Thirteen years ago next month, the Asian financial crisis hit South Korea with full force. With the country’s big conglomerates and banks tottering under massive debts, the stock market plunging and the won losing half its value in a matter of weeks, the government went cap in hand to Washington for an International Monetary Fund–led $58 billion bailout. Kim Dae Jung, the opposition leader who had derided the idea of a bailout in his presidential campaign, won the December 1997 election and promptly endorsed the deal, an about-face that symbolized the country’s humiliation. South Korea, like Thailand and Indonesia before it, had bowed to the demands of the IMF, Western governments and financial markets, and accepted painful austerity measures and devaluation as the price of its profligacy.
This month, President Lee Myung Bak welcomes the Group of 20 leaders to South Korea for a summit meeting that underscores just how radically the global economic order has changed. Asian economies have rebounded swiftly from the global recession and show few of the vulnerabilities of the late 1990s. South Korea, for example, is expected to grow by about 6 percent this year, and the country has amassed $290 billion in foreign exchange reserves as insurance against financial turmoil. By contrast, the U.S., Western Europe and Japan are the sources of financial instability as they struggle with sluggish growth and massive deficits.
In this topsy-turvy world, South Korea and other emerging economic powers, such as China, India and Brazil, are determined to develop political influence commensurate with their commercial clout and gain a greater say over the management of the global economy. They won an early victory last month when G-20 finance ministers, meeting in Gyeongju, South Korea, agreed to shift more than 6 percent of the IMF’s voting shares from the world’s advanced economies to emerging and developing economies, and to award two IMF board seats currently held by European nations to developing countries. G-20 leaders are expected to endorse those reforms at their meeting in Seoul this month.
Agreement on long-stalled reforms at the IMF is welcome progress, but developing a new economic policymaking order promises to be fraught with difficulty. Advanced and emerging countries are far apart on the kind of adjustments needed to reduce global imbalances and on the role that currency movements should play in the process. The G-20 itself is an unwieldy body, so large that achieving consensus on contentious issues is extremely difficult. “Some of those countries that we call emerging markets are driving the world economy,” says Jim O’Neill, London-based head of Goldman Sachs Group’s global economic research. “The underlying dilemma is, the dominant countries are losing their degree of importance, and they are not prepared to make space for the others. They need to give them space in the world economy.”
Still, the Seoul summit represents a historic development, both for the G-20 and for South Korea. The G-20 has superseded the old Group of Seven/Group of Eight bloc since November 2008, when it held its first heads of state meeting, in Washington, to respond to the global financial crisis. The decision by the U.S., Europe and Japan to expand the leadership table was a belated acknowledgment of the growing role played by emerging markets in the world economy. Emerging and developing economies are expected to grow by 7.1 percent this year, led by China and India with expansions running at about a 10 percent pace. That dynamism compares very favorably with the tepid 2.7 percent growth rate of advanced economies forecast by the IMF.
South Korea’s presidency of the G-20 — the first time a country from outside the G-8 has hosted the group — marks another step in the growing influence of emerging economies. The Lee government is seizing the moment to highlight South Korea’s dramatic rise from an impoverished postwar state in the late 1950s to an industrial and trading power. The country is rapidly approaching the wealth levels enjoyed by the old G-7 club. Its per capita gross domestic product, which stood at $9,977 in 1988 in purchasing-power terms — less than a third of the U.S. level — hit $25,493 last year, or 60 percent of the U.S.’s. The summit, in short, is the political equivalent of the 1988 Seoul Olympics in terms of putting South Korea and its achievements on the global stage.
“Korea has advanced from the ashes of war to a near-advanced country,” says Kim Hak Joon, former chairman of Dong-a Ilbo, one of Seoul’s leading newspapers. “It is the first country whose status has changed from aid recipient to aid donor.” Suh Nam Pyo, president of the Korea Advanced Institute of Science and Technology, the country’s leading producer of scientific and engineering graduates, says South Korea’s rapid return to health after the Asian crisis should enable the government to play an active role in coordinating G-20 policies to respond to today’s economic problems: “There’s a lot Korea can offer as to how one can deal with crisis, when you look at the speed with which Korea recovered.”
Most emerging-markets countries share a concern about the recent surge in international capital flows caused by the Federal Reserve Board’s low-interest-rate policy and quantitative easing. Those policies are flooding many emerging markets with money, putting upward pressure on their currencies and threatening to create new asset bubbles. “There is still a risk for countries like Korea, Indonesia and Turkey,” says Lim Won Hyuk, who directs policy research at the Korea Development Institute, an influential Seoul think tank. All of them potentially “are susceptible to reversals of capital flows,” he adds.
Such concerns explain why most emerging countries, including South Korea and China, continue to amass unprecedented levels of currency reserves to guard against future instability, notwithstanding the Seoul government’s collaboration with the IMF on a new precautionary credit line for vulnerable countries and proposed liquidity-pooling arrangements with Asian central banks. Those mechanisms are intended to encourage governments to rely on IMF resources in future crises rather than continuing to build their currency reserves. “People perceive the IMF as acting on behalf of the U.S. and Europe,” says Goldman’s O’Neill. “And many of them see the IMF as giving bad advice. They don’t want to be in the position of depending on the IMF.”
