The Korea Times Articles - 2006

 Things to Check Before Buying Homes in US

August 8, 2006
By Chang Se-moon

Apartment prices are showing signs of falling in the affluent Kangnam district in southern Seoul, affected by a series of government steps to crack down on speculative investment in the real estate market. A growing number of retail investors are moving to buy homes and land in the U.S., China and other countries as a means to avoid higher property-related taxes. /Yonhap
Economics is all about incentives. If the price of Dell notebooks goes up, people buy fewer Dell notebooks. If their prices go down, people buy more of the product. If the amount of fee increases on a toll highway, people drive less on the toll road. If the amount of fee decreases on a toll highway, people drive more on the toll road. If Seoul’s subway is available free of charge to the elderly as is the case, elderly persons in Seoul ride more subways. If the value of Korea’s currency rises in relation to the value of China’s currency, more Koreans will travel to China as tourists and Koreans will buy more products imported from China. If the value of Korean currency falls in relation to the value of China’s currency, the opposite happens.
Economic incentives work in many different ways, too. If taxes are too high, taxpayers try to figure out how to cheat on taxes. If the cost of reaching another person through the Internet is practically non-existent, sellers try to reach more consumers by adding more names to their email list. When students look for a university overseas, they usually search for universities that charge lower tuition and fees. At least, that is what I did when I was young.

When the Korean government announced in May this year that it lifted the cap on purchases of overseas real estate for residential purposes, the interest among Koreans in residential homes and condos in the United States increased dramatically.

The announcement clearly provided an incentive for Koreans to increase their investment in residential homes in the United States. As students of economics, we would like to ask two questions. One is why the Korean government made the announcement, and the other is how well Koreans will do by investing in homes and condos in the United States.

Why did the Korean government lift the cap on purchase of overseas real estate for residential purposes? Since the primary impact is felt in the United States, let us focus on the policy change impact on the economic relations between Korea and the United States. Korea has been running a trade surplus against the United States.

In fact, the United States has been running a trade deficit against most major trade powers, including China, Japan, and Korea. Consequently, the value of the dollar has been falling. Anyone in Korea who is holding the dollar has been losing money. More importantly, Korean products exported to the United States are that much more expensive to the U.S. consumers. Korean exporters to the United States, therefore, have been losing their competitive edge as the Korean currency is getting stronger and the U.S. dollar is getting weaker.

Many Koreans have been purchasing residential properties even before the government announcement in May, but the pace of purchase has quickened after the announcement.

For instance, more than half of the 344-unit Hudson Club luxury condo units in New York are reported to have been purchased by Koreans, and half the Koreans who bought the condo units were reported to have been paid in cash. The condos were priced between $400,000 and $1,600,000.

When Koreans hold real estate property in the United States rather than holding dollars in Korea, these Koreans are not affected by the falling value of the dollar.

In fact, if the dollar gets stronger later, probably much later, then these Koreans may sell their properties in the United States and bring money back to Korea, making more money. From the Korean government’s perspective, the idea is to reduce dollar holdings by Koreans so that the reduced supply of dollars will contribute to a possible appreciation of the Korean currency.

The impact of the new policy on slowing down the appreciation of the Korean currency against the U.S. dollar, however, is expected to be insignificant, at least in the short run.

The second question of how well Koreans will do by investing in homes and condos in the United States is also interesting to speculate. When you purchase a home or a condo, the most important factor is, as professionals in the real estate industry have been saying, location, location, and location. It may not be that simple, however.

There is a problem of asymmetric information, meaning that sellers in the United States are likely to know more about problems with their properties than buyers in Korea. In other words, the information that American sellers possess on their properties may not be equal to the information that Korean buyers of the same properties have.

In this case, Korean buyers may have to experience an adverse selection, by paying more than what they should pay for the particular property.

Asymmetric information and adverse selection are some of the new terminologies that have appeared in business economics in recent years.

Some may argue that since purchases are made through professional real estate brokers, there should not be the problem of asymmetric information. Again, this is not exactly true because professional real estate brokers make a living by earning commissions and commissions are paid by sellers of homes, not buyers of homes. Brokers have a strong incentive to make the sale work because they do not earn commissions if there were no sale.

When sales are consummated, however, sellers pay commissions. Commissions on sales of residential homes vary among regions, but usually range between five to seven percent of the sale price.

If the sale price of a home is $100,000, for instance, commissions vary between $5,000 to $7,000, more likely closer to $7,000.

All major areas in the United States have what is known as multiple listing service books, which list all available homes with detailed information about properties on the market.

The information includes number of bedrooms, square feet of the inside space, availability of a carport or a garage, commission rates, pictures of the home, and more. In some areas, much of this information is posted on the Web site of the local real estate brokers association that anyone in Korea can have an access to.

Finally, on August 29, 2005, Hurricane Katrina hit the U.S. Gulf Coast states. The damage from Katrina is so massive that most coastal areas of Mississippi and Louisiana that were hit directly have not yet begun their recovery construction work, fully 11 months after the hurricane hit.

Believe it or not, Katrina has an impact on Koreans who plan to buy water-front residential homes and condos in the United States.

Home insurance relating to hurricane has two components: coverage on damages from wind and coverage on damages from storm surge. For all practical purposes, it is impossible to buy insurance coverage on damages from storm surge.

Insurance premiums on coverage of wind damages have increased, not only in the Gulf Coast area but also along the Eastern Seaboard, i.e., Atlantic Coast side of the United States from Florida in the south all the way to the north beyond the State of New York.

In coastal areas that are prone to be hit by hurricanes, home insurance premiums have increased by approximately 300 percent during the past 12 months because of Katrina.

The point is that demand for condominiums and single family homes in some coastal areas has decreased so much that their asking prices can be negotiated downward substantially.

The other side of the coin is that prices of coastal water-front properties do not include insurance premiums and management fees, the combined amount of which may be close to the monthly mortgage payment of the purchased property. Since home or condo prices do not include insurance premiums, buyers in Korea may be wise to ask about annual insurance premiums.


What Determines How Much Money You Earn?


August 1, 2006
By Chang Se-moon

Company officials interview job seekers at a tour industry job fair in Seoul. It is not always true that diplomas guarantee high wages but high level of education will surely heighten chances of landing well-paying jobs for young people. /Korea Times File

Once I saw a TV advertisement in which a guy came to a store to buy a billfold. The storeowner, a Chinese lady, was smiling and asked him whether the billfold was for a graduation gift. He responded by saying that he only had a high school education.
The Chinese lady then turned to her husband and spoke in Chinese so that no one, other than Chinese, could understand. Her husband brought out a billfold that was less than half the size of regular billfolds. Needless to say, the small billfold was useless. The guy said to the Chinese lady: "Isn't this billfold too small?" The Chinese lady responded by saying that high school graduates earn only about half as much as college graduates. It was funny, and sent a potent message.

Obviously, education is the most important determinant of how much you make. However when Richard Fairbank of Capital One Financial ($249.3 million), Jerald Fishman of Analog Devices ($144.7 million), and James Kilts of Gillette ($185 million) earned more than $100 million last year, their large earnings cannot be explained by education alone. There must be other factors, perhaps many other factors.

In economics, we explain how much workers earn this way. Let us suppose that we are selling the very popular Assi noodles. Suppose also that we plan to add a sales person to increase our sales. Should we hire the person? If we should, how much should we pay?

In principle, we hire a person if the money the person brings to our company is greater than the money we pay to the person. It sounds easy enough. We need to go a couple of more steps to complete our explanation, however, because we need to estimate what the new person is expected to bring to our company. The number of packages of Assi noodles that the new person is expected to sell is called the marginal physical product. These Assi packages are products. They are also physical products. We thus call them physical products. When we refer to marginal in economics we are dealing with the last added unit, or last additional person. The number of packaged Assi noodles the new person is expected to sell, therefore, is called the marginal physical product.

We calculate the money that the new person brings to our company by multiplying the marginal physical product (MPP) by the price of the product. If the new person is expected to sell 100 packages of Assi noodles (MPP = 100) per day, and if the price per package is $3.00, the money that the new person brings to our company is $300, which is obtained by multiplying 100 by $3. The $300 thus obtained is the gross marginal revenue product (MRP). Assuming that it costs our company $100 to buy the 100 packages from the manufacturer Assi, the net marginal revenue product of the new person is $200. In other words, the new person will add $200 of profit per day to our company.

Should we hire the person? It depends on how much we should pay to hire the person. If it costs less than $200 per day to hire the person, we should hire him or her since the difference between MRP and the wage is the net additional profit to our company. If it costs more than $200 per day to hire the person, we should not hire him or her since the difference between MRP and the higher wage represents net loss to our company.

Since MRP tends to be greater than the wage in a growing company, economists say that we need to increase employment until MRP equals wage.

When we talk about wages or salaries, do not forget that there are also fringe benefits as part of the compensation package. Examples of fringe benefits are health insurance coverage, retirement pensions, paid vacation, employee discount on company products, and other non-wage benefits that employees receive from their employers. When you add all fringe benefits, the amount of fringe benefits can easily be 25 to 40 percent of direct wages for most employees.

Although the underlying economic theory is the same, we can take a look at the determination of how much you make on the basis of a supply and demand model. Like everything else in a market economy, the amount of money we earn depends on supply of, and demand for, workers who can do the same type of work. If demand is greater than supply, our wages will increase. If supply is greater than demand, our wages will fall.

I know one excellent student at my university who wants to be a writer, but is majoring in accounting. His logic is that he wants to make some money by doing an accounting work before he can concentrate on writing.

I think he is realistic. Once you become a popular writer, you can make a lot of money. There are two problems, however. One is that there is no guarantee that you will become a popular writer, and the other is that even if you eventually become a popular writer, you may have to go through many days of hunger and disappointment. The root of his problem, again, is supply and demand. Supply of writers is greater than demand for writers, pushing earnings of writers down. In comparison, the supply of accountants is relatively lower than the demand for accountants, pushing their wages up.

In general, wages are higher in finance, accounting, and medicine, while wages are lower in the various fields of art and music, and many social science fields. Even in the same occupation, the supply of and demand for workers fluctuate. About 10 years ago, there was a surplus of nurses especially in the United States, but now there is a severe shortage. There is even discussion of inviting 10,000 Korean nurses to the United States to relieve the shortage.

When you go to college or select a major at college, you may have to make a compromise between what you really want to do in your life and how much you can earn after graduation. Ultimately, it all depends on what makes you happy. If your objective is to make as much money as you can, you can study hard and try to go to the medical school or study an MBA with concentration in corporate finance or accounting. If you put more emphasis on happiness than on money and power, you can select the major that you like and try to be good at it.

I said earlier that those who major in finance in general make more money than those who major in other business and social science fields. But then, most people who died from the September 11, 2001 terrorist attacks in New York were working in the finance fields. I said earlier that the lifetime earnings are directly proportional to the level of education.

But the world's richest person, Bill Gates of Microsoft, did not even complete his college education. Someone once said that life is queer with its twists and turns. You can never tell. All you can do is to make the best decision at the moment and do your best.

 

Simple Tips for Daily Business Life


July 25, 2006
By Chang Se-moon

An instructor teaches her student how to courtesously bow in greeting during an etiquette course in this file photo.
Through my experience of helping businesses, I have come up with some tips that you can use for daily business life. It is really more than that. You can also use these tips in your schoolwork. The only limitation is your imagination.
The first tip is that you need to be flexible when you quote a price as a seller. In the theory of auctions and bidding, there is a concept called the true reservation price. The true reservation price is the absolute minimum you want to charge for your service or product.

When you quote the price of your service or product, you do not reveal your true reservation price, but you have to make sure that your price is not a take-it-orleave- it price. If it is a take-it-orleave- it price, your clients are likely to leave it, rather than take it.

In Korea’s retail environment in which prices are understood to be negotiated, this tip is not a problem. When you try to sell your service as consulting firm employee, or sell a big-ticket item as a sales person, or negotiate the teaching fee as a tutor, flexible pricing may come handy.

Stated in simple terms, you need to learn to say “this is how much I usually charge and would like to have” rather than “this is my price and I have to have it.”

The second tip relates to human relations. In my dealings with businesses, I always treated everyone in the client business well, including secretaries. You need to be polite and nice to everyone. You never know how and when you will need their services. I am fully aware of the Korean style where all important business decisions are made by the top person and everyone just follows. At least, that is how it appears to work.

Let me tell you how the tip of being nice to everyone in the client’s office can pay off. Once I mailed a contract to a client’s office and the contract got lost in the middle of all the other files. I called the manager a couple of times but he could not locate the contract. Finally, I called the secretary whom I had always been polite to. She found the contract within an hour and the final contract was signed and delivered on time. In another case, my proposal was about to be rejected without my knowledge. A lower-level officer who had no saying on the decision called me to tell me, “ if you have any connections, this is the time to utilize them.” I did and the proposal was accepted. Try to be nice to everyone from top to bottom. You never know how it will pay off.

