regional cooperation in northeast asia: beyond the economic crisis

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Regional cooperation in Northeast Asia: Beyond theeconomic crisisJaewoo Choo a , Kap‐Young Jeong b & Ku‐Hyun Jung c

a National Security Policy Institute , Koreab Yonsei Economic Institute , Yonsei University , Koreac Graduate School of Business , Yonsei University , KoreaPublished online: 07 Apr 2008.

To cite this article: Jaewoo Choo , Kap‐Young Jeong & Ku‐Hyun Jung (1999) Regional cooperation in Northeast Asia: Beyondthe economic crisis, Global Economic Review: Perspectives on East Asian Economies and Industries, 28:2, 114-132, DOI:10.1080/12265089908449763

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114 GLOBAL ECONOMIC REVIEWVol. 28, No. 2,1999, pp. 114-132

REGIONAL COOPERATION IN NORTHEAST ASIA:BEYOND THE ECONOMIC CRISIS*

Jaewoo Choo, Kap-Young Jeong and Ku-Hyun Jung**National Security Policy Institute, Korea

Yonsei Economic Institute, Yonsei University, KoreaGraduate School of Business, Yonsei University, Korea

Contrary to the prevailing views and thoughts on the impact of the Asian financialcrisis on the future prospects for regional cooperation in Northeast Asia, the paperattempts to endorse the positive aspects of the issue by emphasizing what they hadeither overlooked or neglected in their observation. Claiming that regionalcooperation is no longer an abstract term, the paper makes its case on the observationof the positive development of inter-national relations in the region and on the studiesof seemingly feasible initiatives proposed by the regional states, such as FTA andAMF. The Asian crisis has drawn the states much closer to an unprecedented level in

* This research is partially supported by the Research Center for International Studies.* * Jaewoo Choo ia an associate research fellow at the National Security Policy Institute,

Seoul, Korea. He graduated from Wesleyan University in U.S.A. and received both hisM.A. and Ph.D. in International Studies from Peking University, School of InternationalStudies. His publications include Dynamic Transition and Economic Cooperation inNortheast Asia (co-editor) and articles in Europe and Contemporary Asia-Pacific Studies.Kap-Young Jeong, a professor of economics at Yonsei University, Korea, received hisM.A. and Ph.D. in Economics from Cornell University. He is currently a member of theGovernment Administrative Reform Council as well as serving as the editor of the GlobalEconomic Review. He is the author of Economic Structure and Integration Task in NorthKorea and co-editor of Building Capacity for Economic Cooperation in Northeast Asia: Acomparative perspective.Ku-Hyun Jung is a professor of business administration in Yonsei University, Korea. Hegraduated from Seoul National University and received his M.B.A. from State University ofNew York at Albany and his Ph.D. from the University of Michigan. He has held visitingpositions at the University of Michigan, University of Hawaii, and Institute of DevelopingEconomies at Tokyo. Publications to his name include Economic Cooperation BetweenKorea and Hungary, and Divided Nations and East-West Relations on the Threshold of the1990s.

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Regional Cooperation in Northeast Asia 115

terms of their consensus on regional affairs, a consequence of what had started out astheir individual effort to search for outside help to recover from the crisis' shockwaves. As a result of this effort, the states have come to recognize the substantiveneed to build a coordinated cooperation system at regional level in order to meet thefuture challenges that may recur in the future course of deepening globalizationprocess. Whether international or domestic in nature, problems confronting a statehave now become literally insolvent if it were to rely on individual effort for solution.Under this circumstance of growing complexity of globalization and interdependence,the paper suggests that future regional cooperation ought to be carried out at twolevels: at national and local level. It is also by this circumstance that the regional stateshave come forward with more concrete and realistic ideas of framework by whichregional cooperation at national level may be achievable in foreseeable future. Atlocal level meaning cooperation among NGOs, if they were sufficiently utilized, thepaper conceives them as one of the best reliable sources that could perpetuate theimprovement of quality of life. It is from this respect the paper will, first, assess therecent development of international relations of the Northeast Asian region. Upon thisevaluation, the paper will, then, examine the feasibility of the proposed initiatives,including FTA and AMF. To emphasize the rising importance of NGO's role inachieving regional cooperation at local level, the paper takes their activities onenvironment as a basis of analysis.

1. INTRODUCTION

In both realms of theoretical studies and practice, progress on regional integration andcooperation in Northeast Asia has been hard hit by the current Asian financial crisis.When the crisis erupted, talks of the regional cooperation seemed to have come to anabrupt halt The circumstance has left observers and experts of the regional affairspondering if the talks on regional cooperation were allowed and permitted only whenthe economies of the region was at a sanguine state. The idea of regional cooperationamong the regional states seemed to have been valid when the economy of theregion was at its peak. Nowadays however the discussion of such an idea appears tohave suffered a considerable set back with the recent economic difficulties.

Academic debates on regional integration based on cooperation in NortheastAsia seemed to have reached its peak when the slogan, "the Asia-Pacific century,"was at its hype. Prior to the crisis, the so-called "Asia-Pacific century" seemedimpending, and the regional integrity appeared to be a pre-requisite for the feasibilityof such a future scenario. It was by this realization that the states and experts in theregion expanded their talk beyond the theoretical analysis on the need forcooperation to include studies on appropriate means and measures to regulate andcoordinate policies of the regional states. Whether those policies and studiesrepresented the official views of their home governments or not, within the

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116 Jaewoo Choo, Kap-Young Jeong and Ku-Hyun Jung

framework of their observation and analysis, regional integration and cooperationonce seemed very feasible and realizable in the near future.