Beyond their concerns about capital flows, the emerging-markets countries are far from a homogeneous bloc. As the world’s second-largest economy, but with hundreds of millions of people still living in poverty in its interior, China is destined to play a leading role in the G-20 and serves as a link between the developed and developing nations. But China’s export-oriented growth model and its policy of minimizing any appreciation of the renminbi against the dollar has caused tensions with emerging countries with more-flexible exchange rates, such as Brazil, India and South Korea. Brazilian Finance Minister Guido Mantega highlighted these tensions recently when he complained that countries were engaged in currency wars in a bid to sustain their own economies.
As summit host, South Korea is pulled between its long-standing political and military alliance with the U.S. and its increasing economic integration with China, where many of its chaebol have established manufacturing operations. “Korea is more dependent on China than on Japan,” says Jang Ha Sung, dean of the business school at Korea University. “Korea should collaborate with China on G-20. When they work together, the G-20 should pay more attention to Asia than to traditional relationships.”
At the Gyeongju meeting, G-20 finance ministers and central bank governors did endorse a U.S.-proposed plan calling on members to curb persistent current-account deficits and surpluses. Such imbalances are widely believed to have played a role in the recent financial crisis and are behind the rise in currency tensions in recent months. But the agreement was left purposefully vague and did not include a proposal that imbalances be kept below 4 percent of GDP; although Washington had sought this, Germany and China — both of which are running larger surpluses — adamantly opposed it.
Presidents Lee, Barack Obama, Hu Jintao and other G-20 heads of state can be counted on to paper over the differences with diplomatic language at Seoul, but analysts are skeptical about the prospects for genuine policy coordination any time soon. Finance ministers have charged the IMF with the tasks of examining how various countries’ policies, such as the big U.S. budget deficit and China’s pegging of its currency, affect one another’s economies and recommending measures to reduce imbalances and put the global economy on sounder footing. IMF economists did just that for the Gyeongju meeting, calling on advanced nations to adopt credible measures for reducing their budget deficits in the medium term and advising emerging economies to accelerate reforms aimed at boosting domestic demand and to allow faster exchange rate appreciation. Few economists would disagree with that prescription. The only trouble is, it was just the latest iteration of policy advice that the Fund has been offering for several years, so far with little effect. The IMF has no power to enforce its recommendations except with countries like Greece that are dependent on its lending. As one Fund official puts it privately, “No one can be compelled to do anything.”
To some observers, the lack of tangible progress on easing global imbalances and currency tensions reflects flaws in the G-20 makeup. The group clearly has more political legitimacy than the G-7 by virtue of its wider membership, which accounts for roughly two thirds of the world’s population, 90 percent of global economic output and 80 percent of trade. But greater size does not mean greater effectiveness. Many analysts see the group as too large to reach consensus on important policy issues. The G-20 did respond to the collapse in confidence that followed the failure of Lehman Brothers Holdings with an impressive package of stimulus measures, but as the crisis atmosphere has eased, governments have gone back to pursuing national interests ahead of international coordination.
“We need a new G-8,” or perhaps a G-9, says Goldman’s O’Neill. His preferred body would include Japan, the U.S., the U.K., Canada, the four BRIC countries (Brazil, Russia, India and China) and a single seat for the euro area, although getting the Europeans to share a seat would be difficult politically. Lim of the Korea Development Institute proposes reducing the table to no more than 15 seats, with a smaller number of developing countries joining the G-7 and BRIC nations.
For the foreseeable future, however, countries will have to work with the existing policymaking machinery. The G-20 has taken a significant step by shifting the voting weight and board seats at the IMF toward emerging-markets countries. The reform is evolutionary, not revolutionary, but it resolved an issue that had stymied the Fund for several years. And by giving rising powers a greater voice in the institution’s operation, it should increase the prospect that those countries will listen to IMF advice. “There was never any doubt about increased membership for some countries,” says John Lipsky, the Fund’s first deputy managing director. “There’s a shared interest.” Furthermore, the Fund’s recent approval of a precautionary credit line, which would allow a vulnerable country to draw on IMF resources before the bottom falls out of its economy, adds a potentially useful mechanism to the Fund’s tool kit, even if no countries have yet signed up for it. “The idea is to prevent crises so we don’t have to have intervention,” says Lipsky. “Prior to last year the Fund had no financial instruments that had a hope of success.”
Meanwhile, South Korea is determined to use its G-20 presidency to champion the cause of the world’s poorest countries and narrow the gap between rich and poor states. The country’s rags-to-riches development over the past 50 years gives it a unique role to play, says SaKong Il, the former Finance minister who led the summit preparations for the Lee government. Merely delivering on the bloc’s previous stated commitments would increase global output by $4 trillion and create 52 million jobs, he says. Jeffrey Schott, a former Treasury Department official and a senior fellow at the Peter G. Peterson Institute for International Economics in Washington, says Seoul’s efforts to push development higher on the G-20 agenda have been “sincere and substantive.”
“We are given a rare opportunity to play a global leadership role,” says SaKong. “If we work toward national or regional interest, we will not fulfill our opportunity.”