Report Writing

The third tip is on report writing. Your report may be for your boss at work, or a term paper that you are writing as part of your class assignment. Before you start writing, you collect all the information you need and organize the information in order. You now prepare a draft of the report. My tip applies to the next step. You never submit your first writing as your final report. You need to set it aside for a day or two, if not longer, and then read it again. You will be surprised how many corrections or revisions you need to make. Sometimes, you even find some sentences that you are glad you had a chance to delete.

There are two benefits of writing a draft, setting it aside for a few days, and getting back for corrections and revisions. One benefit is to clearly improve the report by correcting typing errors, poor choices of words, and clearer expression of ideas. This aspect of report writing is especially important when you write a letter of complaint or resignation. You should never submit a letter of complaint or resignation without reviewing what you have written in the first draft.

The other benefit is that especially in a business environment, you need to show the draft to your supervisor for comments before you prepare the final report. When you do it, you are likely to gain a supporter of your report. It may not always work, but it will work at least once in a while. You have nothing to lose by trying it.

Once I had to prepare a report for the local chamber of commerce, but did not have time to work on it. I asked another faculty member to prepare the report advising him that he needed to make sure to give the chamber officials an opportunity to review his draft report. He did not listen. He brought his report and left it with the receptionist at the chamber.

Later, I received a call from a chamber official, who was not very happy about the report. I responded by inviting him to a lunch and told him that I would not charge for the report. It was an expensive experience and I never used the same faculty member again to work on a project.

Talking About Other People

Another tip is to be careful when you talk about other people such as colleagues, friends and especially your boss. There is a saying that you should not say anything about others unless it is something good about them. We cannot always practice this because we are human beings. What you should do is not to criticize others in public. As you work hard at a workplace, you will move up and have opportunities to interact with the media. My tip is that you should never criticize others to the media.

It may make you feel good for a few minutes or maybe a day, but I can assure you that you will have many more days of a headache, if not a libel lawsuit. I interact with the media quite often, but I learned the trick from the very beginning of my career, and have never had a problem. However, I saw many other people having problems.

Another simple tip is to be prompt. If your work starts at 9 a.m., be there by 10 minutes to 9, if not earlier. Anything can happen.

Suppose that you make a habit of being right on time, say, one or two minutes before 9. Suppose that one day, your bus or train is a few minutes late and you arrive a few minutes late.

You tell your supervisor that you are late because that stupid bus or train had a problem forcing you to be late.

Your supervisor will respond to you by saying that it is okay and it can happen to anyone. Well, if you think this is all there is to it, you are sadly mistaken.

Most likely you will have a colleague who anticipates the kind of problems that you experienced because it happens all the time. He or she always leaves home early to be ready for the possibility and arrives on time even if his or her bus had a problem. Are you getting the idea?

Before you know it, your colleague who anticipates problems and is ready beforehand will be promoted and you will be left behind.

Your supervisor will not tell you why your colleague is promoted before you. Your colleague may not even know why he or she is promoted before you. Worse yet, you will start complaining and be forced out.

Finally, you should learn to enjoy what you are doing. In other words, you should have a passion for your work. Sooner or later, your passion will be reflected in your performance.

 

Working in Day and Taking Classes in Evening

July 18, 2006
By Chang Se-moon


A student takes an online class at home. The main advantage of online classes is flexibility in both time and place. /Korea Times
There are many students in America who have full time jobs during the day time and take classes in the evening to work on their undergraduate and graduate degrees.
My guess is that the number of students in Korea who work during the day and take classes in the evening is relatively small, but is increasing. When I say taking classes in the evening, I do not mean taking tutorial or remedial classes. I mean students taking regular college classes to earn a degree.

The university where I am teaching is basically a daytime university. However, because the university is located in a fairly large city, we have extensive evening programs.

For instance, we have an evening Master of Business Administration (MBA) program in which students, who have full time jobs as managers, accountants, police detectives, naval architects, bankers, lawyers, and government officials, take classes over a two to three year period and earn an MBA degree. We have a number of Korean students who received an MBA degree from my university and are now working successfully in Korea.

Because of my work as director of a research center at the university, I teach only two classes each semester. Since I teach one MBA class in the evening, I volunteered to teach principles of economics classes in the evening also. As you can see by now, I teach primarily evening classes by choice and I enjoy teaching evening classes.

Students in evening ``principles of economics classes’’ are bank tellers (rather than the bank managers in MBA classes), book-keepers (rather than accountants), sales persons (rather than the store managers in my MBA classes), and runners (rather than the attorneys in MBA classes).

The simple truth is that I like evening students because they are mature and it is fun to communicate with them. I also have a high level of respect for evening students. I know how hard it is to work full time and take classes in the evening. When I was a graduate student, I took day classes, but also worked in the university cafeteria washing dishes.

I was so tired that when I studied in the library, I often fell asleep. It did not matter whether it was day or night. I was always tired.

If you happen to be an evening student, I admire you and I can give you some advice. Perhaps, the most important advice is that you need to sacrifice some of your weekend time for studying. There is no such thing as a free lunch. If you do not have time to study during the week, you need to find study time on the weekends. It is not easy, but you have to do it.

Another important piece of advice is that you need to study in advance. In other words, you need to make it a habit to read before the class the chapters that you will be studying in class. Ideally, you should read the chapter before class and review it after class.

The number of full-time workers who work during the day and study in the evening is increasing as companies want more skilled professionals in many areas. A graduate student at Konkuk University studies real estate economics. /Korea Times
This is a luxury that evening students cannot afford. Evening students simply do not have time to read the chapters before class and then review the same chapters after class. If you have to make a choice, it is better to read the chapters before class because that will help you understand the class lectures better.
With changing technologies, some of you who work full time and plan to take classes in the evening or in the day time for that matter, may have another choice _ on-line classes.

The primary advantage of on-line classes is flexibility in both time and place. You can click on your personal computer or laptop anytime during the evening, night, or weekend and study. You can also click on your personal computer or laptop at the teahouse or inside an airplane and study.

I know that there are not that many teahouses in Korea these days. You already know that laptops are now called notebooks.

I taught on-line classes before because some very good German students wanted to take our MBA classes without coming to the United States.

There are two aspects that I did not like about on-line classes. One is that all examinations have to be open-book tests. This forced me to make examination questions very general and open-ended. These open-ended questions have their own merit in that they test students' logic and writing skills. These questions, however, can make grading rather arbitrary and inflated.

The other aspect that I do not like about on-line classes is that lecture notes stored on-line are focused on textbook material. Put differently, I usually make

numerous comments outside the textbook that I know will help students. I also make many comments on contemporary political and business issues so that students can be up to date on current issues. When I tried to put some of these out-of-the-textbook comments on line, they sounded silly and had the potential of being controversial. In on-line classes, therefore, I stuck to text material.

Even if professionals in educational technology do their best to make the on-line classes realistic by creating a chatroom, threaded discussion, and more, nothing can replace good, face-to-face teaching.

Of late, I have combined face-to-face teaching with an on-line approach, and find the hybrid teaching method quite effective. My students like it. If any teacher is reading this article, you might consider trying my approach.

If you are a student who has an innovative professor, you might ask your professor to try my approach. What is my approach?

I put all my lecture material on Powerpoint, program used for presentations. It is not as bad as it sounds. All best selling textbooks these days make Powerpoint available to professors for classroom use. All I have to do is add what I believe to be important to the publisher-supplied Powerpoint material, or delete what I believe to be confusing or insignificant, or both. The key is that I email these Powerpoint notes to students before they are covered in class. In other words, I make my lecture notes available to students before we study the notes in class.

Students can review the Powerpoint notes whenever and wherever it is convenient for them. With today's laptops that have wi-fi pre-installed, the places where you can plug in are constrained only by the availability of wi-fi connections. Remember that all my students are hard-working employees and managers who take evening classes. They all like this hybrid approach.

To be honest, I go one step further. We have software called eCompanion. It is exactly like on-line classes. I store all Powerpoint material, reading assignments, and home assignments on eCompanion and make them available to students before class. We then go over them in class. Thanks to technology, you should be able to access all my lecture notes, Powerpoint material, and more stored on eCompanion, wherever you may be. All you need to know is the website address that students use. Now you may understand why I enjoy teaching evening classes and like evening students. By the way, let me know if you have questions.
 

 

[Guest Column] Dangerous War Game

July 14, 2006
By Chang Se-moon

Those who were surprised when North Korea test-fired seven missiles on July 4, 2006 are either fools or ignorant of history. When I did a presentation two months ago at a conference about North Korean issues, sponsored jointly by the Seoul Office of the Germany's Hanns Seidel Foundation and Seoul National University’s Graduate School of Public Administration, the message was loud and clear that the history of North Korea's outbursts would recur.

The only unknown was the format of outbursts that we now know turned out to be the firing of missiles, including one allegedly capable of hitting the United States.

North Korea's outburst erupted on June 25, 1950 when it invaded South Korea. Three days after the Korean War broke out, the United States invoked a total embargo on exports to North Korea on the basis of the Export Control Act of 1949.

This embargo turned out to be only the beginning of a long journey of North Korea's hostile acts toward the west, and reciprocal U.S. economic sanctions against the North.

On September 1, 1951, North Korea was denied Most-Favored-Nation (MFN) trade status, making it impossible for them to export to the United States. Both sanctions are still in effect, more than 55 years later. On November 29, 1987, Korean Air Lines 007 crashed due to a bomb explosion aboard while flying from Baghdad, Iraq to Bangkok, Thailand. Two North Korean agents planted the bomb. It exploded just 45 minutes before KAL 007 landed at its destination. The explosion killed 115 passengers and crew. Based on the Export Administration Act of 1979 North Korea was listed as one of the countries supporting international terrorism, on January 20, 1988.

Being on this list made it impossible for them to borrow development funds from international financial institutions such as the World Bank and the International Monetary Fund. North Korea is still on the list.

In 1989, the dissolution of the Soviet Union was not the only major event that affected the Korean peninsula. In the same year, the United States detected new construction at a nuclear complex near Yongbyon, North Korea.

This began another long and tumultuous relationship between North Korea and the United States that led to many more U.S. sanctions against North Korea and companies of other countries that assisted North Korea's nuclear program.

In 1990, the U.S. fined the reputable German chemical firm Degussa for illegally supplying U.S.-originated reactor material to North Korea. In 1992, the U.S. imposed company-specific sanctions on North Korea's Lyongaksan Machineries and Equipment Export Corporation, and Changgwang Sinyong Corporation for missile proliferation activities. On October 21, 1994, the United States and North Korea adopted the "Agreed Framework" that created the multinational Korean Peninsula Energy Development Organization (KEDO).

However, rather than protesting its alleged intrusion via the negotiation table, North Korea shot down a U.S. helicopter, killing the pilot, near the DMZ in December 1994. Since then, U.S. sanctions against North Korea on matters of missile technology became an annual occurrence. North Korea or North Korean firms were sanctioned in 1996, 1997, and 1998.

Following the September 13, 1999 pledge by North Korea to freeze long-range missile tests, President Clinton agreed to the first significant easing of economic sanctions since the end of the Korean War in 1953, lifting most export restrictions applied to North Korea and allowing U.S. passports to be valid for travel to North Korea. Among the notable U.S. sanctions not lifted by President Clinton were the denial of MFN status and placement on the list of countries supporting international terrorism.

North Korea's digressions on missile technology transfer and responding U.S. sanctions were quickly resumed. North Korea or North Korean firms were again sanctioned in 2000, 2001, 2002, and 2003 for separate violations of U.S. laws.

Following the U.S. announcement of discovering North Korea's nuclear weapons program on October 16, 2002, North Korea revealed it was renewing its nuclear weapons program, thus voiding the terms of the 1994 Agreed Framework. On February 10, 2005, North Korea made its first public claim that it had nuclear weapons.

On January 23, 2006, U.S. Treasury officials presented South Korean officials with was termed to be convincing evidence that North Korea was engaged in counterfeiting and laundering of U.S. dollars.

On February 16, 2006, the Macau-based Banco Delta Asia, whom the U.S. singled out as North Korea's main money-laundering channel, stopped all transactions with North Korea under U.S. pressure. On March 30, 2006, the U.S. froze the assets of Swiss company, Kohas AG, for aiding North Korea in its alleged proliferation of nuclear technology. Following Degussa in 1990 and Banco Delta Asia in 2006, this is the third time the U.S. punished non-North Korean companies for assisting North Korea.