If allowed to recall the time when the idea of regional integration budded,most, if not all, of the works by numerous scholars and experts on the regionalizationand regionalism in Northeast Asia shared one common underlying assumption. Thatis, when the national interests of many states are so closely intertwined in aninterdependent world like those of the Northeast Asian states, international problemsbecame too complicated for one state to rely on its individual effort for a solution.Not only is it because national interests are intertwined with one another, but it isalso because every single international incident is to have an impact on another'sinterest. The degree of repercussion of international incident on various states maydiffer depending on its geopoliticality, but, in general, international affair is now verycontagious.

The Asian economic crisis that started in Thailand in July of 1997 has given aserious blow to the confidence of Asian countries in managing their economies. EastAsian countries have experienced an unprecedented high growth rate in the previoustwo to three decades and therefore believed that the 21st century will be the Asia-Pacific Century. The economic crisis has cast doubts on the East Asian economiesbeing able to achieve such a goal, and the debate on so-called Asian values has takena new twist. It is perhaps too early to discuss the full impact of the crisis on the region,in particular on the prospect of cooperation or confrontation. The crisis is still underprogress and should run its course in due time. Moreover, we cannot rule out thepossibility of a second crisis, given the dire economic situation in Japan and China.

From an immediate and intermediate perspective, the current financial crisis inNortheast Asia may have generated many negative consequences to the regionalstates. For the long term end, however, the crisis may have some positive effects onthe seemingly perishing spirit of cooperation among the regional states. States haveexperienced the contagious nature of international affairs, and also learned at a greatexpense that international problems are literally insolvent without cooperation.Support for creating an Asian version of IMF, also known as "Asian Monetary Fund"(AMF), is a result of this hard learned lesson. Furthermore the crisis has also had aneffect of further unifying the nations in the region as reflected in their policycoordination as well as cooperative behavioral effort to overcome the crisis. Be itbilateral or multilateral cooperation, in practice, never before have the nations in theregion acted and behaved in such a harmonious manner in coordinating theireconomic relations and avoiding conflicts in the course. The opportunity has also laida foundation for these nations to act more cooperatively in non-economic sectors. Inparticular, there has been significant progress made on environmental problems.

China, for instance, has made an explicit change in its stance on internationalenvironmental issue. Inducing China's active participation in internationalcooperation on environmental issues no longer seems to be such a challenging task.Furthermore, Japan has also shown positive signs for regional cooperation in its

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action and behavior. It revealed its willingness to be part of the regional integrationprocess by making a dramatic change from its previous stance on the 50 year-oldhistorical feud over an official apology note with its neighboring states. The feudover Japanese apology for its conduct of atrocity upon Asian states during theimperial era has not come to a total and complete end. However, its official apologyto South Korea during Kim Dae Jung's visit to Tokyo alone can be interpreted as apolitically positive initiative for the region.

There are also many other constructive signals to the future prospects forregional integration and cooperation, despite the economic hardship. Politically, theoverall picture of the region's international relations looks very positive. Withstronger political ties within the relationships of these states, there is already anincreasing confidence and trust as well as willingness to amend their historical pastthat are very critical to further enhancing cooperation and integrity in the region.

It is from this respect the paper will assess the development of some positivetrends in contemporary international relations of Northeast Asia that would have aprofound effect on the course of region's cooperation and integration. Based uponthis evaluation, the paper will, then, examine the nature of the critical variables, suchas the feasibility of AMF and inducement of North Korea into regional cooperationscenario, and prospects of regional cooperation for environmental issues. They aretermed "variables" for two reasons. One reason postulates that the successfulestablishment of such an international financial organization as AMF will have anigniting effect on forming a regional bloc that has been long talked about. Other isthat active participation on North Korean part in the regional affairs will perfect theformation of such an economic bloc as well as an environmental cocoon for itsgeopolitical reason. The immediate response of this section is to assess whether thecrisis has aroused a sense of community in Northeast Asia and thus has enhancedpossibility of cooperation both in economic areas and security.

2. POSITIVE DEVELOPMENTS IN NORTHEAST ASIANINTERNATIONAL RELATIONS

In 1998, the world witnessed active summit diplomacy at work. Especially in themonth of November, the leaders of the Northeast Asian states were particularly busywith cross-summit meetings. Although these meetings were motivated by a varietyof factors, they all shared one common agenda that focused on finding the solutionfor the economic crisis. Successive summit meeting with one another also resulted inmore positive consequences for its bilateral relationship than negative ones. Effortsby the leaders to solve the half-century old historical problems were very vivid.Some resulted in desirable consequences, contributing to the stability and peace inthe Northeast Asian region. These meetings also laid a profound foundation forfuture cooperation among the regional states. Regardless of the adjectives used in

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describing their relationship as "partnership," the relationship between one another isall brought under the term "partnership."

Ever since Jiang Zemin of China described his nation's relations with Russiaas a "constructive partnership," "partnership" has become a popular terminology incontemporary international relations.1 There is, however, no clear differentiationmade by the academic circle frequently using terms such as "constructivepartnership," "cooperative partnership," and "strategic partnership" to describecontemporary international relationships. Definition and its meaning can be inferredfrom observation and assessment of the results of the summit meetings. "Strategicpartnership," for instance, is interpreted to have an implication that nations are tocooperate only on their vital national interests, leaving conflicting issues to be dealtby the governmental officials and not by the head of the states. It also requires thestates declaring such a relationship to hold annual summit meetings. Clinton andJiang Zemin met for two consecutive years since their declaration of a strategicpartnership, and politically sensitive and conflicting issues of interest such as tradeand human rights were placed aside from the official agenda of the summit meeting.They were left to be dealt by the related and concerned departmental level and not atthe state or presidential level. Be it constructive, cooperative, or strategicrelationship, "partnership" is the ideal relationship that most states in the region hadcraved for in its conduct of relationship with a bigger power. Such relationship couldgenerate much greater effect on building a more constructive and healthierinternational relations as reflected in the precedent cases of its practice. Leaders ofnations in partnership are obligated to conduct an annual visit, and this action wouldsubstantially boost the confidence and trust in one another. Although potential forconflict in Northeast Asia still exists to a great degree, states will tend to resort tomore diplomatic means and measures in their approach to potential conflicts.

