Rise of G20 and Korea's Response

8/8/2019 Rise of G20 and Korea's Response

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The Rise of G20 and Korea'sResponseThe G20 has replaced the G8 as the primary voice on theglobal economic order. However, antagonism amongmembers and questions about its legitimacy andrepresentation limit its effectiveness. Considering itseconomic and international status, Korea, as G20 co-chair, has little room to take the lead, but it is positionedto mediate between the G20"s emerging and advancedeconomies, and between the US and China.KIM Yong-Ki

The Rise of G20 and Korea's ResponseKIM Yong-Ki

The G20 has replaced the G8 as the primary voice on the globaleconomic order. However, antagonism among members andquestions about its legitimacy and representation limit itseffectiveness. Considering its economic and international status,Korea, as G20 co-chair, has little room to take the lead, but it ispositioned to mediate between the G20's emerging and advanced

economies, and between the US and China.

The Post Crisis Order: the G20, G8, and G2.

A decline in US unipolar power is tantamount to the transformation of the worldorder into either a bipolar or multipolar system.1 In a multipolar world, the prospectof multinational cooperation in regards to international policy is divided into twodifferent camps. The first is through the reinforcement of the G8, which the US hassustained since the collapse of the Bretton Woods system; and the other centers on

the G20 whose membership goes beyond the G8 and embraces key emerging anddeveloping countries.

The G20, which accounts for over 85 percent of the world economy and almost 65percent of the world's population, represents a much broader global constituencythan the limited composition of its wealthy parent, the G8. Moreover, with many ofthe emerging countries left relatively unscathed by the global financial crisis, theyare being recognized as the driving force of the world economy. There are growingexpectations that the G20 will not only lead the global economic recovery in alimited time period but, will become a permanent institution of international policycooperation, to prevent and resolve future economic

and financial crises.


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However, the G20 has its limitations. Fueled by different perspectives, discord hasarisen between the advanced and newly emerging-market economies and alsobetween the US and Europe. Since the coordination of these conflicting views isarduous, there are prospects of a G2 system consisting of the US and China.

Indeed, the first US-China Strategic and Economic Dialogue, held in July 2009 inWashington, D.C., was a signpost indicating the emergence of the G2, or Chimerica,to the watchful eyes of the world.

There are clear disparities in terms of the quantitative aspects of the G8, G20 andG2. The G8 maintains the status quo with the US and six other advanced Westernnations, together with their policy cooperation striving to sustain the liberaleconomic order developed from the Bretton Woods system. While also based on theUS-led Bretton Woods system, the G20 includes emerging markets that are steadilyincreasing their share of the global economy. In this multipolar system, however,the co-existence of cooperation and confrontation is inevitable as some of thesenewly emerging-market economies maintain an authoritarian political system andstate capitalism, which the governments wield to directly intervene into theeconomy.

On the other hand, the G2 is a bipolar system of the US and China, comparable tothe US-Soviet bipolar system seen during the Cold War. Although growing

economic interdependence necessitates and enhances mutual cooperation in thebilateral relationship, sensitive issues such as human rights, expansion of militaryexpenditure and issues regarding Taiwan have generated conflicts betweenWashington and Beijing.


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Rise of the G20 and Its limitations

Ever since the demise of the Bretton Woods system in the 1970s, emerging-marketeconomies have been victimized by recurring financial and currency crises.However, this was not the case for the majority of these economies during therecent crisis, at least, not in the early phases. East Asian countries, in particular,were not as affected by the financial crisis as by the currency crisis of 1997.2

The growing confidence of the emerging-market economies was well demonstratedby China and Russia when they strongly criticized the policy failures of theadvanced Western economies at the Davos Forum, the global arena for neo-liberal

globalization policies.3

The Rising BRIC Powers and Decoupling

Among the emerging-market economies, BRICs (Brazil, Russia, India and China)have attracted the most global attention. Although the four countries are toodissimilar to be classified together in a single category, they share the potential toachieve fast economic growth based on their huge land mass and enormouspopulation. sSince Goldman Sachs' chief economist Jim O'Neill coined the BRICsacronym in 2001 to identify the world's big four emerging economies, BRICs haverapidly enlarged their share of the global economy.4As of 2009, the BRIC nationshad up to 40 percent of the world's population and more than 15 percent of global

GDP.

