Anxiety over Globalization in Korea Shi Young Lee* (Chung-Ang University) syl1347@hanmail.net Taejoon Han (GSIS, Chung-Ang University) Sung Hee Jun (Sunchon National University) Date: December 5, 2008 Place: KIEP

“Fears surged in Seoul in April (of 2008) after it was revealed that (President) Mr. Lee had agreed to a less restrictive import deal with Washington than did Taiwan and Japan” NY Times (June 11, 2008) Korean Leader Considers Ways to Rework Government

인포데믹스 명명자 로스코프 회장은 “정보전염병을 막는 특효약은 지식(Knowledge)…” 열린 사회의 적 매일경제신문, 2008년 9월 11일

Motivations 1. Understand how perception about a policy are shaped  the case of Korea-US (KORUS) FTA 2. Determine which side – sources of information or preferences of individuals – have greater influence on shaping perception of a (globalization) policy 3. Analyze how perceived risk (anxiety) may be determined and how perceived risk affect the attitude toward globalization policies 4. Provide future policy recommendations

Traditional Trade Liberalization differs from Globalization - Market opening generates sector specific impact that creates sector specific winners and losers - It is possible to identify potential winners and losers ex-ante - Political process can – though not necessarily will – design credible and effective compensation schemes for injured sectors - Injured sectors often strongly resist such opening in order to obtain the maximum possible compensation - This game of resistance basically determines how to “divide the pie” via the political process (assuming that trade liberalization is a positive sum game)

Globalization’s impact is larger and more complex - Current trend of globalization: outsourcing, opening and restructuring of service sectors, FDI, financial liberalization, and FTAs - Globalization often does not generate sector specific impact  instead, it may generate intra-sector income redistribution effects, and even affect the same occupation differently (Lee, Chai, and Jun 2008) - Impact of globalization not confined to specific sectors Opening and restructuring of service sectors with rapid growth of outsourcing may produce spillover effects on other industries (a la Young 1928)

Globalization is Unpredictable - Globalization thus raises uncertainty at the individual level  Individuals cannot predict how they would fare under the current trend of globalization (Yu 2007) - Due to spillover effects (via outsourcing and service sector restructuring), globalization’s impact tends to be more severe and widespread than traditional trade liberalization No Effective Compensation Scheme - Unlike trade liberalization, unpredictable spillover effects imply that potential injuries to sectors and individuals cannot be identified ex-ante - Without identification, it is far harder to formulate credible and effective compensation schemes  this further increases uncertainty, adding to the cost of globalization

KORUS FTA as Globalization Essence of FTA - FTA greatly enhances the integration of two (or more) economies, further facilitating trade in goods and services Chile-Korea FTA - Chile-Korea FTA has generated opposing – and highly publicized – impact on agriculture (adverse) and manufacturing (favorable) KORUS FTA - FTA negotiations covered not only industrial sectors but also some service sectors - Widespread spill-over effects are likely and this increases uncertainty at an individual level

KORUS FTA as Globalization - Individuals may perceive KORUS FTA as a symbolic step to accelerating globalization - Substantial tariff reduction (with fast growth of outsourcing) along with the possibility of the opening service sectors can severely impact the Korean economy - Since it is unable to identify potential injured, ex-ante, no effective (and credible) compensation scheme can be promised - Uncertainty at an individual level may be substantially increased due to the above reasons

Public Opinion & Globalization - Public opinion also plays an important role in determining the fate of trade policy (Kono 2008) - Policy entrepreneurs often engage in “spinning,” or a strategy to maneuver public opinion toward their own political agenda and platforms (Mullainathan and Shleifer 2005) - Investigate how public opinion is shaped by examining the case of KORUS FTA  Analyze equilibrium perception about a specific policy

KORUS FTA and US Beef Import A Quick Overview - KORUS FTA negotiations were initiated in February 2005 and completed in April 2007, subject to ratification in both countries. - The talks over the US beefs imports were held in 2007 but did not reach the agreements - At the direction of the newly elected President Lee MB, the beef import deal is made because of less restrictive measures demanded by the Korean negotiators and the suspension of US beef imports was lifted in April 2008. - Amid fears of mad cow disease, protests began immediately and spread through the Internet, bringing thousands of citizens to the streets demanding a complete renegotiating of the beef deal - Under growing and intensifying public pressure, the government sought and obtained a compromise (as opposed to a full renegotiation) with the US to exclude beef from cattle 30 months or older - KORUS FTA remains to be ratified by the Korean Parliament

