Panelist

Shang-Jin Wei (Director of the Jerome A. Chazen Institute of International Business at Columbia Business School, Professor of Finance and Economics and N.T. Wang Professor of Chinese Business and Economy at Columbia University's School of International and Public Affairs and Graduate School of Business)

Hugh Patrick (Robert D. Calkins Professor of International Business Emeritus, Director of Center on Japanese Economy and Business at Columbia University)

Takatoshi Ito (Professor at the Graduate School of Economics and the Graduate School of Public Policy, University of Tokyo, and Visiting Professor at Columbia Business School)

Doowon Lee (Professor at School of Economics, Yonsei University)

Moderator
Kang-Kook Lee (Professor at College of Economics, Ritsumeikan University)

Opening Remarks

Please evaluate recovery procedures implemented by each East Asian nation and the U.S. against the recent economic crisis and consequences seen in each nation.

1. Case in China: Professor Wei
The United States-stemmed economic crisis that recently occurred had resulted in a direct hit to the Chinese economy when its exports to the U.S. experienced a sharp decline. However, the Chinese economy is still displaying positive growth, prompted by active government stimulation in macroeconomic policies. Also, it can imply that the Chinese economy is less export-dependent than many people would think. I think the financial sector was not affected so much since it is comparatively underdeveloped. The Chinese government and its nationals believe in a rapid economic recovery.

2. Case in Japan : Professor Ito
Japan was no exception to the world's recent economic crisis with a sharp decline in exports being displaying to inflict some serious damage to the real sector. The Japanese economy is assumed to have hit the bottom, but is likely to see a slow recovery. On the contrary, the blow to the financial sector was limited. The Japanese financial system had limited exposure to the current crisis with an adoption of Basel II--the conservative management and advanced regulation of financial system. The government response to the crisis has limitations. Prior to the collapse of Lehman Brothers, the interest rate for the Japanese policy was very low to begin with , which was at 0.5% and now at 0.1%, so monetary policy reaction has been very limited; and government debt is too large, so room for fiscal stimulus is very limited too. Furthermore, with deflation looming again, the pace of recovery is forecast to slow down.

3. Case in Korea: Professor Lee
Korea panicked amid the second foreign currency crisis around September of 2008, but is rebounding at a rapid pace. Such a recovery in the Korean economy was possible thanks to successful restructuring of Korean corporate and the financial sector that have achieved a significantly lower debt ratio and higher BIS ratio. The stimulus package implemented by the government was proper in terms of size and timing, and thus, could generate effective results.
Strong global competitiveness of Korean companies, fueled by depreciation of the Korean currency, has boosted exports, especially with China, which has already recovered the pre-crisis volume. However, domestic-demand-dependent small and medium size companies are still struggling while severe high unemployment rate persists for the younger generation. We are now having a debate on an exit strategy.

4. Case in the U.S. : Professor Patrick
The U.S. was the center of crisis, causing a two dimensional crisis characterized by the most severe crisis in financial sector and the downturn of GDP in real sector. Such an economic downturn was not seen in the U.S. since 1930s. This crisis was due to the wrong belief of self-correcting financial markets and their efficiency. Consequently, a reform and a real change in financial system are necessary. However, the government's response to the crisis such as a shutdown of financial institutions is not as effective as Japan's due to political difficulties. The government responded to the crisis with measures such as an interest rate cut, injection of liquidity and direct support for the problematic financial market. Fortunately, a whole international trade system stayed open, and did not turn into protectionism despite a major recession. However, a serious unemployment problem still exists in the U.S. Unlike the U.S., the Chinese labor market in the export sector has very flexible characteristics, while Korea and Japan evade mass lay-offs which the U.S. will need to learn from.

Panel Discussions

Q: This forum at Columbia University was possible by Maeil Business Newspaper and Chazen Institute (Jerome A. Chazen Institute of International Business, Columbia Business School). As a means to recover from the recent financial crisis, global cooperation has never been more significant than these days. Thus, today's forum attended by economic experts from the four countries is especially meaningful.
First, let's look at how East Asian countries have cooperated with each other to tide over the crisis and find out necessary measures to prevent a future crisis.

