Varieties of Capitalism and Innovation Systems, and Post-Pandemic Reform of East Asian Capitalism:

Toward Inclusive and Innovative Growth

Keun Lee

Distinguished Professor, Seoul National University

Editor, Research Policy;

Vice-Chair, National Economic Advisory Council (for the President of Korea & Chair)

1

Lee, Keun, and H. Shin. 2019. “Varieties of capitalism and East Asia,”

Structural Change and Economic Dynamics

2

Presentations based on 4 papers

Hochul Shin and Keun Lee, 2019

“Impact of Financialization and Financial Development on Inequality: Asian Economic Papers

Lee, Keun, et al. (2021). "Variety of National Innovation Systems (NIS) and Alternative Pathways to Growth beyond the Middle-Income Stage," World Development

Keun Lee, "Varieties of Capitalism and re-thinking the East Asian model of economic growth after the Covid-19 pandemic, “ Seoul journal of economics 33 (4): 487-504; ,

Part 1

From Catch-up to Convergence in VoC:

FinancializationThe End of East Asian Capitalism

and Rising Inequality

Varieties of Capitalism (VoC)• Varieties of Capitalism (VoC) proposed by Hall and Soskice (2001)

• focus of VoC : how firms enter into a relation with other actors such as workers,suppliers, business associations, governments, and other stakeholders.

• LMEs : firms use market institutions, competitions and formal contract tocoordinate the relationship

• CMEs : firms use non-market relationship more: strategic interaction among actors

• VoC classification: 2, 3 or 4 Types of Capitalism?

• LMEs - USA, UK, Australia, Canada, New Zealand, Ireland

• CMEs - Germany, Japan, Korea, Switzerland, the Netherlands, Belgium, Sweden,Norway, Denmark, Finland, and Austria

• MMEs (Mixed Market Economies) - France, Italy, Spain, Portugal, Greece, andTurkey

4

East Asian convergence to US:in terms of growth and inequality.

Source: Drawn by the authors using data from PWT 9.0 and the World Wealth and Income Database 5

Why such changes in east Asia?1) Shock in Korea: Asian financial crisis from 1997 to 1998.

IMF forced South Korea to implement liberalization in exchange for a bailout. • Liberalization of financial and labor market

• Most restrictions on foreign investments in Korean stocks were removed.• Layoffs caused by statutory requisites and employment leasing were introduced.

2) Shock in Japan:

the Plaza Accord in 1985 ;

and the burst of the financial bubble in 1991.

The Two lost decades

3) Taiwan avoided the financial crisis in 1997

so, different path from Korea?

These shocks weaken previous institutional complementarity

prompted a change toward more liberalized market economy, close to the US6

East Asia vs. Europe: Shocks vs Lasting Path-Dependency

1) Europe

Due to long history of European capitalism, Institutional complementarity and path dependency might be stronger in Europe than in East Asia.

• Many European countries seem to maintain their specific institutions, particularly labor market institutions.

2) East Asia

• Due to relatively short history of East Asian capitalism, the degree of institutional complementarity and path dependency in the East Asia may be relatively low.

• Given this possibility, external shocks (e.g., financial crises) did the job of weakening the institutions of Asian capitalism

7

Collective bargaining coverage: 1970 to 2015Low (US, Japan, S. Korea) vs. High (European C’s)

• Source: Figures are drawn by the authors; data from OECD Statistics 8

Union density:US, Japan, South Korea vs. Europe

• Source: Drawn by the authors; data from OECD Statistics.9

Long term evolution: using 5-year averaged data (1955-2009)

PeriodGroup 1

(CME like)

Group 2

(MME like)

Group 3

(LME like)

Group 4

(East Asia like)

Group

5

1955–1959 US Japan

1960–1964 US Japan

1965–1969 US Japan

1970–1974 Japan US

1975–1979 Japan US Canada Taiwan

1980–1984 Australia Denmark Japan USFrance Germany Ireland

ItalyCanada Korea Taiwan

1985–1989 Australia Denmark Japan New ZealandFrance Germany Ireland

Italy Netherlands SpainCanada US Taiwan

1990–1994Australia Denmark Germany Japan

Netherlands New ZealandFrance Ireland Italy Spain Canada UK US Taiwan

1995–1999Australia Denmark Japan Korea Netherlands

New Zealand Norway SwedenFrance Germany Italy Spain Canada UK US Finland Taiwan Ireland

