The Korea Times Articles - 2007

Economy Doesn’t Work as the Way Politicians Want to Work

December 6, 2007
By Chang Se-moon

Whenever there is a presidential election, it is always interesting to speculate on how much influence economic pledges of different candidates have on the way voters vote. In an ideal world, voters should compare all the promises that candidates make and vote on the basis of this comparison. The real world has never been ideal, however, and voters usually vote based on incomplete information. Let us try to clarify some of economic promises that leading candidates have made for the coming presidential election in Korea.

Since many are only focusing on the three leading candidates, let us evaluate economic pledges that the three have made. The three candidates are Lee Myung-bak of the conservative Grand National Party, Chung Dong-young of the liberal United New Democratic Party, and Lee Hoi-chang who is independent but widely considered to be more conservative than Lee Myung-bak. We focus on three particular areas: economic relations with North Korea, the issue of growth versus distribution, and the role of large businesses in the Korean economy.

As to the issue of economic relations with North Korea, Lee Myung-bak's Vision 3030 policy calls for continued economic assistance to North Korea over the next 10 years. The economic assistance is intended to help the North continue economic reform and boost the North Korean per capita income to $3,000. Lee Myung-bak, however, does not make it clear whether he will continue economic assistance if the North does not agree to complete denuclearization. Lee Hoi-chang, as a true conservative, would continue dialogue with North Korea, but has called for financial aid to North Korea to be cut off until its nuclear weapons program is dismantled. Chung Dong-young, who helped develop the Gaesong Industrial Complex, promises to seek a new growth engine that combines cheap labor and land in North Korea with the abundant capital and technology of South Korea. Chung pledges to extend the Gaesong model to other inter-Korean cooperative projects.

What the three candidates as well as many South Koreans have to understand is that the North Korea's denuclearization depends, not on what South Korea wants, but on how successfully the U.S. negotiates with North Korea. North Korea already made it clear that it would negotiate with the U.S., not with South Korea, on the nuclear issue. The only choice South Korea has is to decide whether South Korea should continue close dialogue with North Korea and provide economic assistance with or without North Korea's denuclearization.

Considering the fact that the dialogue and economic cooperation between the two Koreas have continued for so many years, it is a bad idea for South Korea to make denuclearization a pre-condition for continuing economic assistance to North Korea. Times have changed. At least on this issue, the view of the young generation or the more liberal view appears to be more realistic and beneficial for eventual unification of the two Koreas.

The issue of growth versus distribution was triggered by Lee Myung-bak's Republic of Korea 747 proposal in which he advocated an annual growth rate of 7 percent for the next 10 years, an increase in per-capita income to $40,000 by 2017, and joining the Group of 7 economic superpowers. Lee Myung-bak claims that the faster the economy grows, the more the low to middle class will be able to share the fruits of economic growth. In contrast, Chung claims that growth and distribution are like the two wheels of a bicycle and Korea needs both. Lee Hoi-chang's view appears to be closer to that of Lee Myung-bak but prudent enough not to promise a specific target growth rate.

It is good to set a target growth rate as a goal. Unfortunately, the economy does not always work the way economists, let alone politicians, want it to work. No one wants a recession, but it happens. Everyone wants a high rate of growth, but no advanced economies can sustain a growth rate as high as 7 percent. If it happens, it is more an exception than the rule. If we create one, it will likely cause a high rate of inflation. There are simply too many factors beyond the control of policy-makers that influence the growth rate of an economy. At least on the economic front, it may not be intentional but candidates have a tendency to promise more than what they can actually deliver.

Whether one prefers growth over distribution, or distribution over growth depends on one's philosophy. In general, conservatives prefer growth over distribution, while liberals prefer distribution over growth. Conservatives such as Lee Myung-bak prefer a cut in business taxes that usually encourages economic growth, while liberals such as Chung Dong-young prefer a tax increase from the rich so that more people can move into the middle class.

In reality, the difference between the two views is a matter of degree. You will never be able to draw a consensus from people who have opposing views over the issue of growth versus distribution. I personally prefer a candidate who feels real compassion for the poor. Since all three leading candidates appear to be wealthy, I am not sure whether any of the three candidates feels heart-felt compassion for the poor.

Interestingly, all three candidates pledge to create more jobs. Lee Myung-bak promises to create 500,000 jobs over the next five years by promoting the growth of small and medium-sized innovative enterprises. Chung Dong-young also has set the same goal of creating a total of 2.5 million jobs over the next five years, 500,000 jobs a year. Lee Hoi-chang has pledged to create more jobs for women at least when he ran for presidency in 2002.

The reality is that the number of jobs will increase over time. Since 2003, the Korean economy has created about 330,000 jobs per year. The half million jobs that Lee Myung-bak and Chung Dong-young are promising to create each year are within the possibility since they are only about 170,000 above the average number of jobs that have been created each year since 2003.

However, creating a particular number of new jobs is likely beyond the control of policy-makers unless policy-makers also promise to provide public sector jobs in case the promised number of jobs is not created by the private sector.

Finally, a recent survey of major presidential candidates conducted by the Korean Association for Policy Sciences provides an interesting insight into the views of the three leading candidates regarding the role of large businesses in the Korean economy. In the survey, there were six key statements: (1) that the owners of businesses are stockholders rather than society; (2) that the main objective of businesses is to maximize profits; (3) that deregulation is essential to the growth of businesses; (4) that intervention with the private sector should be minimized for businesses to increase their global competitiveness; (5) that privatization of government-owned businesses will greatly contribute to solving problems facing these businesses; and (6) that the growth of large businesses is helpful to the growth of small to medium sized businesses

In these six statements, the order of candidates in terms of the level of agreement with these statements is expected to be Lee Hoi-chang, Lee Myung-bak, and Chung Dong-young, since conservative politicians are supposed to prefer a market-driven economy and thus should agree with these statements more than liberal politicians. Interestingly, the combined order was the opposite. Chung Dong-young and Lee Myung-bak came out on top with Lee Hoi-chang remaining at the third place.

In the same survey, there were two liberal statements such as (1) that businesses have an obligation to solve social problems, and (2) that businesses making greater contribution to society should be respected more than businesses that generate greater profits. The order of candidates who agree with these two statements is expected to be Chung dong-young, Lee Myung-bak, and Lee Hoi-chang. Interestingly, the combined order was again the opposite. Lee Myung-bak and Lee Hoi-chang came out on top with Chung Dong-young clearly trailing the two.

There are two possibilities that explain why responses of the three leading candidates are not what we expected. One is that candidates themselves may not know exactly what they believe in, and the other is that if they know what they believe in, their belief is not as strong as their desire to attract the largest number of voters for their candidacy. It is no wonder that people in Korea vote more for birthplace and school connections than for economic pledges that candidates make.
 

Koreas Need Give-Take Economic Relations

August 15, 2007
By Chang Se-moon

The historic first inter-Korean summit between the then President Kim Dae-jung and North Korean leader Kim Jong-il was held in June 2000. At the end of the summit, the two leaders inked the North-South Joint Declaration, which eventually led to several exchanges of separated family members, joint economic development projects, and numerous exchanges and cooperation in various fields.

The upcoming second inter-Korean summit between President Roh Moo-hyun and North Korean leader Kim Jong-il is a political game that requires skillful negotiations on both sides, with the U.S., China, and Japan playing the role of more than by-standers.

If this assessment is accurate, the entire approach toward negotiating with North Korean leaders has to be restructured toward a more give-and-take attitude. There are two related issues that are the logical outcome of this new approach.

To be specific, the new package of incentives considered for North Korea should be substantive, not symbolic. Up to this point, all concessions made to North Korea, which include the 1999 easing of sanctions by President Clinton, were symbolic, not substantive.

Substantive concessions should include the MFN status on North Korea's exports to the U.S., removal of North Korea from the list of countries supporting international terrorism, easing of financial tightening, and a large amount of economic assistance.

Some may oppose providing substantive concessions to North Korea. However they should bear in mind that sometimes we need to cut the rope tying us to the past in order to make progress. It may not be easy, but we need to do it.

The offer of substantive incentives should be accompanied by verifiable reduction and elimination of North Korea's nuclear weapons programs and other measures by North Korea that can improve mutual confidence.

If my assessment of a changed approach by North Korean leaders toward an improved calculation of benefits and costs is accurate, North Korean leaders will respond positively toward substantive incentives.

This does not mean that North Korea will respond quickly, because I have observed for a long time that North Korean leaders are much more patient negotiators than South Korean leaders. This is where the role of President Roh becomes so important in the upcoming summit.

A successful inter-Korean summit requires skillful negotiations and, especially, patience on the part of President Roh. President Roh should focus on improving inter-Korean relations for long-term benefits of the Korean peninsula by requiring meaningful concessions from the North, not on establishing his own legacy by providing unilateral concessions. Any unilateral concessions such as redrawing the Northern Limit Line, scrapping the National Security Law, or halting joint military exercises with U.S. troops will eventually do more harm than good to both Koreas. Concessions of this nature, for instance, should be made in conjunction with North Korea's willingness to pull its troops out of the demilitarized zone.

Patient agreements between the two leaders may not look fancy in tomorrow's newspapers, but will do wonders to both Koreas many years from now.

The two leaders may agree to preserve the demilitarized zone as an inter-Korean national park, figure out how to utilize the low-wage labor force in North Korea under the highly-developed South Korean management skills to the extent of replacing unhealthy Chinese products in the global market, and promote greater cooperation in arts and sports that can unite the minds of the two Koreas.

Hopefully, both President Roh and North Korean leader Kim will find ways to promote peace and prosperity in the Korean peninsula beyond and above personal ambitions and legacies. I am sure that they will.

 

What Determines Your Earnings?

August 7, 2007
By Chang Se-moon

On July 26, Michael Vick, who is a star quarterback of the Atlanta football team, pleaded not guilty to the illegal holding of dog-fighting charges against him. We do not know whether charges leveled against him are true or not. It will be determined by the trial that will begin during the week of November 26, this year.

Our interest in today’s article is limited to how much he earns. When he was selected in 2001, his contract was for $62 million. In 2004, Vick signed a 10-year, $130 million contract, averaging $13 million a year. If the lucrative advertising deals that he signed were included, Vick’s annual earnings would average much more than $13 million a year.

In the U.S. corporate world, I can count many more than 40 executives who earned more than $10 million during 2006. It is difficult to find salaries of business executives in Korea, but I would not be surprised to find several Korean business executives who earn more than $10 million a year. Wouldn’t it be nice if we all made $10 million a year?

Well, life is not designed that way. In the United States, the federal minimum wage was raised from $5.15 per hour to $5.85 per hour on July 24, this year. Annualizing the minimum wage, it increased from $10,712 to $12,168 per year. There are millions of workers in the U.S. who make no more than these minimum wages. In fact, most Korean females who visit the Working Woman's Network for assistance are reported to earn about $10,000 a year.

