China, Japan and South Korea Seek Regional Economic Bloc

First  Published in EPW Vol - XLVIII No. 20, May 18, 2013 

A decade after first being proposed, China, Japan and South Korea have finally kicked off negotiations on a trilateral free trade agreement (FTA). They made small but meaningful progress in their first round of talks in Seoul in late March as they seek to lay the groundwork for continued growth of their region based on mutually advantageous trade and investment.

The three countries adopted negotiation rules, agreed on the range of topics and basic guidelines on concessions. They have decided to carry out both bilateral and trilateral talks for merchandise goods, while engaging in trilateral talks for services, investment, and regulation.

They came to terms quicker than expected in the first talks, demonstrating how much hope and anticipation is riding on the trade deal, dubbed the China Japan Korea (CJK) FTA. Talks between the east Asian neighbours come amid a slew of moves to lower trade barriers, even as the three countries transitioned to new political leaderships.¹ The negotiations will eventually move to Beijing and then a third round will be held in Tokyo later this year.

China, Japan and South Korea are Asia’s largest, second largest and fourth largest economies, respectively. A tripartite deal would give rise to a super economic bloc of 1.52 billion people, accounting for roughly 17.43% of global trade and 20.44% of the world’s gross domestic product (GDP).² It will be the world’s third largest regional market, smaller only than the North American Free Trade Agreement (NAFTA) and the European Union (EU). The government–sponsored collaborative feasibility study carried out by researchers from the three countries³ has noted that there is some convergence and complementarity in the trade structures, demonstrating a similar layout of industries engaging in exports and imports and considerable flows of intermediate goods.

The intra-regional trade patterns among the three countries have also evolved significantly in recent years. This may constitute a good rationale for a trilateral FTA, since it can enhance the competitiveness and efficiency of the three countries by increasing competition, thereby facilitating the restructuring of industries and making a vertical and horizontal division of labour more efficient. In addition to this, there will be benefits for the consumers as well in the form of lower prices and access to a wider range of products, and the improved opportunities afforded to exporters through access to markets will in turn stimulate greater economic activity.

However, even as the talks have just begun, many observers are not sure that a deal will eventually be signed. There are a variety of hurdles to overcome, and politically important constituencies need to be accommodated in all the three nations. Historical problems and their traditional rivalry, coupled with territorial disputes may make it even harder.

Background of Talks

There are at least three fundamental factors that have led to the growing number of FTAs in east Asia since 2000. They include the Asian financial crisis; the rising trends on market-driven economic integration; and the progress of European and North American economic integration (Masahiro Kawai and Ganeshan Wignaraja 2008).

The financial crisis of 1997-98 helped east Asians to understand the importance of economic integration. The Association of South-east Asian Nations (ASEAN) + 3 (CJK) summit has been held every year since the first ASEAN + 3 summit in Kuala Lumpur, Malaysia in December 1997. Also, minister-level meetings such as the foreign ministers meeting, the finance ministers meeting, and the senior officials’ meeting have been held regularly since 2000.

Furthermore, they have been actively promoting bilateral agreements, which created an effective pathway to gradual regional economic integration in east Asia. The Japan-Singapore Economic Partnership Agreement (EPA), concluded in 2000, became the first FTA in the region. Two years later, China signed its first FTA with ASEAN. The same year, Japan launched bilateral negotiations with South Korea, but the talks were suspended after the sixth round.⁴ It was not until 2004, that South Korea signed its first ever FTA, with Chile.

Soon after, there was a steep rise in the number of FTA deals that the three nations separately signed with regional and outside countries.

The conduct of China, Japan and Korea is distinctly different in course of their FTA negotiations. Whilst Japan and Korea sought to negotiate comprehensive FTAs with selective countries bilaterally, China adopted a more pragmatic and flexible approach to negotiate “shallow” FTA agreements (Junji Nakagawa and Wei Liang 2011).

Following its accession to the World Trade Organisation (WTO) in 2001, to date China has trade agreements with ASEAN (2002), Hong Kong (2002), Macau (2003), Thailand (2003), Niger (2005), Chile (2006), Pakistan (2006), New Zealand (2008), Peru (2008), Singapore (2008) and Costa Rica (2010). Meanwhile, the Cross-Straits Economic Cooperation Framework Agreement between China and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu was also signed. It is further negotiating with Gulf Cooperation Council (GCC), Australia, Iceland, Norway and Southern African Customs Union.

Japan is pursuing economic partnership agreements, essentially FTAs, as complementary tools for trade liberalisation. It has reached agreements with Singapore (2000), Mexico (2004), Malaysia (2004), the Philippines (2006), Indonesia (2007), Chile (2007), Thailand (2007), Brunei (2007), ASEAN as a whole (2008), Vietnam (2008), Switzerland (2009), India (2011) and Peru (2011). It is negotiating with Australia, GCC, Mongolia and Canada.