2000–2004

Australia Denmark Finland Ireland Korea

Netherlands New Zealand Norway Sweden

Taiwan

France Italy SpainCanada Germany Japan

UK US

2005–2009Australia Denmark Finland Netherlands New

Zealand Norway Sweden TaiwanFrance Italy Spain

Canada Germany Ireland

Japan Korea UK US

Average of variables for each group

GDP growth (%) 2.19 1.79 1.39 6.83 8.95

Employment (%) 59.90 47.05 59.27 59.54 50.48

Top 10% share (%) 29.89 31.88 39.50 28.47 35.44

Good growth, low inequality, high jobs All in middleLow growth

/High Inequality

High growth

Low Inequality

Clusters using two period (15 Year) data (1985-1999 and 2000-2014)

11

PeriodGroup 1

(CME like)

Group 2

(MME like)

Group 3

(LME like)

Group 4

(East Asia like)

1985–1999Australia Denmark Japan

New Zealand Norway Sweden

Finland France Germany

Italy Netherlands SpainCanada UK US

Ireland Korea

Taiwan

2000–2014

Australia Denmark Finland

Netherlands New Zealand

Norway Sweden

France Italy Spain Taiwan

Canada Germany

Ireland Japan

Korea UK US

Average of variables for each group

GDP growth (%) 1.48 1.82 1.75 6.19

Employment (%) 61.57 49.17 58.76 54.16

Top 10% income (%) 28.37 31.86 39.67 31.11

Highest Employment

Lowest InequalityMixed performance highest inequality Highest growth

* Countries in bold moved from other groups to Group 3 over time.

Summary: End of East Asian Capitalism• Stability of European capitalism – Northern and Continental Europe : support VoC;

(possibly except Germany after the 2000s reform?)

• End of East Asian capitalism

• Korea and Japan – converge to Anglo-Saxon capitalism

• Taiwan – converge to European capitalism

• Why Asian Convergence to LME

1) Weak institutional complementarity and path dependency due to short history of East Asian capitalism might affect different evolution pattern of East Asian and European capitalism.

2) Also, Shocks (Financial crisis in Korea in 1997; Bubble Burst/Plaza Accord in Japan since the mid 1990s) damaged the regime stability, whereas Taiwan avoided the crisis and did not experience such shocks

12

The next question in the second Paper =

What caused the end of E Asian Capitalism?

• Answer = Financialization:

• 1) lower investment -> low growth

• 2) Higher inequality

13

Motivation: Financialization ->Inequality?

• Financial development = promotes economic growth :

-- (King and Levine, 1993; La Porta, et al 2002; Beck, et al Loayza, 2000).

• But, global financial crisis and rising inequality

➔ dominance of the financial sector not always good for the economy.

• Financialization : increasing dominance of the financial sector and its globalization, including excessive dividends payment.

• Some literatures: financialization -> inequality

- (Hacker & Pierson, 2010; Lin & Tomaskovic-Devey, 2013; Godechot, 2012; Kus, 2012).

-- Using domestic aspects of financialization and conventional econometrics14

Definition of Financialization and Financial development

• Financial development : functional concept= improvement of financial functions

(Levine 2005) = value of stock market/GDP; private loans/GDP

• Financialization : observational concept

• Stockhammer (2004) : increased activity of non-financial businesses on financial markets

• Tomaskovic-Devey et al. (2015) : expansion of both the financial service sector and

increased investment in financial instruments by the non-financial sector

• Definition of financialization in this paper: 3 measures

1) Expansion of financial sector

2) Increasing dividends: Increased share of shareholders among profit in non-financial sectors

3) Increased oversees financial investment (financial globalization);

measure = Ratio of external financial asset plus liability to GDP (%)

15

Financialization: A Cause for the end of E Asian CapitalismShare of value-added in the finance/insurance sector:

US, Japan, South Korea vs. Average of European countries

• Source: OECD Structural Analysis (STAN) Database (ISIC Rev. 3). 16

Dividend tendency and top 10% income share

17

Dividend tendency and top 10% income share

18

Spread of maximization of shareholder value.

• Corporate management which put emphasis on maximization of shareholder value widely spread in the USA from 1980s.

• The easy way for maximization of shareholder value : increase of short-term profit

• Many American firms increased financial activities or financial portfolio to raise short-term profit and stock price (Orhangazi, 2008; Lin, 2013; Davis, 2014).

