KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

KDI FOCUS Korea’s Trade Structure since 2010 and Implications for Economic Security

Recent shifts in Korea’s trade structure are characterized by a broad-based rise in imports from China and a concentrated expansion of exports to the United States in a small set of products, resulting in deeper bilateral trade dependence with both economies. These structural shifts introduce multiple risks, including supply chain vulnerability, job losses in sectors competing with Chinese imports, exposure to U.S. protectionism, and macroeconomic instability. Proactive trade diversification through coordinated policies and targeted export promotion initiatives is essential, alongside institutional reforms to shield affected industries and workers. This agenda should remain a policy priority even after the current trade negotiations with the U.S. are concluded.

- Responses to U.S. tariffs dominate attention while Korea’s shifting trading structure remains overlooked.

- Korea’s recent trade features a shift to a deficit with China, a growing surplus with the U.S., and rising dependence on both.

- Korea’s trade balance deterioration with China stems from net import growth in broad manufactured products, while its U.S. trade surplus expansion is driven by exports of a few products, including automobiles and semiconductors.

- Korea’s import and export shifts have elevated its country-level import concentration and product-level export concentration above other major economies.

- Technological, industrial, and policy shifts of the U.S. and China, alongside their escalating geopolitical tensions, continue to shape Korea’s trade patterns.

- Rising supply chain dependence on China poses the risk of negative spillover effects not only on Korea’s current key industries but also on future strategic ones.

- Intensified competition from Chinese imports raises concerns about employment declines and deteriorating job quality in Korea’s manufacturing sectors.

- Korea’s export growth to the U.S., concentrated in a few products, increases the likelihood of becoming the target of U.S. tariff measures.

- Deepening trade dependence on a few countries and products may increase macroeconomic instability.

- Export and import diversification calls for stronger national economic diplomacy and trade cooperation, alongside accelerated CPTPP accession.

- Expanded support is needed for export and import firms to diversify trading partners and product portfolios, prioritizing policies with proven effectiveness.

- Protecting domestic industries calls for stronger monitoring and response systems for unfair trade practices, alongside assistance that helps affected firms and workers adapt swiftly to the changes.

Summary

Policy Study KOR Impact of Global Trade Fragmentation on South Korea’s Exports: The U.S-China Trade War and Policy Insights

This study analyzes the effects of the U.S.-China trade war on third-country exports to the U.S. and China, focusing on South Korea. Using tariff change data that occurred during the 2018~19 US-China trade war, it estimates product-level elasticities of substitution, i.e., tariff cross-elasticities, and investigates their determinants across countries, industries, and products. This analysis elucidates the heterogeneous effects of the trade war, informing policies to seize new export opportunities amid ongoing global trade fragmentation.

The results show that Korea’s tariff cross-elasticities toward the U.S., relative to U.S. tariffs on Chinese imports, were generally positive, implying that higher U.S. tariffs tend to boost Korean exports to the U.S. In contrast, the elasticity toward China, relative to Chinese tariffs on U.S. imports, was negative on average, suggesting that increased Chinese tariffs tend to reduce Korea’s exports to China. Comparing predicted and actual export changes reveals a potential underestimation bias in the regression model.

Decomposing the determinants of tariff cross-elasticities into country, industry, and product factors reveals the significance of country-specific elements for exports to the U.S. and China, with industry factors also exhibiting relevance for exports to the U.S. In the case of Korea, tariff elasticities were higher in high-tech, capital-intensive, or export-integrated industries.

Additionally, analysis of Korean manufacturing shows that industries with economies of scale reduced production costs and expanded output during the trade war. Zooming into factors for economies of scale, capital-intensive industries with prior investments saw increased value-added, expanded investment, and lower costs. Export-integrated industries exhibited similar positive outcomes.