The increasing influence of the emerging economies, represented by BRICs, hasbeen mirrored by the G20's heightened stature. Immediately after the outbreak ofthe East Asian currency crisis in 1997, then-US Treasury Secretary LawrenceSummers and his undersecretary Timothy Geithner proposed the creation of a newinternational group of twenty countries. This new group was founded with the intentto encourage key developing countries such as China, India, Mexico and SouthAfrica to take a greater role in international policy cooperation regarding globaleconomic and financial issues. Its official birth was announced at the G7 FinanceMinisters' meeting in September 1999, and the inaugural meeting in December inBerlin the same year. However, the G20 was little more than a name since its


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inception until it was reborn as a vital international forum at the 2008 G20Washington Summit on Financial Markets and the World Economy. The subsequentLondon summit marked a decisive turning point in witnessing the G20's potential tobe more influential than the G7 has ever been.5

The change in status of the emerging market economies is evident in the debate onthe decoupling of the global business cycle. This is because, although the financialcrisis spread from the Anglo-American countries to East Asia and Latin America,certain phenomena distinctive from the previous tendency of coupling have begunto appear.

Above all, the spread of the US-born financial crisis to the emerging markets wasnot unilateral. From May 6 to May 19, 2008, when the US Federal National Mortgage

Association, more commonly known as Fannie Mae, announced the loss of US$2.2billion since February in the first quarter, the emerging economies merely looked onas the crisis snowballed in the US and UK. During this period, the emergingcountries' stock markets outperformed the US stock market by over 40 percent.This attested to the decoupling of the emerging markets, which were traditionallydependent on the fluctuations of the advanced markets, and which were nowmaking moves independently.

From May 19 to September 15, 2008, however, the disparity in stock priceperformance between the US market and emerging markets was reduced by overthree quarters, and after Lehman Brothers' bankruptcy on September 15, couplingbetween the former and the latter became apparent.6However, this re-coupling wasdifferent from the previous concept of coupling. Whereas in the past, coupling wasa unilateral process in which advanced Western countries asserted their influenceon the emerging market economies, re-coupling in the post-crisis era refers to thebilateral coupling of the two sides, interactively exerting influence on each other. Itis necessary, therefore, to discern re-coupling from the traditional notionof coupling.7While decoupling progressed, the exchange rate in newly emergingmarket economies gained strength against the US dollar by more than 10 percent onaverage. In any case, the debate on coupling and decoupling provided amomentous opportunity to ascertain that the long-standing influence of the US and

West European nations was decreasing while emerging market economies,


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especially East Asia, were gaining influence.

Another noteworthy developement was that the economic growth in emergingmarkets has become higher than that of advanced countries, and their recovery

from the global crisis has been much swifter and steeper.

Limitations of the G20

After four summits, the G20 still cannot declare any remarkable accomplishments.Behind this lies the diversity of its member states which makes it difficult toproduce effective coordination of the varied perspectives of its members. Unlike theG8, a group of advanced Western industrialized countries in pursuit of liberaldemocracy and market capitalism, the G20 has outgrown the G8 and embracedemerging markets that advocate authoritarianism (or dictatorship) and statecapitalism. As pointed out by Yan Xueting, Director of Tsinghua University'sInstitute of International Studies in China, the relationships between the G20members stand at a level of a 'business partnership with shared common interestsrather than common values.'8

Also, there are adverse factors that hinder the G20 in playing its role as the premierglobal policy-coordinating institution. It is difficult to determine whether the G20offers a fundamental alternative to overcoming the global financial crisis. As such,the poor performance of the G20 can be traced to two causes. Firstly, theconfrontational stance of its member countries has piled up multiple-layers ofcollective opinions regarding every controversial issue, which in turn, has made itproblematic to forge a consensus that satisfies all member countries. Issues such

as macroeconomic policies (particularly exit strategies), imbalance of globaleconomic growth, reform of the international monetary system and international


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compensation standards for bankers and others in the financial sector have becomethe source of conflict between the advanced industrialized countries and theemerging market countries and between the Anglo-American countries andEuropean and East Asian countries. Basically, the G20 is a consultative forum for

international policy cooperation, not an executive body. Thus, it has neitheraccountability nor authority to supervise the implementation of its coordinatedpolicy guidelines and action plans. As for the G8, the US has applied direct andindirect pressure on its members through the International Monetary Fund (IMF) andWorld Bank. iIn the G20, however, as it is difficult for one country to assert strongleadership, it is likewise difficult to take charge of supervising the process ofenacting the agreements.9