There are two issues that I would like to explain in today’s article. One relates to what determines how much people earn, and the other relates to whether people really deserve more than $10 million in annual earnings.

First of all, let me explain what is supposed to determine how much people make. Let us assume that we are operating a small noodle shop near the historic Duksoo Palace in Seoul. Assume that a bowl of noodle sells for $5.00, or about 5000 won.

Assume also that we are so busy that we consider hiring another person who can increase our sales by 10 bowls per day. The 10 bowls of additional sales are called the marginal product of the new person we consider hiring. Bowls of noodle are products, and the 10 bowls are marginal in the sense that they are additional sales beyond and above existing sales. This explains why economists call them marginal products.

The dollar value of additional sales is $5 times 10 bowls, which is $50. The $50 is the additional revenue that the new employee is expected to bring for our noodle shop. The $50 is called the marginal revenue product. The marginal revenue product is simply the money value of the marginal product. If the cost of making the 10 new bowls of noodle is $10, the net profit that the new employee will bring to our noodle shop is $40 per day, which is obtained by subtracting $10 of cost from $50 of additional revenue.

If the daily wage to the new worker is less than $40, we will be increasing net profits to our noodle shop by hiring the new worker. The amount of increased net profits is $40 minus wages paid to the new worker.

Stated in simple terms, how much people earn depends on how much money these people generate for the employer. In other words, you are paid what you are worth. This is known as the marginal productivity theory of income distribution. Basically, we all believe that it is a good system since there is nothing wrong with people getting paid what they are worth to their employers.

The problem is that this theory requires perfect competition to be totally valid and the market is far from being perfectly competitive. Perfect competition, in turn, requires perfect information.

Let us return to Michael Vick’s earnings. The marginal productivity theory appears to tell us that if Vick brings $13 million or more in revenue to the Atlanta football team each year, he deserves $13 million pay.

This is not exactly true. Assume that Vick generates $15 million per year. Since he is paid $13 million, he generates $2 million of net profit for the Atlanta football team. What if the team hires another quarterback who can bring in $10 million, but is paid $5 million a year?

The team’s net profit, then, increases to $5 million per year. Does the Atlanta football team calculate profits under all different scenarios? Not likely.

Let us return to earnings to corporate executives all over the world, including Korea and the United States. Mr. Ray Irani of the Occidental Petroleum was paid $52,143,188 in 2006, including salary, bonus, and other monetary benefits. The question is not whether Mr. Irani increased Occidental Petroleum’s net profits by at least $52 million, but whether Mr. Irani’s contribution to Occidental Petroleum’s net profits is greater than contributions to Occidental Petroleum that could be made by another executive who is paid less than Mr. Irani’s pay.

There is no clear answer to the question, because any such comparison requires data that do not exist. The reality is that earnings of highly-paid individuals such as Vick and corporate executives are determined by educated guesses of other people who are in power to make such decisions. Usually, these people are the same people who earn a large amount of money.

The opinions of rich people are biased in favor of higher pay, because the higher the pay of other executives is, the greater their own pay is likely to be. Just imagine what will happen to their own pay if they decide to cut pays in half for all other executives.

It will be a matter of time before their own pay will also be cut in half.

The point is that undoubtedly there are executives and athletes who are worth a lot of money and probably worth more than what they are paid. Overall, however, the pay of many, if not most, corporate executives and athletes is too high for their productivity because the way the pay of executives is determined is inherently biased in their favor.

Let us now turn to the second question of whether people really deserve more than $10 million in annual earnings, assuming that the high pay accurately measures their true contribution to their employers. The answer really depends on the collective judgment of society. This is one of many issues that cannot be answered with economic theory alone.

Clearly, incentives should not be taken away from people who are productive. Just as importantly, society should take care of its people who cannot take care of themselves for many reasons. Some are mentally ill, while others are permanently injured fighting for the country. Some are too old to be productive, while others are too weak physically to make a living. Some are born in such poor families that they have to work while they are young, rather than get an education.

My thinking is that wealthy countries, which include Korea, should be able to afford to take care of the weak and the poor and still be able to allow enough incentives for productive people to continue to be productive. What do you think?



Legal Minimum Age for Drinking

July 31, 2007
By Chang Se-moon

Do you know how old you should be for you to be able to buy or drink alcoholic beverages? My guess is that most of you do not know, but go ahead and drink anyway. Like so many other things in life, it can be complicated if you are not careful, however.

The legal minimum age for drinking varies among countries and, sometimes, within a country. Since laws that govern the legal minimum age for drinking change all the time, it is difficult to identify the exact minimum age for drinking in all countries. So far as I can determine, some countries have no legal minimum age for drinking.

These countries include Armenia, Azerbaijan, Nigeria, Portugal, Thailand, Viet Nam, and possibly a couple more. The legal drinking age is 16 in some countries that include Austria, Belgium, France, Italy, Poland, and several others that allow exceptions. By far, the most popular legal drinking age is 18. Over 40 countries adopted 18 as the legal drinking age.

These countries include Argentina, Bermuda, Chile, Hong Kong, Indonesia, Israel, Mexico, Philippines, Russia, Slovakia, United Kingdom with 16 in restaurants, Australia, Brazil, Canada in most provinces, Malaysia, Ukraine, Venezuela, and more.

Four countries of most interest to you may be China, Japan, the U.S., and Korea. The legal drinking age is 20 in Japan and 21 in the United States. A website says that there is no drinking age in China. With a tight control over personal lives, they may not need one in China.

Recently, the minimum legal drinking age for U.S. marines in Japan was lowered to 20. This change makes the drinking age for U.S. marines in Japan consistent with Japanese law which sets the minimum age for buying and consuming alcohol at 20. Korea’s legal drinking age is stated differently in different places. Some say it is 19, others say it is 20, and still others say it is 21 unless you are a college student.

In the U.S., the minimum drinking age varied among states, ranging from 18 to 21, until 1984 when the National Minimum Drinking Age Act of 1984 required all states to raise their purchase and public possession of alcohol age to 21, or risk losing federal highway funds under the Federal Highway Aid Act. By 1987, all states had complied with the 21 minimum age law. The U.S. legal drinking age is one of the highest, if not the highest, in the world.

Why do countries require the legal drinking age? The predominant opinion is that young drivers are especially dangerous when they drink and drive, although some scholars claim that the more frequent traffic accidents by young people are caused, not necessarily by their drinking, but by their freedom to drive at an earlier age, their increasing ownership of cars, and others. Another popular reason for the drinking age requirement is simply that it is culturally unacceptable in many countries for young people to drink.

Do you want to know what I think about the legal drinking age?

I believe that the legal drinking age should not be higher than the age at which young people can join the military or go to the college, whichever is lower. Perhaps, recognizing this, more than half of the countries that require the legal drinking age have 18 as the legal drinking age. Any legal drinking age higher than 18 is on shaky ground.

I also believe that the minimum age should be the age at which young people can buy or publicly possess alcoholic beverages, not the age at which young people can drink them. What is the difference between the two? Let me explain.

The legal minimum drinking age is usually set by old people with no input from the young. In conservative countries like the United States, the old people who set the legal drinking age would want to increase the age even beyond 21, believing that they are doing a favor to young people. Well, here are some problems.

At least in the community where I live, once in a while the police arrest college students under the age of 21 who drink at a gathering inside college or in their homes. The police and the old people in the community may be doing more harm than good to the young people because once they are arrested, their arrests will be recorded.

When these college students complete their education and enter the job market, they may have to fill out an application form that may include a question of whether they have been arrested. If the students honestly answer the question, they may not be able to get a job. This is a true hidden cost that old people will never understand.

That is not all. Sometimes, the police send undercover agents who look mature but are 19 or 20 years old to stores that sell alcoholic beverages. Store clerks casually check their identification cards but sell alcoholic beverages.

The police then arrest the unsuspecting store clerks for selling alcoholic beverages to the under-aged. The police appear to be proud of what they are doing and the old people who raised the minimum drinking age appear to be happy, believing that the police arrested bad people. They can never think of the possibility that the requirement of a high legal drinking age may not be reasonable to begin with. I even read an article in the local newspaper that a soldier under 21 years of age who just returned from Iraq was arrested because he was buying an alcoholic beverage. Do you think it fair?

As I said earlier, the legal drinking age should not be higher than the age at which young people can join the military or go to the college, whichever is lower. If drinking and driving are the problem, it is a problem for all ages, not just for the young. I cannot think of any reason why it should be higher than 18.

There is another factor that everyone needs to think about. The age requirement should apply to purchasing and, at best, public possession, but not to drinking. Drinking by young people under the supervision of the parents or the school administrators should not be a concern to the police or to the old people in general. The police should have more important work to do than checking on drinking by young people.

Even the U.S. National Minimum Drinking Age Act of 1984 does not prohibit persons under 21 from drinking. It prohibits purchase or public possession. The term "public possession" in the Act is so narrowly defined that it does not apply to possession in private clubs or private establishments.

Many states that prohibit alcohol consumption by those under age 21 also have a variety of exceptions. For example, some states in the United States allow people under 21 to drink alcohol when a family member or relatives give consent and/or are present. Some states in the United States allow people under 21 to drink at all private locations in addition to private residences. When you start making many exceptions, you know that there is something wrong with the law.

Maybe I should not have talked about legal drinking age because even mentioning that may take all the fun out of drinking. However, my understanding is that the police in Korea rarely, if ever, check whether a drinking person is under the legal age. Go ahead and drink, but do not drink too much to lose your control.

 

No Way of Turning Back Globalization Clock

July 24, 2007
By Chang Se-moon

Do you know what is going on with the Korea-U.S. Free Trade Agreement? Many people call it KORUS FTA. We all heard about it, and will hear more about it. However, not too many people know exactly where it stands. Would it not be interesting to speculate what will happen to the FTA?

On June 30, the United States and South Korea signed the free-trade agreement. The signing does not mean that we now have an FTA between the two countries. The signed FTA will have to be approved by the National Assembly in Korea and the U.S. Congress to actually take effect.

You may find it interesting that the signing date, June 30, was not a coincidence. It was predictable. To understand why it was predictable, we need to look back about five years to 2002.

On August 6, 2002, President Bush signed the Trade Act of 2002. This Act contained the President's Trade Promotion Authority (TPA), under which future international trade agreements would be subject to an up-or-down vote in Congress. What this means is that members of the U.S. Congress cannot propose any changes to the agreement. All they can do is to accept it or reject it as proposed by the President.

What normally happens is that even if the majority of congressmen or women favor the agreement, a small number who represent areas that are directly and adversely affected by the agreement can kill the agreement by insisting amendments or changes to it.