Evolution of a Mass Protest How Protests Evolved - In 2006 and 2007, a popular TV documentary program showed graphic videos of maltreated cows in US slaughterhouses, then reminded viewers of mad cow cases in the US: <Figure 1> The program thus insinuated that renewed US beef imports (via KORUS FTA) can bring the mad cow disease to Korean consumers There were some protests against KORUS FTA and imports of the US beefs in 2006 and 2007, <Figure 2> - Sensing growing interest after the beef deal, a similar documentary program aired another episode on the case of mad cow disease in the US in 2008 - Led by anti-FTA activists, protests over the proposed renewal of US beef imports were relatively modest in scale initially but grew steadily as calls for protest spread through the Internet - Angry (tens of thousands) protestors took the streets and to daily candlelight vigils that lasted over a month, forcing the newly elected President to shift policy and key personnel

Strategies against KORUS FTA - Unlike traditional strategies against trade liberalization (which focuses on the magnitude of injuries), anti-FTA policy entrepreneurs concentrated on an issue that could cause outrage: mad cow disease - This strategy does not address any injured sectors but instead directly appeals to the public at large - Since the nature of this issue raises dread and thus anxiety, the issue can attract vivid attention from anxiety-sensitive consumers - In order to understand how the perception about KORUS FTA policy is shaped, we conduct the following survey

Survey Design Design of Survey: In order to understand how perception about globalization policy (KORUS FTA) is shaped, we use the following questions as dependent variables - Does US beef import increase the perceived risk of mad cow disease? - Are you willing to purchase US beef if imported? - Attitude toward KORUS FTA

Survey Design - Questions related to the characteristics of respondents (i) Age (ii) Gender (iii) Level of education (iv) Level of income - Questions related to the preference of respondents (i) Political orientation (ii) attitude toward the US (iii) attitude toward the current Administration and/or the President - Questions related to the supply of information (i) How many hours do you read or watch news per week? (ii) Main sources of news: newspapers, TV or Internet portal sites? (iii) Proportion of exposure to sources (or TV only, or both, so on) (iv) Which newspaper do you receive at home?

Data & Model Data & Survey Method - Period: September 23 of 2008- September 26 of 2008 - Subjects (i) 500 residents in the Seoul metropolitan area over the age of 20 (ii) 50% of subjects are females- following the population distribution (iii) The age group also followed the population distribution - The survey was conducted by a professional survey company through online Q&A

Descriptive Statistics Frequency Percent (%) Gender Male 250 50.0 Female Age 20s 128 25.6 30’s 143 28.6 40’s 140 28.0 Over 50 89 17.8 Education Middle school 4 0.8 High School 75 15.0 College 369 73.8 Graduate school 52 10.4 Household Income (mil. K-won) Under 20 30 6.0 20-40 189 37.8 40-60 165 33.0 60-80 68 13.6 Over 8000 48 9.6 Political orientation Conservative 14 2.8 Moderate conservative 120 24.0 Moderate 216 42.6 Moderate liberal Liberal (progressive) 10 20.

Data & Model Model - Binary logistic regression was used to analyze the survey data. - A value of 0 or 1 were measured for the three dependent variables, as follows: Y 1 Risk of mad cow higher Unchanged/lower Willingness to purchase purchase Not purchase Support KORUS FTA Support Not support

Some Preliminary Data (Dependent Variables) Frequency Percent N Increase in perceived risk No Change 82 16.4 500 Increasing 418 83.6 Willingness to purchase US beef Buy 145 29.0 Do not Buy 355 71.0 Support for KORUS FTA Support 178 35.6 Resistance 322 64.4

Determinants of perceived risk of mad cow disease Dependant Variable : increase in perceived risk Variables Beta sig. Constant 5.438 0.062 Gender (male=0, female=1) 0.142 0.645 Age -0.006 0.672 Education 0.058 0.850 Household Income 0.197 0.207 Support Lee MB administration -1.179 0.000 Globalization should accelerate -0.260 0.297 Support Pres. Bush -0.675 0.014 Political orientation 0.454 0.018 Hourse devoted to news -0.066 0.159 Read progressive newspapers 0.411 0.212 Proportion spent on newspapers -0.009 0.726 “ TV 0.724 “ the Internet -0.011 0.673 “ Acquaintances 0.682 -2Log likelihood 308.314 Cox&snell R2 0.224

Results from Survey Perceived Risk - Perceived risk increases with unfavorable attitude toward the Lee MB and the Bush administration - Respondent identifying themselves as progressives tend to perceive higher risk of mad cow disease - Sources of information and individual characteristics did not significantly affect perceived risk

