[Viewpoint] From arms to currency: a new order

No-nonsense judge and diplomat Yi Jun along with two other emissaries, Lee Sang-seol and Lee Wi-jong, arrived at The Hague in the summer of 1907 for an international peace conference of global powers. They carried with them a secret letter from King Gojong of Korea arguing the invalidity and injustice of the forcibly signed Eulsa Treaty that surrendered Korea to Japan as a protectorate.

But the global leaders, already won over by Japan, shunned the uninvited guests from a small colony in the Far East. Yi Jun, overcome by humiliation, killed himself in a nearby hotel in The Hague.

That was some 103 years ago. To global powers meeting to trot out international cooperation to end territorial disputes amid a conflict-ridden era in the 20th century, Korea was just a small slice of the pie that they chose to discard.

Territorial disputes were frequent in the early 20th century. Territories were essential to securing industrial bases, resources and markets, but their appropriation was unbalanced. Germany, Italy and Japan tried to revolt against this imbalance but were overpowered by the United States, Britain and the Soviet Union.

The 21st century global community is swept up in bloodless yet nonetheless discordant economic war. The combative tone was heightened by a new kind of global imbalance.

Smoke and fury are building due to the disparity in wealth between rich and poor countries. The current account balance among surplus-laden economies and deficit-ridden ones feed volatility in exchange rates and gluttonous speculative capital. The world has yet to recover from the hangover from the global financial meltdown spurred by the disaster on Wall Street in 2008.

The G-20 Summit this week will address these categorical imperatives. Leaders of influential economies will discuss ways to crack the explosive elements of global imbalance and orchestrate an international agreement on monetary systems with the mediation of the host country, South Korea.

It has taken nearly a century for a weak country that was once belittled by the global powers to ascend to the status of sponsoring a major global podium, bringing in leaders of economies that account for 85 percent of the global GDP. Moreover, the upcoming event is touted to be the beginning of a new global financial order and monetary system to succeed Bretton Woods.

Apart from the shift in Korea’s global status, the power imbalance on the world stage has changed little. The Hague convention addressed imbalances in territories, and the theme of the Seoul conference is economic imbalance.

The human race has resorted to war to correct imbalance. There were 103 military conflicts over territory in the 19th century and 84 in the 20th century, including the two World Wars.

Arms cuts served as leverage to contain territorial conflicts. The leverage in an economic war is currency policy.

At the height of the Second World War, delegates from 44 industrial states gathered at a hotel in Bretton Woods, New Hampshire, in 1944 to establish order for the post-war global economic system by setting rules, monetary guidelines and institutions like the International Monetary Fund to help bridge imbalances. Bretton Woods established a system of payments based on the U.S. dollar with convertibility into gold, making the dollar effectively the world’s reserve currency.

The exchange rate is the benchmark embodying the economic power of a nation and at the same time the determinant governing supply and demand. Exporting countries are particularly sensitive to its movement. The strengthening of currency value can dampen export competitiveness and business at home.

The Bretton Woods-administered global currency order pegged to the dollar posed no problem when the United States was an economy with a surplus.

But the reserve currency’s weakening trend has been disrupting the global economy since 1971 until now, as the U.S. economy has dipped further into debt and deficit. International prices of raw materials and oil have shot up and other currencies have strengthened against the dollar.

Currency appreciation is perilous to industrial states relying on exports. China has rapidly become an industrial powerhouse because it rigidly depressed its currency. The U.S. can no longer tolerate China’s currency control as China gobbles up world industrial production.

The global powers are wrangling to take the industrial helm through currency control just as they once depended on military potency to win territorial wars. The shift in ammunition from arms to currency is the backdrop leading up to the G-20 Summit.

About 10 currencies have acted as the world reserve. The weak dollar may one day have to surrender its dominant position to another currency. An exit of a reserve currency can take a catastrophic toll on the world economy. The shock wave may be double or triple the damage of the Great Depression.

It is unclear whether China and other countries will accept the U.S. proposal of setting targets to limit current account surpluses or deficits to correct trade imbalances, but they will more or less likely agree to sustain the current U.S.-led currency order.

But U.S. officials should be aware of the growing impatience with excessive protectiveness over the dollar and U.S.-led governance by other nations.

World leaders gathering at a country that picked itself up from a colony and war-torn shambles should look beyond currency problems to devise a package that can tend to and ameliorate the pains and struggles of weaker countries.

*The writer is a professor of sociology at Seoul National University.

By Song Ho-keun