Korea, Northeast Asian Economic Hub Country?
Lee Kang-Kook (Ritsumeikan University)
Abstract
The new Korean government presents an ambitious economic development strategy,
called Northeast Asian economic hub country. With the backdrop of the fast growth of
China and more integration of the East Asian economy, Korea tries to develop the
center of logistics, financial hub and innovative industrial cluster as a center of
Northeast Asia. Along with post-crisis restructuring, the government is supposed to
open the economy to attract foreign investment, establishing the Free Economic Zone.
However, the strategy to just attract foreign capital with mere deregulation and
incentives would not be successful, only to raise social tensions. Financial opening may
lead to more volatility. More careful opening policy with measures to make use of
foreign capital for national development is needed. In addition, the government should
resolve the international geopolitical issues toward peaceful cooperation for prosperity.
Keywords: Korea, Northeast Asian hub, East Asia, economic restructuring, foreign
capital.
JEL classification: F21, O19, O24, O53
1
Northeast Asian Economic Hub Country Strategy of Korea
Lee Kang-Kook (Ritsumeikan University)
I. Introduction
After the 1997 economic crisis, Korea introduced extensive economic restructuring
toward the more market-oriented economy and it seems to have recovered from the
crisis successfully. However, Korean people present concern about the future growth,
most of all, with the fast catch-up of China and changing global economy. Can Korea
continue the dynamic economic growth even when it has lost the advantage of late
industrializing country and strong role of the state, faced with a cutthroat competition in
the new globalized world economy?
To address this serious question, the Korean government has argued that it should
become a ‘hub’ country in the Northeast Asian economy to lead the economic
cooperation and take advantage of the growth potential in this region. China is the
fastest growing country, and also the development of big natural resources in Siberia
provides a chance for growth. Moreover the world economy is integrating more and
regional cooperation is thought to be essential for growth. In this situation, Koreans
have developed a grand plan to be a Northeast economic hub country. The new Roh
Moo-Hyun government presented an ambitious vision and measures. However, the plan
is still not clear and has got some limits. Some debates already went on and there is
more to be done in the process of implementation.
This paper examines the Northeast Asian economic hub country plan of the new
Korean government critically. After presenting some backgrounds behind it in the
section 2, we present the new government plan and other proposals in the section 3.
Next, we evaluate and discuss this plan, focusing on some issues and debates going on
in Korea. We criticize the project in terms of too much dependence on foreign capital
and the proper role of the government. In so doing, we can understand the plan better
and what are at stake.
2
II. Some backgrounds
1. Need for new engine of economic growth
The Korean economy has been called ‘miracle’ for its brilliant economic growth.
However, as the economy suffered from the crisis in 1997, most argue that we need to
find a new drive for economic growth. Although the crisis was triggered mainly by
careless financial liberalization and industrial deregulation, it is indeed true that now
Korea needs a innovation-driven growth strategy, different from the past. In fact, most
studies point out that the contribution of economic inputs has fallen in the 90s’ and
more productivity growth is essential for further growth (KDI, 2002). The old style
input-driven growth is not feasible any more, especially due to a fast catch-up of China
that utilizes cheap labor and huge foreign capital inflows. As China and other
developing countries grew so fast in the old manufacturing industry, while the
technology and productivity of Korea still stagnates compared to developed countries,
some argued that Korea is now in a ‘nutcracker situation’ without upgrading of the
economy (Booz Allen and Hamilton, 1998).
The crisis was indeed a shock to let Korean people recognize the change of the
economic system seriously. After the crisis, the government implemented far-reaching
market-oriented economic restructuring such as the corporate and financial reform. It
seems like the Korean economy recovered successfully, but the recovery was mainly
thanks to the increase of the huge trade surplus, injection of large-scale public funds and
booming domestic consumption.
Table 1. Major macroeconomic indicators of Korea (%)
198190
8.7
33.0
31.2
199197
7.0
35.4
37.0
1998
1999
2000
GDP growth
-6.7
10.9
9.3
Saving rate
33.9
32.9
32.4
Investment
21.3
26.9
28.3
rate
Household
-40.5*
41.3
44.3
51.1
debt / GDP
Source: Bank of Korea.
* Household debt ratio, calculated by author, average of 1994-97
2001
2002
3.1
30.2
27
6.3
29.2
26.1
62.0
73.6
Recently, more and more concern is presented about the future growth prospect.
Some already criticize the neoliberal restructuring toward the Anglo-Saxon system,
while others argue that more structural reform is needed.1 The economy again has fallen
1
Some argue too much of the Anglo-Saxon style restructuring with the increasing power of the capital
market will lead to lower investment and growth, but most sill think that the market oriented reform for
the financial sector is important, including the government. While mainstream economists applaud the
successful recovery based on the market-driven restructuring, heterodox present more skeptical view
(IMF, 2002; Crotty and Lee, 2002). Again there is a debate about the cause of the fall of investment, if
it’s due to the structural change of the economy including the financial system (Jung, 2003).
3
into recession with more uncertainty and serious private debt problems in 2003. Most of
all, the aggregate investment rate fell a lot after the crisis, which makes the future
growth potential more questionable. This year, the growth rate is expected to be even
lower like about 3%.2
Whatever cause is more important in recent recession, now more people are worried
about the economic future of Korea. It would be natural to see the potential growth rate
would go lower in the future, however the Korean economy needs a new engine for
further economic growth. The recent Northeast Asian economic hub plan has been
presented as a long-term strategic project for the future growth as the old style economic
growth is no longer possible.
