This Annual Report summarizes KDI’s research and other related activities in 2004. We hope this report will help to highlight KDI’s main research output and to share the results of studies conducted by KDI researchers. This report consists of three parts. Part I, as a compendium of research outputs, provides an overview of KDI’s research projects in 2004. This part not only gives a brief summary of main research findings, but also discusses the motivation behind these researches as well as their policy implications. This format is designed to give the reader a better understanding of the relevant context of the policy-oriented researches conducted by the Institute. Part II provides information on KDI’s affiliated bodies and other research-related activities. This includes the major activities of CEIE (Center for Economic Information and Education), IDEP (International Development Exchange Program), and KDI School of Public Policy and Management. Part III, as Appendix, provides a list of other research outputs and periodicals as well as planned research projects in 2005. It also provides a brief overview of KDI’s history and its organization. We will briefly introduce the structure and contents of Part I, which represents the core of the Annual Report. We classified Part I into nine sections by theme. Section 1 summarizes KDI’s major collaborative projects in 2004. The first project is “Population Aging in Korea: Policy Agenda and Reform Issues.” Population aging in Korea is proceeding much faster than those observed in other countries. Past experiences of advanced countries tell us that major difficulty in preparing for an aging society lies in the process of building consensus for reforms. Recognizing this, KDI launched the second round of a collaborative research on population aging with emphasis on policy issues. In-depth discussions on various policy options and suggestions contained in this volume provide a useful starting point for building consensus on necessary reforms. “Enhancing the Efficiency and Effectiveness of Public Spending” aims to support the National Fiscal Management Plan 2004-2008 prepared by the Korean government in 2004. This plan announced medium-term macro-fiscal objectives and the government’s plan for allocating future resources. This project reviews Korea’s current spending structure and proposes directions for change in various areas of budgeting such as welfare expenditures, educational spending, job creation programs, agricultural sector, SOC investment, R&D program, and transfers to local governments. “Economic Structural Changes and Job Creation in Korea” might be the most timely collaborative research project as the Korean economy is recently showing signs of deterioration in the ability to create jobs. Furthermore, the employment structure is rapidly changing as Korea enters a period of economic maturity. This volume covers a wide range of issues related to job creation: long-term changes in the employment structure, structural changes in labor market performance during the crisis, job flow dynamics in the service sector, long-term labor supply projections, economic activities of marginal labor force, youth unemployment post-crisis, problems related to temporary workers, industrial relations, governance structure of SMEs, and effects of FDI on employment. Most papers in this volume provide analytical results as well as policy suggestions. Finally, “Analyses of Housing Markets and Related Policy Issues” deals with Korea’s housing market and related policies, which are of most importance, considering that land is scarce and population is large. It provides analyses of major determinants of housing prices and future demand forecast, in addition to various institutions related to the housing market including the tax system, housing finance market, and residential improvement programs. It also presents policy suggestions related to each issue. Section 2, Macroeconomic Outlook and Analysis, is comprised of researches on macroeconomic trends and issues. “Macroeconomic Trends and KDI Quarterly Economic Outlook” provides an overview of the Korean economy in 2004 and reviews KDI’s macroeconomic forecasting and policy recommendations. “The Analysis of Private Consumption, Savings and Income” looks at the causes of the slump in private consumption in 2004 and draws implications on forecasting consumption. This study points out that the prolonged stagnation in consumption is the result of not only an adjustment of personal liabilities but also low personal income. It also points out that the rapid increase in social contribution is likely to be an important factor in determining future consumption growth. Using micro level data, “Analysis of Investment Behavior Using Balance Sheet Data of Listed Companies” investigates the cause of the depressed fixed capital investment. The author argues that restructuring and improving the profitability of SMEs are important for increasing equipment investment. “An Assessment of Recent Trends in analysis and forecast of construction investment which has been sluggish in 2004. This study notes that the recent increase in inflation and slowdown in construction investment, preceded by the construction boom in 2002 and 2003, are not much different from the cyclical patterns observed in the past. “An Assessment of the Recent Appreciation of the Korean Won and Its Impacts on Aggregate Demand Components” analyses the effect of the Korean Won’s