Tuesday, December 16, 2014

Korea should rethink trickle-down policies

First published in The Korea Herald.

It is no secret that the Park Geun-hye administration and the ruling Saenuri Party are vehemently against raising corporate taxes, arguing that higher taxes could affect economic growth. They instead want to go easy on the corporate sector and the wealthy, all in the name of trickle-down economics ― a theory closely identified with Reaganomics, which states that decreasing tax rates especially for corporations, investors and entrepreneurs can stimulate production in the overall economy.

So it may come as a surprise to them that the latest OECD working paper released on Dec. 9 strongly denounced the trickle-down theory while pushing for higher taxes on the rich and policies aimed at improving the lot of the bottom 40 percent of the population. Coming from an organization of the “elite” countries, it must really mean something for the Korean policymakers.

Drawing on harmonized data covering the 34 OECD countries over the past three decades, the econometric analysis in “Trends in Income Inequality and its Impact on Economic Growth” suggests that income inequality has a sizable and statistically significant negative impact on growth, and that redistributive policies achieving greater equality in disposable income have no adverse growth consequences.

Further, it suggests that it is inequality at the bottom of the distribution that hampers growth. Additional analysis suggests that one key channel through which inequality negatively affects economic performance is through lowering investment opportunities ― particularly in education ― of the poorer segments of the population.

These findings have relevant implications for Korea, which is grappling with slow economic growth.

“On one hand, it points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality: focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases. On the other hand it indicates that policies that help limiting the long-run rise in inequality would not only make societies less unfair, but also richer,” according to the report.

“In particular, the analysis highlights the importance of two pillars of a policy strategy for tackling rising inequalities and promoting equality of opportunities. One policy avenue to reduce inequality involves reforms to tax and benefit policies,” the paper notes.

“As top earners now have a greater capacity to pay taxes than before, governments may consider reexamining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden.”

It adds that the unequal tax treatment of income from different asset classes increases inequality in some cases and distorts the allocation of capital.

Undoubtedly, this is very valuable advice for Korean policymakers, and something they should heed.

That is not all. A recent survey by Statistics Korea found that from 2011 to 2013, more than 3 million people fell into relative poverty, with their households earning less than half of the median income. In addition, according to the OECD Economic Survey 2014, Korea’s middle class is shrinking and its relative poverty rate is the eighth highest among the 34 member countries.

As some experts have noted, the major sources of rising income inequality are closely related to the neoliberal transformation of the Korean economy. The neoliberal reform of the labor market over the past decade and a half produced a sharp cleavage between regularly employed workers and nonregular workers. The Korean working class, which used to be relatively homogeneous in terms of the job market and wage conditions, has become internally divided, and this reflects growing income inequality in the country. It is therefore essential to address the underlying causes by reducing the share of nonregular workers.

Furthermore, in recent years, the significant income disparities that have long existed between the chaebol and SMEs have become even greater.

Due to economic structural problems, the rigidity of the regular labor market and an environment that favors temporary employment, the creation rate of stable, decent jobs has waned.

Also, factors pushing fundamental inequalities are increasing while Korea’s redistribution remains poor due to weak welfare policies. Although the government has long talked about redistribution, and President Park has long touted her welfare pledges, the pace at the ground level is really slow.

Ignoring the widening income inequalities in Korea, the government appears to be only paying lip service to income redistribution and social welfare while focusing on efforts to reinvigorate the economy.

Park recently pledged to expand social welfare programs without raising taxes, something that is not feasible. The government and the ruling party should not be afraid that introducing excessive welfare measures and tampering with tax rates will rein in economic growth.

Korea should focus on inequality at the bottom income bracket in an earnest way. As has been widely acknowledged, the size and nature of the Korean welfare system is currently unsatisfactory, and there certainly is a need to expand and improve it. This should go hand in hand with strengthening the progressive tax and expanding the sources of taxation ― not just by raising taxes for the poor smokers.

Public welfare spending takes up 10 percent of GDP, close to half of the 21 percent average among OECD members. The prospects for declining economic inequality in Korea in the near future are very dim and over the years the welfare cost will increase. On the other hand, the tax rate is equal to 20 percent of the GDP, lower than the OECD average of 25 percent.

Clearly, it is time the government took a hard look at its trickle-down policies.

Thursday, December 4, 2014

Validity of deflation concerns in Korea

First published in The Korea Herald:

With the latest consumer price index showing a further decline in Korea’s inflation rate, the scaremongers are having a field day. While some suggest that the country is staring at deflation, others are going so far as to suggest that Korea has to brace itself for a “lost decade,” similar to what Japan faced.

A government report released on Tuesday showed that Korea’s consumer prices grew at the slowest pace in nine months in November. The CPI rose 1 percent last month from a year earlier, slowing from October’s 1.2 percent gain, the lowest rise since March.

The Statistics Korea data showed that from a month earlier, the price index also inched down 0.2 percent, the third straight on-month decline. The core inflation, which excludes volatile oil and food prices, rose 1.6 percent on-year, the slowest increase since August 2013, when it gained 1.5 percent.

Technically speaking, Korea is experiencing a period of temporary decrease in prices, or disinflation. Historically, the country has avoided long periods of declining prices, so it is natural that when it experiences disinflation, economists and policymakers start getting cautious. More so since just next door, Japan experienced disinflation in the first half of the 1990s, which expanded to deflation from 1994 through 2004, bogging down its economy; and therein lies the concern.

However, we should not start confusing the concepts of deflation and disinflation.

Deflation is characterized by a sustained aggregate fall in the Consumer Price Index or gross domestic product deflator. A sustained price fall can exert more or less permanent influence on a country’s economy with consumption and demand remaining sluggish.

The reasoning is simple: During deflation, if consumers and corporations expect prices to go down, they will often delay purchases, waiting for a better price, which in turn will dramatically slow down demand, causing prices to drop further. This leads to a downward spiral that reduces the circulation of money through the economy, which may limit growth.

Moreover, it generally occurs during long periods of high unemployment, industrial overcapacity, stagnant wages and falling labor costs. High unemployment leads to lower aggregate consumer demand for goods and services. As demand decreases, businesses generally lower the prices of their goods and services. Over time, lower prices can result in less cash flow and profits for companies, which then are inclined to reduce or postpone hiring and initiate layoffs.