2. Integration of the East Asian economy and position of Korea
Another important background is the growing economic integration among the East
Asian countries and its growth potential. The Northeast Asian region including China,
Japan and Korea is now emerging as the biggest economic power and market in the
world economy. It alone accounts for around 23.2% of the world GDP, 21.1% of the
world trade, in 2002, expected to be more than 30% in 2020.3 Moreover, these countries
still show a continuing fastest growth in the world, and own the most of total world
foreign reserves. Although Japan continues to stagnate, China’s growth is expected to
sustain and so are other Southeast Asian countries.
Table 2. Economic growth in East Asia (%)
19851998
1999
2000
2001
2002
94
China
10.2
7.8
7.1
8.0
7.3
8.0
Japan
3.4
-1.1
0.2
2.8
0.4
0.3
NICS 4*
7.6
-4.0
6.5
8.7
-0.2
3.5
World
3.2
2.8
3.6
4.7
2.3
3.0
Source: IMF. World Economic Outlook. Appendix.
* includes Korea, Taiwan, Hong Kong and Singapore, simple averaged value.
19952004
8.2
1.1
4.3
3.6
Recently, closer tie among countries has been developed within the whole East
Asian region. The trade and capital flows within this region has continuously grown,
and as of 1997 intraregional trade in East Asia is about as high as 48%, compared to
59% in EU and 49%. Interestingly, it is mostly NICS countries who contributed to it.
Along with industrialization, they run huge trade deficit with Japan, importing parts and
machinery, and recently surplus with China.4 Also capital flows in this region has
2
The first quarter growth rate is reported to be about 3.7% thanks to the export growth but the income
growth was just 0.2% compared to the same period last year. The second quarter is gloomier (Chosun Ilbo, 2003, 5. 27).
3
The data are based on the World Economic Outlook in 2003 by the IMF. They include Japan, China and
newly industrialized Asian economies such as Korea, Taiwan, Hong Kong and Singapore. Including
4
The data are from the IMF and Taiwan is not included. Taiwan ran a trade deficit of 22 billion $ with
Japan in 2000.
4
grown mainly from Japan and Korea to Southeast Asia, and now to China. With the end
of the cold war and increasing world competition, East Asian countries have made effort
of further cooperation. Negotiations about free trade agreements are under progress
including Japan, China, Korea and ASEAN.5 After the financial crisis, ASEAN+3
countries started advancing more financial cooperation, called Chiang Mai initiative
with agreement on currency swaps.6
Table 3. East Asian countries’ import from East Asian countries (billion $, %)
1980
1985
1990
1995
2000
80-90
increase
90-2000
Japan
29.3
(20.7)
29.9
(22.9)
54.0
(23.0)
101.2
(30.1)
105.1
(31.0)
24.7
(16.6)
51.1
(17.1)
NICS 3
29.7
(43.3)
40.4
(46.4)
105.8
(48.6)
243.8
(53.9)
254.3
(52.3)
76.1
(51.2)
148.5
(49.8)
ASEAN 4
16.4
(42.0)
17.0
(45.7)
45.0
(46.1)
108.6
(49.3)
106.1
(47.6)
28.6
(19.3)
61.1
(20.5)
China
6.4
(32.8)
21.1
(49.6)
25.5
(47.4)
57.3
(43.4)
62.8
(44.1)
19.1
(12.9)
37.3
(12.5)
Total
81.8
(30.5)
108.4
(36.5)
230.3
(38.1)
510.9
(44.8)
528.3
(40.0)
148.5
(100.0)
298.0
(100.0)
1) NICS 3: Korea, Hong Kong, Singapore
2) ASEAN: Malaysia, Thai, Indonesia, Philippines
Source: IMF
The East Asian economic development had been mainly led by Japan with FDI into
other countries traditionally, so called ‘flying geese model’ up to 80s’. But the pattern
has changed with the fast growth of China with more regionalization and parallel
division of labor (SERI, 2002). China has continue to grow fast with more than 9%
growth from 1978 to 2001, and their export in the world market increased from less
than 0.9% in 1980, to about 4% in 2000, with 14% growth in this period. The
development of manufacturing of the IT industry made it a ‘factory of world’, and the
number third country in the IT industry. Thus, in 2005 the Asian countries exports to
China would exceed that to Japan, and the economic integration would turn on the
Chinese economy.
5
Korea agreed on the FTA with Chile in 2002 and Japan agreed on the FTA with Singapore in 2001. The
negotiation between China and ASEAN for the agreement by 2004 is going on. While the FTA is
working already in ASEAN, the relation among Japan-Korea-China is essential for the FTA in the whole
Asia to be successful. For information about recent preferential trade agreements, see ADB (2002).
6
See, for extensive information of development and proposal of the East Asian monetary cooperation,
Bergsten and Park (2002)
5
Under these circumstances, most indicate the importance of the cooperation in
Northeast Asia, as this region has got the largest potential demand with dynamic
economic development in the future. Labor power and resources in China, technology
and capital in Japan and experience and lower technology in Korea can be combined to
result in a great economic growth potential. For example, co-development of vast
energy in this region can lead to big increase of demand that may spur growth.
Moreover, as the manufacturing industry moves to China in a big scale, there must be a
good chance for Korea to become a service and logistics center to make use of the value
added created by China (Kim, 2003). Thus, the growth of Northeast Asia could be a
great opportunity to the Korean economy. Although the fast catch-up of the Chinese
economy is a dangerous threat, Korea could take advantage of the great location and
fast growth of this region, with more Northeast Asian economic cooperation. Welldeveloped manufacturing technology and industrial base, good human capital and
reformed institutions after the crisis may be helpful. The new government plan can be
understood as active measures for Korea to take initiative in cooperation in this region
to take advantage of economic opportunity.