appreciation on aggregate demand components such as consumption and investment. This article points out that while the appreciation of the Korean won will be a factor in contracting aggregate demand, it could contribute to increasing domestic demand-equipment investment, in particular. “Analysis of the Value-Added Inducement Effect of Exports by InputOutput Table” analyzes the value-added inducement effect of exports using a timeseries input-output table by industry when the divergence of growth rates for exports and domestic demand is an issue of major public attention. This article concludes that the recent widening gap between exports and domestic demand might have been caused by a decline in the value-added inducement effect of exports. “A Study of Exchange Rate Regimes in East Asia” contains three research papers from a joint conference conducted with the Institute for International Economics. The first paper evaluates the proposal for regional coordination of exchange rates, and concludes that it is difficult to establish a regional exchange rate mechanism as a way to enhance foreign exchange stability in East Asia. The second paper estimates the effects of a revaluation of the Chinese yuan on the Korean economy based on a simple macroeconomic model, and suggests that an appreciation of the yuan might not significantly increase Korea’s exports, contrary to general belief. The third paper examines the effects of exchange rate movements on the profitability of Korean firms and suggests the possibility that a large number of Korean firms are vulnerable to the foreign exchange fluctuations. The study “Exchange Rate PassThrough and the Market Response: Competition between Korea and Japan in the US Steel Market” explores the relatonship between exchange rate pass-through for the (average) market price and an individual country’s price. The empirical results suggest that it is crucial for an exporter to understand how competitors in the market respond to changes in its price, as well as how its price changes when relevant exchange rate fluctuates. Lastly, “Tying the Hands of Central Banks: Welfare Comparison of Alternative Nominal Anchors” evaluates the performances of alternative nominal anchors by applying a micro-founded structural model. This study concludes that while strict inflation targeting is feasible and desirable under high rates of long run inflation, targeting of nominal income or money growth yields higher welfare with long-run inflation close to zero. Section 3 contains studies on current or foreseeable issues facing the Korean financial markets. Using firm-level data, “The Effects of Policy Lending Programs for Korean SMEs” analyzes the policy effects of SME lending programs. In particular, this study examines whether the SME lending programs contributed to improving the performance of Korean SMEs. Empirical results of this paper indicate that lending programs providing support to older SMEs did not have intended effects on their performence, possibly because these firms did not make enough efforts to enhance profitability or overcome their weakened competitiveness. “Herding and Positive Feedback Trading by Foreign Investors in the Korean Stock Market” looks into trading behavior of foreign investors in order to see whether there are market destabilizing effects associated with it. The study does not find sufficient evidence to reject the null hypothesis that foreign investors do not damage market stability. “Policy Recommendations for Enhancing the Role of Credit Rating Agencies in the Debt Market” analyzes the historic performance of credit rating agencies in Korea. This paper also discusses unique problems associated with Korean credit rating agencies, such as conflict of interests due to an ancillary fee-based structure. The study concludes by drawing policy implications for improving the role of the credit rating agencies. “Effects of the New Basel Accord on the Korean Bank Loan Market” empirically examines the changes in the portfolios of Korean banks that can be expected after the adoption of the New Basel Accord and discusses the consequent structural changes in the Korean bank loan market. Also, this study takes into account the specifics of the Korean banking industry and financial markets in order to draw policy implications. Section 4 contains researches related to competition policy and corporate restructuring. By conducting a statistical analysis, “Policy Suggestions for Restructuring Korean Small and Medium-sized Enterprises” shows that the distresses of most SMEs stem from structural rather than cyclical, problems such as stagnant productivity and dwindling profitability. Based on this recognition, it recommends several institutional reforms to carry out restructuring efforts more efficiently. “Economic Analysis of Regulation on Market Activities: From the Competition Policy Perspective” evaluates the cost of regulations on market activities to protect “economically weak” producers. By modeling two examples of such regulations, it argues that these regulations are very likely to decrease both consumer surplus and social welfare. As such, it is necessary to reevaluate any sort of anti-competitive nature in such regulations. “An Empirical Analysis of Potential Foreign Competition and Market Structures: Evidence in Korean Manufacturing” empirically shows the existence of pressure from foreign competition in the domestic market. Therefore, the study argues that potential