This paper undertakes an investigation of the loans extended by Korean financial institutions to their corporate borrowers based on forward-looking criteria - namely, corporations?debt levels and their debt-servicing capabilities ?while focusing on the future size of non-performing loans (NPLs). We define NPLs as loans and credits extended to corporations, whose interest coverage ratio commonly defined as the ratio of earnings before interest and taxes to interest expense is less than 100 percent.

Financial statements from 1998 demonstrate that the NPLs held by listed companies amount to 32.1 percent of their total debts carried. The ratio for unlisted companies in 1997 appears higher than that of listed companies. We classified our sample companies into four groups based on their sizes. The NPL ratios of unlisted companies consistently ascend in the order of second-tier chaebols, SMEs, third-tier chaebols and the top five chaebols. In the case of unlisted companies, the order is slightly different in that the ratio of third-tier chaebols precedes that of SMEs. However, the order in 1998 resembles that of unlisted companies.

Having classified our data by different industries, it has been shown that the NPL ratios of listed companies in industries, such as textile, apparel, non-metal mining products, automobiles, furniture, construction, and chemical have recently experienced relative increases. In the case of unlisted companies, their NPL ratios are high in industries, such as agriculture, fishing, wood and publishing, and transportation and telecommunications.

Our sensitivity test results show that the decline in interest rates by 5 percentage points will reduce the NPL ratio by 13.9 percentage points - from 35.7 percent to 21.8 percent. Although the reduced interest rates and the rebounding economy are alleviating the corporate debt problem to a certain extent, a significant proportion of the Korean corporate sector still remains subject to the various risks, such as commercial and market risks and external shocks. This study has the following policy implications: reflationary macroeconomic policy is the only option in the absence of plausible alternatives; debt restructuring by creditor financial institutions is necessary, given that the effects of cost reduction from lower interest rates and slimming-down efforts are proven insufficient; and additional public resources may be necessary even after the appropriate cost allocation.

In the 1990s, regional trade agreements (RTAs) have become widespread and increasingly became a threat to non-member countries. Despite the GATT/WTO Article 24 and its provision for the overall trade barriers in any new regional or bilateral trade agreement to be no higher than the preexisting ones, the trade diversion effects of regionalism are having an increasingly negative effect on the trade of non-member countries. A realistic Korean policy response to the spread of RTAs would be the establishment of free trade agreements (FTAs) with major trading partners. This paper analyzes the potential effects of a Korea-U.S. FTA, as this would become the most significant trade agreement, which Korea might enter into.

Not only would a Korea-U.S. FTA allow both countries to benefit from the preferentially favorable measures, but it would likely reduce the amount of trade disputes involving Korea. The United States is the most important trading partner for Korea, and yet, it also is the greatest source of trade friction.

Although a Korea-U.S. FTA could not eliminate every trade friction between the two countries, such a liberalization effort would likely reduce the frequency and gravity of the trade disputes.

In this paper, we have performed simulations to cover five different scenarios of tariff reduction. In each of the scenarios, we have found that the welfare of Korea and the United States would both increase, with Korea receiving a relatively greater share of the welfare benefits. Korea's greater reliance on the trade with the United States and comparatively higher existing tariffs may explain its greater potential benefits. An FTA between the two countries would improve Korea's welfare by 0.73 to 1.73 percent, and that of the United States by 0.07 percent at the most. In addition to the simulations covering an exclusive FTA with the United States, we also have performed a simulation, measuring the effects of Korea's joining the NAFTA. Due to the larger market size, trading with the NAFTA would result in a 0.54 percent increase in Korea's welfare gains, which is higher than that expected from Korea's signing an FTA exclusively with the United States. The simulations also demonstrated that the United States would optimally benefit from an FTA with Korea, if it would have a clause, eliminating all of the agricultural tariffs. In effect, this would promote liberalization for this very sensitive sector.
In this paper, we have focused on the effects of tariff reduction. A more comprehensive analysis / particularly, the one which considers the effects of preferential rules of origin - yet remains undone. And while economic considerations should be the logical starting point, political benefits and burdens of signing an FTA, which this paper only briefly addresses, also require further study.

Up until very recently, Korea had maintained a steadfast support of trade liberalization realized only through multilateral means, such as through the WTO and APEC. However, as countries of almost all regions except East Asia have embraced regionalism, Korea has been forced to question its adherence to a view that would see it lose out to the substantial trade diversion of these growing agreements, even though Korea still remains a strong supporter of the WTO. This paper begins with a more detailed analysis of the factors that led to Korea's more open approach to FTAs, culminating in the officially stated intention of exploring a bilateral FTA with Chile. Korea and Chile have concluded preliminary talks and working-level negotiations are expected to begin in 1999. Looking beyond the FTA with Chile, Korea has stated that it is pondering establishing FTAs with Thailand, South Africa, and Turkey. The choice of these countries is part of Korea's strategy to establish an FTA with a country in each continent in order to increase market access around the world. However, this paper takes the position that if Korea seeks for future free trade partners after the establishment of a Korea-Chile FTA, Korea needs to look a new regional trading bloc within APEC. Through extending preferential bilateral FTAs to other APEC economies, Korea's FTA may not only accelerate the trade and investment liberalization of APEC, but also help Korea play a leading role in APEC in the future.