• Ratio of financial income to realized profits and ratio of financial assets to total assets doubled from late-1970s to early-2000s for USA non-financial firms (Lin and Tomaskovic-Devey, 2013; Tomaskovic-Devey et al., 2015).

• Example : GM Acceptance Corporation (GMAC) and Ford Credit in 2004 (Lin and Tomaskovic-Devey, 2013; Hakim, 2004).

19

Financialization and Inequality

• Spread of maximization of shareholder value • More share of resources and profits of firms goes to shareholders and CEOs in

terms of dividends, stock buyback, and CEO’s stock options and less share goes to workers and other stakeholders.

• Lazonick (2014) showed that 54% and 37% of US companies’ earning had

been spent on stock buybacks and dividends in 449 firms among the S&P 500

firms from 2003 to 2012, respectively, using S&P Compustat data

• Change of bargaining power between labor and capital

• As firms involve financial activities more, they focus more on financial

investment than real investment (Alvarez, 2015).

• Capital account liberalization and financial globalization

20

Income Shares by Top 1% Rich: The higher in Anglo-Saxon Capitalism;

In Korea, rapid increase since ‘97: (Kim , Nak Nyeon; 2014)

0

5

10

15

20

25

1913

1917

1921

1925

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

U.S.

U.K.

Korea

Japan

France

(%)

Korea After the 1997 crisis, Decline of Fixed Investment → The root of slow growth:

investment rate reduced by 5%P (35-40% → 30-35%)

Korea

China

Japan

US

Taiwan

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross capital formation

(% of GDP)

Share of Foreign Investors Up -> Investment rate down:=> Cost of Anglo-Saxon (or American) Capitalism?

10

15

20

25

30

35

40

45

25.0

27.0

29.0

31.0

33.0

35.0

37.0

39.0

41.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total investment(% of GDP) Share of foreign investors in stock market(% of total market capitalization)

Share of foreign investors

Investment

High Dividends -> Inequality (top 10% share):Group-mean FMOLS results using OECD data

24

Dependent variable Top 10% income share Adjusted wage share

Variable Coef. p-value Coef. p-value

Distributed income of corporations 0.093** 0.000 -0.06 0.265

ICT compensation 0.33** 0.000 0.50** 0.000

Tertiary enrolment ratio -0.043 0.266 0.030 0.724

Trade openness 0.036** 0.005 0.010 0.584

Number of countries 10 15

Number of observations per country 12.0 11.8

Number of observations 120 177

Period 1979-2007 1979-2007

Shin, HC and Keun Lee, Asian Economic Papers (2019)

Policy implications to check financialization

• Increasing dividend tendency (distributed income of corporations) in the non-

financial corporations can be one reason of recent rising inequality in the

developed countries.

• Cf) argument that financial development reduces inequality by relaxing the

credit constraints of the poor is not supported.

• policy implication : simple focus on financial development is not enough to

promote inclusive growth (or to reduce inequality)

=> there is a need for government policies, including differentiated taxation on

dividends vs. reinvestment,

=> which induce non-financial firms to focus more on productive re-investment

from profits and to discourage too much dividends for shareholders.

25

Part 2

Varieties of the NIS (National Innovation Systems)and Alternative Pathways for Growth beyond the Middle income stage:

Catching up vs. Trapped NIS

Lee, Keun, et al. (2021). "Variety of National Innovation Systems (NIS) and Alternative Pathways to Growth beyond the Middle-Income Stage," World

Development,

Lee, K., & Lee, J. (2019). National innovation systems, economic complexity, & economic growth. J of Evolutionary Economics, 1-32.

A talk drawing upon 2 papers:

27

Localization( Intra-national creation and diffusion) of Knowledge

(vs. reliance on foreign sources)

Dispersed vs. Concentration = 1-HHI

of knowledge creation (by assignees)

Short vs. long cycle technologies Specialization

Originality (high if citing and combining widely)

(= Technological Convergence /combination)

Technological Diversification

(Wide vs. Deep in patent portfolio)

5 Variables to measure the NIS (Lee 2013):

Basis for a composite index of NIS (Lee&Lee 2019, JEE)

=> Somewhat Narrow but close to the definition by Lundvall (about knowledge)also better in terms of homogenous dataset (US patents) over longer term

NIS Index of 45 economies, 2011~2015: Lee & Lee (2019, JEE), NIS, Econ. Complexity, & Econ Growth