6
III. Other proposals and positions
1. Former government plan
The policy to become a center of Northeast Asian economy is not new in Korea.
Already in Kim Young Sam administration before the crisis presented a similar idea in
the name of ‘globalization’ policy. In 2002, the former Kim Dae Jung government
adopted the ‘Northeast Asian business hub country’ plan, and recently several more
proposals are presented. In April of 2002, the Korean government announced the longterm master plan of a Northeast Asian business hub country (Chosun Ilbo, 2002, 8. 29).
First of all, this plan presents a plan for ‘logistics center’ including development of
Inchon airport as a hub airport, the construction of logistics hub port such as
Kwangyang and Busan to make Korea as a center of logistics in the Northeast Asian
economy. For that, starting from the Kyoung-Yui railway, TSR (Trans Siberia Railway)
and TCR (Trans China Railway) are planned to be constructed.
Also, it presented a plan to establish some regions near Western sea region “Special
Economic Zone” to attract foreign business.7 This area is set up for Northeast Asian
business hub with various measures to make foreign business more comfortable and
attracted in Korea. They include several incentives like more tax cut and deregulation
for foreign business, and establishment of accommodation and education facility for
foreigners. Also, the plan includes development of the IT network and digital media
industry.
The plan is exactly the base for the new government plan, and stresses that the
Korean economy should changes toward the business and logistics center in this region
so soon. It thinks of the more integration into the regional and world economy as an
essential economic strategy. However, some criticized that the plan merely focuses on
attraction of foreign capital, which is not realistic. The establishment of the area with
some deregulation is not likely lead to attract foreign business but just aggravate uneven
development of the country. It is argued that more concrete plan would be needed to
attract logistics industry. The new government’s plan developed this original plans
systemically and shows some blueprints of the strategy in the near future.
2. Recent Finance hub argument
As the financial sector changes much more important the financial restructuring and
opening after the crisis, a voice to argue for the finance hub got strong momentum.
Foreign capitalists and financial capitalists in Korea seem to prefer this plan. This group
includes Jeffrey Jones, chairman of the American Chamber of Commerce and Industry
in Korea, Seoul Financial Forum and others. They argue that the finance hub is the most
important agenda than any others to develop Korea as a financial center like Hong Kong
in East Asia.
Usually, it’s called ‘Export Processing Zone (EPZ)’ in foreign literature. It is similar to Free Trade Zone
(FTZ).
7
7
According to them, there are good reasons for it (Park, 2003). First, it is important to
provide necessary capital in this region as the Northeast Asian economy grows and
needs more investment. The finance hub must be helpful to finance development of
Siberia, western China and North Korea. Also, the financial sector would be the core
and high value-added industry in the future with economic liberalization, digitalization
and more capital movement, absorbing high skilled labor power. Besides, the finance
hub can contribute to development of the domestic financial industry. Financial
institutions would compete more with foreign institutions in the process of the
establishment of the hub, and regulation and monitoring system would be advanced to
achieve the global standard. It would provide more efficiency and stability of the
financial market, and more opportunities for firms to finance.
In fact, other East Asian countries already joined the competition to become the
center of the international finance but they argue that Korea has got some advantage
over other countries. First, the scale of the economy is the most important. Korea is the
13th largest economic country and has several big companies in major industries, which
must be essential to create big investment demand and large scale financial transactions.
Secondly, geopolitically speaking, Korea is located at the center of Northeast Asia with
20% of the world economy produced within 2 and half hours by the airplane from Seoul.
Thirdly, there is large population with wealth and high saving rate, which provides a
large pool of financial assets. Fourth, the financial market works actively and big
financial institutions are emerging after the reform. Now, 9 financial institutions in
Korea are included in 100 largest ones in Asia, while 5 years ago there was nothing.
Fifth, human capital is very good with a relatively young population structure and
world high education level. Sixth, the IT infrastructure is well established to help 24
hour financial transactions of stocks and foreign exchanges. Seventh, the government is
determined to reform the financial sector, seen in post-crisis financial restructuring,
which makes Korea different from other countries in this region. Eighth, jurisdiction is
considerably independent, which helps fair conflict resolution and being international
financial center. Koreans’ strong will of democracy and economic reform are further
added.
These conditions give Korea the largest potential to be a center of finance in
Northeast Asia. For example, Tokyo mostly deals with domestic transactions and
Shanghai would be faced with constraints as it undergoes the transition yet. Hong Kong
is nearer to Southeast Asia and after the integration into China, its role would be smaller
and Singapore too has little domestic resource compared with Korea.
They also present several strategies for this plan. They cover the establishment of
the network with other financial centers, development of multiple currency market, and
attraction of domestic and international capital demanders and investors. Also,
provision of world-level related services, construction of innovative and creative market
environments, development of transparency in regulation are also thought to be
important. This argument exactly follows the neoliberal view for the Anglo-Saxon
capitalism, underscoring development of markets in general, such as establishment of
the proper government role, merge and privatization of financial institutions, better
corporate governance, flexibilization of the labor market, tax cut and so on. The
Chamber of Commerce and Industry argues that the whole Korea should be the free
economic area to satisfy the global standard. Though this argument was presented by
8
some private groups, recently it has attracted strong interest and triggered an ongoing
debate.
