Northeast Asia: Seizing the Opportunities of Globalization -- Speech by Horst Köhler, Managing Director, IMF
February 27, 2004Northeast Asia: Seizing the Opportunities of Globalization
Speech by Horst Köhler
Managing Director of the International Monetary Fund
At the International Conference on a New Vision and Strategy under Changing Leadership in Northeast Asia
Seoul, February 27, 2004
Mr. President, distinguished guests, ladies and gentlemen,
1. It is a privilege to participate in this important conference today. It is a particular pleasure for me to be back in Seoul. When I was here four years ago, Korea was recovering from its severe economic crisis, and still struggling with the problems of the past. Yesterday, I had the honor of meeting with President Roh and was impressed by his vision for Korea, a vision whose focus is firmly on the future, a future of peace and prosperity in Korea, securely embedded in Northeast Asia.
2. This conference takes place against the background of a significant strengthening of the global economic outlook. Led by the United States, the world economy now has the potential for a return to solid growth. The recovery is broadening and deepening, with all major regions showing improvement. And Asia, led by China and India, is in the vanguard of the global recovery. I expect that this will be reflected in an upward revision of the IMF's estimate for global growth in 2004. This rising tide will also lift Korea, and we expect growth in this country to accelerate in 2004.
3. But we know that there are still risks to this outlook, notably arising from the persistent current account imbalances in the global economy. The recovery is still uneven, with growth relatively rapid in the United States and emerging Asia, picking up in Japan, but with the euro area lagging behind. Ensuring that the recovery is robust and sustained requires cooperation. And such cooperation should ensure that no region bears a disproportionate burden of adjustment. This requires a durable increase in national savings in the United States, with priority on establishing a framework for returning to fiscal balance over the medium term. It requires an ambitious acceleration of the pace of structural reform in Europe and Japan to lift their productive potential. And in those countries in Asia that have experienced a rapid accumulation of foreign exchange reserves, it requires making increased use of the scope for exchange rate flexibility and structural reforms to underpin domestic demand growth. Such commitments, made more credible by being collective, would underpin the expectation of a smooth adjustment in global imbalances.
4. Asia's growing weight in the world economy gives it an important role in global cooperation. Asia now accounts for over a quarter of world exports and one third of world output. Korea itself surely ranks among the leading examples of Asia's success: from being among the world's poorest countries, Korea's real per capita income has increased 12-fold over the past two generations. And Asia is rapidly becoming more integrated. Intra-regional trade now accounts for 40 percent of Asia's exports, compared to 30 percent a decade ago. China's strong growth, in particular, is fuelling a vibrant Northeast Asian region.
5. Embracing global economic integration lies at the root of Asia's success. And globalization continues to offer much promise, for Asia and for the world. I see tremendous potential for further long-term growth in the global economy. Technological progress continues at a rapid pace, and ever stronger trade and financial linkages are promoting further international division of labor and expanding markets-holding out the promise of gains in productivity and standards of living everywhere. But these gains are not automatic. Many have not been able to seize the opportunities offered by globalization, and severe poverty persists in too many countries. And as we know from experience, openness and economic interdependence can exacerbate the spillovers of economic shocks across countries, and amplify domestic economic problems. Moreover, the rapid integration of China, India, and other large emerging markets into the world economy is raising competitive pressures for everyone, increasing the need for flexibility and innovation.
6. How can other countries in Asia best address these pressures? And how can all countries ensure that they can seize benefits and opportunities of globalization while containing its inevitable risks? Allow me today to reflect briefly on these questions in the context of the rapid development of Asia, and the rise of Northeast Asia in particular.
7. First, domestic economic policies in Asia must continue to be geared toward building resilient and competitive economies. This requires, in particular, strengthening domestic sources of growth, including by vigorously tackling incomplete reforms in the financial and corporate sectors. It also requires pursuing policies that make economies more flexible and capable of absorbing economic shocks more easily. And it requires maintaining a good business climate, conducive to investment, growth, and employment creation.
8. Korea has made significant strides in implementing the policies needed to take advantage of the new opportunities. Its skilled work force provides a strong foundation for future growth, and has allowed it to become a major center for advanced technology products. In recent years, Korea has further opened up its economy and China is now its number one trading partner. And its prudent policies and low level of public debt have positioned it well to address the challenges of an aging society. Overall, Korea can look to the future with self-confidence that President Roh's vision of doubling per capita incomes to $20,000 is achievable. But it will require perseverance in implementing its reform agenda. Specifically, I see three critical tasks for Korea in the years ahead:
• Further steps are needed to improve corporate governance, including by providing more timely and accurate information to investors, to ensure that Korea remains an attractive investment destination;
• There is need to accelerate the development of a sound financial sector, including a more efficient local capital market, to better channel domestic savings to productive investment;
• And Korea needs to modernize its labor market institutions to foster flexibility and adaptability, thereby creating more and better jobs. At the same time, it needs to strengthen its social safety net to ensure that the most vulnerable in society are protected during periods of economic turbulence.