competition from foreign firms must be taken into account to adequately measure the degree of competition in domestic industries. “Evaluation of Korean Corporate Restructuring since the Financial Crisis: Focusing on Profitability and Financial Soundness” seeks to assess the interim progress of Korea’s corporate restructuring efforts since the financial crisis. Using comprehensive firm-level data, it shows that there still exists a lot of room for improving firms’ profitability despite the significant improvement in debt service capacity over the past years. “Electric Power Sector Restructuring: Major Issues and Policy Alternatives” critically examines Korea’s current restructuring plan for the electric power sector, and provides policy recommendations based on theory and international experiences. The current restructuring plan is based on EnglandWales model characterized by vertical separation and horizontal division of generation segment, which shows its defects in California power crisis. This research also reviews two alternative restructuring plans; 1) modified England-Wales Model utilizing long-term bilateral contracts and 2) the approach taken by the EU and Japan which promotes competition among vertically integrated units. Section 5 contains articles that analyze the changes in Korea’s economic structure, so as to understand the major components affecting economic growth. “Comprehensive Study on Industrial Competitiveness of Korea (II)” is the second year output of a two-year project that seeks to comprehensively evaluate Korea’s industrial competitiveness. Based on the analytical framework established in the first year, it analyzes several industries and compares Korea’s competitiveness with developed countries. “SocioEconomic Impacts of Aging and Policy Issues” is a first-year output of a three-year research project on population aging. It analyzes the impact of a rapidly aging population in Korea from various points of view such as macroeconomy, labor market, social security system, old-age housing, and government sector. It also suggests policy reform recommendations to cope with the consequences of a rapidly aging population. “Dynamic Korea: A Nation on the Move” assesses the Roh administration’s first year in office and presents Korea’s economic and social vision, and national policy principles. The report states that the national vision of a dynamic Korea can be achieved by upgrading the national capacity of “innovation” and “integration” and promoting their synergistic integration. The report also provides seven strategic tasks and detailed action plans to achieve them. Using the accounting method, “An International Comparison and Accounting for Economic Growth by Sector” analyzes the Korean economic growth by industrial sectors. It also compares the growth pattern of Korea with other 14 OECD countries and shows that Korea’s rapid economic growth was mainly driven by the manufacturing sector while the growth rate of the service sector was relatively low with a small contribution from TFP. “Changes in the Weekly Working Hours and the Efficiency of Labor, 1963-2003” decomposes labor input into two groups: working hours and labor efficiency. It estimates that labor efficiency is maximized when weekly working hours is set at 40, which shows that the recent decrease in the ‘legal’ weekly working hours will be compensated by a rise in labor efficiency. “Productivity and Patterns of Trade: The Experience of Korea in the 1990s” analyzes the growth pattern of each industry and how different factors contributing to growth affects trade performance. It shows that Korean industries relying on total factor input for growth experience severe competition from China, but relatively less competition from Japan. Section 6 is comprised of researches related to innovation policy and regional development strategy, which is crucial to the Korean economy’s sustained development. “Globalization of Production Network in East Asia and Its Implication to Korea’s Innovation System” prescribes an industrial development strategy for the Korean economy under current competitive environments. It suggests that policy efforts be made to facilitate participation in international production networks and to secure local competitive advantages. “Economic Growth and Innovation System: A regional Innovation System” deals with the development of a regional innovation system for ensuring sustained economic growth. The study emphasizes the importance of innovation based on individual and social learning processes. In concluding, the study offers policy recommendations needed to achieve these objectives. “Promoting Regional Industries and Building Regional Innovation Systems” suggests government policies to develop a regional innovation system. Instead of direct intervention, it argues, policies should concentrate on improving the market/system by establishing incentive systems, eliminating institutional impediments, strengthening networks among actors, and building up evaluation systems. Section 7 addresses policies to improve Korea’s public finance and social welfare system. “Performance Management in the Public Sector” argues that it is necessary to establish a performance management system to improve efficiency and effectiveness of the national budget. It suggests how the system should be developed. “Introducing the Medium-term Expenditure Framework” suggests a fundamental innovation of the budget system by introducing a