This paper then proceeds to support a view that Korea's next move needs to be the consideration of bilateral FTAs with Australia, New Zealand and Canada or a multilateral FTA encompassing all four countries. While trade with all of these countries would be highly complementary for both sides, the most compelling reason for such a FTA would be its potential for spreading free trade throughout the Asia Pacific region. Along with Chile, Australia, New Zealand and Canada are all APEC members. Such a free trade area would demonstrate the benefits of free trade to regional economies and possibly exert the pressure needed to restart the currently stalled free trade talks of APEC. Such progression would move Korea to the forefront of international trade talks.

Korea's overall position remains one of the pursuit of widening free trade through multilateral agreement. APEC is one potential vehicle through which Korea's goal may be realized. However, currently, efforts to expand APEC trade liberalization appear stalled. This paper takes the stance that one possible approach to reinvigorating free trade under APEC free trade talks is for a group of member economies to spur intra-APEC trade.

The paper evaluates the economic impact of Korea's bilateral and multilateral FTAs with Australia, Canada, and New Zealand. While individual bilateral trade agreements with each country would increase the welfare of Korea, they would also result in an overall increase in Korea's trade deficit. Meanwhile, Korea would likely realize a trade surplus if a multilateral agreement includes all four countries. Furthermore, this four-way multilateral agreement increases Korea's welfare the most. Therefore, this paper concludes that pursuing a multilateral FTA covering all four countries is more in Korea's interest than pursuing bilateral FTAs with each country individually.

Dr. Inkyo Cheong, a Research Fellow of KIEP, earned his Ph.D. in Economics from Michigan State University. He specializes in Korea's FTA policy, economic cooperation in the Asia-Pacific region, international trade policy, and building multi-region, multi-sector computational general equilibrium model (CGE). He wrote several books about Korea's FTA policy and published academic articles on APEC economic cooperation in leading international journals. Corresponding address: 300-4 Yomgok-Dong, Socho-Ku, Seoul 137-800, Korea. Ph. (822) 3460-1208; Fax. (822) 3460-1077; E-mail: ikcheong@kiep.kiep.go.kr

Prospects and Policy Implications of the WTO New Round
Wook Chae & Chang-Bae Seo

Discussions on the upcoming New Round of negotiations have begun in the WTO. In light of the nature, scope and scale of the round of negotiations, it is expected that the round will have a substantial impact on the trade patterns, industrial structures and world trade order of the 21st century. Decisions regarding the specific issues including the scope, modality and duration of the negotiations are to be officially announced at the 3rd WTO Ministerial Meeting to be held in Seattle from November 30 to December 3 of this year.

The most important issue at hand regarding the New Round is deciding upon the scope and modality of the negotiations. While several countries including Korea, EU, Japan and Australia have proposed the negotiations to be conducted as a single-undertaking, comprehensive round of negotiations, allowing the interests of all WTO members to be considered in the talks, the U.S. has strongly advocated a sectoral approach, asserting that the comprehensive approach may unnecessarily prolong the negotiation period. With regard to the scope of the negotiations, developing countries argue that the talks should focus on the UR Built-In-Agendas (BIAs), including agriculture and services, while developed countries have proposed to include tariff-cuts in manufactures and new issues such as investment, competition policy, environment, electronic commerce and transparency in government procurement. On the issue of the duration of the negotiations, most countries agree on the 3-year time frame, reflecting the problems of prolonged UR negotiations.
The discussions to date reflect a possibility of the New Round being pursued in a single-undertaking, comprehensive manner over a relatively short period.

The implications of the New Round are as follows:First, it will establish a firm foundation of the multilateral trade rules by advancing liberalization in existing trade sectors through the improvement of current rules which have not been implemented well or where issues remain incomplete.

Second, it will allow for a substantive trade liberalization through a provision of international rules on new issues. The provision of international rules on those issues will certainly expand world trade in real terms since they are closely related to various national systems and practices which affect trade.

Third, it will strengthen the multilateral trading system through the WTO. The WTO desires not only to enforce institutional functions through expansion of coverage and improvement in its ability to supervise the system and settle disputes among member nations, but also to contribute to the world-wide economic welfare by expanding its functions of assisting developing countries.

