Choongsoo Kim: Challenges and policy responses to the euro crisis
Opening remarks by Mr Choongsoo Kim, Governor of the Bank of Korea, at the
SEACEN-BIS Executive Seminar, Busan, 24 September 2012.
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Distinguished Deputy Governors, delegates of SEACEN member central banks! Ladies and
gentlemen!
I would like to welcome you once again for coming to Busan to attend the SEACEN-BIS
Executive Seminar.
In particular, my special thanks go to Mr. Francesco Papadia (Director General of Market
Operations and Adviser to the Executive Board, ECB), Professor Takahashi ITO of Tokyo
University and Chief Economist Changyong Rhee of the ADB for taking time out of your busy
schedules to attend the SEACEN-BIS Executive Seminar as Speakers. Let me also express
my appreciation to lead discussants and session chairs. Taking this opportunity, I would also
like to express my gratitude to Dr. Eli Remolona and his staffs from the BIS Representative
Office for Asia and the Pacific and the SEACEN Center for your efforts and hard work to
organize this seminar.
We are holding the seminar today on Challenges and Policy Responses to the Euro Crisis
under the theme of Dealing with Financial Contagion with leading experts in each field. I
hope particularly that this seminar will be a good chance to further elucidate the causes and
the prognosis for the euro crisis and its effects on EMEs, and share our experiences and
wisdom on the future policy challenges.
The most notable characteristic of the recent global crisis is that the shocks from a certain
sector have spread rapidly and been amplified to the global real sector through the high level
of global financial inter-connectedness that has been built up over the past few years. That
said, it seems to me that the cross-border adverse spillovers and excessive global liquidity
and the resulting capital flow management difficulties, deemed to be at the root of the crisis,
have, to a large extent, failed to be resolved when we look at the international coordination
efforts so far to deal with the crisis and what they have involved.
Therefore I believe there is a good case for us to conduct a critical review at this point as to
whether the active policy implementation efforts made by major advanced nations including
the US in coping with the crisis have been effective to some extent but have so far fallen
short in terms of the global spillover effects of the crisis, and, furthermore, whether the
various policy tools used during the crisis have worked as they should.
As various views and assessments concerning this are expected at today's seminar, I would
like to make several points about a future global economic recovery from slightly different
perspective and the practical part the EMEs can play in this.
I would like to begin my speech by arguing that the global economy has already entered into
a state of multiple equilibria, where bad and good equilibrium coexist. My working hypothesis
is that an equilibrium that eurozone area economies attempts to achieve is likely to be a
local, not a global equilibrium. Furthermore, it can be a bad equilibrium in that it may incur
negative spillover effects on the EMEs. Such equilibria tend to remain unstable and we
expect that knife-edge equilibrium cannot be sustainable. I believe a global equilibrium can
only be attained with the concerted policy efforts by advanced and emerging market
economies.
Let me be a little more specific about my argument.
The eurozone sovereign debt crisis poses a threat to a global economic recovery and
financial stability, and the upshot may be that it is hard to rule out the possibility of it affecting
the EMEs unstable due to excessive provision of capital and thus making the capital market
of EMEs highly volatile. The chances are also slim that the sovereign debt problems of major
economies including European countries can be resolved smoothly without achieving global
economic growth.
I believe therefore that it is high time for us to concern ourselves with how best to revive the
global economy, while consolidating the achievements of the financial reforms implemented
by the policy authorities of individual countries in the wake of the global financial crisis from a
medium and long- term perspective.
Of course, since the tasks and challenges that we should deal with in order to escape from
the current crisis and get back to a sustainable growth track are multifaceted and highly
interconnected, the solution should not be limited to a single country or a certain region but
be sought at the global level.
In this context, I think the key here is to maximize the positive knock-on effects of growth
running between EMEs and advanced nations. And I am convinced that EMEs will play a
bigger role in this process going forward.
Specific figures also bear this out as well. EMEs accounted for 54% of the growth of the
global economy from 2000 to 2005 and their growth contribution rose to 72% from 2006 to
2011. In addition, while EMEs contributed just 37% of the global GDP in 1999, their share
went up to 49% in 2011, hard on the heels of the advanced nations. The IMF recently
estimated in its global economic outlook that while the contribution of EMEs to the global
economic growth is expected to remain about 70% for the next five years as in the late
2000s, their share in the global GDP is forecast to continue to increase to 54% in 2016.