The concerns of the deflation scaremongers in Korea are valid, no doubt, but at the ground level, there is a marked difference in what Korea is experiencing now and what Japan experienced in the ’90s.

True, prices are decreasing, economic growth is low and private consumption is down, but then there are valid explanations for these.

In Korea, the slowing price hikes are attributable in large part to falling international crude oil costs, which puts downward pressure on many product prices. The data referred to earlier showed that oil prices in November dropped 7.7 percent on-year and 2.7 percent on-month. Affected by the falling energy costs, factory product prices inched down 0.1 percent in November from a year earlier.

There are outside influences on core commodities that move prices and cause them to stay unnaturally low or high.

With regards to low GDP growth, any economic upheaval in China, the U.S or the eurozone has a great impact on Korea’s economy since it is mostly export-driven. That is precisely the reason for the slow growth.

The Korea International Trade Association has forecast that Korean exports will top the $600 billion mark for the first time ever in 2015 thanks to the faster pace of global economic growth and trade. The landmark figure represents a 4.3 percent increase from the expected $576 billion worth of goods to be exported this year.

There is not much the government can do directly on the trade front to revive the economy. It can, of course, try to stimulate the economy by reviving consumer demand, which it is trying to do. The results will take time and cannot happen overnight.

Further, as noted earlier, deflation generally occurs during long periods of high unemployment, industrial overcapacity, stagnant wages and falling labor costs. That is not the case in Korea.

The country’s official jobless rate was 3.2 percent in October, unchanged from the previous month and up from 2.8 percent a year earlier. The per capita real wage for salaried workers was 2.95 million won per month in the third quarter, inching up 0.08 percent from 2.94 million won over the same period last year.

The OECD seems to be more bullish on the Korean economy and policies than the local experts and economists. In its latest country report, the OECD forecast that Korea’s economy would grow 3.8 percent in 2015 on the back of the government’s fiscal stimulus and monetary policy easing. The inflation rate will reach 2.2 percent next year, private consumption will grow to 3 percent and exports may rise 4.9 percent.

The Bank of Korea still has room to become more aggressive in quantitative easing if growth continues to falter. On Dec. 11, the central bank is slated to announce its decision on whether it would further lower the current interest rate of 2 percent following previous rate cuts in August and October.

The irony is that while many experts are calling for more cuts now to stimulate the economy and avoid deflation, there are even more who are against it because of its impact on household debt. The BOK is damned if it does and damned if it does not.

Theoretically, deflation is hard to predict and almost impossible to verify until it has set in. It also makes it difficult to determine if it is really all that bad for the economy.

It may sound strange, but deflation can also be perceived to have positive effects. After the 2008 financial collapse of Ireland and the resulting recession, deflation was treated as a temporary condition that allowed for an improvement in competitiveness and balancing the budget. Additionally, moderate deflation may benefit savers and investors because the value of their assets appreciates and the immediate impact is an increase in purchasing power.

Either way, it is also possible that some deflation may be a normal part of our economic cycle, and is not always such a bad thing.

Tuesday, December 2, 2014

Korean mortgages reveal tactical shift

First published in The Korea Herald.

A lot has been written in recent months about Korea’s soaring household debt and its implications for the economy. Many experts seem to agree that the country is staring at a catastrophe waiting to happen, and call for the debt to be reined in if the country has to strengthen its economic fundamentals.

Bank of Korea Governor Lee Ju-yeol is also of the view that efforts need to be made to control the growth of household debt, as it may dampen consumer spending ― even though the central bank’s decision to cut interest rates in August and October has indirectly promoted its growth.

In the face of all this, Finance Minister Choi Kyung-hwan has stated that an increase in household debt would have a “limited” impact on the economy and the focus should be on reinvigorating the sluggish economy.

As of end-September, the latest Bank of Korea data showed that outstanding credit to households by financial institutions, including commercial lenders, insurers and financial agencies, stood at 1,060.3 trillion won ($960 billion), with total loans registering 1,002.9 trillion won, of which mortgage loans alone accounted for a whopping 445.2 trillion won. If you add up mortgage loans by Korea Housing Finance Corporation and the National Housing Fund, it amounts to 480.9 trillion won.

Not surprisingly, experts have come out against the government decision to relax the real estate policies, which has led to a rise in household loans, saying that it is like adding fuel to fire.

In end-July, the government lowered hurdles for property purchases, as part of a stimulus package aimed at spurring economic growth, which fell in the second quarter to the slowest pace since early last year, loosening caps that were imposed in the mid-2000s when the property market was booming.

It reset the loan-to-value ratio, a gauge of loan size to the underlying collateral, to a uniform 70 percent, from between 50 and 85 percent depending on region; and at the same time, the debt-to-income ratio, which measures a borrower’s ability to repay, became 60 percent across the country, as against 50-65 percent previously.

To top off these measures, it also announced real estate deregulation measures, which included easing reconstruction of old apartments and lessening the supply of new homes.

Critics say the government’s policies will actually increase household debt in the long term and stifle domestic demand, as they encourage households to stack up higher debts. When delinquency rates rise and housing prices fall, it will trigger distressed sales for repayments, which will apply additional downward pressure on asset prices, creating a vicious cycle leading to debt deflation.

As of now, it is too soon to predict the impact of these measures, but the household loans are certainly not expected to decline anytime in the near future.

Many economists are concerned that the massive household debt problems will negatively and significantly affect economic growth, with many doubting the effectiveness of countermeasures, as excessive borrowing could discourage spending.

It could of course be a nonissue if Korea acts quickly to boost economic growth and makes household income rise faster than debt, which is what the government is trying to do.

Amid all this noise the financial regulator, the Financial Services Commission, has underplayed the doubts, saying that the quality of debt is improving. It cited the shift in the type of institutions from which people are borrowing. Those who previously would have had no other choice than to borrow from nonbanking financial companies at higher interest rates have mostly changed course to apply for loans at banks due to the relaxed regulations. That lowers the financial burden of interest payments, reducing the overall risk of defaults.

Is this really the case?

Let us take a look at the household credit data that was released by the BOK on Nov. 25. If we look at the two-month period before the housing mortgage rules were eased and two months after, there seems to some movement in that direction.

