Dr Michael Lim Mah-Hui and Dr Lim Chin sent me their latest book on the great financial crisis for comments. I was curious to know what this manuscript would add to the mass of literature and debate that is circulating at this juncture. After reading the manuscript, I am fully convinced that it is a valuable addition to the literature on the subject for several reasons.

First, the book is very lucid, easy to read and simple to understand. Second, it captures history, current context and the way forward. Third, it succinctly presents theory and focuses on policies and institutions rather than abstract thinking or anecdotes. Fourth, it gives an emerging market perspective while presenting in detail the debates on the subject in the western world, in particular the Anglo-Saxon world. Fifth, the book emphasizes the Asian point of view and it is presented in a way that captures the dynamic and evolving interrelationship between Asia and global economy. Finally, the analysis has several original elements in explaining theory and practice in public policies as well as the behaviour of financial markets.

The book analyses the causes or the origins of this crisis at three inter-related levels broadly covering economic and financial theory, financial sector practices, and macroeconomic imbalances and the international monetary system. The authors refer to the belief in Efficient Market Hypothesis that governed public policies in general and central bankers and regulators in particular as the primary cause of the crisis. I can fully endorse the prevalence of this view even in the year 2006 and early 2007. By then the underpricing of the risks in the financial markets and the dangerous level of macroeconomic imbalances had come to the fore. However, in the interactions between central bankers and market participants exploring methods by which soft landing could be engineered, market participants asserted the view that, interfering with market-determined pricing of risks would be a serious policy mistake.

It is “these same people”, as the authors describe, that pleaded and perhaps even demanded massive intervention of public policies within few months of their assertion to the contrary, once the crisis struck. The asymmetrical response of financial markets to the desirable level of public policy intervention seemed to be governed by the benefits that accrue to participants in the financial sector.

We now return to higher grounds, to locate the financial crisis in a larger historical context. The financial crisis should be seen in the context of contests for hegemony in three areas: a contest for continued political and economic dominance in the international monetary system by the United States; a contest for the continued dominance of the financial industry over the real economy; and finally a contest for continuation of intellectual dominance by neo-liberals and market fundamentalists.

Contest for Continuation of U.S. International Monetary Dominance

We have shown the links between the international monetary system and the financial crisis: how current account imbalances are associated with excess savings in some countries and over consumption in others; how capital flows have trumped trade flows after the collapse of the Bretton Woods system leading to exchange rate instability and undermining the independence of monetary policies.

In particular we have argued that the problem of current account imbalances globally has less to do with countries that have current account surpluses and more to do with a country that is able to defy the “normal rules” of the international monetary system. Under the present international monetary system, it is not possible for most countries to register persistent current account deficits, particularly of a large magnitude, over a long period. Sooner or later market forces will force a correction in their current account deficits and the countries have to live within their means. The United States, however, has been able to defy this trend for a long period. Except for a brief period in 1991, it has registered current account deficits since 1985 rising to a peak of 6.5 per cent of its GDP in 2006. This is because the United States issues dollar that is used as the major international currency not only for transactions but also as a store of value.

An issuer of international currency enjoys important privileges (Cohen 2009, p. 3). The first is seigniorage, in simple language, the ability to print money to pay back your liabilities. All central banks have the power of seigniorage. As the dominant international currency, seigniorage confers the ability to the United States to pay back its dollar obligations in U.S. dollar. In effect, it can borrow and repay without limits as long as other countries want to hold the U.S. dollar.

The Three Imbalances

Although the immediate causes of the current global financial crisis were due to both market and regulatory failures, the seeds of the crisis were sown decades ago. These can be traced to structural transformation in the economy that led to three major macroeconomic imbalances in the U.S. and the global economy. They are the imbalance between the financial sector and the real economy, the wealth and income imbalance in the distribution of resources in the United States, and the chronic global current account imbalances in the world economy. Put together, these three imbalances provided a fertile environment for the crisis.

Just as an organic or biological system becomes dysfunctional when its components are out of balance, the same happens to an economic and financial system when things are not balanced.

Imbalance Between the Financial and Real Economy

As pointed out in the previous chapter, the financial sector has grown to a point where it has eclipsed the real economy. Between 1960 and 2006, the financial sector (defined as finance, insurance, real estate mortgages and leasing (“FIRE”)) rose from 14 per cent to 20 per cent of GDP, while the manufacturing sector more than halved from 27 per cent to 11 per cent of GDP. The big shift occurred circa 1990 when the financial sector overtook the manufacturing sector in terms of GDP contribution. By 2006, not only was FIRE the biggest sector, it was twice as large as the next sector which was wholesale and retail trade at 12.2 per cent. See Figure 3.1.