All these provide various important implications to the Korean economy. First of all, Korea should recognize the need to devise a comprehensive, sectoral negotiating strategy on the basis of studies of the effects of the New Round on the domestic economy. In Korea's perspective, a singe-undertaking, comprehensive negotiation seems to be advantageous, considering the economic and political sensitivity of agriculture and services. For the negotiatins to be carried out efficiently, it is strongly recommended that Korea utilize experts from the private sector in preparing for the round of negotiations. As a priori, it is necessary to establish a task force comprising of government officials from all relevant ministries. A close cooperation between the government and non-governmental sectors will certainly maximize the nation's benefits from the negotiations.

It should be important to provide a comprehensive and systematic negotiating strategies from the perspective of national trade benefits based on analyses of the expected sectoral effects. At the same time, the government should focus its efforts in building up a national consensus on the future policy directions by actively publicizing the implications and effects of the New Round. In particular, it is crucial to draw nation-wide concerns over the liberalization issues in the agricultural sector which made the process of the previous negotiations difficult.

Reform Experiences in Latin America and Britain:Their Implications for KoreaWon-Ho Kim/Chong Wha Lee/Cheol-Won LeeKi-Su Kwon/Jin-O Kim

Up until the mid-1980s, Latin America experienced repeated periods of political and economic crisis. The region was characterized by a deeply rooted dictatorial form of political governance, and by class, regional, ethnic and social conflict. Moreover, the growing fiscal deficits caused by negligent handling of public finances and deep-rooted inflation on the part of the military regimes increased the need for reforms. From the late 1980s, a new form of government emerged. Governments began to pursue market-oriented reform policies such as privatization of state enterprises, trade liberalization and deregulation. From 1979, the British government under Prime Minister Margaret Thatcher sought drastic structural reforms such as industrial restructuring, privatization of state enterprises, deregulation of economic activities, labor market reform and renovation of the bureaucratic framework. The success of these reforms led many to regard Britain as the most advanced among the OECD countries in terms of its ability to implement effective economic changes.

There are several lessons one can extract from the experiences of reform among the four countries of Latin America--Mexico, Argentina, Brazil and Chile--and Britain.First, the reform must be wide-ranging. An economic crisis, such as a currency crisis, has the potential to propel economic reforms. However, economic reforms cannot be successful unless they are pursued parallel to political and social reforms. Previous attempts to implement market-oriented reforms in the Latin American countries in the wake of the economic crises of the early 1980s were hindered by the military dictatorships which held the reins of power. It was not until these regimes stepped down and popularly elected administrations took over that these reform attempts began to bear fruit. However, further political and social reforms are necessary among many Latin American countries. While Chile has been relatively successful in building a transparent political apparatus, deep-rooted corruption in Argentina and Brazil has continued to impede the reform process in those nations. There also remains a social structure of conflict between the capitalist and labor/peasant classes in Latin America, and between the white ruling class and the native/mestizo-dominated class. The social instability now arising from the latter conflict is preventing further market-economy reforms.Secondly, political stability is also crucial for an environment conducive to reform.

Even though the countries of Latin America have been redemocratized since mid-1980s, political instability remains partly due to the overflow and disorganization of political parties, and the lingering remnants of authoritarian rule. This can seriously hinder reform legislation, which in the recent case of Brazil precipitated an economic crisis. Britain, on the other hand, was able to put the reform measures into effect under an environment of political stability under Prime Minister Thatcher's nine years of governance.The third lesson that can be extracted is that reform must be based on market principles. After the currency crises, the Latin American countries and Britain carried out core economic reforms such as slimming of the bureaucratic structure, reduction of public debt, privatization of state enterprises, financial reform, deregulation, and promotion of labor market flexibility and an open economy. Similar economic reforms have been or are being put into effect by Asian countries in an attempt to heal their economies following the region-wide crash that began in late 1997.A fourth conclusion is that consistency and continuity in reform constitute crucial factors for a successful reform. During its 1976 currency crisis and 1982 foreign debt crisis, Mexico attempted to carry out reforms. For political reasons, however, the reform process was abandoned within two to three years of implementation, allowing the crisis to re-emerge. On the other hand, the reformist efforts in Britain since the early 1980s worked well under the policy consistency by Prime Minister Thatcher.Fifth, it is important to establish labor stability. The common dilemma of increased unemployment and the shrinking of the middle class have been a recurring problem in the process of reform. In 1976, a general strike among British workers led to the ouster of the James Callaghan administration. Similarly, labor instability in Latin American countries lies dormant just beneath the surface, threatening decisive reform efforts. In establishing labor stability, it is important to uphold the principles of a market economy: free and impartial competition, and consent on the outcome of competition. It is also necessary to eliminate the sense of alienation felt by workers, by instituting measures to reduce unemployment, expand the social safety net, ensure a more equal distribution of wealth, and promote employees participation in management and ownership.