South Korea is more aggressive, having signed deals with Chile (2004), European Free Trade Association (EFTA) (2004), Singapore (2005), ASEAN (2007), USA (2007, ratified in 2011), India (2010), EU (2011), Peru (2011), Turkey (2012) and Colombia (2013). Talks are under way with Canada, Mexico, GCC, Australia, New Zealand, Vietnam and Indonesia. China and South Korea launched negotiations on 2 May 2012, but soon faced difficulties over the scope of coverage and not much progress has been made.

As can be seen from the above list, while they have individually been successful in arriving at FTA deals with other nations, they have somehow not been very successful in bilateral deals amongst themselves. They hope that, given the ground reality, a trilateral deal may help them sort out their differences.

Chinese Premier Zhu Rongji first proposed exploring the possibility of a Northeast Asian FTA in 2002. The proposal was largely gathering dust, until China took a proactive stance last year perhaps to secure leadership in northeast Asian economic integration and counter the Trans-Pacific Partnership (TPP) Agreement led by the US.⁵

The rapid movement of the TPP agenda has caused China some disquiet, and it is actively promoting regional economic integration with 16 partner countries – three north-east Asian nations, ten ASEAN members, and Australia, New Zealand, and India – as well as a tripartite FTA to build a sturdier free trade bloc in the Asia-Pacific region.

Many Chinese policymakers and scholars consider the TPP agenda as a force that could rip apart the regional economic integration of east Asia. Moreover, a strong voice in Chinese academic and policy circles maintains that the main reason behind the Obama administration’s support for the TPP agenda is a desire to use it as a tool to economically contain China’s rise (Guoyou Song and Wen Jin Yuan 2012).

To counter-balance the US initiative, China is actively pushing for its own FTA agenda, in particular trying to move forward on the trilateral FTA, ultimately seeking to construct a regional web of its own free trade agreements.

It helps that Japan’s new government has shifted its trade policy by becoming more enthusiastically involved in free trade. In addition, Korea already has free trade accords with lucrative markets of the EU, US and ASEAN and now wants to go beyond bilateral trade deals and seek regional FTAs.

A multilateral forum could be more engaging for Tokyo and Seoul, as they bargain more options to contain China’s influence.

Geopolitical Fault Lines

While there is optimism in the air, worrying geopolitical fault lines still exist in the region. The three countries share a long and bitter history of antagonism and warfare.

Korea and China share a deep anger towards Japanese atrocities during the second world war and the continued lack of official recognition or apology. Koreans are still troubled by centuries of domination by Chinese dynasties followed by a ruthless occupation by Japan and attempts at forced assimilation. More recently territorial disputes over the sovereignty of a few islands have strained relations even further.⁶ Any future provocations will jeopardise talks.

Another major obstacle is that each country has its vulnerable sectors and each use not only tariff barriers but also non-tariff barriers to protect their weakly competitive industries. It will not be surprising if vocal farm lobbies in all three countries, particularly Japan and South Korea, vigorously oppose attempts to dismantle subsidies that enable them to earn a living.

An FTA would raise concerns in Japan and Korea for serious impacts on domestic agricultural production. Both nations have officially indicated that it would have asymmetrical effects on the trilateral agricultural trade and possibly lead to an uneven distribution of benefits in the agricultural sector of the three countries.

Then we have a very large sector of, small and medium enterprises, which are less competitive than conglomerates in all three nations. An FTA adds pressure on those engaged in these industries.

Last but not the least, North Korea remains a potential spoiler to continued economic growth and political stability in east Asia. The ongoing negotiations can also be easily interrupted by any flare-up in political tensions. Japan and South Korea would prefer to pressure China to control North Korean rhetoric, before they can even sit down once again to discuss economic cooperation.

Notes

1 Xi Jinpeg became China’s president, on 14 March 2013, in a confirmation vote by the 12th National People’s Congress in Beijing. Shinzo Abe assumed office as Japan’s prime minister on 26 December 2012. Park Geun-hye was sworn in as South Korea’s first female president on 25 February 2013.

2 As per World Bank Data and Trade Statistics compiled by the World Trade Organisation, in 2011, the combined GDP of the three countries was $14.31 trillion, with their total trade valued at $ 6.398 trillion

3 From 2003 to 2009, a Trilateral Joint Research Project was commissioned by the three governments, and conducted jointly by the Development Research Center (DRC) of the State Council of China, the National Institute for Research Advancement (NIRA) of Japan, and the Korea Institute for International Economic Policy (KIEP). The joint report was published on 16 December 2011. (http://www. meti.go.jp/press/2011/03/20120330027/20120330027-3.pdf.)