Lastly, simulations based on the estimated elasticities project that four U.S.-China tariff scenarios increase Korea’s exports to the U.S. by 0.1% to 7.0%, depending on the extent of U.S. tariff changes on Chinese imports. In a severe scenario where both countries impose roughly 10%p additional tariffs on all bilateral imports, Korea's exports are projected to rise by about 4.7% to the U.S. and 9.1% to China.

These findings inform policy decisions for Korea to navigate global trade changes, such as the U.S.-China trade war, by prioritizing targeted support for high-tech and capital-intensive industries and bolstering investment and export infrastructure to enhance resilience and capture emerging export opportunities.

Summary

Policy Study KOR Strengthening Macroprudential Management for Non-Bank Financial Institutions in Korea: Focusing on the Issuance of Equity-Linked Securities (ELS)

This study proposes measures to strengthen macroprudential management for non-bank financial institutions (NBFIs), such as securities firms and insurers, whose importance has grown since the 2008~2009 Global Financial Crisis. Major economies and international financial institutions have actively discussed and pursued new or enhanced supervisory and regulatory frameworks for managing NBFI-related systemic risk.

Using ΔCoVaR, a leading systemic risk metric capturing changes in conditional value at risk, this study analyzes the evolution of systemic risk among South Korea’s banks, securities firms, insurers, and individual financial institutions during major financial shocks, including the Global Financial Crisis, the European Debt Crisis, and the COVID-19 pandemic. Findings reveal substantial increases in systemic risk across all sectors during each crisis, with banking generally exhibiting the highest levels. Sectoral differences varied, with risk for securities firms surging during the March 2020 margin call event, markedly narrowing the gap with banks compared to previous crises.

The study further empirically examines the impact of Equity-Linked Securities (ELS) issuance by financial institutions on systemic risk (ΔCoVaR). Results indicate that increased ELS issuance contributed significantly to heightened systemic risk during the Global Financial Crisis, the European Debt Crisis, and the COVID-19 crisis. These findings underscore the growing importance of NBFIs in macroprudential management and call for systematic monitoring with enhanced regulatory oversight of the non-bank financial sector.

Summary

Policy Study KOR Investor Composition of Government Debt and its Fiscal Implications

This paper estimates the demand for South Korea’s government bonds across investor categories and projects future bond yields in light of the country’s rising debt trajectory. A cross-country analysis shows that public and non-bank sectors have been key drivers of increased foreign investor holdings of Korean government debt during the COVID-19 pandemic. Using sectoral debt holdings data, the paper examines the evolution of marginal holdings of government bonds by each sector and estimates the responsiveness of debt demand to bond yield changes. Over the past decade, domestic banks and public institutions, including the National Pension Service, have reduced their marginal holdings, while private pension and investment fund sectors have increased theirs. These findings highlight the growing importance of non-bank sectors in government debt demand, consistent with the literature (Fang et al., 2022). Foreign investors exhibit the highest demand sensitivity to bond yields, whereas domestic insurance companies show the lowest. Based on sectoral demand estimates, a 10% increase in government debt is estimated to raise bond yields by 43 basis points. By 2030, when Korea’s government debt is expected to reach 2,000 trillion won, bond yields are projected to rise to 4.85%, ceteris paribus. Notably, 60% of the projected yield increase is attributed to the inelastic demand of insurance companies. This underscores the importance of adjusting the investor composition of the government bond market, with a greater share of investors with higher demand elasticity to alleviate pressure on borrowing cost.

