Cooperation not panaceaThe G-20 Summit ended without any major hiccups, but now is not the time to uncork a bottle of champagne. The Seoul bourse took a nosedive on Thursday when leaders of wealthy and emerging countries gathered in the capital to address issues related to the global economy. Foreign funds dumped more than 2 trillion won ($1.77 billion) worth of local shares in the final two minutes of trading as options contracts matured, sending the leading stock index tumbling nearly 3 percent. The selling was propelled by speculative investors seeking hefty returns. This type of investment chicanery was behind the nightmare of 1998, when the country was forced to seek international bailouts, and the 2008 liquidity crunch that came amid a global financial meltdown - showing the vulnerability of Seoul’s fully liberalized stock market.
The statement issued by world leaders at the end of the G-20 Summit says that advanced economies “will be vigilant against excess volatility and disorderly movements in exchange rates,” while emerging market economies with “adequate reserves and increasingly overvalued exchange rates may also implement carefully designed macro-prudential measures” to offset the risk of excessive volatility in capital flows. This technical language provides a framework for emerging economies to defend themselves against the threat of foreign capital sending their markets into chaos.
Foreign capital, of course, is crucial to pumping life into global financial markets, as it helps to ease price disparities. But it can exacerbate market volatility as well. World Bank President Robert Zoellick warned of “bubble risks” developing in emerging markets as a flood of capital sends currencies and equity prices to post-crisis peaks.
International coordination through the Group of 20 and similar organizations on these matters is therefore essential. But it is no panacea.
International Monetary Fund Managing Director Dominique Strauss-Kahn warned that risks won’t easily go away. The world economy is saddled with immense fiscal deficits. Ultralow interest rates that nations implemented to buttress their economies are omnipresent. Such extreme measures will not have a lasting effect. Volatility in the global markets will likely spread even after the G-20 pledge, and nonbinding agreements can easily break.
Korea must continue to collaborate with other nations but at the same time seek ways to build independent resilience.