4 The FTA negotiations between Seoul and Tokyo have been suspended since November 2004, mainly because of Japan’s reluctance to lower tariffs on agricultural goods.

5 The TPP is a multilateral free trade agreement that aims to liberalise the economies of the Asia-Pacific region involving Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. On 12 November 2011, the leaders of these nine TPP partner countries announced the broad outlines of an expanded TPP: it will promote innovation, enhance economic growth and development, and support the creation and retention of jobs among the nine dynamic Asia-Pacific economies. Further negotiations are still underway, with Japan, Canada, and Mexico also having demonstrated a strong interest in joining.

6 Tokyo and Beijing contest ownership of a chain of islands called Diaoyu in China and Senkaku by Japan. Seoul and Tokyo also disagree on the sovereignty of two rocky islets the Koreans call Dokdo and known in Japan as Takeshima. In addition both Japan and South Korea are exasperated by the intrusions of aggressive Chinese fishing vessels into their waters.

References

Guoyou, Song and Wen Jin Yuan (2012): “China’s Free Trade Agreement Strategies”, The Washington Quarterly: Fall 2012, 35:4, pp 107-19, Center for Strategic and International Studies.

Masahiro, Kawai and Ganeshan Wignaraja (2008): “Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA”, Working Paper Series on Regional Economic Integration No 14, ADB.

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China-Japan Korea FTA and Opportunities for India

First Published in The Hindu Business Line

While most Indians are familiar with Asean, and businesses are aggressively seeking to tap the huge Southeast Asian market, there is a new trade bloc in the making, not too far away, that could deliver more economic benefits.
The Big-3 East Asian economies — China, Japan and South Korea — which account for roughly 17 per cent of global trade, 22 per cent of the global population and 20 per cent of the world’s GDP, kicked off negotiations in the last week of March, aimed at signing a trilateral free trade agreement. They made small but meaningful progress in their first round of talks late last month, seeking to roll out a free trade bloc that would be the world's third largest after North America and the European Union.

 THE CONTEXT
Talks between the neighbours have begun amid a slew of moves to lower trade barriers, as they seek to bolster economic growth, hit by the global financial crisis. These thriving economic ties are among the rare positive signs for relations among three traditional rivals.
Historically, Japan’s colonial occupation of South Korea until 1945 and its World War atrocities in China still rankle across the region, while more recently territorial disputes over the sovereignty of a few islands have strained relations even further (Japan-China for the Senkaku/Diaoyu islands, Japan-South Korea for the Takeshima/Dokdo islets).
However, despite their ongoing differences, they are set on reaching a pact, especially now that all three countries are under new leaderships — Xi Jinping, Shinzo Abe and Park Geun-hye.

 ECONOMIC MIGHT
China, Japan and South Korea are Asia’s largest, second largest and fourth largest economies. With a market of 1.5 billion people, the total GDP of the three countries was $14.3 trillion and total trade reached approximately $5.4 trillion in 2012.
While China is the main trading partner for Japan and South Korea, Japan and South Korea are China’s fourth and sixth largest trading partners. These statistics underline the region’s growing weight in the world economy, after more than two decades of swift growth in China and the rise of Japan and South Korea as industrial dynamos.
The trilateral FTA would create a massive economic zone, smaller only than the North American Free Trade Agreement (NAFTA) and the European Union. As major world economies, the Big-3 are not only geographically adjacent, but also important partners in trade and investment. If these FTA talks are successful, it will be a huge boost to the region.