MediumTerm Expenditure Framework (MTEF). It emphasizes that a successful introduction of MTEF requires several preconditions: a macroeconomic projection system; a computerized system to support MTEF; and a performance management system that will help the central budget office in underst and ing the basic objectives of ministerial programs and monitor their performance. Applying a cross-country regression, “The Effect of Social Expenditures and Tax Policies on Economic Equity and Efficiency: The Case of OECD Countries” empirically investigates how various forms of social expenditures and taxes impact economic equity and efficiency. “Social Insurance Reform to Enhance Corporate Sector Competitiveness” examines the current state and future perspectives of Korea’s social insurance burden, at the same time, reviewing reform proposals to establish a more efficient and sustainable social security system in the context of an aging society. Section 8 contains project evaluations conducted by KDI and other related researches to improve the evaluation systems. The purpose of a preliminary feasibility study is to verify the feasibility of large public investment projects through economic and policy analysis. The Ministry of Planning and Budget (MPB) introduced the system in 1999 in order to enhance fiscal efficiency and productivity. KDI has been entrusted to take charge of these preliminary feasibility studies since the introduction of the system in 1999. “Report on the 2004 Preliminary Feasibility Studies” and “Report on 2004 Feasibility Re-Evaluation Studies” summarize the results of 52 preliminary feasibility studies and 6 re-evaluation studies conducted by KDI in 2004, respectively. Individual preliminary feasibility studies on large public investment projects have been conducted based on the “Standard Guidelines for Preliminary Feasibility Studies,” which were developed and updated by KDI. With the increase in the number of reviews and sectors that need to be evaluated, more comprehensive guidelines became necessary. Since the existing guidelines focused on the transportation sector such as roadway and railway projects, relevant tools to evaluate non-transportation projects such as cultural facilities and hospitals were needed. Also, the existing guideline that was based on accumulated research experiences, needed to be upgraded, as well as, further studies on research methodologies and theories, and updated statistics and economic parameters. In this context, a 4th edition to this guideline, and “Valuation of Cultural Facilities” were initiated. Section 9 consists of researches that address the North Korean economy and Northeast Asian economic cooperation. “The Crisis of North Korea’s Public Finance: Its Causes and Policy Options to Regain Stability” examines the impact of North Korea’s continued economic difficulties in terms of its public finance. In spite of the serious constraints on information, this study documents in detail historical developments of North Korea’s public finance, and draws lessons from the experiences of other transition economies. The author argues that North Korea’s public finance crisis can be alleviated mainly by reducing state expenditures, not by increasing taxes. “Analysis on Economic Management in North Korea” describes the structural characteristics, as well as, the underlying incentive mechanism of North Korea’s economic management. The author regards the new economic measures introduced in 2002 as efforts to revitalize the central planning system, not as a move toward a market economy. Nevertheless, the author acknowledges some positive aspects of the new economic measures. “Recent Developments in Trade and Foreign Direct Investment among Korea, China, and Japan: Implications for a Tripartite FTA” examines the characteristics of increasing economic cooperation among the three North-East Asian countries focusing on trade and investment linkages. This study suggests that considering Korea’s relative position between technologically advanced Japan and price-competitive China, a step-by-step approach is preferable for Korea, which could involve initial bilateral FTAs and, subsequently, integration in the form of a tripartite agreement. In closing, we would like to thank JongHee Kim for his logistical support as well as editorial assistance, Nanhee Kim, Kwang Sung Kim and Daniel Yang for their help with English editing. Of course, all remaining errors are ours.

This Annual Report consists of three parts. Part I provides an overview of KDI’s research projects in 2003. Each article in Part I not only gives a brief summary of major research findings, but also discusses the background of, and motivation for, the project as well as the implications of the findings for policy and future research. This format is designed to give the reader a better understanding of the relevant context of policy-oriented research conducted by the Institute. Part II provides information on KDI’s affiliated bodies and research-related activities. It summarizes the major activities of the Center for Economic Information (CEI), International Development Exchange Program (IDEP), and KDI School of Public Policy and Management (KDI School). Part II also provides a brief overview of international conferences supported by the Knowledge Partnership Program as well as a series of seminars organized by KDI’s research divisions. Part III is the Appendix of this Annual Report. It provides a list of KDI’s other