Are you still surprised at North Korea's launching of missiles on July 4, 2006?

Viewed differently, the list of U.S. laws North Korea crossed paths with is quite impressive. They are listed here chronologically: Trading with the Enemy Act of 1917, Export-Import Bank Act of 1945, Export Control Act of 1949, Trade Agreement Extension Act of 1951, Atomic Energy Act of 1954, Foreign Assistance Act of 1961, Arms Export Control Act of 1968, Nuclear Non-Proliferation Act of 1978, Export Administration Act of 1979, North Korea Threat Reduction Act of 1999, Congressional Oversight of Nuclear Transfers to North Korea Act of 2000, Iran Nonproliferation Act of 2000, and North Korean Human Rights Act of 2004.

In addition, North Korea was the target of Presidential Proclamation 2914 of 1950, International Traffic in Arms Regulations of 1955, and the Foreign Assets Control Regulations of 1975 as well as many revisions thereafter. The latest version of Part 500 of the Foreign Assets Control Regulations mentions North Korea 84 times in 11 subsections whereas none would have been preferred.

What lies in the future? Everyone needs to be concerned because there will be no bystanders if events progress beyond control.

It is highly unlikely the U.N. Security Council can come up with meaningful multilateral economic sanctions against North Korea. The North maintains foreign trade with more than 100 countries. A complete ban of North Korea's foreign trade, if imposed, would easily lower their current GNP to the 1999 level when hundreds of thousands, if not millions of North Koreans starved to death.

It would be ironic to impose sanctions allowing many innocent North Korean civilians to die of starvation and then begin a new round of massive humanitarian aid. It is also highly unlikely China and South Korea will support multilateral economic sanctions since they would both mostly carry the costly spillover effects.

North Korea clearly upped its ante by firing long-range missiles without prior warning to the international community. This is a dangerous war game. Knowing American politics, the U.S. is not likely to sit back and enjoy watching North Korean missiles fly over the Pacific Ocean and inch closer to U.S. territory. Knowing American politics, any accidental hit of U.S. planes or fishing vessels by stray North Korean missiles will certainly invite surgical U.S. strikes on selected sites in North Korea, making the war game even more dangerous. It would be one of the worst miscalculations in Korean history, if South Koreans believe the current missile crisis is a problem between North Korea and the United States, having nothing to do with South Korea.

What should the U.S. and South Korea do?

The June 15, 2000 joint declaration between South Korea’s Kim Dae-jung and North Korea’s Kim Jong-il was clearly rushed by not requiring concessions from North Korea on nuclear weapons, missile programs or military deployments in the Demilitarized Zone in return for the large economic assistance to the North.

The declaration, however, led to a stream of contacts between the two Koreas, including development of the Kaesong Industrial Complex that, some say, required relocation of military bases in North Korea. The limited relocation of military bases in favor of economic development, if true, provides a glimpse of hope that the U.S. should seize on. Stated in simple terms, the U.S. should engage in bilateral negotiations with North Korea, not because it is what North Korea demands, but because they may well provide a golden opportunity for the United States to keep a unified Korea under its friendly influence instead of the influence of China or Russia. Unlike the six-party talks that may be bogged down in different opinions and shared responsibilities among six countries, bilateral talks are likely to be more pointed to key issues. Even under bilateral talks, negotiations that can satisfy both sides will take a long time because relations between North Korea and the United States have been nothing but being rocky for the past 57 years, with no basis for building mutual trust and confidence.

The payoff from patient, bilateral negotiations, however, can be enormous to the United States.

Leaders in North and South Korea may also keep in mind that Korea's unification cannot be achieved without the help of the United States because there are many who suspect that Japan, China and Russia may not want the two Koreas to be one nation, again.



 



Economic Implications of North's Missile Launch

July 11, 2006
By Chang Se-moon

Members of some conservative civic groups protest North Korea’s launch of missiles last Saturday in front of the house of foreign affairs and trade minister in Hannam-dong, Seoul. They called for the government to discontinue aid to the North. /Korea Times
On May 19, several news media in Korea reported that U.S. and South Korean intelligence agencies spotted preparations for the test launch of a long-range Taepodong missile in North Korea. Since then, many more news articles have been published worldwide on the looming crisis. On June 19, U.S. Secretary of State Condoleeza Rice warned North Korea not to fire the missile. On June 20, Japan and the U.S. were reported to have agreed to deploy advanced Patriot interceptor missiles on U.S. bases in Japan that can intercept North Korean missiles. On June 30, North Korea threatened a nuclear war if the U.S. undertook a preemptive strike against the missile site. As we all know, North Korea fired missiles on July 4.
Hopefully you all have been following the unpleasant development since the outcome can be disastrous unless handled with extreme care. So far as we are concerned, there are two questions we want to answer. One is whether the new missile crisis is an economic problem as well as a political problem. The other is how new economic sanctions, if imposed, as mentioned by the U.S. and Japanese leaders, would affect North Korea and its neighboring nations.

The first question is easy to answer. The new missile crisis is clearly an economic issue. If the budding crisis grows into a full-blown crisis, it will lower foreign direct investment in South Korea and Korea's global corporations will be tempted to transfer more of their production facilities to overseas.

Both of these impacts will lower the level of employment and earnings of workers in South Korea. The crisis will be an even more important economic issue to North Korea because a full-blown crisis may completely isolate North Korea's economy to the extent that the massive starvation of the late 1990s may return.

The second question is a tough one to answer. I was one of a few speakers who made a presentation on May 19 at a well-organized conference on North Korean issues that was sponsored jointly by the Seoul Office of the German Hanns Seidel Foundation and the Graduate School of Public Administration at Seoul National University. As you may have guessed, the topic of my presentation was on economic sanctions against North Korea. At least from the economic viewpoint, the main impact of the missile firing is likely to be felt through added economic sanctions against North Korea. Let me explain in detail.

You may be surprised to hear that North Korea is either in violation, or the target, of more than 13 U.S. laws, which include laws dealing with transfer of missile technology to other countries and human rights issues. Three of these laws, however, have direct bearing on U.S. economic sanctions against North Korea.

The first is the U.S. Export Control Act of 1949 that became the basis for the U.S. invoking a total embargo against North Korea on June 28, 1950, only three days after North Korea invaded South Korea. The second is the Trade Agreement Extension Act of 1951 that was the basis for banning the most favored nation (MFN) tariffs on North Korea's exports to the United States. As you know, all member countries of the World Trade Organization have to abide by the MFN regulation that requires these nations to levy the same low tariffs to all member nations of the WTO. Without MFN, there is no way for North Korea to export anything to the U.S. because higher tariffs make them impossible to compete. The MFN is so widely spread that it is now known as the normal trade relation (NTR). North Korea was denied MFN tariff status on September 1, 1951.

The third is the Export Administration Act of 1979 that allowed North Korea to be branded as a terrorist state when its agents blew up KAL 007 on November 19, 1987. At the time of the explosion, Korean Air Lines 007 was in flight from Bagdad (Iraq) to Bankok (Thailand). The explosion killed 115 passengers and crew. On January 20, 1988, North Korea was placed on the list of countries supporting international terrorism.

North Korean residents in Pyongyang walk past a huge billboard showing propaganda messages on July 5 in this file photo. The North test-fired seven missiles, all of which apparently fell harmlessly into the sea east of the Korean Peninsula, the same day provoking international condemnation and the convening of an emergency meeting of the U.N. Security Council, and calls in Japan for economic sanctions. The characters on the board read: "Strong great nation" and "Accomplish the militant work task." /AP
Placement on the list made it impossible for North Korea to borrow development funds from international financial institutions such as the World Bank and the International Monetary Fund.
On May 25-28, 1999, former U.S. Defense Secretary William Perry visited North Korea and delivered a U.S. proposal. On September 13, 1999, North Korea responded positively by pledging to freeze long-range missile tests. On September 17, 1999, President Clinton agreed to the first significant easing of economic sanctions against North Korea since the end of the Korean War in 1953 by announcing the lifting of most export restrictions applied to North Korea in response to North Korea's willingness to cease long-range missile testing.

Details of eased U.S. economic sanctions on North Korea were announced on June 19, 2000. Key provisions included that the ban on exports to North Korea had ended, that U.S. passports were valid for travel to North Korea, and that U.S. travel service providers were authorized to organize group tours to North Korea. Among the notable U.S. sanctions that were not lifted are the denial of MFN status and the placement on the list of countries supporting international terrorism.

You may wonder what more economic sanctions can be levied against North Korea beyond the three already in place. To answer this question, you need to know the extent of North Korea's foreign trade.

Contrary to what you may have heard or believe, latest United Nations trade data indicate that North Korea has trade relations of imports, exports or both with no less than 108 countries, which exclude South Korea because inter-Korean trade is not recorded as trade data in the U.S. trade database. North Korea's major trading partners in 2004 were, in order of the amount, China ($585,651,972), Japan (164,101,115), Germany ($100,739,000), Brazil ($73,412,125), and Mexico ($47,662,978) for exports, and China ($799,450,316), Russia ($204,818,560), Brazil ($169,921,763), India ($121,080,999), and Netherlands ($120,525,232) for imports. The total amount of North Korea's exports for 2004 was $1,256,533,361, while the total amount of North Korea's imports for the same year was $1,937,738,240, with the trade deficit of $681,204,879, representing no less than 54.2 percent of total exports.

Now you have an idea. The new economic sanctions may take the form of a multi-national ban of trade with North Korea. The new economic sanctions may also include a complete ban of any transfer of money to North Korea from many Koreans who live in Japan and support North Korea.

There is no doubt that a complete ban of North Korea's foreign trade, if imposed, would easily lower the current North Korean GNP to the 1999 level when hundreds of thousands, if not millions, of North Koreans starved to death.

In view of the large number of countries engaged in trade with North Korea, it would be impossible to impose a complete ban on North Korea's foreign trade without naval blockade, which may escalate tensions on the Korean peninsula so rapidly that China and South Korea may not be willing to go along with multilateral economic sanctions.

Would it not be nice to have some reasonable solutions to the satisfaction of South Korea, the United States, and other neighboring countries? When the hostility has lasted for more than 50 years with so many hostile encounters as has been the case with North Korea, it is not easy to be optimistic even if we want to.

 

Myths About Doing Business in Korea

This is the second in a series of articles regarding changes in Korean corporate culture _ ED.

March 27,2006
By Chang Se-moon

Numerous articles have been written about Korea's unique culture that spills over to the style of business management. Some have characterized Koreans as absolutely loyal to hierarchy, trusting of friends and colleagues, and respectful of parents and superiors, while others have characterized the Korean management style as top-down decision making, authoritarian, and paternalistic.

Still others have characterized Koreans as collectivists who stress group goals in comparison to western culture that allegedly stresses individual creativity. The more I read and think about Korea's business culture, however, the more misunderstandings I have noticed. In today's article, I would like to introduce a few myths about Korea's corporate culture.

Let us start from a simple myth on how to exchange business cards. The myth is that when foreigners exchange business cards with Koreans, these foreigners need to bow a little and hold the card in the right hand and so on. I seriously doubt that Korean business people will pay that much attention to how the business card is handed to them.

Most Korean businesspeople who deal with imports and exports had to be trained to pay attention to the substance, not on the formality. These Koreans would be too much occupied to find out what is written on the business card to pay attention to how the card is handed to them. One needs to be polite in his or her own way in handing business cards but need not be concerned with the formality of exchanging business cards.

Many believe that formal etiquette is very important in Korean culture. It is true that traditional bows are still the most popular, if not official, way of greeting people. Some even suggest that there are several different kinds or grades of Korean bows with each depending on the age, rank, and social position of the individuals involved, as well as the situation in which they are bowing. I am not quite sure whether Korean managers expect foreigners to also accept the Korea tradition of bowing when they greet each other. In fact, I do not believe that they do.

Successful foreign businesspeople will learn how to bow since respecting the culture of other societies is one smart and enjoyable way of doing business. I do not believe that how one bows will influence business decisions one way or another.

Some have stated that in Korea, business does not always stop when you leave the office and some of the most effective business transactions take place in social settings which usually involve soju or beers.

This is another myth. The reality is that important transactions are handled at sober, business tables. Friendly social gatherings are likely followed to celebrate business transactions that are already achieved and reinforce the belief that they made the correct decision. I simply do not believe that social settings improve the probability of finalizing business transactions. If they do, they do it in no more ways than they are handled in western culture.

It may be noted that after-hour social gatherings can also be detrimental to long-term business transactions. After-hour social gatherings can be conducive to illegal transactions. If social gatherings involve female entertainers, there is a danger for, let me just say, possible misunderstandings that may damage long-term healthy business relations.

