[NSP Report 58] The Changing Global Financial Order and Korea's Choices: Linking Regional and Global Multilateralism

Associate Professor, Department of Political Science and International Relations, Korea University. Earned a B.A. in East Asian Studies from the University of Kansas and a Ph.D. in International Politics from the University of Southern California. Previously served as a Visiting Scholar at the Institute of Social Science, University of Tokyo; Lecturer in the Department of International Relations, University of Southern California; Freeman Fellow at the Watson Institute for International Studies and the Department of East Asian Studies, Brown University; Research Fellow at the Central Studies Institute, University of Oklahoma; and Assistant Professor in the Department of Political Science and the School of International and Area Studies at the same university. Author of The Japanese Challenge to the American Neoliberal World Order: Identity, Meaning, and Foreign Policy (Stanford University Press, 2008) and editor of The Political Economy of East Asian Financial Regionalism: Institutional Developments and Issues (Ah Yeon Publishing, 2012).

I. Introduction

Foreign policy consists of policy objectives and the means to achieve those objectives. Policy objectives are determined by what a state seeks to protect and pursue in the arena of international politics, while means correspond to the methodologies employed to achieve these objectives. The setting of policy objectives, often expressed as national interest, is influenced by the structural political, economic, security, and cultural environment in which a state is situated, as well as by the strategic context shaped through relations with other countries, and it is also a product of domestic politics. Policy means include physical pressure, negotiation and cooperation, and persuasion, and these mechanisms unfold in unilateral, bilateral, or multilateral forms. For a non-great power, which is a rule-taker rather than a rule-shaper in the international political order, the range of policy choices may not be broad, and the policy means may be limited.

In international politics, the domains of finance and currency serve as the bedrock of the global economic order, acting as arenas for competition and cooperation mediated by power, interests, and ideas. From the late 19th to the early 20th century, capital liberalization and the gold standard were intrinsically linked to British hegemony. The establishment and collapse of the Bretton Woods system, institutionalized after World War II, and the rise of the neoliberal financial and monetary order all occurred within the framework of competition and cooperation among economic powers, namely the United States and the G-7 countries (Cohen 1966; Kindleberger 1971; Krasner 1982; Ruggie 1983; Keohane 1984; Cox 1996; Strange 1998; Ikenberry 2001). In other words, the international financial and monetary order over the past 150 years is a history of change and continuity. Change and continuity have manifested through institutionalization at global, regional, and national levels within the reciprocity between markets and states. The core of institutionalization is the process of rule-making and rule-transformation (e.g., The Politics of Global Standards), and rules are accompanied by "Rulers" and "the Ruled" (Onuf 1989). The institutional functioning of the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO), which formed the backbone of the Bretton Woods system, exemplifies this well. As a rule-taker, a non-great power's primary policy objective becomes adaptation to the changing international financial and monetary order. This implies that the preference for policy objectives entails constrained choices with limited autonomy. The early 21st century, which has just begun, demonstrates that the world has changed, and so has Korea. The global economic order stands at a critical juncture of change, and Korea, with the fruits of its economic development over the past half-century, is transitioning from a rule-taker to a potential rule-shaper in the international political arena. Korea's participation as a member state in the G-20, a forum for global economic order established in 2009, attests to this. The next decade or so could be historically recorded as a period of Great Transformation in the global economic order, and Korea may face a period of transition from 'adaptation' to 'leadership'.

The global financial crisis originating in the United States in 2008 necessitates a transformation of the existing US-led neoliberal international financial and monetary order at both global and regional levels. Firstly, regarding the monetary order, the hegemony of the dollar as the key currency is being challenged (Helleiner 2009; Eichengreen 2010), and the Euro, born from the neoliberal economic paradigm, is also facing significant challenges (McNamara 1998; Gillingham 2005). China, emerging as a G-2 power, is pursuing the internationalization of the Renminbi to reduce its dependence on the dollar (Lee Yong-wook 2011). Furthermore, South America, Africa, and the Middle East have already launched or are pursuing regional monetary alliances. East Asia is no exception. At the regional level, the Association of Southeast Asian Nations (ASEAN), along with China and Japan (ASEAN Plus Three: APT), in cooperation with the Asian Development Bank (ADB), is studying the establishment of a regional currency to stabilize exchange rates within the region. As Barry Eichengreen suggests, the global economy may be on the verge of transitioning to a multi-key currency system with the end of the dollar system (Eichengreen 2010).

