Professor Phillip Lipscy discusses the current international financial crisis and provides insight for future reforms. "The IMF and World Bank should be reformed to better reflect the interests and concerns of rising economic powers. Voting shares need to be further redistributed to reflect underlying economic realities. Decision making rules should be modified to give greater weight or agenda-setting authority to regional actors -- the US may have a strong interest in loans to Mexico, but Japan may have a greater stake in Indonesia. Assignment of the top positions should be made truly competitive. Core functions should be decentralized -- both institutions are headquartered in Washington, impeding employment of top talent from Asia and limiting intellectual exchange."

Major international crises often produce tectonic shifts in international relations. Under pressure from key European counterparts, President Bush has agreed to a "new Bretton Woods" summit on Nov. 15.

It would be hard to overstate the potential significance of this meeting. The first Bretton Woods, in 1944, set the rules for monetary relations among nations, and it created the International Monetary Fund (IMF) and the World Bank.

While European leaders are pushing for greater regulation and a major overhaul of the international financial order, US policymakers have been lukewarm, emphasizing the preservation of free-market capitalism. This transatlantic drama has obscured the more fundamental problem—how to accommodate the historic shift of economic power away from the West toward Asia.

Including India, broader East Asia encompasses more than half of the world's population. The region already accounts for about one-third of global economic output, oil consumption, and CO2 emissions, and this is only likely to grow in the future. Over the course of the 21st century, Asia's economic and geopolitical weight in the world will, in all likelihood, come to rival that of Europe in the 19th century. Asian problems will become increasingly indistinguishable from global problems.

In the face of such dramatic change, the IMF and World Bank are becoming relics of a bygone era. At the time of their creation, by US and European negotiators, the major challenge was to get capital flowing from the US to war-ravaged Europe. The days of the US as creditor state are long gone—our massive current account deficit is financed by importing nearly $1 trillion in foreign capital every year. Major US banks are being rescued by sovereign wealth funds and financial institutions from the Middle East and East Asia. China and Japan alone held over $600 billion of securities issued by Fannie Mae and Freddie Mac, making the bailout of those institutions a major foreign policy issue.

Despite these changed realities, both Bretton Woods institutions remain dominated by the West. By convention, the IMF is led by a European, the World Bank by a US national. The US is the only country with veto power over important decisions in either body.

My analysis of voting shares in the IMF indicates that the Allied powers of World War II have been consistently overrepresented compared to Axis powers despite the passing of more than 60 years since the end of that war. Studies show that IMF lending is biased in favor of recipients with strong economic and diplomatic ties to the US and key European states at the expense of other members.

This unbalanced representation had real consequences during the Asian Financial Crisis of 1997-98, when the IMF, as part of its rescue operation, implemented policies widely viewed as contrary to Asian interests. During the crisis, Japanese financial authorities proposed an Asian Monetary Fund as a potential alternative source of liquidity. This proposal was rejected by US officials, who feared dilution of IMF authority. However, over the past decade, East Asian states have stockpiled foreign currency reserves and developed regional cooperation that may eventually develop into a credible alternative to the IMF.

The IMF and World Bank should be reformed to better reflect the interests and concerns of rising economic powers. Voting shares need to be further redistributed to reflect underlying economic realities. Decisionmaking rules should be modified to give greater weight or agenda-setting authority to regional actors—the US may have a strong interest in loans to Mexico, but Japan may have a greater stake in Indonesia. Assignment of the top positions should be made truly competitive. Core functions should be decentralized—both institutions are headquartered in Washington, impeding employment of top talent from Asia and limiting intellectual exchange.

An international financial architecture that fragments or remains centered on the West as Asia rises will probably prove grossly ineffective. Europe attempted much the same during the turbulent period between the two World Wars, resurrecting a system based on British hegemony even as Britain was in relative decline. Those were scary times, with free riding and beggar-thy-neighbor policies feeding mutual distrust and economic catastrophe.

This will not be the last financial crisis we face. Next time, ad hoc cooperation by the US and Europe may prove insufficient. Franklin Roosevelt had the foresight to include China on the United Nations Security Council long before that nation became a geopolitical heavyweight. Similar foresight should be brought to bear as world leaders debate the future of the international financial architecture.

In the waning days of the Clinton administration, the momentum for engagement with North Korea, building from the earlier agreement to freeze its nuclear program and a moratorium on ballistic missile launches, accelerated to the brink of full-scale normalization of relations. The U.S. presidential election in 2000 brought that diplomatic freight train to an abrupt halt.

Will the 2008 election bring yet another dramatic change in U.S. Korea policy?

The answer, based on the published positions of the two candidates and conversations with his senior Asia policy advisors, seems to be NO. There are important differences of emphasis in the approaches of both candidates, which I will discuss, but the bottom line is that both men are likely to pick up where President George W. Bush leaves off.

There are two fundamental reasons why U.S. policy toward Korea – and more broadly in Northeast Asia --- will not change dramatically. First, Asia will continue to suffer from a deficit of presidential attention. The arc of crisis – Iraq, Iran, Afghanistan and Pakistan -- will necessarily still command, as it has for almost 8 years, the attention of senior American policymakers. Even that will have to fight for space with the growing global financial crisis.