 SYNERGIES INVOLVED
Their economic relations are complementary, so establishing this trilateral FTA will reduce the influence of many trade barriers and build a huge market. Geographically, these three countries are neighbours, but economically, they are on different growth paths and at different development stages. Japan has the most developed economy, but the economy of South Korea, which took off in the seventies is quickly growing and catching up. China opened up its economy in the eighties, and since then its growth has been more than impressive. They are all outward-looking and depend for growth on their relations with other economies, trading heavily among themselves.
 They are already highly integrated -- Japan and Korea are the major resources of FDI flow to China, while China is their major market. So far, the strategies adopted by the Big-3 have maintained their specific interests and relative political and economic influence. In spite of this, their trilateral relationship has expanded gradually, encouraged by growing interdependence and shared economic interests.
 Given the economic troubles of Europe and the United States, East Asia cannot continue to depend heavily on these markets. The trilateral FTA could greatly expedite the expansion of intra-regional market, the improvement of production capacity and efficiency.
 OVERCOMING BARRIERS
There is no denying that the Big-3 are divided by political mistrust, trade barriers and diverging investment policies, that would make for difficult negotiations. First, they would have to overcome a lot of issues, including the opposition of farmers in all the three countries, and of course, the various territorial disputes that regularly strain diplomatic relations. Negotiating a three-way deal among countries at different stages of development, and each with businesses lobbying for protection is by itself a very complex affair.
It may also take quite a while for the countries to conclude their negotiations and actually strike a treaty. Normally, it takes around two to three years to conclude FTA talks with a major trading partner, but this may take even more time, considering the importance and size of the involved countries and the fact that they are three-way negotiations. The ongoing negotiations can also be easily interrupted by any flare-up in political tensions.
Let’s not forget North Korea. Beijing faces incessant demands from Tokyo and Seoul to put more pressure on Pyongyang, whose nuclear weapons ambitions and rocket tests have alarmed the region. Any knee-jerk reaction by North Korea could derail all talks.
The lessons from the European Union suggest that economic cooperation can precede some intricate political issues in order to achieve regional integration. Market integration in East Asia would have to cope with the obstacles to a high level of cooperation. 
OPPORTUNITY FOR INDIA
Among the Big-3, India’s trade relations with China are the strongest, despite the fact that there is no FTA in place between the two countries. Total trade between both sides amounted to $75.59 billion in fiscal year 2011-12 (9.51 per cent of India’s total trade).
On the other hand total trade between Japan and India was just $18.43 billion (2.32 per cent), and Korea-India trade was lower at $17.45 billion (2.19 per cent). Taken together, India’s trade with the region amounts to $111.47 billion, a share of 14.02 per cent of its total trade with the rest of the world. Although there is talk of an FTA between China and India, not much progress has been made.
There are no government sponsored feasibility studies as yet and negotiations seem distant.
 India signed a watered-down FTA, what they call a Comprehensive Economic Partnership Agreement (CEPA), with Japan and Korea in 2011, but the ground results are far from satisfactory. There has been a gradual increase in Indian exports and investment in both regions, but the potential remains largely untapped. In fact, the agreement seems to have largely benefited Japanese and Korean companies, which are making inroads into India.
 Since an FTA with China seems a distant dream, and is likely to involve many rounds of negotiations spread over years, this is the opportune time for Indian policymakers and businessmen to study how they can leverage the CEPA with Japan and Korea, to take advantage of a trilateral FTA in East Asia and make inroads into the Chinese market.

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Challenges before South Korea's New President

First Published in EPW,Vol-XLVIII, No. 10, March 09, 2013

On 25 February, Park Geun-hye, the daughter of former military ruler Park Chung-hee, was sworn in as South Korea’s first woman president following her tightly contested election victory on 19 December 2012.1
In more ways than one, her election marks a historic breakthrough for a traditionally Confucian country2 whose social, political and business fields are dominated by men. Although the country has shown a remarkably high level of economic performance over the past few decades,3 its global ranking in gender parity is not much to talk about.
Women hold only 14.7% of parliamentary seats, and only 79.4% of adult women have reached a secondary or higher level of education compared to 91.7% of their male counterparts. According to the Gender Development Index of the United Nations Development Programme (2011), female participation in the labour market is only 50.1% compared to 72% for men.

Background
Park’s rise to the top post has raised hopes that it could herald a significant gender power shift and help normalise the idea of women holding positions of power, even as historical evidence in other Asian countries suggests that the ground reality is far more complex and only makes for good media headlines.
Moreover, this is not Park Geun-hye’s first stint at the presidential office Blue House. Born in 1952 as the eldest of three siblings, she moved into Blue House in early 1964, shortly after her father, Park Chung-hee, an army general, grabbed power.4
After spending her school years at Blue House, she enrolled at a local university to study electronic engineering, and, following graduation, left for France to continue her studies. She had to return abruptly in August 1974, after a gunman killed her mother in a botched assassination attempt on her father. For the next five years, she served as the acting first lady until the intelligence chief gunned down her father in 1979.
While it can be argued that she did not have control over her father’s regime, the fact remains that she was from a privileged background, with access to power. Following her father’s assassination, she spent the next 18 years out of the public eye, a period during which, as noted in her autobiography (Park Geun-hee 2007), she endured the betrayals of many of her father’s close aides and also devoted much of her time to reading books on history, philosophy, and visiting cultural heritage sites across the country in an effort to broaden her perspective.
The liberal intelligentsia however has a different story to tell (The Hankyoreh 2012). They claim that all her activities were focused on the restoration of her father’s image, by defending the military coup as a revolution to save the nation, using the bogey of a North Korean communist invasion. She published several books, and appeared regularly in the media justifying the violence committed by her father’s regime.
Throughout her father’s rule, the state’s routine invocation of the threat of communism effectively blocked any popular demand for democratic participation in the political process. The regime functioned in a manner that extended beyond the routine infliction of violence by the state on its citizens, into a realm where the state authority infiltrated every corner of civil society to both control it, and stifle its potential (Korea Democracy Foundation 2010).
Park claims that the Asian financial crisis, which dealt a devastating blow to South Korea’s pride and economy,5 proved to be a turning point in her career and she decided to rejoin public life. She was first elected to South Korea’s National Assembly in 1998, serving five terms as a representative.
Many critics argue that she used it as an opportunity to put her father back on the pedestal.6 This she has apparently succeeded in doing, by becoming the 18th president of the country, and its leader for the next five years. With her success, she has also ensured that conservatives will have held power for a decade since her predecessor Lee Myung-bak took office in 2008.
However, despite her ideological affiliation, her victory owes a lot to her embracing a liberal agenda in areas like economic democracy. During her campaign, she came out with a relatively progressive platform on issues like chaebol reforms7 and social welfare. Park said she would “tend closely to the public’s needs like a mother of ten determined not to let the children go hungry”.
Her promise was that as the first female president, she would adopt a “maternal” approach to her leadership. As a single woman who has never married, she also said she is married to her country and pledged to think only about the people’s happiness.
Park surely realises that pre-election pledges are one thing, but actual governance is a totally different cup of tea. Particularly since there are many daunting challenges that she faces – not just the economic slowdown, but more importantly North Korea’s third nuclear test in defiance of United Nations (UN) resolutions, just 13 days before she assumed office.

