to life in prison with no chance of parole. U.S. policymakers believe that North Korea has been involved in both activities for a long time without any punishment.

It is remarkable that the Korean economy has grown so steadily during this uncertain environment. The latest announcement that the North has nuclear weapons has raised the level of uncertainty toward more confrontation. Global businesses in South Korea are likely reassessing their investment plans in the South. It is important for policymakers of South Korea to understand: (1) that global businesses in Korea need a strong assurance of national security, (2) that businesses will make the decision of moving their assets and investments overseas long before the chilly relations between the two Koreas evolves to a crisis level, and (3) that once these businesses make a decision to move their assets and investments overseas, it will take a really long time to reverse the trend.

I do not believe the massive flight of global businesses out of Korea is here yet. Lacking a strong assurance of national security against the North's threat, however, the threshold of such flight may be inching closer than many think. It may not be a bad idea for leaders of the Korean government to host a meeting of global businesses in Korea and share some of their ongoing efforts to ensure national security.


[Letters to the President] Helping the Poor

February 18, 2005
By Chang Se-moon

MOBILE, South Alabama - Dear President Roh,

I sincerely congratulate you on the progress you have made since you were elected as Korea's president in 2002.

Will you allow me to give you some unsolicited advice? The first thing I would like to suggest is that you write down for yourself, or ask your staff to write down, all the plans that you have and the time schedule of when these plans will be carried out during the remainder of your term.

If you are like me, you will be surprised how little time you have left to accomplish your dreams and policies. This is where you will be forced to make choices.

One of the most important choices that you may want to make is where you would place stronger emphasis, on growth or distribution. Since so many people have been speaking in favor of growth first, you may be suspicious of what I might say. You will be happy to hear that my views are closer to the views of you and your close advisors. I know it is not a popular stand as you have found out.

The truth is that it does not matter whether our views are popular or not since you are not running for re-election and the only running I do is on the jogging track about three times a week. In fact, I ran a 5K run on Feb. 6 as part of the Mardi Gras celebration here in Mobile. My point is that you can do what is right for Korea without having to worry about what critics think and keep telling you.

This is what I think you should keep in mind. Growth first policy is important for the business sector and distribution first is important for the household sector. There is no conflict between the two.

We all agree that the business sector has to grow. There is also no question that not all businesses grow at the same rate. Some are more efficient and innovative than others. Some are simply not competitive. Businesses that are not efficient should be allowed to close their doors. Businesses that are productive should be encouraged to grow to be competitive in the global market place. The economy grows through competition. In competition, there are always winners and losers.

When winners win and grow, everybody wins because winners will provide jobs and opportunities even to those who lose. Providing an environment in which more efficient firms can compete and grow is critical to the future of the Korean economy because the winners will have to win not only in Korea but also in the tougher global market.

In the household sector, competition also rules. The harder the people work, the better off they are. The only problem in the household sector is that winners and losers all live one life and in one society. Further, not everyone has an equal opportunity.

Some are born of wealthy families, who can provide their children opportunities that make their lives so much easier. My personal view is that there are no wealthy without the poor and the wealthy have an obligation to help the poor.

Maybe, this belief is the reason why I volunteered to work for the local homeless coalition and eventually became the President of the Coalition's Board of the Trustees.

Let me explain why there is no conflict between growth for the business sector and distribution for the household sector. Suppose that a business earns one billion won.

The business should be encouraged to invest the earnings for expansion and create jobs. No one disagrees on the importance of providing an environment in which businesses can make money and invest the money for more profits.

When some of the business earnings are paid as salaries and wages, however, we are turning our focus to the issue of income distribution away from the issue of business growth.

I have no doubt that some people have too much money, well beyond what they need to maintain even a luxurious lifestyle, while many others have too little money, well short of what they need to maintain a minimally decent life. In a market economy, not many people will argue that people who have money should make more money than people who don't. The point is: how much more?