3. Northeast Asian Development Bank proposal
Some have already proposed a plan to establish a Northeast Asian Development
Bank (NEADB) for long. Sine the proposal in the Northeast Asia Economic Forum in
1991, studies and concrete plans have been presented including some from Asian
Development Bank (ADB).
The argument also starts from the great economic potential in this region with lots
of economic resources. For economic development, it is essential to construct the
infrastructure such as roads, railway and telecommunication, and huge capital is needed
to finance investment. However, it is highly unlikely that funds through the traditional
channels like private-sector credits and investments, bilateral official assistance, and the
multilateral development banks would be enough for it.8 Thus, additional funds should
be made available for this purpose. It is necessary therefore to install an institutional
mechanism by which to attract additional resources to the region from the international
money market. This situation provides both the rationale and the justification for the
proposed Northeast Asian Development Bank (Nam, 2003).
Also, they emphasize that the Northeast Asian economic cooperation demands
multilateral cooperation and in this regard, the regional development bank can play an
additional role. The bank works not only on financial activities, but also diverse
auxiliary functions, including research on the region's economies, studies on policy
issues, collecting and disseminating information, and educating and training officials. In
particular, transition countries can learn important lesson from other countries hopefully.
This institution can encourage more support by Japan and Korea for North Korea and
thus contribute to its reform and opening further.
The NEADB will benefit all participants. Developing countries members will get
access to the financial resources, much more than their respective amounts of capital
contribution. Non-borrowing or donor members would presumably be granted
preferential status in bidding and supplying equipment and services for NEADBfinanced projects. The return from providing a variety of goods and services would be
greater than the amount of the country's capital subscription. Relative to its benefit, the
financial burden of donor countries, for the establishment of the NEADB, is relatively
small in terms of cash payment. In the case of ADB, the paid-in capital accounts for
only 7% of the total subscribed capital, with remaining “callable capital,” never been
called. The callable capital is a safety net against risks involved in the banking operation.
Between 1966 and 1998, the ADB has been able to mobilize more than $87 billion in
the international money markets, much greater than the paid-in capital.9 They point out
it makes another case for establishing the NEADB.
8
A study calculates as much as $ 7.5billion is needed, however, the traditional source provides mere $2.5
billion a year.
9
It is 25 times as much as the amount of the paid-in capital. No private bank can match this performance
with such a small paid-in capital. For more information, see Nam (2003).
9
Japan was lukewarm for the proposal but recently it has shown more interest. From
2001, the Tokyo foundation carried out the extensive study and made some proposals
including action plans to the Japanese government in 2002. Although the proposal was
not accepted, it recognized its importance and the role of Japan. In particular, the
creation of the NEADB will provide Japan with an opportunity to make a part of her
huge trade surplus with other countries available for the economic development of the
region, to which Japan has a historical debt. However, political consensus including
complex foreign affairs and more attention among Japan, China and Korea are strongly
called on (Lee, 2003). In Korea, the new government seriously thinks of the proposal.
And in March, Korean Development bank announced that they are working on ‘East
Asian Development Finance Committee’ with Mizuho bank and Chinese Development
bank.
10
IV. New Government plan for the ‘Hub’ country
1. Vision and direction
The new president Roh emphasized the Northeast Asian economic cooperation in
his campaign for the election. He presented some promises to lead the development of
Northeast Asian growth mainly based on South and North Korean peaceful cooperation
10
The idea was further developed under the Presidential Transition Committee and now
became a central policy (Presidential Transition Committee, 2003).
The new government announced the Northeast economic hub state plan as an
important state agenda this February. It stipulates the importance of Northeast Asia as a
center of the world economy and regional integration. In this process, Korea should play
an essential role, and peace between North and South Korea is priority. As seen in the
picture 1. this plan basically consists of 3 major components, including logistics,
finance and industry cluster. Different from the former plan, they added the industrial
innovation cluster project for high-tech industrial development.
There are several essential directions in the plan. The first one is competition and
cooperation. The government considers it momentous to establish the Northeast
economic network to achieve win-win cooperative relation, and the efficient
international division of labor. The second is creating a new growth engine with
developing several high value added industries, the IT manufacturing industry, logistics
and finance. Thirdly, a balanced development of the whole country is pursued, by
developing the centers of business and linking them to local industrial clusters. Fourth,
proper management of environment for sustainable development, and lastly, NorthSouth Korean economic cooperation and peaceful circumstances are presented as some
base for the hub country of Northeast Asia
Picture 1. here.
10
The original argument seems to be a new growth drive in the election promise to attain the 7%
economic growth. The plan has been argued to solve the North-South Korean tension and economic
problems based on cooperation with Northeast Asian countries at a time hopefully.
11
Picture 1. Development Plan for Northeast Asian economic hub country
Northeast Asian
Economic Hub Country
Logistics
Industry Innovation
Cluster
Finance
- Inchon, Busan,
Kwangyang
development
- IT infrastructure,
High-tech industry
development
- Deregulation
and institutional
development
- North-South
Korea,
Eurasia railway
- Parts, material,
and R&D hub
development
- Human, physical
Infrastructure
development
- Total logistics
network
- Attracting foreign
business
- Financial market
stability
Source: Government Transition Committee (2003), p. 256.