One noticeable trend of this development in Northeast Asian internationalrelations is clearly reflected in the Korean-Japanese relations. One major obstacle toregional integration and cooperation in the region has been the regional states'hostility and lack of confidence towards Japan. For historical reasons, Korea, likeother former victims of Japanese imperialism, had always cast doubt on the intentionof the proposals and initiatives made by Japan in the name of regional cooperationand integration. Korea and other victims of Japanese imperialism began to see achange in Japanese position on the historical legacy problem when an official apologynote was issued by Japanese F*rime Minister Obuchi to Korean President Kim DaeJung during his visit to Tokyo last October. The apology brought an end to a half acentury old hard feelings and discontent of the South Koreans towards the Japanese.

What is very ironic about the apology was Japan's contrasting stance on thesame matter towards the Chinese demand. Japan's reasoning had its own logic andrationale, arguing on the nature of the case. According to the claim, Japan invadedChina, not occupied it as a colony. Japan, as a defeated state of the war, had made anapology and paid its price to China who was, then, one of the Allies. However, what

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the Japanese government overlooked or neglected was the fact that the formalapology issued at the end of the WWII was towards the government of the Republicof China or the Kukmintang Party, and not the PRC government nor the ChineseCommunist Party (CCP). Under the circumstance, the Beijing regime has every rightto demand an apology for the past wrong doings from the Japanese government fortwo valid reasons. One is that the CCP was also a victim of the Japanese imperialforce when it fought against it in coalition with the Kukmintang party, then, therepresenting political entity of China. Other is that since the CCP is the sole and onlylegitimate representing party of China, an official apology for the past ought to bemade to the CCP as well as to the People's Republic of China, if it were to continueto develop its relations with the mainland China.

Japan's intention behind the apology to Korea is still not too clear.Considering the timely manner and the political background, however, what we caninfer from the action is that the apology may have been made as a congratulatorygesture to the 50th anniversary of Korean government foundation. Chinesegovernment will also be celebrating its 50th anniversary on October 1, 1999, and thehead of Japanese state is scheduled to visit China in July, three months prior to theanniversary. Japan will be left with no other choice, but to issue a formal apologynote to the government and the people of the PRC, if it is to enhance economiccooperation with China and to induce China's support to realize its plan for AMF.Regional cooperation in any sector cannot be realized without China's participation,and Japan knows this better than anyone.

Despite China's failure to retrieve an apology from the Japanese government,the economic relations between China and Japan have gained strength from JingZemin's visit to Japan, the first of its kind by the head of the PRC since itsfoundation. They reached an agreement on 32 articles for economic cooperation, andsalient actions were immediately followed at a great velocity. The positive results innon-political areas were realized by the China's prominent diplomatic thought,separating politics from economics. The thought has been one of the dominantprinciples in Chinese diplomacy since the reform policy was adopted in 1978.Prospects on bilateral cooperation between China and Japan only gained moresubstantial grounds for future development.

While the summit meeting between China and Japan was heralded as anapology feud, the meeting between South Korea and China is held to be a successfulone as the two countries agreed to expand the scope and range of their mutualrelationship beyond economic area. Since formal recognition in 1992, therelationship between the two states have been limited to economic sector for NorthKorean factor. Admittedly enough, the complementary economic reasons had playeda significant role in bringing these two countries into formal diplomatic ties.However, after witnessing a drastic change in the international relations around theKorean peninsula, both Korea and China, China in particular, saw the developmentof imperatives that would justify its change in stance on expanding relations with

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South Korea. They include a number of developments. Though the results were notexactly ideal, direct contacts between North Korea and the US have been moving ata pace beyond China's expectations. China cannot afford to lose its status as a statewith influence and leverage over both the Korean and the Northeast Asian affairs.Under the circumstances, if it goes as stated in the joint declaration, the bilateralrelationship between China and Korea had to be upgraded to an unprecedented levelof partnership as rhetorically quoted in their joint communique.

Stymied by its domestic economic difficulties, Russia has been quiet in theinternational scene of Northeast Asia until the recent times. Although Russia hasshifted the focus of its foreign policy towards Northeast Asia as early as 1994, nosubstantial diplomatic actions and efforts have followed, except in its relations withChina. In 1998, however, it has taken the initiatives at bilateral level. Yeltsin wasvisited by the Japanese prime minister in November, followed by Jiang Zemin in thesame month. Russo-Japanese relations gained strength as the two countries havefinally sought a reaching point on the Kurile Islands issue, which has been the majorhindering problem for the development of the bilateral relationship. The currentnature and characteristics of the Sino-Russian relations seems to have duplicated thatof the bilateral relationship in the 50's, as a result of the successive summit meetingsduring the past 6 years. Furthermore, it has also dispatched a delegation of thegovernment representatives with authority to amend its relationship with NorthKorea in December. With its initiatives, Russia is striving hard to regain its positionin the region it once had in the Cold War'era, but on friendlier terms based on mutualcooperation and equality.

In contrast to most works by security specialists, the above assessmentpresents more positive aspects and views on the region's international relationsdevelopment than negative ones. The Asian financial crisis and the nuclearinspection problem in North Korea may color the region's international relationspicture very gray. However, states in the region are moving towards a much morepositive direction in its approach to the international problems. Inspired by therealization of the importance of cooperation, they are working very closely toovercome the historical legacies so as to enhance confidence, to trust in one anotherand to build an appropriate framework for cooperation.

