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The Role of Koreas Logistics Centers

in Northeast Asia in a Changing World

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 2009.12.8  (Assem Hall)

Key note Address

Chairman, Korea Forum for Progress


 

Introduction

It is a singular honor for me to address this distinguished audience on a subject related to the theme of this conference. The title of my presentation may look familiar to most of Korean audience because I have written and spoken on the subject in a number of occasions. However, I thought I may repeat my remarks today for the benefit of the guest participants from abroad who may need a background information regarding development of logistics centers in Korea together with a Korean perspective on the changing economic conditions in the world and Northeast Asia in particular. 

 

Center of Gravity of World Economy is shifting to Asia

As we are well aware, it has come into vogue to say that the center of gravity of the world economy is shifting from the US and Europe to Asia. Early in 1982, futurologist John Naisbitt wrote in his book Megatrends that one of the megatrends in the 21 century is the shifting of center of gravity in the world economy and culture from the West to the East. His prediction gained force in recent years due to the fact that India and China maintained a high growth pitch in spite of the global financial crisis started in 2007, characterized by general economic stagnation in almost all market economies.

Looking at statistics, Asia in 2008 shares about 60% of World population, 28% of world GDP,  26% of world export, 24% of World imports and more than 50% of foreign exchange reserves. 1

On the basis of trend analysis, Jeffrey Sachs, among others, held that China is likely to overtake the U.S. economy in size by mid-century. And as the world's economic center of gravity shifts to Asia, U.S. preeminence will inevitably diminish. 2[ Last year, the US National Intelligence Council reported that the share of BRICs (Brazil, Russia, India, China) in the World GDP will become equal to that of G7 (US, Japan, Germany, UK, France, and Italy) between 2040-2050, and China will become the second largest economy in the World. 3 Goldman Sachs also   predicted that China will become the worlds largest economy by the year 2030, characterized by the worlds largest importer of natural resources as well as  producer of air pollutants. Goldman Sachs Chart shows that in 2050 only the U.S remains in G7, with Japan and all European members replaced by BRICs plus Indonesia and Mexico4

 However, this does not mean that Asian people will become economically better off than Americans or Europeans. Jeffrey Sachs noted that China would reach about half the U.S. per capita income level by the year 2050, while its projected population of some 1.4 billion will be about 3.4 times the U.S. population of about 400 million, while India's per capita income would reach a little more than a quarter of the U.S. level by 2050.5

 

Northeast Asia is a Focal Point of Asia

It should be noted, however, that Northeast Asia defined as including China, Japan, Korea, Hong Kong, Taiwan, Mongolia, North Korea, and Eastern Siberia, is predominant in Asian economic picture. In 2008, 65% of GDP in Asia (excluding Eastern Siberia due to lack of data) was generated in Northeast Asia, which also accounted for 81% of Asian exports ($3.2 trillion out of $4 trillion) and 76% of Asian imports.

NEA also stands out in economic size in a long term outlook. India is the  biggest economy outside of Northeast Asia, which would rank the third in the world in size of GDP in 2050, Yet, her size will be about half of Chinese size. (Goldman Sachs), and Chinas per-capita income would also reach about half of the U.S. level. while Indias per-capita income would reach a little more than a quarter of the U.S. level, (Jeffrey Sachs). Taking into account economic prospect of other smaller countries in Asia besides India and China, one may say that the center of gravity in the world economy is really shifting to NEA.

 

Implication for Korea

The implication for Korea of changing conditions in Northeast Asia and the world is self-evident. Already Koreas single largest export market has shifted from the US to China beginning in 2003. China now accounts for about of one quarter of Koreas total Exports. On the other hand, as China has become a global manufacturing base with a rapid progress in import substitution, Koreas traditional manufactured goods have lost competitive edge in the Chinese as well as the world market, and Koreas current major export items may meet the same fate in the years to come.

As a word of encouragement to Korean business men and women, I may offer a reflection that no country in the world, however large and diverse, can be self-sufficient and almighty in international competition. China has and will have lines of production in which it has no comparative advantage, and there will always be niche markets in which Chinese industries fails satisfy needs of its own producers and consumers. If Korean businesses explore to make up these deficiencies they will find more than enough business opportunity with China, given the enormity of population and market size.

