The Rise of Korean Leadership

Emerging Powers and Liberal International Order

G. Ikenberry, J. Mo, Mo Jongryn

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781137351111
• eBook ISBN: 9781137351128
• Topic: Politics & International Relations
• Subtopic: Comparative Politics
• Index: Politics & International Relations

South Korea has emerged as a new middle power playing a significant role in a wide range of important global issue areas and supporting liberal international order with its leadership diplomacy. The growing role played by new powers like Korea calls into question the prevailing view that global governance is polarized with emerging powers challenging the liberal international order established by the United States and its European allies after World War II. As the case of Korea shows, large developing countries like the BRICS are not the only emerging powers active in global governance. Newly developed or high income developing countries like South Korea, Turkey and Mexico are also active emerging powers, taking new initiatives, setting agendas and mediating conflicts between rival groups on the global stage. Because these high income developing countries have advanced under and benefited from the liberal international order, they see a great stake in its stability and show a willingness to protect it. "Liberal internationalist" developing countries are joining the expanding list of middle powers who contribute to the maintenance of liberal international order as niche players and system supporters.

Part I

The Global Financial Crisis and the Rise of Korea as a Global Player

1

Middle-Power Leadership and the Evolution of the G20

The most important development in global economic governance since the global financial crisis began in 2008 has been the emergence of the G20, a group of 20 major developed and emerging economies, as the focal point of global efforts to manage the ongoing global financial crisis and prevent future crises. After a series of successful summit meetings, the G20 has been formally recognized as the premier forum for international economic cooperation and now sits at the apex of the global economic governance system, coordinating not only national economic policies but also activities of international financial institutions such as the International Monetary Fund and other economic organizations.

The G20 is also an arena where South Korea made its debut and has established its position as a new global economic leader. Since joining the first summit meeting of the G20 in Washington in November 2008, Seoul has been one of the most active G20 members, contributing to the negotiation of important G20 agreements as well as to the institutionalization of the G20 as an effective governance group. At the G20, Korea has shown a “classic” middle-power leadership style, using its strategic middle-power position to propose new agendas, mediate conflicts between rival groups, especially those between developed and developing countries, and set examples for others in supporting the G20 or implementing G20 commitments.

The Global Financial Crisis and the Rise of the G20

The US subprime mortgage crash and the subsequent collapse of Lehman Brothers, the fourth-largest investment bank, escalated into a global financial crisis in September 2008 at a pace faster than most people expected, affecting almost every country around the world. Investors in panic rushed to dump most of their assets for cash in an extreme case of flight-to-safety and credit flows almost stopped in an expanding crisis. Major economies, from the United States to the European Union, were thrown into the worst recession since the Great Depression of the 1930s. The fear of a global financial free fall and economic system meltdown was so acute and widespread that a quick and coordinated global response was badly needed.

With multilateral platforms often proving too slow and difficulties in reaching a consensus among hundred of countries as seen in the case of the Doha Round for free trade, major powers have increasingly resorted to smaller groupings. With highly selective membership qualified by their economic and political clout, leverage, and like-mindedness, a “club” of a few leaders preferred to sit down for straightforward talks—often calling each other by first names and rarely bounded by formal process, which often resulted in an effective and efficient decision making.¹ The United States, Japan, Britain, France, Germany, Italy, and Canada formed the G7, a group of seven industrial economies, in the 1970s to counter the oil shocks, which has since dominated international discussions over major economic and security issues and set the rules for global policy coordination. Russia joined the league in 1997, making it into the G8.

The global financial crisis posed unprecedented challenge to the G7/G8-dominated world politics. Big powers realized the existing political and economic regimes alone, such as the G8, the IMF, and the United Nations, were incapable of coordinating effective policy actions to such a sudden systemic collapse and broad contagion. The world financial markets and economic system have become so closely intertwined and interconnected that one’s trouble easily spreads to other continents. The Wall Street’s free fall sparked sell-off in stock markets across Asia and then Europe just in a day. Some countries temporarily closed their financial markets in a desperate but vain effort to minimize the panic-driven selling. Investors lost confidence, which quickly chilled business and consumer sentiment and then dragged down overall economic activities at a pace surpassing most people’s expectations. Pessimism prevailed and the doomsday for the world economy was looming.

On the other hand, China and other emerging market countries have been growing big enough to challenge the traditional major powers. They are now leading the world economic growth while most advanced countries are struggling with a deepening economic slump. As former Canadian Prime Minister Paul Martin once warned, the existing framework of global governance must change to embrace the new economic giants or the emerging powers would seek to find their own way. The 2007–2008 crisis called for a fundamental change to the entire landscape of the world economy and global governance.