12
2. Major concrete plans
This plan includes the following major concrete plans. First of all, the government
makes efforts to make a parallel development of the balanced country, and industrial
development. It plans on developing 3 ports as a logistics hub. Inchon is important in
logistics, IT industry and tourism and connected to Kiheung and Gaesong, the business
cluster around Seoul. So is Busan and parts production, and connected to Ulsan and
Sachon, the Southeast business cluster. Kwangyang port is also essential in logistics and
new material industry, connected Sachon and Kwangju, the Southwest business cluster
Second project is to build a free trade area and internationalize finance. The
government develops Free Economic Zone as a Northeast Asian business center, where
economic incentives and network externality are provided with the global standard for
management. Also it encourages the financial and foreign exchange market as a center
of Northeast Asian international finance. For that, it should modernize financial
regulation as the OECD level by 2007, develop human and physical infra, setting up the
‘Finance Center Committee’, and maintain financial stability.
Third is construction of a Northeast Asian logistics center. It includes a plan of
developing the Inchon Airport, and Busan, Kwangyang port as a center of Northeast
Asia. By 2008, the 2nd stage Inchon airport development should be finished, expanding
runway and cargo terminal, bridges and airport train, and also the container port and
international logistics complex in Busan and Kwangyang should be built.
Fourth, the IT and high-tech industry and business hub plan is presented. In order to
become a Northeast Asian IT hub country, they will construct a world-best information
network, establishing the Northeast Asian IT cooperation. Also, it empowers internal
capacity as a high-tech industry base, developing Inchon-Suwon belt as a R&D and
business base, and Busan, Kyoungnam as a base for parts and materials, nurturing the eBiz and logistics network. For that, the government should promote FDI and attract
multinational companies, based on a new Foreign investment assistant. For future,
Korea-China-Japan FTA and the East Asia electronic and trade community, energy
cooperation in Northeast Asia plans are presented.
Fifth, economic cooperation between North and South Korea and peaceful external
condition is essential. The government should develop the economic cooperation base
such as logistics and information technology. It will encourage institutional
infrastructure development. Based on it, Northeast Asian peace cooperation
organization can be possible.
3. Further recent development and the role of the government
After the announcement of the plan, the government organized the Northeast Asian
Economic hub committee under the president in April.11 In the organization, most of
key policy makers participate and it became responsible for some important tasks like
attraction of foreign investment.
The name of the plan changed from ‘Northeast Asian hub state’ to ‘Northeast Asian economic hub
state’, and finally the name of the committee was set as ‘Northeast Asian economic hub’. The meaning of
the political state has been reduced with a concern about other countries, China has showed some
discontent on the name.
11
13
The committee further developed the original plan in an effort to draw a blueprint
for the Northeast Asian economic community. It is interesting that it has emphasized the
industrial cluster more rather than the finance hub, compared to the former plans
(Northeast Asian Economic Hub committee, 2003). The industrial cluster is an
extensive network that consists of corporations, university and research institutes, to
produce a synergy effect (SERI, 2002). The silicon valley model is seriously considered
in Korea. It intends to overcome the limit of the original plans depending too much on
attraction of foreign capita, in order to produce longer term competitiveness and
balanced development. In particular, the government should play an essential role in
establishing the network between the businesses and others, also encouraging more
spontaneity from the private sector. Thus, the project is somewhat oriented to a new
style of an industrial policy. In addition, it seems to shed more light on measures for
economic cooperation more including Northeast Asian energy cooperation, North-South
Korean economic cooperation, establishing FTA, financial and currency cooperation.
However, this organization may be too big and cover so many parts, which might
lead to duplication of organizations.12 There must be better coordination between the
organization and current ministries to avoid possible conflicts. The central coordination
is also needed to overcome regional competition. Actually, they don’t seem to have a
clear consensus on the role of the state and concrete actions (Shindonga, 2003. 6.).
Indeed, the committee is composed of different groups with different ideas, and there
might be some tension. Recently, more positive role of the state is added to the original
market-led approach to attract foreign capital. Especially, industrial clusters call on the
proper role assignment between the government and business, and the active role of big
businesses. In the process, also the good monitoring is of consequence, which demands
a development of the financial system. But in Korea, the transparency is still bad in
corporate accounting, and chaebol reform is still in progress. Thus, the neoliberal
market-led corporate governance reform might be retarded by a compromise between
the government and big business. Though the mainstream idea is still dominant, the
tension between the market-led Anglo Saxon theory, and somewhat state-led industrial
policy, might lead to confusion and inconsistency.13
The question is how to develop a new way of government management of the
economy to encourage more participation of the private sector. The Korean economy
succeeded in growth thanks to the strong state-led industrial policy with close
government-business relation. However it did not work effectively any more since the
90s’, and the changed government-business relation led to more deregulation and finally
the crisis. After the crisis the government led the market-led restructuring process of the
corporate sector, but still the role of the government is confusing. In this regard, more
participatory relation with several stakeholders could be desirable, and based on this, a
new kind of more democratic developmental state can be thought of (Evans, 1995).
In general, the Northeast Asian economic hub state plan is a grand and the most
important economic policy in the new government. The new government puts so much
emphasis on it as a long-term industrial strategy. The president Roh said in his
12
5 specialty commissions established under this organization: South-North Korea, external cooperation,
Logistics, Attraction of foreign investment, Institutional reform, Innovation cluster.
13
In fact, several progressive economists were engaged in the new government economic policy, with a
different view from mainstream economists. Unlike the mainstream economists and MOFE, they consider
the government and market complementary and admit to the more positive and active role of the state.
14
inauguration speech, “The Northeast Asian region is emerging the center of the world
economy.. although we have lived the history of the outer area… the opportunity to
become the hub country in the Northeast Asian era of the 21st century has come..”. In
the next section, we present some issues around the plan and evaluation.