Country LocalizationTech

Diversif’nOriginality

Relative

cycle time

Decentral’n

1-HHI

Index of

NIS-5

Rank of

NIS5

Japan 0.407 0.866 0.354 0.942 0.980 3.566 1

United States 0.246 0.937 0.503 1.005 0.994 3.495 2

Germany 0.140 0.844 0.455 1.106 0.984 3.147 3

France 0.111 0.735 0.402 1.083 0.975 2.873 4

United Kingdom 0.070 0.687 0.450 1.157 0.993 2.855 5

Italy 0.090 0.611 0.408 1.163 0.981 2.763 6

Australia 0.134 0.469 0.466 1.176 0.923 2.742 7

Switzerland 0.042 0.657 0.434 1.159 0.984 2.730 8

Canada 0.065 0.671 0.486 1.014 0.935 2.709 9

Taiwan 0.129 0.674 0.331 0.828 0.971 2.575 10

Netherlands 0.075 0.582 0.434 1.041 0.903 2.564 11

Israel 0.066 0.431 0.498 1.044 0.990 2.551 12

South Korea 0.137 0.705 0.339 0.846 0.854 2.533 13

Denmark 0.081 0.374 0.429 1.169 0.971 2.516 14

Norway 0.080 0.268 0.482 1.200 0.985 2.503 15

Austria 0.076 0.405 0.422 1.133 0.967 2.496 16

Sweden 0.098 0.568 0.390 0.992 0.824 2.435 17

Belgium 0.065 0.378 0.418 1.130 0.955 2.421 18

China 0.048 0.643 0.332 0.854 0.944 2.343 19

New Zealand 0.043 0.172 0.481 1.251 0.976 2.341 20

Spain 0.044 0.324 0.400 1.107 0.986 2.308 21

Dynamic Change of the NIS Variables, Knowledge Localization

Dynamic Change of the NIS Variables: Technological Diversification

NIS and Complexity(ECI) on Growth (Lee & Lee 2019 JEE)

31

Next Question

Which types of NIS to grow

beyond the Middle Income Trap/stage ?

To show the two types of catching-up NIS,;

Balanced and imbalanced

cf) Trapped NIS (middle income trap)

1) Balanced and Mature NIS (6): Canada, Germany, France, Italy, Switzerland, and the United Kingdom.

2) Balanced and Catching up NIS (8): Ireland, Spain, Hong Kong, Singapore, India, Denmark, Norway, Russia

3) Imbalanced Catching-up NIS (3): China, South Korea, and Taiwan.

4) Imbalanced and Trapped NIS (9): Argentina, Brazil, Chile, Malaysia, Mexico, South Africa, Thailand, Greece, Portugal

The Cluster Analysis using the 32 Economies

Variety of NIS ~ VoC

34

❖ Developed (mature) NIS = all high scores

❖ Trapped NIS = long cycle, med originality but very low localization/diversification

❖ Catching up NIS = short cycle and low originality but high localization/diversification

NISDecentral-ization

localizationTech.

diversificationOriginality

(combinationcycle time

Balanced & Mature(Europe)

High High High High Long

Balanced & Catching up(India, Russia)

Med high Medium Medium Medium Medium

Imbalanced Catching-up

(Korea, China)Low High High Low Short

Imbalanced & Trapped

Medium Very Low Very low Medium Too long

Relative Cycle Time of Technologies:How to get out of the Middle income Trap:

