5 th Dialogue on Social Market Economy East Asia and Eastern Europe in a globalized perspective lessons from Korea and Estonia Tartu (Estonia) April

Transcription

1 5 th Dialogue on Social Market Economy East Asia and Eastern Europe in a globalized perspective lessons from Korea and Estonia Tartu (Estonia) April 2013

2 Korea crisis country or superstar?

3 Overview Introduction 3 main fields of institutional transformation Macroeconomic performance after the Asian crisis and the current debate for a new economic model Conclusion

4 Lessons from transformation countries Economic systems laboratories From monist (neo-classical) to heterodox explanations Institutions as missing links 3 aspects Formal vs informal institutions Institutional embeddedness (culture and institutions) Institutional competition (external aspects)

5 The market for institutions model External context: institutional competition (EU; WTO; IMF) Internal context: embeddedness (culture, cognitive models: risk aversion; time; hierarchy etc.) Formal and informal institutions Intended vs. unintended consequences of policies Supply and demand side for institutions market model The expectations equilibrium Economic crisis and transformation

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7 Monetary policy after the crisis Formal vs informal institutions Formal: increased Central Bank independence modeled on European models Change in goals (price stability) Change in independence (political, economic, organizational) Informal: hierarchies and networks continue to work despite changed formal framework No immediate change

8 Over this half-century, the Bank has strived to help the Korean people to shake off the vestiges of colonialism and recover from the disaster of war, and it has made every effort to lay the cornerstone of sustainable growth for the nation s process of economic development (Bank of Korea 2000).

9 CBI and Inflation for selected OECD economies

10 CBI and inflation in transformation economies

11 Reform of the BOK (1) Until 1997 From 1998 Objective of monetary policy Monetary Policy Committee Monetary value; financial system stability 9 members; 2 independent Price stability 7 members; 4 independent Chairman of MPC MOFE BOK Monetary policy regime Indetermined (monetary Inflation targeting

12 Reform of the BOK (2) Until 1997 From 1998 Conflicts in mon. policy Government decides BOK decides Bank supervision BOK FSC Accountability Organizational change indetermined Approval by MOFE Annual reports to National Assembly Approval by MPC

13 Conflicts in post-crisis monetary policy in Korea (1) Crisis did not end conflicts between BOK and MOFE In IMF dominance, nevertheless DJinterest Most often conflicts over call rate (announcements of MOFE before MPC meetings) On more than 50 occasions from Indirect pressure (e.g. through KDI)

14 Conflicts in post-crisis monetary policy in Korea (2) Informal Policy coordination meetings Conflicts over exchange-rate management Informal coordination through Foreign Exchange Market Stability Council Political conflicts over BOK appointments by government

15 The Monetary Policy Committee as an epistemic community 25 members from 1998 to graduates of SNU (plus 4 Korea, Yonsei Uni.) 18 graduates of American universities 9 with MOFE/ EPB affiliation, plus 8 with BOK affiliation MPC as epistemic community, mixing Korean political culture with US-oriented economic belief system

16 A longer term perspective For BOK, institutional reform of 1997 can be called as success Still conflicts about monetary policy Revision of BOK act 2003 increased independence further International environment was conducive Danger of Asset price, real estate bubble Continuing presence of pro-growth orientation

17 ...a longer term perspective Not completely new theory of central banking But identification of important factors to understand CB performance Institutions, institutional competition, cultural embeddedness Important conclusions for CBI measurement Limited value of optimal design approach (as well in normative economics as in public choice perspective)

18 FDI after the Asian crisis from closed economy to embracing foreign investment throughout the 1990s, but only openly and aggressively after the crisis segewha policy to DJnomics protecting core sectors (culture, law, education): protectionism vs. cultural sensitivities Foreign brands: from liability to asset (e.g. cars) Difficult high-profile cases (KEB)

19 Korea s FDI policy change IMF crisis as catalyst for FDI reforms Sale of 2 banks to foreign institutions Opening of restricted sectors (besides media, education) 1998 Foreign Investment Promotion Act Ombudsman for investment KOTRA one stop service for investors Direct financial aid for investing companies

20 Application of transformation theory External environment: pressure for opening (IMF conditionality; bilateral pressure) Institutional competition: learning from FDI inflows in other countries (benchmarking) New policy approach: Hub of East Asia (logistics; finance; services, corporate headquarters) Market for politics: changed position of foreign investors Cognitive models: changed perception of foreign investors

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22 Trade policy after the Asian crisis from multilateralism to bilateralism/ regionalism Latecomer to bilateralism perceptions of opening as threat ( hermit kingdom ) vs. perceptions of opening as chance Political vs. economic aspects of trade agreements (no dissociation of trade agreements from policy, though it works for trade)

23 A look back trade policy 1996 OECD member state, but in trade negotiations still status of developing country Rise of China Rise of outbound investment (in 1990s in China, Southeast Asia) Long-time favoring trade multilateralism Fear of being left out of trade networks particular

24 A look back trade policy (2) Strategy of bilateral FTAs with major partners in all continents FTA with Chile as icebreaker Routine of preparatory studies KORUS, KOREU FTAs as major achievements of Lee Myung-Bak government Regional integration as more and more important alternative/ supplement

