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[Herald Interview] Korea hopeful of G20 progress on global imbalance

By 김주연

Published : March 9, 2011 - 19:39

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The Group of 20 major economies are likely to come up with different numerical current account targets for each member nation in April to correct global trade imbalances, said Sohn Byung-doo, director general of the newly established G20 bureau at the Finance Ministry.

Updating on the G20 agenda, Sohn said the G20 is on its way to delivering optimum trade surplus and deficit targets that cater for the different economic situations of the member nations.

The separate targets for each economy would be a significant development from the idea of applying a universal cap on current account imbalances at 4 percent of gross domestic product. The idea was floated by the U.S. and Korea last year but was blown off by China and Germany.

The current account is the broadest measure of an economy’s trade and investment balances. G20 countries are wary of committing themselves to specific goals that would alter the value of their currencies. The issue is especially sensitive for China which is being increasingly pressured by the U.S. to appreciate the yuan.

The latest coordination takes account of renewed divergence in current account positions encompassing oil exporters, manufacturers, importers in advanced and emerging economies.

“The G20 working group and the International Monetary Fund are currently devising a number for each economy appropriate under their circumstances,” Sohn told The Korea Herald.

“For oil exporters such as Saudi Arabia 5 to 6 percent may be the optimum level of current account surplus in relation to its GDP, while it would be only minus 2 or 3 percent for say, Australia.”

Sohn’s 25-person team is a new committee regrouped from the Presidential Committee for the G20 Summit. The team took the work of 130-person task force that hosted the forum’s first Asian summit in Seoul last November.

Mandated to follow up on G20 agendas, the G20 Bureau staff will coordinate agenda items with the G20 triad members at the working level meetings leading up to the Paris summit in November.

The G20 triad includes the previous, the current and the next chair countries which are Korea, France and Mexico, respectively.

Sohn will be participating at the next meeting of the G20 working group at the IMF slated for the last week of March. The 20 different numbers addressing divergence of the member nations would only be presented at the Paris meeting of G20 finance chiefs on April 14 if the Washington meeting at the IMF proceeds well, he said.

“Finalizing numbers for the indicators is a challenge and it depends on how fast the IMF completes its study on G20 economies,” Sohn said.

It is being prepared on top of finalizing a “limited set” of indicators that will be monitored to judge the progress made by member countries in reducing imbalances.

G20 Finance Ministers and Central Bank Governors in February drew up a list of indicators to assess the severity of imbalances and agreed to put numerical targets on those indicators by their April meeting.

They include public debt and deficits, private debt levels and savings rates. Measuring of current account levels is part of the list, which are broken down into three broad parts -- trade balance in goods and services, net investment income flows and cross-border capital transfers.

Should the list be endorsed by G20 leaders, major economies representing 85 percent of the world’s GDP would be committing themselves to reduce surplus and deficit imbalances.

Sohn said orchestrating guidelines on money flow would also be a challenging agenda leading up to the forum’s Paris Summit.

The G20 made it an official task to come up with explicit rules on capital controls, both for economies printing money and experiencing inflows.

“The IMF is currently detailing capital control measures adopted by mostly emerging economies and assessing their legitimacy. Frictions between advanced and emerging economies are intensifying.”

“We’re not expecting a smooth progress,” Sohn said.

Sohn Byung-doo, director general of G20 Bureau at the Finance Ministry. (Lee Sang-sub/The Korea Herald) Sohn Byung-doo, director general of G20 Bureau at the Finance Ministry. (Lee Sang-sub/The Korea Herald)
The would-be international rules, scheduled for November delivery, aim to prevent fast capital movements from one part of the world to another which often triggers credit shock and adds volatility in the market.

“But the agenda being on the G20 table is an opportunity for Korea to legitimize its recent capital control measures. We have a strong case to make as we are only trying to filter out bad foreign capital to protect the capital market,” Sohn said.

Korea launched a raft of capital control measures last year to cap surging investment inflows and prevent wild swings in the won.

The move, exacerbated after the G20 gave the nod to control of speculative capital movements in November, underlines Seoul’s strengthened supervision of capital flows to prevent another liquidity squeeze that hit the country at the height of the financial crisis in late 2008.

They include 14 percent withholding tax on foreign investor’s earnings from government bonds and bank levy on foreign-currency debt.

“None of the measures imposed discriminate foreign investors. The 14% tax imposition is return of our pre-2009 policy and we actually allow foreign bank branches to take bigger positions on currency forwards than we do with local banks,” he said.

These track movements of its regional peers including Thailand, Taiwan, Russia and Indonesia where defensive policies were also adopted to protect themselves from speculative inflows, sparked by ultra-low interest rates in advanced economies.

He said Korea had invested a lot of hope in the G20 after the country’s hosting of the 2010 Seoul summit allowed Asia’s fourth-largest economy to experience the transition from being a rule-follower to a rule-setter.

Sohn emphasized Korea’s role as the bridge-builder among superpowers.

“Korea is seen as the only trusted communicator with China in the international community. It would do us tremendous good if we benchmark on this,” he said.

By Cynthia J. Kim (cynthiak@heraldcorp.com)