15
V. Issues around the plan and evaluation
1. Finance hub debate and danger of more opening
In development of the plan, there has been a hot debate between the supporters of
the finance hub and those against it. In fact, the original ministry of finance and
economy (MOFE) plan in the former government was mostly to develop the free
economic zone to attract foreign capital, focusing on the finance and service business
hub more. However, the government transition committee have thought it also
important to encourage industrial development and raised some conflicts.
Critics on the finance hub argue that the argument is not realistic, and finance hub
itself needs a strong industrial base like Singapore. Supporters of the finance hub argued
that we need turn to high value added finance and other service business since China
will catch up with Korea in the manufacturing industry. However critics point out
England lost the manufacturing competitiveness by focusing on the service and
financial industry. Also they underscore that the financial industry would not produce
employment much, and the Dutch disease might occur with huge capital inflow and
appreciation after deregulation (Chang, 2003). Already studies point out that the shortterm financial capital inflow is not helpful to growth, and the long term capital flows,
that might spur growth, cannot be encouraged by just deregulation but the growth
potential is more important (Kozul-Wright and Rothown, 1999).14
Still supporters argue that the development of the finance hub as such is helpful to
the development of logistics hub. It can hopefully provide necessary capital for
investment and incentives for foreign firms to join the logistics industry by better
financial service (Kim, 2003). Reflecting these different ideas, the new government plan
includes both of logistics, industry and financial development with a somewhat
compromise.15 Seoul Finance Forum strongly demanded the government to push more
for the finance hub, which led to the establishment of the finance hub committee.
However, the government announced that since competition with Shanghai and Hong
Kong gets more fierce, the most priority for investment is logistics. Also they added the
industrial cluster plans very actively to the original MOFE proposal.16
There may be a complementary feature in these plans, but there must be more
efforts to let the financial sector promote industrial development. Considering the still
underdeveloped domestic financial markets and institutions, the fast financial opening
might cause a dominance of foreign capital. Already it is conspicuous in the banking
sector and weakened the financial intermediation role, increasing consumer finance
instead of corporate finance. Among others, we should consider how to reduce the
possible instability with more financial opening and deregulation.
14
Within the new government, there is indeed skeptic about it, and according to one economist who is
involved in the new government, “Investment-led, innovation-led, asset-led.. still Korea is in the stage of
innovation-led and the industrial capacity is much more realistic than developing the finance hub.” In the
conference by Solidarity for Alternatives in Seoul in March.
15
The debate between the finance hub and industry hub is also closely related to their theoretical or
philosophical difference, or neoliberalism vs. more institutions-centered theory.
16
It might be related with the demand of chaebols who point out the problem of reverse-discrimination of
domestic big business in ‘Free Economic Area’ that provides lots of incentives for foreign capital. Also it
considered the critic against the mere attraction of foreign capital.
16
Although the crisis was due to careless financial opening to a great extent, it was
even further opening and deregulation adopted, demanded by the IMF. Thanks to this
policy, foreign capital inflows skyrocketed and economic instability became more
serious, with more volatility in the stock market (Demirug-Kunt and Detragiache, 1998).
Table 4. Foreign capital flows in Korea after the crisis
FDI inflow
1995
1.9
1996
3.2
1997
6.9
1998
8.8
1999
15.5
2000
15.2
2001
11.3
2002
9.1
Portfolio
Inflow
10.2
12.6
13.2
16.5
41.7
60.1
43.9
Outflow
7.8
8.0
12.1
11.7
36.2
48.8
36.4
Net inflow
2.5
4.6
1.1
4.8
5.5
11.3
7.5
Total
18.0
20.6
25.3
28.2
78.0
108.9 80.4
Source: Bank of Korea. 2002. Recent trend of foreign portfolio investment, and ministry
of commerce, industry and energy.
In this regard, careful regulation measures over financial capital should be
introduced seriously along with the project. However, the government plan doesn’t
consider those measures enough. Some emphasize that more financial opening with
establishment of better institutions must help the development of financial system and
provide more stability. But an establishment of good institutions always takes long and,
it is questionable how the government can address financial instability related to shortterm foreign capital flows, as even developed countries have hard time (Rodrik, 1999).
2. Problems of neoliberal strategy and the role of foreign capital
Although the plan is under change to the direction to emphasize the domestic
industrial development more, still the government plan is mainly oriented toward
attraction of foreign capital with more deregulation and incentives, specially FDI. Thus,
policies like ‘Free Economic Zone’ is exactly in line with the neoliberal economic
restructuring. It may change the power relation in favor of foreign capital even more
and restrain the role of the government for national development further.
Of course, it’s based on the strong assumption that more opening and more foreign
investment must encourage growth. However, we should carefully examine the role of
foreign capital and how liberalization can help the Korean economy. Theoretically, FDI
may encourage investment, and increase the overall efficiency by spillover effects of
better technology and management skill. But most empirical studies show mixed results
at best. Mere opening and incentives for foreign capital inflows would be not good, and
may aggravate instability (Prasad et al., 2003) Several studies support that the FDI can
be helpful under some absorptive capacity, still there are lots of skeptical studies
(Borensztein et al., 1998; Carkovic and Levine, 2002; Hanson, 2002). The productivity
spillover effect in Korea is reported to show mixed results (Kim, 1999; BOK, 2003). In
reality, as seen in the table 2, FDI into Korea surged after the crisis. However, there is
scant evidence that it’s helpful to the economic recovery process in East Asia (Mody
17
and Negishi, 2001). In Korea too, it is said that most FDI was M&A related one, and the
share of so-called Greenfield investment was really low (Hankook KyoungJe Shinmun,
2000. 4. 13.). Already in 2002, the FDI fell significantly due to the decrease of M&A
opportunity after the end of restructuring process.