research outputs and periodicals as well as planned research projects in 2004. After a brief overview of KDI’s history, it also provides information on the Institute’s organization, budget, and personnel. Part I, summarizing the major findings of KDI’s research in 2003, constitutes the core of the Annual Report. For the benefit of the reader, we have divided Part I into ten sections and grouped individual articles by theme as follows. Section 1 summarizes KDI’s major collaborative projects in 2003. Most prototypical of KDI’s policy-oriented research, these projects deal with “mega-trends” impacting the Korean economy and include policy prescriptions based on rigorous research. Five themes are selected for 2003, reflecting major changes in Korea’s demographic structure, comparative advantage, corporate management, and income distribution, as well as inter-Korean relations. Demographically, the ratio of population aged 65 and over is expected to rise from 7.2 percent in 2000 to 14 percent in 2019, and this rapid transition from “aging society” to “aged society” is likely to pose serious policy challenges in the near future. “Population Aging in Korea: Economic Impacts and Policy Issues” presents stylized facts on Korea’s population aging, and assesses its impacts on economic growth, employment, public finance, and financial markets. As for Korea’s comparative advantage, the rise of China as “the world’s factory” is prompting serious concerns about the competitiveness of Korean manufacturing and is encouraging discussions on the “strategic repositioning” of Korean industries. Addressing these concerns, “A Comprehensive Study on the Industrial Competitiveness of Korea” presents an analytical framework as well as empirical evidence to uncover structural problems in Korean industries and to help develop intelligent policy responses. While the rise of China is a source of increasing concern, economic restructuring triggered by the 1997 crisis continues to have a major impact on corporate management. Using firm-level data, “Empirical Evaluation of Corporate Restructuring in Northeast Asia” looks at the financial vulnerability of the corporate sector in the pre-crisis period and assesses the effectiveness of corporate restructuring in the post-crisis period. From a comparative perspective, this study evaluates the economic impacts of court-based insolvency proceedings, market-based M&As, and intermediate measures such as corporate workouts. The 1997 crisis has also raised concern about increasing inequality. “A Study on the International Comparison of Income Distribution and an Alternative Approach to Poverty Reduction” compares the level of income inequality and the incidence of poverty in Korea with those in other OECD countries. This study shows that Korea has a low score on such measures among OECD countries due to the effect of the 1997 economic crisis. Finally, “Changes in North Korea’s Economic Policy and the Role of Inter-Korean Economic Cooperation” places North Korea’s July 2002 economic reform in perspective by looking at the reform measures adopted by countries in Eastern Europe in the 1960s and 1970s. This study suggests that inter-Korean economic cooperation be used to support changes in North Korea, in a direction that is beneficial to both North and South Korea. Section 2 is comprised of studies analyzing macroeconomic trends and variables. A series of external shocks, including the standoff between the United States and North Korea, spread of SARS, and war in Iraq, buffeted the Korean economy in early 2003. As external shocks subsided, the deteriorating financial conditions of credit card companies, rising real estate prices, and increasing unemployment came to dominate policy discussions. Articles contained in Section 2 address these issues. “Macroeconomic Trends and KDI Quarterly Economic Outlook” summarizes and evaluates KDI’s macroeconomic analysis and forecasting work in 2003. “A Comparative Study on Estimation Methods for Korea’s Natural Rate of Unemployment” provides an empirical basis for informed discussions on unemployment and “jobless growth.” Written in response to rising concern over the foreign exchange market stability in March 2003, “Foreign Exchange Liquidity and External Payment Capabilities of Korea and Its Policy Implications” concludes that a repeat of the 1997 crisis is quite unlikely thanks to Korea’s increased foreign reserves and improved external payment capability. “Real Estate Prices under Low Interest Rates: Implications for Monetary and Tax Policies” analyzes why purchase prices for apartment housing surged in spite of stable rental rates and provides policy recommendations. Some of these recommendations were incorporated into the real estate price stabilization policy adopted by the government on October 29. Finally, reflecting continued concern over the potential side effects of capital market liberalization, “Gains from Currency Convertibility: A Case of Incomplete Markets” shows that the foreign exchange market could transmit the risks generated from foreign countries when markets are incomplete. Section 3 is comprised of studies on public finance and balanced regional development, an issue that has been receiving increased national attention since the Roh Moo Hyun government (“Participatory Government”) took office in February 2003. “2003 National Budget and Policy Agenda” provides a comprehensive analysis of issues connected with inter-governmental transfers