E-commerce opportunities surging in Korea

First published in The Korea Herald.


E-commerce is rapidly transforming the way in which enterprises are interacting with each other, as well as with consumers, and growing rapidly across the globe. Korea is no exception and it has clocked rapid growth in recent years.

According to Statistics Korea, in the business-to-consumer, or B2C segment, the online shopping transaction value reached 45.24 trillion won ($41.02 billion) in 2014, which increased 17.5 percent from 38.50 trillion won in 2013. The mobile shopping transaction value recorded 14.81 trillion won in 2014, which increased 125.8 percent from 2013.

Furthermore, in a recent report that has been overlooked by local media, the United Nations Conference on Trade and Development has many positive things to say about Korea’s e-commerce industry.

The 125-page Information Economy Report 2015, released on March 24, examines the potential opportunities and risks of e-commerce and examines how countries can benefit the most from the phenomenon in today’s information society.

More importantly, it has also compiled the first B2C E-commerce Index, which will be updated annually, and can serve as a useful tool for countries wishing to assess their readiness to engage successfully in online commerce.

This index is significant because until now, there were few benchmarks of country e-commerce performance. Those that exist suffer from a lack of public availability, scope or consistent methodology, as well as limited geographical coverage.

The UNCTAD Index ― which compares affordable Internet access, mechanisms for paying for goods and services ordered online, and effective solutions for their delivery ― allows countries not only to compare their performance against others, but also indicates where they are relatively strong and where there may be a need for improvement.

In what should please our policymakers, Korea is placed positively in the index with a rank of 8 among 130 countries with a score of 84.3. The countries ahead of Korea include Luxembourg (91.7), Norway (88.3), Finland (88.1), Canada (87.1), Sweden (86), Australia (85.5) and Denmark (84.7).

Noticeably, Korea is way ahead of its Asian counterparts, with Hong Kong ranking 18 and Singapore 26.

The report also looks at rural e-commerce by showcasing the case of Korea. As it notes, the experience in Korea is positive, with rural e-commerce sales continually rising. Success factors include close collaboration between the government, operators and rural citizens to market and sell goods and services.

While the report may appear favorable to Korea, one should bear in mind there is one crucial aspect that has not been included in the Index ― legal and regulatory framework ― which influences the degree of trust in online transactions.

This issue is all the more important, given that the e-commerce market in Korea is booming.

Having said that, one must compliment the Korean government for this performance. With typical Korean farsightedness, e-commerce has figured in the government’s thinking since the late ’90s.

In 1999 the Korean government ― among the first to do so worldwide ― established the “Basic Act on Electronic Commerce,” which was followed by the “Comprehensive Policies for e-Commerce” in 2000 and “e-Business Initiative in Korea” in 2001.

The government’s stated aim was to play an active role in the globalization of e-business and fully promote it as a means to realize structural innovation of its industry and strengthen the competitiveness of Korean companies.

However in the process, attention was being paid to only one segment of e-commerce ― B2C transactions.

When we talk about e-commerce the first thing that pops into our mind is B2C. It involves sales by e-commerce enterprises to consumers and online sales channels of bricks-and-mortar retail outlets or manufacturing firms.

What is not given as much attention is the business-to-business, or B2B commerce. This actually accounts for the bulk of e-commerce worldwide.

It involves transactions between businesses, such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer.

Then there is consumer-to-consumer commerce, or C2C, which covers online action platforms and sales within online communities. This is followed by business-to-government commerce, or B2G, where the buyer is the government entity, such as in the case of public e-procurement.

While B2C has shown remarkable growth, development of the B2B and B2G sectors have not kept pace.

Unfortunately, Statistics Korea stopped collating statistics on B2B and B2G transactions from the first quarter of 2014, so there are no numbers to compare and evaluate. It had argued that “based on the opinions from policymaking agencies, research institutes and universities, we concluded that e-commerce statistics were not any longer useful.”

In recent months there has been steady news of the conglomerates jumping on the B2B bandwagon and investing more resources, seeing the huge potential. This is surely driving the e-commerce market in Korea.

However, for small and medium enterprises, it is a totally different ballgame. Many studies suggest that B2B offers greater potential benefits for smaller business than other forms of e-commerce. Although they need to engage in B2B e-commerce to participate in national or global value chains, they have not been able to take full advantage.

The e-commerce utilization in SMEs is currently found to be quite insufficient. While there are no regulatory hurdles, clearly the initial cost of setting up a B2B system is too high for them.

The government, for its part, is doing its bit by promoting various projects, such as creating infrastructure by establishing and standardizing B2B networks in industries, developing technology, and fostering manpower.

For years e-commerce has been directed at B2C businesses. Now, however, after substantial shifts in buyer behavior, the industry is changing. E-commerce is becoming a leveled playing field between B2C and B2B.

This is presenting some immense opportunities for B2B businesses and making way for a new age of hybrid companies, and the government should proactively help Korean SMEs jump on the bandwagon, instead of sitting by and watching conglomerates take away the entire market.

It should launch projects on international cooperation for the global B2B market so that SMEs can expand their business. Policies should also constantly be identified to keep up with new changes in the market.

Additionally, Statistics Korea should resume publishing regular data on B2B and B2G transactions. It will help the government in tracking developments and tweaking policy when needed.

Read more »

Deregulate lotteries to fund welfare

First published in The Korea Herald.


There has been a heated debate in recent months about the need to raise taxes in Korea to generate revenue for the various government welfare programs to support the needy. While President Park Geun-hye has ruled out the possibility of raising taxes and is instead eyeing the “shadow economy” to get the much-needed funds, there is one other source that has been completely overlooked ― lotteries.

Lotteries are of particular interest to public finance economists since they represent an important source of government revenue in many countries. As a significant contributor to the government kitty, they have been widely examined by economists focusing primarily on their revenue potential and desirability as a method of taxation ― in many countries they exceed in magnitude tax collections on goods such as alcohol or tobacco.

Moreover, lotteries run for or by governments are used to support public programs such as infrastructure development, public safety, public health and education. The principal argument used to support lotteries has focused on their value as a source of “harmless” revenue, contributed by players voluntarily spending their money.

Critics have, of course, argued that lotteries for the most part have a regressive impact ― in the sense that the burden falls disproportionately on people with lower incomes, who typically spend a greater portion of their income on lotteries than those with higher incomes.

That said, while the lottery market in Korea has been growing, the pace of growth has been very negligible. Moreover, the lottery options available to customers are also limited.

Korea’s lottery business model currently has a three-tier structure: the Korea Lottery Commission, primary lottery operators and secondary lottery operators.

The KLC, a government agency responsible for formulating and implementing lottery-related policies, has exclusive authority to issue, sell and manage lottery products, but it entrusts private lottery companies with the operations.

The available lottery schemes are: online lottery game Lotto 6/45, four printed lottery games ― one draw game, three instant games ― and seven Internet lottery games ― four draw games, three instant games. Then there is a sports lottery.

Unlike in other countries, the National Gambling Control Commission, a regulator under the Prime Minister’s Office, sets a limit on sales each year for the industry as part of its efforts “to control, supervise and regulate the gambling industry independently, with prevention policies as the first priority.”

The Finance Ministry asks the NGCC every year to eliminate the sales ceiling, arguing that the lottery is less addictive than other gambling industries and its share of GDP is half of the OECD average and one-third of the rate in other Asian countries. The NGCC has consistently refused the request, afraid of annoying the antigambling lobby.

Since lottery tickets went on sale for the first time in 1947, printed lottery tickets have been dominant in Korea. But from 2003, the Korean lottery market has become disproportionately lopsided toward the online lottery.

Industry experts have noted that Koreans want to try out new lottery products, but the limited options and lack of enthusiasm for other products that offer lesser payouts made them switch back to Lotto.

Lotto continues to offer the highest prize money among all available lotteries, but it is just a fraction of that in other developed markets. While jackpots often run into hundreds of millions of dollars in Europe and the U.S., the average single jackpot prize in Korea works out to around $2 million.

The growth of this industry is artificially restricted as the government has been under constant pressure to “stabilize the market and curb reckless gambling.” On the contrary, by artificially constraining the legal lottery market, the government helps sustain the growth of illegal gambling.

The latest statistics of the Finance Ministry show that Korea’s lottery industry grew for the ninth year in a row in 2014, with total sales surpassing 19.87 trillion won.

According to official data, gambling-related sales ― casinos, lotteries, horse, cycling and boat races and traditional bullfights ― grew 1 percent, by 199.2 billion won from the year before. For 2015, government officials expect the size of the industry will top 20 trillion won, mainly from a rise in demand for lotteries and casinos.

Of this, sales of various lottery tickets and sports betting exceeded 3.28 trillion won each, up 1.4 percent and 6.5 percent, from the year before.

The NGCC’s claim that the domestic lottery market is overheating is far from true. It has only been showing modest growth.