In June-July bank lending to households was 6.5 trillion won while nonbank lending was 5.1 trillion won. In the August-September period, banking lending was higher at 9.3 trillion won, while nonbank lending was lower at 2.6 trillion won. In other words, bank lending grew by 43 percent and nonbank lending fell by 49 percent. There is merit to what the FSC has been saying, something that has been lost in the din raised by critics.

Moreover, even the case of debt deflation that the experts are concerned about is not happening. Recent data shows that housing prices have been increasing since the new rules came into force.

The Land Ministry has noted that the number of home transactions reached an eight-year high of 108,721 in October, spiking 20.4 percent from a year earlier. Also reflecting an apparent recovery in the real estate market, the number of groundbreakings for housing construction jumped 53.9 percent on-year to 60,085 last month.

As they say, there are two sides to every coin. There is no doubt that the government should keep a watch on the growth in household debt and step in immediately when there are signs of a problem. But clearly as of now, one should not jump to conclusions just on the basis of the absolute figures for household loans.

I think it is premature to suggest that Korea is staring at a crisis. The household debt issue should be considered in the context of the households’ ability to repay.

With the tactical shift in housing loans from the insecure nonbanking sector to the more secure banking sector, there seems to be less risk of widespread default.

The biggest risk is a sharp fall in residential property prices. Korean households have more than 80 percent of their assets in real estate. It is expected that the recovery of the real estate market will boost domestic demand and household income, which may eventually solve many fundamental problems.

In any case, the country has the means and experience to deal with a banking crisis. The saving grace: history has endowed Korea with a legacy of distortions in its credit system, which has taken time and a few crises to resolve. Today, its financial system is more mature and less prone to such crises than before.

Also, basic tools to manage household debt are already in place ― for example, the “Measures to Enable Soft-Landing of Household Debt” (June 2011) and “Measures to Promote Structural Soundness of Household Debt” (February 2014).

This is not to suggest that there will not be a problem. But we should be confident that the government will adequately manage the risk factors, if any, of household debt.

Sunday, November 23, 2014

Win-win regional trade pact choices for Korea

First published in The Korea Herald.

After dillydallying for several years, China has thrown the cat among the pigeons by aggressively pushing for the Free Trade Area of the Asia-Pacific at the recently concluded APEC summit in Beijing.

Threatened by China’s urgency, the United States, which has been driving its own Trans-Pacific Partnership minus China, was seen making backroom maneuvers to dilute any reference to the FTAAP in the Leaders’ Declaration. It did manage to take out the deadline of 2025 that was in the draft and what was finally released had no real specifics, except that a collective feasibility study will be concluded by 2016. 

The final declaration noted: “we decide to accelerate our efforts on realizing the FTAAP on the basis of the conclusion of the ongoing pathways, and affirm our commitment to the eventual realization of the FTAAP as early as possible by building on ongoing regional undertakings, which will contribute significantly to regional economic integration, sustained growth and common prosperity in the Asia-Pacific region.”

The idea of creating the FTAAP has been discussed for many years at the annual APEC gatherings, but it is only recently that China has stepped up diplomatic efforts. It would not be wrong to say that it wants to assert its economic clout and neutralize the U.S.’ efforts to forge the TPP in its own backyard.

“Having reached an important consensus on starting the FTAAP process ... What we should do now is translate the consensus into action,” Chinese President Xi Jinping said in his speech at the opening session of the summit on Nov. 11.

Just a day earlier, U.S. President Barack Obama expressed his desire to make the TPP a reality. “We’re going to keep on working to get it done,” he said, describing it as “the model for trade in the 21st century.”

While the two countries battle it out for influence, another regional trade agreement is slowly making progress ― the Regional Comprehensive Economic Partnership.

The three RTAs ― the FTAAP, TTP and RCEP ― are all focused on the Asia-Pacific region. 

APEC ― comprised of 21 member states including China and the U.S. ― first formally began discussing the concept of the FTAAP at the 2006 Hanoi summit, although proposals for such an agreement have been around for a long time. In 2010, APEC leaders issued its “Pathways to FTAAP,” and instructed members to take concrete steps toward the realization of the RTA.

Over the past several years, members have discussed a broad range of issues relevant to the prospects for the deal, conducted analytical work, addressed a number of next-generation trade and investment issues, and undertaken sectoral initiatives. However, China was not really keen to push ahead with the deal.

Sensing this, in November 2011 the U.S and eight other countries (Brunei, Chile, New Zealand, Singapore, the U.S., Australia, Peru and Vietnam) formally announced the TPP, which is intended to “enhance trade and investment among the partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.”

Malaysia officially joined in October 2010, Canada and Mexico in October 2012, and Japan in July 2013.

So far 20 formal rounds of TPP negotiations have been held. However, the members have been unable to reach a consensus on a number of contentious issues like intellectual property and the liberalization of agricultural markets. Adding to this, the U.S. could not make forward progress because of political difficulties at home regarding the passage of a Trade Promotion Authority by Congress. Perhaps this is why China is suddenly showing interest in the FTAAP.

As for the RCEP, it is a proposed trade deal between 10 ASEAN member states: Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Australia, China, India, Japan, Korea and New Zealand.

It was announced at the 19th ASEAN Summit in November 2011, and negotiations began a year later, aimed at concluding talks by end-2015. The sixth round of negotiations are due to take place in New Delhi in the first week of December. It remains to be seen whether the negotiations will be successful and the targeted deadline reached, which at present seems unlikely. 

So, where does that leave Korea in the grand scheme of things?

It is already a part of the FTAAP and RCEP, and has also expressed its interest in joining the TPP. While the two largest economies fight it out for dominance, Korea can gain by participating in all three RTAs. Even if one of them falls by the wayside, it has nothing to lose. Being an export-driven economy, it has already been actively pursuing FTAs with its biggest trading partners, and has made quite a few notable achievements.

It makes sense for Korea to ask to join the TPP as soon as possible, instead of sitting on the fence because of its bilateral issues with Japan. The country can pursue the TPP side by side with other RTAs since they are mostly complementary and will only reinforce each other.