I still remember that you were elected because you had fought in the past for those people who were neither rich nor powerful. I also remember that in your post-election news conference, you vowed to narrow the widening income gap between the rich and the poor. Now is the time for you to finalize your step-by-step plans on how to narrow the gap.

When you do, you will realize how little time you have left to achieve the goal.

Helping the poor in the household sector will in no way slow down the growth of the business sector. The two are separate issues. If at all, the two are complementing each other, rather than competing against each other. Denying any assistance to the poor in the name of growth first is not just wrong but inhumane. Please keep in mind that good leaders are not always popular, but lead the general public down the correct path. Finally, I wish you great success in the remainder of your presidency.
 


The Great Tsunami of 2004

February 1, 2005
By Chang Se-moon

Whenever disasters hit, I have a bad habit of trying to visualize how painful it must have been for those who died in the disaster. It may be my own small way of sharing pain with those who suffered. We all know that at 7:59 in the morning of Dec. 26 (Sunday), 2004, what I call the Great Tsunami of 2004 started from under the sea about 155 miles west-southwest of Banda Aceh, Indonesia. Reportedly, the tsunami killed as many as 162,000 persons, or possibly more.

The 2004 tsunami is not the greatest disaster that mankind has experienced. Some man-made disasters killed many more people. No less than 16 million civilians were killed in Russia during World War II, which also led to the death of 6 million Jews at the hands of German dictator Hitler. Korean War alone led to the death of more than 2 million civilians. AIDS has killed more than 25 million and is still killing people.

Even if we limit casualties to natural disasters that tend to kill people almost instantly, the 2004 tsunami is not the biggest, although the number of disasters of earlier years may not be exact. An earthquake hit Aleppo, Syria in 1138 killing 230,000. An earthquake that struck Shansi, China, in 1556 is believed to have claimed the lives of 830,000 people. A typhoon, or an earthquake according to some, killed about 300,000 people in Calcutta, India in 1737. An earthquake hit Gansu, China in 1920 killing 200,000 people and another earthquake hit Xining, China in 1927, killing another 200,000 people. A modern record of great natural disasters may be the 1976 earthquake that hit Tangshan, China, that killed 255,000 according to the Chinese government and as many as 655,000 according to others.

There were many more major natural disasters although their casualties were not as many as those of the 2004 tsunami. In 1815, volcanic eruptions killed 80,000 people in Tambora, Indonesia; in 1883, another volcanic eruption in Indonesia killed 50,000 people; in 1908, an earthquake in Sicily killed 123,000 people; in 1915, an earthquake in Avezzano, Italy killed 29,800 people; in 1923, an earthquake in Kanto, Japan that was rumored among many Japanese to have been caused by Koreans living in Japan killed 143,000 people; in 1932, another earthquake in China’s Gansu area killed 70,000 people; in 1935, it was Pakistan's turn to suffer from an earthquake that killed 30,000 people; and finally in 1985, there were volcanic eruptions in Nevado del Ruiz, Columbia that killed 25,000 people.

If we go way back in history, there were greater natural disasters although human casualties were probably less because there were not too many people living on this good earth. One, of course, is the Biblical Flood of the Old Testament about 3000 BC, which is believed to have affected sea level changes. The other was the mass extinction of living creatures about 65 million years ago that may have been caused by an asteroid.

Those of us who do not believe in God may brush these disasters aside as something that human beings have to live with since we will never be smart enough to avoid all man-made disasters, nor be intelligent enough to avoid all natural disasters.

Those of us who believe in God, however, are having a hard time explaining or finding an explanation of what is going on. Why does the all-powerful God allow such disasters to happen, making so many innocent people suffer?

Some believe that God is a creator of all good things and that creation is still in progress. God is aware of all disasters and human sufferings there from. These disasters are simply part of God's work toward creating a perfect world in which disasters and human suffering no longer exist.

