Panel: Geopolitics of Finance
Date/Time: Tuesday, April 28, 2015 / 12:30-13:45

Moderator: Bark Taeho, Seoul National University

Speakers:
Troy Stangarone, Korea Economic Institute
Benn Steil, Council on Foreign Relations
Oh Suktae, Societe Generale

Panel Description

In 2008, the U.S. financial system was on the brink of collapse. The great recession that soon engulfed the developed world seemed to lay bare the deficiencies of the so-called “neoliberal” model. Today, as the global economic recovery remains in doubt, the ability of the global financial system to ensure stability and support growth is in question. Can the global financial system be reformed to better serve the needs of the global economy? Does China’s Asian Infrastructure Investment Bank presage a fundamental challenge to the U.S.-led global financial structure? Can the existing financial order accommodate China’s rise?

Session Sketch

Session 2, titled “Geopolitics of Finance”, explored the future challenges of the global financial system in the wake of the 2008 global economic crisis. The moderator of the session, Dr. Bark Taeho, professor at Seoul National University, began by presenting three questions to narrow the scope of the debate that was to follow. Explaining how initial efforts of the G20 to examine and address shortcomings of the current system lost its momentum after the peak of the crisis had passed, Dr. Bark brought up the trends and substitutes that had emerged in its wake. His first question explored the process of quantitative easing, which many countries such as the United States, Japan, nations of the European Union and even China have undergone in order to cope with the aftermath of the 2008 recession. Because normalizing these unconventional financial policies could have negative effects on regional neighbors, when and how were countries to go about implementation? His second question revolved around potential restructuring of the International Monetary Fund (IMF) given the new world stage and different requirements for international development, which segued into his last question regarding countries’ positions on the Asian Infrastructure Investment Bank (AIIB). Taking U.S. opposition into account, Dr. Bark used this last point to assess U.S. global influence in the face of rising foreign institutions to bring the debate back to the central question guiding the entire Asan Plenum: Is the U.S. back?

Troy Stangarone, Senior Director of Congressional Affairs and Trade of the Korea Economic Institute, started the debate by exploring the different frameworks used to evaluate U.S. return. He made the point that slow changes add up to a big systemic shift, and suggested that one should focus on what stage of the transition that the United States is in to have a better view of the entire situation. In saying so, Mr. Stangarone acknowledged that the United States is taking significant steps to improve itself economically, such as getting rid of bad loans. However, for the United States to maintain its leadership in finance, it must learn to adjust to a changing world and respond accordingly. Taking China as an example, the U.S. approach to dealing with China is a double-edged sword that achieves very little. On one hand, the United States has officially broadened its policies for increased engagement with China. On the other hand, it does not take opportunities to interact with China and bring it into the international community, which it could have done with China’s AIIB. As argued by Benn Steil from the Council on Foreign Relations, the AIIB presented a chance for the United States to increase its foothold in the Northeast Asian region, despite contrary belief. Rather than opposing its allies joining the AIIB, Dr. Steil argued that it should have encouraged them, particularly Japan. Given that China had made major concessions to woo U.S. allies, such as offering Japan large voting shares in the AIIB’s decisions, the United States could have both fulfilled its objective to limit Chinese dominance through allies and geo-strategically facilitated better ROK-Japan relations, whose economic interests would have aligned.

However, U.S. opposition to the AIIB combined with parts of America’s political right that have taken a hard-line stance against multilateral bailouts have only bolstered the rise of new institutions. They give credence to the belief that there must be other outlets that give voice to rising powers. Despite studies conducted by the IMF that show the need for government to play a strong hand in economic development or recovery, the U.S. Congress increasingly sees such efforts as currency manipulation. This has led to trading tensions between the United States and others. Moreover, as former organizations spearheaded by the United States, such as the World Bank, seem to become more focused on poverty reduction rather than infrastructure, institutions like China’s AIIB become an attractive alternative. However, as economist Oh Suktae of the Societe Generale Corporate and Investment bank maintained, the AIIB will never be a commensurate alternative for the Northeast Asia region. Given the region’s institutional problems that could not support new infrastructures, there are issues of governance that undermine credibility. For example, the fact that China is forgoing its veto privileges in the AIIB is a cause for pause.