Come to think of it, all three RTAs are quite different in scope. Experts have noted that the TPP deal is likely to be much more substantial in terms of depth of prospective trade liberalization and rule-making obligations compared to the other two. It includes stipulations for labor and environmental protection, intellectual property protection and rules for state-owned enterprises.

Compared to the TPP, the standards and degree of liberalization sought in the RCEP are low. The founding document states: “individual and diverse circumstances” of its members, and provisions on labor rights, intellectual property, SOEs and other behind-the-border issues will either be left out or only lightly addressed.”

However, the RCEP could produce significant economic results. The members represent 49 percent of the world’s population and account for 30 percent of world GDP. It also makes up 29 percent of world trade and 26 percent of world FDI inflows. 

Also, according to a recent study, the FTAAP would result in income gains of about $2 trillion, or nearly 2 percent of the world’s GDP in 2025. The biggest winners would be China, the U.S., Japan, Russia and Korea.

Whichever of these deals is wrapped up first will be the foundation for the next deal and finally the total economic integration of the Asia-Pacific region. Either way it is a win-win situation for Korea.

Sunday, November 16, 2014

Shady projections on Korea-China FTA

First published in The Korea Herald.

Now that the dust has settled, and the free trade deal between Korea and China has been sealed, it is time to look at the validity of various claims being made on its economic impact once it is implemented sometime next year.

I am not referring to the merits or demerits of the FTA and the bruises to the agricultural sector, but to the economic projections that are being thrown around by the government officials.

There is no denying the high expectations for the trade deal compared to the FTAs with the U.S. and the European Union, since China is Korea’s largest trading partner, with a massive market. Moreover, it is bang next door, and offers a definite advantage compared to other economic blocs.

Under the deal, Korea will eliminate its tariffs on 79 percent of all products, or 9,690 items, imported from China within 10 years following the implementation of the deal. China, meanwhile, will eliminate its import duties on 71 percent, or 5,846 products, shipped from Korea over the same period.

On the face of it, this is an opportunity not to be missed. For this reason, the government ― which rushed to wrap up the deal, ignoring the side effects ― went to town after the announcement in Beijing on the sidelines of the APEC summit.

The Ministry of Trade, Industry and Energy immediately rushed in to state that the FTA was “expected to help boost the countries’ annual bilateral trade to $300 billion in 2015. This will mark a 39.5 percent hike from $215.1 billion in 2012. It will help bring Korea’s per capita income to over $30,000.” The ministry also said that as a result of the deal Korea’s gross domestic product would go up by 2-3 percent in the short term.

Reading this, I wondered on what basis the projections were made, and that got me digging. In the past 10 years since I settled in Seoul ― and, coincidentally, since Korea started along the path to becoming an FTA juggernaut ― these types of projections have been made by the government after every deal is inked.

From Korea’s first FTA with Chile to its latest with China, government officials have always highlighted the supposed impact on GDP, trade and per capita income. This was done when eight other FTA were implemented in the past decade ― including with major economies such as the United States, the European Union, India and ASEAN ― and even when FTAs with Colombia, Australia and Canada were concluded recently.

I have noticed a pattern in these “official economic projections.” All of them are from the joint feasibility studies that were conducted before the respective FTA negotiations began.

It is the Korean government’s usual practice to carry out a joint study with a candidate country to examine the feasibility of an FTA before it starts negotiations. The joint study ― normally done by the state-run Korea Institute for International Economic Policy and an institute from the partner country ― examines such issues as the economic effect of the FTA, sectorwise impact, the scope and coverage, and negotiating modalities.

When the joint study ends with the conclusion that the proposed FTA will bring benefits, a public hearing is held and then negotiations with the partner country commence. It takes several years for the negotiations to be completed and then many more months or years till they are finally ratified by the National Assembly and enforced.

The process for the Korea-China FTA started in November 2004 when former Chinese President Hu Jintao and former Korean President Roh Moo-hyun declared the launch of an unofficial feasibility study. Completed in 2006, this study concluded that the FTA would be mutually beneficial and a win-win for both countries.

In November 2006, both the countries then decided to upgrade the unofficial study to a joint study made by government, business and academia, which concluded in May 2010. After a public hearing in February 2012, official negotiations started and were wrapped up after 14 rounds in November 2014.

In other words, there was gap of four years since the report of the joint study was published and the deal was announced by President Park Geun-hye in Beijing on Nov. 10.

But that is not all. Interestingly, the joint study report ― a comprehensive and detailed 170 page analysis of the impact on various sectors and trade mechanisms ― did not use its own estimation based on any economic model to talk about the overall impact on the economy vis-a-vis GDP, bilateral trade and per capita income. It instead refered to the economic projections made by the earlier unofficial study conducted by the Development of Research Center of China and KIEP that was published in 2006. Moreover, the first analysis used the 2001 statistical database, which at that time was the latest updated version of the Global Trade Analysis Project model, to derive these projections.

I have no issue with the use of the GTAP model, which aggregates different levels of sectoral and regional details, but the date of the estimates and the statistics used raise a lot of questions about the validity of the projections being made today. More so because it shields a whopping 10 percent of all goods exchanged between the two sides from tariff abolition, the result of negotiators simply throwing out contentious items as they rushed to seal the deal.

While being gung ho about the FTA, the government relied on 13-year-old data and an 8-year-old analysis to make the claim about the economic impact. One can only take their assertions with a bucket load of salt.

We will have to wait for a more recent analysis by KIEP or any other reputed academic institution to gauge the actual economic impact of the agreement on the Korean economy. Even then, there are other economic variables and global economic situations that could come into play.

It is safer to keep the government macroeconomic projections on the deal at an arm’s length and concentrate on the sectorwise costs and benefits. Especially since there are still many hurdles to cross before the deal is ratified by the National Assembly and finally implemented.

Thursday, November 6, 2014

Doing business in Korea ― going beyond ranking

First published in The Korea Herald.

A World Bank report released last week ranked South Korea as having the fifth-best business environment among 189 countries this year. Commendably, the country also topped the Group of 20 emerging and advanced countries and came in third among Organization for Economic Cooperation and Development member countries.

Between June 2013 and June 2014, “Doing Business 2015: Going Beyond Efficiency,” which measures 189 economies worldwide, documented 230 business reforms, with 145 aimed at reducing the complexity and cost of complying with business regulations, and 85 reforms aimed at strengthening legal institutions.