If we contrast the performance of Korean lottery sales with average performances in the Asia-Pacific, the real picture emerges. Estimates by the World Lottery Association show that Asia-Pacific lotteries have been witnessing average growth of over 10 percent.

The fastest-growing market is China. According to government figures, China’s lottery market continued to grow in 2014, with total lottery sales of $61.2 billion, representing a growth of 23.6 percent.

Even in European countries smaller than Korea, with historically similar income levels, the lottery market is almost four times larger.

Clearly, the market growth in South Korea is insignificant given its potential.

It may be true that in the past the industry’s growth potential was limited because of the social stigma attached to lotteries in a Confucian society, but that restraint has slowly faded over the years.

If the lottery market is to expand, the legal and regulatory framework needs drastic changes. The operators should be allowed a wide portfolio of games, which they should be able to offer across all channels ― retail, Internet and mobile.

More importantly, if the government is serious about mopping up revenues without higher taxes, it should consider the lottery option for funding welfare schemes.

Currently, 35 percent of lottery proceeds are appropriated to 10 legally mandated projects in accordance with Article 56 of the Lottery and Lottery Fund Act; the remaining money is used to help low-income families with housing, veterans’ welfare, cultural heritage and art promotion, and other public works.

Instead of imposing penalties and curbing the growth of the market, the NGCC should do away with any limits and let the markets decide. It will go a long way in boosting the lottery market and help the government efforts to boost welfare without tax hikes.

Read more »

Dynamics of Korea-China economic relations

First published in The Korea Herald.


The much-awaited Korea-China Free Trade Agreement was initialed in late February, taking a step closer to implementing what is seen as Korea’s most significant trade deal.

The initialing came about three months after the two countries concluded FTA negotiations that began in May 2012, and is expected to eclipse its deals with the U.S. and the EU, as China is already its largest trading partner.

China, the world’s largest destination for Korean goods, accounted for more than one-quarter ― $145.28 billion ― of Korea’s overall exports of $572.66 billion in 2014. The next biggest national-level markets for Korean exporters are the United States at 11 percent and Japan at 6 percent.

According to news reports, the agreement, currently written in English, will be translated into the two countries’ native languages before it is officially signed.

“The two governments have agreed to work toward the official signing of the FTA within the first half of 2015,” the Ministry of Trade, Industry and Energy said in a press release.

The pact requires approval from both the respective legislatures for implementation, and will come into force immediately after it is passed.

Under the deal, Korea will completely eliminate its tariffs on 79 percent of all products, or 9,690 items, imported from China within 10 years of its implementation. China will reciprocate the move on 71 percent of the products, or 5,846 items, from Korea during the same period.

Within 20 years, Korea will eliminate its tariffs on 92 percent of all goods, with China eliminating its own import duties on 91 percent of products from Korea.

“The government will do its utmost to have the agreement ratified by the National Assembly without any disruption so that our companies can start benefiting from the Korea-China FTA at an early date,” the Trade Ministry said.

Soon after initialing the deal, Deputy Trade Minister Woo Tae-hee pointed out that some new and positive elements had been added to the agreement since the conclusion of negotiations on Nov. 10.

According to the government, 310 products from the inter-Korean joint industrial complex in Gaeseong will immediately benefit from a reduction or elimination of Chinese import tariffs.

The two countries have also added a new standstill clause in their bilateral agreement that will prevent either side from raising or adopting new customs duties on any products or services.

Through additional dialogue, Korea has gained better market access and established a better business environment in China for financial and communications service providers, the Trade Ministry said.

The two countries have also agreed to provide preferential treatment to each other’s financial firms and to set up a new committee to jointly deal with any business problems for the firms. They also guarantee nondiscriminatory access to communications networks by companies entering each other’s markets.

In addition, the Korean government moved to quieten fears of damage to its farmers, as 596 out of 2,240 agricultural and fisheries products currently imported from China will be permanently excluded from market liberalization, while 16 others, including rice, were excluded from negotiations from the beginning.

Following its implementation, the FTA is expected to help boost the countries’ annual bilateral trade to over $300 billion, a 21.54 percent hike from $235.36 billion in 2014.

Also, according to the government, Korea’s trade territory, represented by the combined gross domestic product of countries with which it has a free trade pact, will grow to 73 percent of global GDP from the current 61 percent.

There is no doubt that this a very significant deal and could have a very great impact on the economies of both countries.

However, as many analysts have pointed out, China’s rise puts Korea in a strategic dilemma between the U.S. and China. Traditionally, Korea and the U.S. have been close allies. Their alliance has been a major factor in Korea’s political and economic success. Due to China’s consistent rise, market growth and size, it so happens that Korea is now increasingly dependent on its neighbor’s economy. Consequently, it has to dually manage its security, which is grounded in the alliance with the U.S., and its economic well-being, which depends on its economic partnership with China.

It is therefore important to check how the economic relations panned out prior to the implementation of the FTA.

Economic relations

China established trade relations with Korea as early as the mid-1970s. However, due to the lack of formal diplomatic relations, most of the trade was conducted indirectly via Hong Kong, thus limiting trade volume.

Experts have suggested that their economic cooperation developed through three stages. In the early 1990s, many Korean politicians were eager to construct a dialogue with key political leaders of China. Business executives of Korean conglomerates then joined the politicians in opening channels for dialogue with China. Finally, in August 1992, a diplomatic relationship was established between both sides which opened a new chapter for bilateral economic relations.

The first stage started with diplomatic normalization and the beginning of the first China boom ― both trade and investment increased sharply from almost nothing. This trend continued until the second half of 1997, when the country was hit by the Asian financial crisis. Following this, the second stage brought about a slowdown bilateral economic relations, including the pulling out or canceling of many investment projects in China because of difficulties with Korean companies’ cash flow.

This did not last too long, however, since China became a member of the World Trade Organization in late 2001, which once again saw foreign companies flocking to the country, and Korea was no exception. Since then, China once again has been the biggest economic partner of Korea, including the development of a new destination of informal migration. As a consequence, it did not take long for the relationship to solidify, and in 2004, China became the exporting and investing country of first importance to Korea.

In the meantime, the trade structure has also changed considerably. In the early 1990s, trade from China to Korea was often in primary goods, as well as labor-intensive products, while China imported technology-intensive and capital-intensive manufactured products from Korea. In recent years, trade between the two countries is mostly in technology- and capital-intensive goods. Foreign-invested enterprises, especially those with investment from Korea, played a critical role in the structural changes of the bilateral trade.

As noted by Cheong Young-rok, professor at the Graduate School of International Studies at Seoul National University, “There are two different schools of thought in Korean academia: One school argues that China is a mere clone or extension of other Asian countries that were once glorified as newly industrializing economies or high-performing Asian economies. In this context, China could be a really tough competitor for Korean companies, especially for Korea’s exporting industries, and could undermine the export basis of Korean growth.

“The other school of thought tries to prove that China’s growth is intrinsic in the sense that it has resulted from a combination of improved resource allocation and a new model for a sizable economy that has been carried out by China’s own design. As a result, Koreans hope that China will become an additional country for quick economic interaction.”

The flip side of this increasingly tight economic relationship is, first, that Korea is now more dependent on the fate of the Chinese economy, and second that the risk of friction is higher than in the past.

Any fluctuation in the fortunes of the Chinese economy has an immediate impact on the Korean economy. If there is a slowdown in China, Korea’s trade is hurt badly, which has a ripple effect on other sectors.

Trade figures

If we look at the bilateral trade figures between both the countries in 2014, a number of important facts emerge.

According to latest available trade figures, Korea’s total exports to China in 2014 slipped by 0.4 percent on-year. The slowdown started in May 2014 when there was zero growth, and since then the monthly exports have registered consecutive negative growth. This was the first decline in five years.

This is significant, given that Korea relies heavily on its neighbor.

If we look at the export components, the picture becomes clearer. Korea’s exports to China are mostly comprised of intermediate and capital goods.

At the disaggregate level, in 2013, Korean exports to China were dominated by machinery and transport equipment (48 percent), followed by manufactured goods (24 percent), chemicals and related products (19.5 percent), and minerals, fuels and lubricants (6 percent). Crude materials, food and live animals, beverages and tobacco, commodities transactions, and animal and vegetable oils make up for the remainder of exports.

Now, if we look at the growth rate of these categories, something interesting emerges.

Export of machinery and transport equipment grew 4.6 percent on-year (from $70.49 billion to $73.72 billion) in 2014. This does seem positive, but if we look closer, the pace of growth has actually fallen drastically. In 2013, growth was at 21.8 percent. Since this group accounts for almost half of total exports, it is worrisome.

Next, the export of manufactured goods to China shows a negative growth of 5.4 percent, down to $22.82 billion. Chemicals and related products were down 4.2 percent at $27.14 billion; minerals, fuels and lubricants down by 12.5 percent; crude materials, food and live animals, commodities transactions, animal and vegetable oils all declined, by 6.6 percent, 1.6 percent, 39.6 percent and 43.3 percent, respectively.

Some explanations can be provided for this decline in South Korean exports to China.