The final lesson to be learned is the importance of reform supervision. It is important to maintain the direction and the adequate supervision of the reform process. The role of the government should ideally change over time. In the initial stage of reform, the governments's direct intervention is unavoidable. As reforms are carried out, though, the government's role--supervision of the institutions operation, analysis of effectiveness, and institutional improvement--should shift to a more indirect one.

Trade policy in the United States since 1930 is evaluated in this publication. Using a public choice analysis to identify and explain protectionist behavior, Charles K. Rowley, Willem Thorbecke and Richard E. Wagner demonstrate why unilateral free trade cannot be achieved through the normal political process and make a strong case for constitutional reform.

Trade protection in the United States analyzes the history of U.S. trade policy to explain why interest groups are able to foster protectionist policies despite the advantages that free trade offers consumers. The authors also explain why the principles of managed trade - as epitomized in the institution of the GATT - are inevitably subverted by protectionism. This important book concludes with a vigorous justification of unilateral free trade and makes a convincing case for protecting the freedom to trade though an amendment to the U.S. constitution.

Applying recent developments in constitutional political economy to a key policy issue, this book will be welcomed by economists, political scientists and lawyers as a major statement of the right to trade.

Foreword

Acknowledgements

Contents

Executive Summary

I. Introduction

II. The Nature and Current Development of the IMF Fund Support
1. The Nature of Fund Support by the IMF
1-1. Conclusion of the Stand-by Arrangement with the IMF
1-2. Conditionality of the IMF
1-2-1. The Concept of Conditionality
1-2-2. The Letter of Intent and Stand-by Arrangement
1-2-3. The Performance Criteria
1-2-4. The Legal Nature of Stand-by Arrangement
1-3. Drafting of the IMF Macroeconomic Program
2. Financial Assistance of the International Financial Institutions
3. Types, Conditions, and Terms of the Financial Support

III. Changes and Development of the IMF / Korea Agreements
1. The Macroeconomic Policy
1-1. Macroeconomic Indicators
1-2. Monetary and Exchange Rate Policies
1-3. Fiscal Policy
1-4. Foreign Reserves and External Debt Management
2. Restructuring of the Financial Sector
2-1. Development and Problems of the Financial Sector
2-1-1. Structural Problems of the Financial Sector
2-1-2. Current Development of the Non-Performing Loans
2-2. Directions for Restructuring the Financial Sector under the IMF Program
2-2-1. Legislation to Improve Soundness of the Financial Sector
2-2-2. Restructuring of the Merchant Banks
2-2-3. Restructuring of the Banks
2-2-4. Strengthening Prudential Regulations, Information Disclosure, and Transparency
3. Improving the Corporate Governance and the Corporate Restructuring
4. The Trade Liberalization
5. The Capital Account Liberalization
6. Improvement of the Labor Market Flexibility and the Establishment of a Social Safety Net

IV. Progress of the IMF Program in Korea
1. The Macroeconomic Policy
1-1. Current Trends of the Macroeconomic Indicators
1-2. Current Progress of the Monetary Policy
1-3. Implementation of the Exchange Rate Policy
1-4. Implementation of the Fiscal Policy
1-5. Foreign Reserves and External Debt Management
2. Progress of Restructuring the Financial Sector
2-1. Legislation to Restore Soundness to the Financial Sector
2-1-1. Establishment of a Consolidated Financial Supervisory Organization
2-1-2. Liquidation of the Nonviable Financial Institutions and Establishment of the Principles for Loss Sharing
2-1-3. Efficient Handling of the Non-Performing Loans and Protecting the Depositors
2-2. Progress of the Bank Restructuring
2-2-1. Measures Toward Korea First Bank and Seoul Bank
2-2-2. Management Improvement Measures for the Banks Failing to Meet the BIS Standards
2-3. Progress of the Merchant Bank Restructuring
2-4. Progress of Strengthening Prudential Regulations, Information Disclosure, and Transparency
2-4-1. Strengthening the Prudential Regulations
2-4-2. Information Disclosure and Enhancement of Transparency
3. Progress of the Corporate Restructuring and Corporate Governance
3-1. Enhancement of Transparency in the Corporate Management
3-1-1. Improvement and Internationalization of the Corporate Accounting Standards
3-1-2. Introduction of the Combined Financial Statements
3-1-3. Enhancement of Credibility in the Account Auditing
3-1-4. Improvement of the Corporate Public Disclosure
3-2. Abolishing the Mutual Debt Guarantees of Affiliate Companies
3-3. Improving the Financial Structure
3-4. Determining the Core Business Areas
3-5. Increasing the Accountabilities of the Controlling Shareholders and Managements
3-5-1. Mandatory Appointment of the Outside Directors and Auditors
3-5-2. Strengthening the Minority Shareholders' Rights
3-5-3. Systemizing the Institutional Investors' Voting Rights
3-5-4. Developing the Mergers and Acquisitions Market
4. Progress of the Trade Liberalization
5. Progress of the Capital Account Liberalization
6. The Labor Market Flexibility and Establishment of a Social Safety Net