Since the saving rate is higher than the investment rate after crisis, the
microeconomic benefit of FDI must be more important to Korea, if any. But, for that,
the policies should be complemented by some measures for proper management of the
FDI, and better strategy to maximize its benefit. For example, measures to attract the
R&D center into Korea and promote a forward and backward linkage effect with local
companies to provide parts are essential. That is, more localization of foreign direct
investment is needed in Korea. Some report that although the R&D by foreign firms in
Korea has increased recently, still the size and nature of the local R&D by foreign firms
is quite limited. Also, the linkage with domestic companies in parts provision and joint
R&D is reported to be such weak (Kwack, 2003).
In this regard, the law of ‘Free Economic Zone’, already passed in 2002, is also
problematic. In the government plan, a tax support is given only based on the size of
investment. It may result in the decrease of the government tax revenue without
encouraging FDI.17 Also, this kind of policy might lead to an attraction of only low-tech
cheap-labor industries as is true in many developing countries like Mexico, and ‘the
race to the bottom’ competition with other East Asian countries. More sophisticated
incentives system such as more supports for investment that really helps the domestic
industrial development is strongly called on.18 Maybe it is possible that the policy can
attract some service and finance-related businesses as expected in the government plan.
But the result may not be that beneficial to long-term growth either. It may lead to a
kind of dualization of the labor market divided into a few high skilled labor and more
low skilled, and no improvement of the social welfare of all people with worse logistics.
Thus, this policy toward mere attraction of foreign capital may not be only
unsuccessful, but also faced with serious resistance by Korean workers in reality. Since
the measures are mostly to support foreign capital at the cost of workers’ rights, the
government would have hard time getting supports from nation people, though most
admit the importance of the vision. The related law seriously impinges on the workers’
right with several deregulation of the labor law such as the temporary labor usage, some
compulsory workers’ right and welfare. For instance, it allows abolishment of paid
holidays per month, more dispatch labor and repression on rights of a collective action
by workers in the zone.19 Also it does harm to the public education and health system by
permitting establishment of foreign schools and the entrance of natives. Moreover,
environmental regulation is encroached and more service sector opening is expected in
this area. In the competition among regions to establish the special zone, there is a
17
Total effective corporate tax rate is determined by each country’s prevention of double taxation, and
that of America and U.K. is not affected by the tax rate in Korea. Thus, some argue that tax cut for
foreign capital in Korea would not help attract foreign capital (Kwack, 2003).
18
The corporate tax cut was presented by the government and cancelled. In fact, the corporate tax rate is
not high compared to other countries. Currently, there seems to be some debate within the government
about the range of ‘Economic Freedom Area’, some argue that several zones are not effective with
reverse-discrimination (Hankyore Shinmun. 2003. 5. 11.)
19
Already, the Korean workers work the longest time in the OECD countries with not much of social
welfare and workers’ right. A lawyers’ group present s a serious concern about the policy that may be a
violation of the constitution, and the possible extension.
18
concern that the measures may spread into the whole country, and also other domestic
companies.
Thus, already the labor unionists and progressive civil groups started organizing the
movement against the ‘Free Economic Zone’ law, which is supposed to be enforced
from this July. The policy against this resistance might incur a high social cost, and it
might be hard to be successful without social consensus. It raises more concern since
the participation of economic agents and more cooperative relation are the essential
preconditions for the enhancement in productivity and the success of the industrial
cluster. The worsening distribution and social fragmentation of the neoliberal strategy
may significantly hinder the overall growth potential.
3. Competition, cooperation and international geopolitics
Though nobody may deny that the project is essential for future, still the question is
how realistic it is. It seems that the plan integrates all good rosy measures, but they are
not yet concrete. Other Asian countries have already tried to become a hub country and
in terms of competitiveness, Korea might not have strong advantage compared with
other candidates, except as a logistics hub. Thus the grand vision looks too ambitious
and there is serious doubt that project might be just a rip service even in Korea.
The government plans are, in fact, mostly domestic measures to mainly attract
foreign capital. There is no much concern about how to take the initiative to lead the
cooperation with other countries, and co-projects in spite of the name of the project.
Except some between North and South Korea, and energy cooperation, there are no
concrete proposals with the Korea’s initiative. Even in terms of the FTA, only 1 FTA
Korea-Chile was established in Korea while other Asian countries has made more
efforts. For example, the ASEAN is very keen on setting up the FTA with China and
Japan, ahead of Korea. The level of cooperation of Korea with other Asian countries is
not that high. Some argue that maybe rather than the ‘hub’ or ‘center’ that might bring
about discontent from other countries, and rhetoric to construct ‘corridor’ to connect
Korea with Singapore, Shanghai and Tokyo would be more persuasive (Kim, 2003).
The more stress on cooperation or the concept of network, indicating mutual benefits
should be done, than possibly detrimental hub competition.20 Also, the consideration of
the broader ASEAN+3 framework covering the whole East Asia might be helpful to the
bargaining power against China, as Korea gets more and more dependent on the giant
China.
Most of all, the international geopolitical situation is not friendly to the success of
this vision. China, Japan and other countries’ interest may be so different around the
possible cooperation. Politically, the U.S. power is too strong in this region and they
don’t seem to like the Northeast Asian cooperation in an effort to check the rising China.
