Successful Hosting of G20 Finance Meeting

The two-day meeting of G-20 finance ministers and central bank governors ended Saturday in Gyeongju, North Gyeongsang Province, with a breakthrough in a global currency dispute and concrete measures to reform the International Monetary Fund. By committing to moving toward market determined exchange rate systems and avoiding competitive devaluation of currencies, the finance ministers have established the principle of non-intervention in foreign exchange markets. Building on the agreement made in Gyeongju, Korea, as chair country of the forthcoming G-20 summit, should continue to show its economic and diplomatic leadership until the summit adopts a declaration.

The Gyeongju meeting reaffirmed the shift of power in the world economy as demonstrated by the greater say given to emerging economies including China in IMF operations. In return for the agreement on foreign exchange rate policies, the U.S. and the European Union reached a compromise to shift more IMF quota shares to emerging countries from more than 5 percent to more than 6 percent. As a result, China has become one of the top three countries in IMF quota shares and Brazil, Russia and India have joined China in the top 10. Korea’s ranking was also raised to 16th from 18th, but the country should not grow complacent.

Another achievement is Korea`s successful role as chair country. Over the past month, Seoul contacted leaders of G-20 countries to convince them that global trade imbalances can be tackled through either exchange rates or other policy measures, and got the finance ministers agree to “maintain current account imbalances at sustainable levels.” Korea should take the lead in setting numerical guidelines, which the G-20 failed to do at the Gyeongju meeting. Seoul also has many things to do to complete IMF reforms.

The Korean government should focus its energy on making behind-the-scenes compromises to generate visible results on the establishment of a financial safety net and development agenda for developing countries. Its efforts to resolve the currency row should not reduce attention to the concerns of 172 non-G-20 countries. If Korea plays a bridging role between emerging and advanced economies, this will raise national prestige and credibility and serve long-term national interests.

If the Chinese currency yuan is appreciated in accordance with the agreement reached in Gyeongju, the appreciation of the Korean won, which has markedly strengthened, could get much faster. From 2005 to 2008, the won appreciated 0.5 percent per 1 percent appreciation of the yuan, but the rate has risen to 1.5 percent. Other countries accept the regulation of hot money to prevent excessive volatility in foreign exchange rates, so Korea should also do the same. The Korean government and businesses should brace for the prolonged appreciation of the won.