from short to long detour in Korea, Taiwan, China

36

Why specializing into Short Cycle Tech. matters

Cycle time = speed of change in the knowledge base of a technology

= mean citation lag

= time difference between the application year of the citing patent

and of the cited patents

“To catch up, specialize in Short cycle technology-based sectors“

because old knowledge quickly obsolete/useless

+ new knowledge tend to emerge more often

-> less disadvantageous for the latecomers

=> technological sectors

with less reliance on the old technologies

but with greater opportunity

for emergence of new technologies

37

G5 Class Class NamePatent

count

1 514 Drug, Bio-Affecting and Body Treating Compositions 10349

2 428 Stock Material or Miscellaneous Articles 3883

3 73 Measuring and Testing 3789

4 123 Internal-Combustion Engines 3479

5 424 Drug, Bio-Affecting and Body Treating Compositions 3389

6 210 Liquid Purification or Separation 2853

7 435 Chemistry: Molecular Biology and Microbiology 2852

8 250 Radiant Energy 2639

9 264 Plastic & Nonmetallic Article Shaping or Treating 2349

10 324 Electricity: Measuring and Testing 2325

Top 10 Classes of G5 vs Korea-Taiwan ->no overlap

Korea-

TaiwanClass Class Name

Patent

count

1 438 Semiconductor Device Manufacturing: Process 1189

2 348 Television 712

3 439 Electrical Connectors 408

4 257 Active Solid-State Devices ( Transistors, Solid-State Diodes) 374

5 362 Illumination 374

6 280 Land Vehicles 355

7 365 Static Information Storage and Retrieval 346

8 70 Locks 340

9 360 Dynamic Magnetic Information Storage or Retrieval 313

10 482 Exercise Devices 311

38

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Telephone switches

Steel & Automobiles

Apparel &textiles

Memory chips

Cell Phones

Digital TVs

Medicine& Basic Science

Korean Detour from Short to long cycle technologies1st in the mid 80s: to short cycle sectors

2nd in the 2000s: to long cycle sectors; ex. Samsung’s biosimilar

2 Tech. turning point

0.75

0.85

0.95

1.05

1.15

1.25

1.35

1984~1987 1988~1991 1992~1995 1996~1999 2000~2003 2004~2007 2008~2011 2012~2015

Table 3-1 Period average cycle time of technologies in selected economies

Brazil China Germany Korea Taiwan

China

Germany

Korea

(Normalized) Average Cycle Time of Technologies: mid 1980s to 2010s

Brazil

Korea = Used to be in the big mixed group but created catching up NIS Dynamic Evolution of the NIS over time (Cluster Analysis) :

Grou

pGroup 1 Group 2

Gro

up

3

Group 4 Group 5 Group 6 Group 7Group

8

Gro

up 9

1984

-91

Argentina, Brazil, China, Denmark,

Finland, Hong Kong, India, Ireland,

Israel, Malaysia, Mexico, Norway,

Singapore, S. Africa,

South Korea, Spain, Taiwan

Chile,

Greece,

Portugal

Tha

ilan

d

Canada, France,

Germany, Italy, UK,

Swiss, Sweden,

Netherlands

Japan USA

1992

-99

Argentina, Brazil, Chile, China, Den

mark, Finland, Hong Kong, Greece,

Israel, Ireland, India, Mexico,

Malaysia, Norway, Portugal, Russia,

S. Africa, Spain, Thailand

Chile,

Portu

gal

SingaporeSouth

Korea

Canada, France,

Germany, Italy, UK,

Swiss, Sweden,

Netherlands, Taiwan

Japan USA

2000

-07

Argentina, Brazil, Chile, Denmark,

Hong Kong, Greece, Mexico,

Norway, Portugal,

Russia, South Africa,

Spain, Thailand

Singapore,

Ireland, India

Malaysia,

China

South

Korea,

Taiwan

Canada, France,

Germany, Italy, UK,

Swiss, Sweden,

Netherlands,

Finland, Israel,

Japan USA

2008

-15

Argentina, Brazil, Chile,

Malaysia, Mexico,

South Africa, Thailand,

Greece, Portugal

Singapore,

Ireland, India,

Spain, H.Kong,

Denmark,

Norway, Russia

South

Korea,

Taiwan,

China

Finland,

Sweden,

Israel,

Netherlands

Canada, France,

Germany, Italy,

UK, Swiss

Japan USA

Balanced vs. Imbalanced Development: Nurkse (1953) vs Hirschman (1958):balance between agriculture and manuf => between manuf and services & balances in NIS

High coeffOf variation

Low coeffOf variation

Bigger NIS-5 Smaller NIS-5

Ireland, Spain, Hong Kong, Singapore

Korea, Taiwan, China

Summary: NIS to Economic Growth : Catching up & Convergence

1) Confirms correspondence between diverse NIS types andcatching-up/falling behind performance.

-- There are variety of NIS, similar to Variety of Capitalism:Balanced NIS (mature or catching-up)

vs. Imbalanced (catching-up vs. Trapped)

2) Imbalanced Catching-up NIS in E Asia = specialization into short cycleTechnologies, and there by promoted localization and diversification;-- Getting into short cycles -> higher localization (less need to rely on

incumbents) -> tech. diversification by keep entering newly emerging classes

➔Detour from short to long cycle tech = Convergence

3) Balanced Catching-up NIS = alternative to E Asian Path;India/Russia in the NIS : promising signs for future growth

Part 3

Re-balancing of Capitalism since the Pandemic

K. Lee (2020)

Keun Lee, "Varieties of Capitalism and re-thinking the East Asian model of economic growth after the Covid-19 pandemic,