Many news reports and studies have noted that Chinese manufacturers are now increasingly producing the parts and equipment that once were imported from Korea. However, many Korean companies still continue to regard China as a production base for exports to other countries. This is a fallacy because Chinese companies have fast developed their consumer goods market and are increasingly becoming self-sufficient in intermediary goods.

If, as has been the norm, Korea continues to export to China mostly products that are actually being exported to a third country, they will be in trouble if China’s exports falter.

Also hurting Korean exports is China’s growing self-sufficiency, with greater investment and technological abilities in industries where Korean companies have historically supplied exports.

As noted in many news reports, officials at the Trade Ministry agree and attribute this decline to the fact that China is improving its own supply capacity and therefore has reduced dependence on Korean intermediary goods. Chinese firms have started producing more of the intermediary goods on their own.

Local Chinese companies appear to be giving tough competition to Korean firms.

This is a view also taken by the state-funded think tank Korea Institute for International Economic Policy, which noted recently that China has been ramping up its own production capacity for intermediary goods and has less demand of its own for finished products because of moderating economic growth.

Hopefully, the FTA will set things right for Korea on the trade front. For this, the government needs to undertake a more detailed analysis to understand the cause for this decline and how Korean companies can overcome the situation.

Investment situation

Another important form of interaction between the two economies is foreign direct investment. FDI into China tends to be dominated by Asian investors, and Korea plays an increasing role in this respect.

In 2014, Korean companies’ investment in China ― financial sectors such as banking, securities, insurance were excluded ― hit an eight-year high last year and entered the $60 billion zone. By contrast, Japan’s investment in China dramatically decreased during the same period.

Recently, the Korea International Trade Association announced that the real investment of Korean companies in China in 2014 was $3.97 billion, which was 29.7 percent higher than that of the previous year. This is the highest in eight years and is a similar number to that of 2006 ($3.99 billion). Moreover, it is a significant increase when considering the recent annual investment in China has been only around $2 billion to $3 billion. Accordingly, last year, Korea accounted for 3.3 percent, of the total foreign investment in China, which was higher than 2.6 percent in the previous year. In addition, at the end of last year, Korean companies’ cumulative investment in China was $59.82 billion.

While Korean companies’ investment in China rapidly grew, Japanese companies greatly reduced their investment there. Therefore, the annual investment gap between the two countries in China has narrowed to $300 million, KITA has noted.

Japanese companies’ investment in China last year was only $4.33 billion, which was 38.8 percent lower than the previous year. When taking into consideration that Japan’s investment in China was around $7 billion for three years since 2011, which was double that of Korea, last year’s investment was an exceptional figure.

According to the trade agency, Korea’s highest investment in China in eight years is understood as Korean companies gaining interest in entering Chinese domestic markets now that the settlement of the Korea-China FTA is helping to mature the economic cooperation between the two countries. It is expected that the scope of investment will expand, not only because of the reduction of tariff on items owing to the FTA but also because of the opening of service sectors.

Clearly, while the FTA does provide investment opportunities for Korean firms, the bilateral trade between both sides is vulnerable to external pressures and also geopolitical developments.

Some economists have criticized the Korean government for promoting FTAs in such a way as to make the number of FTAs and not their contents the central object. They have pointed out that the conclusion of an FTA should not be its own object since an FTA is only a means to strengthen competitiveness and enhance efficiency, and since Korea’s basic FTA policies focus on external expansion, the effects of trade liberalization are less than what are expected. It remains to be seen how the effects of the Korea-China FTA pan out.

Read more »

Restrictive Internet platform in Korea

First published in The Korea Herald.


The Korean government has finally announced its plans to start removing the troublesome ActiveX software from public websites later this month in order to create a more user-friendly Internet environment.

For long, this tech-savvy country has been stuck in a time warp with its slavish dependence on Internet Explorer.

ActiveX controls were one of the many troublesome regulations that President Park Geun-hye vowed to remove in her signature deregulation initiative, and it is good to notice that the government is moving fast.

It is a software framework that defines reusable software components in programming language and has become an integral part of the country’s Internet landscape.

Because it is a nonstandard software, it sometimes has trouble interacting with different browsers and is not really appropriate for mobile platforms. In particular, the system requires users to submit authentication certificates issued by local authorities, making it impossible for people to buy products or make financial transactions online without using Internet Explorer with the ActiveX plugin. In addition, websites of government bodies also use this technology for Internet security.

The Ministry of Government Administration and Home Affairs announced on March 3 that it would draw up a set of guidelines to remove ActiveX controls from public websites and implement it later this month.

The government has been seeking to help develop alternative technologies to replace the ActiveX controls, the home ministry said, adding that private sector website operators would also join the move to get rid of them in cooperation with other ministries.

Accordingly, the Ministry of Science, ICT and Future Planning is currently in charge of similar efforts vis-a-vis the private sector. The ministry is also planning to complete its private-sector ActiveX removal efforts by the end of this month.

However, one should not get our hopes too high. Back in 2009, the government and the Korea Communications Commission announced these very same objectives and even set up a task force. They grandly stated that they would make it mandatory for online shopping malls and financial institutions to provide subscribers with an alternative to ActiveX.

It was loudly cheered at that time, but then slowly forgotten, and the policy gathered dust. The same issue is now being revisited and it is hoped the authorities walk the talk.

To provide a little context to this situation, the Korean government was among the first to encourage shopping and banking online, but many people were concerned about Internet safety. The goal was to make Internet shopping very secure, so the government created its own system to authenticate the identities of online buyers. To make purchases, shoppers had to supply their names and registration numbers and apply for government-issued “digital certificates,” which they could present to sellers as proof of ID. This required the additional plug-in ActiveX ― which worked in tandem only with Internet Explorer, the browser that reigned supreme at that time.

Times changed and technology advanced, but the authorities continued with this piece of regulation. As a result, in Korea, when using Web browsers such as Chrome Firefox or Safari, online shopping often begins with a warning that the ActiveX plugin is required.

Those who use Apple computers or have installed Linux variants ― which cannot run Internet Explorer ― are virtually banned from doing any online financial transactions.

They have to either partition their computers and install Windows on one side, or rely on their office desktops, PC rooms and helpful neighbors.

It is really vexing, and I should know, having been a victim of this digital discrimination myself. I replaced my desktop with iMac way back in 2008. While I refuse to have anything to do with Internet Explorer, and also replaced Windows with Ubuntu on my laptop, I had to reluctantly install Windows on a partition of my Korean wife’s iMac, since she has to do most of the shopping and bank work online.

The funny thing is that Microsoft now supports ActiveX in Internet Explorer only as a legacy technology and actively discourages the use of the protocol. In fact, in a security advisory put out by the company a few years ago, the company actively discouraged the use of ActiveX.

It said: “Unfortunately, ActiveX controls are like any other software program ― they can be misused. They can stop your computer from functioning correctly, collect your browsing habits and personal information without your knowledge, or can give you content, like pop-up ads that you don’t want. Also, ‘good’ ActiveX controls might contain unintended code that allows ‘bad’ websites to use them for malicious purposes … . Here’s a good rule to follow: If an ActiveX control is not essential to your computer activity, avoid installing it.”

However, the Korean authorities appear to have ignored the warnings. So it is about time they are straightening things out. This will not only ease the hassles for customers but also grow the e-commerce business.

Last year, the Federation of Korean Industries carried out a survey on this issue and found that Koreans overwhelmingly approve the scrapping of the ActiveX framework, citing it as a hindrance.

According to a survey by the lobbying group for the country’s large conglomerates on 700 people nationwide, 78.6 percent of respondents said they wanted ActiveX software to be discontinued and replaced by a more up-to-date support system that is not so restrictive.

Going into details, the federation said 79.1 percent complained the framework made it a hassle to purchase products online, with 71.7 percent saying it affected bank transactions.

“This is the reason why despite Korea’s advanced information technology infrastructure, the proportion of its online shopping sector compared to its GDP, is much smaller than the United States, Japan and China,” the federation claimed.

For that matter, retail e-commerce sales in the country are expected to reach $36.76 billion in 2015, according to the latest eMarketer estimates of e-commerce and total retail spending around the world. Those figures give South Korea the third-largest retail e-commerce market in the Asia-Pacific, after China and Japan.

There is no doubt that if ActiveX is scrapped, it will breathe new life into the domestic online market place that could attract more buyers at home and abroad. It will go a long way in boosting the e-commerce market in the country, making it a growth engine.

Read more »

Korea's growing M&A activity

First published in The Korea Herald.

Mergers and acquisitions in Korea scaled new heights last year as companies undertook massive restructuring and big deals were struck.

According to the Global M&A Market Review published recently by Bloomberg, the M&A market nearly doubled to $79.7 billion in 2014 from the previous year. This is also four times more than the $20.4 billion recorded in 2011.

It is not very difficult to guess the reasons for the M&A boom. For starters, many companies were sitting on massive cash piles, while the slowdown in the economy and their weak earnings forced businesses to restructure and discard their poorly performing units.