By requiring members of the U.S. Congress to simply accept it or reject it without amendments, chances are much greater that these agreements, including the KORUS FTA, will be approved.

The President Trade Promotion Authority expired on July 1. To take advantage of the TPA, the KORUS FTA had to be signed by June 30. And it was. If any of you remember reading my articles on FTA in this column, you may recall that I emphasized the importance of concluding the negotiation on KORUS FTA before the end of June.

The reason was TPA. In fact, Korea is not alone. The U.S. also concluded free trade deals with Colombia, Panama and Peru ahead of June 30 deadline. My guess is that the Peru agreement is likely to come to a vote first, with Congressional action expected this summer.

Some of you may ask why the U.S. Congress does not simply renew the Authority beyond July 1. This is where all the ugly stuff is coming in. Ever since the war in Iraq turned from bad to worse, President Bush lost not only his popularity, but his political influence as well.

When the President Bush's Republican Party lost its congressional election last year and the Democrats took over control of the U.S. Congress, a red flag was raised on the future of the President's Trade Promotion Authority. Sure enough, the Democrats stated that the Trade Promotion Authority would not be renewed. It is not renewed.

Without TPA, the probability of the KORUS FTA being approved in the U.S. Congress is rather low. The current version of the KORUS FTA, however, is still covered by the TPA because it was signed before July 1 although it was only one day before July 1. Both Korea and the U.S. will have to make concessions to make sure that the FTA be approved without new negotiation. I think both countries will make it work because many good and competent people have been working on the agreement in both countries.

No Turning Back

I am aware of some in Korea who are strongly opposed to Korea's efforts to globalize its economy. Let me first tell you that free trade agreements are not the only trend of global economic cooperation these days. There are also economic partnership agreements (EPAs), which are less formal and less binding than FTAs.

The number of FTAs and EPAs was only 6 in 1970, but increased to 186 by the end of 2005. It is now more than 200. Korea's economic prosperity, and economic prosperity of any other country for that matter, would not have happened without participation in the economic globalization. You can imagine how China's economy will look if they cannot export their products.

There is no turning back from globalization. It is not just movement of goods and services crossing borders. People have been moving all over the places, also. According to Professor Richard B. Freeman of the Harvard University, no less than 23 percent of people in Australia are immigrants, while the percentage is also high at 18 percent in Canada and 12.4 percent in the United States.

In terms of absolute numbers, the United States has accepted the largest number of immigrants in recent years, followed by Russia because of the collapse of the Soviet empire that induced many people of Russian ancestry to move back to Russia. Kuwait has 49 percent foreign-born, while Israel has 37 percent foreign-born. Countries with the largest number of nationals living in other countries in recent years are China, India, and the Philippines.

Lately, economists have also found macroeconomic benefits from globalization. Globalization led to a more stable growth in real GDP, a lower rate of inflation, and higher labor productivity in many trading countries. Reasons cited for contributing toward these benefits are numerous. Globalization led to lower communication and transportation costs.

Rivalrous Consumption

Many of you make international calls as it is not a big deal. Many years back, people could not make international calls because they were too expensive. You all cannot live without cell phones, but you are not likely to have cell phones now without global competition and cooperation.

Globalization led to stronger competition that lowered prices and forced improvements in production technology. Globalization led to knowledge spillovers toward less developed countries. Globalization also spread non-rivalrous consumption in such products as television programs, movies, Internet, and more. Non-rivalrous consumption means that when you surf the websites on the Internet, you are not preventing others from surfing the same websites.

In other words, you are not a rival in surfing the websites. If you eat a watermelon, on the other hand, others cannot eat the same watermelon. You and others are rivals in eating the same watermelon. The iPhone that Apple introduced to the market only weeks ago is another example of rivalrous consumption.

To tell you the truth, I am not using any of the Blackberrys or iPhones because I think marginal benefits that I derive from these cute instruments are smaller than marginal costs of using them. In plain English, I am not crazy about making the monthly payment.

Regarding the future of the TPA, it will be renewed sooner or later. Like Korea, the U.S. cannot allow the rest of the world to pass by because that is what could happen if the U.S. does not renew it.

However, it may not be renewed until next year when a new president is elected in the United States.


Stricter Gun Control Needed

April 25, 2007
By Chang Se-moon

All would have heard by now about the March 16 tragedy in which Korean immigrant Cho Seung-hui killed 32 people and injured 26 others on the campus of Virginia Tech. Cho killed himself at the end of the rampage.

Why did it happen? If I gave him the benefit of doubt, Cho’s life turned in the wrong way and he became mentally ill while his parents worked hard to support him. Unlike most Korean immigrants who seem able to overcome language barriers and cultural differences in the U.S., Cho was not able to join normal friends in mainstream American society.

Knowing that the mass killings were premeditated for many months, however, I feel reluctant to give him that benefit of doubt. When you watch the video that he sent to NBC, I do not see how anyone can describe him as anything other than a cold-blooded murderer.

Who is responsible? I can tell you who are not more easily than those who are. Two persons who are not responsible are Cho’s father and mother. In Asian culture, Cho’s parents are almost as guilty as Cho himself. In American culture, Cho’s parents are not responsible for what Cho did at Virginia Tech campus.

No matter how you may look at it, it is the beauty of mainstream American society that they never criticized Cho’s parents in the continuing coverage of the massacre because all Americans believe that it was Cho’s fault, not the fault of his parents.

Well, who are responsible? I can tell you that unfortunately civil lawsuits will follow. I can see families of those who were gunned down by Cho filing lawsuits against many.

Potential defendants may include administrators of Virginia Tech regardless of how reasonably they may have handled the situation; mental health specialists who released Cho from custody and allowed him to return to campus; owners of the store that sold guns to Cho; manufacturers of the two guns that Cho used in killing; and eBay, through which Cho may have purchased bullet cartridges.

Lawsuits will primarily be of the wrongful death and injury type, which seek payment for the present value of lost future earnings, family expenses following the killing spree, and possibly the value of lost pleasure known as hedonic damages. It was ironic that Cho himself mentioned the term ``hedonic’’ in his video sent to NBC, and criticized hedonic values that the rich allegedly enjoyed.

How is Korea involved in this horrible tragedy? The negative impact on Korea of Cho’s killing spree is not expected to last long. However, America is a large country with over 300 million people, meaning that there might be exceptions. There is a small possibility that some may resent the event and attempt violent acts against Korean-American businesses, especially in places such as Los Angeles, Atlanta, and New York where clearly identifiable Koreatowns are well established.

What can Korean-American communities do to prevent any such action against Korean-American businesses and, possibly, Korean-American individuals? The best defense is for leaders of the Korean-American communities to understand that Korean-American businesses cannot be successful without those customers who might turn against them in times like this, and thus pursue cooperation and support of the communities in which these businesses are located.

Any efforts for Korean-American communities to cultivate a close relation with the host community have to be heart-felt and lasting to minimize any adverse actions that could be triggered by such insane acts as Cho’s killing spree.

What can the American people do to prevent such heinous actions from recurring? You cannot prevent such killing sprees from happening again without tighter gun control. In America, it is not going to happen. When practically anyone can buy a gun and in many states in the U.S everyone has the right to carry a gun in their car, it will happen again although the number killed may be less than those at Virginia Tech.

There are many Americans who feel strongly that guns should be more tightly controlled. There are also many Americans who love guns so much that they want individual rights to bear arms expanded.

These gun-loving Americans can never see the fact that without a gun at home and in the car, the Tennessee preacher’s wife would never have killed her husband while he was sleeping; and the Alabama lady would never have shot another lady for passing her SUV on I-65 near Birmingham.

Gun-loving Americans can never see the truth that the number of good people being killed by other good people with a gun is much greater than the number of bad people killed by good people with a gun for self protection. Gun-loving Americans can never see the possibility that good people should be willing to give up their guns before guns can be taken away from bad people.

Knowing American culture, guns will never be taken away from civilians in the United States. The least Americans can do to prevent such killing sprees from recurring would be serious efforts to make the purchase of guns much harder and the behavior of gun owners more tightly controlled.

I was disappointed to hear no one, including President George W. Bush, mention the possible tightening of gun ownership during the memorial for those who were killed by Cho. To me, meaningful memorials and eulogies will have to include a serious exploration of how society can minimize the availability of guns to civilians. When I heard nothing on gun control during the memorial at Virginia Tech, all speeches sounded so hollow and empty.


What Is Corporate Governance?

April 17, 2007
By Chang Se-moon

In 2005, the founder and former CEO of WorldCom, Bernard Ebers, was sentenced to 25 years in federal prison for fraud and conspiracy.

Unlike in Korea, there is no early release in the U.S. if someone is found guilty of violating federal laws as Mr. Ebers was. On March 5, this year, the U.S. Supreme Court turned down an appeal from Mr. Ebers rejecting his claim that he was denied a fair trial. Since Mr. Ebers was born in 1941, you can calculate how old he will be when he completes his 25-year sentence. He went to prison over the corporate governance issue.

Because of some dramatic revelations of mismanagement at large corporations worldwide, corporate governance has become an issue of enormous relevance in business and economics. In fact, it has become so important that some business professors are now specializing in the subject. In today’s article, we will study the basics of corporate governance.

Let us begin with the term corporate. Corporate is the adjectival form of corporation. Corporation is one of three forms of business organization, with the other two being sole proprietorship and partnership.

Sole proprietorship means one owner. The sole owner makes all the decisions and keeps all profits if the business is successful. The sole owner is also liable for all losses if the business is not doing well.

A partnership is a business owned by two or more owners, called partners. Partners make business decisions jointly, and keep all profits among themselves if their business is successful. All partners are also liable for losses if their business is not doing well. Partners are usually relatives; or close friends at least when they organize their partnership.

A corporation is something different. Corporations are owned by common stock holders. In small corporations, stockholders who are owners may also be managers just like sole proprietorships and partnerships. In large corporations, managers are usually hired by stockholders.

Corporate governance is the process by which corporations are directed and controlled. When large corporations are controlled by a small number of people, the issue of corporate governance becomes important because corporations can easily be manipulated to their benefit at the expense of public interest.

The problem is that there have been several major scandals involving governance of large corporations. In Korea, several hired managers and owner managers have been arrested for mismanagement. In the U.S. where laws are applied more objectively, there are cases where the law has dealt a heavy blow to former managers. Mr. Ebers of WorldCom is one such example.

Former CEO, Ken Lay, of Enron Corporation is another. Perhaps due to mental pressure incurred, Mr. Lay passed away soon after he was found guilty last year.

You may wonder why corporate governance matters and why rich managers violate laws. Let me answer the first question first. Suppose that the rich managers of a large corporation inflate the company’s profits.