Summary

Policy Study KOR Capital Flows and Challenges in the Digital Age: Focusing on Central Bank Digital Currencies (CBDCs)

As the digitalization of finance accelerates, discussions on the adoption of Central Bank Digital Currencies (CBDCs) are gaining momentum, particularly among G20 nations. This development calls for examining the potential impacts of CBDC implementation on both domestic and international financial markets and capital flow, alongside exploring appropriate response strategies. Upon reviewing the status and background of CBDC adoption among G20 countries, setting up a unified CBDC platform for this group in the short term is highly unfeasible. Instead, some emerging economies are expected to introduce retail CBDCs to enhance payment infrastructure or conduct experiments linking wholesale CBDCs for cross-border payments. Should CBDCs be adopted globally, the speed and scale of international capital movements could increase, potentially amplifying the volatility of capital flows and currency values. In order to ensure the effectiveness of capital flow management policies already in place, it is crucial to foster close cooperation between major central banks on CBDC integration. Moreover, efforts should be made to maximize the benefits of the new payment systems introduced by CBDCs. These efforts include revising financial regulations and upgrading infrastructure by implementing open foreign exchange regulations, maintaining balanced oversight of fintech firms, and enhancing the efficiency of existing payment and settlement infrastructures.

Summary

Research Monograph KOR Foreign Direct Investment in Korea: Performance Evaluation and Policy Implications

Countries are actively seeking ways to attract foreign direct investment (FDI) as a crucial instrument for economic growth, and Korea is no exception. The Korean government has been an ardent supporter of FDI after switching its stance on FDI as a key source of materializing its growth potential after the 1997 Asian Financial Crisis. Currently, Korea implements a wide range of support measures, such as location choice assistance by establishing Free Trades Zones, Foreign Investment Zones, and Free Economic Zones, tax reductions and exemptions, and cash grants. However, despite its extensive efforts, the inflow of FDI remains small, while the outflow of FDI by domestic firms continues to rise.

Underlying this stance is a hypothesis that the gain outweighs the cost, which means the positive ripple effects of FDI on the overall Korean economy are greater than the monetary value of incentives given to foreign investors. Still, that hypothesis needs to be verified. As for the productivity spillover effects of FDI in Korea, the prior empirical studies show mixed results, both positive and negative or ineffective. Also, previous studies empirically comparing foreign-invested enterprises’ performance with domestic firms had contradictory results.

Such conflicting conclusions are primarily due to statistical restraints. The scope of data on foreign-invested firms studied previously is narrow because information disclosed by the government is extremely limited. In order to overcome this shortfall, this study employs a complete enumeration of data on foreign-invested enterprises operating in Korea, provided by the Ministry of Trade, Industry and Energy, to analyze their business performance as follows. First, an analysis method of propensity score matching is used to see if there is a significant difference in operational performance between foreign-invested and domestic companies in the manufacturing and services industries at the enterprise level. Second, it also estimates the effect of FDI on the productivity of domestic firms in the manufacturing industry. Accordingly, this study calculates their firm-level productivity to estimate the effect of productivity spillovers from FDI, taking into account foreign-invested companies’ impacts on their local competitors as well as on upstream and downstream domestic companies.

This study analyzes firms operational on the 2019 KIS-DATA using a control group of domestic firms similar to foreign-invested firms in terms of firm age, size, wage level, and debt ratio. The results are summarized as follows. First, as to two productivity indicators, labor productivity and per capita operating profit, it finds no empirical evidence to support the hypothesis that foreign-invested companies perform better than domestic ones in manufacturing and service industries. Rather, domestic firms outperformed their foreign competitors in the service industry. Second, in terms of growth potential measured by the average annual growth rates of per capita value-added and sales over the past five years (2015-2019), there is no empirical evidence to support the hypothesis of better growth potential among foreign-invested companies. Third, as to innovation capacity measured by the proportion of R&D expenditures and costs of education and training to sales, no empirical evidence is found to support the hypothesis of a higher level of innovation for foreign-invested firms in the manufacturing industry than their domestic counterparts. However, the analysis finds that R&D intensity in the service industry was much more significant for foreign-invested companies.

