(G-20) (Yonhap Interview) S. Korea cautioned on exit plans

By Hwang Doo-hyong
WASHINGTON, Sept. 24 (Yonhap) -- South Korea should be cautious in reversing its
expansionary fiscal and monetary easing policies until the United States takes
corresponding steps, a U.S. scholar said Thursday.
"South Korea should prepare a schedule of specific monetary and fiscal steps,"
said Derek Scissors, senior research fellow at the Heritage Foundation, a
Washington-based conservative think tank, in an interview with Yonhap News
Agency.
"But South Korea should be very cautious about getting too far out in front with
implementing contractionary policy because the American commitment to the timing
of a monetary exit is tentative."
The G-20 summit, scheduled to be held in Pittsburgh Friday, is expected to
address the sensitive issue of whether and when to consider implementing the
so-called exit plans. Optimists have called to consider such measures and while
pessimists fear premature exit strategies could cause a double dip recession.
South Korean officials have said they will continue with their expansionary
budget and record low interest rate policies for the time being, dismissing
concerns over inflationary pressure.
Despite signs of earlier-than-expected recovery, the U.S. Federal Reserve said
Wednesday it will keep its key lending rate at near zero percent "for an extended
period," which analysts interpreted as up to early next year, to prop up the
struggling economy.
The Paris-based Organization for Economic Cooperation and Development recently
forecast an annualized U.S. quarter-on-quarter growth of 1.6 percent and 2.4
percent for the third and fourth quarters, respectively, up from the zero and 0.5
percent predictions made earlier this year.
Scissors noted that the U.S "is just starting to schedule the first steps toward
monetary contraction, with no sign of reduced government spending. Until we act,
the G-20 will be able to do nothing but talk."
Nonetheless, G20 will help South Korea enhance its representation in the global
economy, he said.
"I expect South Korea to push for a greater role for the G-20 in international
economic decision-making," Scissors said. The scholar predicted U.S. dominance
will continue despite the growing Asian economies, saying he did not see any
replacement.
"It does not matter what the G-20 says," he said. "East Asia cannot move too far
ahead of the U.S. And Germany, the heart of the EU, cannot move too far ahead of
East Asia and the U.S."
As for Asia replacing the U.S. as the major economic power, he said, "What is
much more likely than any country replacing the U.S. is that the U.S. declines
due to poor policy choices but no country or countries rise as a replacement."
He defended the U.S. dominance of the world economy as being "based on more than
pure size."
"By running a large trade deficit, the U.S. also contributed greatly to global
GDP growth," he said. "China's trade surplus, though shrinking at the moment, is
still the world's largest. Through that surplus, China is detracting from the
rest of the world's GDP."
"The dollar has clearly weakened but the RMB (China's currency) is far from
convertibility and, in fact, has been pegged more tightly to the dollar since
June 2008. Beyond GDP and trade, the U.S. global investment portfolio is still 4x
larger than China's. There is still no comparison between the two," he said.
Scissors attributed the ongoing recession to "government intervention in housing
in the U.S. starting in 1999, bad monetary policy in the U.S. starting in 2002,
and external sector distortions in East Asia starting in 1999," rather than the
malfunctioning of the International Monetary Fund.
The IMF and World Bank still need reform, he said.
"Still, the Bank and the Fund need reform," he said. "The starting point should
be a reallocation of weight according to current GDP."
China and other emerging economies have called for an increase by up to seven
percentage points in their representation in the IMF.
"I'm not sure why China's quota hasn't already been increased," he said. "Most
likely, it is opposition from Europe, which will lose share."
On the European call for capping bonuses for top executives of financial
institutions to prevent them from investing in high-risk portfolios, Scissors
said, "The Europeans want more international financial management and the U.S. is
unwilling to go along. Perhaps Europe is stalling the institutional reform in
part because the U.S. refuses to take actions such as capping executive bonuses."
He did not expect China will be on a collision course with the U.S. due to
latter's imposition of punitive tariffs on tire imports.
"The concern over a trade conflict from the China tire tariffs is unwarranted,"
he said. "China will not risk its exports to the U.S. by retaliating sharply. One
thing the G-20 could accomplish is to have President Obama make a specific pledge
regarding trade but I doubt this will happen."
He expected the G-20 to "make yet another statement on protectionism, as it has
before. And as has happened before, individual countries such as India will take
small protectionist steps regardless."
hdh@yna.co.kr
(END)