Another myth is that Korea is a collective society in which group harmony and group efforts are so emphasized that Koreans always use ``we’’, not ``I’’ in any group settings. For instance, Koreans almost always say ``our school,’’ ``our company,’’ or ``our country.’’

When a married man introduces his wife to others in a social-setting, he often introduces her as ``our wife’’ rather than ``my wife.’’ Again, this is not necessarily true. Successful people in successful organizations always stress ``we’’ not ``I’’ to signify the group efforts regardless of whether it is in Korea or in western culture.

There is no great goal-keeper without great players in his front, there is no great quarterback without great linemen, and there is no great general without great soldiers supporting him. Only egoistic and tasteless people keep mentioning ``I’’ no matter what culture you may do your business in.

Seniority has been an integral part of Korea's corporate culture. It has been common in Korea that a worker quits the company if a younger colleague is promoted ahead of him or her.

I even know a Korean friend in Los Angeles who quit his hob at a prestigious research organization when a new employee was promoted ahead of him. Sometimes, Korean companies limit the age groups from which they hire new employees in order to preserve internal harmony. This is because many Korean managers do not feel comfortable working with older subordinates and many employees do not feel comfortable working for younger superiors.

Again, the reality is that this tradition is also changing in the corporate sector for the sake of survival in a competitive world, if for no other reasons.

Still another myth is that Koreans have more ``warmth’’ toward other human beings than their western counterparts. The warm feeling is known as ``injong’’ in Korean, ``ninjo’’ in Japanese, and ``jen’’ in Chinese. Some have argued that people with injong are sensitive to others' feelings and quick to extend emotional and material support to sufferers.

According to this logic, superiors in a corporate setting are obligated to track their subordinates' hidden feelings of discontent because of the Korean tradition of injong. Maybe I am a little cynical but I think those who believe injong plays a big role in social and corporate setting are confused about the difference between emotion and caring.

Let me elaborate on the subject of injong. If a pet animal is hit by a car and the picture is reported by news media, many Koreans feel strong injong and feel truly sympathetic. These are the same Koreans, however, who feel nothing when homeless people beg for help at many subway stations.

National leaders who express a deep sorrow when someone they know dies do not care about developing a national plan to help those who truly need help. This to me is not injong.

What appears to be injong is simply an emotional outburst. If you still do not believe me, try to call back the president or the manager friend of a company after he or she was fired. Quite often, the person who receives your call will not even acknowledge your call. Korea's injong rarely extends to strangers who are weak and poor.

The bottom line is that the Korean economy has been exceptionally successful in the tough global market environment. The success in the global environment requires nothing less than maximum efficiency from all employees, and an open communication among all employees.

Perhaps the great challenge that Korean businesses face is to preserve much of the Korean tradition without sacrificing the success of their businesses. Or, it could be the other way around in that the great challenge facing Korean businesses is to continue the success of their businesses without sacrificing too much of the Korean tradition. To a large extent, I think Korean businesses have done that.

 


Measures to Reduce Underground Economy

March 21,2006
By Chang Se-moon

During the past couple of weeks, we studied GDP concepts and briefly mentioned the concept of the underground economy in such a way that Korea's GDP underestimates the actual economic activities because of the underground economy.

At that time, we also discussed that the share of the underground economy in Korea is most likely greater than the 10 to 20 percent estimated for the U.S. economy. Sure enough, an article was published in the February 26 issue of The Korea Times, indicating that the size of the Korea's underground economy is 27.5 percent of GDP.

According to the article, the estimate is made by Professor Jeon Tae-young of GyeongSang National University and Professor Byun Yong-hwan of Hallym University, who have also stated that the underground economy as a percentage of Korea's GDP is lower than the 32.6 percent average of 110 countries surveyed, but much higher than the Organization for Economic Cooperation and Development (OECD) average of 18 percent.

Specific countries cited include Japan at 11.3 percent, the United Kingdom at 12.6 percent, and China at 13.1 percent. Interestingly, the two professors state that the percentage for the U.S. economy is 8.7 percent, which is lower than 10 to 20 percent indicated in the studies that I have read.

Since Korea's GDP is approximately $700 billion, the size of Korea's underground economy could be as much as $200 billion. The underground economy hires workers just like the normal economy. It uses legal tender currency such as the won or dollar just like the normal economy. You may wonder then, what the problem is with this underground economy. There are several.

One problem is that taxes cannot be collected from these transactions. This means that the tax burden of the normal economy could be higher with the underground economy than without the underground economy. Another problem is that since transactions in the underground economy are not subject to laws, the underground economy is likely to breed many activities that are not socially desirable.

Another issue is that realistically, we are all not that far from the underground economy. In fact, many of us are participating in the underground economy without realizing that we do. Let me give you examples and warn you that examples are virtually endless.

Do you know someone who is on cocaine, marijuana, or methamphetamine? The buying and selling of these illegal drugs is one of the largest components of the underground economy.

Have you heard of any high level politicians in Korea who were accused of bribery? I am sure you have. Businessmen who give money to politicians illegally and politicians who accept money illegally are both active participants of the underground economy. What can you do when presidents of a country such as Chun Doo-hwan and Roh Tae-woo are the leading participants of the underground economy?

Have you been to karaoke room? Have you invited a do-u-mi to the karaoke room to help you sing and given her tips? If you did, you are a participant of the underground economy since the do-u-mi would not declare the tips as income and you probably never asked for a receipt. Have you been to Namdaemun Market or other places like that where there are many small stores? When you buy products and pay for them at the market, the chances are very small that the owners will report all or most of the sales as their earnings. Under-reporting sales is so prevalent that we do not even consider it as being wrong.

Under-reporting or not reporting sales is another example of the underground economy.

Some of you may work as tutors, teaching other youngsters, in order to earn money to help finance your educational expenses. How many of you report your earnings as income? I doubt many, if any of you report earnings from tutoring as income when tax time comes. The reality is that rich and powerful people participate in the underground economy in rich and powerful ways and poor people participate in small ways.

Now we have an interesting question. What can we do to eliminate the underground economy? I can tell you without any hesitation that you cannot eliminate the underground economy. What then can society do to reduce the size of the underground economy?

Professors Jeon Tae-young and Byun Yong-hwan suggested that reducing indirect tax rates would help reduce the size of the underground economy by providing incentives for businesses to report their sales and for more taxpayers to reveal their sources of income. Examples of indirect business taxes include sales tax that applies to a wide range of sales at the retail level, excise tax that applies to a particular product at a particular tax rate at the retail level, or value-added tax that is levied at each stage of production from producers to retailers, so that no additional tax is added at the retail level when consumers purchase the products. Sales tax is practiced widely in the United States.

Value-added tax can be said as being a hidden sales tax and is widely practiced in European countries and Korea.

It may be surprising, but I simply do not believe that lowering indirect business taxes will reduce the size of Korea's underground economy. Realistically, how many businesses will report their illegal gifts to politicians? Would lower indirect taxes have induced Chun Doo-hwan and Roh Tae-woo to report their hundreds of millions of dollars of alleged kickbacks to the Korean government as legal income? Can anything other than strong law enforcement reduce sales of illegal drugs?

Some underground transactions are probably better left as is. For instance, is it really necessary to force students to report their earnings from tutoring? What about tips people receive when they work at restaurants, karaoke rooms, hotels, dance halls, and so on? Do you really think that they should have to report their tips as legal earnings? When the U.S. congress passed a law several years ago that required waiters and waitresses to report part of their tips as earnings, I did not like it. In fact, these waiters and waitresses have to report a certain amount of tips as income even if they do not receive any tips at all.

Perhaps, the most effective way of reducing the size of the underground economy is to enforce laws more strongly. I have never been to Singapore, but I have heard many times that if you get caught with even a tiny amount of illegal drugs, you may have to live in prison for the rest of your life. When laws are enforced with such low tolerance, the size of the underground economy will decrease. Beyond law enforcement, it will take time for the size of the underground economy to decrease.

 


Fiscal, Monetary Policies Chart Economic Course

March 14,2006
By Chang Se-moon

Last week, we studied the concept of gross domestic product (GDP). Once we produce goods and services such as cars, we asked who are buying these products? We answered that there were four groups.

First of all, you and I need cars to go to work, to shop, and what have you. When we buy goods and services for own consumption, it is called consumption (C). Secondly, businesses need cars to run their business or produce more goods and services. When businesses buy cars for business purposes, it is called investment (I). Third, government also needs cars for government officials to work, to pave the road, or to run military operations. When the government buys cars, it is called government spending (G). Finally, we sell cars to other countries. In this case, we need to subtract the amount we buy from other countries. This last item is called exports minus imports, or net exports (X-M) in which X stands for exports and M stands for imports.

Combining the four and making it equal to total GDP, we obtain the famous macro-economic identity: GDP = C + I + G + X-M

This simple identity raises an interesting question. Assuming prices remain the same, would we not want an increase in GDP? We do because an increase in GDP means the economy is growing and more jobs are created. What can policymakers do to increase GDP? Look at the identity again. If we can increase consumption (C), investment (I), government spending (G), and/or net export (X-M) on the right side of the identity, GDP will increase. What are some policy measures that can increase them? This is where economic policies come into play.

Broadly, economic policies are of two types: fiscal policy and monetary policy. Tools of fiscal policy are (a) changing government expenditures and (b) changing tax rates, whereas tools of monetary policy are (a) changing interest rates and (b) changing money supply.

Let us go over fiscal policy, first.

A cut in income tax rates for individuals will increase the after-tax income of individuals, which in turn will increase consumption (C). A cut in income tax rates for businesses will increase the after-tax profit of businesses, which may be used to increase investment (I) by building more plants or upgrading machines and equipment. Government may also give a tax credit for exporters in such a way that the government reduces tax payments for exporters who increase exports during the year. This tax credit will provide incentives for exporters to work harder and increase net exports (X-M).

Government usually lowers tax rates when the economy is slow and thus policymakers want to speed up the growth rate of the economy. Government usually raises tax rates when the economy is growing too fast, generating an inflationary pressure, and thus policymakers want to slow down the growth rate of the economy.

Here is an interesting question. Will overall consumption (C) increase if government raises tax rates for the rich and lowers tax rates for the poor?

According to statistics just released by Korea's National Statistical Office (NSA), the wealthiest 10 percent of Korean households earned 89.86 million won ($92,000) last year, while the poorest 10 percent of Korean households earned 6.37 million won ($6,500) last year.

The average income of all households combined last year was 35.04 million won ($36,000). The NSA data also indicate that wives in the wealthiest ten percent of Korean households earned 9.14 million won ($9,360) on the average last year, while wives in the poorest ten percent of Korean households earned 277,900 won ($285) on the average last year.

Now the question can be made more specific. If the Korean government takes one million won from the wealthiest 10 percent through higher taxes and gives the money to the poorest 10 percent through lower taxes or earned tax credits (giving money for poor people who work), will consumption increase or decrease? If consumption increases overall, the policy of income transfer can be used as a tool of fiscal policy when the economy is slow and increased consumption is needed.

The answer depends on what the rich and the poor do with the last one million won. In fact, the answer depends on what the rich do with the last one million won since it is highly likely the poor will spend the money when they are given that extra one million won. If the rich also spend the last one million won, there is no change in total consumption and the income transfer policy has no impact on total demand or GDP in the economy. If, on the other hand, the rich save part or all of the last one million won, the government policy of transferring income will have an impact of increasing GDP.

The percent of spending in relation to the last one million won is called the marginal propensity to consume (MPC). If you are given one million won and spend 750,000 won and save 250,000 won, your marginal propensity to consume is 75 percent and your marginal propensity to save is 25 percent. If the marginal propensity of the poor to consume is greater than the marginal propensity of the rich to consume, the government policy of transferring income from the rich to the poor will have a positive impact on GDP. If they are the same, the policy of transferring income from the rich to the poor will have no net impact on GDP.

I might add that having a lot of money does not necessarily mean that the rich are happier. According to a February 27, 2006 article by Oren Dorell in the USA TODAY, William Post, who won the $16.2 million Pennsylvania lottery in 1988, spent all his money and was living off government social security when he died this year. Also, his brother tried to kill him. Two years after winning a $31 million Texas lottery in 1997, Billie Harrell committed suicide. Victoria Zell, who shared an $11 million lottery in 2001, is in a Minnesota prison after the March 2005 conviction in a drug-related collision that killed one person and injured another. I also remember a story that several years back, a terrific guy in Chicago who won millions of dollars in a lottery gave all the money to his ex-wife.