Others view God as having more to do with love and healing than to do with designing all those disasters. Rabbi Michael Lerner, editor of Tikkun Magazine, wrote in the Jan. 9, 2005 issue of the Philadelphia Inquirer: ``Stop thinking of God as some big man up in heaven sitting there and making individual judgments about who shall live and who shall die, where he should put a tsunami and where he should put a beautiful sunset. Instead, understand God as the force of healing and transformation in the universe, the aspect of the universe that is the source of love, kindness, generosity, social justice, peace and evolving consciousness.’’ In other words, ``God is not so much the cause of the tsunami as an entity joining us in mourning for its victims.’’

Others also view God as being imperfect, contrary to the traditional view held by most Christians, Muslims, Jews and others. Bill Tammeus quotes in his Jan. 9, 2005 issue of the Birmingham News: ``While most Christian and Jewish theology describes God as omniscient and powerful, Rabbi Harold Kushner says ``there are some things God does not control.’’ God, in fact, ``is not perfect and has limitations.’’ Rabbi Kushner is the author of the popular book ``When Bad Things Happen to Good People,’’ which is read widely among good people faced by personal tragedies.

Still others admit that we just don't know because human knowledge and capacity is just not good enough to understand what God has in mind and why God allows disasters to occur. After the Sept. 11, 2001 terrorist attacks in New York, the Rev. Billy Graham is quoted to have acknowledged that he has never found a fully satisfactory answer to the question of why God permits evil in the world.

I am not a theologist, nor a deep thinker. But I know that man-made disasters will continue to kill people in large numbers because human beings are simply too arrogant and selfish to admit that we are only transient beings on earth in the scheme of the big universe. I also know that the number of casualties from natural disasters will continue to increase because the global population keeps encroaching on areas that have long been kept from human habitation.

Perhaps the most unfortunate aspect of all these disasters is that political leaders all over the world do not seem to have learned how to prevent man-made disasters even if such prevention is perfectly within their choice and reach. Just as unfortunate is my biased observation that political leaders all over the world are cruelly incapable of feeling empathy for the victims. I just wonder what kind of decisions these political leaders will make to assist current and future victims of disasters, man-made or natural, if the one gasping for air under the tsunami water were their son, the one being buried alive under the volcanic ashes were their daughter, or the ones wondering aimlessly with nothing to eat and wear were their grandchildren or themselves.

 

Korean Economy in 2005

January 13, 2005
By Chang Se-moon

This year’s annual big meeting of economists from all over the world was held in Philadelphia on Jan. 6 to 9. The Korea-America Economic Association (KAEA) sponsored several sessions as part of the Allied Social Science Association meetings. One of the sessions sponsored by the KAEA was devoted exclusively to the Korean economy. There were three excellent presenters in the session: Kim Choong-soo who is the president of the Korea Development Institute, Jwa Sung-hee who is the president of the Korea Economic Research Institute, and Choe Heungsik who is the president of the Korea Institute of Finance.

According to Kim of KDI, the Korean economy will grow at a slightly slower rate of 4.0 percent this year than it did last year at 4.7 percent. It is encouraging to hear that consumption will increase by 2.5 percent this year in comparison to the estimated 0.8 percent decrease during 2004, while equipment investment will increase at an annual rate of 8.3 percent and construction investment at 2.8 percent. They are estimated to have increased at annual rates of 3.8 percent and 2.3 percent, respectively, last year.

The growth rates of exports from Korea and imports to Korea were very high during 2004. Exports increased by 30.0 percent and imports increased by 24.4 percent. These growth rates are projected to slow down this year. Exports will increase by 14.1 percent, while imports will grow by 18.3 percent. This will lower the current account balance from $27.0 billion in 2004 to $19.5 billion this year. Partly because of the slower growth in 2005, this year's inflation rate is projected to slow down to 2.9 percent from 3.8 percent in 2004 and this year’s rate of unemployment is projected to edge up a notch to 3.6 percent from 3.5 percent in 2004. It should be noted that figures for 2004 are all preliminary estimates since it takes several months for 2004 figures to be finalized.

