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11. Repercussions of Negatively Selective Migration for the Behavior of Non-migrants when Preferences are Social

Author:
Oded Stark and Wiktor Budzinski
Publication Date:
08-2019
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
We study how the work effort and output of non-migrants in a village economy are affected when a member of the village population migrates. Given that individuals dislike low relative income, and that migration modifies the social space of the non-migrants, we show why and how the non-migrants adjust their work effort and output in response to the migration-generated change in their social space. When migration is negatively selective such that the least productive individual departs, the output of the non-migrants increases. While as a consequence of this migration statically calculated average productivity rises, we identify a dynamic repercussion that compounds the static one.
Topic:
Migration, Income Inequality, and Economic Policy
Political Geography:
Asia and South Korea

12. Deeper Regional Integration and Global Value Chains

Author:
Nakgyoon Choi
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Recently, international trade has become regional rather than global. This paper aims to test if deeper regional integration contributes to the organization of global value chains along the regional clusters including Asia, Europe, and America. We estimate the impacts of deep regional integrations on global value chains by region, investigating the implications of mega FTAs for global value chains by scenario. We use not only data on trade in value added but also global value chains participation indexes which reflect the global value chains better than domestic value added in goods and services exports. The estimation results reveal that a deep regional trade agreement has heterogeneous effects on global value chains depending on the regional clusters. In particular, Asia turns out to import more intermediate goods than Europe and America while RTA member countries tend to import more intermediate goods from Europe than Asia and America.
Topic:
International Trade and Finance, Regional Integration, Economic Policy, and Exports
Political Geography:
Europe, Asia, Global Focus, and North America

13. New Delhi’s ‘Act East’ and the India-ASEAN Engagement: What They Mean for India-Korea Relations in the Indo-Pacific

Author:
Jagannath P. Panda
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
One of the principal objectives of New Delhi’s ‘Act East Policy’ (AEP) is to strengthen India’s contact with the ASEAN as well as with the countries in Southeast Asia. The pursuit is evolving and ever-growing, both institutionally and regionally. With a focus on ASEAN-centric cooperation, forging a closer multi-modal connectivity cooperation between India’s bordering states and the immediate Southeast Asian countries has been one of the guiding principles of this engagement. Also, this engagement is becoming deeper with India aiming to extend the connectivity cooperation to the interior parts of the ASEAN region from the immediate neighbouring region of India. A renewed focus on engagement through increased cooperation in areas such as economic, political and security realms offers a positive future graph to the India-ASEAN engagement at present which is becoming one of the defining features of Indo-Pacific. With the possible conclusion of the Regional Comprehensive Economic Partnership (RCEP) in 2019-20, the regional economic architecture will move to a new level of maturity in which India would like to factor in its engagement strongly with the other countries. More importantly, it is in India’s interests to further deeper cooperation with the ASEAN as an institution. The economic role of ASEAN’s dialogue partners, especially that of China, will test India’s relationship character with the ASEAN. How should India react to the evolving regional economic and security architecture around the ASEAN? Options for India are perhaps plenty. Yet, India needs to find strategic compatibility with most of the ASEAN dialogue partners – some of which are influential economic actors in the region – to position its strategic interests more coherently. South Korea (officially known as the Republic of Korea) is one of those prime actors with whom India must envision to have more policy convergence keeping the ASEAN framework in mind, and draw strategic compatibility in specific areas of cooperation and mutual benefit. This study examines India’s growing engagement with the ASEAN and factors how India-South Korea could possibly cooperate within and outside an ASEAN framework. The study tries to establish policy convergence between India’s Act East Policy (AEP) and South Korea’s New Southern Policy (NSP), bilaterally and regionally, factoring the ASEAN and the countries around as the central focus of this cooperation.
Topic:
International Trade and Finance, Regional Cooperation, Treaties and Agreements, and Economic Policy
Political Geography:
South Asia and India