Returning to our discussion of fiscal policy, government can also increase its spending (G) to increase GDP. The government has three choices if it wants to increase its spending. One is to increase taxes to pay for the increased spending. In this case, the government spending is replacing spending by the private sector. The other is to print money. In this case, the increased money supply will eventually cause an inflation that the government does not want. Another is to borrow money and spend it. In this case, the borrowing will increase demand for money and may raise interest rates, which may slow down the economy and offset the initial objective of increasing GDP.

Finally, two policy options are listed as tools of monetary policy; (a) changing interest rates and (b) changing money supply. Unlike fiscal policy, which is the responsibility of the executive branch, monetary policy is the responsibility of the central bank which, in Korea, is the Bank of Korea. The reality is that the two policy options are closely connected. If the central bank wants to raise interest rates to make borrowing more expensive and thus slow down the economy, the central bank will have to tighten money supply. Without tightening money supply, market rates of interest will not stay high.

If the economy is too slow or is about to get into a recession, the central bank lowers interest rates and increases money supply to keep the interest rates low.
 


A Close Look at Gross Domestic Product

March 7,2006
By Chang Se-moon

You all know what GDP stands for. GDP is the gross domestic product, which measures the total market value of all the newly produced final goods and services during a year. Assuming that prices remain constant, an increase in GDP means that the economy is growing, while a decrease in GDP means that the economy is heading into a recession. GDP, however, is not the only measurement of a nation's total production. There are several concepts that go with GDP. Let us review those concepts using, hopefully, a simple example.

To really make our explanation simple, let us assume that the only product we produce in our economy is 10 Hyundai cars with selling price of $10,000 per car. The GDP of our economy then is $100,000. Note that to manufacture cars that run, we need tires. The $10,000 price includes tires since all cars have at least four tires and possibly one more, called spare tire. Suppose that the Hyundai car uses Kumho tires.

If Kumho sold a set of four tires at $1,000 to Hyundai, should our GDP be $110,000 rather than $100,000? Answer is no, because the value of tires is included in the final price of the car at $10,000. If we include the tire cost of $1,000 per car separately, we will be double-counting total goods produced in the economy. We only count the value of the final product. Our GDP is still $100,000.

Suppose that Hyundai made 10 cars last year, but 2 of the 10 cars were sold this year. Should the last year's GDP be $100,000 for 10 cars newly manufactured or $80,000 for 8 cars manufactured and sold during the year? Answer is $100,000 since GDP measures the market value of all products newly produced during the year.

What if Hyundai uses 3 of the 10 cars they produce for their own use? Will the GDP be $70,000 since Hyundai is using 3 cars for themselves rather than selling them in the market place? Answer is no. When Hyundai uses 3 cars for their own use, the 3 cars are treated as being purchased by Hyundai from Hyundai. GDP is still $100,000.

What if Hyundai actually made 11 cars but gave one away to a high-ranking government official as a bribe without reporting to anyone? In this case, should the GDP be $110,000 for 11 cars or $100,000 for 10 cars? GDP will still be $100,000. Products that change hands illegally are called the underground economy or the subterranean economy. There is no way of measuring the value of all products that are traded illegally and the value of illegally-traded products is excluded from measuring GDP. The size of underground economy is believed to be 10 to 20 percent of GDP for the U.S. economy, It may be greater for the Korean economy.

The value of illegal drugs, earnings or sales not reported during the tax time, and the money that people give and take under the table are some of many examples of the underground economy.

Market values of cars or computers can easily be measured since they are traded in the market place. What about the values of entertainment that lady golfers such as Lee Meena and Lee Seon-hwa produce? The two ladies have been playing golf very well lately in the LPGA circuit. Lee Meena and Lee Seon-hwa were number one and number two in the Fields Open that was held during the last week of February in Hawaii. The values of services that professional golfers, attorneys, teachers, and soccer players produce are measured by the amount of their annual earnings and included in GDP just like prices of goods such as cars and computers.

Once we produce goods and services, who else is buying these products? Let us continue our example of cars. Broadly classifying, there are four groups.

First of all, you and I need cars to go to work. shop, and what have you. When we buy goods and services for own consumption, it is called consumption or personal consumption expenditure (C). Secondly, businesses need cars to run their business or produce more goods and services. When businesses buy cars for business purposes, it is called investment or gross private domestic investment (I). In the third place, government also needs cars for government officials to work, to pave the road, or to run military operation. When the government buys cars, it is called government spending or government purchase of goods & services (G). Finally, we sell cars to other countries. In this case, we need to subtract the amount we buy from other countries.

This last item is called exports minus imports, or net exports (X-M) in which X stands for exports and M stands for imports. Combining the four and making it equal to total GDP, we obtain the famous macro-economic identity: GDP = C + I + G + X-M When we calculate government expenditures (G), we need to make a distinction between direct government expenditures such as government purchases of cars for government officials to work, to pave roads, or to run military operations, and government transfer payments such as welfare payments and retirement payments or payments from the national pension program. These transfer payments are payments that are transferred from government to individuals such as welfare recipients and retirees who receive retirement benefits. Transfer payments are counted as consumption when recipients spend the money. The portion of transfer payments in the government expenditures, therefore, is not included in GDP as government expenditures.

Let us go back to investment (I). Businesses need plants, machines and equipment such as cars. These assets that are used to produce more goods and services are collectively called capital goods.

Capital goods are simply accumulated investment goods. The only problem is that capital goods wear out as time goes on. They may be wearing out because they are used again and again like cars and other machines. They can also wear out because they become obsolete over time like low-memory computers. For the economy to grow continuously, we need to allow for some of these capital goods that are wearing out or consumed. The portion of capital goods that are wearing out each year is called capital consumption allowance (CCA), or simply depreciation. When CCA is subtracted from GDP, we obtain net domestic product (NDP).

Some economists prefer to use net domestic product (NDP) over gross domestic product (GDP) as the measurement of a nation's total production. Gross domestic product is the one, however, that we all use to communicate as the measurement of a nation's total production, probably because it is almost impossible to measure the amount of annual depreciation accurately. As a practical matter, businesses use the amount of legally allowed depreciation to lower their business income tax. Congress or the national assembly, on the other hand, changes the legally allowed amount of depreciation once in a while depending on which direction the political wind blows. This is another reason why economists in general use gross domestic product, not net national product, as the measurement of a nation's total production.

For those of you who are working in marketing research or any aspect of local economy, personal income (PI) can be more valuable than GDP. Personal income is the amount of all incomes received by individuals regardless of whether those incomes are earned for services performed or as transfer income. In other words, personal income measures all incomes that individuals receive regardless of sources so long as they are legal sources. The reason why personal income is important for those who study local economy or business marketing research is that data for personal income are available for areas as small as counties. When personal taxes are subtracted from personal income, we obtain disposable income that we can actually spend. Anything left over after spending (called consumption) is known as saving. If we spend more than we earn, there is a negative saving.
 


Young People Vulnerable to Internet Crimes

February 28,2006
By Chang Se-moon

I have to admit that I went to www.myspace.com to find out why it is so popular among the young. While surfing MySpace.com, I was able to click one of my few precious hobbies, ballroom dancing. I like swing, rumba and waltz. As you may know, swing is better known as the jitterbug.

Interestingly, MySpace.com gave me an opportunity to apply for participation in the popular TV program, ``Dancing with the Stars.’’ That was when I logged out because dancing on this show is too fast-paced: it is more for show business. It is too far removed from the more ordinary ballroom dancing that those who truly love it usually do.

MySpace.com was created by Tom Anderson and Chris DeWolfe about two years ago. It became so popular the traffic on MySpace.com surpassed the traffic of eBay and Amazon.com, based on the number of pages viewed by users. Incredibly, the site reportedly has over twice the traffic of Google.

MySpace.com may have been intended as a social site for those under 30 or maybe 20, but quickly became a cultural phenomenon for the young. The profit aspect of MySpace.com appears to be totally beyond the scope of those under 30, especially since last year when Rupert Murdoch, owner of Fox News, bought MySpace.com and its parent company Intermix Media at $580 million.

Why is MySpace.com so popular? The site allows users to easily design their own personal web pages, describe their personal interests and share pictures. This allows users to communicate and share their common interests. In other words, the site is customizable and user-friendly. Better yet, all this interaction is free because the site is allegedly maintained through advertising revenues.

Many musicians and artists over 30 find MySpace.com highly effective for sharing their talents, if not for the promotion of their work.

According the Matt Krantz of USA TODAY, more than a million bands and artists including U2 and Madonna now have MySpace pages. MySpace.com reportedly has 55 million members.

Anyway, all this aside, it was only going to be a matter of time before ``bad’’ people visited MySpace.com. According to Matt Apuzzo of Associated Press, police in a small town in Connecticut are investigating recent reports that as many as seven young girls were sexually assaulted by men in their 20s, pretending to be teenagers who contacted them through the site.

The abuse of the well-intended site is so bad that Matt Krants reports MySpace.com employs about 12 workers who do nothing but look at about 1.5 million images uploaded each day for inappropriate photos.

Stories on crime that relate to social websites such as MySpace.com appear in the printed media almost daily. Janet Kornblum of USA TODAY reports that in January a 14-year-old girl was found strangled in a garbage bin in Newark, N.J., and that the death may have been linked to MySpace.com. Also in January, a 15-year-old girl was found dead in a canal near her home in Livermore, Calif., and police suspect a linkage to MySpace.com. Kornblum reports that the Connecticut Attorney General's office is investigating MySpace.com ``for possible criminal prosecution,’’ saying ``its failure to shield minors’’ from pornographic images and sexual predators makes it ``a parent's worst nightmare.’’

To see what MySpace.com is saying about the problem, I read the MySpace.com's Terms of Use Agreement. According to the Agreement, your MySpace.com profile ``may not include the following items: telephone numbers, street addresses, last names, and any photographs posted by you may not contain nudity, violence, or offensive subject matter.’’ The Agreement also warns that ``Information provided by other MySpace.com Members (for instance, in their Profile) may contain inaccurate, inappropriate or offensive material, products or services and MySpace.com assumes no responsibility or liability for this material.’’

The Agreement has an age limitation of users by stating that ``You further represent and warrant that you are 14 years of age or older and that your use of the MySpace.com shall not violate any applicable law or regulation.’’ I am not sure how you can regulate the age limit. Many people under 14 will lie about their age. More ominously, many old people will lie about and represent themselves as being young.

Contents prohibited by MySpace.com also include racism, bigotry, hatred or physical harm of any kind, harassment of another, transmission of junk mail, chain letters, or unsolicited mass mailing or spamming, any material that exploits people under the age of 18 in a sexual or violent manner, solicitation of personal information from anyone under 18, and more.

The Agreement sounds like a statement by MySpace.com, rather than a real agreement between MySpace.com and its users when it states: ``By participating in any offline MySpace.com event, you agree to release and hold MySpace.com harmless from any and all losses, damages, rights, claims, and actions of any kind including, without limitation, personal injuries, death and property damage, either directly or indirectly related to or arising from your participation in any such offline MySpace.com event.’’ The Agreement also states in its disclaimers that ``MySpace.com is not responsible for any incorrect or inaccurate content posted on the Website or in connection with the Service provided, whether caused by users of the Website, Members or by any of the equipment or programming associated with or utilized in the Service. MySpace.com is not responsible for the conduct, whether online or offline, of any user of the Website or Member of the Service.’’

Well, I can see MySpace.com is an excellent idea of improving communication among young people with similar interests. I am even thinking about how I as a professor might be able to improve my teaching through the use of it, although my thinking did not go very far. When I asked my class how many had their personal pages at MySpace.com, only three of 30 students raised their hands.

At the same time, you all need to understand there are many bad people in this world and MySpace.com provides another avenue through which these people can try to take advantage of you, even hurt you badly. When the target of these people is early- to mid-teenagers, the possibility is strong that many, innocent, young people can and will become victims before they realize what is going on. And this is something I think you all might have wanted to know.

 


Many Faces of Exchange Rate Arrangements

February 21,2006
By Chang Se-moon

These days, one U.S. dollar is exchanged for about 970 Korean won, while one Chinese yuan is exchanged for about 120 Korean won. One euro is exchanged for about 1150 won, while one Mexican peso is exchanged for about 92 won. As you know, these exchange rates fluctuate on a daily basis if not on an hourly basis.

When you look around at currencies of many other countries, you will find that exchange rates do not always fluctuate like the Korean won. This is because countries can have several different exchange rate arrangements. In today's article, let us go over the types of exchange rate arrangements.

If you read economics textbooks, they usually classify exchange rate arrangements into fixed system, pegged system, and flexible system. Reality is a little more complicated than that.

First of all, let us start from one end of the spectrum in which exchange rates do not exist between any two or more countries. How is it possible that two different countries that trade together cannot have an exchange rate? Not only is it possible, it is more common than you think it is. Such arrangement is known as the system of no separate legal tender.