Only Singapore, New Zealand, Hong Kong and Denmark ranked higher than South Korea.

Not surprisingly, the Finance Ministry was elated. In an official statement, it noted that this is two notches above its rank in the previous year. What is more, all the Korean media outlets picked it up and highlighted it, without crosschecking.

The rank actually remains the same, after adjustment, the World Bank has noted. But that is just a minor issue, and we cannot really fault the Finance Ministry for glossing over the fact.

A closer look at the data, which the ministry has also ignored, suggests that not everything is as rosy as it is made out to be. The ministry has attributed this rank to “improvements in regulations and the system for starting a business, granting construction permits and protecting minor investors.”

This is not entirely true, if we take a look at what the data actually shows.

The factors that are scrutinized to compile the ranking include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

The World Bank data reveals that South Korea has slipped in many of these parameters. In starting a business, South Korea’s rank slid from 16th to 17th this year; for registering property, it slipped from 78th to 79th; for getting credit, it dropped six notches from 30th to 36th; and in paying taxes, it slipped from 24th to 25th.

The country’s rank is stagnant is other parameters such as dealing with construction permits, trading across borders, enforcing contracts and resolving insolvency.

There is one parameter in which South Korea has shown improvement, and that is protecting minority investors. Its rank has climbed from 26th to 21st, but the country still has a long way to go.

It is only in providing electricity to businesses that South Korea is ranked first, and for that, the government can be proud.

These numbers beg the question: Has the situation really improved on the ground for investors wanting to start a business in South Korea? The figures speak for themselves.

The Finance Ministry said the improved ranking in business environment could have a “positive” impact on luring more foreign investment.

In the first half of 2014, South Korea’s FDI recorded historic highs for amounts declared and received. The amount declared was $10.33 billion, with annualized growth of 29.2 percent from $8 billion in the same period of 2013. The amount received was $7.2 billion, rising 55.9 percent from $4.62 billion on-year.

However, foreign investors do not just look at the overall rank when they explore opportunities here. They also get into the nitty gritty of all the issues outlined in the World Bank report, as well as the country’s labor market regulations.

If the government is serious about luring more investment and competing in Asia for investors, it has much left to do in terms of improving the business environment and raising South Korea’s rank in all the parameters.

As the World Bank has noted, a high overall ranking does mean that the government has created a regulatory environment conducive to operating a business. However, it added, “While this ranking tells much about the business environment in an economy, it does not tell the whole story. The ranking on the ease of doing business, and the underlying indicators, do not measure all aspects that matter to firms and investors or that affect the competitiveness of the economy.”

Wednesday, November 5, 2014

Should South Korea join China-led AIIB?

First published in The Korea Herald.

South Korea, Australia and Indonesia were conspicuous by their absence in Beijing on Oct. 24, when China, India and 19 other countries signed a memorandum of understanding to launch the Asian Infrastructure Investment Bank ― set to become one of the Asia-Pacific’s biggest lenders in the years to come.

While there is still time for the three countries to make a decision ― the AIIB will be operational only next year ― and they are keeping their options open, there is a real danger that they may not enjoy the same clout as they would have if they had joined the other Asian countries in Beijing. The case is more so for South Korea, whose economy is closely linked to other emerging Asian economies.

The Finance Ministry has officially stated that it has been speaking with China to request further consideration over details such as the AIIB’s governance and operational principles.

“We have continued to demand rationality in areas such as governance and safeguard issues, and there’s no reason not to join it,” Finance Minister Choi Kyung-hwan was quoted as saying.
Obviously, Korea is still in a dilemma on what sort of strategic choices it has to make as China and India together challenge the international economic order led by the U.S. and its Western allies.
Did South Korea do the right thing by refusing to commit itself immediately as a founding member?

On the surface ― there have been numerous media reports ― the three countries gave in to pressure from the U.S., which has raised questions about “the need for another funding agency to rival the World Bank and Asian Development Bank” as also concerns on “its governance, environmental standards and debt sustainability.”

Among the Asian countries, Japan has also kept its distance, but has not raised any eyebrows as was widely expected. It possesses the most influential and powerful voting power over the decision making of the $175 billion ADB along with the U.S., and is not rushed to support a new “rival” on the block.

Since its establishment in 1966, the ADB has played a clear complementary role to the World Bank in aiding infrastructure development and poverty alleviation in the region. Its main role is to make money available to member countries so they can implement their own development programs and provide working-level assistance in carrying them out.

In 2013, the ADB approved $10.19 billion in loans and $142 million in equity investments, and raised $12 billion in long- and medium-term funds.

However, if one looks at the shareholding pattern of the organization, it becomes clear that apart from Japan, the U.S. and its Western allies, the remaining emerging economies in Asia have very little say in the running of the organization that is meant for them. The ADB was modeled closely after the World Bank, and has a similar weighted voting system where votes are distributed in proportion to each member’s capital subscriptions.

As of December 2013, Japan had the highest percentage of shares at 15.7 percent with a voting share of 12.8 percent, followed by the U.S. with 15.6 percent (12.7 percent vote) and China, India, Australia, Canada, Indonesia, and Korea each with 5-6.5 percent of shares and a 4-5.5 percent vote. The European Union member states, if taken as a single block ― though they vote independently ― have a share of 14.4 percent with a voting share of 15.7 percent.

Since the ADB’s early days, critics have charged that Japan, the U.S. and its Western allies have extensive influence over lending, policy and staffing decisions. There is a feeling that these decisions are not always in the best interest of the other Asian countries.

It was therefore natural for China to push for the proposed $100 billion AIIB. After initial reluctance, India too has joined, along with Singapore and other regional heavyweights.

By becoming a founding member and having a greater stake in the organization, Korea could easily raise its economic clout in the region. The AIIB should not be seen as a rival to the ADB, but as a complementary organization.

As per the ADB’s estimates, developing Asian economies need to invest $8 trillion to 2020 just to keep pace with expected infrastructure needs, of which only a tiny portion is provided by the existing multilateral lenders. As such, the AIIB will be able to bridge the gap to a certain extent.

