The current financial crisis is reminiscent of what Koreans experienced in 1997-1998. In fact, in terms of its impact on the KOSPI and the won value of the dollar, the present economic crisis comes very close, though not completely, to that of the earlier financial crisis. This time around, however, there has also been a precipitous fall in the country’s exports due to the global recession due to the global financial crisis. Merchandise exports began to fall in the last quarter of last year and their growth rate fell from 27 per cent in the previous quarter to -10 per cent in this quarter over a year ago. As a result, the Korean economy is estimated to have recorded a negative growth rate of -3.4 per cent during the fourth quarter of last year over a year ago, making the growth rate for the year 2.2 per cent. During the previous 10 years, the Korean economy’s annual average growth was 4.4 per cent.

Korea’s experience is similar to that of all four Asian newly industrialized economies (Korea, Chinese Taipei, Hong Kong, and Singapore). The irony is that the crisis seems to be taking as great a toll, or even greater, on these Asian economies as it has on the U.S. and Euro economies where it originated. According to the IMF projection (January 2009), the growth rate during the 4th quarter last year over a year ago was -1.1 per cent in the U.S. and -0.7 per cent in the Euro area whereas it was -3.4 per cent for the four newly industrializing economies in Asia. For 2009, the IMF projects the growth rate of -1.6% for the U.S. and -2.0% for the Euro area and -3.9% for the newly industrialized.  This reflects the high dependence of these economies on international trade, and on the growth of the U.S. and Euro economies through direct trade, as well as their dependence on trade with China and on international capital market intermediation.

A further irony is that the economic and financial policy regimes of these economies have, with some individual variation, all come close to satisfying to the letter of the standard policy prescription of the international financial institutions such as the IMF and the World Bank for the emerging market economies. The so-called Washington Consensus captures the spirit of these regimes. Korea, in particular, was forced to follow this prescription under the terms of the IMF conditionality in return for an emergency financial assistance when it was struck with a financial crisis in 1997.

And in order to regain the confidence of the international capital markets as well as the financial support from the U.S. and European governments, the Korean government at that time proclaimed it was going even further than the IMF prescription toward the implementation of the Washington consensus by pledging ‘IMF+’ remedies. Among other things, this involved completely opening financial and capital markets to foreign participation. In the few years after that, the Korean government also proclaimed the vision of Seoul as an international financial hub as a goal to be reached by 2015, and has been pursuing the policy of internationalizing the domestic financial, capital, and foreign-exchange markets since then. The wisdom of all these policies has now come to be doubted.

If Korea had been more reserved in following the IMF prescription and the Washington consensus, and had not opened up the capital market, in particular, the impact of the current crisis might have been less. Alternatively, the financial turbulence might have been contained if it had had ready access to sufficient international reserves or sufficient international safety nets in the form of the IMF lending facilities. Korea held the fifth largest amount of international reserves, US$243.2 billion as of early September, which is now down to US$206.3 billion (at the end of March this year), making Korea the holder of the 6th largest foreign reserve, but this did not seem to help very much in containing the attack on the won.

Korean government, finding the IMF lending facilities inconvenient, unwieldy and inadequate, instead resorted to bilateral swap arrangements, by obtaining a swap of US$30 billion with the US Federal Reserve and increasing bilateral swap arrangements with Japan and China to US$30 billion each. These swaps have helped contain the fall of the currency.

Looking to the future, the Asian newly industrializing economies find they have no choice but to continue to pursue trade-led growth for development as well as open-door policies for their domestic financial and capital markets. But they are afraid that there is no assurance of the sustainability and stability of their economic growth unless the international financial architecture is reformed to remedy its revealed weaknesses and the disciplines of the multilateral trading system are strengthened.

China and the other Asian countries may seem to have been affected less severely by the global financial crisis than the newly industrializing economies for now but, as they see it, the damage being done to their real economies is large and serious. More significantly, Asia’s confidence in the global economic architecture, and by the same token, in its outward-oriented development strategies, has been shaken profoundly.

The crisis shows that Asian economies face bleak prospects for continuing economic growth and development under existing global economic arrangements. If this is to change they need to be actively engaged in reform of the architecture.

There is a déjà vu in this call. The Asian countries argued for a new international financial architecture in the wake of the regional financial crisis of 1997-1998. Under the auspices of the G7, a number of international financial reforms were implemented but these reforms, promoted by the finance ministers from seven industrialized nations, have not gone far in addressing the fundamental concerns of the developing countries.

The G20 was created in 1999, consisting of the finance ministers and central bankers from the G7 countries plus Australia and 11 large emerging market economies such as BRIC, as well as Korea, Indonesia, Mexico, Saudi Arabia, South Africa, and Turkey, in order to provide those emerging economies with an opportunity to participate in the discussion of matters pertaining to the international financial system. It is also attended by the rotating chair country of the EU. The G20 has not to this point been very effective in injecting the concerns of emerging economies into the discussion of the reform of global financial architecture. The emerging economy participants in the process have failed in articulating and pressing their concerns.

East Asian countries, especially ASEAN+3, have focused on the promotion of financial and monetary cooperation at the regional level in order to supplement the global financial architecture.  These regional efforts have made progress under two headings, the Chang Mai Initiative (CMI) and the Asia Bond Market Initiative (ABMI). The current crisis underlines the need for Asian economies to accelerate that progress, especially that of the CMI, toward the creation of the Asian Monetary Fund which would augment the IMF. The efforts under ABMI should be accelerated toward the goal of creating integrated regional capital markets in order to help make regional savings more readily available to regional borrowers at lower cost.