25 Application of transformation theory External environment: pressure for opening through fear of being left out (plus subsequent failures of world trade negotiations) Institutional competition: imitation (benchmarking) New policy approach: proactive approach to ASEAN plus 3 (China, Japan, Korea), Korea as catalyst, regional balancer in Northeast Asia, plus access to markets by worldwide FTAs Market for politics: decline of producer lobbies (in particular agriculture), rise of consumer lobbies Cognitive models: changed perception of gains and losses from FTA

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28 Some macroeconomic comparisons

29 Korea, a crisis country? The different perception of Korea`s success abroad and at home (education policy and PISA; growth policy and inequality; Dependence on two giants: Samsung and Hyundai/Kia The slow, but undeniable limitations to welfare spending The Damocles sword of household debt

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34 The failure of an old expectations equilibrium Growth of chaebol will lead to overall and strong growth and income Working hard for education will lead to secured jobs Successful companies will take care of unsuccessful companies (Kia, Daewoo vs. Ssangyong case) Growth will help to overcome debt problems, in particular through ever-growing house prices

35 Is the Social Market Economy a way out? The idea of Social Market Economy 3.0 The alleged attractions of Social Market Economy Balanced regional development Strong and independent SME sector, hidden champions with innovative potential Political stability as precondition for longer term growth policies The big question: can their be a new state-led drive for Social Market Economy? Or how can it grow from below?

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37 Thank you very much!

38 Backup Data

39 South Korea before the crisis (1) Democratic transformation 1987 Political and economic liberalization Power of trade unions in chaebol, but dual market Chaebol grow too big to fail, too big to govern OECD membership is sign of success But it also requires a lot more liberalization labour

40 South Korea before the crisis (2) Not profitability, but growth ideology Only partly financed by high savings rates More and more international capital market also higher dependency Since early 1990s, capital flows to Asia grow Mostly short-term financing, but long-term 1997: Korea ca. 60 bn. US-$ foreign debt access, i.e. projects

41 South Korea before the crisis (3) Reform attempts of Kim Young-Sam ( ) Globalization (segewha) policy 1994 specialization plan for chaebol (later abandoned); growing overcapacities Improved relations with neighbours, esp. P.R.China government

42 The crisis year 1997 (1) July bankruptcy of Kia, later Hanbo steel, (soju maker) Jinro Credit ratings negative : Moody`s A1 (January Ba1 December 1997); S&P AA- (January) BBB- (December) Higher interest rates Growing defaults Outflow of foreign currency (usable reserves at 29.4 bn. US-$ in January; 7.3 bn. US-$ in November)

43 The crisis year 1997 (2) Decline or roll-over of short-term credit (until June percent, December percent) Crash on stock exchange (KOSPI loss of 1/3) Crash of currency market (12/1996: 844 Won/ US-$; 12/1997: 1965 Won/ US-$)

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46 KRW/ USD exchange rate

47 The IMF programme of 1997 Outflow of foreign currency reserves November 21, asking IMF for help (during period!) December 3, IMF programme Structural adjustment Sales of two banks to foreign investors election

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49 DJnomics (1) December 1997: Kim Dae-Jung becomes president First president from opposition in democratic times MOFE: DJnomics as anwer to economic crisis: 4 plus 1-policy Reform of labour market, financial sector, public sector, private sector (chaebol) Plus market opening (FDI)

50 DJnomics (2): reform of the labour market Strong antagonism of trade unions and political agenda of trade unions Organization of tripartite commission (government trade unions employers) Cumbersome, but partly successful Sharp decline of strikes No more lifetime employment guarantee Necessity to increase welfare system employers;

51 DJnomics (3): reform of the financial sector Bad loan problem, political credit allocation Sales of Korea First Bank, Seoul Bank New debt problem through Daewoo and Hyundai crisis 1999 Until 1999: 40 bn. US-$ public aid for the sector (lender of last resort) Problems of investment trusts (Daehan) Too big to fail bankruptcy financial

52 DJnomics (4): reform of the financial sector (2) KAMCO (Korean Asset Management Company) buys bad debt and resells it on secondary markets Japan as a (bad) example for lost decade Liberalization of the financial sector (Korea as financial hub of East Asia)

53 DJnomics (5): reform of the public sector Strong bureaucracy (in close cooperation with chaebol) Meritocracy, but at the same time favoritism and corruption Transparency International 1999: 50/99 Also 2 sons of Kim Dae-Jung indicted Reduction of red tape (successful in particular for foreign investment)

54 DJnomics (6): reform of the private sector (chaebol) Attempt to curb power of headquarters End of cross-subsidization big deals forced mergers in sectors with overcapacity Only partly successful Despite anti-chaebol rhetoric: close coope- Hyundai over North Korea projects ration with

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56 The Korean crisis: an IMF-crisis? Economic hardship (- 6 pct growth in 1998) Unemployment rising Conspiracy theories (Mahathir) Korean companies cheap for foreign investors brand sales IMF prices...

57 DJnomics (7): results Korean answer to crisis more successful than that of most other countries J-curved recovery (high growth rates ) World economy, cheap money helped But structural problems continued (household loans, credit card boom, real estate boom)

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59 Official reserves after the Asian crisis

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