3. COOPERATION AT LOCAL GOVERNMENT ANDNGO LEVELS

Cooperation at Local Government Level Demanded

The central government is usually preoccupied by the national and domestic issuesthat are more relevant to the general well-being of its populace. Under thecircumstances, there are two contributing factors to the rise in demand for

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cooperation at the local level.One is the globalization of world affairs. Globalization not only has

undermined the meaning of national territorial boundary, but has also made nationsmore subject to the development in other states. As reflected in the current Asianfinancial crisis, one's domestic affair has an international effect. In other words, theeffect is very contagious. To promote and protect its national interests, therefore,the central government now has to be on constant alert of domestic developmentsof its neighboring states and the ensuing changes in both foreign and domesticpolicy. To a certain extent, it has to maintain a close monitoring of the same activityfor the states on the other side of planet. As defined by some scholars, in short,globalization is discussed as an intensification of cultural, social, political, andeconomic interactions among nations2 (Jun 1996:34). The intensification of such avariety of inter-activity of a state has forced it to pursue an institutional change inresponse to changes in both domestic and international environment. It is against thisbackground that the central government has granted more autonomy and authority tothe local governments to act as a political entity in their conduct with foreigncounterparts.

Another reason is attributed to the result of development in domestic society.When a nation grows, so does the society. This causal relationship between the stateand society has only persistently enhanced the diversification of domestic society'sinterests that are all closely related to the well-being of domestic populace. Fulfillingthe diverse demand of interests by a variety of interest groups has become a near-impossible task for the central governments of the 21st century. As if acknowledgingthe consequence of this causal relationship in advance, the central governments inNortheast Asia, for instance, has since the 80's taken significant measures andinitiatives in decentralizing the central authority and granting more autonomy to thelocal governments. Japan was the first state to do so, followed by Korea and China.

Also known as a prefectural government, the degree of the Japanese localgovernment's decentralization and autonomy easily exceeds those counterparts inKorea and China, as the local autonomy in Japan has started significantly earlier thanthe two states. Reflecting the case, their international exchange programs easilyoutnumber those counterparts in Korea and China. As of 1996, the number of itssister relationship with foreign counterparts stands at l,200.3 Since 1992 when thenumber reached 72, however, the number of sister exchange program ratificationwith foreign counterparts has witnessed a steadfast decrease, and only a slightincrease in 1996 with 42.4

While the causes are found in many factors, two reasons stand out with muchimportant implications. One is economic reasons. Economic recession in Japan had asignificant effect on the international exchange program at local level as a result ofbudget constraints of the local governments. The budget constraints have forcedthese local governments to review and reduce their program to a great extent. Manyof them, consequently, only hold their names and titles with activity programs scaled

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down to almost none.Another reason is a persistent rise of rather individual civilian organizations in

international realm since the 80's.5 Due to the rapid development of sophisticatedmeans of communication and transportation, their activities have expanded beyondthe boundary of their franchise. While the development of high-tech may have been acontributing factor to the cause of this expansion, globalization has also led theseorganization to internationalize their activities, which are now regarded to concern notonly the welfare of their home state, but also the well-being of the world populace.

Aside from insufficient budget and rise of other non-governmental andcivilian organizations whose mission tends to overlap with that of localgovernments, there are other factors that prevent them from gaining a full autonomyfor their international cooperation purpose. It is a universal cause commonly foundin all states in the Northeast Asian region. Regardless of the differences in theirdegree of autonomy from the central government and the amount of budget, localgovernments in Japan, Korea, and China all share common problems that impedetheir desire and effort to promote international interests and cooperation. The level ofself-governing ability by the local government still remains very low. Various kindsof laws and regulations of central government sternly control all the localgovernments (Choi 1996:10).

Although the degree of autonomy and independence of local government vis-a-vis decentralization of the central government's authority may vary from state tostate for domestic reasons, local governments in these three states cannot be said tohave become fully independent and autonomous in its conduct with foreigncounterparts. Their foreign relations and conducts are all heavily constrained by theconstitution and bureaucratism that are conservative in nature and anti-foreign incharacteristics. For the foreign counterparts to engage in a conduct with the hostingstates, they have to, first, overcome the enormous amount of bureaucratic obstaclesof the host state. The procedure is usually so overwhelming and time-consuming thatit often generates an adverse effect against the original purpose of their initiative forengagement Before undergoing the whole procedure, they often find themselves lostfor motivation and purposes.

What further prohibits their process of becoming a total independent entity istheir heavy reliance on the central government for its financial assistance andpolitical support. In particular, the latter factor could be attributed to the politicalculture of these Confucius states that have a long tradition of the centralgovernment's endorsement to the local government's sovereignty and justification.Without the endorsement, the local governments are unable and incapable toimplement policies that they regard as critical and vital to the well-being of theirlocalities. It is due to this endorsement relationship between the local and centralgovernment that the local government is usually shaped by the governor and localbureaucracy, who are rather autonomous against the local assembly, local interestgroups, and local constituencies (Yang 1996: 110).

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To promote their self-governing ability and international role, localgovernments should first reform their own organizations and then adapt a sufficientglobalization strategy. In structural dimension, the goals and development plans oflocal government should be changed into international and open-door system. Theirroles have to be rebuilt, their organizations and bureaucracy should be reformed, andfinancial capacity also be strengthened. In functional dimension, they shouldexamine international market trend and movements, innovate managementtechniques and develop global information networks and expand communicationsystems. In addition to these arrangement, social infrastructure, promotinginternational conventions and various kinds of international events can be utilizedthrough cooperation with international organizations and civilian ones alike tointernationalize their community.

NGO Cooperation for Environmental Protection

Environment protection has become a issue of great concern to all nations in theworld. The Northeast Asian states are no exception, and the concerns are expressedin various ways. Protection programs and cooperative operation among the states toprotect and preserve the environment is much more prominent at the state level thanat the NGO level. It could be attributed to the fact that the cooperation forenvironment protection programs has a longer history as they can be traced as farback as the 70's in the programs that were mainly initiated by the United Nations. Inthe 90's, when the Cold War ended, such programs and activities began to bevigorously pursued by various types of NGOs in the region. However, their benignintention and rigorous pursuit of action were seriously undermined by insufficientbudget and funding. It is in this respect that there is a serious need for governmentalsupport for NGOs to continue their benign act of civil diplomacy, which is regardedto be very effective in promoting the welfare of the general human beings. It isparticularly the case with Northeast Asia as the number of governmental programssimply outnumbers that of the NGOs. Since the states are pretty occupied withreforms so as to overcome the financial crisis, it would be appropriate forgovernments to fulfill the need for NGO's success in environmental protection.