This study also examines business establishments operational on Statistics Korea’s 2003-2009 Mining and Manufacturing Survey to see the effect of FDI enterprises on the productivity of domestic manufacturing firms. First, it finds the productivity of foreign-invested companies in the mining and manufacturing industries to be 8% higher than that of local competitors after controlling for other effects. Second, the analysis using level statistics finds the impact of FDI on the production of domestic firms to be negative in all cases of the competition effect on the same industry, forward linkage effect on the productivity of the downstream sectors as foreign-invested companies supply intermediate goods to them, and backward linkage effect on the productivity of the upstream industries as foreign-invested companies consume the output from them. However, large-sized foreign-invested enterprises positively impacted the productivity of other firms in the same industry. Third, the result shows that the growth of highly productive foreign-invested companies positively influenced the productivity of upstream firms. Such a positive effect appears to grow over time and become stronger for the larger foreign-invested firms. While no positive effect was observed for the same industry and downstream industries with time, FDI had a significantly more positive impact on the productivity growth rate of industries with a high share of the production of intermediate goods.

In conclusion, the finding that FDI negatively impacts the productivity of domestic firms raises a serious question as to whether Korea’s foreign investment support policy has effectively achieved its intended goals. A key implication from the results of this study is that future FDI policies should focus more on quality over quantity. To this end, the Korean government needs to develop a comprehensive index model that can measure not just the total amount of FDI but also the positive effect of foreign-invested companies on the Korean economy in various aspects like productivity and employment. Moreover, this index should be utilized to evaluate and further advance FDI support policies. Currently, the criteria for government assistance to attract foreign investment are confined to the amount of investment and the size of employment, but more diverse indicators need to be incorporated, taking into account growth potential. Furthermore, the government should shift its focus to attracting quality multinationals as well as creating a business environment conducive to their growth and sustainable development in the host country.

Summary

Research Monograph KOR Economic Security and Strategies to Strengthen Supply Chains

On top of the US-China strategic competition, the COVID-19 pandemic, climate crisis, and rising geopolitical risks have pushed economic security and supply chain policies to the forefront of policy dialogue in South Korea. This study examines the factors behind the growing importance of economic security and response measures from geo-economic and traditional economics perspectives, along with analyses of case studies in key sectors. The primary aim of this research is to identify strategies to enhance Korea's economic security.

The policy directions regarding Korea’s economic security presented in this study are as follows: First, Korea should build upon its manufacturing capabilities in advanced industries and actively foster related cutting-edge technologies to secure strategic advantages. To achieve this, industrial policies should be more closely integrated, and supply chain vulnerabilities should be mitigated particularly by reducing dependence on China.

Second, simple localization or domestication of intermediate goods suppliers should be avoided. Instead, the Korean government should actively participate in international joint investment and R&D cooperation to support private-sector investments for diversifying supply chains.

Third, the strategy of large enterprises sharing technological know-how with small and medium-sized enterprises (SMEs) with similar technological development goals has been a key driver of Korea’s high localization rate and international competitiveness in the display industry. Therefore, in promoting the localization of advanced strategic sectors, the government should enhance support for improving the technological capabilities of domestic supply chain firms. Moreover, industry associations should establish various mechanisms and channels to strengthen collaboration between advanced industries firms and supply chain firms.

Fourth, a stable supply of mineral resources urgently requires investment in R&D, international cooperation, and the mobilization of financial resources for large-scale investments. Expanding R&D in mineral resource development technologies and leveraging these efforts as a platform for international cooperation should be prioritized. Additionally, concrete strategies for securing financial resources to support large-scale investments should be explored.

Fifth, when supply chain crises in advanced strategic industries pose risks that can potentially escalate to national crisis level, it is critical to consider adopting the 'emergency acquisition flexibilities' strategy used in defense material procurement. To this end, existing systems should be restructured to enable rapid procurement and response, ensuring greater resilience in times of crisis.

Sixth, to enhance the competitiveness of advanced strategic industries, priority should be placed on expanding power generation capacity through targeted investments in energy infrastructure. Simultaneously, measures such as connecting and expanding power grids, developing smart grids, and diversifying energy resources to improve efficiency should be pursued. As for water resource infrastructure, ensuring quantitative stability requires the multipurpose use of existing infrastructure, the activation of alternative water resources, and the construction of new water resource infrastructure. Additionally, strengthening technological capabilities through localization efforts is essential to securing a stable supply of ultrapure water.