14. Push vs. Pull Factors of Capital Flows Revisited: A Cross-country Analysis

Author:
Tae Soo Kang and Kyunghun Kim
Publication Date:
02-2019
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Capital market integration contributes to economic growth and it can be more beneficial for emerging market economies (EMEs, hereafter) at their early stages of development where the capital is relatively insufficient. An open capital market also enables investor to share the country-specific risks by holding foreign assets. However, there are also some negative side effects of capital market integration. Financial shocks originating in the center coun-try can be quickly propagated through the integrated financial market. The Global Financial Crisis (GFC, hereafter) is a good example of the contagion of the financial crisis. Volatile cross-border capital inflows and outflows nega-tively affect financial stability, which eventually lowers economic growth by causing financial crises. Despite of these negative side effects, capital market integration has been an inevitable long-term trend for many EMEs over the past few decades (Aizenman et al. 2010). There have been continuous capital flows to EMEs, which started even before GFC and this trend has been more pronounced during the U.S. zero-interest rate period (Ahmed and Zlate 2014). Though some monetary authorities in EMEs tried to moderate the procyclicality of credit flows by implementing policy instruments such as capital controls or macro-prudential policy measures after GFC (Kim and Mehrotra 2018), the common factors in the global financial market still play a crucial role in de-termining capital inflows to EMEs. The relationship between the global financial condition and its impact on capital inflows to EMEs, has been a long-debated issue. This issue concerns whether push or pull factors are the major determinant of capital flows. The push factor represents the common factor that exists in the global financial market or center countries, which influences capital inflows to peripheral countries. These factors are interest rates and GDP growth rates of advanced economies (AEs, hereafter), global risk factors such as VIX (S&P 500 Volatili-ty Index), and the commodity price index. The pull factor denotes domestic factors that attract funds from the global financial market to domestic finan-cial markets. These factors are domestic interest rates, domestic GDP growth rates, and other country-specific characteristics such as exchange rate regime, degree of the capital account openness, institutional quality, and stages of economic development. In previous literature, many scholars have found strong evidence for push factors being the major determinant of capital movement. The interest rates of mature economies and VIX are significant determinants of capital inflows to EMEs. However, there is only some evidence that higher domestic interest rates and higher domestic GDP growth rates pull capital from the center countries to individual EMEs (Koepke 2015). Related to this long-debated issue in academia, the Chairman of the Federal Reserve, Jerome H. Powell recently stated, "... I will argue that, while global factors play an important role in influencing domestic financial conditions, the role of U.S. monetary policy is often exaggerated." With this statement, he also pointed out that the slowdown in capital inflows to EMEs which has been happening ever since 2011 has been mainly due to the narrowing of GDP gaps between AEs and EMEs, i.e., the recent decrease in capital in-flows to EMEs can be attributed to the decline in EMEs' GDP growth rates given the fact that the U.S. GDP growth rate has picked up. In this paper, we revisit this issue of push and pull factors of capital inflows. To this end, we consider the heterogeneity that exists in EMEs by dividing them into four subgroups. We investigate which is the main driver of capital inflows between push and pull factors across country groups. Categorizing subgroups is important for two reasons. First, EMEs are so heterogeneous that we make subgroups which share similar economic fundamentals by re-gions. Second, making subgroups across EMEs is an effective way to indi-rectly consider the regional contagion effect. With this cross-country analysis, we can figure out the differing effects of push and pull factors across country groups, and this can eventually lead to the development and implementation of appropriate policy instruments. Our empirical finding shows that the push and pull factors play a different role in determining capital inflows to AEs and EMEs. The major drivers of capital inflows to AEs are both push and pull factors, but push factors turn out to be the main determinant of capital inflows to EMEs. When EMEs are divided into four subgroups, we find sizable heterogeneity across subgroups. In Asian countries, both push and pull factors are significant, which is similar to AEs, but only U.S. interest rate plays a major role in Eastern Europe. Some pull factors are important in Latin American countries and other EMEs, but these are not robust to alternative empirical models and measures.
Topic:
Capital Flows, Economic Policy, Push Factor, and Pull Factor
Political Geography:
Global Focus

15. The Spillover Effects of Regional Trade Agreements on Trade

Author:
Dakshina G. De Silva, Soon-Cheul Lee, Robert P. McComb, and Maurizio Zanardi
Publication Date:
12-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
The purpose of this paper is to examine whether or not there is a spillover effect of third countries’ regional trade agreements (RTAs) on their bilateral trade relationships. To identify the RTA spillover effects, we expand a gravity model into a third-country framework using a dataset of bilateral trade and RTAs for 62 country-pairs over the period 2002-2013. We construct a weighted third-countries’ RTA contiguity matrix as well as a spatially-weighted matrix to identify both the spillover and spatial effects of RTA on trade flows. The results show that the spillover effects of RTAs on trade are positive while the spatial effects of RTA are negative and imply that third parties’ RTAs have complementary effects on bilateral trade while the existence of neighbors in the RTA between the two trade partners reduces their bilateral trade. As a result, the proliferation of RTAs expand international trade through spillover effects as well as trade creation and trade diversion.
Topic:
Bilateral Relations, Regional Integration, Economic Policy, and Trade
Political Geography:
Global Focus