In Northeast Asia, governmental programs and activities for environmentprotection have been, thus far, carried out in both bilateral and multilateral forms.Results of multilateral approaches at governmental level have, however, beenlimited, if not productive at all. There are numerous works and reports ofinvestigation on the region's environment conditions. There are also various types oforganizations and forums including those subcommittees in APEC and ASEAN. Atbilateral level, all the states in the region have treaties and governmental committeesas a result of the summit meetings. Multilateral discussion and debates on theseriousness of region's environmental problems succeeded in drawing attention andconsensus from the participating countries, including North Korea. For some reason,

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though, specific actions or initiatives were not followed. Actions are rather taken inbilateral forms, usually as a result of summit diplomacy. For instance, for the nextthree year, Japan will be in charge of a tree plantation project in China, whichamounts to $3.6 billion. There is no other significant actions at the state level. Statesrather lie on domestic sources and means for actions following the agreements madeat the governmental meetings.

Domestic sources for environmental protection activities are mainly from theNGOs. Related activities have been initiated and fully carried out by the non-profitcivil organization with inadequate and insufficient attention and financial supportfrom the government. While these NGOs' initiatives tend to place much focus ondomestic environmental issues, they cannot expand the scope and range of theiractivities beyond their national boundaries for the above reasons. As the NortheastAsian Conference on Environmental Cooperation (NEACEC), a governmentsponsored environment forum since 1992, has emphasized, governments dorecognize the importance and the need for expanding role of NGOs'. Despite therecognition, their initiatives and activities are not conducted internationally. What thegovernment can do is to help them form an alliance through economic channels, andencourage their activities through diplomatic channels. They are viable asgovernments all have agreements and treaties for such activities.

4. COOPERATION AT NATIONAL LEVEL

Asian Monetary Fund (AMF)

As a means to help the region overcome the financial crisis, Japan took the initiativewith the announcement of its financial rescue packages, which would have anappalling effect to the observers of the regional affairs. The creation of AsianMonetary Fund was announced in September 1997 with an estimated budget of $50billion, originally, and later, the Miyazawa plan with a $30 billion package. Whenthe idea of founding an Asian version of a IMF-like financial institution was firstpresented by the Japanese finance minister Hiroshi Mitsuzuka at the annualgathering of the IMF and the World Bank, held in Hong Kong in September 1997, itonly ran into skepticism and criticism from the American and some Europeanparticipants. Tentatively named as the "Asian Monetary Fund," the idea wasoriginally to create a $50 billion fund (now estimated to be $100 billion), financedand run by the Asian countries, to help the region's governments cope with currencycrisis {The Economist 1997: 84). At the meeting, the idea was speculated to bemerely a product of pressure for its absurdity and ambiguity. Japan had long beenunder the spotlight of criticism for not taking the responsibility in world affairs,which would be in line with its economic status. As criticized when the financialcrisis erupted in Southeast Asia, the Japanese government failed to take immediate

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action, but succeeded in attracting more negative judgments from the rest of theworld. Japan's idea of creating a regional financial institution was merely regarded asan idea arising under pressure that only appalled the participants at the meeting.

The idea of creating AMF was appalling to the economic and financialexperts at the meeting for numerous reasons. First of all, in the light of its currentrelations with other Asian states, Japan's leadership and capability to create such aregime was seriously questioned. If the crisis countries had known $100 billion stoodready for times of trouble, they did not have to pursue the tough policies required bythe western financial organization at the price of the so-called "bail-out-fund." Whydid Japan not take any appropriate measures before the disease of the crisis spread toothers?

Second, the idea received lukewarm responses from the crisis countries forhistorical reasons. The intention behind the idea was, and still is, not too clear toother Asian countries, but has much implications for historical reasons. The last timethe Japanese took charge of economic responsibility for Asia was in the 1930's and1940's in the name of "the Greater East Asia Co-Prosperity Sphere." The memory ofthose days are filled with too many untold misery and havoc. Third, there is anapparent contradiction between a Japan in recession and a Japan that is puttingadditional $30 billion in aid on the table as in Miyazawa Plan (Vatikiotis and Hiebert1998/1999: 12). There has been a viable option for Japan, if it truly wishes toprovide assistance to other's recovery effort from the crisis. Instead of throwing casharound, it could help these crisis ridden countries by stimulating its domesticeconomy and allowing more imports from them, as demanded for a long period oftime prior to the crisis. Under the circumstances, Japan's push for the creation of anAsian financing arrangement ran into early obstacles with much doubt andskepticism from both the West and its neighboring states. Furthermore, theMiyazawa Plan is now perceived to be the seed money for AMF.

Fourth, the opposition from the US played a vital factor to the realization ofcreating AMF. When the idea was announced, the United States Treasuryimmediately took actions to kill the proposals, reasoning that the IMF should be thesole coordinator of the rescue effort (Wade, Robert and Veneroso 1998a: 19). TheUS' claim for the viability of a single international monetary regime received lop-sided support from other Western nations and regional states for its indispensableleadership in the regional affairs. Opponents also argued that an Asian-only fundcould only have an undermining effect on the IMF, which lends financial support todeal with such problems with tough conditions attached, thereby severely placingthe pressure on the governments to put their economies in order {The Economist1997: 84).