A string of megadeals including the merger between Daum Communications Corp. and Kakao Corp. and the merger between Samsung SDI and Cheil Industries contributed to the growth in the total M&A volume.

Other notable deals were the acquisition of Oriental Brewery by Belgium’s Anheuser-Busch InBev and the acquisition of Tyco Fire & Security services by The Carlyle Group.

One recent megadeal that made headlines involved Korea’s biggest chaebol, Samsung Group, which struck a deal a few months ago to sell four of its chemical and defense affiliates to Hanwha Group for 2 trillion won ($1.8 billion).

According to industry experts, we can expect more M&A this year given the cheaper financing costs under low interest rates and also because of moves by the Korean government to tax companies sitting on huge cash piles.

In October last year, the Bank of Korea cut its benchmark interest rate by a quarter percentage point to 2 percent, matching a record low set in the aftermath of the global financial crisis. It is widely expected to cut rates again to boost the tepid economic growth -- its next monetary policy committee meeting is scheduled for Feb. 17.

News reports suggest that as many as 700 local companies are likely to be hit by a new tax on internal cash reserves, which is part of the government’s three-pronged taxation initiative announced in August.

Companies that have more than 50 billion won in capital will face the new tax. A single 10 percent tax will be imposed on companies that use less than 80 percent of their annual revenues for investment, wages and dividends from this year.

The initiative is a cornerstone of the economic plan of Finance Minister Choi Kyung-hwan to boost the domestic economy by forcing businesses to use some of their cash to raise employees’ wages, invest in facilities and raise dividends for investors. However, some companies might try to reduce their cash reserves by actively seeking out acquisitions.

As economic theory suggests, the M&A benefits are manifold. They can generate cost efficiency through economies of scale, enhance revenue through gains in market share and even bring the companies tax gains.

To narrow it down, the benefits can be listed as increased value generation, increase in cost efficiency and increase in market share.

All this should be good news for the Park Geun-hye administration, which announced proposals in March last year to give a much-needed boost to M&A activity and expand the local market.

It aimed to increase the volume of the local M&A market by announcing proposals to amend and abolish a number of regulations so as to encourage corporate takeovers and more private-equity-backed M&A deals. The plans include easing regulations on private equity firms and providing capital for M&A.

To boost private equity-backed M&A deals, the government said it would discard voting right restrictions and also strict disclosure obligations placed on PEFs under the fair trade law.

The government also announced it would make it easier for PEF-owned companies to list their shares on the local stock market. Until now, strict rules on investor protection blocked such companies from going public.

Other steps include expanding the size of a fund for the M&A activities of startups and small and medium-sized firms to around 1 trillion won within the next three years, and also introducing tax-exemptions for M&A deals carried out through a share exchange.

On the face of it, the volume of M&A activity in 2014 appears to suggest that the government push seems to be working. However, a closer look shows that not everything is as rosy as it looks.

The number of M&A deals were actually lower at 468 last year, versus 482 in 2013. A few deals have been very large, which in turn pushed up the total volume of transactions.

The M&A deals that occur in Korea take place mostly to improve the financial health of large companies by selling affiliates, rather than acquiring venture companies related to the new growth engines. In contrast, overseas M&A deals are more focused on means to secure new growth engines.

Mergers between affiliates of a large company and the division of a large company into affiliates for a shift in corporate governance continues to be one of the most active types of domestic deals.

Meanwhile, business transfers and mergers by large companies to diversify business -- apart from a few -- have declined due to uncertainty in the economic environment. Abroad, deals between companies in the same industry and across all different industries for external growth and business diversification are active. The Korean M&A market has clearly been dominated by acquisitions of domestic companies in the country. While cross-border deals are still lower, accounting for less than 3 percent of the total M&A transaction volume. This needs to pick up for the companies to make a global mark.

Without a doubt, much more progress is needed in the M&A sphere in Korea, and one should not just go by the transaction volumes that have been recorded. It is still in a nascent stage.

Another point that needs to be made is something that has been largely glossed over by economic commentators -- the impact of M&A activity on economic growth.

Neoclassical economic theory is primarily concerned with why M&A occur and views them either as responses to industry shocks, such as new regulations, technologies, liquidity constraints and competition or as responses to industry life cycles. The implications of M&A for economic growth, however, are largely ignored.

In Korea too, the consequences of M&A remain less studied than the reasons why mergers occur. Maybe it is time for Korean economists to do a comprehensive study on the impact of M&A activity on the domestic economy. It is bound to provide valuable policy advice to our policymakers.

Read more »

Korea-India economic ties slow to take off

First published in The Korea Herald.


It has now been five years since the India-Korea Comprehensive Economic Partnership Agreement ― a de facto free trade agreement ― went into effect, but the trade statistics do not present a very rosy picture.

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 tariffs on 93 percent of Indian imports, and India has done the same on 75 percent 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.

However, according to the latest statistics released by the Korea International Trade Association, while bilateral trade has slightly improved, it is still way below expectations.

Bilateral trade between both countries was $12.15 billion in 2009, which spiked to $17.11 billion in the first year of the agreement. However, since then, it has been a rollercoaster ride, increasing to $20.55 billion in 2011, and then falling to $18.84 billion and $17.57 in the following two years. In 2014, bilateral trade inched up a little to $18.05 billion ― well below the CEPA target of $30 billion.

Clearly, there is something wrong here. Even as Korea’s bilateral trade with the U.S. and the European Union has leaped, its economic relationship with India appears to be stumbling.

It is a wonder what happened to the grand proclamations that were made when the CEPA was being negotiated and finally signed.

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.

Now, coming to the foreign investment figures. According to the latest statistics published by Eximbank Korea, total Korean investments in India to the end of 2014 amounted to just $3.53 billion ― 1.3 percent of their $270.43 billion overseas investments.

In comparison, Korean companies have pumped $49.69 billion into China, $15.70 billion into Hong Kong, $10.72 billion into Vietnam, $7.96 billion into Indonesia and $6.02 billion into Singapore. In the entire Asian region, Korean companies have invested $115.57 billion.

Looking at it from India’s point of view, the latest available analysis of FDI equity inflows by the Department of Industrial Policy & Promotion shows that Korea continues to rank low with only around $1.5 billion in investment.

Clearly the economic ties are still way below potential and CEPA has not really been very effective.

It is true that large Korean brands are household names in India and their strength has grown in the years since they first started operations. However, the fact remains that Korean FDI inflows have been growing at a very tardy pace, and companies seem to be keener to explore other emerging markets.

Many Korean companies were the first movers as FDI investors in India, following the spate of reforms and liberalization since 1991. They started to invest by forming joint ventures with local companies or established wholly owned subsidiaries, predominantly in automobiles and white consumer goods. With clever business models, they managed to make deep inroads into the Indian market in a relatively short period of time, led by technology giants Samsung Electronics, LG Electronics and Hyundai Motor. More recently Lotte Group, Doosan Heavy Industries and POSCO have become familiar names in the Indian business lexicon.

It may come as a surprise, therefore, that India figures quite low on the list of favored investment destinations for Korean companies.

Part of the explanation could be the nontariff barriers that continue to exist in India. The main irritants for Korean companies there are poor infrastructure, corruption, labor management, taxes, administrative services, fluctuating government policies at the central and state levels, political intervention, and customs and clearance procedures. Such uncertain policies have made investors opt for divestment or delaying their planned investment as they consider India a less attractive investment outlet than other Asian countries.

A case in point is the troubles faced by POSCO in India ever since it decided to start operations there. It has still not gotten clearance to start full-scale operations and the latest news suggests that there could be further delays.

As for Indian investments in Korea, among the noticeable investors are Tata Motors (which acquired Daewoo Commercial Vehicle in 2004); Novelis Inc., a subsidiary of Hindalco Industries Ltd. (which acquired Alcan Taihan Aluminum Limited in January 2005); and Mahindra and Mahindra (which acquired Ssangyong Motors in March 2011). Among the smaller investors are Nakhoda Ltd. and Creative. While Indian software companies such as TCS, Wipro and L&T Infotech have a small presence in Korea (with representative offices), they have not made any large commitments.

Does this mean that Korea does not offer any potential for Indian businesses? On the contrary: As an FDI destination, the nation has several strengths compared to China and Japan.

The economies of India and Korea are highly complementary in terms of factor endowment, capabilities and specialization. If the investment barriers are effectively tackled, India’s cost-effective human resources may complement growing labor scarcity and rising wages in Korea, and a number of companies may consider India an ideal destination for their relocation or global sourcing.

As experts have noted, India’s booming knowledge-based service industry complements the hardware and manufacturing-based economic structure of South Korea. India’s capability in the pharmaceutical, IT software and auto components industries usefully complement Korean competence in heavy engineering, automobiles, machinery and electronic hardware.

So it is all the more important for the two governments to become more active in sorting out the problems and realizing the full potential of the CEPA. India could make a conciliatory gesture and give permission to POSCO to start full-fledged operations.