V. Implementation Plans for the Future IMF Programs
1. Major Future Plans of the Financial Restructuring
1-1. Basic Directions for the Financial Restructuring
1-2. Financial Restructuring as the Top Priority : Modality and Timetable
1-2-1. Priority Status of the Financial Restructuring
1-2-2. Principles of the Bank Restructuring
1-2-3. Methods of the Bank Restructuring
1-2-4. Implementation Plan and Schedule of the Bank Restructuring
1-2-5. Timetable for Restructuring the Merchant Banks
1-2-6. Modality and Timetable for Restructuring the Secondary Financial Market
1-3. Strengthening the Prudential Regulations
2. Future Plans for Structural Adjustment of the Corporate Sector
2-1. Principles and Modality of the Corporate Restructuring
2-2. Strengthening the Accountabilities of Management and Improving the Corporate Governance
2-3. Improving Transparency of the Corporate Management
2-4. Revitalizing the Stock Market
2-5. Lifting the Entry Barriers
2-6. Privatization of the Public Enterprises
2-7. The Exit Facility

VI. Effects and Assessment
1. Trends of the Korean Economy under the IMF Program
1-1. Recent Trends of the Macroeconomic Indicators
1-1-1. The Domestic Recession
1-1-2. The Sluggish Production Activities and the Rising Unemployment
1-1-3. The Rising Price Inflation Rate of the Economic Recession
1-2. Trends of the Financial Market
1-2-1. The Domestic Financial Market's Credit Crunch and the High Interest Rates
1-2-2. Declining Rate of the Dishonored Corporate Bills
1-3. Stabilizing the Foreign Exchange Market and Improving the External Debt Structure
1-3-1. Stabilizing the Exchange Rate
1-3-2. The Increased Usable Foreign Reserves
1-3-3. Improving the External Debt Structure
1-3-4. Successful Bond Issuance of the Exchange Equalization Fund
1-4. The Trade Balance and the Trends of Exports and Imports
1-5. Stagnation of the Domestic Securities Market and the Fall of Stock Prices
2. Trends of Korea's Sovereign Credit Rating Since the Request for the IMF Fund Support
2-1. Characteristics and Implications of the International Credit Rating Agencies' Standards
2-2. Historical Background and Trends of Korea's Long-term Foreign Currency Denominated Debts
2-3. Implications of the Future Adjustments of Sovereign Credit Rating
3. The Characteristics of the IMF Program in Korea
3-1. The Unprecedented Support Package and Early Support
3-2. Emphasis on the Corporate and Financial Restructuring

VII. Conclusion

Annex 1. Key Measures and Chronology of Events Related to Korea's Currency Crisis

The East Asian financial crisis emerged as Thailand's currency crisis in July 1997 spread to the neighboring countries, which eventually forced Indonesia and Korea to request assistance from the IMF. The Korean government had officially made the request on November 21 after nearly all of its foreign reserves were depleted in defense of the Korean won. For the short-term, the IMF program stresses on a tight aggregate-demand policy to stabilize the foreign exchange market. For the mid- and long-terms, it stresses on the structural reforms of the financial and corporate sectors, which were the underlying causes of the currency crisis. The IMF programs for the affected East Asian countries - including Korea - are a combination of the traditional aggregate demand and restructuring policies.
The international financial institutions' assessment of the Korean economy and the Korean government's mandated and voluntary reform measures wields a significant influence over Korea's ability to attract fund support from the governments and banks of the United States, Japan, and other advanced economies, including foreign investors. Thus, a continued cooperation with the international financial institutions, such as the IMF and IBRD, and, particularly, the steadfast compliance with, and successful implementation of the IMF program is the highest priority for Korea to overcome the current currency crisis.
The aim of this publication is to help improve wide audience's understanding of the posed issues in the IMF Restructuring Program Agreement, and to examine the progress of Korean government's implementation of the Program. The structure of this book is as follows. In Chapter II, we will examine the nature of the IMF support and the conditions, which Korea must adhere to. In Chapter III, we will examine the trends of working relationship between the IMF and Korean government while the discussions of the Program were in progress. The book covers from the 1st Letter of Intent of December 3, 1997 to the 6th Letter of Intent of May 2, 1998 - 6 rounds of fund support. The changes of issues are classified into five categories: macroeconomic policies (monetary, exchange rate, fiscal, foreign reserves, external debt management), financial sector restructuring, corporate restructuring, trade and capital account liberalization, and labor market policies. In Chapter IV, we will review the Korean government's implementation of the IMF Program. In Chapter V, we will introduce and discuss the future implementation schedule of the IMF Program, as indicated in the 6th Letter of Intent. An emphasis will be placed on major reform issues for the financial and corporate sectors in the future. In Chapter VI, we will analyze and evaluate the enduring effects, which the crisis and the IMF Program both have had on the Korean economy, largely through reviewing the macroeconomic indicators from November 1997 to June 1998. In Chapter VII, we will summarize and make policy recommendations for the future.