However, after 15 months experience under the IMF rule, and with theimpending inauguration of the EMU, views and attitudes towards the idea of AMFgained a substantial ground for change. Need for a revamping of the internationalfinancial system and for the reform of the IMF has become very vocal, particularly

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126 Jaewoo Choo, Kap- Young Jeong and Ku-Hyun Jung

by the Japanese. On behalf of this voice, Wade and Venroso claimed that the IMFsstrategy for Asia has failed, only to produce "a second wave of capital outflows andrenewed falls in currencies and stockmarkets" (Wade, Robert and Veneroso 1998b:20). Moreover it only prompted Asian governments to turn away from the initialIMF strategy as reflected in their reduction of interest rate and fiscal expansion. Witha contrasting financial mechanism and structure in the crisis countries, IMF-styleausterity program that imposes western measures of financial restructuring failed torecognize the danger of fiscal restriction, and the danger of high real interest rate.6

Admittedly, there is also a possible danger looming over the idea of AMF. Itwould only perpetuate "crony capitalism" and "alliance capitalism" among the states,businesses, and banks in Asia, which are considered to be the major causal factors ofthe crisis in the eyes of the West. It is simply because of the differing viewspossessed by the West from the East in its studies of the causal factors of the crisis.As mentioned above, according to the western school of thoughts, the crisis was aresult of crony capitalism and capital alliance system that had only endorsed the lackof transparency in financial and judicial systems as well as investor's confidence inthe banking system. On the other hand, the East blames the underlying causes,rather, lie in its heavy dependency on dollars, or the dominance of a single currency,and lack of cooperation and crisis management system within the region. It isprobably the latter perception that had convinced Japan to come up with such ideasas AMF and Miyazawa Plan.

There are much doubt on AMFs capability to act as the "last resort of lender"for the size of its fund reason, which is the vital function that enables the IMF to actthe way it does. To date, it is clear, however, that AMF would be capable to act as a"fire fighter" with a responsibility to "make quick-disbursing loans available tomembers in difficulty, with conditionalities limited to stabilization rather than toIMF-type structural reforms "(Wade, Robert and Veneroso 1998b: 21). At theASEAN summit meeting held in last December, and during its prime minister tourof Europe in early January, Japan presented a much more concrete proposals withcold cash to explain how and where the fund would be used. It is claimed to be usedfor both purposes of reviving Japanese domestic economy and revitalizing host ofcrisis-hit states in the region. For this end, the initial aid of $30 billion will be tied toprojects to stimulate demand for Japanese goods and services overseas and to boostthe role of the yen (Vatikiotis and Hiebert 1998/1999: 12). Furthermore, to fend offthe skepticism of its intention to create an alternative to the IMF and immediate yenbloc, it also announced that the aid will be disbursed by bilateral means (Vatikiotisand Hiebert 1998/1999: 13).

Against the doubt by the regional states that Japan will exploit AMF andMiyazawa Plan to realize its long pursuit of creating a "Yen Bloc" in the region, theAsian financial crisis had an adverse affect. The crisis has helped these states togradually recognize the importance and the necessity for such a regime and plan.Although a year of Asian turmoil witnessed China raise its economic profile while

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Japan sank deeper into the mine, and has left many convinced that the region has anew rising star. It also proved a realistic problem. China is not yet capable of fillingin Japan's shoes in terms of trade, investment and aid flows vital to the Asianeconomy.7 In other words, the crisis has allowed Japan to take a much moreaggressive approach towards regional affairs.

AMF, like the IMF, will not totally discard the problems in financial andgovernmental sectors of crisis-hit nations when dealing with the problem. AsMiyazawa was quoted in saying, "transparent financial markets and clear corporategovernance are the main items that we hope to use as conditions" (Tatsuo 1999). Asimplied by a senior Ministry of Finance official, AMF will attach an importance onone principle. When lending loans, it will complement a regional mechanism that isanchored to a sense of solidarity and mutual dialogue among the nations in theregion, which does not exist in the IMF's principles. In an overall sense, theestablishment of AMF would enhance regional cooperation and dialogue as it willbear the responsibility of a pre-emptive force to a similar financial crisis that theSoutheast Asia is currently experiencing. As emphasized by Wade and Veneroso,"Too much is at stake to worry about Asia going its own way" (Wade, Robert, andVeneroso 1998b: 19).

Free Trade Agreement

It is well known that Northeast Asia is perhaps the only region in the world wherethere is no Free Trade Area (FTA). The region has APEC, which is not really a FTA.Reasons for the lack of regionalism in Northeast Asia are manifold. First is thedifference in economic systems. China is still a socialist market economy and hasnot given up some principles of socialism. It is also not yet a full member of theinternational economic community. Second, the countries in the region have notgotten over the legacy of Japanese military expansion in the first half of this century.Jiang Zemin has made this point clear during his recent visit to Japan. Third, therelative size and stage of development are quite different in the region. In terms ofper capita income, it ranges from several hundred dollars to thirty thousand dollars.Japan has been a dominant economic player in the region until very recently and hasbeen very competitive in many industries globally. And then there is North Koreawhich is a black hole in the region in terms of economic cooperation and security.Because of these reasons, there has not been a multilateral approach to economic andsecurity cooperation in the region.

The question is whether this is likely to change in the coming years. In thissense, it is noteworthy for Japan and South Korea to agree to think about a free tradearea. This could be viewed as a beginning of a regional cooperation. What are thepros and cons of a FTA? From the Korean side, the immediate response would bethe fear that some of Korean industries will be taken over by Japanese. For example,some people fear that the Korean automobile and electronics companies will not be

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competitive against Japanese companies. But what is a FTA? It means the gradualelimination of tariffs on some or all products. The average tariff rate for imports toKorea is about 8 percent at the moment. A FTA with Japan means Korea willabolish these tariffs on Japanese products. The eight percent tariff is notinsignificant, but is not protective, either. Korean Government has alreadyannounced its intention to abolish all discriminatory import restrictions on Japaneseproducts by year 2000. Korean market will be open to international competitionanyway, with low tariffs and liberal stance toward foreign direct investment. A FTAimplementation with Japan over, say, ten years with some exceptions will not besuch a big shock to Korean industries.