When people notice the company’s profits have risen, the demand for the company’s stock increases and the price of the company’s stock goes up. These managers are then likely to receive a bonus worth millions of dollars since their performance is often measured by market prices of the company’s stock. Assume that you buy the company’s stock because of the rising price.

The rising stock price will not continue and is unlikely to remain high long because the higher price is based on false information. When the stock price falls, you lose money, while the rich managers have already cashed their bonus money.

Poor you were effectively forced to give money to rich managers because of their fraudulent behavior. Stated in simple terms, this is what happened at Enron and WorldCom.

In its Global Investor Opinion Survey of over 200 institutional investors, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. McKinsey defines a well-governed company as one that has mostly outside directors with no management ties, undertakes a formal evaluation of its directors, and is responsive to investors' requests for information on governance issues.

As you know, directors are the people who make sure that top-level managers do their jobs properly. The size of the premium, i.e., the extra amount that they are willing to pay for the stock, varies from 11% in Canadian companies to around 40% for companies where regulations are weaker such as in countries like Morocco, Egypt, and Russia.

Violators of corporate governance are mostly wealthy top-level managers. Why do rich people violate laws? It may be hard to believe, but I can tell you that rich people tend to be greedier than poor people. There are many rich people who are good and contribute to society. There are also many rich people who are morally questionable and try to be richer at the expense of poor people.

These corrupt people are everywhere including the U.S., Korea, and Italy. In the Winter 2007 issue of the Journal of Economic Perspectives, Professors Luca Enriques and Paolo Volpin wrote a story about the Parmalat company in Italy. The name may sound strange, but the story will be familiar to those who follow corporate scandals.

Calisto Tanzi inherited a small family business, called Parmalat, in the 1960s and the firm started a pattern of ever-accelerating growth. By the time it listed on the Milan stock exchange in 1989, Parmalat Finanziaria was the holding company of a group comprising 58 companies with aggregate sales of $720 million.

The Tanzi family was the controlling shareholder. They acquired many other businesses with total sales reaching almost $10 billion in 2002. Most of the acquisitions were financed with debt.

In 2002, the company’s annual report indicated a healthy $4.3 billion in cash against a $9.3 billion debt. The reality was that most of the cash reported in the balance sheet no longer existed.

They’d spent it. On December 8, 2002, Parmalat informed the market that it could not repay bonds that were maturing. When the company’s bond was downgraded to bottom level, the price of the company’s stock collapsed.

Meanwhile, the Italian securities and exchange commission asked the Bank of America where the company kept its $4.3 billion of cash. The Bank of America replied that there was no such account: Parmalat Finanziaria was declared insolvent, and Calisto Tanzi jailed.

Parmalat hid losses, overstated assets, recorded nonexistent assets, understated debts, forged bank documents, and diverted cash to the Tanzi family.

Unlike Enron and WorldCom where managers engaged in earnings’ manipulation and accounting irregularities to inflate stock prices, the Parmalat family took money from shareholders and creditors as if the money were their own.

Successful businesses cannot thrive if there is no economy in which they can grow. Without buyers, businesses would not be able to sell their products. Without government protection, these businesses would not be able to exist.

As businesses grow, it is important for owners of these businesses to remember that they owe society for the success of their businesses and that they should continue to abide by laws.
 

Classes in English Uneasy But Will Benefit Students

April 10, 2007
By Chang Se-moon

Students listen to a lecture in English at Sookmyung Women’s University. A growing number of universities plan to increase classes taught in English.

I recently found an interesting article in a Korean daily. The article was titled ``Lectures in English.’’ According to the article, all lectures at KAIST will be in English, starting with this year’s freshmen.

At Seoul National University, all freshmen starting from this year will have to take at least three classes taught in English as part of their graduation requirements. At Sogang University, all freshmen who enter the university this year and on will have to take at least four classes in English to graduate.

At Korea University, at least 60 percent of classes will be taught in English by year 2010, which is only three years from now. At Yonsei University, the percentage is lower at 40 percent also by year 2010. At Hanyang University, the percentage is lower at 20 percent also by 2010. Finally, at Pohang University, the percentage is higher at 100 percent. In other words, all classes at Pohang University will be taught in English by 2010.

Assuming that this report is all accurate, I do not know what to make out of the article. As a first step, let us think through some economic impacts such policy changes favoring lectures in English.

One impact would be an increase in demand for professors who can speak fluent English. The problem here is to find professors who can speak good English and at the same time academically qualified by having, say, several publications in academic journals. I can tell you that it would not be easy. When Korean students obtain a doctoral degree in English-speaking countries, their English is usually not that good at the time they receive the degree and they will have minimal, if any, publications.

The new policy will also make it difficult for those who obtain doctoral degrees in Korea to find teaching positions in Korea. There will be some who obtain a doctoral degree in Korea but speak good English. However, there will be a bias against them even before they are interviewed for the teaching position. In other words, there will be a decrease in demand for instructors who receive a doctoral degree from Korean universities. Possible long-term consequence may be that some Korean universities may not have enough students to continue their graduate program.

Another impact will be on textbooks. Demand for textbooks written in Korean will decrease and demand for textbooks written in English will increase. This means that the prices of textbooks written in English will increase. As it is, textbooks in the United States are terribly expensive, prompting many students to sell and buy used books that are also very expensive. Some schools turn to e-books to lower expenditure by students on textbooks.

Another impact would be on aging professors who have not spoken in English for a long time. There will be added pressure for them to retire early, either voluntarily or involuntarily. There may even be the development of private schools that teach professors how to teach in English. Many more professors will participate in overseas academic programs to refresh their English as well as their knowledge.

Another impact may involve educational technology that even those advocating policy changes may not foresee at this time. In a few years, new terminologies will appear at Korea’s universities. These terminologies will include on-line classes, e-text, on-line text, podcast, and so on. If the class size increases and it becomes difficult to find qualified professors who can teach in English, universities may try to save money by encouraging on-line teaching. In fact, leading universities in Korea will most likely establish or expand their departments of educational technology. The supply of these educational technologies by innovative Korean companies will soon follow.

Implications for students

The initial impact will be headache for everyone. Students will feel more tired because they will be trying to understand the contents of the lecture as well as the delivery of the lecture itself. When classes are taught in Korean, you only have to think about learning the contents of the lecture. Believe or not, professors will feel even more tired because they will have to prepare the contents of the lecture as well as how to deliver it in English. At least for a couple of years, both students and teachers will be sleeping better because both are tired.

After the initial learning curve passes over the peak, students will find it easier to understand many concepts and theories if these are developed in English-speaking countries. I have found academic terminologies to be difficult to understand when they are translated from English into Korean.

Some classes may preferably continue to be taught in Korean. It will be difficult to teach Korean history, Korean literature and art, and other classes that depend heavily on Korea’s culture.

Teaching them in English will have one benefit, however, in that they will have to be translated into English and provide an opportunity for appreciation of their value overseas. For example, Korean writers will never earn the Nobel Prize no matter how good they are until their work is properly translated and spread widely overseas.

Once students get over the peak of the learning curve and get used to taking classes in English, it is highly likely that they will become more competitive globally as those promoting lectures in English envision.

There are a couple of suggestions that I would like to make: one for students and the other for university administrators. It is important for students not to try to judge the quality of a professor’s teaching on the basis of how well the professor speaks English.

It is best if you leave the judgment of teaching quality to the university administrators and just trust your professors. I have seen many good professors who speak bad English, and many bad professors who speak good English. If you are suspicious of the professor’s ability to teach in English and act suspiciously, it will make both students and professors uncomfortable and eventually hurt both. Again, trust your professors, and enjoy the class.

For university administrators, I would like to suggest that you admit more foreign students and include at least one, possibly more, foreign student in each class that is taught in English. This will make professors feel more comfortable in delivering lectures in English and improve the overall classroom environment by forcing all students to speak in English also.
 

FTA: Inconvenient Necessity

March 30, 2007
By Chang Se-moon

This is the first in a series of articles highlighting the Korea-US FTA.
Interestingly, I noticed something strange about the FTA talks. The process of negotiation, especially leading up to the March conclusion, had been reported almost on a daily basis in leading Korean newspapers, but not in U.S. newspapers. I am a regular subscriber to the U.S. daily USA Today. I could not find any substantive article about the Korea-U.S. FTA trade talks in USA Today in March. I think this observation tells the whole story. An FTA between Korea and the U.S. is more important to Korea than it is to the United States. At least from the view of Korea, it is something that needs to be done like an inconvenient necessity.

As part of the Korea Economic Institute’s (KEI) ongoing efforts to provide information on the FTA., KEI has contracted a series of opinion surveys, seeking to learn the views of Americans who have an interest and knowledge of Korean affairs. The latest, posted on KEI’s web site, is based on interviews with 25 key individuals from December 14, 2006-January 9, 2007.

All 25 favored a successful conclusion of the FTA. Reasons for support were mostly long-term benefits for both countries such as the potential positive impact on both sides’ economy, strategic advantages for the U.S.-Korea alliance and a positive effect on overall Asian economic integration for the United States.

If we choose 25 key Koreans and ask the same questions, the majority will likely support the FTA but the support is not likely unanimous.

The greatest short-term benefits were aptly described by Lee Hong-shik, head of the FTA Research Team at the Korea Institute for International Economic Policy (KIEP), when he said, ``The most important point of the FTA is that Korea will enter the U.S. market earlier than other nations,’’ such as Japan, Taiwan and China.

Korea will clearly have advantages in bilateral trade with the United States by being able to expand its market share at the expense of Japan, Taiwan and China who are struggling to sign an FTA with the U.S.

If you are a supporter of close ties between North and South Korea, you should also like the FTA. Although Kaesong products may not be included in the FTA at this time, opportunities for including Kaesong products as part of South Korean exports subject to the FTA will arrive as soon as economic ties between Korea and the U.S. become stronger through the implementation of the agreement. Without the FTA, chances are small, if any, that any North Korean products would be exported to the U.S. market free of tariffs any time soon.

The FTA will cause a growing pain for some Korean companies that may be on the edge of comparative advantages with no room for setback of any type. We all know that negotiations on agriculture, rice, pharmaceuticals, beef, automobiles, textiles, financial services, investments, trade remedies and intellectual property rights have been difficult.

Some of these issues may still prove to pose themselves as major hurdles in Korea’s National Assembly and the U.S. Congress. Two key products are farm products and automobiles.

Korea is already a net importer of food, purchasing a large amount of it from the United States even if Korea’s agricultural tariffs average 52 percent, which is more than four times the U.S. average. Two of the most controversial farm products are rice and beef. Understandably, Korea wants to protect rice and cattle farmers.