Development and Internationalization of Chinese Township-Village Enterprises Chai Wook Chun and Eui-Hyun Choi

During the period between the establishment of People's Republic of China (1949) and the Third Plenum of the Chinese Communist Party's 11th Central Committee of 1978, the Chinese economy showed some signs of growth at least on the surface. The average annual growth rate between 1957 and 1978 was claim to be 4.4% and the growth rate of agricultural output was at 4%. However, these figures ate dubious as they come from central planning system forthermore, the government transferred the surplus from the agricultural sector to the heavy industry sector. This is well supported by the statistics - the annual consumption increases of the agricultural sector was only 1.4%.

It was the reform of 1978 that brought major change to the Chinese economy. As the government sought to modernize its economy, the socialist central planning system was overhauled to distribute power to local authorities and other new agricultural policies were introduced. As a consequence of the successful reform of agricultural sector, the income increases have allowed the farmers to invest in the non-agricultural sector with the labor surplus that came from improved efficiency. These surpluses naturally led to creation of the Township-Village Enterprises(TVEs).

The fast-growing TVEs acted as the engine of prosperity of peasant households of China during this period. A special focus on TVEs is warranted for a variety of reasons. First, the output of rural industries achieved phenomenal growth rates in the 1980s, and by the end of the decade this sector assumed a significant role not only in the rural economy, but also in the economy of the country as a whole. Employing about 12% of the rural labor force, these industries were accounting for over a third of the total rural output. TVEs thus become an important source of signigicant rural-urban migration and in view of the limitations on the growth of agriculture, the growth of income from TVEs and other enterprises become an engine of growth in rural income. Second, these industries played an important role in fostering the growth of agriculture(e.g. by providing funds for social investment in irrigation, facilitating farm mechanization and the use of fertilizers, etc.) and thus made valuable indirect contributions to the income of peasants.

This study focus on the performance of TVEs in the changing environment where it can be characterized by foreign trade, foreign direct investment(FDI) and overseas direct investment(ODI). The TVEs in coastal region and textile industry have played a major role in exports, while FDI has helped the TVEs to improve manufacturing and management technology. However, since the most part of FDI comes only from Hong Kong and Taiwan its role as an engine of development is limited.

The overseas direct investment(ODI) of TVEs is only at the beginning stages as foreign subsidiaries of TVEs are ODI by TVEs functioning as so rather than as manufacturing facilies. Despite the current status, ODI by TVEs has great potential for dynamic growth because of globally distributed overseas Chinese connection.

As the globalization of TVEs are at the beginning stage, interaction with Korean firms is not yet very active. Most of the Korean firms investing in China are seeking low wage and low rent and prefer direct investment rather than through joint ventures. Although the ties between TVEs and Korean firms are not get active, the close relationship with TVEs will be necessary in the near future and following are some suggestions for Korean firms. First, TVEs should be considered as a group of fast growing enterprises rather than small or medium firms of rural area. Second, it is necessary to have a close relationship with TVEs to facilitate business activities in China. Third, while cooperating with TVEs, it is important to consider local and market characteristics of the region where cooperating TVEs are located.

North Korea is experiencing severe shortage of food, fuel and foreign currency which appear to have scant prospect of being relieved soon. More fundamentally, it is in the grip of a long-term structural decline. The strategy of extensive growth is exhausted, and the techniques of central planning have broken down. Given the North's increasingly dire economic situation, muddling through clearly is no longer enough of a policy response. Pyongyang's leaders are taking a series of pragmatic, short-term, temporizing measures to cope with the severe economic problems.

North Korea's leaders know that to stage a recovery, the economy must open. Since conclusion of the Framework Agreement(1994), the DPRK has redoubled its effort to normalize relations with the United States and economic sanction. Pyongyang also has expanded economic cooperation with South Korea. Therefore the leadership in Pyongyang is currently engaged in a variety of enterprises to attract foreign investment and economic development to the DPRK. The most visible of these efforts is the establishment of the Rajin-Sonbong Free Trade Zone(1991. 12) and the legislation of the 'Foreign Investment Law'(1992. 10).

