GUEST POST - A year in power for the Korean President: a question mark over the 'Asian miracle’

From our correspondent in South Korea, Louisa Metcalfe:

Seoul - I sit reading about “dark clouds” moving over the Korean economy. Of course, the problem is common to all of the global economy, but a phenomenon which has been specific to Korea since the Lehman Brothers collapse of September last year. The continuing slide of the Korean economy begs the question: how will Asia, the apparent new beacon in the global economy, lead the world economy out of recession? Moreover, will the progress be facilitated by further cooperation as witnessed at the end of last year?

This is a question which is in part related to the recent news that a Tripartite Agreement has been formed between Japanese, Chinese and Korean leaders. Korean President Lee Myung-Bak, Japanese prime minister, Taro Aso, and Chinese Premier Wen Jiabao, pledged “Tripartite cooperation” at Fukoka, Japan, on December 13th 2008. This agreement comes as somewhat of a breakthrough in Asia, after decades of mistrust and resentment toward the acts Japan committed during World War II, and before. Therefore, the subject of cooperation here in Korea seems to have witnessed symbolic progress - something which appears to be a result of the global economic downturn itself.

The relevance of this news resonates now as this week in Korea marks a year in power for the president Lee Myung-Bak. Yet despite talks of the Asian miracle of late, and hopes of economic success via cooperation in December, the ratings of the Korean president have been halved in the past year. This is arguably largely a result of the extent of the damage which has occurred in the Korean economy during this time. The past year has seen a vast decline in exports and capital reserves as the USA has become less able to consume Asian goods. Two of the traits which lead to nations such as Korea being held up as examples of the ‘Asian Miracles’.

So what now? Will the Asian miracle last? I see that this question may be subject to cooperation. Can and will the ‘Asian Miracle’ persist without external facilitation? For me, the answer is yes. The situation looks optimistic for the next year in power of Lee MyunBak. The Korean media is projecting that the president has finally accepted that the crisis means harder action must be taken, and his mantra has become, ‘Crisis equals Opportunity’. Moreover, the two words have the same meaning in Japanese, portraying an image that the national differences between the two countries will soon be offset, at least temporarily, in order to resuscitate the Asian economies.

The Tripartite Agreement promises to boost the Asian Development Bank, and supersede the "Chiang Mai initiative", created during the East Asian Financial Crisis, to allow bilateral swaps. Furthermore, the Association of South East Asian Nations (ASEAN) has been further developed in recent years (for example, including China into ASEAN+3). The recent news of cooperation and change in Korea therefore comes as a refreshing change to the news of gloom and doom, with Korea, Japan and China comprising a quarter of the world’s population, and a fifth of the world’s economy. Thus portraying the potential for these countries, including Korea, to chase away the dark clouds over their economies over the coming year.

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That Was The Week That Was

Politique
-Obama unveiled his massive 2010 budget proposal, much of which breaks with the conservative consensus that governed US policy for much of the past 30 years. $634bn in health care spending will be, in theory, offset by tax increases on American's earning over $250,000 a year. The US president also vowed to cut the deficit in half by 2012. More than a few people questioned the likelihood, and math, of this plan.

-Obama fulfilled a core campaign pledge by announcing a withdrawal date for US combat troops in Iraq (August 2010). He aims to have all troops out by 2011. Oddly, congressional Republicans embraced the president's announcement. Didn't their candidate for the oval office just run on not "cutting and running"? I guess after seeing their poll numbers plummet in the wake of their stimulus obstructionism, they latched on to a sure political winner.

-In Pakistan, Taleban leaders in Bajaur province declared a unilateral ceasefire, a week after a negotiated truce was reached in the Swat valley. In Islamabad, Nawaz Sharif and his brother Shahbaz, the chief minister of Punjab province, were banned from holding political office by the Supreme Court, causing the Punjab government to collapse and igniting protests. Political instability + balance of payments crisis + losing control of large portions of your territory = failed state.

-In her first foreign trip abroad, US secretary of state Hillary Clinton promoted pragmatism in US-China relations, overlooking human rights in favor of economic and financial cooperation...and US treasuries. Days later, a US State Department report laid the smack-down on China over the very issue Clinton skirted face-to-face. China was not pleased.

-Cracks in the Russian power structure?

Economia
-The central banks of Poland, Czech Republic, Hungary and Romania issued coordinated statements defending their currencies, while a consortium of international institutions announced a loan package for the troubled region.