Readers may wonder whether these projections are good or bad. The projection that the Korean economy will continue to grow but at a slower rate during 2005 is consistent with the world-wide trend. The latest CESifo World Economic Survey indicates a similar trend for North America, Western Europe, Latin America and Asia in general. The only region that may continue to grow at last year's pace is Eastern Europe. CESifo World Economic Survey is a joint initiative of the University of Munich’s Center for Economic Studies and the Ifo Institute for Economic Research that gathers economic assessments from over 1,000 economists worldwide.

The estimated 4.7 percent growth rate in 2004 and the projected 4.0 percent growth rate this year of the Korean economy may be a disappointment to many Koreans who are used to much faster growth rates since the 1970s. It is all relative, however. Japan has not experienced growth rates of 4 percent in well over 15 years. The growth rates of the U.S. economy since 1900 have averaged about 3 percent. The slow growth rates in 2004 and 2005 reflect the tougher global competition with China’s emergence as a global economic power as well as the maturing process of the Korean economy. Although I expect the future growth rates of the Korean economy to be lower than pre-1997 rates, I would not rule out the possibility that the growth rates of the Korean economy return to the higher rates of the past, at least for a short period of time.

Readers may also wonder how the projected 4 percent growth rate in 2005 jibes with the 5 percent that the Korean government announced. I personally do not see any inconsistency between the two numbers. The projection of 4 percent is based on the judgment of economists who take all the facts known at this time into consideration, while the 5 percent announced by the Korean government is more a target that is certainly within reach. The economy may grow faster or slower than projected partly because there are many unknown events that influence its growth and more importantly because the government policies have a significant impact on its growth rate.

Jwa of KERI stressed his opposition to what he termed the government’s egalitarian policy or ``1/n’’ policy in that government support has been divided equally among all recipients regardless of the difference in their growth potential. I may restate Jwa’s view as an opposition to corporate welfare. Uniform support of all businesses is certainly counter-productive. The economy grows through competition. In competition there are winners and losers, and winners in the marketplace are more efficient, innovative and productive. In other words, winners in the market place have comparative advantages.

When winners win and grow, everybody wins because they will provide jobs and opportunities to those who lost. Uniform support to all businesses that ignores comparative advantages will eventually hurt not only the efficient ones but the inefficient ones as well. Providing an environment in which more efficient firms can grow is critical to the future growth of the Korean economy because the winners will have to win not only in Korea but also in the tougher global market to sustain the momentum of the Korean economy.

Choe of KIF made several interesting observations. One such observation is herd behavior in which investors grab certain assets, acting on rumors like sheep following the leader. My thinking is that herd behavior can be corrected only through better education and better information through the media. Another observation is the rapid increase in foreign ownership in the stock market from 14.6 percent in October 1997 to 43.6 percent in June 2004. Related to this increased foreign stock holdings is the rising trend of the volatile portfolio investment as opposed to the more stable capital investment. Efforts to improve research on global financial markets are clearly needed since funds may be pulled in and out of Korea beyond the knowledge and control of Korea's policymakers. Finally, Choe reminded the audience that households in Korea own excessive amount of real property (73.0 percent) and not enough financial assets (27.0 percent) in comparison to households in the U.S. that own smaller amounts in real property (36.9 percent) and larger amount in financial assets (63.1 percent). With growing financial markets in Korea having undergone an annual average growth rate of 12 percent since 2000, the composition of household investment in Korea is expected to change over time, albeit slowly.


*Dr. Chang is a professor of economics and director for the Center for Business & Economic Research at the University of South Alabama. He currently serves on the Editorial Board of The Korea Times and as a panelist on the World Economic Survey sponsored jointly by the Ifo Institute and the Paris-based International Chamber of Commerce.

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