Luckily for Korea, Indian Prime Minister Narendra Modi ― unlike his predecessor ― is business-friendly. Realizing this, most of the advanced countries are rushing to strengthen ties, with U.S. President Barack Obama even making a second state visit to India during his tenure ― something unprecendented ― and has accepted the invitation to be India’s Chief Guest at its Republic Day celebrations on Monday ― the first by a U.S. president. Modi has promised to bring sweeping economic reforms to make doing business in India easier. He is well on his way to doing it, and it not too late for the Park administration to take the initiative and sort out the problems plaguing trade and investment relations by initiating a comprehensive dialogue.

Read more »

Curious case of Uber in Korea

First published in The Korea Herald.


Over the past couple of years, the sharing economy ― a system built around the sharing of human and physical resources ― has caught the world by storm. While the practice of sharing goods has always been common between closed groups ― friends, family and neighbors ― now the concept has evolved into a profitable business model.

It has been helped largely by the strides in information technology that led to the worldwide boom in Internet penetration and smartphone use.

The sharing economy has many advantages. It can reduce costs for available goods, services and time. You can use a product or service only when necessary, and don’t have to deal with the normal headaches. On the other hand, an owner can unlock the potential value of an item, such as a room, a vehicle or a consumer good when it’s not in use. The sharing economy also offers access to things that might not be practical to own or obtain.

Some of the most notable businesses that have boomed on the concept of the sharing economy are Airbnb, Snapgoods, DogVacay, RelayRides, TaskRabbit, Getaround, Liquid, Zaarly, Lyft, LendingClub, Fon and Poshmark.

With the range of services offered, one can rent a room or a whole home, get petsitters for dogs, allow people to borrow cars from neighbors, help people to hire others for jobs and tasks, rent bikes and cars, and even get hard cash when in need, share a home Wi-Fi network, and buy or sell used clothes.

Given the huge advantages that this system offers, similar services are bound to proliferate around the world, and most likely in technology-driven Korea.

On the face of it, people should welcome such businesses with open arms and governments should have no objections.

Then why is it that the so-called sharing economy business Uber is being hauled over the coals by the Seoul city government? And moreover, is the government unfairly targeting the app that helps summon a car for a cost?

As 2014 drew to a close, the Seoul Central District Prosecutors’ Office issued an indictment against CEO Travis Kalanick and the firm’s Korean unit for violating a law prohibiting individuals or firms without appropriate licenses from providing or facilitating transportation services.

This was immediately met with protest by the company, which was echoed by countless “sharing” enthusiasts across the world.

However, although I am all for disruptive technologies and hugely back the concept of the sharing economy, I am with the Seoul government on this case.

Over the past several months, Uber has asked the mayor of Seoul to revise the laws so that citizens can use the service without worrying about breaking the law. However, even after it was flatly refused it went ahead and started offering the service without getting clearance.

It began offering UberX as a paid service, with a base fare of 2,500 won ($2.24), with an additional 610 won per kilometer and 100 won per minute. By comparison, base fare for local taxis starts at 3,000 won plus 100 won per 142 meters and 100 won per 35 seconds.

It smacked of arrogance to believe that since they were able to operate in so many cities around the world, they should be able to operate in Seoul. Uber had no right to start services when they knew that it was a gray zone they were operating in, and had been repeatedly warned.

The company knows that under current laws, anyone using his own passenger car to carry paying customers is subject to imprisonment for two years or less, or fines of up to 20 million won.

When you want to start a flourishing business, you just don’t abuse the goodwill of the government and cock a snook at the authorities. Wait till all the regulatory hurdles are cleared and then start your business. Lobby for amending the regulation, but do not jump the gun.

To make matters worse for the company, a city ordinance has been passed to criminalize the violators and reward up to 1 million won to those reporting illegal Uber taxi operators beginning in January. Using a private car for a taxi service is also punishable by an immediate six-month suspension for that car.

Coming to my second point of defense of the Seoul government decision. The reason Uber has grown so quickly worldwide is because it is not regulated the same way that traditional taxi services are. Proponents of the service say that it’s about time for monopolistic, overregulated city cab services to be broken up. They argue that people deserve options, better pricing and more nimble technology, which Uber offers.

However, the way I see it, taxis are a public utility and the government has every right to regulate them. Imagine if companies started offering other public utilities without regulation ― a sure recipe for chaos and disaster.

It is not very easy to get a taxi service license in Seoul, and the market is already saturated with around 6,000 taxis. Given this, the service offered by Uber has the potential to deal a severe blow to the taxi industry, whose hands are tied due to excessive regulations, even as the upstart “illegal” taxis are waiting to pounce on the opportunity. Most taxi drivers come from a lower-income background, and it is like kicking them in the stomach; the issue is not about depriving “unregulated” taxi drivers of additional income as Uber is making it out to be.

On top of it all, data privacy is something that has not been clearly addressed by the company. There are also doubts about the screening process and the training that is provided to the Uber drivers, which has become an issue in many cities. Because of the way their system operates, the safety concerns will only increase. Maybe that is why Uber claimed that “UberX is safer than any other mode of transportation in Seoul.”

However, safety is not really an issue for the public when it comes to taxis in Seoul. The taxis here are amongst the safest in the world, unlike in, say, Delhi. It is just an ad line that holds no water. Moreover, the company says the same thing in all places it operates, but molestation cases are not dying down. The company has a standard answer when faced with such cases: We are cooperating with the authorities. We are just a platform to connect people to drivers and are not directly responsible.

Given these clouds, it will be better for the company to clear all the regulatory hurdles before offering the service here, instead of readying for a legal battle.

Having said that, now that the Seoul government has taken on Uber, it should ensure that the misdemeanors of its taxi drivers ― for example rash driving or refusing passengers ― should be strictly dealt with. It should push forward regulations strengthening the crackdown on taxi drivers, and increase the supply of alternative transportation. Once the public stops complaining about the existing taxi services, the government will be on a firmer footing.

Read more »

Corruption and business ethics in Korea

First published in The Korea Herald.

On most occasions, the Korean government latches on to any new international report or study that commends the country, be it on competitiveness, ease of doing business, regulatory reforms or education. However, there has been remarkable silence from bureaucrats and government officials regarding the latest Corruption Perceptions Index recently released by Transparency International.

In its much-awaited yearly report, the nongovernment organization ― calling itself the “global coalition against corruption,” with 100 national chapters and an international secretariat in Berlin ― gives a comparative list of corruption worldwide. The organization is widely recognized as a corruption crusader and has built up a solid reputation since it was established in 1993.

The cornerstone of its work is the annual Corruption Perceptions Index. It also publishes the Global Corruption Barometer, Bribe Payers Index and Government Defense Anti-Corruption Index.

The CPI quantifies the perceived levels of public sector corruption around the globe, and over the past two decades has become one of the key corruption indices worldwide.

It focuses on corruption that involves public officials, civil servants or politicians. The data sources used to compile the index include questions relating to the abuse of public power and focus on bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and the strength and effectiveness of public sector anticorruption efforts. The scores, therefore, provide a reflection of the amount of corruption faced by ordinary people and businesses in a country.

In the 2014 CPI, Korea ranked 43rd among the 175 countries surveyed. The Asian countries and territories ranked above Korea include Singapore (7), Japan (15), Hong Kong (17), UAE (25), Qatar (26), Bhutan (30), Taiwan (35) and Israel (37). Interestingly, Korea was ranked No. 39 in 2010 and No. 40 in 2005.

What does this tell us?

Clearly, Korea has a long way to go when it comes to tackling corruption. As long as its government and politicians are perceived to be corrupt, this will hamper investment and affect growth. With other territories in the vicinity being perceived as less corrupt, it is natural for investors to eye them first.

It is true that over the years the country has made many efforts to tackle corruption and has tweaked a lot of regulations to ensure transparency. Anticorruption acts have also been enacted. But it clearly is not enough.

Excessive bureaucracy, weaknesses in corporate governance, inconsistent application of laws and regulations, and nontransparent regulatory processes are among the challenges that have been cited by many foreign companies in Korea.

Moreover, the corruption watchdog Anti-Corruption and Civil Rights Commission has been criticized for its poor ability to focus on corruption issues as it lacks independence and efficiency. It does not have a mandate to independently initiate investigations, but it can request cooperation from the relevant agencies, such as public prosecutors.

In the 2013 Global Corruption Barometer, the current government’s anticorruption efforts were found to be “ineffective,” with 39 percent of those surveyed perceiving that the level of corruption had increased in the previous two years. Moreover, 70 percent of households evaluated Korean political parties as being “corrupt” or “extremely corrupt.”

In last year’s World Competitiveness Report issued by the World Economic Forum, Korea ranked 26th out of 144 countries, its lowest position in 10 years. It also ranked 33rd in terms of transparency of government policymaking, and 97th in terms of public trust.

