International Economy 11 International Economy Week 7 Prepared by Shi Young Lee* (Chung-Ang University)

Contents 1. Infant Industry Protection Argument and Strategy 2. Political Economy Approach - FTA - What’s so Special about Agriculture? 3. Perception Game & Policy: Application to Korea-US FTA

Perception Game & Policy  Some Background: Korea-US FTA - Due to bargaining impasse of Japan-Korea FTA, Korea- US FTA is pursued next by the government - Preliminary intuitions: (i) Economic gains may be substantial due to the size of the US economy (ii) At the same time, Korea-US FTA entails complicated issues including restructuring service sectors and reforms due to the influence of US standard

Perception Game & Policy  Possible Economic Gains from Korea-US FTA - Economy size: Size of the US economy & its interrelated markets is huge and thus can generate substantial gains from trade for Korea - Geographical proximity: Not to close to each other geographically but the distance was never a problem to both countries - Reform possibility: Korea-US FTA can invite institutional reforms for our ailing industries especially for agricultural and service sector industries: Ahn & Lee (2007)  At the same time, Korea can adopt global standard and can lead to the reforms of the service sector - Trade expansion with technological advanced countries (via the rise of inter and intra industry trade) can lead to technological advancement of technologically inferior countries

Perception Game & Policy  Possible Political Costs - Public sentiment toward America: Bi-modal distribution toward Americanism  Some are pro and some are anti to the US with the rest neutral - Resistance by inferior industries (i) The analysis demonstrates that the inferior and highly protected industries are most likely to be the strongly resistant industries: Lee & Jun (2004) (ii) According to this rule, we predicted that beef and tobacco (and some agricultural products) are highly resistant industries (iii) Rice is not included in the list since the exemption is expected

Perception Game & Policy  Summary - Economic gains for Korea can be substantial - Political cost can stem from anti-American sentiment (however, bi-modal) and selected resistant (especially beef) industries (but fewer than expected)

Perception Game & Policy  Awareness of Policy Issues - Awareness is the precondition for participation and democracy because participation is essential to democracy but many policy issues today are often too complicated to understand - Involvement in (many) policy issues may be low and thus voters may suffer from imperfect knowledge - Without awareness, appropriate participation cannot be possible  fragile democracy - Korea-US FTA is a prime example that may suffer from the awareness problem

Perception Game & Policy  Korea-US FTA and Awareness Problem - In the case of Korea-US FTA, many individuals may suffer from individual specific uncertainty due to service sector liberalization coupled with institutional reforms - This is unlike to the previous FTA (Chile-Korea FTA) where inter-industry trade was the main issue (traditional trade liberalization) - With severe awareness problem, the susceptibility to persuasion is high  Persuasion game is important in determining the policy outcome and the success/failure of the policy - Name of the game boils down to a perception game via effectively persuading voters

Perception Game & Policy

Perception Game & Policy  Determination of Perception: Equilibrium phenomenon between demand for and supply of information - Demand side (Confirmation bias) (i) Belief (such as hatred) plays an important role in determining one’s demand for a particular information (static) (ii) Examples: anti-Japanese sentiment, party preference (iii) Past hatred or future threat pose negative sentiment for another country

Perception Game & Policy - Supply side (i) Policy entrepreneurs (media outlets, government, political parties, & NGOs) via media often influence public opinion for their own benefits (ii) They do so for their own benefits and personal gains and suppliers often spin their stories to achieve their purposes [Glaser (2005) and Mullainathan & Shleifer (2005)]

Perception Game & Policy  Persuasion Game played by Anti-FTA groups - Anti-FTA groups effectively instigate anti-American sentiment and relate it to the danger of mad-cow disease - Examples of Anti-FTA posters: "The First Gift of Korea-US FTA: Mad Cow Disease is coming from the US": "Mad Cows are coming": “Human BSE: It can be the reality for Korea!": Ohmynews article (11/28/06) - A popular TV documentary program shows a couple of dirty slaughter houses in the US and emphasize the case of BSE (mad cow disease) in the US Then implicitly relate them to Mad Cow Disease and scare Korean consumers to increase the opposition

Perception Game & Policy  Survey - Survey conducted in order to analyze which side (demand vs. supply) influences perception more - Survey considers individual characteristics, demand and suppliers - In order to understand how perception about beef imports and KORUS FTA is shaped, we use the following questions as dependent variables (i) Does US beef import increase the perceived risk of mad cow disease? (ii) Are you willing to purchase US beef if imported? (iii) Attitude toward KORUS FTA

Perception Game & Policy  Results from Survey - From the survey, the perceived risk of mad cow disease is greatly exaggerated when compared to the actual risk - The perceived risk increases with unfavorable attitude toward the current Lee Myung Bak and the Bush administrations - Respondents identifying themselves as progressives tend to perceive higher risk of mad cow disease - Sources of information and individual characteristics do not significantly affect perceived risk and attitude toward FTA

Perception Game & Policy  Example of Perception Game

Perception Game & Policy  Rationale for the difference from Gentzkow and Shapiro (2004), - KORUS FTA is a multi-dimensional and complex, covering a wide range of issues and affecting many sectors  High individual specific uncertainty – Because of high level of individual specific uncertainty, support/opposition decision does not come from economic impacts but on the perception - A high proportion of Koreans may enjoy higher education and income levels than the citizens from Middle East  Due to wide use of internet and intense competition among information suppliers, both conservatives & liberals are exposed to the similar sources of information  - The game boils down to the choice of information given wide range of information supplied

Perception Game & Policy  Discussion of Results - Choice of Information matters  Individuals (respondents) who are unfavorable toward the current administration can relate the fear-inducing message to confirm their beliefs and find a reason (via self-persuasion) to oppose to the policy - The choice may be based on their preferences because they like to have their beliefs or preferences confirmed by what they read and watch

Exposure to Sources of Information by Political Orientation

Perception Game & Policy  Policy Recommendations - Relatedness is a key to preference determined policy outcome - Instigation of nationalistic sentiment (for example) can lead to confirmation bias  policy makers should identify indirectly related issues ex ante and take precautions in dealing with them - Since the perception game boils down to the confirmation bias or preference determined, State’s restriction of certain information flow can only backfire or even increase the resistance because restriction can only strengthen the beliefs held by the individuals

Perception Game & Policy  Future of Korea-US FTA - We still wait Korea-US FTA to be ratified in both countries  it is still uncertain whether this will be ratified or not (as it is) - If fail to be ratified, what will happen? - How to prepare each contingency?  Should consider path-dependent FTA strategy