Last but not least, prompt establishment and implementation of a national logistics strategy is required to adapt to changes in the global logistics network. This strategy should focus on securing overseas networks and global logistics hubs, as well as fostering globally competitive logistics companies, and enhancing adaptability to shifts in the logistics environment.

Summary

Policy Study KOR Impact of Carbon-Neutrality Policies:Focusing on Trade and Environment

This study examines the impact of carbon neutrality policies on Korea and explores potential government responses to the rapidly evolving global policy landscape concerning carbon and trade. Specifically, it focuses on the European Union’s Carbon Border Adjustment Mechanism (CBAM) and how South Korea's carbon neutrality policies might influence the CBAM's impact. In addition, it analyzes the effects of each carbon neutrality policy option on Korea’s economy, including trade and GDP, and emissions.

This study finds that the EU CBAM may not affect Korean exports due to its relatively narrow scope of products and emissions covered in the current version of the policy. However, its influence is likely to grow if the scope of regulated products expands and the range of indirect emissions covered increases. The study then considers carbon pricing, green technology R&D, and green supply chain policies as strategic directions for Korea's government to both respond to global policy changes, such as CBAM, and achieve climate neutrality. Although both increasing carbon prices and developing carbon reduction technologies mitigate the negative impacts of CBAM by decreasing CBAM tariff rates, their effects on Korea's production, exports, income, and welfare differ.

Green supply chain policies involve adjusting trade costs according to the carbon intensity and price of intermediate inputs’ origins. This aims to reduce production's embedded indirect emissions and increase the carbon price already paid in source countries. The study evaluates two opposing approaches to implementing this policy: lowering trade costs for 'green' suppliers and raising them for 'dirty' suppliers. The results indicate that decreasing trade costs, as opposed to increasing them, results in higher GDP, greater export competitiveness, and improved welfare. The study shows that although different policy options are themselves effective in responding to CBAM and reducing carbon emissions in Korea overall, their impact on Korea’s economy and emissions are heterogeneous. Therefore, understanding the complex consequences of these policies and selectively implementing them based on the distinct characteristics of the affected industries is crucial.

Summary

Policy Study KOR Analyzing the Productivity Spillovers of Foreign Direct Investment (FDI) Considering the Characteristics of Industrial Complexes

Using large-scale panel data at the business unit level in South Korea, this study analyzes how the presence of FDI firms in industrial complexes impacts the productivity of domestic firms through vertical spillovers. Due to industrial agglomeration, FDI firms in industrial complexes are expected to engage more in vertical interactions with local firms and to procure a higher proportion of inputs locally compared to those outside the complexes. Therefore, the backward linkage effects of FDI firms in industrial complexes on domestic firms are anticipated to be more significant than FDI firms not operating in these complexes. To test this hypothesis, it constructs an indicator for the backward linkage effects of FDI and analyzes its relationship with the total factor productivity (TFP) of Korean manufacturing establishments.

This study finds that FDI firms located in industrial complexes exhibit significant positive backward linkage effects on the productivity of domestic firms. In contrast, the backward linkage effects of FDI firms outside the complexes are significantly lower and sometimes negative when domestic firm productivity is measured by value added per employee. These results support the hypothesis that, at least from 2010 to 2019, clustering into industrial complexes positively affects the productivity of domestic firms through the backward linkage effects of FDI firms.

Summary

Research Monograph KOR Foreign Exchange Policy in Response to Changes in Macroeconomy and Financial Markets

This study analyzes the relationship between cross-border capital flows and the foreign exchange market in Korea. It aims to propose revisions to the Foreign Exchange Transaction Act to facilitate international transactions and maintain external financial stability in light of changing macroeconomic and financial market environments.