Second, both candidates agree on the broad outlines of an Asia policy, one that does not depart radically from the one pursued by the Bush administration. As a senior McCain advisor put it to me: “There is not a huge difference on Asia between Obama and McCain.” Privately, Obama advisors also stress that there will not be a huge break with current U.S. policy.

Both campaigns are critical of the lack of attention paid to Asia and the need for the U.S. to be more proactive to strengthen existing alliances and to join the discussion about new forms of regional integration. Both candidates support the need to engage, rather than confront, a rising China. Both men call for the U.S. to pay more attention to management of our alliances with South Korea and Japan. And both Obama and McCain support the North Korean nuclear negotiations carried out by President Bush in his second term, although privately both campaigns are critical of the deal that has been struck.

If there are differences, they can be found in two areas – support for the Korea US free trade agreement and the willingness to directly engage North Korea and its regime.

Free Trade and the KORUS Free Trade Agreement

If there is one single issue regarding Korea on which Senators Obama and McCain clearly part company, it is the future of the free trade agreement negotiated with the Bush administration. Senator McCain is an unambiguous supporter of the FTA, not only as a trade pact but also as a symbol of the broader partnership between the U.S. and South Korea.

Senator Obama also supports free trade but is critical of this and other agreements, such as NAFTA, for failing to ensure market access and the protection of labor rights and the environment. Privately, Obama’s advisors understand the symbolic value of the FTA to the alliance, but they plan to ask Seoul to reopen talks on market access, particularly for the automobile industry. Their position reflects the importance of trade unions and the role of some key states – Michigan most of all – in the election outcome. Even if Obama loses, the Democrats are likely to strengthen their control of Congress, making approval of the FTA difficult under any circumstances.

Negotiating with Pyongyang: Back to the Future?

Both the McCain and the Obama camps publicly back the Bush administration’s negotiations with Pyongyang, but both are also privately critical, though for different reasons.

The Obama team is heavily populated by former Clinton administration officials who were involved in the negotiation of the 1994 Agreed Framework with North Korea. They see the current deal as an inevitably flawed bargain, the result of the refusal of the administration to seriously engage the North directly until it had crossed the red line of nuclear weapons testing. With little leverage, not least the credible threat of coercion, we are left with containing the plutonium production of the North, and hoping that a grand bargain down the line can yield full denuclearization.

Obama recognizes the need for “close coordination and consultation with our allies South Korea and Japan,” as one of his advisors put it in a published interview, and supports continuing the Six Party Talks. But the emphasis is clearly on direct talks with North Korea, though conducted with a principled toughness that the Bush administration has not exhibited in its final months in office.

That readiness to conduct direct negotiations, up to conclusion of a peace treaty with Pyongyang and full normalization of relations, is where the two candidates part company. The Republican nominee is clearly uncomfortable with direct dealings with Pyongyang – his position resembles the first term of the Bush administration more than the second in that respect. His advisory team combines realists, mainly veterans of the Powell State Department, and neoconservatives, reproducing the divisions that thwarted coherent policy-making in that first Bush term.

In the end, the views of McCain himself may be decisive. He was an opponent of the Agreed Framework, an agreement he characterized as “appeasement.” He maintained this stance into the Bush administration, vocally opposing any direct negotiations with the North Koreans as long as they maintained the right to develop nuclear weapons. He has been critical as well of the main deal struck by President Bush in his second term – “I didn’t believe in the KEDO agreement that President Clinton made and I don’t believe in this one,” he said in January.

McCain, according to an interview with one of his senior Asia advisors, would “seek a return to the core principles of denuclearization known as CVID, or complete, verifiable, irreversible, dismantlement.” The demand for CVID was the watchword of the Bush administration’s earlier stance, in effect a call for Pyongyang to abandon its nuclear option as a first step. But that demand was dropped after Pyongyang called the Bush administration’s bluff by exploding a nuclear device in October, 2006.

McCain also wants to “broaden our policy goals related to North Korea” beyond nuclear issues, to including human rights, economic and political reform, and reduction of the conventional military threat from North Korea, goals also set out at the outset of the Bush administration. McCain has repeatedly referred to the North Korean regime, and its leader, Kim Jong Il, in harsh terms and embraced a policy of “rogue state rollback.”

Realistically, however, McCain offers no credible, practical means to reach these goals. He reserves, as does Obama, the option to use force. But concretely he comes back to the strategy of pressing China to bring North Korea to heel. Unfortunately the Bush administration also relied on China and found there were clear limits to Beijing’s ability to control or its willingness to press its North Korean client. In the end, McCain may have little option but to follow Bush to Pyongyang’s doorstep.

One Caveat – Events Matter

Despite the powerful impetus to maintain continuity in U.S. policy toward the Korean peninsula, no matter whom is elected in November, there is one important caveat to keep in mind – events matter. Unplanned, and unforeseen, developments could force Korea to the top of the President’s agenda. Already we have seen the reports of Kim Jong Il’s serious illness trigger fresh concerns about a possible collapse of political authority in Pyongyang. A simultaneous rush by China, South Korea and the United States to fill a vacuum of power in the North could upset all calculations. For South Korea, and President Lee Myung-bak, it is always best to prepare for the unexpected.