Currently Koreas major export items comprise parts and semi-finished goods based on technological advantage. This implies that Korea has impelling need for going ahead of China in technological advancement at least in some line of production.

Needles to say, Chinas market is important not only for Korea but also for the rest of the world as well. This implies that Korea can play a bridging role between China and the rest of the world taking advantage of Koreas geographical and cultural vicinity to China. This, of course, depends on the precondition that Korea offers a palatable business environment to foreign investors in terms of facilities, services, and government policies.

Koreas Logistics centers in Northeast Asia

Fortunately, Korea has another avenue through which to survive and prosper, this is to say that Korea can play the role of logistics centers for Northeast Asia. There are several reasons why Korea has to assume this role.

In the first place, population of China is expected to increase from the present 1.3 billion to 1.4 billion in 2050. When the rapid economic growth entails rapid increase and diffusion of income, more and more of Chinese people will wish to visit foreign countries for sightseeing or business purposes.  The world Tourism Organization predicted that outbound tourists from China will exceed 100 million and the number of inbound tourists will be the largest in the world around 2050. The rapidly increasing number of Chinese tourists, in addition to tourists from other countries, will visit or pass through Korea calling for diverse services of Korean businesses for their conveniences.

Secondly, Chinas trade volume is expected to increase from $2.6 trillion in 2008 to $45 trillion in 2050. Ever increasing volume of cargoes will be loaded and unloaded in Koreas marine and air ports. That is why Busan and Kwangyang are already functioning as one of the major logistic hub in Northeast Asia. Busan is known to be the fifth largest in the world in handling container cargoes. Inchon Airport is one of the largest in Asia with Korean Air ranking the first in the world in the volume of cargo transport.

Thirdly, Korea is situated in the epicenter of Northeast Asia, making it easier for Busan and Inchon to link up to all of the air and marine ports in the world. In addition, Korean ports located in the west coast of Korean peninsula and Chinese ports in the north edge of Yellow Sea can link up together, eventually forming a Yellow Sea Economic Zone in the coming years.

To illustrate geographical advantage of Korean logistics centers, export goods produced in Northern part of China are currently loaded in liners at Tsingtao, Tientsin and Dalian in the Northeast coast of China. The liners bound for North America pass through Korea Strait and sail north to America. They may stop at Busan for various logistic services. 

Another example relates to Japan. Because the ports (Nigata, Thruga) located in west coast of Japan have to go through Korea Strait making a call at Busan or Kwangyang.

As for Airlines, there are 62 cities with population of more than 1 million which can be reached in less than 3 hours from Inchon. Creating a network of low cost carriers connecting numerous cities in the region deserves serious consideration, subject, of course, to the Open Sky Agreement among countries in the region.

Finally, regional economic cooperation has an important bearing on the role of Koreas logistics centers in Northeast Asia. International discussions have been underway with respect to building networks of Asian highways, Asian rail ways, and pipelines of natural gas in the region, and the air and marine transport network in the region which is the main topic in this conference require close cooperation among countries in the region for mutual benefit.  

Unfortunately these proposals still remain in NATO by which I mean No Action Talk Only in the absence of institutional vehicle by which to expedite the proposals into action. This situation, among others, moved me to propose some years ago to establish a Northeast Asia Development Bank6 as an instrument for economic cooperation in the region. Although the time frame available does not permit me getting into this subject, I am hoping that the day will come when those cooperative proposals come to a reality and Koreas logistics centers play even greater role not only for the region but also for the rest of the world.

 

 Conditions for the success of logistics centers    

The favorable geographic location, however, by itself does not guarantee success of logistics centers. It must be equipped with the excellence in both hardware and software put into effect in the logistics centers. This awareness led some members of the [Korea Forum for Progress] including myself to make an observation tour at the major logistics centers in the world, including Amsterdam, Rotterdam, Hamburg, Antwerp, Singapore, and Hong Kong. As a result, we were able to derive what we considered to be conditions for the successful logistic center, which can be itemized as follows.