Lee:
Toward the end of 2008, international cooperation played a key role in Korea's escape from a global financial crisis. Biggest aid came from the Fed. The announcement on Korea's $300 billion SWAP deal with the Fed stabilized the Korean financial market rapidly last October. Depreciation of the Korean won, significantly greater compared to the Japanese yen, was another reason behind a sharp increase in exports. With a strong rebound in China, Korea was able to display a strong recovery backed by improved exports. In my opinion, the financial crisis of 1997 was an insolvency crisis, but certainly a liquidity crisis in 2008 which requires a quick supply of foreign exchanges through SWAP deals. However, it was one time deal and there is a need to institutionalize such efforts within East Asia through measures like CMI (Chiang Mai Initiative).

Ito:
Since 1998, Japan has made significant efforts to prevent a next financial crisis through enhancement of cooperation among East Asian countries. CMI, Asian Bond Initiative and Pan Asia Credit Rating Agency need to be fully developed as they are necessary measures against the liquidity crisis of 1997 and of today. For liquidity crisis, an effort to provide liquidity without conditions of economic restructuring such as swap agreement like CMI, swap agreements between Federal Reserve and many countries, and the new Flexible Credit Line (FCL) implemented in 2009 at IMF(International Monetary Fund) is desirable. Asian monitoring and surveillance mechanism, when established, will be an effective mechanism to prevent a future crisis. Yen appreciated most among all currencies recently, but 110 Yen for 1 US dollar, before the collapse of Lehman Brothers, was actually a very depreciated level considering Japan's decade long deflation. Therefore, in historical viewpoint, I would say that 90 Yen now, in inflation adjusted basis, is not so high. Therefore, in historical viewpoint, I would say that 90 Yen now, in inflation adjusted basis, is not so high.

Wei:
China has a lot of SWAP agreements but they did not play an important role in the current crisis. It is noteworthy that advanced nations and East Asian countries successfully cooperated with each other politically. In other words, a fiscal macro monetary policy could stimulate imports, and be limited to a domestic recovery. This time around, however, all of the G20 members simultaneously pursue low interest rates, and increase in government spending, which resulted in a successful execution of economic expansion policy. At the same time, each government restrained its urge to turn into protectionism, and thus, was able to avoid hindering a global economic recovery through international trades. Regional collaboration such as CMI and programs like AMF (Asian Monetary Fund) should be further promoted. The competition among these plans would be necessary and desirable.

Patrick:
Discussion on the topic of macro economic cooperation is very meaningful. It is particularly important to understand how policy coordination is managed while it is also significant to find out each other's macroeconomic policy and implications in this process. It is fortunate that there was no competitive depreciation of countries after this crisis. SWAP agreements and CMI, which hold significance yet are effective, will require improvements to be made in order to be more credible and operational. However, we may have a competition-- a healthy one that can be helpful to everybody-- among CMI, AMF, IMF and the Fed when they become effective.

Q: The United States opposed AMF in 1997, but things are quite different now. What is the view of United States on this? And also, what are measures needed to promote financial collaboration and realization of AMF in East Asia?

Patrick:
Prospects for the position of the United States toward AMF are still unclear. That will depend on the framework of the overall regional policy. However, the global power relationship has indeed changed compared with 1997 with China becoming a global power. In 1997, the U.S. was frustrated with the AMF plan due to the lack of leadership in this region such as China's indifference. After all, the success of AMF will depend on how China and Japan cooperate with each other.

Lee:
I think it would be very important to institutionalize AMF and make it more operational.
First, we need to make the size of the current CMI substantially bigger. Currently, we have $120 bn. However, the total amount of foreign exchange reserves in the East Asian region is forecast to amount to roughly $4 trillion. If only 10% of this is devoted to CMI, it would be more meaningful than now. Second, as we all know, both the U.S. and IMF opposed the idea of AMF in 1998. Therefore, in order to avoid such opposition this time, we need to make AMF open to IMF. That is to say, I think we need to make it complementary and supplementary to IMF. Also, I believe that it would be difficult for AMF, at least in the initial stage, to urge structural reforms to its member countries when a bailout fund is provided. Therefore, the following mechanism would be more desirable: AMF involves into short-term liquidity crisis only, while both AMF and IMF involve into an insolvency crisis which requires structural reforms to be resolved. Third, we need to minimize the so-called moral hazard problem. Too each access to AMF can make the member countries complacent in their foreign exchange management. There is a need to prevent misuse or abusive use of AMF. Lastly, a governance structure is important. Balancing between advanced countries and developing countries is needed as well as the harmony between Japan and China.

Ito:
Financial cooperation of East Asian region, like the CMI, is very important to prevent future financial crises. Such a measure will not completely wipe out the risk, but will contribute in stabilizing the regional economy. This dynamic region of East Asia has a bright future if we are successful in more regional economic cooperation.