Second, both the legitimacy and representation of the G20 as an internationalinstitution have continuously raised questions. Among others, the most criticalproblem starts from the absence of consistency in the criteria for selecting membercountries. For instance, the European Union (EU) is not a sovereign state but stillbecame a G20 member. Spain and the Netherlands are not members even thoughtheir respective economies are larger than those of Argentina and South Africa.Given such questionable representation, an attempt by the G20 to enforce thecompliance of its policy agreements on the rest of world could be seen as a breachof national sovereignty, the core principle of modern international order. In addition,the legitimacy of the G20 can be questioned because the US and UK, the centers ofthe global financial crisis, are the countries that have led policy discussions sofar.10

Implications for Korea

Changes in the Structure of Eeast Aasian Regional CooperationIt is likely that future global governance will entail the increasing and mutualdevelopment of the G20 and G2. Thus, in any case, China is expected to play a keyrole. Moreover, with the ascendency of China, changes in the East Asian regionalorder are also predicted. China's growing influence on East Asia may lead to anerosion of the US-centric regional order which has been maintained on the basis ofthe US-ROK and US-Japan alliances.11 Unlike the EU, East Asia does not have acentripetal mechanism to lead regional cooperation. Furthermore, regionalinstitutions are considerably different in terms of objectives; therefore, it is highlyimprobable that they will integrate through an agreement. In particular, there is no

institution for regional cooperation, in which major nations can discuss both


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economic and security issues.

Therefore, fierce competition for leadership in regional cooperation is unfolding.Whereas the US wants to see the further development of APEC, which was

established in 1989, East Asian nations have attempted to pursue regionalism, withthe exclusion of the US, since the 1997 currency crisis. The Chiang Mai Initiative,which was agreed upon by the ASEAN+3 in 1999, became a pivotal development tofacilitate East Asian financial cooperation. China is in favor of this framework toultimately squeeze out the US and hold Japan in check. In order to curb China,Japan has been promoting the ASEAN+6 model which includes such countries asIndia, Australia, and New Zealand who share in the idea of liberal democracy andcapitalist values.12However, among the aforementioned regional institutions, theASEAN+3 will be the most practical in terms of operation, which will come undergrowing influence from China. With the exclusion of the US, it is widening itsagenda from foreign currency to trade, finance and economic policy.13

Coupled with the unfolding rivalry over regional leadership, efforts to establishintra-regional cooperation are continuing. China, Japan and Korea, the three largesteconomies in East Asia, convened their first tripartite meeting, held on December13, 2008 in Fukuoka, Japan. It was Korea who benefited the most from the meetingwhich declared East Asia to be a new growth engine of the world economy. TheKorean government was able to alleviate its concerns on the lack of foreigncurrency reserves by expanding the size and period of bilateral currency swaps withChina and Japan, respectively.14


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Response to the G20 Summit Mmeeting

The G20 is an international institution in which Korea has a direct hand in globalgovernance. As co-chair of the G20 in 2009, the country succeeded in its bid to hostthe next summit meeting in Seoul. As chair of the 2010 summit, Korea has anopportunity to exercise influence on the selection of G20 agendas and discussions.There is not much room for Korea to take the lead, considering its economic power

and international status. Nevertheless, as chair it is important to coordinatecontending views and bring about consensus between advanced and emergingcountries. Korea can play the role of mediator for the two most fundamentallyconfrontational groupings within the G20. Although the advanced Westerneconomies led by the US are in simultaneous pursuit of liberal democracy andcapitalism, emerging-market economies, represented by China, have a tendency toignore any discussions on political systems, regarding it as interference indomestic affairs. Korea's experience of having achieved both economicdevelopment and democratization at the same time may have implications for theemerging markets. Also, with Korea being the fastest recovering economy amongthe OECD member countries, its success story can be presented as a model case

for other G20 member countries to follow.