16. The Rise of China and the Rebound in Korea’s Manufacturing Employment

Author:
Kyong Hyun Koo and Unjung Whang
Publication Date:
12-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Over the last three decades, the world has experienced a substantial in-crease in Chinese import penetration due to the rapid improvement in Chi-na’s supply productivity, which is often called the “China shock” or “China syndrome.” The existing literature have shown that the increase in imports from China due to the China shock adversely affected the manufacturing employment of a number of advanced countries such as the U.S., Norway, Denmark, and Spain. Unlike those advanced countries, South Korea has shown a pronounced increase in exports to China as well as imports from China since the 1990s. Over the same time, furthermore, Korea’s manufactur-ing employment has shown a stagnated downward trend compared to other advanced economies and even rebounded since the mid-2000s. Given these motivations, this study investigates both import and export channels to ex-plore how the China trade shocks affected the exceptional trend in Korea’s manufacturing employment from 1993 through 2015. To capture the overall employment effects of the China shocks, specifically, we consider not only how a Korean manufacturing industry employment is affected by the change in its direct exposure to China trade shocks (direct effects), but also how other industries’ changes in exposure to China trade shocks affect the industry through domestic industrial linkages (indirect ef-fects), largely following the empirical approach employed by Acemoglu et al. (2016). Mainly using firm-level data for almost all Korean manufacturing firms with more than four employees and the 2SLS estimation method, we find that during the period 1993-2015 the increase in Chinese import expo-sure had statistically insignificant direct effects on Korea’s manufacturing em-ployment on average, while 1% point increase in Chinese export exposure directly caused 0.18% increase in employment across Korean manufacturing industries. For the indirect effects of China shocks, in contrast, 1% point in-crease in Chinese import exposures of downstream industries (intermediate goods buyers) led to 3.00% decrease in employment of upstream industries (intermediate goods sellers) on average, while 1% point increase in Chinese export exposures of downstream industries brought 1.70% increase in em-ployment of upstream industries on average. The relatively moderate direct effects compared to the indirect ones are partly explained by two factors: First, Korea has gone through a substantial change in the structure of its trade with China since 2000s, so that within-industry supply chains between China and Korea have become more intertwined for some industries. Second, the Korean industries whose main downstream industries were substantially exposed to the Chinese imports (exports) tended to have a relatively low di-rect Chinese import (export) exposure during the period 1993-2015. Based on the 2SLS estimates above, the increased Chinese import expo-sure turns out to have decreased Korea manufacturing employment by 1,210,000 during the period 1993-2015, mainly through the indirect channel. In contrast, the increased Chinese export exposure appears to have increased Korea manufacturing employment by 1,090,000 during the same period, through the direct channel (210,000) and indirect channel (880,000). In the case of Korea’s manufacturing industry, therefore, most of the job reduction attributable to the China shocks has been also offset by job creation caused by the China shocks. Such a considerable increase in manufacturing jobs due to the rise of China, which has not been reported yet in other advanced economies, appear to have played an important role in generating the re-bounding trend in Korea’s manufacturing employment.
Topic:
Globalization, Labor Issues, Economic Policy, and Trade Shocks
Political Geography:
China, Asia, and South Korea

17. Sources of Comparative Advantage in Services: Institution vs. Social Capital

Author:
Nakgyoon Choi and Soonchan Park
Publication Date:
12-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Previous studies that have identified the impacts of institutions or cultural traits on comparative advantage focused on goods trade, but not services trade. In contrast to the rapid increase in trade in services, empirical examina-tion on sources of comparative advantage in services trade remains limited. This paper attempts to fill this gap by investigating empirically the impacts of institution as well as social capital on comparative advantage in services trade. Services are exposed to relatively more pre-choice risks than goods, because it is difficult to obtain information on the quality of services before the con-sumer decides to purchase. In addition, trade in services involved in global value chains possibly takes on the risks of contract breach by other firms along the same value chains. As a result, the transaction risks for trade in ser-vices are higher than for trade in goods. Using the World Input Output Da-tabase, we estimate the importance of social capital for comparative ad-vantage in services. We find that countries with more social capital tend to specialize in the production of contract-intensive services. We also find that social capital rather than institution matters for comparative advantage in ser-vices.
Topic:
Economic Policy, Institutions, Services, Trade, and Social Capital
Political Geography:
Global Focus