The development of North Korea's policy to induce foreign investment can be divided into three stages. The first is until the enactment of the 'Joint Venture Law' in September 1984, the first legislation to attract foreign capital. The second stage is from the time of its enactment until December 1991 when the Rajin-Sonbong Free Trade Zone were set-up. The third stage refers to the period after the establishment of the Rajin-Sonbong Free Trade Zone and the enlargement of open policy. Now, North Korea has made the development of the Rajin-Sonbong Free Trade Zone the focal point of its current economic opening. It is in the attempt to attract foreign direct investment that North Korea has shown the greatest inclination to reform its system. As a general rule, such reforms are intended to allow North Korea access to hard currency and new technology. While North Korea would prefer investment from the U.S., Europe or even Japan, in the process of opening its investment market to the world, North Korea has inevitably opened it to one of Asias most active investors, South Korea.

For many of the reasons outlined in the section above, South Korea firms are the most likely to be willing to take the risks associated with doing business in North Korea. Significant involvement in North Korea by South Korea large enterprises is unlikely until the political situation between North and South improves. Without a double taxation treaty and some sort of governmental guarantee, South Korean firms are unlikely to invest. Whereas an overly close involvement of the government in the investment process inhibits economic exchange, complete lack of government support also demands the prospects for investment.

In all frankness, the future of the Korean peninsula is unclear. Whether North Korea will reform and adapt to a changed international environment or whether the regime will eventually collapse are uncertain. The one certainty is that Korea, both North and South, must globalize if they are to be competitive in the international community. therefore South Korea should play in the process of integrating North Korea into the world economic system.

A relentless trend of the severe economic plights in North Korea since 1990 - including the shortages of food, raw materials, and foreign exchange - is likely to continue in the short- to medium-term, at the least. Worse still is South Korea's economy under difficult economic conditions, owing to its own financial crisis since late 1997. Therefore, a search for multilateral international cooperation has become all the more attractive and critical for North Korea.

For South Korea, the burden of the unification cost has been felt increasingly heavier since the advent of the financial crisis. There is no doubt that South Korea's fiscal support cannot be left out in the calculus of financing the cost of unification. As a recourse, however, South Korea will necessarily have to opt to 'internationalize' financial burden for the unification by means of a multilateral international cooperation, given the impact of the financial crisis and its lack of economic caliber like that of the former West Germany.

Beyond a need for the liberalization and reform of the North Korean economy, increased efforts to build structures for the international cooperation are especially important for paving the road to the unification. To this very end, the South Korean government has to mix flexibility into the existing unification policy, which places the sole and foremost importance on the North-South relation, and manage to create a working framework with an initiative for the multilateral international cooperation.

Until now, a vast majority of the researches on the Korean unification have focused on the domestic economic policy for the post-unification period. As a result, there is a growing need for the development of studies on the unified Korea's international economic policy and structural design of the international cooperation. In due preparation for the unification of the two Koreas, our research aims to develop a paradigm for cooperation with the international financial institutions - such as the International Monetary Fund (IMF), World Bank, and the Asian Development Bank (ADB).
Since South Korea's fiscal support to North Korea can only make a limited contribution to the astronomical amount of the unification cost, direct investment by the foreign private sectors in alliance with South Korean enterprises will become a magnanimous supplier of funds.

Accordingly, inducement of the foreign direct investment in North Korea not only remains, but will continue to remain as an important issue for the international cooperation. Without the endorsement of the international financial institutions, no substantial private investment in North Korea seems feasible in the current world economic order. And by a thread of this reasoning, inducing North Korea to participate in the international community on official terms by first helping it join the international financial institutions would likely prove to be a most practical way of facilitating and reducing the cost of the unification.

Moreover, to the extent that the various international financial institutions' economic support to North Korea could prevent its economic over-dependence on any particular country, the North Korean leadership would find it advantageous to accommodate the inducement on the ground that it can maintain the stability of its political power. In fact, North Korea has continued to demonstrate its enthusiasm for participation in the international financial community as early as 1997. In February 1997, it had officially applied for membership to the Asian Development Bank, and in September of the same year, it had received a fact-finding visit from the IMF. Furthermore, North Korea had invited a senior official from the World Bank in February 1998. Given this trend, North Korea appears to have made a considerable progress in improving its relations with the international financial institutions. And despite the skeptical views about its missile tests and nuclear sites, North Korea's relationship with the international financial institutions is expected to progress. In light of these developments, again, the need for an in-depth research on North Korea's international cooperation before the unification materializes is becoming more clear and present.

Our study intends to find out under what conditions North Korea can be eligible to receive what available types of financial support when it joins the international financial institutions. Moreover, we intend to investigate and understand what types of support there are available for North Korea to receive in the context of a non-member status. We also intend to make an overall assessment of the information and materials obtained in order to provide a basis for the development of South Korean government's North Korea policy.

