EAI Middle Power Diplomacy Initiative Policy Recommendation 1

Author  

Yong Wook Lee is an Associate Professor in the Department of Political Science and International Relations at Korea University, Seoul, Korea. He is an author, editor, and translator of six books, including “The Japanese Challenge to the American Neoliberal World Order: Identity, Meaning, and Foreign Policy” (Stanford University Press, 2008), and “China’s Rise and Regional Integration in East Asia: Hegemony or Community?” (Routledge, 2014). Lee’s works also appeared in various academic journals, such as International Studies Quarterly, Review of International Political Economy, and Review of International Studies. He is currently finishing up a book on East Asian financial regionalism. Lee received Ph.D. in international relations at the University of Southern California in 2003.

In international politics, financial and monetary relations are the nucleus and backbone of the international economic order(s). As such, they are an arena of competition and cooperation that involves power, interests, and ideas among great powers. From the late 19th century to the early 20th century, both capital liberalization and the gold standard were inseparable from the hegemony of Great Britain. Similarly, the establishment and demise of the Bretton Woods System and the surge of neoliberalism as the organizing principle for financial and monetary order all materialized within the framework of competition and cooperation among great powers, such as the United States and the G-7.

A core function of institutionalization is the process of rule-making and rule-transformation. The politics of global standards is a case in point. At the same time, a rule accompanies a ruler and the ruled. The trinity of the Bretton Woods system—the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO)—just demonstrates the relationship between the ruler and the ruled through rules. Rule-setters set the terms on which future interactions among members take place. They are the authors of the rules of the game. By contrast, rule-takers’ main policy goal is to adapt themselves to the changing international financial and monetary order(s). Put differently, weak powers’ policy preference reflects constrained choices with little or a relatively narrow range of policy autonomy.

The start of the 21st century shows that the world has changed and so has Korea. The world economic order is at a crucial crossroad of transformation. Korea, previously a rule-taker as a catching-up state at best, is taking an important step toward being potentially a rule-setter. The fact that Korea today is a member of the G-20, the consultative body for the world economic order created in 2009, is one example of such transition. In the history of the world economy, the next ten years can be noted as a period of epochal change, ushering in the great transformation of the world economic order. The 2008 global crisis calls for changes to be made in the international financial and monetary order at both a global and regional level.

How can Korea, which is not a great power in any meaningful sense, effectively carry out the role of a rule-setter, encompassing the world and East Asia in this major transformational period? More concretely, how can Korea secure such policy goals as exchange rates stability, financial market developments, and financial stability without at the same time losing its policy autonomy? Would there be any way for Korea to project its policy preferences onto the emerging global and East Asian regional finance and monetary order? In light of both the 1997 and 2008 financial crises that shook up the Korean economy and threatened to turn it upside down, the importance of financial diplomacy cannot be overstated to Korean policy makers.

Policy Recommendations

1. Macro Strategy: Korea Should Pursue Multilateral Linkages of Regional and Global Levels

I argue that multilateralism, particularly multilateralism linking regional and global dynamics, should be the cornerstone of Korean financial and monetary diplomacy. Being a middle power that is far more limited in projecting its policy preference on the international arena than a great power is, Korea should not only employ multilateralism as a policy tool. Korea should also pursue it as a goal in itself, if Korea is to be a rule-setter in the changing international and regional economic order(s). To be specific, Korea’s multilateralism should be a mixed strategy of regional and global linkage. By this it means that the best way to maximize Korea’s policy influence is to take a two-step approach (not mutually exclusive), attempting to exercise a global clout that derives from solidifying regional multilateralism. This is a bottom-up strategy that flows from regional to global processes.

2. Korea Should Act as a Broker in Regional Rule Setting Processes

In developing and designing regional financial and monetary arrangements in East Asia, Korea should build trust and mutual experience in policy cooperation and coordination with China and Japan. Korea should actively take the role of an honest broker in these regional rule-making processes. In so doing, Korea can consolidate the patterns of cooperation among regional powers. These patterns of cooperation would, then, translate into the regional source of Korea’s global influence. In short, Korea can do much more in shaping the global financial and monetary order(s) than what its middle power position may allow it to do by choosing to embrace East Asia. A strategy of regional and global linkage opens up more possibilities for Korea to implement and reflect its policy preferences in comparison to other strategies. Of course, there may be a limit as to how far a middle power can go in initiating a multilateral approach and designing an institutional framework. Nonetheless, it can effectively take advantage of the multilateral framework already established, as the extant literature on multilateralism suggests.