The G20, established in 1999 as a finance ministers meeting in a response to the 1997 Asian financial crisis, has now emerged as the “premier forum” for international economic cooperation and financial governance to replace the G7 in the aftermath of the global financial crisis. The G20 successfully shielded the world from deeper recession and helped it regain confidence at a critical moment by coordinating timely policy actions of unprecedented macroeconomic stimuli and financial assistance. Representativeness, legitimacy, credibility, and crisis-fighting capacity as a global governance body have increased significantly under the G20. Its member countries make up more than 85 percent of the world GDP, 80 percent of world trade and two-thirds of the world population. The G20 heralds the beginning of a new world order, with the membership relatively well-balanced between advanced and emerging countries, given that the global governance system is under increasing pressure to reflect the sea change in the world economic landscape. The G20 is already acting like a global economic council as it sets new rules for the world economy and tasks and evaluates international financial institutions.²

The G20 has also enhanced the International Monetary Fund’s capacity to fight, manage, and prevent a financial crisis. It helped the IMF cast off the so-called stigma effects and regain its influence and reputation as a reliable lender of last resort to sovereigns. Applying for the lender’s bailout program had been often regarded as declaration of de facto state default and political suicide for a government. This deep-rooted perception can cause unnecessary, avoidable, and costly consequences. The Koreans, who suffered massive layoffs and exorbitant interest rates under the IMF restructuring program in return for its rescue money during the Asian financial crisis, still call the experience as the “IMF Crisis.” At the same time, the G20 has mandated the IMF as its researcher and policy advisor while boosting its coffer and making its money much more easily available to countries suffering or facing a credit crunch due to external shocks despite solid domestic economic fundamentals.

Strong and sustained commitment by individual countries is the key to the G20’s viability and success since the agreements among leaders lack legal binding power in the absence of global jurisdiction and thus it can only resort to their goodwill as a responsible member of the international community. Waning sense of urgency on signs of an economic turnaround in 2010 and 2011 raised questions about the G20’s future fate, prompting the members to delay difficult and thorny issues to later discussion and produce few tangible outcomes. Disappointment and skepticism over the G20 emerged, with Nouriel Roubini declaring a G-Zero world with the argument that rather than “a forum for compromise,” the G20 will become “an arena of conflict.”³ But the debacle from the unsustainable sovereign debt in the Eurozone again sent the global financial markets and world economy into another tailspin. The deepening fiscal crisis and austerity measures in the debt-ridden European countries are now crippling major exporters in Asia and derailing the world economic recovery. At a time like this, the international community may have to turn to the G20 again as a global crisis management group.⁴

Korea’s G20 Leadership

In November 2010, South Korea became the first non-G7 country to host a G20 summit, with leaders from the United States to China presenting remedies for a crisis-stricken world economy. This was Korea’s first official debut as an active and responsible player in global decision-making forums. Many participants in the G20 meetings and even outside observers have cheered Korea’s leadership in terms of coordination and mediation, agenda setting, and sustained activism.⁵

Most observers agree that Korea, Australia, and Britain are the most active G20 members.⁶ Korea has contributed significantly to the G20’s establishment and evolution. It decided from the very first beginning that it would aggressively lead the global discussions on ways to overcome the global financial crisis as its economic and financial system was at risk from the fallout of the US subprime loan crisis. President Lee Myung-bak called for a standstill on trade protectionism at the first G20 summit in Washington, and urged nations to refrain from introducing additional protectionist measures that may end up with trade war and deep economic recession.

The Korean government has since endeavored to bridge between the two camps–advanced and developing states–and to institutionalize the summits by proposing issues of mutual interests for sustainable and balanced global economic growth. It mobilized every possible diplomatic effort to persuade the United States, major European countries, Japan, China, and other emerging countries that the world needs a quick and concerted action to fight the global financial crisis and fend off a recession under the spirit of open market and trade liberalization. After the London Summit of April 2009, President Lee contributed an op-ed column with Kevin Rudd, Australian prime minister, urging the G20 leaders to avoid protectionism and address global macroeconomic imbalances through a new framework for macroeconomic policy coordination.⁷ In September 2011, President Lee joined five other G20 leaders in an open letter to French president Nicolas Sarkozy in which he called for decisive action on global imbalances in the Cannes Summit.

The mediation role came at a critical juncture when tension between the United States and China escalated into a currency war, blaming each other as the culprit of the global imbalances. The United States accused China of manipulating its currency to export more while Beijing blamed Washington for pumping money to buy economic growth. The US Treasury Secretary Timothy Geithner dropped his long tactic of putting behind-the-scene pressure on China and made a public declaration at the IMF annual meeting in Washington in early October 2010:

Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery . . . Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.⁸

Chinese officials countered with strong criticism that the extreme monetary easing and public debt in the United States and other advanced economies were the main source of the global problems, stoking inflation pressures, asset bubbles, and excessive exchange-rate moves. China also warned that a hasty revaluation of the yuan would do the world economy more harm than good. The already complex discord between the world’s two largest economies was even more compounded by differing interests of other G20 nations.

Near-zero interest rates and unconventional quantitative easing measures that the United States, Japan, and the European Union took to avert a deep recession and quell financial market turmoil indeed fueled demand for high-yielding assets in emerging countries from Brazil to South Africa. As a result, Brazilian Real soared 34 percent against the dollar and South African Rand jumped 27 percent in 2009. Brazil, Thailand, and other emerging countries resorted to capital controls, including taxing on foreign bond sales and loans, and intervened heavily to stem the currency appreciation. Japan also intervened in September 2010 for the first time since 2004 after the yen rose to its highest level against the dollar in 15 years. Unless checked, the battle of currency depreciation and capital controls could stifle the world economy, trade, and investment. The world was looking at the G20 for workable remedy, with a gleam of hope and much of pessimism.

The tension heightened in late October 2010 when financial chiefs held a G20 meeting at Gyeongju, a southern resort city of Korea, a few weeks before the Seoul summit. Their deputies quarreled several days and nights to reach an agreement and draft a communiqué. South Korea, with strong support from the United States, proposed to cap individual country’s surplus or deficit at 4 percent of one’s GDP.⁹ But the idea of specific numeric target ran into strong opposition from Germany, Brazil, and Japan.¹⁰

With few willing to challenge the two economic super powers or the G2, Korea came to the fore as an honest broker by using its unique position: traditional ally to the United States and major trading partner for China. Learning from history that China would not accept the appearance of bowing to foreign pressure, Korean officials found a way to steer the G20 debate toward boosting domestic demand in China, which ultimately achieved the same goals without specifically pushing China to revalue its currency.¹¹

South Korean President Lee Myung-bak, former CEO of a big construction company, pushed for a breakthrough with his proactive and energetic leadership in an unscheduled visit to Gyeongju, half jokingly saying he will stop all transportation until the financial chiefs from the G20 nations reach an agreement. Korea, which was believed to keep its currency cheap to earn trade surplus, played an active role in hammering out the so-called indicative guidelines to prevent competitive currency depreciation and trade war. Under the Seoul summit communiqué, world leaders eventually agreed to move toward more “market-determined” exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.¹² They also pledged to take preventive and corrective actions for a strong, sustainable, and balanced growth of the global economy on the ground that the uneven global economic recovery sparked the currency war and could easily trigger another one.

Korea’s leadership of mediation and coordination also played a pivotal role in the IMF reform. The agreement on capital increase and quota change is a major overhaul of the international crisis-fighting body voice and governance structure that has enhanced its legitimacy, credibility, and effectiveness, with the shifts in global power dynamics reflected. After endless and agonizing negotiations, the G20 members gave a critical support to the shift of more than 6 percent in quota shares from advanced countries to emerging economies and from over-represented to under-represented countries while protecting the quota shares and voting power of the poorest members at the same time.

Europe agreed to give up two board seats in the IMF while China and Brazil gained more voting rights. Korea’s quota increased to 1.8 percent from 1.41 percent, rising to the sixteenth from eighteenth in the IMF quota ranking. The world lender’s principal source of financial resource, or quota, doubled to SDR 476.8 billion (about US$ 755.7 billion ) on strong commitments from the G20 member countries, enhancing its crisis-fighting capacity to a considerable extent. Cheering the reform as the “most fundamental governance overhaul” in the IMF’s history and the biggest power shift to emerging countries, IMF Managing Director Dominique Strauss-Kahn acknowledged that Korea played an “important” role in bringing together the G20 and reaching the agreement for the “greater common good.”¹³

Korea’s leadership went beyond the traditional middle-power role of coordination and mediation. It was no longer a passive follower but provided intellectual leadership by adding key topics to the G20 agenda as an active responsible chair: global financial safety net...

Table of contents

• Cover
• Title
• Introduction: Korea and Global Leadership
• Part I   The Global Financial Crisis and the Rise of Korea as a Global Player
• Part II   Korea as a Bridge to the Developing World
• Part III   Korea’s Emerging Role in Global Security
• Notes
• Bibliography
• Index