From the U.S. viewpoint, however, all Americans eat American beef without a second thought. Americans wonder why Koreans do not want to eat the same beef that Americans have eaten for so many years with no problem. Ordinary Americans will also wonder what an FTA means if it does not include all products.

Farmers and policy makers in Korea can assist Korean producers of rice, beef and other agricultural products in that matter by differentiating their products. I can give you examples. I like Korean grapes. Imported grapes sold in Korea do not taste as good as Korean grapes.

In fact, I am willing to pay much more for Korean grapes than imported grapes. My problem was that I could not find Korean grapes when I was shopping at one of large department stores in Korea.

For another example, Koreans eat short grain rice. I know that there are many different brands of short grain rice. However, we all have our preferred brands and are willing to pay more for those particular brands.

A successful differentiation will not erase the pain from free trade, but will certainly reduce it. It is interesting to note that one of the respondents to the KEI survey suggests that the U.S. should not push too hard on the rice issue because ``Rice is the political third rail of South Korean politics.’’

Automobiles are another product that threatens the approval of the negotiated FTA. The U.S. requested that South Korea revise its tax system for imported cars based on engine displacement, alleging it discriminates against U.S.-made cars, which are generally larger than Korean cars.

Chances are that ordinary Americans will not know what engine displacement is. However, ordinary Americans know that they buy more than 800,000 Hyundais and Kias each year, but sell only about 4,000 American cars in Korea. When you look at it this way, perspectives seem to change dramatically.

From the view of Korean exporters to the U.S., the U.S. seems to invoke anti-dumping rules too quickly and too frequently against Korean products. Even economists agree that it is really difficult to prove that any product is really dumped or sold below the cost of production.

Although the monetary impact may not be large, Korea needs a concession on the issue from the U.S. to convince the skeptic Korean public that tangible gains were made in the FTA.

Virtually all experts agree that an FTA between Korea and the U.S. will benefit both countries in the long run. At least in the immediate future, however, the pain will be greater for Korean businesses than for American ones.

The reason is simple in that the U.S. market has been open to the world for so many years that an FTA with Korea will not pose much threat to any of its industries. In fact, when China became the 143rd member of the WTO on December 11, 2001, the U.S. Chamber of Commerce had an easy time in convincing the American public that China’s new membership will lower tariffs on American exports to China, but will not require lowering tariffs on Chinese exports to the U.S. because the U.S. had already granted most favored nation tariffs on imports from China.

Even for Korean businesses, the pain may not be as great as it is perceived by many Koreans since the Korean economy has been open to, and benefiting from, global competition for many years.

An FTA between Korea and the U.S. is a long-term necessity for both countries, but a short-term inconvenience to some, but not many, Korean businesses. All things considered, the time is now to ratify the negotiated FTA.

For the U.S., the incumbent Republican administration would be more accommodating to the deal than the likely Democratic administration following the November election. The political leadership is even more needed in Korea because a series of protests will be staged in the streets of Korea. Korea did very well in managing the FTA with Chile. I have no doubt that Korea will also do well in having the FTA approved and implemented successfully.

The enhanced sense of security following the FTA’s approval will make Korea more attractive for foreign investment. As a couple of KEI panelists stated, ``trade agreements like this have the effect of fortifying relations between the two countries.’’
 

Beauty of Product Differentiation


March 27, 2007
By Chang Se-moon

Companies make their products different from other rivals to be able to target specific customers and take a greater market share. MP3 player makers continue to strive to produce unique players with differentiated designs.
Economists coined the word ``product differentiation’’ in the 1930s. These days, the term appears to be more popular among marketing people than among economists. Let’s go over what product differentiation is and how it can be applied to real life.
Stated in simple terms, product differentiation is a strategy that businesses use to make their products a little more appealing to consumers than their competitors’ products. The important truth is that product differentiation depends ultimately on the minds of consumers.

Consider Samsung MP3 player and Sony brand MP3 players. If you feel that they are just about the same and you would be happy to have either of them, the two brands are not differentiated. When products are not differentiated, economists say they are homogenous or standardized. If products are homogeneous, that is, if you feel that the two brands of MP3 player are equally attractive, you then will buy whichever is cheaper. If, on the other hand, you feel that Samsung is better than Sony, the two brands of MP3 player are differentiated in favor of the Samsung brand. In this case, you will buy the Samsung one. It is always possible that you may prefer Samsung, while your friend in Japan may prefer Sony.

Why is product differentiation important? If many people prefer one brand such as Samsung to other brands such as Sony or Apple, Samsung can and will raise the price of their MP3 players. In other words, the whole idea of product differentiation is to make more people like your brand so that you can raise the price of your product. Using another economic terminology, when a product is differentiated in its favor, the demand for the product becomes less elastic, allowing the seller to raise the price.

Product differentiation depends ultimately on the minds of consumers. Consider pure aspirin. The famous Consumer Reports magazine reports that there are more than 400 different brands of pure aspirin. Note that these are pure aspirin, and do not include many good medicines like Advil, Aleve, Motrin and others that people take for pain. The Consumer Reports also reports that the ingredients of pure aspirin are just about identical, meaning that all aspirins are more or less equally effective. However, Bayer did a wonderful job in convincing consumers that ``Bayer works wonders.’’ Consequently, Bayer dominates the aspirin market even though the price of Bayer aspirin is higher than those of other competing brands.

The question that many businesses want to know the answers to is how they can differentiate their products. The general answer is non-price competition. In other words, all kinds of strategies other than lowering the price of the product are employed to differentiate their products. There are several non-price strategies that businesses employ to differentiate their products.

One is advertising. Effective advertising will convince buyers that their product is better than its competing substitutes. It is not really easy to come up with truly effective advertising. This is because advertising specialists have their own tunnel vision that may not necessarily reflect the views of the consumers. I have seen many TV commercials that turned me off rather than turned me on to the product. Some TV commercials look cute, but I do not see how it can attract more consumers to buy the product.

The other important tool for non-price competition is an improvement in the quality of the product. You have to have a good product for the advertising to have a long-term positive impact. The key to holding onto loyal buyers is to have a product that is good and, hopefully, better than its substitutes. Sometimes, businesses simply re-package their products using more attractive colors and designs for the same product. This will work only if the product was good to begin with.

Another tool is services. Even if the product is good and its advertising is highly effective in attracting consumer attention, bad services may negate all that and push customers away from the product. In my personal experience, for instance, I bought a Toyota Camry based on recommendations of the Consumer Reports. When I had problems and brought my Camry to the local Toyota dealership, they never failed to find something new that needed to be fixed. Finally, one day I asked whether my car would stop on the road if I did not have the new problem fixed on that day. I think the problem is that the particular Toyota dealership used the service department as a profit center, not as a service center.

Eventually, I sold the Camry. Based on all different reports, I know that Toyota is an excellent brand, but I have not bought another Toyota since then. What was bothering me was that when I went to the dealership with a problem, they pushed for more repairs that might not always have been needed. In contrast, when I brought my Benz to the local dealership for a 5,000-mile oil change, they refused to do it by telling me that I did not need an oil change for another 5,000 miles.

Services at retail stores such as department stores are also very important. I found sales girls at the Lotte Department Store near Myong-dong to be very pleasant and efficient. I also found sales girls at Insa-dong gift stores to be very pleasant and efficient. I left these stores with a smile and determination to go back.

Product differentiation is also very much pronounced in restaurants. There are many Chinese restaurants, but not many of them can prepare tasty Jjajangmyun. There are many Korean restaurants, but not many of them can prepare tasty Naingmyun. Food lovers constantly exchange information on which restaurant is the best for certain types of food. Opinions of food lovers are all subjective and biased to their own taste, making it difficult for restaurant owners to differentiate their food products.

As the world increasingly globalizes, product differentiation has a national significance. When one Korean company sells a poor quality product in the world market, it affects not only the company’s product, but also products of other Korean companies. Many customers will say that Korean products are bad rather than the company’s products are bad. In recent years, many Korean products have earned an excellent reputation worldwide. These products include Hyundai automobiles, Samsung electronic products, Hankook tires, Assi food and many more. It is important to sustain a good reputation for all Korean products in the world market.

Product differentiation applies not only to businesses, but also to all of you individually. When you look for a job, you need to differentiate yourself somehow to attract the attention of prospective employers. Once you are employed, you need to differentiate yourself somehow to attract the attention of your supervisors. Product differentiation in the labor market is often referred to as competitive edge. In modern life, product differentiation is something that all businesses constantly pursue for more profits.
 

How Can You Do Better on Economics Exams?


March 20, 2007
By Chang Se-moon

I teach the principles of economics. In fact, I enjoy the teaching principles of economics. Although I have been teaching it for many years, one question is still bugging me. Why are students doing so poorly in exams, especially their first examination in economics? I am sure we all can think of hundreds of reasons why students are not doing well in the first economics examination. In today's article, I will give you my explanations. If you have any better ideas, please let me know.

I think students underestimate the amount of time that they need to spend to adequately prepare for exams. Some students have to earn money to pay for college and thus do not have enough time to study. Some students are active in many on and off-campus activities, leaving little time to study. Others may simply start too late studying for exams.

It is also possible that the exams are too difficult. Professors teach the same concepts over and over again. When you repeat something many times, it becomes easy. Exam questions should be easy for professors because they have asked the same or similar questions so many times in the past. In other words, it is difficult for professors to put themselves in the position of students and try to answer the examination questions from the students' view. My guess is that you like this explanation, which blames professors, better than the first ones, which blames students.

Still another explanation may well be that economic concepts are too difficult at least for students who take economics classes for the first time. I have to admit that when I went to the Seoul National University to major in economics, I had no idea what economics was all about. I went there because economics and law were the most popular fields for high school seniors when I went to college.

If you relax and think about it, some of the basic concepts in economics are really not that difficult. They simply describe our daily lives. In fact, people who have never taken economics classes use economic terminology all the time. For example, if you want to buy pants or socks really cheaply, you will probably go to Namdaemun or Dongdaemun Markets. Well, economists also use the term ``market''. You pay a price for your choice of pants and socks. Economists also call this a ``price.''

If you are not in the mood to pay the price that sellers charge, you negotiate the price down. Economists call the negotiated lower price a `discount price.'' Economists also call the price an ``equilibrium price'' in the sense that at the negotiated price, sellers are happy and you are happy. When the negotiation is done freely by you as a buyer and store owner as a seller, economists call the negotiation process a ``competitive market'' or ``flexible prices.''