9. Second, regional cooperation in Asia must complement national policies. Growing regional and global interdependence requires that policy-makers pay increasing attention to the international context of their decisions. Recent initiatives to strengthen economic and monetary cooperation in Asia are going in the right direction and are supported by the IMF. The ASEAN +3 framework, which includes Korea and China as well as Japan, will surely play an increasingly important role in promoting regional integration. I also welcome the efforts to improve intra-Asian monetary cooperation through the Chiang Mai network of bilateral swaps. And I am encouraged by the recent signing of the free trade agreement between Korea and Chile, as a stepping stone towards broader liberalization, especially in the area of agricultural trade. However, my advice is to ensure that these regional initiatives remain consistent with broad participation in the global economy. A regional focus that remains open to the rest of the world holds the greatest promise for Asia's long-term growth prospects.
10. Third, effective multilateral cooperation is essential for a successful globalization. And trade liberalization is a key pillar of this cooperation. It is well worth reminding ourselves that the tremendous expansion in global prosperity in the second half of the 20th century was only possible in the context of broad-based, multilateral trade liberalization, within a framework of reciprocity and rules. I am aware that trade liberalization can raise difficult issues, including here in Korea, because the short-term costs to domestic competitors are often more immediately visible than the long-term benefits that will accrue to producers and consumers alike. But history has shown that Asia, including Korea, has been a primary beneficiary of multilateral trade liberalization. I share Alan Greenspan's concern that "creeping protectionism" could significantly erode the flexibility of the global economy. Averting this threat requires strengthening international cooperation to bring the Doha Round to a successful conclusion as soon as possible. And I think Korea can be a strong voice in this effort, for this highly open economy has much to gain if trade advances, and much to lose if we retreat into protectionism.
11. Since the Asian crisis, the IMF itself has gone through a process of wide-ranging reform to strengthen its ability to foster global financial stability. We are reinforcing our regular surveillance of our members' economies, focusing increasingly on vulnerabilities in financial sectors and international capital markets, which have been at the root of the crises of the late 1990s in Asia and elsewhere. We are strengthening the framework of rules for the global economy by developing and implementing international standards and codes, ranging from sound corporate governance to credible and transparent statistical systems. And we are promoting a culture of transparency, in our own operations and by encouraging our members to publish our regular assessments of their economies. In this work, I am guided by the principle of evenhandedness because stable financial markets require good policies in both emerging market economies and mature financial centers. And overall, I believe our work is beginning to pay off and has contributed to the remarkable resilience of the international financial system in the face of multiple shocks during the past three years.
12. But it would be unrealistic to expect that dynamic market economies can be fully sheltered from periods of turbulence and adjustment. Indeed, it is the willingness to take risk and tackle uncertainty that drives innovation and technical progress—and helps create jobs and build prosperity. We must be aware that for many, living with this uncertainty can be unsettling. And it is the responsibility of policy makers to have efficient safety nets in place. But I believe we must be clear that tackling the challenges of globalization requires always remaining in motion, i.e. the economic and political ability to adapt to constant change.
13. Amidst these changes, the role of the IMF in Asia is evolving. Six years ago, the capital account crises in Thailand, Indonesia, and Korea led to some of the largest IMF financing packages in its history. Today, Korea and Thailand have fully repaid those loans ahead of schedule, and Indonesia no longer needs IMF financial support. Their robust recovery is testimony to these countries' success in implementing strong economic policies, and the IMF is proud to have worked closely with them in difficult times. Looking ahead, I have no doubt that Asia's growing role will eventually need to be reflected in a sizeable increase in the quotas of members in this region at the IMF—and, as a result, in their stronger voice in the IMF's decision-making process. This is a difficult debate, which touches on the interests of many members, and I do not expect a resolution overnight. But I believe it is the right thing to do, and I support a quota increase for Asian members. Meanwhile, I encourage Asian countries, including Korea, to play an active role in our Executive Board and help us address the manifold challenges facing the global economy.
Ladies and Gentlemen:
14. Asia's success story was once dubbed the "Asian Miracle". But I would not call it a miracle: rather, it was the result of hard work, economic policies that encouraged business investment, and—not least—a strategy to participate and compete in the world economy. I agree with President Roh when he said in his inaugural address to the National Assembly that "Northeast Asia, which used to be on the periphery of the modern world, is now emerging as a source of energy in the global economy". Tapping this energy will help Korea realize its hopes and aspirations. And I am confident that a vibrant Northeast Asian region will also benefit all world citizens and make a significant contribution to building a better globalization.
Thank you very much.