Post-World War II economic development of the U.S. can be divided into two major periods: the first from mid-1940s to mid-1970s, and the second from mid- 1970s to the present. The first thirty years after the war saw rapid growth and also a rise in the real wages and living standards for a majority of the population. This was the Golden Age for the U.S. when it assumed global hegemonic position with the biggest military and economic power and its currency became the international currency. However, after the Vietnam War and the oil shock in the mid-1970s, its rate of growth began to slow down.

Introduction

There is nowhere to hide. What began as a crisis in the subprime sector ($2.5 trillion in size) of the U.S. housing industry in mid-2007 set the whole financial industry globally on fire and subsequently sucked the world economy into a global recession with growth rate of 3.1 per cent in 2008 and negative 1.4 per cent in 2009 (IMF 2009b). The implosion of the U.S. subprime mortgage industry has affected every asset class — from equities to bonds, from money markets to commodities; every type of credit — from mortgages to credit cards, to auto and student loans, to corporate debt and leveraged buy-outs; and every country that is integrated into the world financial system from Australia to Tokyo to Uzbekistan. The collapse of two Bear Stearns’ hedge funds that invested in subprime collateralized debt obligations (CDOs) is the trigger of the crisis; it is not the cause.

The causes or origins of this crisis should be analysed at three inter-related levels — the theory and methodology underpinning the disciplines of neoclassical economics, finance and risk management; their influence on the evolution of the financial industry and poor regulatory practices; and the fundamental structural changes in the U.S. and international economy and the resulting major macroeconomic imbalances.

This chapter traces the roots of the crisis to the theoretical and methodological flaws in market efficiency theories that form the foundation of finance and risk management and how they contributed to the crisis.

Evolution of Macroeconomic Theory of Market Efficiency

Modern macroeconomics was born out of the Great Depression. In fact Ben Bernanke, the current Federal Reserve chairman, wrote in 1995 that “not only did the Depression give birth to macroeconomics as a distinct field of study, but … the experience of the 1930's continues to influence macroeconomists’ beliefs, policy recommendations, and research agendas” (cited in Koo 2008, p. xi). Keynes in “The General Theory of Employment, Interest, and Money” (1936, republished 1964), set out not only to explain the Depression but also constructed a new edifice for explaining the workings of, and interplay between the financial sector and the real economy. The Keynesian theory held sway for decades until the 1970s when it met difficulties in explaining the phenomenon of stagflation.

Australia's foreign economic policy towards ASEAN has changed considerably over the past thirty to forty years. The change has not only closely reflected the shifts in Australia's overall foreign economic policy orientation but at times it also strongly drove those shifts. This chapter reviews the findings and insights of previous chapters. The implications for Australia's foreign economic policy in the future are also raised. The chapter concludes with a remark that the bilateralist approach as the dominant strategy for Australia's foreign economic policy is likely to continue for some time.

THE RISE AND FALL OF STATE-SOCIETY COALITIONS AND CHANGES IN Australia's ASEAN POLICY

To explain the changes in Australia's foreign economic policy towards ASEAN, the book focused on the evolution of state-society relations. By positing virtual coalitions among state and society actors with shared beliefs on policy ideas (perceptions of causal relationships between policy goals and the most effective policies for realizing those goals) as the core competitors in the policy process, this book' approach facilitates a layered analysis of factors affecting Australia's foreign economic policy and its ASEAN policy decisions.

Changes in the International Environment and Shifts in Australia's Foreign Economic Policy

An analysis of the foreign economic policy of a smaller state like Australia needs to begin by defining the international structure, or environment, within which the state has to operate. The core policy ideas of state-society coalitions are difficult to change. Yet changes in the international environment may induce replacement of a dominant coalition with another coalition, because such changes in the international environment can act as exogenous shocks that shake the perception of the validity of the dominant coalition' policy ideas.

The protectionists’ domination began to erode in the 1970s when the international economic structure changed drastically after the first oil crisis. The beginning of globalization of national economies was associated with a slide in Australia's terms of trade from the mid-1970s well into the 1980s. During this period, there was continued questioning of the effectiveness of Australia's traditional economic policy strategy, which was characterized by “protection all round” and the institutionalized wage arbitration system that led to inflationary pressure and low productivity growth (thus, lower competitiveness) particularly in manufacturing.