Willingness to purchase US beef Observed Predicted Yes No Percentage Correct (%) 73 72 50.3 18 337 94.9 Overall Percentage 82.2 Variables Beta sig. Dependant Variable : willingness to purchase Constant 3.156 0.018 Gender (male=0, female=1) -2.098 0.011 Increased risk of mad cow (increase=1, unchanged=0) -4.075 0.000 Interactive term (Gender*Increased risk of mad cow) 1.505 0.083 Indirect consumption of US beef -0.867 Age 0.030 0.013 Education 0.373 0.117 Household Income 0.142 0.240 -2 Log Likelihood 417.042 Cox&Snell R square 0.309 Nagelkerke R square 0.442

Results from Survey Perceived Risk & Consumption Pattern - Respondents having greater perceived risk of mad cow disease are less willing to purchase US beef - Females are less willing than males to purchase US beef - The willingness to purchase the US beef rises with age

Determinants of support for KORUS FTA Dependant Variable : support for KORUS FTA (support =1, oppose=0) Variables Beta sig. Constant -1.838 0.400 Age 0.009 0.444 Gender (male =0, female=1) -1.112 0.000 Education -0.085 0.735 Household income 0.263 0.030 Support Pres. Lee MB 0.676 Korea-US relations must be more equal 0.123 0.576 Globalization should accelerate 0.078 0.698 Support Pres. Bush 1.059 Political orientation -0.352 0.022 Perceived risk of mad cow (increase=1, unchanged=0) -1.041 0.003 Hours devoted to news (per week) 0.050 0.226 % Newspaper -0.015 0.396 % TV -0.019 0.249 % Internet -0.009 % Acquaintance -0.012 0.601 Read progressive newspapers -0.206 0.416 -2Log likelihood 445.322 Cox&snell R square 0.317

Results from Survey Perceived Risk & Attitude toward KORUS FTA (Globalization) - Subjects who support the Lee MB and Bush administrations also tend to support the KORUS FTA (and globalization) - Higher income level is associated with support for the KORUS FTA - Higher perceived risk of mad cow disease is associated with stronger opposition to globalization - Respondents identifying themselves as progressives tend not to support globalization policies

A Framework of Perception Game Game of Perception - Interaction between demand and supply of information determine the equilibrium perception of a specific policy Supply side - Information suppliers (news media, the Internet, acquaintances) provide information - Policy entrepreneurs often have an incentive to manipulate public perception (Mullainathan and Shleifer 2005) Demand side - Individuals are reluctant to adopt new information that is inconsistent with their beliefs and sometimes look for evidence to support their beliefs  Confirmation bias often plays an important role in determining the equilibrium perception (Rabin and Schrag 1999) - Preference of individuals also help shape their perceptions

A Framework of Perception Game <Figure 3> A B C D E F a b c x y z

A Framework of Perception Game - <Figure 3> Suppose that A through F represent a set of information – or signals – available for a specific policy (say KORUS FTA) and a~c & xyz represent beliefs held by a particular individual – Assume that the information “A” and belief “a” can be matched and “B” and “b” so on - Some information can be made visible than others  either by effective spinning or sensitivity of issue itself - In this example, suppose that signals B and D are either sent by policy entrepreneurs to a group of individuals or happen to be more visible - However, the group (or the individual) chooses only signal B in forming their perception about this policy in question This individual does not or cannot relate to a set of beliefs associated with signal D and thus rejects it - That is, individuals may rely on a subset of information set  The equilibrium perception about a specific policy heavily relies on one’s willingness to accept the information supplied by the market

Discussion of Survey Results Sources of Information (Suppliers) - Sources of information supply information regarding a particular policy - In doing so, policy entrepreneurs can target an anxiety-prone issue (mad cow disease)  this strategy can capture attention from individuals (Caplin 2003) - Those individuals can focus on the issue when outrageous and uncontrolled issue/message is disseminated But this does not mean that anxiety level will be automatically raised - Our survey results indicate that unlike Gentzkow and Shapiro (2004), the sources (or suppliers) of information do not matter much in shaping the equilibrium perception

Discussion of Survey Results Preferences - Those who are unfavorable toward, for example, the current administration can relate this message to confirm their belief and find a reason (via self-persuasion) to oppose to the policy (executed by the current administration) via associative thinking - Associative thinking transfer of information from one context to another where the information has almost no value (Mullainthan, Schwarzstein, and Shleifer 2008) In this case, political orientation or favorability toward the current administration may function as a mechanical engine for associative thinking - Associative thinking can play a powerful role in shaping perception because individuals feel that they have digested the information by themselves  They may feel that the shaped perception is self-generated and thus proprietary

Discussion of Survey Results Preferences - 90% of the respondents prefers more equal partnership with the US This demonstrates nationalistic sentiment of respondents - Since the beef deal in April was less restrictive than Taiwan and Japan, the respondents felt that the current administration “gave in” US demands - In this case, Japan and Taiwan serve as a reference point to the eyes of respondents Any deal less than this reference point can be perceived as unpatriotic deal - This (seemingly unpatriotic) deal raised the anxiety level by instigating fear and sparked the anger of nationalistic South Koreans Hence, massive street protests

