2014 Overview and Macroeconomic Issues Lessons from the Economic Development Experience of South Korea Danny Leipziger The Role of Aid in Korea's Development Lee Kye Woo Future Prospects for the Korean Economy Jung Kyu-Chul Building a Creative Economy The Creative Economy of the Park Geun-hye Administration Cha Doo-won The Real Korean Innovation Challenge: Services and Small Businesses KOREA Robert D. Atkinson Spurring the Development of Venture Capital in Korea Randall Jones ’S ECONOMY VOLUME 30 Economic Relations with Europe KOREA’S ECONOMY Korea’s Economic Relations with the EU and the Korea-EU FTA apublicationoftheKoreaEconomicInstituteof America Kang Yoo-duk VOLUME 30 and theKoreaInstituteforInternationalEconomicPolicy 130 years between Korea and Italy: Evaluation and Prospect Oh Tae Hyun 2014: 130 Years of Diplomatic Relations between Korea and Italy Angelo Gioe 130th Anniversary of Korea’s Economic Relations with Russia Jeong Yeo-cheon North Korea The Costs of Korean Unification: Realistic Lessons from the German Case Rudiger Frank President Park Geun-hye’s Unification Vision and Policy Jo Dongho Kor ea Economic Institute of America Korea Economic Institute of America 1800 K Street, NW Suite 1010 Washington, DC 20006 KEI EDITORIAL BOARD KEI Editor: Troy Stangarone Contract Editor: Gimga Group The Korea Economic Institute of America is registered under the Foreign Agents Registration Act as an agent of the Korea Institute for International Economic Policy, a public corporation established by the Government of the Republic of Korea. This material is filed with the Department of Justice, where the required registration statement is available for public inspection. Registration does not indicate U.S. Government approval of the contents of this document. KEI is not engaged in the practice of law, does not render legal services, and is not a lobbying organization. The views expressed in this publication are those of the authors. While this monograph is part of the overall program of the Korea Economic Institute of America endorsed by its Officers, Board of Directors, and Advisory Council, its contents do not necessarily reflect the views of individual members of the Board or of the Advisory Council. Copyright © 2015 by the Korea Economic Institute of America. Printed in the United States of America. All Rights Reserved. ISSN 0894-6302 CONTENTS KEI Board of Directors ................................................................................................................................. II KEI Advisory Council .................................................................................................................................. III Preface ........................................................................................................................................................V Overview and Macroeconomic Issues Lessons from the Economic Development Experience of South Korea ..............................................................1 Danny Leipziger The Role of Aid in Korea’s Development .......................................................................................................................7 Lee Kye Woo Future Prospects for the Korean Economy .................................................................................................................27 Jung Kyu-Chul Building a Creative Economy The Creative Economy of the Park Geun-hye Administration ..........................................................................35 Cha Doo-won The Real Korean Innovation Challenge: Services and Small Businesses .....................................................................47 Robert D. Atkinson Spurring the Development of Venture Capital in Korea ....................................................................................55 Randall Jones Economic Relations with Europe Korea’s Economic Relations with the EU and the Korea-EU FTA .....................................................................65 Kang Yoo-duk 130 years between Korea and Italy: Evaluation and Prospect ..........................................................................73 Oh Tae Hyun 2014: 130 Years of Diplomatic Relations between Korea and Italy ...................................................................81 Angelo Gioe 130th Anniversary of Korea’s Economic Relations with Russia ..................................................................................87 Jeong Yeo-cheon North Korea The Costs of Korean Unification: Realistic Lessons from the German Case .....................................................93 Rudiger Frank President Park Geun-hye’s Unification Vision and Policy ..............................................................................101 Jo Dongho KOREA’S ECONOMY 2014 - I ECONOMIC RELATIONS WITH EUROPE KOREA’S ECONOMIC RELATIONS WITH THE EU AND THE KOREA-EU FTA By Kang Yoo-duk Abstract Since the late 1990s, Korea has sought a FTA with its trade partners, while the EU has been pivoting to Asia since the mid-2000s in search of a FTA partner. The Korea-EU FTA was important for both sides: Korea had been recording the most important trade surplus with the EU; and from the EU’s point of view, the trade deal with Korea was its first FTA attempt with an Asian partner. Despite optimistic expectations, Korea’s exports to the EU decreased since the Korea-EU FTA was implemented. Reasons for this unusual change in trade include the economic recession in Europe, Korea’s concentrated export structure, relocation of Korean firms’ production base abroad, and an increase in imports of certain products such as crude oil. Classic statistics on exports and imports will lose their role in assessing the outcomes of FTAs, and the strategy of governments and firms in the post-FTA era must change. ECONOMIC RELATIONS WITH EUROPE - 65 Introduction Background of the Korea-EU FTA The European Union (EU) is an important economic partner Korea’s Perspective for Korea both in trade and investment. If the EU is considered a single economic area, it is fourteen times larger than the Negotiating a FTA with the EU was scheduled in the FTA Korean domestic market and it has always been an important roadmap announced in September 2003. This medium- export destination of Korean companies. Trade with the EU term FTA plan reflected and expanded upon Korea’s first accounts for 10.4 percent of Korea’s total trade in 2014 FTA, the Korea-Chile FTA. Even though trade with Chile and it is the third most important partner after China (21.4 accounted for a very small part of Korea’s total, the first FTA percent) and the U.S. (10.5 percent). European companies provoked significant controversy and its ratification took have been very active in investing in Korea. According to more than one year. In order to obtain public support, the European statistics, they represent more than 40 percent Korean government set up the FTA roadmap which states of the cumulative total FDI (Foreign Direct Investment) four principles of the Korean government’s FTA policy: since 1962.1 For the period 2008-12, European companies 1) multiple-track FTAs; 2) advanced and comprehensive were the largest contributors to inward FDI into Korea FTAs; 3) transparent procedures in FTA preparation; and 2 The roadmap with investment totaling $22 billion. Korean companies 4) diplomatic consideration in FTA policy. also announced trade partners to be considered for FTAs on are also increasingly active in investing in Europe. Half of the basis of concrete economic criteria, such as economic Korean cars sold in European markets are produced in the feasibility and large and advanced economies. It organizes assembly lines in Slovakia and the Czech Republic, and FTA partners into two groups: partners in the near future Korean electronics companies made a number of important (negotiation in two years) and those for medium-term investments from R&D centers to production facilities perspective (negotiation in more than three years). The in Europe. In financial sectors, Korea’s economy is more EU was included in the list of medium-term perspective closely related to European financial markets. According FTAs with the United States and China. One reason for this to statistics from the Bank for International Settlement differentiated schedule is that they are large trade partners, (BIS), European banks have very important exposures to the and the impact of the FTAs will be much more significant Korean economy. Almost half of Korea’s external liabilities than FTAs with small countries. Another reason is that the are with European banks, which means that both economies EU exercised a de facto moratorium on new FTA negotiations are increasingly interdependent. In this context, creating a from 1999 to 2006.3 more stable economic framework is beneficial to both Korea and the EU and this was the basic background that Korea In the meantime, trade and investment with European and the EU agreed to launch a FTA negotiation in 2007. As countries had been rapidly increasing. In 2007, the EU became of early 2015, the Korea-EU FTA is the only FTA that the the second largest trade partner for Korea after China. After EU has implemented with an Asian country. its first FTA with Chile, Korea initiated new FTA negotiation with the European Free Trade Association (EFTA). The This article reviews Korea’s economic relations with the EU, FTA with EFTA was generally considered as a preparatory focusing on the Korea-EU FTA implemented in July 2011. The step to one with the EU,