KoreaToday Chinas Ascent ’Blessing’ for Korea
Seoul Advised to Take Lesson From Switzerland
By Kim Jae-kyoung
Staff Reporter
The year 2009 is a milestone year for South Korea, as well as the world, as it's considered a critical turning point when the balance of global power shifted to the East from the West.
With U.S. capitalism careening on the edge of a meltdown in the wake of the Wall Street crisis, the world is slowly moving from the West to the East, a harbinger of the re-emergence of Pax Sinica, which is likely to take shape once the ongoing global crisis passes.
This major transition, which is taking place at a snail's pace, has huge political and economic implications for Korea because the country is located right next to the world's fastest-growing economy.
Korea has been a front-line state facing the pressures of globalization due to the so-called Korea sandwich, where the economy is squeezed between China and Japan. Many economists warn that the ascent of China will intensify this sandwich phenomenon.
However, in the eyes of Moritz Schularick, an economics and economic history professor at the Free University of Berlin, the global power shift is an opportunity for Korea to increase its influence in the global market.
In an interview with The Korea Times, Schularick stressed that Korea, as a small, open economy, will benefit from the Korea sandwich phenomenon depending on how it positions itself between the two economic giants.
``I have been to Korea many times. It is a wonderful country, but obviously much smaller than the two big neighbors ― China and Japan. This is often seen as a problem, but I don't agree,'' he said.
``Being a small open economy next to big neighbors can be a big advantage. Korea will profit tremendously from China's economic ascent,'' he added. ``The best strategy for Korea is to be an open society with strong rule of law, sound business ethics and a functioning democracy."
He emphasized that Korea should be on good terms with its neighbors but retain close ties with the U.S. and Europe.
``Being a hub for business and a pole of political stability and economic freedom provides for the best development strategy in my eyes,'' he said.
Schularick, who coined the term ``Chimerica,'' a fictional combination of China and America, together with Harvard University professor Niall Ferguson, said that Switzerland in Europe can be a good example showing how Korea can survive between China and Japan.
``Being a small(er) economy next to an emerging giant has many advantages to profit from the ascent. Switzerland case shows that it is possible to remain an independent economic entity with a diversified economy next to a much bigger economy such as Europe,'' he said.
``Obviously, Korea is much bigger than Switzerland, but there are clearly advantages from being a stable, open, Western-oriented country open to foreign business and next to a very big country like China that will be undergoing a volatile period of economic change and development,'' he added. ``It is important to see the advantages. Korea needs to be perceived as more free, stable, and economically open than the bigger neighbor and keep its technological advance.''
China has been the main growth engine for the Korean economy, taking in around 23 percent of Korea's total exports and accounting for 28 percent of Korea's GDP growth from 2003 to 2008.
Era of Pax Sinica
Regarding the global power shift, the veteran economist said that the emergence of Pax Sinica is not a matter of choice but it won't happen in the coming decades.
``I don't see it happening in our lifetime, at least not before the end of the century. I think China's importance will grow, but I don't think it will overtake the West in the coming decades,'' he said.
``The most difficult part of China's development is still ahead (political and economic). China still has to prove that it can grow intensively instead of extensively,'' he added.
He pointed out that China should take a lesson from the Soviet Union as it too was very successful in heavy industries but never made the transition to intensive growth.
``China might ultimately make the transition, but it will take time. Extrapolations of past growth rates are naive. Many obstacles to development must still overcome, not least in the political sphere,'' he said.
China's ascent in the global scene will gain further momentum once it tides over the current economic turmoil. China's latest economic data showed a slowdown in growth but there are some signals indicating a slowing of the economic downturn.
The Chinese economy grew 6.1 percent in the first quarter of this year, down from 6.8 percent in the last quarter of 2008. But exports fell at a slower pace in March, while Chinese consumers were also buying more goods. A total of 772,000 cars were sold last month, up 22.4 percent from the same month last year.
This shows that the Chinese domestic economy is strengthening and supports the argument that China can continue to achieve its growth targets even as its export markets are suffering.
Paradox of Reserve Accumulation
Schularick said that the key culprit behind the ongoing global crisis was emerging economies' attempts to pile up U.S. dollars to secure a cushion against external shocks.
He pointed out that ironically, individual countries' continuous attempts to make their economies safer have contributed to macroeconomic imbalances and a market anomaly of financial risk on a global level.
``By running current account surpluses, intervening in foreign exchange markets and building up currency reserves, Asian and other emerging economies were sustaining export-led growth and buying insurance against future financial instability,'' he said in his latest research report.
``These policies turned developing markets into net capital exporters to the developed world, mainly to the U.S.,'' he added, noting that poor emerging markets ― most notably China ― helped to create the macroeconomic backdrop for the current financial crisis by subsidizing interest rates and consumption in the U.S.
According to the IMF, between 1990 and 1998, emerging and developing economies were running an average current account deficit of about 1.7 percent of their GDP. Between 1999 and 2008, this deficit turned into a surplus of 2.5 percent of GDP.
He also cited several other factors for financial distortions that brought the financial system to the brink of collapse in the second half of 2008 ― fraudulent lending and short-term incentives for bankers, loopholes and mistakes in financial regulation, and Federal Reserve policy that failed to spot and stop the credit cycle.
``Unless emerging markets can be convinced to take on global finance without the protective shield of large currency reserves, we will either have to learn to live with the economic and financial distortions caused by capital flowing from poor to rich, or once again alter the model of financial globalization,'' he said.
Schularick is a visiting scholar from the economics department of Cambridge University and a professor of economics and economic history at the Free University of Berlin. He was also a director of studies in economics at the Graduate School for North American Studies, Free University of Berlin, 2007. He worked for Deutsche Bank Research as a senior economist between 1999 and 2002 and German Advisory Group to the Ukrainian Government as a consultant in 2000. He received an M.Sc. from London School of Economics, an M.A. from Humboldt University of Berlin and a Ph.D. from Free University of Berlin. His Ph.D. thesis was ``Financial Globalization in Historical Perspective." He wrote a famous journal article, ``Chimerica and the Global Asset Market Boom'' in 2007, together with Harvard University historian Niall Ferguson.