While the monetary order concerns the issue of exchange rates through the stable operation of supply and demand for currencies serving as standards for settlement, reserves, and accounting, as the foundation for trade and investment, the financial order pertains to the formation and development of capital markets, including the degree of capital liberalization to promote trade and investment, and the expansion of financial safety nets for preventing and effectively managing financial crises. Globalization, which has been underway since the 1980s, has signified neoliberal financial liberalization, and the 2008 global financial crisis poses a significant challenge to it. At the global level, capital control theories are gaining traction, spearheaded by IMF reforms. At the regional level, discussions on establishing regional financial crisis prevention mechanisms, such as the European Stability Mechanism, are actively underway in South America, Africa, and the Middle East. Concurrently, regional financial market development plans are emerging in various regional blocs with the aim of reducing dependence on Western capital markets.

East Asia, where Korea is located, has also been accelerating regional financial integration through institutional cooperation mechanisms established after the 1997 East Asian financial crisis, primarily centered around ASEAN Plus Three. Specifically, measures for preventing and effectively responding to financial crises have been institutionalized, starting with bilateral swap agreements in 2000 and evolving into the multilateralized Chiang Mai Initiative Multilateralization (CMIM) in 2010, and discussions have expanded to the creation of an Asian Monetary Fund (AMF), an 'Asian IMF.' ASEAN Plus Three successfully launched the ASEAN Plus Three Macroeconomic Research Office (AMRO) in Singapore in May 2011 as a sister institution to CMIM, enhancing the prospects for an AMF. The revitalization of regional financial markets focuses on the development of regional bond markets, exemplified by the Asian Bond Market Initiative (ABMI) launched in 2002. ASEAN Plus Three launched the Credit Guarantee Investment Facility (CGIF) in May 2011, a crucial mechanism for revitalizing the Asian bond market, and discussions are actively underway for the establishment of a Regional Settlement Institute (RSI) to provide settlement services for regional bond transactions.

Therefore, the international financial and monetary order during this period of great transformation, which will serve as the structural context for Korea's financial and monetary diplomacy, can be broadly summarized into three interconnected trends. First, the change in the existing neoliberal institutional framework at the global level, including its depth, extent, and direction. Second, the increasing emergence and consolidation of regional financial and monetary systems (Katzenstein 2005; Powers and Goertz 2011). Lastly, the relational nature of the financial and monetary orders developing at the global and regional levels. Will they develop complementarily? Or will the development of regional financial and monetary orders take an exclusive form, leading not only to competition between global and regional levels but also to institutionalization in the form of inter-regional competition?

In this era of great transformation in the international financial and monetary order, how can Korea effectively play a rule-shaping role that encompasses both the global and East Asian regional spheres? In other words, with exchange rate stability, the expansion of financial safety nets, and the smooth supply and management of capital for economic development as the overarching policy objectives of financial and monetary diplomacy, by what means should these be pursued, and how can policy autonomy be maximized to reflect Korea's preferences in the global and East Asian regional financial and monetary orders?

This report argues that multilateralism should be the policy direction for Korea's financial and monetary diplomacy. As a non-great power, Korea should pursue multilateralism not only as a policy means but also as an end in itself. More specifically, Korea should focus its efforts on institutionalizing the ongoing financial and monetary cooperation in East Asia by acting as an honest broker and participate in the rule-making process of the global financial and monetary order, such as the G-20, based on a regional East Asian foundation. This is a strategy of linking the regional and global through multilateralism, and such a strategic choice, compared to other strategies, opens up the possibility for Korea's policy preferences to be most secured and reflected during the period of re-establishing the global economic order. Through the consolidation of regional multilateralism, Korea can build trust and gain experience in policy coordination with China and Japan, developing policies together to realize Korea's policy preferences on the global stage. While a non-great power may have limitations in initiating multilateralism and establishing institutional frameworks on specific issues, it can effectively utilize existing multilateral frameworks.