The year 2009 marks the 20th anniversary of the ASEAN-Republic of Korea (ROK) Dialogue Partnership. As such, Korea hopes to use this occasion as an opportunity to further strengthen and expand its relationship with many Southeast Asian countries. In March of this year, ASEAN and ROK established the ASEAN-Korea Centre, aimed at promoting economic and sociocultural cooperation between ASEAN and Korea. In June 2009, the parties welcomed the opening of the ASEAN-Korea Commemorative Summit held for the first time in Korea.

The celebratory events merely reiterate and reinforce the importance that South Korea attaches to its relationship with ASEAN. In trade, ASEAN is Korea's third largest partner with a total volume of $90 billion (2008). It is also Korea's third largest investment destination with a total accumulated FDI amount of $29 billion (1968–2008). It is Korea's second largest construction market in the world with a cumulative order of $54 billion (1966–2008). Southeast Asia is also an important source of import commodities such as oil, gas, coal, palm oil, tin, and pulp for South Korea. ASEAN and Korea concluded an FTA (AKFTA) related to goods in June 2007 and shortly thereafter concluded an FTA on service provisions in November 2007.

Cultural and personnel exchanges between Korea and the countries of Southeast Asia have expanded rapidly in recent years. The number of Korean visitors to ASEAN countries has increased more than three-fold in twelve years from 1.1 million in 1995 to 3.5 million in 2007. Nearly half a million ASEAN visitors travelled to Korea in 2007.

In the context of a series of agreements such as the ASEAN Integrated Initiative (2000), Joint Declaration on Comprehensive Cooperation Partnership (2004) and Korea-ASEAN Action Plan (2005), the two sides agreed on cooperation in building IT infrastructure, human resource development, environment, energy, eradication of contagious diseases, and cultural exchange.

But it is in the area of East Asian cooperation where the interests of ASEAN and Korea have coincided closely and the two parties have worked together most productively. Through the efforts of such bodies as the East Asian Vision Group (EAVG) and East Asian Study Group (EASG), Korea and ASEAN countries worked together to plan and build an East Asian community. This cooperation resulted in creating and/or re-invigorating such mechanisms as the East Asian Summit, ASEAN Regional Forum (ARF) and ASEAN+3 (APT).

In June 2009, the leaders of Korea and the ten ASEAN member countries met in Jeju for the ASEAN-Republic of Korea Commemorative Summit. At that historic meeting, the eleven leaders recognized that Korea and ASEAN had been developing a mutually beneficial relationship over the past twenty years. The summit took place also in the context of Korea's efforts to strengthen its relations with ASEAN through the New Asia Initiative.

The world's economic centre of gravity is shifting towards the continent. Korea, as an Asian economic powerhouse, and ASEAN — a potential economic heavyweight in Asia on account of its population, its growth rates (dented but not destroyed by the global crisis), and attractiveness to foreign investors — enjoy natural points of compatibility and convergence that can solidify their cooperation in the years ahead. Cooperation is something that policy-makers in Korea and the ASEAN capitals must work towards if the region at large is to fulfil its potential.

Unfortunately, Asia is home to several security challenges as well. The actions of the North Korean Government in upping the strategic stakes in Northeast Asia are a case in point. Terrorism remains a problem in Southeast Asia. As two responsible stakeholders in the international system, South Korea and ASEAN have a common interest in ensuring peace, stability, and prosperity in the two Asian sub-regions. One important point to remember is that they can achieve much because both are nonthreatening international actors whose benign intentions are recognized by others as well.

Finally, the importance of people-to-people ties cannot be overestimated. The peoples of Korea and ASEAN must see themselves as culturally fellow-Asians if the new Asia is to take its place at the table of the great powers.

Introduction

Over the last two decades, particularly in East Asia, we have witnessed great change in everyday life as well as change in the socio-economic and natural environment. Under the banners of “globalization” and “regionalization”, not only commodities, factories, and money but also people, such as businessmen, students, scholars, tourists, and migrant workers, cross national borders. This new trend of people-to-people exchange is so extensive that Korea, once regarded as one of the most homogenous nations in terms of ethnic composition, is now entering an era of being a multi-ethnic and multicultural nation.

Southeast Asia plays a greater role than any other region in the transformation process that Korea is currently undergoing. As of September 2007, more than one million foreigners resided in Korea, with Southeast Asian countries contributing approximately one-fifth of that number. The number of foreign migrant workers is reportedly 400,000, of which more than 30 per cent are Southeast Asian workers (Immigration Bureau 2007). It is expected that these numbers will increase as Korea is one of the world's fastest-ageing societies. This change in Korea's demographic structure will lead to a demand for an economically active population, which will probably come from foreign countries and, in particular, from Southeast Asia.