There is clearly room for a new development bank, specialized in financing large-scale economic infrastructure on commercial terms. The ADB does have the expertise to lend a lot more for infrastructure, but has moved in a different direction, focusing more on concessional lending and knowledge sharing with low-income countries, with the main goal being poverty alleviation. That leaves an important niche to be filled by the new organization.

It will also be more effective if the countries that are affected by its lending policies actually have a greater say in how it is run.

The MOU said authorized capital of the bank would be $100 billion and that the AIIB would be formally established by the end of 2015 with its headquarters in Beijing. China is set to be its largest shareholder with a stake of up to 50 percent, the remaining coming from other countries and the private sector.

If Korea has concerns about its governance, it should become a member and try to fix it. Not becoming a founding member of something like this could be a tactical blunder. This is the opportunity to grab a big stake and voting powers, before it is too late.

In any case, in a speech to delegates after the inauguration, Chinese President Xi Jinping promised the best practices. “For the AIIB, its operation needs to follow multilateral rules and procedures. We have also to learn from the World Bank and the Asian Development Bank and other existing multilateral development institutions in their good practices and useful experiences,” he said.

Refusing to take part in an effort to help Asian countries fix their infrastructure will only end up putting Korea in a very poor light ― particularly since, in the initial stages of development, it borrowed heavily from the ADB to shore up its own infrastructure.

Korea needs to continue to develop its relationship with broader Asia and be seen as a part of the development push instead of bowing to U.S. pressure. Moreover, joining the AIIB is in no way indicative of Korea’s stand on political issues in the region.

Sunday, October 26, 2014

An ‘emotionally richer’ Templestay program

First published in The Korea Herald

If you want to experience a Templestay program in Seoul, but do not have the time to venture far, there are four popular places to do so in the area ― Myogaksa Temple and Geumseonsa Temple in Jongno-gu, Bongeunsa Temple in Gangnam-gu and the International Seon Center in Yangcheon-gu.

But not included in this list is one of the oldest temples in Seoul, Jingwansa Temple, a smaller but historically rich temple located just to the west of Seoul with a reputation for stellar temple food.

The Seoul City government is now trying to raise awareness of its historical value and its importance of being one of the four “great temples” in the city, together with Bulamsa Temple in the east, Sammaksa Temple in the south and Seunggasa Temple in the north.

To this end, they invited a dozen journalists to experience a short program Thursday.

Nestled in the expansive mountain and deep valley, the temple is not only in the foothills of the beautiful Bukhansan National Park, but also contains an impressive collection of cultural and historical properties. It provides a quiet place for city dwellers to enjoy, even as they learn about Buddhism.

As noted by Seonwoo, director of Jingwansa Templestay program, during the Joseon Dynasty, King Sejong built a library in the area for Confucian scholars to visit and read.

Foreign journalists attend the Templestay program organized by Jingwansa Temple in Seoul. (Kim Myung-sub /The Korea Herald)

“The temple was built for a monk named Jingwan by the eighth king of the Goryeo dynasty, Hyeonjong, about 1,000 years ago. At the age of 12, Hyeonjong was kicked out of the palace during a power struggle. The monk Jingwan took care of him, saving his life. After Hyeonjong became king, he built a temple named after the monk called Jingwansa to repay him for his kindness.”

The temple compound consists of the main Buddha sanctuary, or “daeungjeon,” in the middle, the monks’ living quarters to its left, the “myeongbujeon,” a place to pray for the dead spirits so they can have an easy passage into eternity to its right, and other buildings.

“During the Korean War in 1950, all the buildings in the temple compound were destroyed by bombs except for three including the ‘Nahanjeon,’ a sanctuary where Nahan’s spirit lives. The remaining buildings contain holy artifacts which were produced from the late 16th century to the early 20th century and were named cultural assets of Seoul,” she said.

During restoration work in 2009, materials related to the Korean independence movement against Japan were found ― newspapers published by independence fighters and a Korean flag from 1919. These are now on public display.

“We offer a Templestay program where visitors can experience Buddhist culture throughout the year. While some restoration work is going on, starting January 2015, visitors can get to experience the entirety of Buddhist living, including monastic food ― the ‘ultimate slow food,’ as it’s called,” she said.

“Sustainability has been at the core of the Korean Buddhist diet for centuries. The temple cuisine follows several strict rules, with no meat and fish, and almost all ingredients must be grown on or near the temple grounds.”

Korean Buddhists are prohibited from using vegetables like garlic and onions that are considered “hot” and distracting to meditation.

There are a variety of programs offered, including a “freestyle” program, a program that lets one experience the daily life of practitioners in the temple, as well as Buddhist cultural programs, and others designed for groups and those with regular jobs. The programs feature chanting services, 108 prostrations, tea and conversation with a monk, meditation, monastic formal meals and the preparation of temple food.

This is the only temple in Seoul that serves “suryukje,” a Buddhist ceremony that provides food and Buddha’s teachings to spirits and starved demons that wander the land and sea, and provides training facilities for female monks. The Jingwansa National Suryukdaeje is a royal ceremony practiced exclusively in Seoul for 600 years after the first king founded the Joseon dynasty. It is performed every leap year for 49 days between August and October, and is designated as Intangible Cultural Heritage No. 125 by the government.

Saturday, September 27, 2014

Unity in diversity: 2014 Incheon Asian Games

First published in The Korea Herald:

The 2014 Asian Games, the largest sporting event on the continent, kicked off Friday for a 16-day run in Incheon, a metropolitan city west of Seoul.

The event, governed by the Olympic Council of Asia, brings together some 10,000 athletes for a multisport spectacle second only in scale to the Summer Olympics.

Korea has had the experience of hosting the Asian Games twice before ― first in 1986 in Seoul and second in 2002 in Busan, the second-largest city.

This will be the biggest Asiad ever, with 439 events in 36 sports and disciplines, and the organizers have pledged to stage an impressive event that will showcase Asia’s unity in diversity, with all 45 participating countries marching as one.

The official slogan is “Diversity Shines Here,” which represents and highlights the significance of Asia’s diversity in history, culture and religion.

As before, the powerhouses of Northeast Asia will slug it out for the gold medals.

China is the hot favorite to top the medal count for the ninth straight Games, and is sending the biggest delegation to Incheon with 899 athletes.