This report is structured as follows. First, it will discuss why multilateralism can be advantageous for non-great powers like Korea, drawing on existing research to provide a theoretical framework for the report's main argument. Second, it will examine the development process, key issues, and future directions of regional East Asian financial and monetary cooperation and global G-20, which are the primary targets of Korea's financial and monetary diplomacy. Based on the above discussion, it will argue for the importance and urgency of a strategy linking regional and global multilateralism for Korea, and conclude by proposing the strengthening of policy network capabilities for Korea to play an effective role within the multilateral framework.

II. Why Multilateralism?

Multilateralism, along with unilateralism and bilateralism, is a method by which states conduct their foreign policy. For non-great powers, unilateralism is not an easily chosen method; thus, bilateralism and multilateralism are the available options. For the following reasons, multilateralism can be more favorable than bilateralism for the realization of a non-great power's policies. First, the advantages of multilateralism for non-great powers will be examined in general terms, and then the utility of multilateralism in Korea's financial and monetary diplomacy, linking regional and global dimensions, will be explored.

Multilateralism itself offers several benefits to non-great powers like Korea. Most generally, consensus-oriented multilateralism allows the voices of non-great powers to be heard in the policy-making process compared to other forms of political processes. Of course, the final policies decided upon do not always bring symmetrical benefits to all participating countries. As realists argue, multilateralism may also be an extension of great power politics (Krasner 1985; Mearsheimer 1995; Grieco 1999). However, even in such cases, multilateralism can mitigate the distribution of benefits arising from asymmetrical power relations compared to bilateralism (Ruggie 1990; Martin 1998). By utilizing the norms, rules, and procedures provided by multilateral institutions, opportunities can be created to maximize the adjustment of interests with great powers (Hurrell 2005, 50). Regarding this, Catherine Lu argues as follows (Lu 2009, 54-55).

While conflicts, especially over the distribution of goods and burdens, will inevitably arise, under conditions of political friendship among peoples [in a multilateral setting], they will be negotiated within a global background context of norms and institutions based on mutual recognition, equity in the distribution of burdens and benefits of global cooperation, and power sharing in the institutions of global governance rather than by domination of any group.

Multilateralism is advantageous during periods of great transformation. A period of great transformation refers to a turbulent period where various opinions and policy proposals for change unfold in the political arena, with new powers clashing with existing powers. The framework of multilateralism provides a forum for discussion for various actors during these transformative periods, enabling them to share information about each other (such as policy preferences and means). While discussions and increased information do not always lead to conclusions that all actors can agree upon, the discussion facilitated by multilateralism allows for the exploration of what the problems are and what solutions exist. In this process, each country's position is expressed, allowing rule-taking non-great powers to more easily make policy predictions for adaptation (Pouliot 2011).

For example, the G-20, launched in response to the global financial crisis, is composed of four clusters. Cluster 1 deals with financial regulatory reform (Banking Capital Requirements/Basel III Agreement), discussing issues related to banks' capital ratios and various banking regulations ("Bonus Regulations," "Accounting Harmonization," "Credit Rating Agencies," "Bank Tax, International Transaction Tax," "Derivatives," and "Hedge Funds"). Cluster 2 is Macroeconomic Policy Coordination. Issues discussed for macroeconomic coordination include "Sovereign Debt Management," "Global Imbalances and Currency," "Currency Valuations and Movements," "Monetary System" (The Future of the Dollar as Core Currency), "Global Financial Safety Net" (Korean Agenda), and "Trading System Coordination" (Prevention of Protectionism and Doha Round Completion). Cluster 3 discusses Public Goods. The agenda items included are "Millennium Development Goals," "Climate/Energy," "Food Security," and "Innovation/Education, Corruption." Finally, Cluster 4 addresses Institutionalization and Governance Framework, dealing with the establishment of a G-20 Secretariat and the reform of international financial institutions, including the IMF. Thus, within the framework of multilateralism, detailed discussions are held cluster by cluster. In the process of agreement and disagreement, a public sphere of interaction emerges centered on each country's position regarding the issues at hand, thereby increasing the possibility and predictability of policy directions for problem-solving... (to be continued)