Discussion of Survey Results Perceived Risk - Due to political orientation and nationalistic sentiment, some respondents may perceive high risk (anxiety) - In our survey, 83% of the respondents perceive that the risk of mad cow disease is increased if US beef import is allowed  The perceived risk is greatly exaggerated when compared to actual risk - This perceived risk may be associated with a dread factor: The possibility of mad cow disease can stimulate political orientation in their backgrounds and nationalistic sentiment and increase anxiety level The more anxious, the less precisely people tend to calculate the probability of risk: probability neglect (Sunstein 2002)

Discussion of Survey Results Consumption Pattern - The condition for not purchasing US beef: (p*-p)> 2gb/H p*: perceived risk from consuming US beef p: perceived risk from consuming domestic beef 2g: price gap between domestic and US beef b: benefits from consuming beefs H: health

Discussion of Survey Results - Perceived risk plays an important role in determining unwillingness to consume US beef - Higher perceived risk is the necessary condition for not consuming US beef p*>p - Females claim that they purchase less US beef since they care more about health of their families, H, given the risk perception Data indicates that the females tend to feel the same risk but will consume less

Discussion of Survey Results Anxiety & Globalization - Perceived risk (anxiety) is the one of the most important factors in the political opposition to globalization policies - Another important factor is political orientation As people feel that the current administration gave in to US pressure, respondents with negative attitude toward the current administration oppose globalization via nationalistic sentiment political orientation and nationalistic sentiment complement with each other in political opposition to globalization policies - As females are less willing to consume US beef, they are more likely to oppose to KORUS FTA

Summary of Results Findings - Sources of information appear to be not so important in influencing perceived risk and thus attitude toward globalization - Political orientation and nationalistic sentiment provide the key determinant of perceived risk - In return, anxiety (perceived risk) determines the attitude toward globalization - As a result, the willingness to accept select information may be more important than source of information in determining the equilibrium perception of globalization

Summary of Results Rationales - The KORUS FTA – a globalization process – is multi-dimensional and complex, covering a wide range of issues and affecting many sector; as such, it is difficult for individuals to relate to any particular dimension - Nationalistic sentiment and political sentiment raise anxiety and in return they determine the attitude toward globalization policy - A priori belief (confirmation bias) can be important in determining the support or opposition to a policy ion bias to the danger of mad cow disease and is likely to oppose the policy

Policy Implications Reflections - This paper provides a framework for how equilibrium perception about a policy may arise - The key mistake was that the current administration had made a less restrictive beef import deal than Japan - This instigates nationalistic sentiment and raises anxiety level associated with the US beef imports - In the future, negotiators and policy makers should avoid such mistakes if they want to effectively deter anti-globalization movements

Policy Implications Policy Recommendations for Globalization - In pursuing globalization policies, it is likely that there exist multiple equilibria In this case, effective expectation coordination can be important in lock in to the equilibrium of globalization with low resistance (rather than with high resistance) - “Starting-small & tailoring” approach can lead to such equilibrium

References Caplin, A. (2003), "Fear as a Policy Instrument," in Time and Decision edited by Lowenstein, G., Read, D., and R. Baumeister. Gentzkow, M. and J. Shapiro (2004), “Media, Education, and Anti-Americanism in the Muslim World,” Journal of Economic Perspectives, 18(3): 117-133. Glaser, E. (2004), “Political Economy of Hatred,” Quarterly Journal of Economics. Kono, D. (2008) “Does Public Opinion Affect Trade Policy?” Business & Politics, 10(2) Lee, S. Chai, S. and S. Jun (2008),”On the Analytics of Resistance Tactics to Korea-US FTA Strategies,” a working paper. Levitt, S and S. Dubner (2005), Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, William Morrow, New York. Mullainathan, S. Schwartzstein, J. and A. Shleifer (2008), “Coarse Thinking and Persuasion,” forthcoming in Quarterly Journal of Economics. Mullainathan, S. and A. Shleifer (2005), “Media Bias,” American Economic Review, Rabin, M. and J. Schrag (1999), ”First Impressions Matter: A Model of Confirmatory Bias,” Quarterly Journal of Economics, 114(1): 37-82. Rodrik, D. (1993), "The Positive Economics of Policy Reform," American Economic Review, 83(2): 356-361 Sunstein, C. (2002), Risk and Reason, Cambridge University Press Yu, Z. (2007), “The Fear of Competitive Pressure of Globalization and Outsourcing,” a working paper.

<Figure 1>

<Figure 2> Mad Cows are coming!