Customs union theory tells us of two effects of regional economicintegration: static effect and dynamic effect. Static effect refers to trade creation andtrade diversion effect. For Japan whose average tariff rate is less than 4 percent,elimination of all tariffs to Korean products would mean relatively small diversioneffect because Korean products will have only 4 percent cost advantage compared toimports from other countries. For Korea whose average tariff rate is 8 percent, thetrade diversion effect would be greater, which means Japanese products will havesignificant cost advantage compared to imports from other countries. This meansthat the dependence of Korea on Japanese industries may increase due to the FTA.This fear of dependence on the Japanese economy could be a major hurdle toovercome for the Korea-Japan FTA to be implemented. One remedy to this problemwould be further lowering of overall tariff rates to imports, which will reduce tradediversion effect Since the average tariff rates are relatively low in two countries,trade creation effect would be also relatively small. Overall, static effects would berelatively small, which means that the cost of adjustment to the FTA in two countriesis relatively small, too. The FTA could be viewed as a leverage to further liberalizethe economies of the two countries.

The dynamic effect would be much more significant than static effect. Firstof all, the psychological barrier to trade and investment would be lowered. Forexample, Japanese companies attitude to Korean investment climate is still verycool. They are still concerned about potential labor problems and high productioncosts. The FTA alone would not solve labor problems or cost problems, but thepsychological distance will be lowered. Second, there will be more mergers orstrategic alliances between two countries. There will be more division of laborbetween two countries. For example, the automobile industry will see a possiblemerger of strategic alliance. The FTA will force some industries to be restructured. Ifone can supply both Japan and Korea from a single production base, a more efficientand bigger plant will be located in one country. This means locations in Kyushu orKyungsangdo areas will be preferred. In the long run, if North Korean market isincluded, this FTA will have the total population of 190 million people, which is nota small market. This market will attract more direct investment from multinationalcorporations. More investment and industry restructuring means that both economies

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will be more efficient and will have a higher growth rate.There is bound to be significant opposition to the Korea-Japan FTA in two

countries. The past haunts us: fears of the East Asia Co-Prosperity Region are stillwith us. Nationalistic sentiments are still very strong in two countries. But if we lookat the global trend of regionalism, the Korea-Japan FTA (KJFTA) is just a first steptoward the region's strategy of gaining international competitiveness. This iscertainly not an exclusive bloc. After all, NAFTA shows that short-term trade effectsare relatively small. It will have a great announcement effect that the region begins tothink in terms of the region, not in terms of each country. As was mentioned above,the KJFTA could in due course interest China, which will gradually open hereconomy and join the international economy more fully. This could lead toNortheast Asia Free Trade Area (NEAFTA) including China and Mongolia.Eventually, it could develop into an East Asian Free Trade Area by linking NortheastAsia with ASEAN Free Trade Area. Again this is not an exclusive bloc. Why can'tEast Asia have a FTA when the other major players in the global economy alreadyhave powerful bloc such as the European Union or the NAFTA. The absence ofregionalism in the region shows the lack of imagination and leadership of politiciansin the region.

5. CONCLUSIONS

Since the eruption of the Asian financial crisis, future prospects for regionalcooperation in East Asia have been cast with overwhelming doubts. Evidence forsuch pessimistic views is everywhere. What these views, however, overlook is thatmost of the evidences are either domestic issues or international ones that arepursued by concerned nations for peaceful solution. Domestic political instability iswitnessed mostly in the Southeast Asian states. The impact of the consequences onEast Asia's international relations and economy would be very marginal, if allowedto recall the political turmoil that Taiwan, Philippines and Korea underwent. Theirdomestic political instability did not have a negative impact on the regional stabilityat all, and it did not deteriorate their economic development. While we do not haveto overestimate the impact of their domestic turbulence on the regional affairs, we donot want to exaggerate the situation to the extent that it will have a detrimental effecton the prospects for regional cooperation and integration process.

The Asian financial crisis has been devastating for Asian states. Theireconomic development strategy and performance have proved to be a real myth, atleast for now, and probably only temporarily. The hope for forming a regional blocthat has been long sought by many seems to be history. Nevertheless, the crisis hasshined on some positive perspectives for regional cooperation and integration.Although forcibly and at a great price, states have undertaken actual reformmeasurements and initiatives in sectors that are essential to the regional cooperation

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and integration. Through reforms, transparency in business and financial transactionswill be enhanced. Legal system will be institutionalized. Rule of law will beimplemented. They all exist on paper, yet they simply did not function in proper wayas designed.

Current international relations development has been encouraging for theprospect of achieving regional integration and cooperation, as it is moving towards apositive direction with China assuming a bigger responsibility in times of crisis.While taking much burden upon its own shoulder, China has, in other words,provided a new hope, and much needed active participation, for the realization ofregional cooperation. The impact of the Asian Crisis, so far, on Northeast Asia hasbeen the power shift in favor of China at the expense of Japan. China acted like astatesman and has claimed that it will refrain from devaluing its currency in order tohelp out neighboring countries from devaluing their currencies further. So far Chinaacted according to its rhetoric.

Japan has been unfairly criticized to a certain degree by the internationalcommunity for not doing enough to help out its Asian neighbors. Japan has its owninternal problems and political system where decisive actions cannot be taken, whichhas prevented it from taking bolder measures to help out Asian countries. Morerecently, Japan came out with a package totaling $30 billion to provide funds to Asiancountries stricken with the crisis. Even without the crisis, relative weights of Japanand China in the region and world economy have experienced a gradual shift.Japanese economy has grown in the range of 3-4 percent while the Chinese economyhas done so in the range of 8-12 percent in the last two decades. Various observersnoted that China's GDP will surpass that of Japan in the first decade of the 21stcentury, if it has not already done so in purchasing power parity basis. The long-termshift of power in Northeast Asia has been accentuated by the recent economic crisis.