3. Micro Strategy: Korea Should Make and Utilize Policy Network Processes

Consolidating financial cooperation in East Asia is a significant stepping stone toward this endeavor. As discussed earlier, the ASEAN+3(the APT) has institutionalized financial cooperation in no trivial way since the Asian financial crisis of 1997-8; however, there remain many challenges yet to be met before the institutional consolidation and stabilization of financial cooperation finally takes place. In this process of institutional consolidation, each member country’s political will as well as mutual trust through communication and cooperation is indispensable. One can glean from the existing literature three main structural constraints in the way of robust institutional cooperation in East Asia. They are leadership competition between Japan and China; sovereignty sensitivity among regional countries; and finally heterogeneity in political institution, domestic economic structure, and core values among the countries (Lincoln 2004). As such, the key to success for Korea’s financial diplomacy is to find the ways in which Korea can stretch these constraints for nurturing patterns of sustainable cooperation. In other words, Korea needs detailed, micro strategies to help materialize the macro-vision of the bottom-up multilateral linkage. Korea’s micro strategies should be carefully designed in combining Korea’s political and economic position and expertise in East Asia with thoughtful analysis of political dynamics within the APT. What can be Korea’s micro strategies that curtail the structural constraints at the maximum? In this regard, Sohn’s (2012) work is very useful in helping analytically think through the construction of such micro strategies. Sohn suggests three strategies to employ in mitigating against the aforementioned structural constraints facing East Asia (Sohn 2012, 9-16). Although Sohn offers three strategies in general without targeting a particular country within the APT, one can draw a great deal of the implications borne out of his analysis for Korea.

4a. Principled Minimalism and Host Regulation

The first strategy is ‘Principled Minimalism and Host Regulation’. This strategy aims to create patterns of cooperation by taking into account power imbalance, sovereignty sensitivity, differences in domestic politics and economic structures among the APT countries. There are two key features in applying this strategy to actual practices of institutional building/consolidation. One is for the APT to focus initially on working out the most agreeable principles (regulations and rules). This is the case of ‘Principled Minimalism’. The other is that domestic application of agreed principles is entrusted to individual countries based on their capabilities. In this scheme, each country sets the pace of its own adjustments to changing regional economic and political conditions without external imposition. This is the case of ‘Host Regulation’. Taken together, the APT can develop the practice of working together with relatively easy issues while not worrying about external pressure-driven implementation.

4b. Decomposition and Issue Linkage Strategy

Decomposition refers to breaking down into multiple stages the complicated bargaining and negotiation processes of institutional cooperation. In the context of the APT, these processes include the efforts to establish the Asian Monetary Fund, to harmonize Asian bond market standardized measures, and to work on the creation of an East Asian common currency. ‘Issue Linkage’ is a strategy to smooth out negotiation processes by enhancing fairness in distribution of benefits among the APT countries. The upshot of this strategy is to link relevant issues with side payments to minimize distributional conflicts of negotiation parties.

4c. Activating "Informal Intermediaries"

This strategy is concerned with agenda setting, co-development of policy ideas, and construction of robust policy networks. More concretely, it aims to take advantage of revitalizing both Track 1.5 Diplomacy and Track 2 Diplomacy for these goals. Track 1.5 Diplomacy increases interactions and exchanges of policy ideas among government agents, scholars, and professionals. Track 2 Diplomacy helps the formation of non-governmental policy network, which might be able to provide bipartisan perspectives on critical issues and debates in a way facilitating cooperation. The combination of Track 1.5 and Track 2 Diplomacy can help narrow down differences between the APT countries’ stances in institutionalizing East Asian financial cooperation in addition to proposing creative policy ideas. Various formal and informal policy channels can ameliorate the side effects of policy proposal competition. For example, China and Japan, the two regional leadership rivals, may react negatively toward each other’s policy proposals regardless of their policy contents. In cases like this, informal meetings for policy proposal discussions can provide leeway for building mutual trust and sharing policy visions (Depersonalizing effects)...(Continued)