Fireworks rise over the opening ceremony of the Asian Games at the Incheon Asiad Main Stadium on Friday. (Yonhap)
It hopes to use the Incheon Games as a springboard to launch the careers of future Olympic champions.

The country set an Asian Games record by scooping 416 medals in the previous edition ― 199 gold, 119 silver and 98 bronze medals.

It is likely to dominate diving, gymnastics, table tennis and badminton, while fielding big stars across many of the other sports in Incheon.

South Korea has set an ambitious target of 90 gold medals, though the host would probably settle for less, as long as it finishes above its fierce rival Japan.

South Korea has gold medal favorites in Park Tae-hwan for swimming, Son Yeon-jae for rhythmic gymnastics and Oh Jin-hyek for recurve archery.

It also has high hopes in shooting, fencing, judo and taekwondo, as well as team events such as baseball and men’s and women’s soccer.

North Korea sent around 150 athletes to the Games.

Tokyo has won the right to host the 2020 Summer Olympics but Japan won only seven gold medals at the 2012 London Games and finished third in the medal standings behind China and South Korea at the last four Asian Games.

The Japanese are sending 716 athletes, with their swimming team expected to spearhead the gold medal hunt.

India, a perennial underachiever in global sporting events, is hoping to improve on its tally of 14 gold medals clinched four years ago in Guangzhou, while Malaysia, Singapore and Thailand will battle it out for the top slot in Southeast Asia.

Among the 45 competing countries, 12 have not yet won a gold medal and three have never captured any medal.

After the Games close on Oct. 4, the memory of the fierce competitions will soon fade from people’s minds, but what will remain in the minds of many people will be the spirit that athletes from diverse cultures in Asia demonstrate in the competitions.

Also check facts and statistics on Incheon Asiad here.

Monday, June 9, 2014

India-China Economic Relations in a Changed World Order

Chinese Foreign Minister Wang Yi was one of the first prominent visitors to make a trip to India after the new Indian government was sworn in, showing how much China values its economic partnership (maybe for its own self-interest) with India.
While it is true that economic cooperation between the two Asian giant markets is still hampered by unresolved disputes, there is plenty of scope for advancing economic relations; something that is rattling USA and the European Union.
It should be kept in mind that China and India have yet to agree on sovereignty over an area along the shared Himalayan border (Arunachal Pradesh), the subject of a brief war 52 years ago. Other problems include tension over how to manage over a dozen rivers that the two countries share.
Many Indian security experts also worry that China is trying to encircle the country with a string of ports and naval bases.As many news reports in the Indian media have pointed out, a growing trade imbalance with China has contributed to a current account deficit that pushed the rupee lower last year. While India’s current account deficit has narrowed recently, Indian officials are still pushing for a larger piece of the trade between the two countries. Although India and China have pledged to increase bilateral trade to $100 billion by 2015, right now it appears that there is still quite a long way to go.
News reports suggest that the foreign ministers of both countries discussed ways to increase Chinese investments in India through setting up industrial parks and infrastructure projects. They also discussed ways to address India's concern of huge trade deficit.
Until the end of 2013, the accumulated foreign direct investment from China to India had amounted to $ 0.94 billion. Hardly satisfactory.
There are several institutional mechanisms for economic and commercial engagement between both sides. India-China Joint Economic Group on Economic Relations and Trade, Science and Technology (JEG) is a ministerial-level dialogue mechanism established in 1988 during the visit of former Prime Minister Rajiv Gandhi to China. A Joint Study Group (JSG) was set up after former Prime Minister Vajpayee’s visit to China in June 2003 to examine the potential complementarities between the two countries in expanded trade and economic cooperation. As per its recommendation, a Joint Task Force (JTF) was set up to study the feasibility of an India-China Regional Trading Arrangement. JTF Report was completed in October 2007. There are also Joint Working Groups on Trade, Agriculture and Energy. In Dec 2010, both countries agreed to set up the India-China Strategic and Economic Dialogue (SED). The first SED took place in Beijing on September 26, 2011.
During Chinese Premier Wen Jiabao’s visit to India in December 2010, India and China agreed to set up the Strategic and Economic Dialogue mechanism. "It is a forum for both sides to discuss strategic macro-economic issues impacting both nations as a result of the changing international economic and financial landscape, to share their individual best practices and in handling challenging domestic economic issues and to identify specific fields for enhancing cooperation, learning and experience sharing."
As one news report pointed out- with the growth in bilateral trade between India and China in the last few years, many Indian companies have started setting up Chinese operations to service both their Indian and MNC clientele in China. Indian enterprises operating in China either as representative offices, Wholly Owned Foreign Enterprises or Joint Ventures with Chinese companies are into manufacturing (pharmaceuticals, refractories, laminated tubes, auto-components, wind energy etc.), IT and IT-enabled services (including IT education, software solutions, and specific software products), trading, banking and allied activities. While the Indian trading community is primarily confined to major port cities such as Guangzhou and Shenzhen, they are also present in large numbers in places where the Chinese have set up warehouses and wholesale markets such as Yiwu.
"Most of the Indian companies have a presence in Shanghai, which is China’s financial centre; while a few Indian companies have set up offices in the capital city of Beijing. Some of the prominent Indian companies in China include Dr. Reddy’s Laboratories, Aurobindo Pharma, NIIT, Bharat Forge, Infosys, TCS, APTECH, Wipro, Mahindra Satyam, Dr. Reddy’s, Essel Packaging, Reliance Industries, SUNDARAM Fasteners, Mahindra & Mahindra, TATA Sons, Binani Cements, etc. In the field of banking, ten Indian banks have set up operations in China. State Bank of India (Shanghai), Bank of India (Shenzhen), Canara Bank (Shanghai) and Bank of Baroda (Guangzhou), have branch offices, while others (Punjab National Banks, UCO Bank, Allahabad Bank, Indian Overseas Bank, Union Bank of India etc.) have representative offices. Apart from PSU banks, private banks such as Axis, ICICI also have representative offices in China."
According to information available with the Embassy of India in Beijing, close to 100 Chinese companies have established offices/operations in India. Many large Chinese state-owned companies in the field of machinery and infrastructure construction have won projects in India and have opened project offices in India.
"These include Sinosteel, Shougang International, Baoshan Iron & Steel Ltd, Sany Heavy Industry Ltd, Chongqing Lifan Industry Ltd, China Dongfang International, Sino Hydro Corporation etc. Many Chinese electronic, IT and hardware manufacturing companies are also have operations in India. These include Huawei Technologies, ZTE, TCL, Haier etc. A large number of Chinese companies are involved in EPC projects in the Power Sector. These include Shanghai Electric, Harbin Electric, Dongfang Electric, Shenyang Electric etc. Chinese automobile major Beijing Automotive Industry Corporation (BAIC) has recently announced plans to invest US$ 250 million in an auto plant in Pune. TBEA a Xinjiang-based transformer manufacturer has firmed up plans to invest in a manufacturing facility in Gujarat.  During the visit of Premier Wen to India, Huawei announced plans to invest in a telecom equipment manufacturing facility in Chennai."
I welcome this new development. If China and India join hands, the economic powers of the past, who still strut around with a 'big brother' attitude will get a very good humbling lesson- the future is more important!