A market is a place where there are many sellers and buyers. When you look around at Namdaemun Market, you will notice that you are not the only one who wants to buy pants and socks. There are others. All the pants and socks that all buyers want to buy are called ``market demand.'' All the pants and socks that all sellers want to sell are called ``market supply.'' The market price is determined by market supply and demand. When the market is highly competitive so that everyone knows who is selling what products at what price, we have something close to a perfectly competitive market. Prices that are determined in a competitive market are equilibrium prices, whereas prices that are determined in a real market are market prices. Real market is not necessarily highly competitive because buyers do not know which sellers are selling the same products at what prices. This is why you walk around the streets of Namdaemun Market before you actually buy what you want. You have an information gap and try to gather as much information as you can before you make a decision. As you know, shoppers at Namdaemun Market often walk around the same street several times to compare prices and the quality of products.

When you look at the marketplace this way, economics does not seem to be such a difficult subject. You may wonder, then, why exams have to be so hard. Now you have to understand something else. There is a difference between an educated person and an uneducated person. The difference is that an educated person should be able to generalize what may appear to be independent events to an uneducated person.

An uneducated person may observe that there are many sellers of pants and socks at Namdaemun Market and prices are low. An educated person, on the other hand, should be able to understand that the prices are low because the supply of pants and socks is greater than their demand at the market. When you generalize, you will be able to predict and find solutions when problems arise.

For instance, when the price of apartments rises in Kangnam, the first thought that may come to uneducated people is to buy apartments before prices increase further, or buy apartments now and sell them later at higher prices. Educated people think beyond that. At least, we hope that they do. Educated people will try to figure out what factors are causing prices to go up and what will happen to these factors in the future. Educated policymakers, in particular, will think further to see how the supply can be increased and the demand can be decreased to slow down price increases.

This is where exams come in. The process of generalizing real observations requires the ability to think in abstract terms and develop a theory. In the case of supply and demand, an increase in supply lowers prices while an increase in demand raises them. We of course assume “ceteris paribus”, meaning that all other factors are assumed to stay the same. What happens to market prices depends on the direction of the simultaneous changes of supply and demand. If supply increases more than demand, prices fall. If demand increases more than supply, prices rise. We then need to figure out what underlying factors cause supply and demand to change. When you reach this point, you realize that you need to read the textbook more carefully.

To me, the best way to study for exams is to read ahead. When you read chapters before they are explained in class, you can understand the lecture better. In addition, you will be able to figure out what was bothering you when you were reading the chapters before they were covered in class. This will lead you to ask meaningful questions during class. I have always noticed that the harder students study, the more questions they have.

There is a saying that ``ignorance is bliss.'' If you do not even know what the problem is, there is nothing for you to worry about. Real life does not work that way. Real life works more like Murphy's law: ``If anything can go wrong, it will, and usually at the most inopportune moment.'' Murphy's law is believed to have originated at Edwards Air Force Base in 1948 and named after Major Edward A. Murphy, Jr., a development engineer at the Air Force base in California. If you are not sure about Murphy's law, think about this. When do you usually find out that your iPod or car battery is dead? Only fools allow no room for error, or pursue a just-in-time lifestyle. If you want to be safe, be prepared. If you want to do well on exams, you need to prepare well in advance.

 

Korea Ten Years From Now


March 13, 2007
By Chang Se-moon

Did you all read the report about Korea ten years from now, produced by the Progressive Politics Institute in Korea earlier this year? The report was written in Korean and titled ``Korean Society to Be Divided into Two Extreme Factions in 2017.’’ I think it is an interesting and provocative document, pointing out ten areas in which Korean society will be divided into two opposing groups. Since critical thinking is very important in economics, it should be fun to review the ten areas from the view of basic economic concepts. Let us make it clear in the beginning that our intention is not to criticize the report, but to show that there can be different points of view.

Proposition one of the report states that a free trade agreement between Korea and the U.S. will lead to the second economic crisis in Korea, with the 1997 IMF crisis being the first one. As we studied in the past in this column, a free trade agreement between Korea and the U.S. is very important for long-term prosperity of the Korean economy. In fact, a free trade agreement between the two countries is more important to Korea than it is to the United States. This is because the U.S. market is more important to Korean exports than the Korean market to the U.S. exports. An FTA between Korea and the U.S. is likely to lower the probability of Korea having an economic crisis rather than raising it.

Proposition two of the report states that all female workers will become part-time workers in the service industry. The key here is whether job opportunities for Korean females will be worse ten years from now than they are now. This is highly unlikely. The level of education for females in Korea has been rising. As the level of education for Korean females rises, their productivity also rises. As the productivity of Korean female workers rises, they become more important to employers. The current state of many Korean females working in the service sector is in large part due to the lower level of education of Korean females in the past as well as the male-dominated culture of Korean society. Both have been changing for the better, and it is not likely that the trend will be reversed. Korea has a female prime minister. There are many more sexual harassment complaints and lawsuits. These are all signs of improvement for the social status of Korean females.

Proposition three states that there will be two classes of home ownership ten years from now in Korea: those who own homes and those who do not. The ultimate source of the Korea’s housing problem is the imbalance between supply and demand. An increase in supply will lower the price, while a demand greater than supply will cause prices to go up. Shortsighted policies may well make the housing problem worse. Appropriate policies that will increase construction of more apartments and reduce speculative demand are likely to ease the housing problem over the next ten years.

Proposition four states that Korea will have two classes of people in terms of language: those who speak Korean and those who speak English. Worse yet, proposition four states that those in upper income classes will speak English, while those in lower income classes will speak Korean. The report also states that only English is spoken during many important government and corporate meetings because most participants of these meetings were trained in the United States.

There are two problems with this proposition. One is that most people who are trained in the U.S. speak Konglish (Korean English), not English. It is rare for me to meet Korean people who speak good English even among those who are trained in the United States. The other problem is that language requirements run both ways. Many Koreans who are in global contact have to learn English because it is a global language. One the other hand, many foreigners who trade with Koreans need to learn Korean. As the Korean economy grows further, more foreigners will learn and speak Korean. The issue is not Korean vs. English, but Korean and English.

Proposition five states that there will be two types of Korean elderly ten years from now: those who have pensions and those who do not. This is an issue of income distribution. Many educated and wealthy Koreans argue that any savings should be used for re-investment, not for distribution from the rich to the poor. On this issue, I tend to agree with the view of the Progressive Politics Institute in the sense that Korea needs to develop a better safety net so that no elderly person will go hungry ten years from now. However, there will be too many old folks who will fall between the two groups to claim that there will be two distinct groups of Korean elderly ten years from now. A third group may be comprised of those who have pensions but with not enough money.

Proposition six of the report states that, ten years from now, Koreans will be divided between those who want to align with the U.S. and those who want to align with China. This one is difficult to predict because the outcome involves North Korea, Japan, the relationship between China and the U.S., and Korea’s economic ties with China and the United States. Ten years from now, it would still be impossible for Korea to stand alone in terms of national security. This suggests that Korea may need both the support of a close relationship with China as well as with the United States.

Proposition seven of the report states that Korea will have to develop nuclear weapons and competition among North East Asian countries for nuclear dominance will get worse. This may be an issue of benefits and costs. A realistic alternative is to strengthen the alliance with the U.S. so that Korea can continue to be protected under the U.S. security umbrella that has so far served well for Korea’s miraculous economic progress. This alternative requires the Korean government to discourage anti-American sentiment because the U.S. is not likely to continue to provide the nuclear umbrella against rising anti-Americanism. The other alternative is to join the nuclear race that may make losers out of everyone.

Proposition eight states that the Kang-nam area of Seoul will become a separate city, thus dividing Seoul into two: rich Kang-nam and poor Kang-buk. Kang-nam may have more rich people and more karaoke bars than Kang-buk, but the problem with Kang-nam is that all the historic and cultural attractions are located in Kang-buk. If Kang-nam does become a separate city, there are some measures that Kang-buk can undertake. For instance, Kang-buk may levy a toll for crossing the bridges over the Han River or levy new sales tax on visitors to counter possibly decreasing tax revenues.

Proposition nine of the report states that there will be a massive movement toward granting citizenship to foreign workers who migrate to Korea. There is nothing wrong with this movement. Just think of the way Japan has treated Koreans who were forced to live in Japan since the days of Japanese occupation. If Koreans hate Japanese for their refusal to grant Japanese citizenship to Koreans who have lived in Japan for a long time, shouldn’t Korea grant citizenship to foreign workers who have lived in Korea for a long time? Anyone who is against granting citizenship to foreign workers who have lived in Korea for many years is totally behind the changing times.

Proposition ten of the report states that because economic and political power is concentrated in the hands of the conservatives, there will be many Koreans who are poor and discontented. The report further states that this will lead to a major social upheaval ten years from now. I doubt that this will happen. The liberals have held power for the past five years under the leadership of President Roh. If opinions of taxi drivers are any indication, the level of complaints among the poor appears to have increased, not decreased, under the government of the liberals. Progress depends on how the incumbent leaders lead the country, not on whether the incumbent leaders are conservatives or liberals.

 

Will North Korea Honor Pledge This Time?

 

February 20, 2007
By Chang Se-moon

A South Korean police officer walks by North Korea’s Scud-B missile, green center, and other South Korean missiles at the Korea War Memorial Museum in Seoul. North Korea agreed last week after arduous talks to shut down its main nuclear reactor and eventually dismantle its atomic weapons program, just four months after the Stalinist state shocked the world by testing a nuclear weapon./ AP-Yonhap
I am writing this article only for the young readers of the Korea Times. When I say young readers, I mean everyone who is younger than 20 years old. If you are 20 years old or over, you have to be young at heart so that you do not have any strong pre-conceived opinions on the issue.
The issue that I want us to think about is the joint resolution that was released on Feb. 13 by the representatives of the six countries who met in Beijing to solve the North Korean nuclear issue. The key may well be the issue of economic incentives.

Do you know that old people act crazily and stubbornly? Maybe not all of them, but most of them do. The unfortunate thing is that old people control everything. They have all the money. They have all the power. Besides, they all think they are right, leaving not much room for compromise.

The real story about the six-party resolution began many years before you were all born. It began on June 25, 1950 when an old man named Kim Il-sung in the North invaded the South.

Why he had to start a war instead of trying some peaceful means of unification is incomprehensible. As I said earlier, it is typical of old people. Kim Il-sung had a strong opinion on how the two Koreas should be unified and never had the decency to try through negotiation.

The war he started eventually killed more than one million people. Does it make sense to you? It doesn’t to me. When the war ended with no one clearly winning, Kim Il-sung had a Korean Air plane blown up in midair on Nov. 29, 1987, killing 115 people. No one knows why he did it. Again, he was an old man acting crazy.

You probably know that all old people die sooner or later. Kim Il-sung died and his son, Kim Jong-il took over all the powers in the reclusive North. That transfer of power took place on July 9, 1994. Even before this transfer of power, however, the North had been working on a nuclear program. Why they had to develop nuclear stuff is beyond us.