Whatever efforts there are to create a new Asian regional financial architecture, they cannot supplant the need for reform and strengthening of the international financial system. The 11 non-advanced member countries of the G20 need to get serious about this imperative, and to provide substantive, creative and constructive inputs into the process that has been set in train by the activation of the G20 this time round, with the addition of the Summit process, occasioned by the global financial crisis.  They need to assert themselves as major players as a new system of global economic governance unfolds.

Of the 11 non-advanced member countries, the 3 Asian countries, namely, Korea, China, and Indonesia, plus ASEAN as a regional institution to be represented within the G20 by its rotating chair government (Thailand, for now), can form a cohesive group for action and cooperate with one another in pursuit of fundamental reform of the international financial architecture, supportive of their common outward-oriented development strategy.

This ‘East Asian Caucus’ should provide leadership for all the emerging economies participating in the G20 process in steering the reform of the international financial architecture in ways which would best serve the developmental interests of emerging market economies. This caucus should exercise leadership by forming a coalition of the like-minded on the reform, and by extending this coalition to Japan, Australia and India, which together are other major members of the East Asia Summit group, in the form of a possibly looser Asia-Pacific Coalition.

A window of opportunity is open for the East Asian Caucus and the Asia-Pacific Coalition on G20 to pursue this role. Korea is scheduled to chair the G20 process in 2010 and, for this reason, is currently among the triad countries – along with Brazil and the United Kingdom – which will be steering the G20 process during this year. The G20 process has been assured of a leading role in global economic governance reform by the launching of the G20 Summit. Participation by the heads of state from the non-advanced countries, and especially, from the East Asian Caucus and the broader Asia-Pacific Coalition, can critically strengthen the voice and influence of East Asian countries. These countries should seize this opportunity, and especially during 2009-2010, the Korean government should play a leading role in mobilizing the East Asian Caucus to make this happen.

The Asian countries should also seek to preserve the efficacy of their trade-led economic growth. They should lead international efforts to fight the protectionist backlash from the global recession. Korea has been leading the call in the G20 for a standstill commitment against all protectionist trade policy measures which may otherwise arise to protect jobs at home in individual economies. Other Asian countries should support Korea on this, and work together to push for its effective implementation. Asia can claim a larger role in global economic governance by leading the international efforts to keep domestic markets open through the period of recession in this way.

Asia can strengthen this role further by pursuing trade liberalization unilaterally. Korea continues to seek further opening of the domestic market by continuing the policy of building a network of bilateral FTAs around itself. Having entered into FTAs with Singapore, Chile, EFTA and ASEAN countries, the Korean government is now intent on pushing for ratification of the Korea-U.S. FTA in the respective parliaments, and on completing the Korea-EU FTA, Korea-Canada FTA, and Korea-India FTA, in the near future. Even after the onset of the crisis, the Korean government announced that it is preparing to launch negotiations of FTAs with Australia and New Zealand, while reviewing its present stance of reservation on a Korea-Japan FTA as well as a Korea-China FTA.

Korea’s stance on FTAs seems broadly representative of the East Asian countries’ trade policy strategies. Well aware of the benefits of international trade and trade integration, they tend to view trade liberalization, rather than protectionism, as the right response to economic crisis. This being the case, the leaders of the Asian economies may want to go further than just ‘standing still’, and collectively pursue unilateral trade liberalization at a regional level by launching negotiations towards an ASEAN+3 FTA or an ASEAN+6 FTA, whichever is easier to implement. In this way, Asian countries can set an example for the rest of the world to follow in resisting protectionism at home and liberalizing international trade.

Given the plethora of the bilateral FTAs the country has been pursuing, Korea seems to be well positioned to provide leadership for such regional trade liberalization move. President Lee Myung-Bak of Korea should seriously consider proposing these initiatives at the upcoming ASEAN+3 or East Asian Summit meetings.

To preserve and strengthen their trade-led economic growth, Asia needs to promote intra-regional aggregate demand, reducing dependence on extra-regional markets such as those in the United States. Region-wide FTAs, like those discussed above, may be a start. Regional financial and monetary cooperation along the lines of the CMI and ABMI can also play a role.

But beyond these efforts, the Asian economies can also work together to create new engines of regional economic growth and thus to make Asia more resilient, launching coordinated investment in infrastructure, the ecological system, and ‘green growth’. In parallel, they may also promote coordinated reforms behind the border, to deregulate and modernize the services sector in the individual economies. The vision of a ‘resilient Asia’ could be best pursued by the Asian governments by forming, and working together through, an Asia-Pacific version of the OECD. The role of the Asia-Pacific OECD would be to promote and facilitate transfer of developmental policy as well as technological know-how.

By exposing the fundamental vulnerabilities of Asian economies to external shocks for the second time, the current global financial crisis reminds Asians of the need for a new thinking as well as a new bold vision of their economic and societal progress, as well as a new approach to regional development beyond the piecemeal steps which have been taken thus far.

All these efforts to play an active, creative and constructive role in reforming the global financial architecture and enhancing the liberal trading environment, as well as to make the Asian economies as a whole more resilient by promoting intra-regional aggregate demand and creating new engines of regional growth will help facilitate the shift in global economic governance from a bi-polar to a tri-polar structure, and a more stable and better functioning one, with East Asia as the new, third pole.

The East Asian G20 Caucus can launch this shift by working through the Asia-Pacific Coalition. The current year, 2009, is the year of opportunity for this initiative. And it is incumbent upon Korea to lead the process as the next host of the G20 process.