Legal tender is money that is unique to a particular country. Everyone in that country should accept it by law as money or a medium of payment. For instance, Korea's won is a legal tender, Japan's yen is a legal tender, and China's yuan is a legal tender. Under the system of no separate legal tender, a country may use another country's money as its sole legal tender.

Since another country's money is usually the U.S. dollar, this arrangement is known as dollarization. Examples include Ecuador, which in September 2000 officially adopted the U.S. dollar as its own currency, and El Salvador that did the same in November 2000.

Another interesting, and quite important, example of no separate legal tender is that a country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. It may be hard to believe, but all European countries that use the euro as a common currency have the system of no separate legal tender because individual countries that use the euro have no currency of their own.

When a country has its own legal tender, the amount of foreign currency that the country or its people hold can influence the country's money supply. This simple observation leads to a remarkable outcome in the country's monetary policy. To simplify the explanation, suppose that the Korean government decides to purchase $100 from businesses or individuals who hold $100.

When the Korean government buys $100, the government will pay 97,000 Korean won assuming that the exchange rate is $1 = 970 won. The government's purchase of the 100 U.S. dollars from the private sector effectively increases Korea's money supply by 97,000 won. When countries adopt a regime of no separate legal tender, therefore, these countries completely surrender their independent control over domestic monetary policy.

Will it be possible for East Asian countries which include China, Japan and Korea to have a level of trust among themselves high enough to give up control over domestic monetary policy and adopt a common currency? Probably not, but there has been a discussion of forming an East Asian optimal currency area.

Secondly, there is a system called currency boards in which a country adopts an explicit legislative commitment: (a) to exchange domestic currency for a specified foreign currency at a fixed exchange rate, and (b) to ensure the fulfillment of its legal obligation of exchanging domestic currency for a specified foreign currency at a fixed exchange rate.

This means that domestic currency will be issued only against foreign exchanges the country holds, no more and no less.

This system is almost as restrictive as the regime of no separate legal tender by allowing little, if any, room for domestic monetary policy. An example is Argentina that has dollarized not through the adoption of the dollar as its currency, but by limiting the creation of its domestic money supply to the quantity of dollars available to back its peso.

In the third place, there is a fixed exchange rate system in which a country commits to exchange domestic currency for a specified foreign currency at a fixed rate like currency boards, but the fixed rate can change periodically and the supply of domestic currency is not tied to foreign exchanges that country holds as is the case with currency boards.

Korea had this system during early years of economic development when there was a severe shortage of foreign currencies.

Fourthly, many countries have a pegged exchange rate system. Under this system, a country pegs its currency at a fixed rate to another currency or a basket of the currencies of major trading or financial partners.

While this is a popular exchange rate system, there are several variations within this group. For instance, the exchange rate may fluctuate within narrow margins of less than one percent around the central rate, or the maximum and minimum values of the exchange rate may remain within a narrow margin of 2 percent for at least three months.

The currency may also be adjusted periodically in small amounts at a fixed rate or in response to changes in selective economic indicators such as the difference in the rate of inflation between the two countries. This last arrangement is also known as a crawling peg.

Selected examples of a pegged exchange rate system include The Bahamas and Marshall Islands that peg their currencies to the U.S. dollar; Niger and Senegal that peg their currencies to the French franc; and Bangladesh, Czech Republic and Thailand that peg their currencies to a basket of several currencies of their choice.

Under the pegged exchange rate system, the country's central bank stands ready to maintain the fixed parity through sales and purchases of foreign exchange in the market place or through changes in interest rates.

When interest rates are raised, foreign currencies tend to flow into the country that is raising interest rates because owners of foreign currencies can make more money at higher interest rates.

One important advantage of the pegged exchange rate system over the system of no separate legal tender and the currency board is that the country with the pegged exchange rate system has a considerable amount of discretionary power over its domestic monetary policy.

In the fifth place, there is a managed floating system. Under the managed floating system, the country's monetary authority tries to influence the foreign exchange rate in such a way to stabilize the exchange rate since importers and exporters do not want exchange rates to fluctuate too widely. Exchange rates directly affect profits of importers and exporters.

When they agree on the price of traded goods, their agreement is based on a certain exchange rate that will make both sides profitable. If exchange rates fluctuate too much, exporters do not know how much to charge for their exports and importers do not know how much to pay for their imports. Pakistan, Taiwan, and Venezuela are examples of countries that have a managed floating system. Many economists include Korea in this group.

Finally, there is a freely flexible or independently floating exchange rate system. Under the freely flexible exchange rate system, the exchange rate is determined solely by supply and demand.

Any official intervention in the foreign exchange market is infrequent and discretionary and is usually aimed at preventing wild fluctuations in the exchange rate, not at establishing a particular rate. All major currencies are under this independently floating exchange rate system.

What Will Korea Gain From FTA Deal?

February 14,2006
By Chang Se-moon

Are you ready to watch another current economic issue unfold in front of your eyes? On February 2, Korea and the U.S. agreed to begin serious negotiations toward a bilateral free trade agreement (FTA). On that day, President Bush said that an FTA between the U.S. and Korea would ``provide important economic, political and strategic benefits to both countries.’’ The negotiations are expected to take about a year, if not longer, even if fast tracked.

Fast track in this context refers to the U.S. president's authority to negotiate trade agreements, called the trade promotion authority (TPA). The authority expires in mid-2007. Under this fast track authority, the U.S. Congress can only approve or reject a negotiated trade agreement within strict time limits, and most importantly cannot add amendments that could easily kill the negotiated agreement. Both Korea and the U.S. would like to complete negotiations before the TPA expires in mid-2007.

Will the negotiations be successful? My opinion is yes. The main reason why the negotiations will be successful is that the stakes are enormous for both countries, especially for Korea because of security reasons, and for the U.S. because the U.S. needs Korea to counter the rapidly rising economic and political power of China in the Asian region. In Asia, the U.S. only has a free trade deal with Singapore at this time, and is currently in negotiations with Thailand.

The negotiations will be successful also because Korea and the U.S. are already such close and important trade partners for one another. Korea is America's seventh largest trading partner, while the U.S. is Korea's second most important trade partner, surpassed only by China. In addition, the U.S. is the leader in foreign direct investment (FDI) in Korea and more than 3,000 U.S. companies are operating in Korea already. Korea's FDI in the U.S. has also been rapidly expanding in recent years with Hyundai's Alabama plant being the latest example.

Will the negotiations be easy? My answer is no. There will be strong resistance from Korean farmers, who have staged violent street demonstrations, not only in Korea, but also in other countries, with Hong Kong being the latest example. Some members of the U.S. Congress will also oppose the FTA because of a belief that the FTA agreement will cost jobs in the districts that they represent.

Although the U.S. now has FTA agreements with 17 countries, the new FTA between Korea and the U.S., if successful, will be the largest yet for the U.S., with the exception of the 1993 North American Free Trade Agreement that united the U.S., Canada and Mexico. This is because the FTA between Korea and the U.S. is an agreement between the world's largest and 11th largest economies. This also means that it will be that much more difficult to iron out all the differences between the two countries.

Another reason why the negotiations will be difficult is that there are numerous non-tariff barriers to trade that have been quite restrictive in bilateral trade between Korea and the U.S. For instance, the U.S. claims that Korea's regulatory regime and import procedures are significant trade barriers working against U.S. exports to Korea, while Korea claims that safeguards on product quality, antidumping and countervailing duty laws in the U.S. are significant trade barriers that adversely affect Korea's exports to the U.S.

There is no doubt that an FTA agreement between Korea and the U.S. will benefit both countries. According to Christine McDaniel of the U.S. International Trade Commission, within four years of the agreement being signed, U.S. exports to Korea could increase by more than 50 percent, while Korea's exports to the U.S. could increase by more than 20 percent. The largest gains from an FTA for U.S. exporters to Korea are expected in agriculture and manufacturing, while the largest gains for Korean exports to the United States are anticipated in textiles, apparel, and leather goods, and other manufacturing (e.g., chemicals and allied products, electronics, and transportation). (I need to caution you that McDaniel's opinions are her own and not the opinions of the International Trade Commission.)

Perhaps, the most important question relates to which export products will experience increases from the U.S. to Korea, and from Korea to the U.S. when the agreement is finalized. If I were a producer of karaoke DVDs in Korea and if karaoke DVDs were one of those exports that will increase to the U.S., I would be optimistic and work hard to produce more by the time the agreement is finalized. If, on the other hand, I were a producer of fax machines in Korea and fax machines were one of those imports that will increase to Korea, I would be concerned and may have to plan for decreasing sales when the FTA deal is all finalized.

During the January 2004 joint session of the American Economic Association and the Korea-America Economic Association in Washington, Christine McDaniel made a presentation in which she identified exports that would probably increase one way or both ways. Keep in mind that the list is preliminary and may change by the time the FTA is approved by both countries. Still, the list provides some idea of who will gain or lose from the FTA.

U.S. exports that have the potential to increase to Korea include in alphabetical order: animal oils and fats; cereals and cereal preparations; chemical materials and products; essential oils & perfume material; toilet and cleaning preparations; raw hides, skins and fur skins; inorganic chemicals; live animals chiefly for food; machinery specialized for particular industries; meat and meat preparations; metalliferous ores and metal scrap; miscellaneous edible products and preparations; miscellaneous manufactured articles; oil seeds and oleaginous fruits; organic chemicals; other transport equipment; paper, paperboard, and pulp products; power generating machinery and equipment; professional, scientific & controlling instruments; pulp and waste paper; road vehicles (including air cushion vehicles); sanitary, plumbing, heating and lighting fixtures and fittings; special transactions & commodities not classified according to kind; tobacco and tobacco manufactures; and vegetables and fruit.

Products with the potential for increased exports from Korea to the U.S. include: articles of apparel and clothing accessories; iron and steel; metal manufactures; rubber manufactures; textile yarn, fabrics, related products; and travel goods, handbags and similar products.

Products that both countries produce and may compete against each other include: armored fighting vehicles and arms of war; artificial resins, plastic materials, cellulose esters; electrical machinery, apparatus & appliances; office machines & automatic data processing; telecommunications & sound recording apparatus; and textile fibers (except wool tops).

Today's article should give you a good idea of the types of problems that trade negotiators will have to overcome. All we can do is watch and see what happens. Do not forget that the FTA between Korea and the U.S. will benefit both countries once all the kinks are ironed out and the agreement is ratified by both countries.

 


How Much Economics Do You Need to Know?

February 7,2006
By Chang Se-moon

Framed by piles of dollars, a bank employee counts the currency at a local bank in Seoul. How the foreign exchange rate is determined is one of the basic economic concepts students need to learn. /Korea Times File Have you thought about how much economics you need to know? To tell you the truth, the more you know, the more you feel that you need to know. Have you heard of the saying that ``ignorance is bliss’’ or ``ignorant people are braver?’’ In science, which includes economics, ignorance is not necessarily bliss, although ignorant people have a tendency to be braver.

Maybe I should first define what an expert is. An expert is not necessarily someone who knows more than others, but someone who has a clear understanding that his or her knowledge on a given subject is limited.

Let me ask you a little different way. I do not know how many of you have taken an economics class in school. When you finished the semester, have you felt as if you could not remember anything and you did not learn anything?

I teach economics at the college level. Every time a semester is over, I have often wondered whether students learned anything from me during the semester and how much students retained from what they learned in my classes.

After so many years of teaching, I finally started a new approach this year. My approach is that I have selected about 50 multiple choice questions on core economic concepts. I plan to give out these questions and the answers to all my students with an understanding that any or all of these questions will be on all three examinations that I give during a semester.

In other words, students will have to master the 50 questions by studying them repeatedly for all three examinations that they have to take to pass or do well in class.

Some of these concepts are very basic but they are so important that everyone needs to know them even if he or she has never taken economics and has no plans to take economics in the future. Let me go over three of those concepts in today's article.

One is the gross domestic product (GDP). GDP is the market value of all goods and services produced during a year. Stated in simple terms, GDP measures the overall economic activity of a country. When GDP increases, people say that the economy grows. When the economy grows, more jobs are created, workers earn more money, and tax revenues increase. In other words, almost everyone is happy. When GDP decreases, the economy is said to be heading toward a recession. During a recession, more people lose jobs, earnings of many workers decline, and tax revenues fall. In other words, many people become unhappy.

Strictly speaking, when we say GDP, we are talking about real GDP. Think this way. Assume that an economy produced 10 cars last year and that was all they produced in their economy. If the price of a car was $10,000, last year's GDP was $100,000 (obtained as 10 times $10,000). Assume that the economy produces the same number of 10 new cars this year but the price of the car doubles this year from $10,000 to $20,000.