The weakened and isolated position of Japan during the crisis has changed itsposition toward regional cooperation. It is noteworthy that Japanese Ambassador inKorea proposed to study the feasibility of Japan-Korea Free Trade Area. It is evenmore noteworthy that the Korean government has agreed to have a joint study of theidea. This shows a remarkable turnaround of sentiments in Japan and Korea towardseach other. For the first time in fifty years, Japan and Korea can at least talk about aregional trading agreement. It shows the underdeveloped nature of regionalism inNortheast Asia. China has, so far, refrained from talking about a free trade area in theregion and is against any such idea. But China could change its position if a FTA canbe implemented between its two neighbors. There are few factors that could changethe attitude of China toward regional economic cooperation. One is the entry ofChina into the WTO, which will make it easier for China to take a more liberalstance toward international trade. Another would be China's policy shift to a marketeconomy, in particular its policy toward private ownership. Still another would be itseconomic situation. If China runs into a serious economic difficulty, it could changethe attitude toward economic integration in the region. In this sense, the Asian

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economic crisis could increase the sense of community in the region and provide anopportunity to think about a new form of regional cooperation.

The financial crisis has also forced Japan to assume a leading role andresponsibility commensurate to its economic power. Regardless of the degree of therole and responsibility it has taken thus far, Japan has finally come forward to thecall for leadership in the regional affairs. It is too early to know whether it willsucceed or not. However, what helps the region to be more optimistic and confidentabout the prospects for regional cooperation and integration has correlated with whatJapan has thus far shown in terms of its willingness to take the leadership in regionalaffairs. It is the leadership that has long been demanded by the rest of the states in theregion, and Japan responded to it very positively.

By taking advantage of the crisis-hit states' preoccupation with domesticeconomic problems and reforms, NGOs could expand the scope and range of theiractivities on their concerned issues, to which governments cannot afford to manageor pay attention. And governments of these states must also recognized the reality, inwhich they cannot act upon every concerned issue presented by NGOs.Governments could provide guidelines, financial support, and diplomatic assistancefor their transnational activities. In other words, time for governments to utilize, andto an extent exploit, these interest groups for their passion and expertise of their workhas arrived.

The financial crisis may have hit hard on the daily economic life of thepeople in the Northeast Asian region. To date, however, it seems to have generated areversing effect on the prospects for regional cooperation and integration, making itonly brighter. It sure has enhanced a sense of unity and cooperation among the statesin the region. Successive summit meetings held in. the month of October andNovember last year and ensuing consequences of action all clearly reflect the case.As the saying goes, "Seeing is believing." Without the experience that the states inthe region have undergone so far, it is no exaggeration to say that action for regionalcooperation and integration have remained without any progress.

Notes

1 The term "partnership" was not originally first used by Jiang Zemin, if argued and examinedwith the course of the international history. However, in the context of its meaning and thescope of this paper, the particular meaning of the "partnership" was first quoted by theChinese president. At the end of the Cold War, then-the-US president Bush also describedthe US relations with Japan as partner on mutualism and equality; that they would share theexpense of the US military stationed in Japan, and would share the financial expenses inconducting international affairs. The term "partnership" described by Jiang Zemin has left asignificant impact on the international behavior of contemporary states in the post-Cold

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War period, as will be discussed later.2 For detailed analysis, please refer to Jun and Wright (1996).3 With the US, the number has reached 374, followed by China(229), Australia(81),

Korea(65), and Brazil(58) (http://clair.or.kr/hesul.je11ho/6page.htm).4 http:clair.or.kr/hsel/jel lho/6page.htm5 The number of sister relationships established in the 80's by the Japanese local governments

with their foreign counterparts averaged at 42.8. In the 90's, it reached its peak in 1992when the number stood at 72. Since then, due to the stated reasons, it has been in a steadydecline. Ibid.

6 The fact that budgets in the crisis states had long been roughly in balance, and deflationaryconsequences of high real interest rate were totally neglected by the IMF. For details, pleaserefer to Wade, Robert and Veneroso (1998b: 19-21).

7 Although doubts on its intention behind late response still remain, when Japan steppedforward, it did with dignity and respect. The amount of aid is simply incomparable to that ofChina's. Miyazawa plan alone outnumbers China's pledge of $5.5billion, including$1 billion from Hong Kong, made at the APEC summit meeting last November.

References

Choi, Bong-Ki (1996) 'A study on local government, its ability and globalization strategy (inKorean),' Journal of Local Government Studies 8(3): 10.

The Economist (1997) 'An Asian IMF?' The Economist, 27 September: 84.Jun, Jong S. (1996) 'Globalization and its implications for domestic governance, policy

making and administration,' Korean Review of Public Administration 1(1): 34.Jun, J.S., and D.S. Wright (eds) (1996) Globalization and Decentralization: Institutional

context, policy issues, and intergovernmental relations in Japan and the UnitedStates, Washington, D.C.,: Georgetown University Press.

Tatsuo, Ito (1999) 'Japan wants to revive regional monetary fund idea,' [online], availablefrom: http://www.yahoo.com/fianance. 8 January.

Vatikiotis, Michael and Murrey Hiebert (1998/1999) 'Help yourself,' Far Eastern EconomicReview 31 December, 1998- 7 January,1999: 12-13.

Wade, Robert and Veneroso (1998a) Two views on Asia,' The Economist, 1 November: 19.(1998b) The resources lie within,' The Economist, 1 November: 19-21.

Yang, Kee-Ho (1996) 'An empirical study on the policy making process of Japanese localgovernment (in Korean),' Journal of Local Government Studies 8(2): 110.

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regional cooperation in northeast asia: beyond the economic crisis

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