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Korea holds a geopolitical advantage to bridge gaps between the two G2 members,who are also at the center of the G20. With China, Korea shares thousands of yearsof mutual exchanges, and closer relations acquired through trade, travel andoverseas study, since the normalization of their diplomatic relations in 1992. At the

same time, Korea has supported economic and foreign policies of the US, as itsmilitary ally. Unlike Japan, Korea has never been regarded as a potential regionalhegemon by either China or the US. Korea is also a part of the six-party talks, amultilateral diplomatic stage in Northeast Asia to discuss military and securityissues along with the two countries.

The most critical task related to the G20 agenda is to forge international cooperationin order to suppress protectionism. Although the harmful effects of protectionismare commonly recognized, protectionist policies have been introduced due tomounting domestic political pressure as a result of the increasing unemploymentrate. As for Korea, which is heavily dependent on external markets, the making of apractical and concrete agreement to curb resurging trade protectionism is a toppriority.

The US, which has supported free trade since the end of World War II, recentlyadopted a "Buy American" policy, and the US Congress delayed the ratification ofthe Korea-US Free Trade Agreement. In response, China installed a retaliatory "BuyChinese" policy. Trade disputes caused by protectionism between the two countriescould be a heavy blow to Korea's exports. In order to prevent this calamity, it isimportant to make efforts through the G20 summit to sustain free trade on aworldwide scale. Coupled with this, Korea should also continue to expand bilateral

free-trade agreements with member countries, including China, Korea's biggesttrade partner.

It is also desirable to have the G20 leaders express more active interest in thesituations on the Korean peninsula. A G20 declaration or statement could have asignificant impact as it can be read as a global recognition of economic aid for anuclear-free North Korea through international cooperation.

KeywordsG20, decoupling, protectionism, emerging economies, G2, G8

Note

1. National Intelligence Council (2008). Global Trends 2025: A Transformed World.National Intelligence Council.

2. Gwinner, William B. and Anthony Sanders. (2008). The Sub Prime Crisis:Implications for Emerging Markets. Policy Research Working Paper, No. 4726. World

Bank.; Asian Development Bank. (2009). The Global Economic Crisis: Challengesfor Developing Asia and ADB's Response.; Asian Development Bank. (2008).


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Addressing the Impact of the Global Financial Crisis on Asia-Pacific Economies.Macroeconomic Policy Brief, Vol. 1: Financial Crisis, No. 1.

3. Edgecliffe-Jonhson, Andrew. (January 29, 2009). Wen and Putin Lecture Western

Leaders at Davos. Financial Times.

4. Gillian Tett (2010) The Man Who Named the Future. Financial Times (16-17)

5. About G20. ; Davis, Bon andStephen Fidler. (2009. 4. 2.). "A Slate of G20 Rivals Waits in the Wings." Wall StreetJournal.

6. Michael P. Dooley and Michael M. Hutchison, "Transmission of the U.S. SubprimeCrisis to Emerging Markets: Evidence on the Decou pling-Recoupling Hypothesis,"Journal of International Money and Finance, Volume.28, No.8 (2009)

7. Kim, Soyoung, Jong-WhaLee, and Cyn-Young Park.(2009). "Emerging Asia:Decoupling or Recoupling." Working Paper No.31. ADB.

8. Recited from Ian Johnson, "New Frictions Confront U.S.-ChinaRelations," WallStreet Journal (9 November 2009).

9. Eric Helleiner and Stefano Pagliari, "Towards a New Bretton Woods?: The FistG20 Leaders Summit and the Regulation of Global Fi nance," New PoliticalEconomy. Vol.14, No.2 (2009)

10. Anders Aslund, The Group of 20 Must be Stopped, Financial Times (November27, 2009).

11. Marcus Noland (2009) "American Economic Relations with Asia," AsianEconomic Policy Review. Vol.4.

12. Yukio Okamoto (2009-2010) Great Power Relations in Asia: A JapanesePerspective. Survival. Vol.51, No.6.

13. Bergsten, C. Fred. (2007). "China and Economic Integration in East Asia:

Implications for the US." Working Paper No.07-3. Washington D.C.: Institute forInternational Economics.

14. Dickie, Mure. (December 15, 2009.). "Tokyo, Beijing and Seoul Vow to TightenTies." Financial Times.

KIM Yong-Ki is senior fellow at SERI. His research interests include financial policy,financial supervision, comparative corporate governance and state autonomy ineconomic policy in the era of globalization. He holds a PhD in International Political

Economy from London School of Economics. Contact: [email protected].


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Rise of G20 and Korea's Response