While the 1997 crisis hit many Asian economies, Korea was almost the sole Asian economy hit again by the 2008 global crisis. Lee and Rhee (2012) succeed in summarizing the background and the policy responses by the Korean government to these two crises. They draw lessons from the Korean experience for macroeconomic policies, foreign reserve management, and development finance in emerging markets today. The intensive reforms implemented after the 1997 crisis made Korea as a typically small, open economy, fairly vulnerable to the global crisis (Hur & Youn, 2010). Therefore, the 2008 crisis has raised some essential issues concerning how emerging economies can achieve financial integration while maintaining financial stability. These issues have not yet been fully resolved.
Among these issues, two are of special significance, as the world has entered another phase of crisis emanating from Europe in 2010. The first issue is that the two crises have left “the most unfortunate lesson” for Asian countries that accumulating foreign reserve is the best defense against unexpected capital outflows. Lee and Rhee are right in pointing out that given their substantial opportunity costs, excessive foreign reserves in safe assets are costly for individual countries. However, their point about the global cost may be even more important in that they also referred to the assertion that the global imbalances fueled the housing bubble in the USA. If so, the “wrong” lesson may continue to hurt the export-led growth of Asian countries, and it will be difficult to master this lesson overnight.
The second issue relates to the right balance between the banking sector and the capital market. As Lee and Rhee stress, after the 1997 crisis, Korea has benefited from much faster capital market development than any other Asian country, and it is true that the non-banking domestic investors “served as props against a sudden decline in the market.” However, on the other hand, the development itself made Korea the most liquid market in the region, paving the way for the 2008 crisis. Lee and Rhee did not seem to reach a resolution of this issue, only referring to “better” financial regulations, but there can be a different argument that Korea's development of her capital market was probably too fast compared with the Association of Southeast Asian Nations (ASEAN) and China.
This issue of the pace in reform and market opening will be linked to the generalizations Lee and Rhee draw from the Korean experience. In fact, Korea stands rather unique in Asia (Lee & Rhee, 2007). As the massive public spending after the 2008 crisis showed, China has huge potential in her domestic market. Despite following the “unfortunate lesson” to accumulate foreign reserves, China has been still prudent in her capital market opening. On the other hand, relatively resource-rich ASEAN members like Indonesia or the Philippines were also different in terms of their increased exports of primary goods and stronger domestic demand than in Korea. In the financial centers of Hong Kong and Singapore, the domestic markets are negligible. Therefore, even though these two issues are significant, there may be limits to simple generalizations of the Korean experience.
Finally, a lack of convergence in the financial institutions seems to be the major constraint in making Asia's voice louder in the global financial rule-making. For those economies that are more closed or less developed than Korea, the motivation for active participation may remain smaller. On the other hand, Lee and Rhee's claim regarding the responsibility of those countries with international reserve currencies may face constraints too, as these countries are under heavier pressures from their voters than the international community, including the moral hazard arguments on the bilateral swap network. In addition, the political and legal independency of the major central banks also differ, which may well explain why the G-20 gave in on the reinforced role for the International Monetary Fund (IMF). Lee and Rhee also mentioned the Chiang Mai Initiative (CMI) Mechanism with a partial IMF linkage as the second-best option, but the linkage has been supported by the lack of strict surveillance in the CMI. If Lee and Rhee still wish to stress the first option, probably they need to provide specific suggestions on a similar relationship between the swap network and the IMF, to counterbalance the moral hazard arguments. After all, Korea is in a unique position to share its views with emerging markets as well as with advanced markets. Without any improved governance structure in the global finance system, the chances of another crisis may remain for Korea. However, looking at it differently, Korea may continue to be the most motivated player to bridge the gap between the emerging and matured economies, based on her experience.