-The US government increased its stake in Citigroup to as much as 36%, days after Bernanke and Obama sought to calm fears over nationalization. Bernanke said the debate essentially "misses the point." The US Treasury also provided details on its upcoming stress tests.

-ASEAN signed trade agreements with Australia and New Zealand.

-The defense of the rouble appears to have been a success. For now.

The Rest
-In the Champion's League, ManU held Inter to a draw in the San Siro, Arsenal beat Roma on a Van Persie penalty, and Liverpool beat Real Madrid in typical Kop Champion's League fashion. In the UEFA Cup, two of the favorites, AC Milan and Aston Villa, crashed out.

-This. Is. Crazy.

-The Times of London looks at "Japan: the nation that loves robots."

-Slumdog Millionaire was the big winner at the 81st Academy Awards.

Summits: a bad place to get drunk

From the BBC:

Japan's finance minister is facing calls for him to resign amid claims he was drunk at a recent G7 meeting.

Shoichi Nakagawa has apologised for his behaviour but blamed cold remedies for a slurred performance at a news conference in Rome at the weekend.

You may recall similar suspicions following Nicolas Sarkozy's "winded" press conference at the '07 G8 in Heiligendamm. Which begs the question: what are they serving at these summits (and where can I get some)??

Update: Nakagawa's gone, can Aso be far behind?

That Was The Year That Was: The Rest

IPE Journal looks back at the cultural, sporting and down right random things that diverted our attention from economic Armageddon in 2008. In other words, The Rest...

-The 2008 Olympic Games were much more than China's coming out party. The world stood in awe at the Opening Ceremonies, Michael Phelps became the greatest Olympian of modern times and China's athletes topped the gold medal table. 2008 was a year of stark contrasts for China: the tragedy of the Sichuan earthquake, tainted milk, and exposure of the shortcomings of China's economic miracle v. the scale, triumph and symbolism of the games, land reform and progress with Taiwan. 2009 promises to be an interesting year.

-In the Prem, Arsenal collapsed following a very bad day in Birmingham, throwing away the 07-08 title. They began the 08-09 season in disarray, and placed their future on the young shoulders of Cesc Fabregas, who, naturally, was immediately lost for four months with ruptured knee ligaments. ManU and Chelsea provided a cardiac finish to both the Prem and Champions League final in Moscow, with SAF's men taking the double.

-Rafael Nadal, Roger Federer and an epic Wimbledon final, considered by many the greatest tennis match of all time.

-The Year in Japanese innovation: robots that feed you, bionic legs and a trumpet playing robot joins the Cincinnati Pops. According to the International Federation of Robotics, robot use will increase substantially over the next few years, for combat, labour and personal uses. The Guardian identifies Japan as the world leader in robotic labour density (25 per 10,000 workers).

-In what will surely go down as man's historic victory over the animal kingdom, monkey waiters hit Japan.

-Contemporary art market boom/bust: The contemporary art market is an interesting barometer for investor sentiment (the Mayfair, not main street, investor) and Banksy provides a perfect case study. In October 2007, 10 prints by the London-based street artist sold at auction for a whopping ₤546,000. Fast forward to September 2008, and the five Banksy pieces at auction in London went unsold. In fact, two thirds of the items in the Loyd and Turnbull contemporary art auction were withdrawn. (Editor's note- my two Banksy prints were purchased in Covent Garden for 30 quid. Beat that.)

-Finally, in a year of great You Tube moments (Bush shoe thrower, Brown's messiah slip), this one takes the cake, both for humour and IPE symbolism:

The Macroeconomic Rebalancing Act

The rapid US dollar resurgence of the past couple of months is being felt in a number of very specific ways. Rory has been following this trend closely (see posts on USD resurgence, other currency stuff and the, er, "GreenPack.") so I won't spend too much time on the specifics. What I have been meaning to discuss is the significance of this shift in a broader context.

I'm referring to the issue of "global macroeconomic imbalances." What are these imbalances, you ask? The expression refers to situation that has arisen because A) countries in East Asia and the Middle East have a lot of money they wish to lend somewhere safe and B) the United States has until recently been very willing to borrow.