For that matter, for many years now the foreign media has constantly reported that the chaebol in Korea are so powerful that the ACCRC has no jurisdiction over them, even when they are involved in tax evasion, bribery and price-fixing. Except for a few outlets, the local media has been largely silent on the close nexus between politicians and the large business houses. It is evident that despite the protests by civil society, they are only getting stronger.

Each time a big-shot chaebol head is snagged by the prosecution and convicted by the courts, our politicians step in to bail them out of their misery. The constant refrain one hears from them is their “importance to the national economy.” Earlier the courts too used the same logic to give suspended sentences and a rap on the knuckles to “powerful” white-collar criminals, but thankfully now such judgments are rare.

In fact, it has become a global joke, and Korea has become a laughing stock for continuing with the policy of frequently granting special presidential pardons to businessmen, but the thick-skinned politicians have blinders and shamelessly continue their routine.

In the latest instance, ruling party politicians started howling for presidential pardons for some prominent chabeol owners in end-December. Finance Minister Choi Kyung-hwan too is reported to have recommended for the presidential office to release top chaebol owners.

By their logic, if you are rich and powerful with a huge business empire, you can freely break the law, because putting you behind bars will hamper your company, and since your company is so important for Korea, it will hamper economic growth and push Korea down from its advanced country status. What they do not realize is that if businessmen are given a free hand to evade taxes, set up slush funds and cheat investors, the country will automatically fall in the eyes of the world. Overseas investors will be put off, which will only stall economic growth ― much more so than if the businessmen are behind bars.

President Park Geun-hye has vowed to administer the law strictly and treat all criminal offenders equally. To that end, she has not granted special pardons to any politicians or businessmen in prison since taking office in early 2013. It remains to be seen whether she will succumb to pressure this time around. If she does, then many of the businessmen will continue to have scant regard for the law and Korea’s corruption ranking will continue to slip. If she does not, then it will be a strong signal that the law is equal for everyone.

As it is, Korea is perceived to have a pervasive system for conveying favors in return for monetary consideration, along with lax enforcement of existing anticorruption laws.

President Park should walk the talk and make abolishing corruption a top priority by overhauling the anticorruption systems. She should go beyond the Kim Young-ran law ― a comprehensive anticorruption bill aimed at public officials, likely to be enacted by January 2016 ― and end the practice of dealing out pardons to convicted chaebol chieftains.

Read more »

Regional agreements gaining steam

First published in The Korea Herald.

While bilateral free trade agreements, as a means to further the market-opening and rule-making agenda, have been globally picking up steam, there have also been parallel efforts to usher in a plethora of regional trade agreements and economic unions.

Given the uncertainty of the multilateral agreement under the ambit of the World Trade Organization, which has been dragging on for years, efforts to form regional agreements are picking up. Although many of them are overlapping, 2015 could see some progress being made on at least some of the deals.

They will have a significant impact on global trade. It is an opportunity for countries that seek to diversify their trade partners to closely follow the deals that are being put in place, to get first-mover advantage.

Eurasian Economic Union

First off the block is the Eurasian Economic Union that is still “warm from the oven.” The Commonwealth of Independent States established an economic community in 2001 with the aim of creating a fully fledged common market. However, as it was not making much headway, the leaders of the CIS gathered in Minsk in October 2014 to formally cancel the 14-year-old setup to pave the way for the EEU to be the largest common market in the ex-Soviet Union region.

The treaty on the establishment of the EEU, which just launched on Jan. 1, is the basic document defining the accords between Russia, Belarus and Kazakhstan for the free movement of goods, services, capital and labor and conducting coordinated, agreed or common policies in key economic sectors such as energy, industry, agriculture and transport.

It is sought to rival the European Union and seeks to be the most advanced organization for regional cooperation the former Soviet bloc has seen. Armenia recently joined the union and Kyrgyzstan is expected to join on May 1, with more countries likely to follow.

Although many Western countries are concerned that it is simply a resurrected version of the Soviet Union, the EEU is a powerful economic bloc that accounts for one-fifth of the world’s gas reserves and around 15 percent of its oil. With the start of a new year, a new and serious geopolitical player is indeed emerging, and other emerging markets had better start paying close attention.

Trans-Pacific Partnership

The most talked-about deal in 2014, the Trans-Pacific Partnership, is a proposed regional regulatory and investment treaty that has gained traction recently, but seems to be stuck in a limbo. As of now, 12 countries throughout the Asia-Pacific region have participated in negotiations on the TPP: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. South Korea has expressed interest in joining but has not taken a step forward.

The agreement intends to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.”

If concluded as envisioned, the TPP potentially could eliminate tariff and nontariff barriers to trade and investment among the parties and could serve as a template for a future trade pact among APEC members and potentially other countries.

Over 20 chapters are under discussion in the negotiations. In many cases, the rules being negotiated are intended to be more rigorous than comparable rules found in the WTO.

As the countries that make up the TPP negotiating partners include advanced industrialized, middle income, and developing economies, the TPP, if implemented, may involve restructuring and reform of some participants’ economies. It also has the potential to spur economic growth in the region.

So far 20 formal rounds of TPP negotiations have been held, but the members have not reached a consensus on a number of contentious issues like intellectual property and liberalization of agricultural markets. Another problem has been that, the U.S. could not proceed because of political difficulties at home regarding the passage of a Trade Promotion Authority by Congress.

Transatlantic Trade and Investment Partnership

The so-called “mega deal,” the Transatlantic Trade and Investment Partnership is a trade agreement that is presently being negotiated between the European Union and the United States. Talks started in July 2013, but have faced a lot of opposition from civil society and trade unions in Europe.

The aim is to increase trade and investment between the EU and the U.S. by unleashing the untapped potential of a truly transatlantic marketplace. The agreement is expected to create jobs and growth by delivering better access to the U.S. market, achieving greater regulatory compatibility between the EU and the U.S., and paving the way for setting global standards.

In more concrete terms, the goal will be to eliminate duties and other restrictions for trade in goods. Freeing up commercial services, providing the highest possible protection, certainty and level playing field for European investors in the U.S., and increasing access to U.S. public procurement markets are also objectives.

The T-TIP negotiations will also look at opening both markets for services, investment, and public procurement. They could also shape global rules on trade. The seventh round of negotiations on the agreement concluded on Oct. 3, 2014.

Together, the European Union and the United States account for about half of world GDP and one-third of global trade flows. Latest estimates show that a comprehensive and ambitious agreement between the EU and the U.S. could bring overall annual gains of 0.5 percent increase in GDP for the EU and a 0.4 percent increase in GDP for the U.S. by 2027. While the road is quite long, all eyes are on this deal and some progress may be made in 2015.

Free Trade Area of the Asia-Pacific

A road map for the Free Trade Area of the Asia-Pacific was sketched out at the recent Asia-Pacific Economic Cooperation Summit in Beijing.

Ministers of the 21 APEC member nations agreed to “launch and comprehensively and systemically push forward the FTAAP process.”

In the summit declaration, it was stated that the rules-based multilateral trading system would remain a key tenet of APEC. The FTAAP should be pursued on the basis of supporting and complementing the multilateral trading system.

“The FTAAP should do more than achieve liberalization in its narrow sense; it should be comprehensive, high quality and incorporate and address ‘next generation’ trade and investment issues.”

A collective strategic study on issues related to the realization of the FTAAP by building on and updating existing studies and past work, providing an analysis of potential economic and social benefits and costs, performing a stock take of FTAs in force in the region, has been announced and will be submitted by the end of 2016.

The member countries account for 40 percent of the world’s population, 54 percent of its economic output and 44 percent of trade, making it a very powerful entity and clearly a deal to watch out for.

It will take a while, but given the interest shown by China, it may proceed faster than the TPP.


Regional Comprehensive Economic Partnership

In what could be a game-changer, the Regional Comprehensive Economic Partnership is a 16-party FTA launched by the leaders of the Association of Southeast Asian Nations ― Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam ― and six of its FTA partners: Australia, China, India, Japan, New Zealand and South Korea.

The negotiations for the agreement started in 2013 and are expected to be concluded by year’s end.

The RCEP would lead to greater economic integration, support equitable economic development and strengthen economic cooperation among the countries involved.

The agreement will cover trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement and other issues.

The sixth round of negotiations took place in New Delhi in the first week of December. However, members were unable to agree on a template for negotiations.

The grouping envisages regional economic integration, leading to the creation of the largest regional trading bloc in the world, accounting for nearly 45 percent of the world’s population with a combined gross domestic product of $21.3 trillion. The regional economic pact aims to cover trade in goods and services, investment, economic and technical cooperation, competition and intellectual property.

As of now, it is unlikely that the 2015 deadline will be met, but one can always be ready for surprises.

ASEAN Economic Community

The ASEAN Economic Community seeks to establish ASEAN as a single market and production base, making ASEAN more dynamic and competitive with new mechanisms and measures to strengthen the implementation of its existing economic initiatives; accelerating regional integration in the priority sectors; facilitating movement of businesspersons, skilled labor and talents; and strengthening the institutional mechanisms.

