Friday, October 15, 2010

Seoul hopes 'COEX Accord' to bring peace to currency war

By Kim Tae-gyu

An increasing number of experts point out that the currency war involving the world’s economic powerhouses is developing into a “prisoner’s dilemma” scenario — each player does its best for its own benefits but the overall result is less than that desired.

They claim that Korea can play a pivotal role in resolving the stand-off as the host of the G20 summit, which will bring together heads of 20 nations to COEX in southern Seoul midway through next month. 

“Countries around the world have intervened to depreciate their currencies of late, creating a lose-lose situation, which is very similar to the prisoner’s dilemma,” professor Yun Chang-hyun at the University of Seoul said. 

“To grapple with the prisoner’s dilemma problem, a good solution would be to promote communication with each other. The G20 Summit would be the best place where such communications can take place to reach win-win agreements.”

The prisoner’s dilemma refers to a theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. 

For example, after a crime is committed two suspects have been arrested and are interviewed in separate police cells. 

Due to insufficient evidence for a conviction, the two can be freed should both deny the crime. Because they are separated, however, they betray each other and eventually confess in order to get lighter sentences, believing one is betraying the other. 

The result: they tried their best to enhance their situation but fail to take the best option.

In early September, Strategy and Finance Minister Yoon Jeung-hyun also likened lingering disputes on foreign exchange rates to the prisoner’s dilemma at the annual meeting of the International Monetary Fund and the World Bank. 

“When countries do not trust each other and seek only their own interest, they can be entrapped in the prisoner’s dilemma. They should open their minds in order to closely cooperate,” Minister Yoon said. 

Prof. Yun argues that G20 states can reach a gentleman’s agreement next month in Seoul so that exchange rates are determined by market forces, without being affected by governments or central banks.

The professor tentatively named the agreement the “COEX Accord” after the summit’s venue — just like the Plaza Accord, the agreement that envisioned the Japanese yen’s appreciation, reached in 1985 at the Plaza Hotel in New York. 

“Seoul would be able to mastermind the COEX Accord under which G20 countries stop mutually destructive conflict on exchange rates. Otherwise, they might not have a chance to do so,” Prof. Yun said.

Shinhan Investment Corp. analyst Lee Sun-yup agrees that a COEX Accord is a plausible idea. 

“The U.S. has taken center stage in the currency wrangling ahead of its mid-term elections on Nov. 2. After the elections, the U.S. might attempt to settle the latest conflict amicably,” Lee said.

“The G20 meeting, which is set to take place about 10 days after the elections, is the perfect place to do so. Next month, Seoul may go down in history as the place that ended the currency wa

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