  Economic Challenges
Amid the continuing global financial crisis, South Korea’s economy has slowed down significantly in recent years. The government estimates that the economy grew 3.3% in 2012, but many worry that it could actually have been lower. It would follow 6.2% and 3.6% gains reported for 2010 and 2011, respectively. Things could ease to some extent this year, but risks, which have dogged the export-driven economy throughout 2012 are likely to remain in place, and the country could enter into a phase of low growth (Ministry of Strategy and Finance 2013).
The country is highly dependent on exports,8 which makes it even harder to recover. The prolonged eurozone debt problems and a possible global slowdown, as well as low domestic consumption and volatile exchange rates only accentuate the economic uncertainties. At present, there is very little that Park can do to provide an immediate boost to the economy.
An export-oriented country will always find times difficult when the world’s major importers are experiencing sluggish growth (ASAN Institute of Policy Studies 2012).
 Another problem is the indebtedness of the Korean public. Today, household debt stands at greater than 160% of income, making a reorientation of the economy towards domestic consumption very difficult. The government will therefore have to make effective management of the macroeconomy its first priority in order to successfully deal with internal and external risks, continue to help boost the economy, and pursue inclusive growth.
 The long-term challenges include a rapidly ageing population, inflexible labour market, and heavy reliance on exports. As a candidate, Park promised to work for the livelihood of individual families, making several pledges aimed at reversing the collapse of the middle class. She vowed to implement policies to improve growth, create jobs and increase social welfare spending.
 She also highlighted the importance of reforming large conglomerates that dominate the economy by promising that she will stop their unfair practices and excessive profit-seeking. While this is certainly a core issue in rebalancing the country’s wealth distribution, her party has always been strongly pro-business, and there is every likelihood that she will back away from strong reforms.
Now, with power in her hands, the focus may be on economic growth and job creation rather than on reining in the chaebols. Clearly, keeping the campaign pledges will not be easy.