Other areas of cooperation are to be incorporated later. The AEC envisages key characteristics: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy.

Although ASEAN has come a long way toward realizing its goal, the challenges that remain suggest that it may miss its end-2015 deadline.

Union of South American Nations

One dark horse is the Union of South American Nations, which is going to be a regional organization integrating two existing customs unions: Mercosur and the Andean Community of Nations, as part of a continuing process of South American integration. It is also modeled on the European Union and was established in Brasilia, on May 23, 2008, and entered into force on March 11, 2011, but full integration is yet to take place.

On Dec. 5, 2014, the 12 members ― Bolivia, Colombia, Ecuador, Peru, Argentina, Brazil, Paraguay, Uruguay, Venezuela, Chile, Guyana and Suriname ― announced new proposals at a summit meeting in Ecuador.

They have taken steps to create South American citizenship and freedom of movement and also opened the organization’s new permanent headquarters in the Ecuadorian capital of Quito.

Part of this proposal is to create a “single passport” and homologate university degrees in order to give South Americans the right to live, work and study in any UNASUR country and to give legal protection to migrants ― similar to freedom of movement rules for citizens of the European Union.

Plans are also afoot for the advancement of financial integration and sovereignty, such as the Bank of the South and Reserve Fund, a currency exchange system to minimize the use of the dollar in intercontinental trade, the creation of a regional body to settle financial disputes, and a common currency “in the medium term.”

African Free Trade Zone

For long an underestimated region, the East African Community, Common Market for Eastern and Central Africa, and Southern African Development Community have already begun negotiations to merge, which is a precursor to a single trade area across the continent.

Africa’s free trade zone is expected to be operational by the end of 2017. They include Angola, Botswana, Burundi, Comoros, Djibouti, Democratic Republic of Congo, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Libya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Swaziland, South Africa, Sudan, Tanzania, Uganda, Zambia and Zimbabwe.

In October 2014, they agreed to launch a tripartite FTA as a way of contributing to economic growth of the blocs and the entire continent. The tripartite FTA will encompass 26 member states from the three blocs with a combined population of 625 million people and a gross domestic product of $1.2 trillion and will account for half of the membership of the African Union.

The free trade area is expected to offer huge opportunities for business and investment and will attract foreign direct investment into the tripartite region. The business community is also expected to benefit from an improved and harmonized trade regime in a 26-nation free trade zone and enjoy the reduced cost of doing business.

Pacific Agreement on Closer Economic Relations ― Plus

The Pacific Agreement on Closer Economic Relations, or PACER, is a framework agreement to deepen trade and investment liberalization in the broader Pacific on a step-by-step basis.

Participants in the PACER Plus negotiations are: Australia, Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Pala, Papua New Guinea, Republic of Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu.

PACER Plus negotiations for a regional trade and economic integration agreement were launched in August 2009. A series of meetings on the PACER Plus were held in Fiji in December 2014 to progress the negotiations. It is expected to boost private sector development and create economic growth and employment opportunities, and bring the Pacific Forum economies closer.

There are some bumps, of course, with many Pacific countries wary of the dominant roles played by Australia and New Zealand.

Read more »

Crucial year for tackling climate change

First published in The Korea Herald.


Toward the end of 2014, there was incremental progress in global efforts to tackle the fallout of climate change. It is now expected that all countries will reach a broad consensus when they meet in Paris in November and December this year.

The United Nations Climate Change Conference was held in Lima, Peru, from Dec. 1-12, to negotiate a global climate agreement. This was the 20th yearly session of the Conference of the Parties, or COP 20, to the 1992 U.N. Framework Convention on Climate Change, or UNFCC, and the 10th session of the Meeting of the Parties, or CMP 10, to the 1997 Kyoto Protocol.

While this was a conference in the annual series, and was hailed as an important first step ― it resulted in a five-page text now officially known as the Lima Call for Climate Action ― toward a full climate change deal, more attention is being directed toward the 2015 UNFCC in Paris.

In Lima, about 190 nations agreed on the building blocks of a new-style global deal to combat climate change amid warnings that a lot tougher action will be needed to limit increases in global temperatures. The proposals call on countries to reveal how they will cut carbon pollution.

Under the deal, governments will submit national plans for reining in greenhouse gas emissions by an informal deadline of March 31, 2015, to form the basis of a global agreement at the Paris summit.

Notably, most of the tough decisions about how to slow climate change were postponed until then.

The text, agreed two days into overtime after two weeks of talks came close to collapsing, because of objections by emerging economies led by China and India, who were concerned that previous drafts imposed too heavy a burden on emerging economies compared to the advanced ones.

The compromise preserved a notion enshrined in a 1992 climate convention that the rich have to lead the way in making cuts in greenhouse gas emissions. It also satisfied rich nations that want the fast-growing emerging economies to rein in emissions.

Some environmental groups, however, were not satisfied and said that the deal was far too weak. They also warned that negotiators had left too many contentious issues unresolved before the deadline for reaching a deal in Paris.

The countries put off decisions about the legal structure of the agreement, and deferred decisions about ensuring a flow of finance to developing countries. The biggest issue left unresolved for Paris is the burden for cutting greenhouse gas emissions.

However, that does not take away the fact that the Lima deal, with obligations for all nations, is a shift from the 1997 Kyoto Protocol that obliges only the rich to cut emissions.

As per the agreement, national pledges will be added up in a report by Nov. 1, 2015, to assess their aggregate effect on slowing rising temperatures, but there will not be a full-blown review to compare each nation’s level of ambition.

The text also lays out a vast range of options for the Paris accord, including the possibility of aiming for zero net global emissions by 2100 or earlier in a drastic shift from fossil fuels toward renewable energies such as wind and solar power.

If all goes well, China, whose emissions have overtaken those of the U.S., will as part of the agreement formally pledge to cut its greenhouse gas emissions, as will India, Brazil and other emerging economies. But much remains uncertain about the prospects. That is why the year 2015 is very crucial.

There is more hope than ever before that all the countries will be able to iron out their differences. Especially because before the Lima meeting several major economies declared targets to curb emissions. In October, the European Union committed to reduce greenhouse gas emissions by at least 40 percent below 1990 levels by 2030. In November, the U.S. and China jointly announced their reduction targets. The U.S. would reduce greenhouse gas emissions by at least 26 percent below 2005 levels by 2025, and China would seek to stop CO2 emissions from rising around 2030.

China has also promised to cap its annual coal consumption through 2020, after which its use of coal is expected to decline. In parallel, more than 20 countries have come forward to financially support the Green Climate Fund, a new multilateral fund that will help developing countries shift to pathways of low-carbon and climate-resilient growth. As of now it has received more than $9.5 billion in commitments.

For many years now, the division between the rich and poor nations have reduced hopes at U.N. climate talks. Going forward, it is hoped that this will be a breakthrough year.

As a recent report, “Paris 2015: getting a global agreement on climate change,” notes, a strong deal will make a significant difference in the ability of individual countries to tackle climate change.

“It will provide a clear signal to business, to guide investment toward low carbon outcomes. It will reduce the competitiveness impacts of national policies, and create a simpler, more predictable framework for companies operating in different countries.”

More importantly, a strong climate deal will also help to meet international development aims, which are at increasing risk from rising global temperatures. Eliminating poverty, improving health and building security are all outcomes linked to tackling climate change.

The joint report by Christian Aid, Green Alliance, Greenpeace, RSPB and WWF states that to ensure meaningful action on climate change, the deal must contain the following elements: ambitious action before and after 2020; a strong legal framework and clear rules; a central role for equity; a long-term approach; public finance for adaptation and the low carbon transition; a framework for action on deforestation and land use; and, clear links to the 2015 Sustainable Development Goals.

Making this conference a success is therefore essential. Will it be just another conference of big promises and disconcerting results? We have to wait and see how serious the countries are in tackling climate change.

Read more »

ICT evolving for consumers in 2015

First published in The Korea Herald.

Over the last few years, the impact of information and communication technologies on society has been enormous. ICT has deeply affected and reshaped most parts of our society, while radically influencing the global economy. No one can predict with certainty what role it will play in the future, but we do know that it will be significant.

One aspect of the growth of ICT in 2014 has undoubtedly been its entry into the “mobile era.” It is a tool that constitutes a new infrastructure, changing the way our societies function, while its technical applications give us totally new opportunities to develop new and better solutions to our existing problems.

As the latest International Telecommunication Union publication “2014 Measuring the Information Society Report” notes, the world witnessed continued growth in ICT last year and, by end-2014, almost 3 billion people had used the Internet, up from 2.7 billion at end-2013. While the growth in mobile-cellular subscriptions is slowing as the market reaches saturation levels, mobile broadband remains the fastest-growing market segment, with continuous double-digit growth rates in 2014 and an estimated global penetration rate of 32 percent.