For more specific details, you may refer to the results of the study conducted by the Bank of
Korea recently in order to examine to what extent EMEs could drive the economic growth of
advanced nations. According to the study, there are similar positive growth repercussions
between EMEs and advanced economies, when controlling conventional macro and
institutional factors. To put it another way, a 1% increase of per capita GDP of advanced
nations will lead to a 0.4%p per capita GDP growth in EMEs, and a 1% increase in per capita
GDP in EMEs will be translated into 0.3%p per capita GDP growth in advanced economies.
Given that the positive knock-on effects of growth between emerging and advanced
economies are higher than a certain level, one country's structural reform could have a
positive impact on other countries' growth through such knock-on effects. If advanced and
emerging economies carry out the structural reforms and expand market openness at the
same time, the world economy will grow faster and more robustly.
As we can learn from Asian countries' experience in overcoming the late 1990s Asian
financial crisis very fast on the back of major advanced nations' robust economic growth, if
EMEs can sustain their relatively high growth rates as at present, this will be greatly helpful
to advanced nations in breaking free from the current dilemma of reducing sovereign debt or
achieving economic growth.
To catapult the world economy onto a sustainable growth trajectory, what would be the most
desirable policies to be taken by major advanced and emerging economies? I cannot explain
this in great detail, but I think that roughly five requirements should be met in order for the
global economic recovery.1
First, major advanced economies should establish a credible medium-term fiscal
consolidation plan and put it into practice to put their sovereign finances on an even keel.
Second, the negative spillover effects through financial channels should be minimized. To
this end, eurozone member states should build a strong firewall ensuring financial stability,
while providing sufficient public funds to banks that they can be recpaitalized to fend off
contagion effects.
Third, trade and financial protectionism should be completely rejected.
Fourth, even though implementation of a new international financial regulatory framework is
desirable for global financial stability, we need more thorough analyses and studies on
whether there is a possibility that the framework could undermine the incentives for
appropriate risk sharing needed for productive investment.
Last but not least, global financial safety nets should also be strengthened.
This poses the question, what kind of role should central banks play in seeking such global
solutions?
I think that above all central banks need to remain faithful to their original mandate. They
should contribute to economic growth by maintaining price stability and financial stability and
establishing an effective macroprudential policy framework to manage systemic risks.
In particular, major advanced nations' central banks need to bear in mind that their monetary
policies could have negative spillover effects on emerging market countries. I think even from
advanced nations' standpoint, the benefits from precluding the possibility of adverse effects
would far outweigh the ex-post costs caused by conducting monetary policies in
consideration of their own conditions alone.
Let me conclude.
As I am sure you are all too well aware, it has been four years since the global financial crisis
broke out in September 2008. There is an urgent need for policy responses commensurate
with the changing conditions in line with the most severe global financial crisis since the
Great Depression in the 1930s.
As I mentioned earlier, to overcome the challenges facing us, we need above all to consider
the measures at the global level. To that end, close cooperation in the global community is
required, bearing in mind the growing role of EMEs.
The world economy nowadays seems to be waiting for a sage like the philosopher Aristotle
who claimed that the whole is greater than the sum of its parts. That is because, in this
increasingly multipolarized environment, global leadership which can envision "the whole"
future of the human being is becoming more important than ever before so as to address
transnational issues, including global policy cooperation and coordination for global financial
regulation and global sustainable growth.
In the face of the unprecedented Great Depression in the 1930s, our august predecessors in
office were bold enough to change their conventional wisdom and recast the academic
framework of the macroeconomy from a new perspective. For our part, we also similarly
need to further push back and advance the horizon of a new explanatory paradigm that will
stand for the next twenty or thirty years, through the historic impetus of the outbreak and
resolution of this global financial crisis.
Noting that "the ever-changing nature of the challenges calls for vigilance and an on-going
willingness to re-examine critically even well-honed convictions" in his speech, former BIS
General Manager Sir Andrew Crockett, who passed away in early September, emphasized
the importance of overcoming the ever-increasing challenges through "vigilance" and
"willingness".2
We need to exercise our wisdom to overcome such challenges through creative responses in
the face of the historic challenges. To this end, I think all economic players should stop
looking back and start looking forward.
Brief though this seminar is, I hope that it will be useful for us broadening our perceptions of
the new intellectual paradigm.
Once again I would like to extend my gratitude to all participants and hope that this seminar
will serve as a forum for lively and productive discussions with the active participation of all of
you who are attending this seminar on behalf of SEACEN members. Thank you.