Japan, China and others have so many funds to lend because they have exceptionally high national savings rates, relatively low levels of spending (esp. China) and foreign currency reserves generated from trade surpluses. Since the US is the largest, safest, most open economy in the world, these excess foreign reserves have been pouring into their economy as low-yield investments. For instance, Japan holds about $1 trillion in US assets; China about $1.9 trillion. That means the US is indebted to these countries to the tune of several trillion dollars.

Fed Chairman Ben Bernanke has argued that this "savings glut" in developing countries is the main source of the imbalances. These precautionary savings have two problems. First, they provide low-yield return. For instance, China could take a portion of those nearly $2 trillion and invest it in their own country's education and infrastructure - this is in fact less of a savings glut than an "investment drought." Second, developing countries that rely on export surpluses are essentially relying on the United States to buy those exports. In short, the US must act as "consumer of last resort."

On the other side of the equation, the American economy has been saving almost nothing and accumulating debt like it's going out of style (this applies to other rich developed economies, but less so). This is partly because there was no need: cheap credit from abroad helped fuel equity bubbles in the late 1990s and the recent housing bubble - people were getting rich. But this system was only sustainable so long as American deficits continued to grow and American consumption continued to hold up the world economy.

Some people have argued that this balancing act is (was) sustainable, but they are wrong. The real question is when and how will things re-balance themselves. There are two worries. First, that US deficits grow to the point where China & co lose faith in the dollar, dump their assets and cause a recession in the United States. I think that fear has always been overstated. To paraphrase the old banking addage: when you owe the Chinese government $100 million, you have a problem. When you owe the Chinese $1.9 trillion, they have a problem. If the US economy drops 10%, say, these Chinese-held assets will suffer enormous losses. So the fear of a "hard landing" caused by foreign investors was always problematic.

The second worry is that of a Sudden Stop: a slowdown in the US economy prevents them from acting as "consumer of last resort" and emerging markets are forced to readjust internally on short notice. This could also result in a "hard landing" for the economies involved - something to be avoided.

However, last week John Kemp pointed out that we no longer need to worry about which outcome it will be since the decision has been made for us:

The unfolding credit crisis is producing a deep recession, cutting U.S. demand for imports, and forcing the long-overdue adjustment in the trade deficit.

He concludes:

With recession taking care of the current account deficit, financial crisis reducing gross capital outflows, and foreign official buyers continuing to support the Treasury market, the U.S. currency has been a strange beneficiary of the crisis. If the dollar’s earlier decline was a symptom of over-fast growth, its rise is a by-product of recession.

That's all fine and good for the dollar, but what about everyone who was relying on US consumers to fuel growth? A hard landing is still a strong possibility in some parts of the world. Over the next few months we're going to find out just how capable some countries are at redirecting investment inwards and stimulating their own demand.

Further Reading: Patrick and I discuss China's counter-move of devaluing the yuan. Checkitout!

(Photo: Daylife)

That Was The Week That Was

Politique
-US President-elect Barack Obama unveils details of his "21st century New Deal". The Economic Recovery Plan is preliminarily based on 5 pillars: energy, roads and bridges, schools, broadband, and electronic medical records. Many, including prominent members of his own party, are becoming increasingly frustrated with his "there is only one president at a time" line, as the sitting President appears to have checked out while Rome burns.
-The terrorist attacks on Mumbai end, the Indian investigation expands, and at least 29 people die from a car bomb in the Pakistani city of Peshwara. Blame for the attacks has focused on Pakistan-based Lashkar-e-Taiba (the likely perpetrators), the Indian government (early warnings, poor response, failure to hold Pakistan accountable), and the Pakistani regime (failure/inability to address sources of terrorism and militancy within its borders).
-A deliciously intriguing affair in the British House of Commons has ignited a fierce debate over Parliamentary independence, opposition politics, and police powers. Meanwhile, Canada has its own legislative controversy to deal with (find Dave's take here).

Economia
-The US learned it has been in recession since December 2007 (something everyone but this guy has been well aware of) and lost 533,000 jobs in November, the largest jobs decline in 34 years.
-Angela Merkel grew increasingly isolated in Europe as French President Sarkozy unveiled a €26bn stimulus package. UK Prime Minister Brown and Sarkozy will meet in London on Monday to renew their call for a coordinated European stimulus.
-An historic week in European central banking: BoE cuts 100 basis points to 2.0% (lowest level since 1951), ECB goes with 75 basis points to 2.5% (its largest single cut ever), and Sweden slashes a record 175 basis points to 2.0%.