Saturday, May 31, 2014

Missed Opportunities for South Korea in India

Even before Narendra Damodardas Modi was officially declared the Prime Minister Designate of India on May 20th, foreign heads of state and governments rushed to personally convey their best wishes to him, looking forward to strengthening relations with India under his leadership.
The notable countries included USA, Japan, Germany, France, China, Russia, UK, Australia, Singapore, Canada, Israel, France, South Africa and Spain among others. From the immediate vicinity of South Asia- leaders from Pakistan, Sri Lanka, Bangladesh, Nepal and Afghanistan sent in their personal messages after the Indian Parliamentary Election results were announced on May 17th. So it was rather surprising that South Korea’s President Park Geun-hye skipped the opportunity to personally convey her wishes- given the huge potential for economic ties between both sides.
The only acknowledgement of the election results came from a low level bureaucrat in the Ministry of Foreign Affairs who read out a short prepared statement: “The government offers its congratulation to the National Democratic Alliance on its landslide victory, which reflects the Indian people’s aspirations for a change and a reform. The government looks forward to working together with the new Indian government to further advance the relations...”
Throughout his election campaign, Modi has emphasized his ‘Look-East Vision,’ on more than one occasion, even singling out South Korea as a shining example of economic development. While admittedly, business-friendly Modi may be more focused on relations with China and Japan, this was the right opportunity for South Korea to send out the right signals before he assumed office on May 26th.
Sadly, President Park was too preoccupied with regional issues and developments in North Korea to even consider giving Modi a call. A personal gesture on her part could have been a step in the right direction, to revive economic relations, which, despite a four-year old Comprehensive Economic Partnership Agreement (de facto FTA) has stagnated.
Moreover, just five months ago, President Park made a State Visit to India, where she talked highly of the complementary economic structures and assets, admitting that only about 40 percent of the trade agreement’s capacity is being utilized.
Trade Relations
It was widely anticipated that the CEPA, which came into effect in January 2010, would lead to more bilateral trade and investments. South Korea has abolished tariff on 93% of Indian imports and India has done the same on 75% of Korean imports. Besides, the agreement sought to increase the interactive trade account as it includes investment in various sectors like goods, services and even intellectual property.
According to statistics compiled by Korea International Trade Association (KITA), while bilateral trade has slightly improved, it is still almost halfway short of the target of $30 billion set for 2014.

Table: Bilateral Trade between India and South Korea (Amount in million US$)
Total Trade
Indian Exports
Korean Exports
         Source: Korea International Trade Association (KITA)

Bilateral trade between both countries was $17.57 billion in 2013, with India ranked as the 15th largest trade partner of South Korea, a very low position. In 2002 India’s share in South Korea’s global trade was 0.83%, which now reads 1.63% in 2013.
India’s contribution in Korea’s global imports increased from 0.78% in 2001 to 1.2% in 2013. In 2013, India was South Korea’s 18th biggest source for imports while India was its 9th biggest export market.
During the first year of operation of CEPA in 2010, bilateral trade between both sides increased by 40%. Indian exports rose by 37% in 2010 while Korean exports increased by 42.7%. In the 2nd year of implementation, bilateral trade reached $ 20.57 billion recording a growth of 20.28%. In 2012 the bilateral trade came down to $18.84 billion and further dropped last year.
Clearly, while considerable scope exists, it is not possible to pump up trade between both sides without government efforts. It is all the more important for South Korea to do so, as its economy has thrived on export-led industrialization.
Bilateral Investments
Over the past few years, even as Indian companies have aggressively expanded globally, they have hardly made any significant inroads into the Korean market. Among the few noticeable investors are Tata Motors Ltd., Novelis Inc. and Mahindra & Mahindra.
While Indian software companies like TCS, WIPRO and L&T Infotech do have a minor presence in the country; they have not made any large commitments to the market.
The major Korean conglomerates that have invested in India include: POSCO, Hyundai Motor, Samsung Electronics, LG Electronics, Lotte, Hyundai Mobis, Doosan Heavy Industries and Hyundai Wia Corporation.
According to EXIM Bank Korea, 647 Korean companies have invested a little over $ 3 billion in India to-date. In contrast, USA continues to be the main investment destination with a total of $ 48 billion; China its main destination in Asia with an overall investment of about $ 46 billion, Hong Kong $ 15 billion and Vietnam $10 billion.
Given India’s huge market and the advantage of having a business-friendly Prime Minister, it is time South Korea woke up to reality and proactively engages with the new government. While the other economic powerhouses have already started their groundwork, South Korea seems to be a laggard in this regard.
India’s booming knowledge-based service industry complements the hardware and manufacturing-based economic structure of South Korea. India’s capabilities in pharmaceutical industry, IT software and auto components usefully complement Korean competence in heavy engineering, automobiles, machinery and electronic hardware. There is also potential for bilateral cooperation in India’s telecoms, high speed Internet and e-governance.
Opportunities for expanding business cooperation exist in engineering, design engineering and construction services. Then there is the power sector and India’s plans to enhance civil nuclear power generation capacity.
There are also many sectors in South Korea that provide ample opportunities for Indian investments. Financial & legal services, auto-parts, food industry, pharmaceuticals, fashion & textiles, and the IT industry are just some of the few industries that Indian businesses may find attractive.
President Park should not rue that she let go of this opportunity by being late to the party.