The foreign exchange system is shaped by historical contexts, typically introduced to minimize the negative impact of currency fluctuations during events such as economic recessions or wars. However, as economies develop and financial markets grow, there is an increasing demand for the relaxation of regulatory measures on foreign exchange transactions.

As an open economy highly dependent on external trade, Korea encounters considerable risks to its economic stability from rapid fluctuations in exchange rates. Therefore, understanding the relationship among cross-border capital flows, interest rates, and exchange rates is crucial in crafting an effective foreign exchange system. Despite the projected increase in fiscal spending to address the aging population and enhance the quality of life, Korea's overall savings are expected to grow for the time being. With the domestic potential growth rate declining, it seems that the demand for private external financial investments will persist, indicating an expected increase in cross-border capital movements. The growth in private external financial investments presents an opportunity to ease regulations in the foreign exchange market, as the private sector can serve as an automatic stabilizer against exchange rate volatility by actively participating in the foreign exchange market and restoring normal rates.

Chapter 2 examines the impact of increasing domestic and international capital flows on Korea's financial markets. Analyzing the effects of foreign capital inflows using the Flows Implied by Rebalancing (FIR) index (Pandolfi & Williams, 2019), this chapter indicates that global passive fund inflows are associated with significant increases in bond prices (lower interest rates) and a strengthening of the Korean won (weaker exchange rate). These effects are more pronounced for non-reserve currency emerging market countries like Korea. Furthermore, the study investigates the impact of domestic funds' overseas investments on the foreign exchange market. It uses a synthetic control method to assess the effects of the 2017 policy that recognizes asset duration irrespective of insurance companies’ hedging practices. The findings show that an increase in domestic securities investments abroad leads to a decrease in the real effective exchange rate, resulting in a depreciation of the Korean won. However, there is no evidence that excessive demand in the foreign exchange market rises as swap rates increase, suggesting Korea’s foreign exchange market has gained stability compared to the past. An examination of the correlation between the won-dollar exchange rate volatility and the amount of net foreign assets reveals that more recently, as net foreign assets increase and the ratio of won-denominated liabilities rises, the amplitude of the net foreign asset increase due to non-trading factors tends to rise when the won depreciates, indicating the operation of an automatic stabilizer.

Chapter 3 puts forth the direction and key policy recommendations for the revision of the Foreign Exchange Transaction Act. The focus is on enhancing the efficiency of foreign exchange transactions while pursuing external stability. It suggests recognizing the Foreign Exchange Transaction Act more as a trading law than a business law, aiming to reduce overlaps with individual financial laws arising from its business law characteristics.

More specifically, Chapter 3 explores the history of Korea’s foreign exchange management policies and analyzes their characteristics and problems. Initially designed to curb the outflow of foreign exchange, these policies have since transformed to liberalize foreign exchange transactions across both current and capital accounts. However, the foreign exchange authority has maintained a conservative stance, prioritizing external soundness. Notably, the Foreign Exchange Transaction Act is recognized as a business law, maintaining a bank-centric approach while regulating the foreign exchange operations of non-banking financial institutions. Furthermore, the Act adopts a listing and delegation legislative approach. As a result, the current law is not only vulnerable to changes in the external environment but also faces issues of low legal systematicity, leading to high compliance costs.

Currently, most developed nations operate without legal restrictions on foreign exchange transactions. Countries that initially introduced regulations as a response to economic crises or wars have either eliminated or considerably eased these regulations to improve national competitiveness and foster the growth of their financial industry. Japan, whose foreign exchange system has historically resembled Korea’s, opened up foreign exchange operations to non-banking financial institutions and even non-financial companies as part of its financial big bang in 1998. However, Japan has retained a regulatory role in terms of information collection and monitoring for foreign exchange transactions. It continues to inspect and supervise foreign exchange operations of individual financial institutions under the applicable financial industry laws or laws governing financial product transactions.