“ Seoul journal of economics 33 (4): 487-504; ,

43

After the Covid-19,New Tradeoffs or Coronomics

1) Lock-down vs economic growth (+inequality)

2) GVC: efficiency vs. resilience

-> resilient efficiency /efficient resilience

3) Country: New balance

bt. Manuf vs services (and Agriculture)

4) Capitalism: new balance

between shareholder vs stakeholder capitalism

Re-balancing of Capitalism since the Pandemic:a retreat of shareholder capitalism

• Acemoglu et al. (2012): the US model of capitalism vs. Western European models

= ‘cutthroat’ capitalism versus ‘cuddly’ capitalism;

Cutthroat capitalism is good for innovation but generates inequality,

cuddly capitalism: better at redistribution & protecting employment and health but worse at innovation.

• Aghion et al (2020) tries to compare again these US and Western European models in terms of how they are dealing with and responding to the Covid-19 crisis.

• Western economies have also revealed their weaknesses: suffered greatly.

• -> their reliance on East Asia for the production of medical devices, including the test kits.

• Overall GVC (global production chains) have revealed weakness associated with too widespread a fragmentation over diverse countries.

• Thus, Covid-19 also signals the retreats of the Anglo–Saxon style shareholder capitalism that has driven globalisation or neoliberalism since the 1980s.

45

A new move toward stakeholder capitalism?

• Shareholder capitalism is again being criticised:

- Eg) Boeing : asked for financial help from the public sector because it paid – before the pandemic outbreak – a huge amount of money to its shareholders (with its top five all PEFs) in the form of dividends and stock buybacks, rather than reserved profits for in-house reserves or reinvestment funds.

• Even before the pandemic crisis: Reset capitalism

- Business Roundtable (August 2019): ‘Statement on the Purpose of a Corporation’ by top business leaders:

- Financial Times under the heading of ‘Capitalism: Time for a reset’.

• January 2020 Davos Forum: endorsed stakeholder capitalism as the vision for the future of capitalism.

46

A series of blows to Globalizationand G7’s Cornwall Consensus

1) the 2008-09 global financial crisis (GFC)

-- the first blow: to financial globalisation

2) US-China trade war:

- a major setback against trade globalisation

3) The pandemic is the final blow to production globalisation or over-fragmented GVC;

-- Multilateral Free Trade ➔A small-number alliance based GVC

4) 2021 G7 Cornwall Consensus:

A big deal between US and EU: common corporate taxation and digital taxation,

(facing the common threat of rising China)

-> A new, rule-based, fair and accessible global order?

47

Checks on free capital mobility re-instituted in Korea during Covid Crisis in 2020

1) Dollar Swap with 9 countries:

In March 2020, global financial markets = suffering the shock of the outbreak of the pandemic.

- US FED : Dollar swap to: Korea, Brazil, Mexico, Singapore, Sweden, Norway, Denmark, New Zealand and Australia

2) Three macro-prudential measures (introduced in 2011 after GFC):

• an additional stabilising role by reducing the possibility of capital flight.

a) Bank of Korea: banks’ position in forward exchange markets enlarged from 200% to 250%

(of equity capital for Korean branches of foreign banks, and from 40% to 50% for domestic banks.)

b) no taxes on new non-deposit foreign exchange debt during Spring 2020.

c) the Korean government: the LCR (liquidity coverage ratio) reduced from 80% to 70% until May 2020.

=> these measures to stabilize inflow and outflow of hot money during the times of uncertainty.48

Post-Covid Reform of East Asian capitalism• Covid-19 pandemic:

- suddenly stopped globalisation; questioned the superiority of shareholder capitalism (associated with financialisation, globalisation, and inequality).

• A need for rebalancing between shareholder and stakeholder capitalism.

• East Asian economies can be reborn as a hybrid capitalism,

with East Asian capitalism at its original core,

to restore their growth momentum in an inclusive way.

• Post-pandemic retreat of globalisation is a good opportunity to restore autonomy in domestic economic policymaking over interest rates and exchange rates,

while imposing some checks against too much capital mobility and financialization

To boost more inclusive and innovative growth;

need more supply side interventions, including ALMPs and industrial policy,

given the possibility of cost-push inflation (or stagflation)

50

Gracias! ස්තුතියි !Obrigado!

Thank you! Tak! amesege'nalo’

謝謝大家감사합니다

Danke shon!ありがとう

www.keunlee.com