North Korea Relations
This year marks the 60th anniversary of the armistice agreement that ended the combat phase of the Korean War. The North Korean nuclear negotiations have lost all momentum. The six-party talks are part of a distant past and North Korea’s third nuclear test on 12 February, conducted in defiance of international warnings, have put a sudden halt to Park’s proposal to reach out to the communist neighbour.
During her campaign, she disapproved of the hard-line policy that came to define her predecessor over the past five years and said that a friendly relationship with North Korea will be the core of her foreign and security policies. Inter-Korean relations were effectively cut off during the Lee Myung-bak administration due to a string of provocations committed by North Korea and the response by Seoul.9 Park said she would find middle ground between the approaches of South Korea’s previous presidents – Roh Moo-hyun, who gave the North unconditional aid, and Lee Myung-bak, who treated it as an adversary. Back in 2011, Park announced her vision for foreign relations, national security, and unification policy, an idea she called “diplomacy of trust and a new Korean Peninsula”.
The measures she described emphasised incremental approach over radical changes in inter-Korean relations (Park Geun-hye 2011). This was clearly done to woo large sections of the voters who disapproved of the traditionally hard-line stance of her political party towards North Korea, and it worked in the elections.
What she did not expect was that Pyongyang would go to any extent to guard its regime and increase its negotiating power, even before she could occupy her seat. Moreover, even as the UN is in the process of discussing what actions it should take to penalise the country, North Korea warned it can acquire intercontinental ballistic missiles to counter hostile forces and bolster its self-defence capabilities.
On the whole, Park has made clear on numerous occasions that she cannot allow the North to have nuclear weapons, yet stressed her commitment to engaging the communist country in a dialogue to deal with all outstanding issues. The nuclear detonation has effectively tied up her options, since South Korea is likely to join other countries in sanctions. Such a stance can cause North Korea to take a more tough approach, making it harder for her to make any conciliatory overtures.
 To make matters worse, just two days before her inauguration, the North Korean military’s representative at the truce village of Panmunjom was quoted by the official Korean Central News Agency as saying that the peninsula is facing “a grave situation where a war may break out any moment”.
The latest developments will clearly jeopardise inter-Korean relations that otherwise could have made headway under her administration. It will force her to reassess her “Korean Peninsula confidence building process”, which she has said is the cornerstone for better inter-Korean relations.
With pressure to fix the domestic economy and South Koreans’ individual welfare along with a desire to see improved relations with North Korea, Park will have to work quickly on both fronts to have a chance of succeeding. Her ability to handle relations with North Korea while working towards solutions to domestic issues will decide her legacy in the Blue House other than of being South Korea’s first woman president.
  Notes
1 Since its transformation into a republic, the Korean government, except for a brief period between August 1960 and July 1961 when a parliamentary system was in place, has maintained a presidential system. Under the Sixth Republic that began in 1987, the president is directly elected for a single five-year term by plurality vote. It was a two-way competition between Park Geun-hye and the opposition candidate Moon Jae-in. With a high voter turnout of 75.8%, Park defeated her liberal rival by 3.6 percentage points garnering 15.77 million votes.
 2 For 2,500 years Confucian teachings have influenced the thought and behaviour of people in China, Korea, Japan and Vietnam. Confucianism drew a clear distinction between the woman’s domestic sphere and the man’s public sphere, in the belief that the law of nature gave women an inferior and subordinate position in all aspects of life.
 3 Popularly known as the “Miracle on the Han River”, South Korea’s highly accelerated export-fuelled economic growth, including rapid industrialisation, technological achievement, education boom, exponential rise in living standards, rapid urbanisation and globalisation transformed it into a wealthy and highly developed country with a globally influential trillion-dollar economy.
 4 Park Chung-hee led a 1961 military coup, dislodging South Korea’s very first experiment with parliamentary democracy.
 5 For South Korea the consequences of financial and economic crisis and the intervention of the IMF in overcoming the accompanying problems were extremely painful. These problems included: a large number of bankruptcies of industrial firms and private banks; the increasing pressure on industrial firms to carry out rapid restructuring; massive dismissal of workers; currency devaluation; drastic decrease in domestic households’ demand caused by income reduction and high interest rates, etc. An average of more than 100 companies went bankrupt each day and the number of laid-off workers increased from 5,00,000 to more than 1.2 million in only a few months.
 6 Park Chung-hee won wide respect for transforming the poor war-ravaged nation into an economic juggernaut, but is also reviled in some quarters for his human rights abuses. Still, many older South Koreans remember the almost two-decade rule with fondness thanks to the economic successes of his government.
 7 Chaebol refers to a South Korean form of family business conglomerates, such as Samsung, LG, Hyundai, and SK. Since the Asian financial crisis, several attempts have been made to decentralise their management, strengthen their accounting practices, enforce anti-trust laws and impede the ability of families to retain control.
 8 The weight of exports in the South Korean economy hit an all-time high in the first nine months of last year. Exports of goods and services amounted to 57.3% of GDP, according to data by the Bank of Korea, the highest since the central bank began compiling related data in 1970.
 9 In 2010, North Korea sank a South Korea naval vessel resulting in the deaths of 46 sailors and shelled an island in the Yellow Sea that left four dead, while in 2008 a woman tourist was killed at the Mount Kumgang resort. The North also detonated its second nuclear device in May 2009 and launched a long-range rocket despite warnings issued by the international community. Seoul halted most exchanges and cooperation projects between the two sides in May 2010.

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SMEs in India Deserve a Better Deal