This study proposes revisions to Korea’s Foreign Exchange Transaction Act based on international case studies. First, the Foreign Exchange Transaction Act, presently skewed towards business law characteristics, should shift its focus to underscore its role as a trading law rather than a business law. To invigorate foreign exchange transactions, the Korean government should move away from classifying foreign exchange operations as regulatory subjects and instead strengthen the monitoring and reporting systems for transactions. It is advisable to delegate regulation of foreign exchange operations to financial authorities under individual financial industry laws, with the Foreign Exchange Transaction Act stepping in only where foreign exchange operations are not covered under the relevant financial industry laws.

Second, this study recommends transitioning the regulatory approach for foreign exchange transactions under the Foreign Exchange Transaction Act from institutional to functional regulation. Functional regulation involves categorizing operations by their function and applying consistent regulations to identical activities, laying the groundwork for adapting to future changes, such as the digital transformation of finances.

Third, in response to the relaxation of foreign exchange regulations, the study suggests reinforcing liquidity and soundness for non-bank financial institutions. This compensatory measure addresses concerns associated with the shift toward functional regulation, which might essentially eliminate bank-centric practices, posing potential risks to financial stability due to the risk-taking practices of non-banking financial institutions. Specific measures include applying foreign exchange liquidity coverage ratio (LCR) requirements for financial investment firms, enhancing the effectiveness of Net Operation Capital Ratio (NCR) regulations, strengthening the responsibilities of boards and CEOs as licensing conditions for foreign exchange operations, and ensuring continuous supervision and inspections post-authorization. This approach mitigates concerns about functional regulations compromising external soundness by adopting a ‘same taskssame riskssame regulations’ rule at the financial regulatory and supervisory level to respond to systemic risks.

Finally, the study proposes imposing prompt corrective action measures on financial institutions handling foreign exchange transactions to enhance the effectiveness of safeguards before emergencies arise. Corresponding to the extent of regulation relaxation on foreign exchange operations, the Korean government strengthens the liquidity and soundness of financial institutions engaged in foreign exchange operations by enforcing prompt corrective action when various regulatory ratios are exceeded. Such measures not only minimize the broader systemic impact in case of early-stage insolvency but also incentivize companies to uphold sound management practices.

While Korea's foreign exchange system has evolved to reflect changes over time, the pace of these changes has been notably slow. While Korea actively engages with the international community, its efforts to liberalize foreign exchange transactions are constrained as a non-key currency nation. Nevertheless, the need for reform in the current conservative foreign exchange system persists for the sake of economic and capital market development.

Despite Korea’s orientation toward an open economy, its view on openness has traditionally centered around trade. From the early stages of economic development, exports have served as the primary engine of Korea’s economic growth, leading to minimal regulations on current account transactions. Consequently, foreign exchange transactions related to current account activities have been freely permitted. On the contrary, foreign exchange transactions for capital account activities have faced stringent regulations. While strict control over foreign exchange transactions might initially boost financial stability, it could also lower overall economic efficiency and potentially decelerate economic growth. Furthermore, ensuring financial stability requires collaborative efforts and coordinated actions among monetary, fiscal, financial, and financial supervisory authorities to enhance the stability of the financial system.

In conclusion, the study advocates for a significant easing of the regulations on foreign exchange transactions in Korea, recommending adjustments to match the current economic conditions and national competitiveness strategy. Korea’s financial institutions are positioned to lead the development of the financial system, especially as global portfolio diversification emerges as an economically efficient choice. This shift is happening against a backdrop of declining potential growth rates and rising demand for both domestic capital investments abroad and foreign capital investments within Korea. Therefore, it is imperative for the Korean government to comprehensively reassess restrictive regulations that hinder the global expansion of financial institutions, with the restrictions imposed by the Foreign Exchange Transaction Act as a prime example of such regulation in need of thorough reevaluation.

SITEMAP

HOT ISSUE

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

International Economics

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary