Distinguished Speaker Seminar: Duck-Koo Chung - Post Crisis Issues and East Asia

Duck-Koo Chung, Chairman of the North East Asia Research (NEAR) Foundation, former Minister of Commerce, Industry, and Energy; Republic of Korea; and Professor in the Graduate School of International Studies at Seoul National University delivered a lecture on "Post-Crisis Issues and East Asia" on 8 September 2009 in Tokyo.

Mr. Chung's timely seminar addressed post-crisis issues confronting Northeast Asian countries—Japan, Republic of Korea (Korea), and the People's Republic of China (PRC)— in light of the region's astonishingly quick economic rebound and the changing political landscape in Asia's richest nation. Mr. Chung set the context of his lecture by discussing the current global crisis and its surrounding issues, followed by the implications of these developments on Northeast Asia, and finally, the choices Northeast Asia has and the tasks it faces to secure the region's stability and prosperity in the post-crisis era.

To shed light on the foothold of the recent economic recovery, Mr. Chung believes that the unemployment rate and fiscal health of the United States (US), and economic developments in the PRC are crucial to the sustainability of the "green shoots" in the horizon. As the PRC is expected to exceed its 8% annual economic growth target, much depends on the ability of the US to emerge successfully from the crisis. The post-crisis world is also confronted by issues on: (1) crisis exit strategies; (2) "downsized balancing" of global trade; (3) the future of the US dollar and of the international financial world; and (4) the absence of alternative power to the US.

According to Mr. Chung, the world economy risks a W-shaped recovery and low long-term growth, thus there is a looming threat of jobless growth if the financial sector recovery is proven to be short-lived. While policymakers are lauded for their bold expansionary policies designed to veer away from these risks, they also recognize the need to reduce global imbalances that triggered the crisis and to quell inflationary concerns from liquidity surges causing spikes in commodity prices. He recalled the successful exit strategies of Japan in 1990 and of the US in 1937 that could enlighten governments in their policy dilemma.

Mr. Chung offered probable scenarios in the next year or two. He believes governments may cut spending rather than increase interest rates or tax rates. But as the global debt crisis spreads, deficits are likely to rise, eroding faith in monetary authorities. Stability of the eurozone is also in peril as weaker members, such as Greece, Ireland, Italy, Portugal, and Spain are on the verge of default. But in the foreseeable future, the US is likely to maintain its economic, military, and diplomatic dominance as its close rival, the PRC, is focused on fulfilling its domestic economic targets. If the global economic recovery proceeds, excess liquidity may trigger inflation; adversely affecting the value of the US dollar unless the US can improve its fiscal position and implement long-term restructuring measures. But in the long run, a US dollar-centered multi-currency system will likely emerge.

Turning to Northeast Asia, Mr. Chung highlighted the conundrums faced by the three countries and offered suggestions to address them. For Japan, addressing its rising population dependency ratio, inefficient service sector, and depressed consumption are crucial for regaining its economic dynamism. If successful, Japan could secure a firm footing for the yen that has weakened in recent years, within a diversified reserve currency system. As Korea follows the Japanese development path, it faces the same issues of low birth rate, aging population, sustainability of social security system, and weak local demand. Reform of the financial sector is imperative to prevent another economic trauma experienced in the last two external shocks. Like Japan, additional risks and threats are posed by the PRC's rise and a fragile North Korea. Mr. Chung recommends a reexamination of policy responses that hamper Korea's longer-term fiscal stability.

For the PRC, being the largest US creditor, it has increasingly expressed concerns over the dollar depreciation and calls for a less US dollar-centric monetary order. While the PRC aims to elevate the yuan to a reserve currency, doing so, will entail relinquishing state control of the yuan to the market. In addition, given the PRC's undervalued exchange rate and huge foreign exchange reserves, it needs to change its growth paradigm and boost local consumption. It also faces the challenges of stimulating local demand, of commercializing its banks, and of containing protectionism abroad.

The last topic of the lecture was on East Asian post-crisis choices and tasks. Mr. Chung believes that the road to an East Asian economic community is hardly paved given the political, conceptual, and psychological obstacles along the way. He discussed two salient factors influencing the process: (i) Chiang Mai Initiative Multilateralization (CMIM); and (ii) regional exchange rate stability.

The CMIM reserve expansion to US$120 billion is seen as a step in the right direction. However, as contributions are required only when member countries request support, economic crises affecting multiple member nations simultaneously, could easily dry up the funds. Mr. Chung recommended an independent surveillance institution to monitor members' foreign currency liquidity with the capacity to offer preventive policy measures. As the decision to provide support is determined by countries with the most votes, Japan and the PRC could play a vital role in the smooth operation of the CMIM.

To achieve (ii), Mr. Chung recommended the creation of guidelines and agendas for countries to fulfill before discussing the prospects of a regional currency unit. These include bolstering free trade agreements through gradual adoption of local currency units for regional settlement, flexible exchange rate to deliver an effective monetary policy, and further capital account liberalization. If supervisory and regulatory mechanisms are in place that boost investors' confidence, this will help develop capital markets in the region mitigating the flow of capital to developed markets, such as the US. He also recommended regional initiatives that Korea may be in the best position to lead, to promote common understanding in addressing regional concerns.

As East Asia's contribution to balance the world economy, Mr. Chung recommended a true partnership with the US that reflects Asia's standards. While the region shares admirable Confucian principles, the presence of a dominant power that can threaten common interests could hasten the process of overcoming individual country differences. Although countries in the region have taken to heart the "The Art of War" —making allies with countries afar in waging war against one's neighbors—Mr. Chung believes this tenet has outlived its usefulness in an increasingly interdependent world. And sailing in the same boat does not necessarily imply commonality of aspirations, as the East Asian Economic Community even when formed, will be a loose form of integration, unlike that of the European Union.