China is still in the process of transition and Japan has been caught in the domestic
problems. They have not been active in cooperation with current problems, always
trying to check each other. It seems that Russia that own the most natural resource try to
20
The government seems to recognize it. An economist who developed the project clearly puts emphasis
on the feature of cooperation as the most fundamental principle of the project (Interview in Mal, 2003. 5.).
19
get the most benefit among these countries.21 Because of historical and ideological
conflict in the region, it is not easy to hope for the cooperation, which makes the
situation quite different from the integration of other economic blocks there were strong
leading countries. In this situation Korea should find a casting voter’s role between
China and Japan hopefully to derive more cooperation in this region.
For whatever cooperation to be successful, the establishment of peace in this region
is really essential. However, recently tension has aggravated more around the North
Korean nuclear arms problems. The U.S. government stance is quite aggressive with
more repression on North Korea in future including sea blockage. The South Korean
government seems to change from the Sunshine policy in the former government to
more harsh one following the U.S. policy. The Japan-North Korea relation worsened too.
In spite of the Pyoungyang declaration last September, the kidnapping problem caused
the more conservative policy to North Korea. Thus, the external security problem with a
possibility of political and military crisis may be most serious obstacle to the success of
Northeast Asian cooperation. Mutual assistance between South and North Korea should
be developed to promote the exchange of peace and prosperity in North Korea.
Considering the current situation and the limit of the current plan, in the short-term,
concrete plan for energy and railway construction throughout the Eurasia continent is
prospective. In the process, the Northeast Asian development bank plan could be
implemented together. Through the bank, South Korea and Japan may support North
Korea in an indirect way, while direct support measures are hard to get political support.
Through the NEADB, foreign capital may be invested in the new grand project, which
interacts with more peace, producing a positive feedback. The bank may be also helpful
to further financial development and more stability, rather than mere deregulation
measures.22 In the long run, we should orient to broader financial and economic
cooperation in whole Asia based on the experience of the Northeast Asian region. The
financial cooperation provides a great condition for more economic stability in this
region and less dependence on foreign capital from the outside (Bergsten and Park,
2003). Some feasible financial cooperation is being discussed recently starting from the
Chiang Mai initiative to the possibility of the Asian Monetary Fund (AMF). The Korean
government plan should be positioned in this long-term development of cooperation.
21
Already, it is reported that China and Russia agreed on construction of the gas and oil pipeline from
Siberia to China, along the so-called ‘Dai-ching’ line. Originally the Korean government has the plan to
construct the line through North Korea and the Japanese government try to construct it to Japan through
the Pacific line. However, the nuclear problem in North Korea blocked the negotiation and China was too
keen to secure energy resource after Iraq war (China Daily, 2003. 5. 28.)
22
The Korean government should spread the importance of the proposal politically through an official
channel, and also more efforts by scholars are called on.
20
VI. Concluding remarks
The new Korean government plan for ‘Northeast Asian hub state’ presents a grand
vision to lead the Northeast Asian economic cooperation. The Korean economy
attempts to take advantage of the new growth potential of this fast growing region.
Basically we understand the urgent need for a new developmental policy in Korea and
recognize the importance to take the opportunity in Northeast Asia.. The government
plan consists of 3 main axes such as the establishment of a logistics center, industry
cluster and the finance hub. Clearly, it points to a breakthrough from the old industrial
policy, as the old style state-led policy did not work since the 90s’. However, though
there is a feature to emphasize the important role of the government like in the industrial
cluster, it is mainly oriented toward attraction of foreign capital and a strategy for the
more integration into the world economy.
In this paper we present backgrounds and the development of this plan, and point
out several problems. First of all, it attempts to introduce more liberalization and
opening in the financial sector, but the finance hub argument is not that realistic and
helpful to national economic growth. Most of all, the government ignores the possible
cost of instability and more measures for better regulation and monitoring over the
short-term financial capital should be considered. Also, most policies are oriented
toward mere attraction of foreign capital, establishing ‘Free Economic Zone’ with lots
of incentives such as tax cuts. However, those incentives and deregulation may not be
successful to attract foreign capital, and never beneficial to the national development,
without proper measures to take advantage of the FDI. Moreover, the policy to repress
workers’ right may cause social tension. Even though successful, the growth might be
concentrated inside the specific area and firms, increasing the articulation of the
national economy and worsening distribution.
With regard to the Northeast Asian cooperation, still the government plan is not
concrete without effective measures. There is a question if Korea really can be a center
of this region and take initiatives in cooperation. More realistic co-projects should be
developed and presented. In the process, the government should underscore the feature
of cooperation for mutual benefit, not competing become a hub among countries. In
reality, the recent international power politics in this region is serious with the
possibility of the serious security crisis problem in North Korea. The government
should exert to get to peaceful solution for it. The establishment NEADB and
development of the resource and IT infra in this region can be a prospective short-term
project. In the long-term, a broader economic cooperation in the whole East Asia should
be pursued.
In sum, although we recognize the consequence of the plan, the mere foreign capital
dependence based on neoliberalism should be overcome. Considering the level of the
development, the important role of the state and proper measures for catch-up should be
adopted seriously, not just turning to the market. Although the old direct intervention
lost its ground, reinventing the new developmental role by the state, somewhat more
participatory, is called on faced with the wave of recent globalization (Weiss, 2000). In
this sense, the public discussion should include more nation people including the civil
groups and workers for more consensus and participation. In addition, the cooperative
relation with other countries in this region is seriously needed including the closer
21
government relationship. Development of mutual understanding and more
communication in several levels among countries in this region must be desirable.
22
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