18. A Study on the Dynamics of Foreign Trade and the Issues of Regional Economic Integration in Central Asia

Author:
Kodirjon Maxamadaminovich Umarkulov
Publication Date:
11-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
At the current stage of globalization, Central Asia (CA) is becoming a focal point for the political and economic interests of global forces because of its rich natural resources and critical strategic position. From this point of view, the CA countries need to form a joint development strategy for solving regional problems and a strong mechanism for countering the main political and economic conflicts in the region. At the same time, the countries of the region need to choose the path of joint development in order to increase the efficiency of their internal capacities and resources, adapt the domestic social and economic infrastructure to modern requirements and improve the living standards of the population. This is directly related to the progress of regional economic integration in CA. Through this integration, the economies of the countries in the region could complement each other and ensure a high level of development in mutual trade and industrial development. However, there are some obstacles and problems hindering the development of economic integration in the region. Most particularly, the weak infrastructure in the region, its economic-geographical isolation from world markets, administrative barriers and political instability hinder trade between the countries of CA. From this point of view, this study focuses on the problems of general and cross-border trade in CA countries, and the opportunities for economic integration in the region.
Topic:
International Trade and Finance, Regional Integration, Economic Policy, and Exports
Political Geography:
Central Asia and Asia

19. A Quantitative Trade Model with Unemployment

Author:
Kyu Yub Lee
Publication Date:
10-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Over the last decade, quantifying the welfare effects from tariff changes has become one of the main challenges among international trade economists. There are a number of quantitative trade models with micro-foundations which emphasize demand-side (Anderson and Van Wincoop 2003), supply-side (Eaton and Kortum 2002), Bertrand competition (Bernard et al. 2003), extensive and intensive margin (Chaney 2008), etc, and conclude that trade liberalization with tariff reductions leads an economy to reach a higher level of welfare compared to pre-liberalization (Costinot and Rodriguez-Clare 2014). While elegant, these models inducing gravity equations share the common assumption, a perfect labor market. Quantitative trade models with full-employment developed so far have not taken account of labor market frictions when evaluating the welfare effects from tariff changes. This paper aims to fill the gap in the trade literature by explicitly considering labor market frictions. I employ search-and-matching to a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity, in order to quantify the welfare effects from tariff changes. The paper shows that labor market frictions can be a source of comparative advantage in the sense that better labor market conditions contribute to lower cost in production. Labor market frictions play a critical role in determining the probability of exporting goods to trading partners, and interact with bilateral trade share, price, expenditures, etc. Unemployment and changes in unemployment rates due to tariff reductions contribute welfare changes across countries, implying that welfare effects based on quantitative trade models with full-employment are likely to be biased. I confirm the biased welfare effects by revisiting Caliendo and Parro (2015), who conduct an analysis of the welfare effects from the NAFTA from 1993 to 2005. I show that the welfare gap between theirs and mine has a positive correlation with changes in observed unemployment rates across countries. With the constructed model, I further conduct counterfactual exercises by asking what would happen if China’s tariffs remain unchanged from 2006 to 2015. It turns out that there are mild welfare effects to trading partners in the world trading system.
Topic:
Tariffs, Economic Policy, Trade, Unemployment, and Welfare
Political Geography:
China and Asia

20. Exchange Rates and Firm Exports: The Role of Foreign Ownership and Subsidiaries

Author:
Hyelin Choi and Hyo Sang Kim
Publication Date:
08-2018
Content Type:
Working Paper
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
Exchange rates have been changed unusually large these days. From 2011 to 2016, the Euro and the Japanese Yen have depreciated against the US Dollar by more than 25 percent. According to a theory, since competitively valued exchange rate helps to boost export growth, we should have observed a sub-stantial increase in export in the EU and Japan. However, the effectiveness of the exchange rates on exports appears to be weak across countries. This anomaly is one of the central puzzles in international macroeconomics: why large movements in the exchange rate have modest effects on the aggregate variables such as import prices, consumer prices, and quantity of exports. In this paper, we examines the role of global production linkages on ex-change rate elasticities by using Korean firm-level data. At firm-level, foreign-owned firms or firms with foreign subsidiaries participated in the Global Value Chains (GVC) play an important role in weakening the effect of ex-change rate movements on firm exports. The empirical results show that the exchange rate elasticity of total export is about -0.64, which implies that 10% appreciation of Korean Won would make a drop in total export by 6.4%. However, the exchange rate elasticities of firms are not the homogeneous across firms. We find that the exchange rate elasticities of firm exports are significant and negative for domestic-owned firms and firms without foreign subsidiary whereas those are insignificant for foreign-owned firms and firms with foreign subsidiaries. After controlling exports to foreign affiliates, we still find that the estimated exchange rate elasticities of exports are statistically insignificant, but become negative and relatively larger for firms with global production linkages. More-over, firms with higher GVC integration measure or more imported inter-mediate inputs have the significantly lower exchange rate elasticities of firm exports. It suggests that developments of global production linkages via firm ownership, within-industry or within-firm in the last decade play an essential role in alleviating the effect of exchange rate movements on the firm exports.
Topic:
Exchange Rate Policy, Economic Policy, Exports, Macroeconomics, and Global Value Chains
Political Geography:
Global Focus