Q: Currently, a competition between the U.S. and emerging China is the most important issue to be discussed. Actually, there are several critical comments between the Chinese and the U.S. governments on the U.S. monetary policy and RMB. What do you think of the future of RMB and what changes do you see in the global economy?

Wei:
A more flexible exchange rate is good for China and I think that China will eventually move in that direction. However, floating exchange rates and RMB valuation alone will not guarantee a trade balance as it has been demonstrated in Japan and proven in my own recent research as well.
Therefore, China, at least in near future, will maintain a managed exchange rate and when looking to the longer term, it will adopt floating exchange rates in conjunction with a domestic inflation control. The key point is that we should consider a change in the Chinese foreign exchange regime in respect to the effects on Chinese such as inflation, instead of just looking into a change in respect to bargaining with US.

Patrick:
With Japan emerging as a global power during 1980s, everyone expected a direct competition with the United States. But it did not happen. The U.S. perceived Japan as a big threat, and implemented various bilateral and sectoral trade measures. Afterwards, global cooperation measures like G5 and G7 entered the stage. But recently, China's inclusion in such organizations for international cooperation has been emerged as the key issue.

Ito:
G5 (predecessor of G7) played an important role in 1985 Plaza Accord. And more organizations of international cooperation have been developed, reflecting the changes in the global economy. Of course, there are sometimes dissatisfactions from some member countries.

Q: How do you evaluate the current organizations for global economic cooperation? Nowadays, G20 seems to be playing a relatively more important role than G7. What are your thoughts on this? And also, some raise the possibility of establishing G2 in the future. Can you tell us on this issue?

Ito:
I am sure that G20 is currently the most important cooperative organization in the world. G20 began as a meeting of treasuries of major countries after the East Asian crisis, but now has developed into a world summit and thus much more meaningful. It's the most important economic cooperation council.

Patrick:
Some criticize that G20 has too many member countries. The most important factor to be considered here is that China and India are included in the group. Hence, given that these two countries are the members, G20 can effectively manage the world economy.

Wei:
Personally, I believe the fact that G20 has too many countries as its members was part of efforts to include China as a member nation, while it was also an effort to prevent China from being too proud.

Lee:
I think China can be G2 in the future, in terms of its overall GDP size. However, I am not sure whether China would be able to catch up with the U.S. in terms of GDP per capita. In this sense, China is different from Japan. In the late 1980s, Japan clearly caught up with the U.S. in terms of GDP per capita. However, Japan never exceeded the size of U.S. GDP. In the Chinese case, however, if only China increases its GDP per capita over the $10000 level, then its total GDP size would easily exceed the current U.S. aggregate GDP.

Patrick:
The G2 regime composed of only the U.S. and China does not seem too promising to me. There are many limitations for the two countries to develop talks on the global economy and draw solutions to address problems exhibited in the global economy. How does China feel about that?

Wei:
It is hard to imagine the U.S. discussing the global economy only with China. Realistically speaking, G2 is not a feasible system to discuss critical matters of the global economy.

Q: Finally, could you give us some comments on the future of East Asian economy and regional economic cooperation?

Ito:
I think this discussion was very helpful in thinking about the future of the East Asian regional cooperation in future. I agree with Prof. Wei on most of things including RMB. I hope that Beijing will listen to Professor Wei on how the exchange rate should be framed and considered. I am optimistic about the future of East Asian economic cooperation.

Wei:
I could close with a more cautious remark. Risks and problems still exist in that further efforts are required for a continuous financial reform. A bright side is that despite talks on Japan and China rivalry and heterogeneity of countries in the process of economic integration in East Asia, these differences and competing nature between the two countries did not stop European countries from collaborating productively.

Lee:
The most important point discussed today was the integration of the Asian financial market in the future, and that CMI is our current foundation. We will further need to address issues on how to institutionalize and make this operational. To this end, we have to develop a good monitoring system to prevent overuse along with a good governance system agreeable to the member countries.

Patrick:
East Asian economic integration and development have been driven by market forces and businesses, not by a government policy. My anticipation is that it will be driven, first of all, by businesses and private sector players. Then, to some extent, it will also be driven by agreements upon countries that see some interest in institutionalizing particularly on a financial side, perhaps on trade side. The biggest challenge for East Asia is how to deal with the U.S. Regional integration in East Asia cannot be exclusionary, but has to remain open. Political leadership and collaborative efforts between China and Japan are significant.




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