Its development, however, raised the level of concern among many old people, including old people in the United States. On Oct. 21, 1994, therefore, the U.S. and the North concluded four months of negotiations by adopting the so-called Agreed Framework. The North agreed to freeze and eventually eliminate its nuclear facilities, while the South and the U.S. agreed to supply two light-water reactors and annual shipments of heavy fuel oil during construction of the reactors.

Are you still thinking about old men being crazy and stubborn? Well, the North cheated, proving our point that old men are crazy. Old men in the U.S. and the South were not much better. These leaders never thought about going a step further by providing economic assistance to the North that was more symbolic than substance.

Substantial economic assistance may have allowed the U.S. and the South to request a tighter monitoring of the agreements made in the Agreed Framework. To be honest, old people in the North may still have cheated. They may not. We never know. In any case, old men in the South and the U.S. look as if they were just old with no vision.

The six party meeting that led to the Feb. 13 resolution began in 2003. In the beginning, it was a three-party gathering among the U.S., North Korea and China. Can you imagine why South Korea was not included in the talks? Old men in the North were crazy enough to think that the South had no real power and insisted that the South be excluded from the talks.

At least at the time, old men in the U.S. and China were also crazy enough to agree with old people in the North by excluding the South from the talks. Old people in the South could only whine and dine.

More likely, they were dining and whining. Later in 2003, the three-party talks were expanded to include South Korea, Russia and Japan to make it a six-party talk. Perhaps, once in a while, even old people seem to realize that they cannot stay crazy all the time.

We have said old people are crazy. It appears that as people get older they become crazier. Let me take it back. As people get older, they become really crazy, not just crazier. Let me tell you why I am saying that.

Yellow handkerchiefs are displayed on a pine tree at the Imjingak Pavilion, near the demilitarized zone (DMZ) of Panmunjom to publicize the plight of South Koreans believed kidnapped by North Korea./ AP Yonhap
On July 5, 2006, North Korea test-launched seven missiles, of which one was the long-range Taepodong-2 type. Let me tell you how crazy old men are. The first missile was fired at 3:32 a.m., local time. Asiana flight OZ 235, from Chicago to Incheon International Airport, flew across the air space between 2:30-3:10 a.m. Old men in North Korea could not care less about Asiana passengers.
They proved many times in the past that they could not care less about human lives except their own. Old men in South Korea knew the test was coming but did not bother informing Asiana. At least that is the report I read in Korean newspapers.

It was getting worse. On Oct. 9, 2006, the North conducted an underground nuclear bomb test. Now, everyone acted crazy. Old men in the South were telling South Korean people that the North’s nuclear bomb would never target the South.

Assuming that a war breaks out in the Korean Peninsular and that the North requests the South to force U.S. soldiers out of South Korea, what will the South do? Will South Korea say yes to the North, thus fighting the U.S. that has protected the South for over 60 years?

Will the South say no to the North, still believing that the North will not use the big bomb on South Korean soil? In fact, old men in the entire world felt so worried that they passed a unanimous resolution condemning the North’s testing of a nuclear bomb. Passing the resolution may have helped old people sleep better because the resolution itself meant little, if any.

On Feb. 8, old men from the six party countries met again. Apparently old men in the North realized how bad their economy was becoming. The North has an annual average trade deficit of $800 million to $1 billion. With mounting economic sanctions, old men in the North found it increasingly difficult to finance its trade deficit.

Without payments, other countries were refusing to sell what the North needed. Maybe, old men in the North had a trouble in getting American videos or French cognac. They are well known to love these western products.

On the other hand, old men in the five other countries seem to have realized the urgency of resolving the issue before the North makes many more nuclear bombs. February this year appears to be one of those rare times when old men everywhere seemed to come back to their senses, a little bit.

In a surprisingly fast fashion, they issued a resolution in which the U.S. and four other nations promised to supply fuel oil and other economic support to the North in return for its promise to disable its nuclear facilities.

I am not sure how long the old men from the six countries will be able to keep their senses before they go back to being crazy.

The only thing that we can do is to hope that the old men in the U.S. and four other countries remain sober enough to offer not only the removal of the North from the U.S. list of states sponsoring terrorism, but also restoring the Most Favored Nation tariff status to the North’s exports as well as offering a large amount of economic assistance, possibly through direct investment in facilities, that can make a real difference in the quality of life for North Korean people.

We are also hoping that the old men in the North remain sober enough to get rid of all nuclear weapons, allow a close monitoring of their compliance, improve human rights, and begin a serious discussion of a peaceful unification with the South through a democratic process. Do you think they will?

 

Benefits and Costs of Studying Abroad While Young


Februaury 6, 2007
By Chang Se-moon

An analytical tool in economics that can be quite useful in decision-making is cost-benefit analysis. Stated in simple terms, the cost-benefit analysis means that we calculate the benefits and the costs of a decision. If benefits are greater than costs, we decide to go ahead and take action. If costs are greater than benefits, we decide not to go ahead. Cost-benefit analysis has a wide range of applications.
In private investment, such as whether Hyundai should open another car manufacturing facility in China, the cost-benefit analysis takes the form of a net present value approach. In the net present value approach, Hyundai projects all future revenues from the proposed new facility in China, converts all projected future revenues to today’s prices and adds them up. The present value of all future projected revenues is the benefit from building the factory. The benefit then is compared to the cost of building the plant. If the benefit is greater than the cost, Hyundai should go ahead and build it. If the benefit is smaller than the cost, Hyundai should not build it.

Sometimes, benefits and costs cannot all be calculated in numbers. In this case, the cost-benefit analysis can still be useful. What you can do is list all the benefits and the costs. Even if many of these benefit and cost items cannot be calculated, the listing alone can be a big help in making decisions. In today’s article, we will do exactly that by listing some benefits and costs of studying in other countries when the students are young or very young.

Not only has the number of young Koreans going abroad to study been increasing rapidly, but the number of countries that young Koreans go to for study has also been increasing. These countries include the United States, Canada, China, Japan, Britain, South Africa, Fiji, Australia, France, India, South American countries, Southeast Asian countries and others.

Let us go over some factors that need to be considered for calculation of the benefits and the costs of studying abroad while students are young.

The first factor is language. As the Korean economy plays a greater role in global trade and politics, the needs for workers who can speak foreign languages fluently are bound to increase. Clearly, learning a foreign language is a major benefit. After all, what better place is there than the country in which the language you want to learn is spoken? There is a problem, however.

If a student is very young when he or she is sent abroad, there is no doubt that the student will learn foreign language quickly because younger students seem to have a greater ability to learn foreign languages. The other side of the coin is that very young students can easily forget the Korean language.

Even if young students have a greater ability of picking up foreign language quickly, sometimes parents become overly ambitious and burden their young children with worries that they may not be able to handle. Let me give you an example. This is a true story.

A young couple arrived in the United States to go to a graduate school. They had an 8-year-old son. The parents knew that their son could handle algebra better than American students and thus enrolled him at the grade level at which 8-year-old students were enrolled. Remember that the boy just arrived. The problem here is that at least during the first six months, if not longer, the 8-year-old Korean boy must have had a hard time understanding what the teacher was saying in class. Quite often, the boy could not pay attention to the teacher because he was not able to understand what the teacher was talking about. This led to misunderstanding, and the teacher gave warnings to the boy’s parents.

It is not that the boy behaved badly. The boy simply could not understand the language and thus was unable to follow the teacher’s instructions. If parents send their young sons or daughters to other countries for language training, it is wise to put them, at least at first, in places where they can learn language without having to compete in other areas. Once the youngsters learn the basic language, they may then be placed in schools in which they will have to compete.

When college-aged students go abroad to study a language, there is a new set of challenges. Perhaps the biggest challenge is that these students and their parents may assume that students will learn the foreign language simply because they are in another country. This is clearly a false assumption. Korean students tend to stay together in other countries. They eat together, play together and travel together. The only time they are exposed to the foreign language is when they are in class.

Part of the problem is that many Korean students who go abroad to study a language tend to go to colleges in large cities where there are many Koreans. I remember the response from a Korean mother when I suggested that she send her daughter to a southern city in the United States. She said that she did not want her daughter to learn a southern accent. She did not understand that English with a southern accent is better than English with a Korean accent. The reality is that not too many teachers at colleges have a strong regional accent.

So far in this article, we talked about language. The second factor is culture. Language is part of a culture. You really cannot learn a foreign language without learning the country’s culture. You cannot learn culture simply by reading books. You need to interact with people and try to experience the way people in your host country live. When you do that, the benefits are to learn language quicker and to learn culture as well. If you are a quiet person and prefer to stay away from other people, you may have to be more friendly and start a conversation with other people. Especially if your mood changes often, that is, if you are a moody person, life in another country may be a good opportunity to improve your personality a little by being more open and pleasant.

The third factor is costs. Costs also depend on the age of Korean students who go abroad for study. When I say costs, I do not mean actual educational expenses that everyone understands. When I say costs, I mean non-monetary costs that both parents and students have to think about. These costs are called implicit costs, as opposed to explicit costs such as tuition, rent and other cash outlays.

For the very young students who are sent to other countries to learn a language, some things can become really complicated if the student returns to Korea after two to five years of staying abroad. These students can be behind their age group in many areas. When I asked the parents of these young students about this problem, they said their children would be placed in foreign language schools in Korea. No one knows what the future will hold for these students. I have no idea of whether these young students are better off or worse off.

For college-aged students, the path appears straight. If you want to stay for a year or two to learn a language, you need to stay with people who speak the language. You need to watch local news in the local language and read local newspapers. If you want to get a degree, you need to choose a field that is in demand. This advice is especially important if you plan to stay in the country where you are studying the language. Many countries have become more restrictive in hiring foreign students since Sept. 11, 2001, because of the threat of terrorism. Even if it may take a year or two longer, you need to choose a field that can give you an advantage in the job market.

I am sure that this discussion is a headache to those of you who study overseas or are considering studying overseas. The key is to accept it as a challenge, not as a headache, and move on.

 

Domestic Violence Entails Economic Costs


January 30, 2007
By Chang Se-moon

I have to confess that I did not know who Lee Min-young and Lee Chan were until their stories started appearing in Korean newspapers and Web Sites. I started reading their stories with interest because I know that their fight is not just a fight between the two TV stars, but a classic case of domestic violence that has been widely ignored in Korean society.
Experts on domestic violence agree that it is all about power and control. The abuser, who is usually the male, wants to control the abused, who is usually the female. Domestic violence encompasses a range of abusive behavior that may be physical, sexual, and emotional.

From the criminal justice perspective, domestic violence may be defined narrowly as an act by a member of a family or household against another member that is intended to result in physical harm, bodily injury, assault, or a threat that reasonably places the member in fear of imminent physical harm.