International bandwidth has also grown steeply, at 45 percent annually from 2001 and 2013, and developing countries’ share of total international bandwidth increased from around 9 percent in 2004 to almost 30 percent.

The growth in Internet users ― including via smartphones and smart pads ― has witnessed a parallel, steep growth in the volume of Internet content. More and more people are actively participating in the information society by creating, sharing and uploading content and using social media and other Internet-based applications, covering a large range of topics and sectors.

Going ahead, this year we are likely to see a consolidation of the gains that have already been made, and there will progress on many other technologies that are now on the periphery.

Some of the technologies that have been forecast to make a big impact among consumers in 2015 include, among others, mobile cloud computing, the Internet of Things, 3-D printing, wearables and smart machines.

As noted by International Data Corporation, in 2015 the industry is going to accelerate its transition to the “Third Platform” for innovation and growth, built on the technology pillars of mobile computing, cloud services, big data and analytics, and social networking.

“In 2015, the Third Platform will account for one-third of global ICT spending and 100 percent of spending growth. The industry is now entering the most critical period yet in this era: the ‘Innovation Stage,’” it said in a recent report.

Of this, MCC is expected to be a hotbed of activity and will grow briskly. The combination of cloud computing, mobile computing and wireless networks will bring rich computational resources to mobile users and network operators, as well as cloud computing providers.

The ultimate goal of MCC is to enable the execution of rich mobile applications on a plethora of mobile devices, with a rich user experience. And as smartphones and other mobile devices continue to grow in market share, despite the sudden dip witnessed in recent months, there is likely to be more focus on serving the diverse needs of the mobile customer. Especially when it comes to making their data available whenever and wherever they are. There will be a rise in the delivery of on-demand computing resources and with wireless data set to emerge as the largest and fastest-growing segment, one can expect the cloud services to grow in parallel.

Next is the new buzzword, the Internet of Things ― all-encompassing, cutting across existing product categories and industries ― which is supposed to provide an impetus to the so-called “third platform” era.

Its expected growth, along with the increasing consumer demand for an always-on, connected lifestyle, has made startups and large companies bullish on the IoT sector.

The invention of more and more intelligent and connected “things” will push the development of many new machines, applications and solutions. There are, however, many issues that still need to be tackled, including privacy, data ownership and spectrum congestion.

As noted by Jamie Moss, an analyst at the leading ICT research and advisory firm OVUM, “Its definition and constituents are expanding and evolving. All companies involved in the establishment of today’s ICT service infrastructure believe they have a pivotal role to play in the IoT. However, few accurately know what that role will be, or have a realistic estimation of the size of the opportunity. The IoT is beset by far more questions than answers.”

Experts are also expecting significant activity in 3-D printing. According to Gartner, 3-D printing will reach a tipping point over the next three years as the market for relatively low-cost 3-D printing devices continues to grow rapidly and industrial use expands significantly. New industrial, biomedical and consumer applications will continue to demonstrate that 3-D printing is a real, viable and cost-effective means of achieving improved designs, streamlined prototyping and short-term manufacturing.

Another segment that could see an explosion of innovation is wearables. But, even as many anxiously await the release of the iWatch, Apple’s own foray into wearables, the interest already appears to be diminishing.

According to a survey conducted by Ovum in mid-2014 across 15 countries, less than 10 percent of respondents planned to buy a wearable device in the next 12 months. At the same time, more than a dozen smart wearable devices have been launched since, and many of them have fared dismally.

As regards smart machines, there are already prototype autonomous vehicles, advanced robots, virtual personal assistants and smart advisers, which are likely to evolve, ushering in a new age of machine helpers. Experts think that the smart machine era could be the most disruptive in the history of IT. We can only wait and watch to see how they evolve.

Many new gadgets and software programs will make their way to the market in 2015, but the most understated technological change is the promise of new Wi-Fi standards. Emerging standards will increase Wi-Fi performance this year.

Also, when HTML 5 finally hits the market this year, it is set to become an essential technology for many organizations. With this new system, Web development tools will mature, as will the popularity of mobile Web and hybrid applications. Ultimately, businesses will be able to easily and quickly deliver applications across multiple platforms in a way they never could before, while consumers will be able enjoy superior-quality applications.

There will also likely be an uptick in mobile payment technologies as more and more companies roll out their services, and consumers get accustomed to convenient cashless transactions. In addition, there will be more on-demand apps for various services, like Uber, leading to the so-called sharing economy.

In short, be prepared for seamless mobile access, smarter and more flexible wearable mobile devices, and increasingly strong and flexible cloud computing technology. Moreover, mobile office, information sharing, socialization, electronic business, Internet finance and other services will become accessible anytime and anywhere, further improving our lives with added convenience. There will of course be more security challenges as hackers become more sophisticated.

Read more »

Currency wars on the horizon

First published in The Korea Herald.

Brazilian Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weakening their currencies. As we enter 2015, the specter of currency wars appears to be once again looming on the horizon.

In layman’s terms, currency wars are said to occur when countries seek to devalue their currency to gain a competitive advantage ― exports become more competitive while imports become more expensive, leading to a rise in aggregate demand, which helps boost economic growth and reduce unemployment.

However, if one country seeks to become more competitive through devaluation, it means other countries become less competitive. Therefore, they may respond by weakening their currency too. This leads to a situation of competitive devaluation, where each country seeks to reduce its own currency’s value. In the end, this creates global economic instability by discouraging investment and trade.

With many major economies across the world yet to fully recover from the recession, and some facing the threat of deflation, central banks are slowly but surely seeking to boost demand through exchange rates.

According to data compiled by Bloomberg recently, weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies forecast to decline the most through 2015 belong to nations that are in deflation or pursuing policies that weaken their exchange rates.

Lowering interest rates, quantitative easing and intervention buying are some of the measures that have become more prominent in recent months, and unless the respective economies recover, we are likely to see similar actions in 2015.

Taking a brief look at the major economies, this trend is not yet fully confirmed, but the possibility remains high.

The U.S. Federal Reserve has been pursuing quantitative easing for some time, but with a gradual economic recovery, expectations for a pickup in inflation and a strong dollar, it has hinted at the possibility of policy normalization. As crude oil prices are continuing to slump to historic lows and inflation has not picked up, such a move would have to be well-timed.

In its Dec. 17 statement, the Federal Open Market Committee noted that economic activity is expanding at a moderate pace. Inflation has continued to run below its longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” it said in a statement.

As such, if global growth remains weak and the dollar becomes too strong, the Fed might decide to change its position and continue with monetary easing, or even accelerate it.

Meanwhile, the European Central Bank recently announced new stimulus policies, and unveiled a promise to buy asset-backed securities and covered bonds. With Europe’s fragile recovery slowing down the rest of the world and inflation running at a fraction of the ECB’s goal, President Mario Draghi has raised the prospect of large-scale asset purchases. So far, it has stopped short of full-fledged quantitative easing, but is widely expected to consider a package of broad-based asset purchases including sovereign debt this month.

With a decline in oil prices, which have led to a fall in the value of the ruble, Economists are of the opinion that Russia won’t speed up its plan to allow the ruble to trade freely next year, even though the central bank’s continued defense of the currency has cost it a lot of money.

Russia’s central bank, led by Gov. Elvira Nabiullina, has so far failed to reverse the currency plunge even after spending a fifth of its international reserves and raising its key interest rate five times since March 2014. One can expect sharper rate moves to sway the currency market.

With Japan’s Prime Minister Shinzo Abe back in the saddle, the Bank of Japan is widely expected to continue with its quantitative easing programs to get the economy back on track. At the end of 2014, it engaged in one of the largest experiments in quantitative easing and has been selling yen and buying U.S. assets. This may pick up pace, depending on the progress of its recovery.

China has long been accused of currency manipulation. Many economists also expect the People’s Bank of China to continue its monetary easing, now that GDP has slowed down. Only recently it lowered lending and saving rates and increased the ceiling for deposit rates in an effort to boost the growth rate of its economy. The country has room to ease further, which shouldn’t be disregarded if the economic situation fails to improve.

According to experts, if the risk of deflation rises amid the unwinding of its credit bubble, there’s a risk that China will follow Japan and devalue the yuan.

Xinhua news agency cited a government official as saying that monetary policy will be kept prudent ― “There will be greater focus on monetary policy being appropriately tight or loose.”

Many other emerging economies are either trying to stabilize prices or gain competitiveness by weakening their currencies as they ease their monetary policies. Everything depends on how the economies fare.

South Korea, like China, is desperately trying to fight deflationary pressures with rate cuts. Malaysia started raising rates in July 2014 and Indonesia followed suit in November. The central banks of India and Thailand are not engaging in monetary loosening right now, although their inflation rates are moderating.

In a recent note, ANZ forecast 3 percent depreciation in Asian currencies over 2015, “a similar decline to that seen in 2014,” noting that “risks are tilted toward a larger depreciation should tighter U.S. monetary policy lead to larger portfolio outflows from the region.”

The groundwork for currency wars in 2015 is clearly being laid

Read more »