This year's GDP then will be $200,000 (obtained as 10 times $20,000). The real GDP remains the same between the two years, however, since the total of what they produce this year is the same as what they produced last year. They are not any better off. In real GDP, we measure the real goods and services an economy produces after we subtract any effect from inflation. Most economists have predicted that Korea's real GDP will grow faster this year than last year.

Another example of core concepts is supply and demand. In a market that is not regulated by the government, price is always determined by both supply and demand. If supply increases while demand remains the same, price falls because there is a surplus. Businesses lower prices to reduce or get rid of the surplus. When the increase in supply is caused by increased imports, the price of the competing product produced in Korea falls and domestic producers lose money.

Sometimes domestic producers, with the notable example of farmers, strongly oppose the government policy of allowing increased imports. If supply decreases while demand remains the same, a shortage develops and price rises.

If demand increases and supply remains the same, again a shortage develops and price rises. Sometimes, a shortage seems to persist with no end in sight. Oil or gasoline comes to mind. If demand decreases and supply remains the same, a surplus develops and businesses find their inventories increasing. In this case, businesses lower prices to get rid of surplus inventories.

In reality, supply and demand both change at the same time or with only a little lag. When the latest Harry Potter books arrived at the bookstore, demand quickly exceeded supply and the publisher printed more copies to meet the excess demand without raising the price. When the XBOX package was first introduced late last year, a long line formed at stores but supply quickly caught up with demand.

When supply and demand equal to each other, we have the equilibrium price. At the equilibrium price, the quantity supplied and the quantity demanded are exactly equal to each other. The equilibrium price is quite illusive, however, since many real conditions that affect supply and demand continue to change. The market price, therefore, always continues to chase the ever-changing equilibrium price. The market price is closest to the equilibrium price when the market is highly competitive so that no one seller or buyer is large enough to influence the market price.

Still another example of core concepts is the foreign exchange rate. The foreign exchange rate is the price of one currency in relation to another. Suppose that the exchange rate between the Chinese yuan (CNY) and the Korean won (Won) is 1 CNY = 120 Won. If the value of the Korean won rises, then the exchange rate changes to, say, 1 CNY = 100 Won.

In this case, prices of China's products become cheaper to Koreans and Korea's imports of Chinese products increase because Koreans can now buy more Chinese yuan with the same amount of won. This will also make travel to China cheaper and more Koreans will visit China. If the value of the Korean won falls and the exchange rate changes from 1 CNY = 140 Won, the impact is exactly the opposite. Korea's products become cheaper to Chinese consumers and Korea's exports to China increase, and there will be more Chinese visitors to Korea.

The exchange rate is also determined by supply and demand of involved currencies. One problem with the exchange rate is that we do not know all the factors that determine supply and demand for any given currency.

For instance, the exchange rate between the U.S. dollar ($) and the China's yuan had long been pegged at $1 = 8.2 yuan. When the yuan was no longer pegged to the dollar under heavy pressure from U.S. trade officials last year, many expected the value of the yuan to rise. In reality, it has not changed much and has been fluctuating around $1 = 8.06 yuan.

There are many more core concepts that I stress to students. How much economics you need to know or you want to know very much depends on the future academic plans you have. If you plan to get a job after getting your bachelor's degree, you may want to concentrate on learning and understanding core concepts that can help you in making daily decisions.

If you plan to move on to graduate degrees in economics or economics-related fields, I suggest that you study calculus and statistics before you go to graduate school.

 

Plugging Gap Between Education, Business Needs

January 31, 2006
By Chang Se-moon

I can ask this same question in several different ways. Are university students in Korea learning what they need to know to get a job? Is there a large gap between what students learn at the university and what businesses in Korea need as many claim? Do Korea’s universities prepare students well enough to successfully compete in the job market? Is it worth going to colleges and universities?

Are Korea’s universities keeping up with the changing demands of the business community? If I were one of Korea’s college students, I would ask myself what in the world I am supposed to do to improve my chances of getting a job when I graduate?

Leading economists outside universities have been highly critical of Korea’s higher education system, claiming the quality of education at Korea’s universities is too low, and educators at these universities either are not preparing their students for the job market or do not know how to prepare their students for the post-graduation job market.

Even if the nationwide rate of unemployment has been low in Korea, reports indicate that fewer than 50 percent of college graduates in Korea find jobs after graduation.

Criticisms have been extended even to Seoul National University (SNU), which many claim is Korea’s best university. Last year SNU held its first job fair after concerns were expressed about the lack of job opportunities for its graduates. Some potential employers were even quoted in The Korea Times as saying, ``SNU graduates have plain and simply become bad candidates.’’

Critics sound intelligent when they say the quality of education at our universities is low and that they are doing a poor job in educating students for post-graduation jobs. The reality may be a little more complicated than that, however, because reality, unlike criticisms, requires real answers.

First of all, how to train students for the job market depends heavily on the fields students major in. If students major in art or music, perhaps the most important mission of the university is the cultivation of artistic or musical talent in these students.

If students major in foreign languages, again the most important mission of the university may be to train students to be fluent in writing and speaking selected foreign languages.

Beyond this technical expertise, there are some common threads crossing different areas of study that students may want to keep in mind. In 2004, a group of headhunters made several recommendations to SNU graduates on what they should do to better prepare for the job market.

The top three recommendations to graduating students were: (1) learn problem-solving skills so that they can successfully deal with changing or unexpected circumstances; (2) develop better interpersonal skills; and (3) drop their pride.

Let me discuss these recommendations in reverse order.

Dropping pride is not a problem for most students. After one or two rejections in the job market, the problem may well be not to lose confidence, rather than having too much pride.

Only fools will have too much pride in themselves. Employers generally prefer employees who are steady and reliable and take matters seriously, to those who are brilliant but somewhat irresponsible. Employers can teach many of the professional skills employees need to know, but employers cannot teach employees’ attitude. Good attitude comes from having confidence in oneself, not from misplaced pride.

Developing interpersonal skills is a little different. It is not easy to develop good interpersonal skills. If you look around your friends or even professors, there are some who can give you unpleasant messages without making you hate them. These people are rare and precious.

These people have good potential to succeed in sales and management of human resources.

Then there are others who cannot say anything without making other people unhappy or even angry.

No matter how competent you may be in your field of study, it is important to become someone who can deliver unpleasant messages without making others hate you. It is not enough for you to think you are one of them. It is important for you to actually become one.

It is not easy to be one of those special people because who you think you are can be totally different from who others think you are.

Developing such skills is really not easy, but you need try hard to become such a person because it is so important to survive in real life.

Let us go back to the first recommended skill for students, problem-solving, so one can successfully deal with changing or unexpected circumstances.

This is another tough one. There are two components in this recommendation. One is specialized knowledge or expertise in the field, the other is being able to think critically.

To learn all the specialized knowledge you need, students may have to seek out off-campus learning opportunities to complement on-campus learning. As a university professor, I can tell you that colleges and universities are rather slow in picking out cutting-edge knowledge and teaching it to students.

Thinking critically is not something you can learn overnight. There are several things to keep in mind to develop critical thinking. One is to be thorough, although not perfect, in whatever you do. When you try to be thorough, you are likely to view any assignment from many different angles.

The other is to hear opposing views with a smile on your face. If you cannot take criticism or pay attention to different opinions, there is no way for you to develop critical thinking.

What should universities do to educate and train students better? I do not know the answer. All I know for sure is that it is so important to have a president or dean with vision and who possess good interpersonal skills that can bring the best out of their professors and staff.

What should students do to improve their chances of getting a job and being successful after getting a job?

Well, I will make it easy to understand. Keep in mind two magic words: attitude and communication.

Attitude shows up in many more ways than you think, while leaving a channel of communication open is essential for any person or organization that strives to be successful.

 

Economic Costs of Stem Cell Scandal

January 24, 2006
By Chang Se-moon

I bet that you all are deeply disappointed at the turn of events regarding the once-promising stem cell research in Korea. I am very disappointed myself , because on June 22, 2004, I wrote an article in The Korea Times to encourage government support for what appeared to be very promising Korean stem cell research at the time.

Research with human embryonic stem cells is a new field of research that began in 1998 when a group of researchers led by Professor James Thompson at the University of Wisconsin developed a technique to isolate and grow the cells. Ethical and political aspects of stem cell research have since been hotly debated all over the world with strong emotion from both supporters and opponents of the research.

Powerful opponents of embryonic stem cell research are led by U.S. President George Bush who made a policy decision on August 9, 2001, that U.S. federal dollars can only be used for research on stem cell lines that were created before that same day. Proponents of such research are many, including the former first lady of the United States, Nancy Reagan, who in May 2004 said at the Juvenile Diabetes Research Foundation dinner that ``Ronnie's long journey has finally taken him to a distant place where I can no longer reach him. Because of this, I'm determined to do whatever I can to save other families from this pain. I just don't see how we can turn our backs on this.'' The former First lady was referring to stem cell research and President Bush's reluctance to support the research.

When I wrote the 2004 article in The Korea Times, Korea was believed to be one of a few countries in which significant stem cell research was underway. Other nations included Japan, Israel, Singapore, Australia, and the U.S. in which private sector research was about to take off even without federal funds from President Bush. My 2004 article concluded that policymakers of the Korean government should consider strong financial support for stem cell researchers in Korea since the economic payoff to Korea is potentially huge.

Well, it did not quite turn out the way we all hoped. Instead of counting economic payoffs, we are now counting economic costs. Let us see the types of economic costs that Korea's stem cell scandal brought about. Costs are widely spread among many people in many different ways.

First of all, there are costs to individual researchers of the Korea's stem cell research team. These costs may well be the loss of a job, lost future earnings, and possibly jail time for one or two leaders of the team. It may be unethical, but not illegal, to lie in a scientific research paper. My understanding is that empirical results of all scientific research papers should be able to be repeated by those other than authors of the papers based on data and methodology that are contained in the paper or made available by the authors of the paper. What is illegal is to acquire research funds on the basis of fraudulent claims or lies. This particular cost may be an issue to individual researchers, but not an issue for the national economy.

Secondly, there are costs to the Korean government which invested about $40 million in the scandalous stem cell research. Even that may not be a total loss, partly because about $30 million was spent on physical structure that can be used for other purposes, and partly because the government may be able to recover some of this money when the investigation is complete. Whatever is left over is the net loss to the government. Since this loss to the government is funded by tax revenues, this amount is a net loss to all taxpayers in Korea. Because the scandalous stem cell research was still in its early stage, however, the net economic loss is expected to be rather small.

According to the January 11, 2006 issue of the New York Times, the problem with Korea's government was to try to produce quick results by focusing national support on target industries such as stem cell research. The New York Times article states that the approach worked in semiconductors and shipbuilding, but "South Korea has tried the same trick with biotechnology. That endeavor flopped spectacularly on Tuesday when a panel at Seoul National University announced that" the stem cell research papers were based on fabricated data.

In the third place, there are costs to other scientific communities in Korea that could have received part of the money that was given to the stem cell research group. In the narrowest sense, this is known as the true economic cost or the opportunity cost of the Korea's stem cell research since the support to the stem cell research group caused other scientific communities in Korea to lose opportunities to make progress if government research support funds were given to them instead of the stem cell research group. Again, because the controversial stem cell research was still in its early stage, the net economic loss is expected to be rather small.

In the fifth place, there are economic costs to private businesses that have donated money to the stem cell research group. I have yet to read any reports, however, that show how much was given by whom for what purposes, and where the stem cell research group spent the money. For instance, it has been reported in many newspapers that Korean Air provided a free first-class flight service to the lead investigator, and that two members of the Korea's stem cell research group went to Pittsburg to hand over $10,000 to one Korean researcher and $20,000 to another Korean researcher who were working on the project at the University of Pittsburg.

Since it is highly unlikely that the government funds allow such payment, I am assuming that private funds were used to make such payment. To these private businesses that donated funds to the stem cell research group, the donated funds most likely represent a sunk cost. If some of these funds changed hands illegally under the table, these activities are known as an underground economy. I am curious how far Korea's tough prosecutors will be able to find all the trails of illegal transactions involving this case.

In the sixth place, there are costs to investors who bought stocks in Korea's biotechnology firms. The accounting way of calculating the loss is the difference between the amount they pay to purchase the stocks and the amount that they receive when they sell the stocks. The economic way of calculating the loss, however, is a little different in that the amount of loss is the difference between what the average investor has earned during the period and what those who invested in firms related to stem cell research have earned or lost during the same period. Again, the concept of opportunity cost plays a role in calculating economic costs. These costs, however, may be a concern to private investors who may have lost money from the scandal, but not to the Korean economy as a whole.