Going back to the case, I was able to gather the following from reported articles. They held a wedding ceremony on Dec. 10. The actress claimed that the actor had beaten her up, kicking her in the stomach and causing internal bleeding. The actor denied the allegations that he kicked her in the stomach, calling it a lie. The actress had been in the hospital with her nose broken. I saw her picture on the Internet. There was the death of an unborn baby.

The actress claims that the death was a miscarriage caused by the actor’s physical violence, while the actor claims that the death was an abortion carried out intentionally by the actress. In his defense, the actor admitted slapping her, but he also claimed she slapped him too. He completely denied kicking her in the stomach. So the story continues.

You may not realize, but domestic violence does incur many different types of costs. These costs are known as opportunity costs in economics. Let me tell you what opportunity costs are generated when he hit the actress.

As an actress, Lee must have earnings that she had to give up because she had been beaten up and thus become sick. All these lost earnings are economic costs. If the victim is hospitalized, there are hospital expenses. If there are legal disputes arising from the violence, as there seem to be in this case, there are legal expenses to be paid.

All these costs incur to the abused and her family, and are properly called private costs of domestic violence. These private costs can be calculated accurately. When all private costs are added, the total amount can be very high. You cannot just ignore these costs. Someone has to pay. That is not all. Domestic violence also incurs social costs.

If a community, such as the city government of Seoul, is serious about fighting back domestic violence, Seoul’s law enforcement officers need numerous equipments that they have to have in order to prove that there was a violent behavior.

The types of equipment needed for successful prosecution include digital cameras, memory cards for each camera, photo printer, supplies, Dragon software, phone recorders for victims, cell phones for victims, independent contractors for victim assistance, training videos and books, and photographic envelopes for preserving evidence. These can easily add up to about $100,000, or 100 million won. These do not even include any personnel expenses.

If the local community such as the city governments of Seoul, Pusan, Inchon or any other place really wants to take care of domestic violence, there are a number of important actions that these communities should undertake. They all cost money.

First of all, we need a specialized domestic violence court. Advantages of having a specialized domestic violence court include easy accessibility for victims, greater expertise to understand the issues, greater accountability, consistency in case handling, timely responses, and the sending of a message to the community. The court needs a judge or two, several staff members, and court security because the abuser tends to be violent. The court also needs office space to be used as a courtroom and a waiting room. It costs money to set up a specialized domestic violence court. In facts, it costs a lot of money.

Secondly, there is a very interesting issue involving domestic violence. In Korea, usually when there is violence between two people, the abused has to complain to the police for the police to arrest and prosecute the abuser. For instance, Lee Min-young has to ask the police to arrest the actor.

Many thoughtful people working in the field of domestic violence believe that the abused would be reluctant to ask the police to arrest the abuser, who usually is her husband or boyfriend. If you ask the victim whether her violent husband should be arrested, the abused wife is likely to say no. She may be afraid that her companion will beat her again because she agreed to have them arrested. Or, she may honestly believe that her husband or boyfriend will change.

Many states in the United States, therefore, have authorized law enforcement officers to carry out mandatory arrest of offenders of domestic violence without complaints from the abused. In other words, the police arrest the abuser as soon as the police find any evidence of abuse.

Arresting the abuser male without the consent of the abused female is a good idea because it protects the abused from future violence. Study after study indicates that the violent behavior is not likely to change without severe punishment or in-depth counseling. Again, it costs money because arresting someone requires a space in the jail, staff to guard the jail, and people to process the case through the legal system.

Finally, especially in a domestically violent society like Korea, there is a need for a shelter. The abuser in domestic violence tends to be relentless, chasing his victim to the end. Many communities in the United States have a shelter that houses victims of domestic violence. The location of the shelter is unknown to the general public, and the shelter is fenced with locks, almost like a jail. Communities need a shelter that can protect abused females from the abuser. Again, it costs money to prepare a good shelter. If communities truly want to prevent domestic violence, these communities should spend enough money to develop meaningful plans to prevent domestic violence and protect the victims. There is no such thing as a free lunch.

This is the way I see the violent confrontation between the actor and actress. No matter what the reasons may be, stronger partners should never hit or slap or harm the weaker partners such as Lee Min-young. I do not know the details of why they had a fight.

Honestly, I do not care. Whatever differences in opinions they may have had, they should have resolved their differences non-violently. Once the actor admits that he slapped the actress, I simply do not believe anything he says after that. He is the abuser and the actress is the abused. It does not matter how hard the victim fought back after the victim was first hit. All responsibilities should squarely be borne by the abuser.

Do you still remember all the private costs of domestic violence we discussed earlier in this article? In a civilized society, the abuser should pay for all these private costs. The abuser should also realize that his violent behavior incurs a large social cost that he is not paying.

As for you, you should never, ever, hit or slap your girl friend or wife or anyone for that matter. As soon as you hit someone for the first time, chances are that you will be an abuser for the rest of your life, and you will pay dearly sooner or later. When you hit someone, it is convincing proof that you are not the strong person you think you are. You are a coward. If you are truly a strong person, you settle issues without resorting to violence.

The bottom line is that only people with a criminal mind can hit or slap someone, as these people do not feel the pain of the victim, which cannot be calculated as part of the cost of domestic violence.
 


Will Economic Sanctions Have Impact on N. Korea?


January 23, 2007
By Chang Se-moon

Obviously, it is important to know the correct answer to this question. Sanctions that have no impact on North Korea’s economy will not change the behavior of North Korean leaders. If sanctions do have a significant impact, the possibility that North Korean leaders may be tempted to resolve the pending security issues through negotiations exists.
In answering the question, however, we need to keep in mind what the British economist John Maynard Keynes (1883-1946) said: ``The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.’’ In plain English, Keynes stressed an unbiased economic way of thinking that could help us draw correct conclusions. In other words, until we review all the facts with an open mind we should not make up our minds.

This is exactly what we will do by assessing the impacts of economic sanctions on North Korea.

The first question that comes to mind is which sanctions are we talking about. If we review U.S. sanctions on North Korea since the outbreak of the Korean War in 1950, there would be too many sanctions imposed on North Korea to be practical. There are three important sanctions that are still in effect, however. One is the U.S. denial of a Most Favored Nation (MFN) trade status on North Korea’s exports.

This sanction was imposed on North Korea’s exports to the United States on September 1, 1951, following the outbreak of the Korean War. MFN tariffs are the lowest tariffs that are levied on imports to the U.S. Over 99 percent of imports to the United States qualify for the MFN tariffs. Without MFN status, tariffs on North Korean exports to the United States are so high that North Korea simply cannot even imagine exporting anything to the United States.

The second of the three important sanctions stemmed from the bombing of Korean Air 858 by North Korean agents on November 29, 1987. The explosion killed 115 innocent passengers and crew members. On January 20, 1988, North Korea was placed on the list of countries that supported international terrorism according to the U.S. Export Administration Act of 1979.

The importance of this sanction is that placement on the list has made it impossible for North Korea to borrow money from international financial institutions including the World Bank and the International Monetary Fund. Like the denial of MFN status, the placement of North Korea on the list of countries supporting international terrorism continues to this date.

The third of these three key sanctions relates to tightening of North Korea’s illegal financial transactions, which culminated in Banco Delta Asia’s termination of business dealings with North Korea as of February 16, 2006. You may know that Banco Delta Asia had long been suspected of handling North Korea’s illicit activities overseas such as laundering of counterfeit U.S. dollars and sales of illegal drugs

Banco Delta Asia is located in Macao, which is a Special Administrative District of China. Tightening of North Korean financial transactions was extended to North Korean trade during 2006. This added pressure on North Korea originated from U.N. Resolution 1540 following North Korea’s test-launching of long-range missiles on July 5, 2006, as well as from U.N. Resolution 1718 which followed North Korea’s nuclear test on October 9, 2006.

Are these sanctions having an impact on North Korea’s economy? Perhaps, a more accurate question is whether these sanctions are placing enough pressure on North Korean leaders to reconsider the possibility of returning to the negotiation table?

One aspect is the status of North Korea’s trade deficit. As you probably know, North Korea buys from other countries much more than it sells to other countries. When the amount of imports exceeds the amount of exports it’s called a trade deficit. North Korea’s annual trade deficit averaged about $800 million from 2003 to 2005. This figure does not include North Korea’s trade deficit against South Korea, since South Korea appears to consider any financial support to the North as a long-term investment rather than a trade deficit.

How has North Korea been paying for the trade deficit? The ways have been unique. Almost the entire deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects.

In fact, a study by the Korean Institute for Defense Analysis indicates that full implementation of U.N. Resolution 1718 would cause North Korea to lose just about the same amount ($700 million to $1 billion) by stopping exports of weapons and illegal drugs and counterfeit money.

The Economist Intelligence Unit is quoted to have estimated in 2003 that ``North Korea earned as much as $100 million a year from counterfeit money, while in 2005, a U.S. task force estimated that ``$45 million to $60 million in Pyongyang’s counterfeit currency (primarily in U.S. $100 bills) is in circulation,’’ reportedly, including some in Seoul’s Namdaemun Market.

Assuming that recently added sanctions will cause North Korea to lose about $800 million that it has been earning overseas each year, the next interesting question is how North Korea will pay for the annual trade deficit of $800 million in the future? If North Korea does not pay for its imports, other countries will refuse to sell products to North Korea and the North Korean economy will suffer.

North Korea cannot borrow from world financial institutions because of the 1988 U.S. sanctions that branded North Korea as one of countries supporting international terrorism. They cannot use the money from foreign direct investment because China and Korea are the only two countries that have been willing to invest in North Korea, but the combined amount is not even close to paying for the annual trade deficit.

Think of it this way. If you borrow money every year, and lenders believe that your ability to pay off the debt is rapidly declining, will lenders continue to lend you money? Not likely. With sanctions adversely affecting North Korea’s ability to pay for imports, North Korea will find it increasingly difficult to buy what it needs. The breaking point may not be imminent, but the future is predictable.

This is what I think will happen. North Korea will ask China to increase its foreign direct investment in North Korea by giving China more incentives for such investment. These incentives may include low taxes and free land. North Korea will ask South Korea to send more money.

For instance, as of July 1, 2004, Hyundai Asan and North Korea set the entrance fee to Mt. Kumkang at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1, 2005, these fees were raised to $15, $35, and $70. On July 1, 2006, these fees were raised again to $30, $48, and $80. This is just one way.

North Korea may also ask South Korea to lend it a large sum of money with an empty promise of paying it back. This explains in part why it is so important for North Korea to have leaders of the South Korean government who are friendly to North Korea.

These desperate acts are likely to be very short of paying for the majority of the annual trade deficit. If sanctions continue to be effective, the likelihood of North Korea returning to the negotiation table increases. Economics is rarely boring, especially when it deals with real problems.