As a consequence, Korea will become over the next two or three decades a nation that feels most keenly the impact of “globalization and regionalization”. Southeast Asia, as the neighbouring region, will play an important role in the process of change. In this regard, more attention needs to be paid to how and to what extent Korea is preparing for change. This study forms part of the project to answer this question. First, it attempts to examine what Korean researchers who specialize in the study of Southeast Asia are doing and have done as part of their research. In particular, researchers' socio-demographic characteristics, academic backgrounds, research interests, and research activities will be examined. The study also attempts to investigate the current situation, at the tertiary level, of Korean education about Southeast Asia. It focuses on how well Korean universities prepare their programmes and curricula in Southeast Asian studies and language education. The postgraduate careers of the college students who have been trained in this programme are then analysed.

Background

Korea's economic relationship with ASEAN for both trade and investment dates far back. Indeed, when Korea's economy began expanding vigorously in the past, especially before the normalization of its relationship with China in 1992, Southeast Asia — mainly ASEAN — was the main area among the developing regions of the world where Korea's trade and particularly its outward foreign direct investment were carried out. Then China began to replace ASEAN, to some extent, in Korea's trade and investment markets from 1992 onwards. However, it was after the outbreak of the Asian (and Korean) financial crisis in 1997 that China really began to replace ASEAN as Korea's main economic partner. Both Korea and ASEAN were too badly hurt by the crisis to continue their existing economic relationship; the economic recessions shrank market demand and the shortage of foreign exchange limited investment potential for both Korea and ASEAN shortly after the crisis.

Since 2000, the economic relationship between Korea and ASEAN has begun turning back to the pre-crisis level as both economies have emerged from the doldrums of the crisis. The history of the trade and investment relationship between Korea and ASEAN in the past, turbulent fifteen years or so will first be described in this chapter. This will be followed by an investigation of other related issues such as Korea's construction activities in the area, FTA negotiations with ASEAN, and labour migration from ASEAN to Korea. Then, the role of Korea in ASEAN in view of the presence of other very important East Asian players in this region, namely Japan and China, will be discussed. Finally, prospects for a future economic relationship between the two will be explored.

Korea's Economic Relationship with ASEAN

Korea's Trade Relationship with ASEAN

Annual trend and country distribution

The annual trend of trade in terms of exports, imports, trade volumes, and trade balances between Korea and ASEAN from 1990 to 2006 is shown in Table 5.1. From the table, the following can be summarized with respect to the trade relationship between ASEAN and Korea: (1) The total trade volume of Korea with ASEAN during this period increased 5.5 times during 1990–2006. However, the share of ASEAN in total Korean trade volume fluctuated around a 10 per cent level — reaching 11.5 per cent in 2000 but since declining to less than 10 per cent in more recent years.

Korea's involvement in Southeast Asia has had considerable effects on all the societies involved. It is obvious that Korea's economic impact on the ASEAN region has been profound, both in terms of trade and investment. Even in foreign economic assistance, where Korea is still a modest donor in comparison to its economic standing in the world, its impact is significant, especially in the field of training. But perhaps Southeast Asia's effects on South Korea has been the deeper of the two-way relationship even if its economic impact has been less than Korea's on the region.

Although the ASEAN region ranks third in South Korea's economic ties, and the cultural impact of the West, China, and Japan (even though it is unlikely to be admitted in nationalistic circles in Seoul) far more prolonged and extensive, Korea has been affected both directly and more obliquely by the enhanced multiple patterns of changing relationships with the ASEAN region. That there is now a significant body of Korean scholars and researchers concerned with the area, while there is no equivalent group individually or cumulatively in the countries of the region, is partial evidence for this conclusion.

More basically, Korea is moving from a supposed but in part mythic (though in comparative terms generally accurate), officially sponsored ideal of conceptual cultural homogeneity that has been a hallmark of policy, perhaps in part to emphasize the importance of eventual unification with North Korea. Now, official publications discuss Korea as a “multicultural” society. This is a monumental shift in policy and official attitudes and has been a product of Southeast Asian impacts. In an immediate sense, the Korean Government has awakened to the present reality of Southeast Asians settling into Korean society and of Koreans' extensive intermarriages with foreigners. In a longer-range perspective, the Korean Government is preparing for the infusion of non-Koreans (and Koreans from China) into the labour force, since the dependency ratio of workers to the ageing and retired population is rapidly increasing. The extended family and clan associations that in effect provided social security for the population have eroded as Korea has shifted from a rural society to an urbanized one. This gap, together with the social and economic demands of the people, will have to be closed by the Korean Government with the establishment of safety nets for the burgeoning elderly population.