First published in The Hindu Business Line: ____________________________________________________________________
How often have we read that small and medium enterprises are a strategic asset for the Indian economy? We are told that they contribute nearly 8 per cent of the GDP, 45 per cent of the manufactured output and 40 per cent of exports. The sector provides employment to about 60 million people through over 26 million enterprises producing over six thousand products.
 However, what is seldom mentioned is that many of them are at the mercy of the larger corporations, with no effective relief from the existing government policies. For instance, delayed payments by large companies and the resultant crippling effects have always been the bugbear of SMEs, but at the risk of losing their large orders, they do not legally complain.
 While the government efforts have always focused on ways to ease credit restrictions, strengthen training, marketing, technological support, exit policies and cluster development, very little thought has gone into the relationship between large corporations and their sub-contractors. At the risk of being accused of bringing back the “control regime,” our policymakers could well take a look at the recent initiatives in South Korea, a country that has built its strong economy on the basis of capitalistic free market principles.
 On May 22, the nation's top conglomerate, Samsung Electronics, found itself in the national anti-trust agency's crosshairs, falling afoul of the unfair practices law for its repeated cancellation of parts' orders to small contractors.
 The Korea Fair Trade Commission (KFTC) announced that it is imposing a $1.4 million fine on the company for withdrawing orders long after payments are due. It said that among 1.5 million parts orders placed by Samsung Electronics between January 2008 and November 2011, some 2 per cent or 28,000 orders were reneged on unreasonably. This left suppliers with bursting inventories, interest payments owed and disruptions to their production schedules. Although the company has strongly refuted the claims, this just goes to show that SMEs in South Korea which have been unfairly treated by their larger counterparts can always bank on help from government agencies. The same may not be true for Indian SMEs.
  RESERVED FOR SMES
 The anti-trust agency's proactive steps can be traced to the ‘shared growth' policy of the present government under President Lee Myung-bak, a former high-profile businessman. He has been pursuing co-prosperity between conglomerates and SMEs since last year as a means of addressing economic polarity.
As a response to concerns that big companies were thriving while small ones weren't under his administration, a ‘‘Presidential Commission on Shared Growth for Large and Small Companies'' was launched in December 2010, as a private institution, which is formally independent from, but actually supported by, the government.
Since its formation, the commission has announced many policy instruments to promote shared or mutual growth of large companies and SMEs through what it calls “cooperation profit distribution.” Representatives from both SMEs and large companies agreed to introduce the system and a number of proposals were then announced, including a list of business areas restricted only to SMEs.
 The commission recently announced a list of 79 products that it believes should be produced by SMEs rather than big ones, an attempt to prevent big companies from driving smaller ones out of promising markets. The conglomerates have reluctantly accepted this proposal.
  INDEX OF INCLUSION
 ‘Name and Shame' is another tool used by the Commission. It released a ‘‘shared growth index'' earlier in May, tracking how large businesses have made efforts to realise shared growth.
 Of the 56 large conglomerates subject to the index calculation, seven companies received the lowest grade of “improvement needed”, while six companies, including Samsung Electronics, POSCO, and Hyundai Motor Company, received the highest grade of “superior”. Twenty companies were ranked as “good” and 23 others were listed as “average”. The index has been calculated by combining the performance assessment of the conglomerates by KFTC, plus a personal survey of 5,200 contractors of the 56 companies.
Large companies that received the lowest mark in the assessment will not face any disadvantages. However, 26 companies with the satisfactory grade or above will be given various incentives from government agencies, including tax breaks and subsidies.
 It is the first time that the shared growth index has been calculated. Although some conglomerates may not be content with the index, it is desirable for them to acknowledge the commission's effort to improve the environment for achieving co-prosperity between conglomerates and SMEs.
 In fact, following its active involvement in the ‘‘shared growth'' agenda, many large enterprises have recently reached mutual agreements with subcontracting SMEs for fair trade and shared growth. Two prominent examples of such arrangements are Samsung and Hyundai's agreements with their respective subcontractors.
  GOVERNMENT PUSH
 Nine Samsung group affiliates, including Samsung Electronics, made cooperative agreements for shared growth with 5,200 subcontractors. The package of financial assistance amounted to $5.7 billion, among which R&D support comprised $1.7 billion.
 Samsung agreed to induce its subcontractors to make cooperative agreements with lower-level sub-subcontractors, and provide them with incentives. Similarly, six Hyundai group affiliates, including Hyundai Motors, made cooperative agreements for shared growth with roughly 1,600 subcontractors. The package of financial assistance amounted to $3.9 billion, with R&D and capacity investments making up $2.3 billion.
Hyundai promised to provide 300 R&D support manpower for its subcontractors. This is just the beginning, and many more large companies have announced similar initiatives.
With a small push from the government, the Korean companies have realised that they need to share the burden of their sub-contractors.
 That is what is lacking in India. Any number of laws can be enacted but effective implementation is crucial. It also requires a concerted effort by the government; so that the large corporations in India automatically devise their own ways to help their sub-contractors survive and share their growth.
Many companies may still be doing it on their own initiative, but if there is a government push, it will make a world of difference.