and fiscal decentralization. The next few studies in this section provide an overview of short-term to mid-term budget prospects and explore ways to improve the efficiency of public finance. “Quasi-Fiscal Activities of the Bank of Korea” shows that the quasi-fiscal activities of the central bank still remain significant and suggests that these activities be phased out to enhance its independence and improve the transparency of Korea’s public finance. “Economic and Fiscal Outlook: 2004-08” assesses mid-term budget prospects. According to this study, if the increase in discretionary spending can be contained within the limit of nominal GDP growth, the government budget excluding social insurance funds and public funds will achieve a balance, and the size of the national debt relative to GDP will remain at a stable level. Commissioned by the National Assembly, “Budget Guidelines Based on National Priorities for Fiscal Year 2004” provides budget guidelines by policy area and recommends programs designed to achieve national priorities. Finally, “Economic Impacts of a New Capital Construction” estimates that the construction of the new administrative capital will not have a significant effect on GDP and the real estate market. According to this study, as the annual government expenditure on the construction project is expected to max out at 1.5 trillion won, or 1.02 percent of the general account budget in 2010, it is not likely to be a serious burden to the government. Section 4 is comprised of studies on money, banking, and finance. Most of these studies deal with major issues faced by the Korean financial sector in the wake of the 1997 crisis, such as the introduction of market-based risk management and the consolidation of banks. “Credit Insurance as a Financial Assistance Vehicle to Small and Medium Sized Enterprises” suggests that credit insurance, by reducing the risk of bankruptcy due to counterparty defaults, may contribute to improving both the viability of SMEs and the stability of the national economy. “Bank Consolidation and the Financial Risk of the Korean Banking Industry” shows that bank consolidation does not necessarily reduce risks. In fact, the bank-specific risks evaluated in the stock market have a positive relationship with bank-size variables, as investors apparently believe that the assets of larger banks are managed in a more aggressive manner. “Deposit Insurance and the Adequacy of the Insurance Fund” suggests that the government concentrate on reducing the size of the deposit insurance fund by encouraging each member bank to have a better credit rating and strengthening supervision to reduce the severity rate and moral hazard associated with deposit insurance. “Assessing Concentration and Competition in the Korean Banking Industry” shows that the pricing behavior of Korean banks is consistent with perfect competition for the 1996-2002 period, even after the increase in the concentration ratio following mergers. Using minute-by-minute data, “Expiration Day Effects in the Korean Stock Market: Wag the Dog?” shows that there are significant price, volatility, and volume effects on expiration days in the Korea Stock Exchange, contrary to earlier empirical studies based on daily data. Finally, “Transmission of Stock Returns and Volatility: The Case of Korea” provides empirical evidence that there were statistically significant lagged volatility spillovers from Korea to the U.S. during the crisis period. Section 5 consists of two studies on income distribution and welfare. “The Impact of Lifting Liquidity Constraints on the Distributions of Consumption, Assets, and Debts” shows that consumption inequality was reduced in Korea in the post-crisis period as banks made it easier for individual or household borrowers to have access to credit. “Directions for Social Welfare Policy: A Comparative International Study on Income Distribution” advises against quick fixes to improve income inequality and instead recommends poverty reduction measures to protect the most vulnerable groups in society, adding that that the best way to reduce both income inequality and poverty is job creation through sound economic policy. Section 6 is comprised of studies on corporate governance and competition policy, two issues that have become increasingly important in the post-crisis period. “Proposals to Improve the Effectiveness of Korea’s Fair Trade Laws and Regulations” suggests that the Fair Trade Commission streamline laws and regulations under its jurisdiction, close loopholes, and clarify judgement criteria to focus on promoting competition and providing consumer protection. “A Study on Designing the Governance System of Corporate Pensions Plans in Korea” suggests that an independent outside monitor be made to work for the interests of pension holders and that firms be kept separated from the management of pension funds. “Public Enterprise Reform and Privatization: Lessons from Korea” emphasizes that as the effectiveness of privatization crucially depends on the existence of competitive and efficient markets, privatization should be part of a comprehensive program of market-oriented reform. “On Breaking Up Monopolizing Firms in Korea as an Antitrust Policy” emphasizes that before introducing such structural remedies as divestiture, government policies, explicit or implicit, that help form or maintain monopolies should be overhauled. “Developing and Measuring an Evaluation Index for Market Reform” shows