The Rest
-In the Prem: Arsenal continue form following famous win at Stamford Bridge, Liverpool stay top, and ManU and Spurs on track for Carling Cup final. In Europe: Cristiano Ronaldo wins Ballon d'Or, reveals he was "an inch away" from being a Gunner in 2003.
-This week in Japanese innovation: omelets with the Motoman SDA10.
-"Experienced bandits" steal €85mn in luxury jewels from Harry Winston store in Paris. According to Reuters, the heist occurred almost a year to the day of a similar $16mn robbery at the store.

That Was The Week That Was

While IPE Journal got a makeover...

Politique
-The US National Intelligence Council's 2025 project releases Global Trends 2025: A Transformed World. The report announces the end of the "unipolar moment", and predicts declining American influence and power. While the US will remain the preeminent power, the rise of the BRICs will reintroduce a multipolar world. Other defining trends: increasing competition for scarce resources, greater West-East transfer of wealth, and broader Middle East destabilization.

-World trade is grappling with a tricky little pirate problem, as Saudi joins a NATO anti-piracy fleet and calls for a global response to this "terrorism".

-The IAEA confirms speculation that the Syrian structure bombed by Israel in 2007 contained nuclear material. Syria swiftly calls for end to probe.

-Obama announces plans to create 2.5 million jobs through massive fiscal stimulus, government projects. His cabinet takes shape: Geithner for Treasury, Clinton at State (the Guardian broke her acceptance plans, beating US media to story), and reported negotiations for Gates to remain at Defense.

Economia
-Citi executives huddle in New York with government officials to discuss the bank's survival. The Dow Jones Industrial average closed below 8,000 this week, the first time since March 2003.

-Japan falls into recession, ending longest postwar expansion.

-Pakistan formally requests $7.6bn IMF standby loan, agrees to economic reforms including fiscal deficit reduction.

The Rest
-Scientists now believe that massive glaciers may lie beneath the rocky Martian surface, and humanity is step closer to confirming life beyond Earth.

-Arsenal drop Gallas, ManU lose Berbatov for big Villa clash, and Liverpool/Chelsea stay top of Prem

-Vanity Fair releases its International Best Dressed List. This year's list includes Michelle Obama, Kate Middleton, and Kanye West. West drops a full preview of new album, 808s and Heartbreak.

That Was The Week That Was

Politique
-G20 leaders arrived in Washington for a summit that had been hailed Bretton Woods II. With President-elect Obama avoiding the summit, and sharp differences between world leaders on the reforms needed to repair the international financial and economic systems, the summit ends like so many before it- with a consensus on principles, little coordinated action, and an agreement to meet again. Declaration text here.

-A regional war looms as the situation in the DRC deteriorates. African peacekeepers are impotent and declared targets by Nkunda, the number of foreign troops/mercenaries in the country grows by the day, and southern African leaders are threatening full-scale military involvement. The NYT looks at the role of minerals in the DRC's history of conflict.

-The EU agreed to restart talks on a strategic partnership agreement with Russia following an EU/Russian summit at Nice. Russia hasn't met the EU conditions set out as a prerequisite to talks following the conflict in Georgia, and it seems only Lithuania has the spine to say so.

-Iraq's cabinet approves new security pact with the US. The agreement extends US troop mandate through 2011.

Economia
-Paulson shocks congress with plan to spend remaining TARP money on capital injections into troubled institutions and companies and consumer spending. The Treasury will no longer purchase illiquid assets, and congressmen/women of both parties are screaming "bait and switch". Paulson deputy Kashkari testified before an angry House, with Rep. Elijah Cummings asking him, "Is Kashkari a Chump?"

-Treasury v. FDIC. FDIC's Bair wants to directly assist 1.5 million homeowners in the US, while Paulson resists a (*cough-cough*) "government spending program"- Paulson believes that his actions are "investments".

-Is a sterling run imminent? That's what George Osborne, Tory shadow chancellor, implied this week in criticizing Gordon Brown's fiscal plans. Osborne's political career is likely done. Sterling has hit a 6-year low against the dollar at $1.49, and Simon Derrick at BoNY Mellon believes sterling's position is now worse than Sept. 1992.

-Eurozone enters its first official recession.

The Rest
-India celebrates first lunar landing.

-This week in Japanese innovation: a robot that feeds you, and bionic legs.

-Arsenal's Prem title run is dead in the water.

-Gordon Brown: control freak.