Rewriting Economic History for the Korea FTA
U.S. Trade Representative Ron Kirk and Han Duk-soo, Korean Ambassador to the U.S., discussed aspects of the Korea Free Trade Agreement (FTA) at a panel on Thursday. They talked about deadlines, little anecdotes, and so forth, but what Ambassador Han had to say about how the Korea FTA would impact Korean domestic economic policymaking was most intriguing. He said:
But more important for Korea is that we develop our economy by opening it to global competition. The Asian Financial Crisis of 1997 and 1998 was a good lesson for us. What the Korea-U.S. Free Trade Agreement offers the Korean people is a comprehensive legally-binding reform package that will lead to the opening of our market.
Here Ambassador Han alludes to what Thomas Friedman called the "Golden Straightjacket". The idea is that you should force harsh economic policies on countries, often through some less-than-democratic means (in this case, a trade agreement that has been negotiated in secret), and they will eventually prosper. Ambassador Han referred to these "painful prescriptions" in an earlier speech here. (In the first chapter of Bad Samaritans, Dr. Ha-Joon Chang does a great job of exploding the Golden Straightjacket myth while demonstrating that Friedman's beloved Lexus in his Lexus and the Olive Tree could never have been produced without significant government involvement in the economy.)
It's quite perplexing that Ambassador Han would invoke the Asian financial crisis as a reason to throw all the chains off financial markets. Sure, the Korean Ambassador to the United States can do a lot, but he can't rewrite history. Financial deregulation was the major cause of the 1997 Asian financial crisis and efforts to further open financial markets during the crisis actually deepened its severity.
As Mark Weisbrot of the Center for Economic and Policy Research has pointed out, the Asian financial crisis developed because of excessive short-term international borrowing among East Asian nations. What was the cause of the excessive debt?
This build-up of short-term international borrowing was a result of the financial liberalization that took place in the years preceding the crisis. In South Korea, for example, this included the removal of a number of restrictions on foreign ownership of domestic stocks and bonds, residents' ownership of foreign assets, and overseas borrowing by domestic financial and non-financial institutions. Korea's foreign debt nearly tripled from $44 billion in 1993 to $120 billion in September 1997.
Indeed, countries that bucked the International Monetary Fund (IMF) prescriptions of greater financial liberalization, such as Malaysia, did better than countries like South Korea that had shed their financial regulations and capital controls. A paper on the Asian financial crisis published by the National Bureau of Economic Research compared the IMF strategy of complete openness to foreign investment and floating exchange rates against Malaysia's strategy of imposing capital controls to combat the crisis. The study concluded that "Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market."
More than ten years after the Asian financial crisis, even the IMF has come to its senses and reversed its position on capital controls. As we document in our memo on the Korea FTA's harmful foreign investor and financial deregulation provisions, the Korea FTA bans key measure that governments have at their disposal to prevent and combat financial crises, including capital controls. Far from a prescription for stable growth as Ambassador Han claims, enactment of the Korea FTA will leave both Korea and the United States vulnerable to future financial crises.