The structure of our study is as follows. In Chapter 2, we will discuss the importance of international cooperation in a closely equated context of the cost for the unification. In Chapter 3, we will overview the current economic situation in North Korea and the North-South economic cooperation. Chapter 4 suggests a model for the international cooperation on the provision of technical assistance to North Korea, as a measure to involve the international financial institutions for the short run. Chapter 5 examines a variety of ways to engage the international financial institutions in North Korea support. And finally, Chapter 6 will comprise of a conclusion based on our research and study of the methods for utilizing the benefits, which the international financial institutions have to offer, and a number of the remaining issues for the future international cooperation. In the annex, we have incorporated the main contents of the IMF's November 1997 North Korea Report and a several detailed explanations of the international financial institutions' technical assistance to North Korea, and the functions and roles of the financial support. In this way, we hope to offer our readers an ample amount of the reference materials on the central issues of our concern. Helping North Korea join the international financial institutions would be a first step in laying the foundation for a practical framework of the international cooperation. With South Korea's crisis-hit economy, North Korea as a member of the international financial institutions would effectively shoulder the cost of financing the unification. At the IMF/World Bank 1997 Annual Meeting held in Hong Kong, the South Korean government had announced a position in support of North Korea's joining the international financial institutions. However, in order to clear the way for North Korea, the U.S.-DPRK and Japan-DPRK relations will have to improve, as they will continue to remain critical issues for South Korea.

For South Korea to participate in development of a constructive framework for the international cooperation before North Korea joins the IMF and the World Bank, each of the current United Nations Development Programme (UNDP), the World Bank's educational programs for the North Korean government officials, and the World Bank's North Korea-related research programs deserves a close examination. The benefits of educational programs for North Korea, such as an increased knowledge of the international financial institutions and the market economy, as well as the recent trends and flows of the capital and trade, will altogether serve the last totalitarian, communist entity to become a part of the international community.

South Korea's participation in the educational programs has to proceed in a number of stages. First, South Korea's research institutions would have to participate in the North Korea educational programs on market economy on the unofficial basis. More specifically, they would have to participate in designing the World Bank and the UNDP's educational programs for North Korea. Subsequently, the foreign private sector  such as colleges, research institutions, and non-governmental organizations (NGOs)  would need to participate in the training programs in either Pyongyang or any third world nation. In case the U.S. and Japanese colleges were to respond positively to such an initiative, then not only the U.S.-DPRK and Japan-DPRK relations would improve, but also the U.S. economic sanctions against North Korea would be eased. Furthermore, development of a constructive working plan for cooperation by South Korea's private institutions  such as economic research institutions, colleges, and more  in partnership with those of the United States, Japan, and other major countries, is urgently being called for. As a response, the international financial institutions should offer official technical assistance to North Korea. Taking such a measure poses no severe difficulty in that the trust funds, which the major countries have deposited with the international financial institutions, can be used to deliver the necessary technical assistance to the non-member countries.

South Korea will need to pursue a diplomatic maneuver of securing a special trust fund through the World Bank to aim at organizing an extensive technical assistance for North Korea. As a precedent, the World Bank had established a special trust fund - so-called the 'Trust Fund for Gaza and West Bank' - to give financial support to the Palestinians, who had not been a non-member state. With the political and diplomatic support from the United States, the special trust fund had been the source of benefits to the Palestinians, while they had been experiencing difficulties in joining the World Bank back then. So had been the cases of Bosnia and Herzegovina before they became members of the World Bank. Each of the non-member cases had involved a critically significant amount of the financial support. Therefore, North Korea has as much an equal chance as to benefit the large financial support, with South Korea's diplomatic effort to play an important success variable.

Once North Korea joins the international financial institutions, South Korea will need to help North Korea receive financial assistance on the concessional terms. The possibilities of such assistance would include the ESAF (Enhanced Structural Adjustment Facility) of the International Monetary Fund, the IDA (International Development Association) fund of the World Bank, and the ADF (the Asian Development Fund) of the Asian Development Bank. Should North Korea successfully implement the reform programs of the IMF and the World Bank, then South Korea would also need to help North Korea receive external debt relieves through the HIPC Initiative of the IMF and the World Bank.

Apart from the focus of our research, there could be many other ways to foster the international cooperation on North Korea support. We intend to look into those possibilities in the next phase of our research. For instance, development of a facility for the foreign private investment in North Korea with the aid of the World Bank Group's International Finance Corporation (IFC) is one of the various important considerations. Furthermore, with North Korea still not introduced into the international community, a method of utilizing the non-governmental organizations (NGOs) - which would avoid the North's negative reaction - could be put into a practical use. Moreover, expedient ways of acquiring emergency economic support from the international financial institutions in contingency situations should be sought after. This is based on a concern that, in a given contingency situation, a deluge of refugees would cross into Russia, China, and Japan. Therefore, a preventive course of international cooperation should also be outlined.