  1. The terminals of sea port, air lines and land transportation are located in the same harbor area so that the services of the three means of transportation are closely intergrated, making function  of the logistics center as a whole highly efficient.
  2. The logistics centers are characterized by a cluster of multinationals stationed for storage, distribution, and supply chains.
  3. The logisttics centers were backed by a nearby metropolitan city with mass consumption or production.
  4. Provision of complete and efficient hardware and software including minute supporting policies of the government.
  5. Creation of environmental and social conditions attractive to business firms and personal living.
  6. Advance public investment to attract private investment.
  7. Public education and training of professionals for logistic services.
  8. Government supported training program for bilingualism.
  9. Lasting Peace in labor-management relation.
  10. Political stability combined with wide public understanding and   support for strategic economic policies of the government. 

 

 Creation of Free Economic Zones (FEZ) in Korea

 To the great pleasure of Korea Forum for Progress, our National Assembly passed the law, Act of Free Economic Zone in November 2002. Under the law, 6 cities thus far have been designated as free economic zone, in which regulation for labor union was changed in favor ofr foreign investors, official documents were to be prepared bothe in Korean and English, and tax concession was accorded to foreign investors with 100% exemption of corporate tax, acquisition tax, and property tax, followed by 50% exemption in the next two years. As a managerial head office, the FEZA(Free Economic Zone  Administration) was established in each district headed bu a high ranking

 

Progress in FEZs

More than 6 years have passed since the introduction of the Law and initiation of the FEZs. In the mean time considerable progress has been made in building up hardware facilities including high rising buildings and the worlds sixth longest bridge as can be seen in Inchon, yet there is criticism that foreign investment induced thus far to the FEZs is much less than expected. Foreign investment received by the major FEZs (Busan, Kwangyang, Inchon) amounted to $1.6 billion up to October this year, although the keen interest shown in the form of contract or MOU is quite encouraging. The slow progress in foreign investment may mean that provision of infrastructures in terms of hardware and software in the FEZs is not yet adequate enough to activate foreign investment. However, we have noted earlier that advance investment is a necessary condition for success of logistics centers.

 At any rate, there has been much discussion about the shortcoming of the law and government policies.  It was pointed out that, constructive as it was, the law failed to resolve highly complex regulations related to land development, preservation of national cultural objects, environmental protection, and, above all, failed to bring about speedy and effective coordination of differences among central government, local government and the FEZA. These criticisms moved National Assembly to amend the existing law into a new Special Law, providing a more solid basis on which each ministry concerned could go further to reduce regulations. However, the result is yet to be seen.

 

The Model of Free Economic Zone

At this juncture I may illustrate what real free economic zone is like. Let me cite an example in Amsterdam which my team visited about 7 years ago.

 

Policy Recommendation

Specific situation of one country may make it difficult to follow the example of another country, yet Amsterdam surely provides a model of free economic zone to be looked upon by other countries. To be sure, Korea has realized some of the conditions found in Amsterdam. Yet she is now well advised to review its practices regarding the FEZ in view of the changing conditions at home and abroad. What I would like to see in this regard is the following policy measures deemed necessary to renovate the FEZ.

 

  1. The governent ministries should take more drastic steps to minimize regulations on the basis of the new Special Law. 
  2. Central government should delegate its power of decision to local government and the FEZ as much as possible so that wastful red tapes are eliminated.
  3. Financial aid of central government to local government for the FEZs should be concentrated on a few FEZs to get them ready as quickly as possible to receive foreign investment.
  4. A new strategy is needed to meet demand for a network of Low Cost Carriers in the region, and to build up Koreas global network of logistic services
  5.  Current regualtion restirictiing foreign innvestment and operation of schools and hospitals in the FEZ to non-profit organization should be removed.

 

.    Concluding Remarks

    In closing, I sincerely welcome this conference designed to discuss prospect and issues confronting Air and Marine transport industry in the context of upgrading Koreas logistic services for Northeast Asia. I have no doubt that the eminent scholars and experts present here today will provide us with valuable guidance in our path to meet the foreseen challenges ahead.

         

Thank you for your attention. 


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  1.    World economic outlook database,  IMF. 57 countries are listed for Asia. Trade figures are from Global Insight
  2.  Jeffrey  D. Sachs, U.S. Economy in Size, Fortune, (Jan. 12 2004)
  3.   National Intelligence Council, Global Trends 2025: A Transformed World (Nov. 2008)
  4.   Goldman Sachs, Global Paper 170, 2007
  5.  Jeffrey Sachs, ibid.
  6.   For the explanation of this proposal, the readers are referred to my articles in my home pages: www://dwnam.pe.kr.   

 

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