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Lessons for Retail Giants Hoping to Enter India

First published in Business Standard: __________________________________________________________________
After a quiet period, intense lobbying for opening up multi-brand retail once again seems to be hotting up. On May 24, Carrefour’s India head, Jean-Noel Bironneau, met Commerce Minister Anand Sharma, and his counterparts from Wal-Mart, Tesco and Costco will no doubt follow soon.
 Ever since the government announced its decision to allow foreign direct investment (FDI) in multi-brand retail trade, and then backtracked, there have been a flurry of articles on the pros and cons of such a move.
There is no clear answer and those in favour and against FDI have expressed ample views. So, another attempt to do so would be futile, although it must be stressed that allowing FDI does not mean that the global retail giants will automatically wind up capturing the market.
 Take their experience in South Korea, home to one of Asia’s most dynamic and largest retail markets, ranking fourth behind Japan, China and India, with a relatively wealthy population. Wal-Mart and Carrefour have had to beat a retreat after struggling for years to increase market share. Tesco is the only successful foreign retailer, going from strength to strength.
 The varying success of these three retail giants in South Korea has become must-read case studies for all potential foreign investors. It also holds lessons for them in the Indian market, given the high complexities in terms of a wide geographic spread and distinct regional consumer preferences. Historically, South Korea kept its major retailing operations closed to foreign ownership. It was only in 1988 that the government began a series of three-year plans designed to improve the efficiency and productivity of the retail and distribution industry.
The first stage of this process occurred in 1989 when regulations on the establishment of foreign companies’ subsidiaries and the inflow of FDI were eased. Then, foreign retailers were permitted to establish stores at a maximum size of 1,000 sq m, as prescribed by the second stage of the open-up policy. The regulations on the number and size of retail outlets of foreign companies were further relaxed in the third stage of the programme beginning in 1993, when foreign companies were allowed to open up to 20 stores with each store not exceeding 3,000 sq m.
 It was not until 1996 that FDI in the Korean retail market was completely liberalised and foreign retailing companies began expanding there in earnest. Sensing huge opportunities, Wal-Mart, Carrefour and Tesco entered the country around the same time, but adopted different strategies.
 Wal-Mart attempted to penetrate the Korean market by building stores in distant areas where land prices were low, replicating the US strategy of smaller-city store build-up. It had only 16 stores in all of Korea with just one in the Seoul metropolitan area and could not achieve economies of scale.
The company expected the Korean consumers to drive to its stores for price shopping as American consumers do. However, this location strategy did not match well with the Korean consumers’ lifestyle and shopping habits. They prefer to buy smaller units on a more frequent basis and to have accessibility to a store within walking distance.
 As a result, Wal-Mart faced serious challenges in implementing its core competence in South Korea. Moreover, it could not enjoy its buyer power in the local vendor market and had no control over its Korean supply chain and procurement. Eventually, it packed its bags in 2006.
 Carrefour had a similar story. Despite its experience elsewhere, the company failed to localise its stores to a sufficient extent. Instead, it tried to introduce its global practices and strategies in the country. Its store layout, ambience, products and location failed to attract customers. The company wanted to attract customers by providing them high-quality products in bulk at low prices. Its stores were styled like warehouses and were simple in appearance compared to the stores of its competitors. Initially, customers were enthusiastic, but most of them were not bulk purchasers.
 Also, unlike other markets, Korean customers prefer a clean and sophisticated atmosphere along with low prices. At the time of its exit in 2006, Carrefour was the fourth-largest retailer in the country, with 32 hypermarkets. The company had invested $1.5 billion, making it the largest foreign investor in the Korean market, but that was not enough to guarantee it success.
 In contrast, Tesco had an effective “localisation” strategy for downstream activities. It entered the market by forming a joint venture with a major local partner, Samsung, leveraging its knowledge and expertise of the local market. Tesco devoted considerable attention to transferring its core capabilities to this new market, but did not attempt to iterate the British version of its retail format.
It gradually increased its stake in the company to 95 per cent, but continued to localise its 450 stores, consisting of both large hypermarkets and small Express stores. Also, of Tesco’s 27,000 staff in Korea, only four are expatriates. As a result, it became one of Tesco’s biggest success stories, generating a third of its overseas sales.
 One key factor that contributed to Tesco’s success was its ability to create “value” that is suitable for the Korean tastes and preference. While other foreign brands like Wal-Mart and Carrefour have failed, Tesco’s Korean brand, Homeplus, is moving from strength to strength, as it closes the gap with the market leader E-mart.
It also has leveraged Korean’s love for high-tech, having just launched innovative virtual stores in subway and bus stops where customers can use their smartphones to buy products that are delivered right to their homes.
 These stories contain valuable lessons for the global retail companies who now wish to expand their presence in India, whenever the law permits. Their multi-brand retail strategy has to be different from their wholesale cash and carry stores. Moreover, it is important to heavily localise operations keeping Indian tastes in mind, with or without a domestic partner. Blindly applying western business models for the Indian market will not work.

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