In the seventh place, there are costs to the Korea's scientific community. Let me explain it this way. Assume that I am one of a number of promising young scientists in Korea. Assume also that because of the stem cell scandal, my research paper attracted extra scrutiny and is not accepted for publication in a major journal. The reduced number of journal publications leads to a smaller pay raise and a loss of funding opportunity for my research. The economic cost of the stem cell scandal on me is the loss of my pay raise and funding opportunities.

To be more specific, the economic cost of the scandal on my career is the present value of all future pay raises and lost grants. In reality, however, these costs are expected to be very insignificant. This is because research papers are usually blind-reviewed, meaning that reviewers do not know who the authors are. This is also because scientists at least in the United States are less emotional and thus are not likely to punish Korean scientists simply because one or two Korean scientists lied.

Finally, to patients who have incurable disease and had high hopes of having their illness cured through the Korea's stem cell research, the costs are mostly non-economic. These non-economic costs are often referred to as non-pecuniary costs or hedonic damages. I would say that the cost of the stem cell scandal on Korea's patients who had high hopes of having their incurable disease cured is priceless in that the agony and disappointment that these patients suffer cannot be measured in dollars and cents.

 


Economists Optimistic About 2006 Growth

January 17, 2006
By Chang Se-moon

When you think about it, economics is not as abstract as some people think it is. Economic decision making affects ordinary people in more ways than people realize. Because of the real impact that economics has on everyone's life, it is important to know exactly what will be going on in the Korean economy during the rest of this year.

On January 8, three prominent economists from Korea made a special presentation to members of the Korea-America Economic Association in Boston. Let me relay to you what they said. You will find their presentations quite informative.

Lee Kyung-tae, president of the Korean Institute for International Economic Policy, made the first presentation. Lee has been deeply involved in trade negotiations representing Korea's government policy and has a good understanding of the intricate give-and-take in trade negotiations.

According to Lee, there is no problem of pushing for lower tariffs on industrial products because Korea as well as many other countries exports industrial products that they all want to sell more.

The one interesting comment he made on industrial products is that many countries feel that the United States abuses the anti-dumping policy. Dumping is usually defined as selling products below the cost of production.

Assuming that dumping by China takes place in the U.S. market, the prices of dumped products in the U.S. fall and the U.S. producers of the dumped products lose their sales, explaining why dumping is a problem to the U.S.

If their industries lose sales because of dumping of the same products by other countries, these countries in which dumping takes place can retaliate by raising tariffs on the dumped products.

If, for instance, Korea is found to have been dumping steel products in the U.S. market, the U.S. can retaliate by raising tariffs on the steel products that Korea sells to the U.S.

In reality, it is very difficult to prove that products are actually dumped in the global market because there may not be enough data to prove that sales prices in the importing country such as the U.S. are below the cost of production in the exporting country such as Korea.

According to Lee, many countries feel that the U.S. is invoking antidumping policies too often to the extent that the policies are abused. Lee touched a sensitive issue of Korean farmers. I think Lee is very sympathetic of the problems that Korean farmers are facing and is doing his best to help them.

We all know that Korea is a member of OECD and one of the developed countries. Korea is no longer a "developing" country. The word "developing" is a nice way of saying "underdeveloped."

Growth and Job Prospect

In global trade, if a country is classified as a "developing" country, the country's exports enjoy lower tariffs by importing countries and the "developing" country can sell more of their exports. The problem is that Korea claims that Korea is a "developing" country so far as agriculture is concerned, while Korea is proud of being a developed country in all industrial products.

The real problem is that Korea wants other countries to accept its claim that Korea is a "developing" country in agriculture (and environment). Would you like to be in Lee's position to persuade other countries that Korea is underdeveloped in agriculture only and Korea's agriculture.

While Korea wants to protect Korea's agricultural sector, Japan also wants to protect Japan's agricultural sector. In fact, this is exactly the reason that Korea and Japan are having a problem in negotiating the bi-lateral (i.e., between two countries) free trade agreement (FTA). Korea is a little behind the global bilateral FTA movement and needs to push ahead because once it is left behind, it is difficult to catch up.

Roh Sung-tae, president of the Korea Economic Research Institute, followed next for his assessment of the Korea's economy 2006. According to Roh, the Korean economy will grow at an annual rate of 4.8 to 5.0 percent during 2006.

This is considerably higher than the 3.7 to 3.8 percent growth rate during 2005. As you know, economic growth is measured in terms of the rate of increase of gross domestic product (GDP) after subtracting any effect from inflation.

According to Roh, many economists in Korea accept five percent as the long-term potential growth rate of GDP in Korea. Roh is more upbeat by saying that if everything goes well, the Korean economy may be able to grow by 7 to 9 percent a year. Roh further states that a slow growth in domestic consumption is a concern, but is likely caused in large part by high oil prices.

Roh's optimistic assessment of the Korean economy was cautioned somewhat by Lee Chaewoong, who is the president of the Korean Economic Association and made a presentation the night before on Saturday.

Lee, who is a professor of economics at the Sungkyunkwan University, reminded the audience that Korea's growth rate is the lowest among leading Asian economies and needs to find new niche in export market especially in the area of entertainment by saying that South Korea's TV drama, "Taejanggum" is the most popular show in Taiwan. I think Dae-jang-geum is the story of a female doctor who was deeply involved in the internal politics of Korea's king hundreds of years ago.

The final speaker of the Sunday's panel was Lee Ji-eun. Lee is the research coordinator of the Korea Institute of Finance. According to Lee, Korea's stock market grew faster in 2005 than in 2004, but household borrowing and business borrowing relative to the GDP have also increased.

Short-term deposits that have been increasing since 1998 are expected to fall during 2006 owing to the government's successful real estate policy adopted in August 2005. Lee also pointed out that Korea's stock market has become more independent of the U.S. stock market, that businesses depend less on stock market for fund raising even if stock prices are higher, and that interest rates are expected to rise during 2006.

What do all these mean to the Korea's young generation? The Korea's economy will do better in 2006 than in 2005. This means that job opportunities will improve this year compared to the last year. In job search, however, it is important to keep in mind that jobs will be more plentiful and pays are higher in the export sector that is predicted to grow much faster than the rest of the Korean economy.

You need to keep in mind that unpleasant events can quickly develop in Korea which is positioned, albeit reluctantly, right in the middle of some nasty global politics such as North Korea's nuclear issue, competition between China and Japan, and competition between China and the U.S. However, all indications at this point are that Korea will be able to enjoy a growing and peaceful economy during 2006.

In such peaceful times, the best you can do is to study hard and explore opportunities that will benefit you without being carried away too much on national politics.

 


Fruit of Free Trade to Be Sweet in Long Term

January 3, 2006
By Chang Se-moon

When in Korea you go to ``supermarkets,’’ more commonly known there as ``super’’, you will find all kinds of free traded fruits. When you travel overseas such as in China, Guam, Japan, Vietnam, New Zealand, Argentina, and Canada, quite often you may want to eat food with lots of fiber to avoid stomach pain.

There you will also find all kinds of fruits of free trade. By fruits, I mean real fruits such as apples from New Zealand, apricots from China, bananas from Ecuador, blackberries from Chile, coconuts from Philippines, grapefruits from Bahamas, grapes from Peru, Kiwifruit from Italy, lemons from Argentina, limes from El Salvador, oranges from Australia, pears from Korea, pineapples from Costa Rica, plums from Guatemala, raspberries from Mexico, strawberries from Poland, tangerines from South Africa, and watermelons from Honduras.

According to the Heritage Foundation in Washington and the Fraser Institute in Canada, economic freedom and per capita consumption have a direct correlation. The top 20 percent or most free countries enjoy over $18,000 annual consumption per person; the next 20 percent free countries enjoy about $10,000 per capita consumption; the middle 20 percent of free countries spend about $6,000 per capita consumption; the next 20 percent of free countries spend about $4,000 per capita consumption; and the bottom 20 percent or least free countries spend $2,000 per capita consumption.

It is a well known fact that in North Korea, which ranks lowest in economic freedom in the world, consumers have to struggle to find the most basic items such as food, while in South Korea, which is one of the most rapidly-growing market economies, consumers enjoy per capita income which is about 12 times that of North Korea.

Trade fosters competition, which increases productivity that in turn lowers cost. This explains why the rate of inflation is lower for products that are traded among nations than products that are not traded.

You can sit back and think about what has been happening to prices of products that are traded and those that are not traded. If you are still thinking, let me give you examples.

Products that are easily traded among nations include video equipment, television sets, notebook computers, toys, photographic equipment and supplies, audio equipment, women's and men's clothing, and new cars.

Prices of these products have risen very little, if not fallen during the past ten years, they rose once in a while when producers came up with a new generation of products such as high definition TVs.

Products that are less traded or not traded at all include household electricity, garbage collection, restaurant meals, haircuts, car repair, apartments, admission to movies, and college tuition..

One interesting observation is that all countries try to increase their exports while trying to lower imports. The idea is that an increase in exports will lead to increased production, which in turn will create more jobs and more income to the country's workers.

Would it not be nice if all countries can just export without importing any? Now we have a conflict between illusion and reality. You can sell something only if there is someone who buys it. Countries can export products only if some other countries buy the products through imports.

If countries want a free trade in exporting, the same countries should also be ready to accommodate a free trade in importing. Free trade goes both ways.

There is another good reason why free trade should go both ways. Suppose that there is a paradise economy on Mars that is just happy to import anything that the good Earth produces. Suppose Korea exports ten million cars to Mars without having to import any from Mars.

To produce ten million cars, all unemployed workers as well as low-wage workers are now employed in car manufacturing. Wages go up, and so do prices in general since many workers have more money to spend on goods and services produced in Korea with no competition from imports. There will be a bad inflation with no competition from overseas. Is this what Korea, or any other country for that matter, would want? Not really.

Imports are as important as exports because imports increase the quantity of goods and services available in the market place. This increased supply will raise the level of competition which then lowers prices and checks inflation. In addition, imports provide a greater choice in selection of consumer goods.

Just imagine that you cannot buy any iPod made by Apple. Or you can ask your father or brother who play golf how they would feel if they cannot buy Taylormade or Honma clubs.

The protest staged by more than 1,000 Korean farmers during the December WTO meeting of ministers in Hong Kong and the suicide of a Korean farmer in Cancun two years ago clearly demonstrate that not everyone benefits from free trade at least in the short run. Individual countries will have to find ways other than export subsidies to assist losers from free trade such as farmers.

By now it should be understandable why countries promote free trade and why countries with free economy enjoy higher earnings and greater variety of goods available to them. What has Korea been doing to promote free trade lately? As a member of the World Trade Organization, Korea has actively been participating in multi-lateral negotiations to lower tariffs.

Multilateral negotiations mean that many countries negotiate simultaneously to lower tariffs among all countries. Besides, Korea has also been pursuing bi-lateral negotiations to promote free trade, known as the free trade agreements or FTAs. Free trade agreements are rather special in that virtually all tariffs are eliminated between the two countries.

Korea has successfully negotiated three FTAs so far. Partner countries are Chile, Singapore, and the European Free Trade Association (EFTA). EFTA is an international organization of Iceland, Norway, Switzerland, and Liechtenstein.

In addition, Korea is pursuing free trade agreements with Japan, ASEAN, Canada, India, Mexico, Russia, MERCOSUR, China, EU, and the United States. Just in case you are not familiar, ASEAN, the Association of Southeast Asian Nations, was established on August 8, 1967 in Bangkok by five countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam (January 8, 1984), Vietnam (July 28, 1995), Laos and Myanmar (July 23, 1997), and Cambodia (April 30, 1999) joined later. MERCOSUR was created by Argentina, Brazil, Paraguay and Uruguay in March 1991.

The European Union (EU) was founded on November 1, 1993 in Europe. Austria, Finland and Sweden joined EU on Jaunary 1, 1995, and ten countries joined on May 1, 2004, making EU a 25-country organization.

Member countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom, and the ten new members that joined in 2004 such as Cyprus (Greek part), the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.

Finally, there is a strong movement toward creating an East Asia Community with Japan, Korea and China as its key members. All three countries try to be the leader in the movement. Interestingly, it does make a difference to be the leader in terms new economic activities that will be created in the host country.

If the East Asia Community were to be housed in Korea, for instance, Korea would be able to enjoy a high-rise headquarters office with hundreds of high-paying jobs, a quick dissemination of trade information that will help Korean businesses, and a national prestige to go with these economic benefits.

It may be noted that Malaysia, Japan and China, in addition to Korea, are all hoping to play the leadership role in the march toward creating the East Asia Community.

 

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