that although there has been some improvement in corporate governance and investor protection in the post-crisis period, there still exists large room for further improvement when compared against an international benchmark. In addition, this study also suggests that a large control-ownership disparity found in Korea’s corporate groups can create significant social costs resulting from the controlling shareholders’ pursuit of private interests. Section 7 is comprised of studies on the North Korean economy and Northeast Asian economic cooperation. “’Art and Science’ on Nuancing Conflict” provides a theoretical framework for arriving at a negotiated solution to break a deadlock, with a possible application to negotiations involving North Korea. “Trade Patterns Among East Asian Countries and Its Implication for the Korea-China-Japan FTA” suggests that the FTA among the three countries requires not only the political will but also a fairly complete loop of trade flows among the countries involved. Section 8 is comprised of studies on knowledge economy. “Industry-Science Linkage” provides policy recommendations to build regional innovation systems by promoting university-industry cooperation. “National Science and Technology System” discusses policy measures to improve the national innovation system. Finally, “Economic Impacts of Intellectual Property: Empirical Analysis Using Patent Data” shows that patent acquisition activities have a positive effect on economic growth and improve the productivity and market value of not only the firms conducting such activities but also those of their competitors as well. Section 9 is comprised of studies on public investment management, including both ex ante feasibility studies and ex post evaluation studies. “Report on 2003 Preliminary Feasibility Studies” and “Report on 2003 Feasibility Re-Evaluation Studies” summarize the results of 32 preliminary feasibility studies and 7 re-evaluation studies conducted by KDI in 2003, respectively. “Performance Evaluation System and Guidelines with Application to Large-Scale Construction, R&D, and Job Training Investments” provides detailed guidelines for evaluation. Section 10 is comprised of empirical studies on productivity, industrial structure, and economic growth. “Analysis of Korea’s Industrial Structure Using Time-Series Input-Output Tables” empirically analyzes changes in Korea’s industrial structure in the 1975-2001 period. “On the Inter-Industry Productivity Spillover Effect of Foreign Direct Investment in Korea” shows that FDI has significant inter-industry productivity spillover effects, especially through backward linkages. “Entry, Exit, and Aggregate Productivity Growth: Evidence on Korean Manufacturing” shows that the process of “creative destruction” has a positive effect on productivity, and emphasizes that through effective competition and credit policy, the government should provide an economic environment conducive to such a process. “Exporting and Performance of Plants: Evidence on Korea” shows that the benefits of exports are realized not only through the improvement of total factor productivity but also the improvement of resource allocation. In closing, we would like to thank Sangbong Oh for his logistical support as well as editorial assistance, Kwangsung Kim and Nanhee Kim for their help with English editing, and Hyunae Kim for formatting the documents. Of course, all remaining errors are ours.

Publication Types KDI is the premier institution for comprehensive policy research in Korea. Covering a wide range of research areas including macroeconomics, finance, industry, competition policy, public finance, labor, welfare, global economy, and North Korean economy, KDI delivers data-driven, objective and highly credible policy recommendations to decision makers, rooted in a commitment to building social consensus on national agendas.  ▶ Go to the KDI Research Areas https://www.kdi.re.kr/eng/research/topicList  Research Reports   Research Monograph  Comprehensive research on mid- to long-term economic policies based on theoretical and empirical analysis of the Korean economy  Policy Study  In-depth analysis of important economic issues having policy priority for the purpose of offering policy recommendations  Working Paper Research in progress requiring further study before completion  Issue papers   KDI FOCUS  Analysis on critical pending issues of the Korean economy to enhance public understanding of the economy and provide useful policy alternatives  Analysis of Current Economic Issues  Material that analyzes timely economic issues included in the Economic Outlook  Periodicals   Economic Outlook  Biannually published report on short- to mid-term macroeconomic forecasts and analyses including the analysis of the current economic conditions  Monthly Economic Trends Monthly published report on the analysis and forecast of the Korean economy based on domestic and foreign macroeconomic statistics  Review of the North Korean Economy Monthly published paper on the current status of the North Korean economy and major issues on inter-Korean economic cooperation assisting academia, policy makers and corporate sectors to better understand North Korea  Journal of Economic Policy Semi-annually published professional journal dealing with academic and policy issues relating to the Korean economy  Narakyungje (National Economy) Monthly economic policy maga- zine jointly published with 16 economic ministries and agencies