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South Korea, Poland, and Turkey: Three Emerging Market Success Stories Look to Sustain Their Growth

Foreign Affairs Live: The New Emerging Markets

Speakers: Steven A. Cook, Hasib J. Sabbagh Senior Fellow for Middle Eastern Studies, Council on Foreign Relations, Marcus Noland, Executive Vice President and Director of Studies, Peterson Institute for International Economics, Mitchell Orenstein, Professor and Chair, Political Science Department, Northeastern University, and Gideon Rose, Peter G. Peterson Chair and Editor, Foreign Affairs
January 29, 2014
Council on Foreign Relations

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ROSE: Welcome, everybody. My name is Gideon Rose. I am the editor of Foreign Affairs, and I'm delighted to be able to welcome you to another Foreign Affairs Live, this one on new emerging markets, which is based on our package in the Jan-Feb issue, "Where to Bet Now."

Let me just say a little word about this, because some people might say, gee, what is Foreign Affairs doing talking about emerging markets? And this is not your kind of wheelhouse. And why are you in there at all? And for 90 years, we've been purveying a steady stream of serious expert commentary on a whole range of subjects. Our best known subject matter has always been, of course, U.S. foreign policy and grand strategy and security studies and diplomacy, but we've done a lot of other things, as well, and certainly the original vision was one that essentially covered the world.

And in today's world, our feeling is that, if it's important, we should be covering it, and we should be covering it with the same kind of seriousness intellectually, the same kind of practical relevance, and the same kind of accessible presentation that we've always brought to other kinds of things.

And so whether it's emerging markets, whether it's technology, which is the subject of the lead package in our March-April issue, whether it's energy markets, which are the subject of our -- the lead package in May-June, we're going to be doing not just all the things we used to do and better than ever, but we're going to be tackling whatever else is out there that is important, the trends that are driving the world that are important to our clientele, and bringing to it the same kind of expertise and accessibility and authority that we've brought to the things that we're traditionally better known for. So that's, if you're ever wondering why we're doing this kind of thing, expect more of the -- expect more of this. But it's not so much a new departure, as it is an expansion of the franchise to all things that matter.

So with that, everybody knows that, despite the recent week or so in which the public seemed to pick up on it for the first time, or in a big way, the major emerging markets that have been hot over the last several years have started to come undone. The BRICs are crumbling. Some of the major countries that were doing very well a few years ago, you could throw a dart -- you know, throw a dart at a dartboard and do well by investing in the developing world, that's not true now.

That said, there are some green shoots out there. There are some very promising stories. And if you look at a stagnating Europe, a slowing China, a muddling forward in a positive, but not particularly exciting way U.S., we thought that it was very important that -- and worth time -- to essentially take a look at some of the newer emerging markets, the hotter developing countries that people hadn't focused on as much, and say, gee, where are places that over the next several years are going to be interesting to watch and worthwhile to -- to maybe bet on.

And what we did was we went out and found sort of absolutely top experts in each of those countries to present to us honestly and straightforwardly, not in a kind of touting way, not in a national champion kind of way, just what are the secrets of this country's success to date? What are the reasons to be optimistic about it in the world that's going forward? And what are the challenges that have to be overcome? What are the walls of worry that have to be climbed? Because, of course, every place has all sorts of problems that need to be overcome.

This is our attempt to basically dip into sort of global economic forecasting. And without further ado, let me introduce our panel, and we'll get right to it.

So, Marcus Noland is the executive vice president and director of studies at the Peterson Institute for International Economics, and he's going to talk about South Korea.

Mitchell Orenstein is the chair of the political science department at Northeastern University, and he's going to talk to us about Poland.

And Steve Cook is the Hasib Sabbagh Senior Fellow for Middle Eastern Studies at the Council. He's going to talk to us about Turkey.

David Dombey -- sorry, yeah, Dombey wrote the piece in the package on Turkey. He couldn't be with us tonight, but Steve is not only a good friend, has written for us on Turkey many times, and is going to be the Turkey expert tonight. I urge you to look at the whole package...

COOK: And Dombey's taller than me.

ROSE: ... to look at the whole -- whole package, and Mexico is obviously one of the most interesting countries, and Shannon's piece on that is quite good. And the two pieces on ASEAN, sort of the archipelagoes and the mainland one, highlight countries that people haven't really paid all that much attention to outside pure regionalists and are also worth a close look.

Without further ado, so, Marcus, why is Korea in this? And why are we -- what are the reasons to be excited and/or worried about Korea?

NOLAND: Well, I think the reason that Korea is in it tonight is that Korea is the premier development success story of the last 50 years. Fifty years ago, South Korea was poorer than Mozambique or Bolivia or Ghana. And today, it's richer than Spain and New Zealand. It was the first non-OECD -- excuse me, non-G-7 or -G-8 country to host the G-20 summit. It was the first Asian country to host the G-20 summit.

But as remarkable as its economic transformation has been, its political transformation was arguably even more stunning. In a period of a decade, from the late 1980s to the late 1990s, they went from a military dictator to his hand-picked general who was elected successor to an elected civilian centrist politician to electing a political dissident who a previous leader had tried to kill as president of the country. And it was a country that hosted the second nuclear summit and now a Korean national former foreign minister is secretary general of the United Nations.

So it is a country that has had stunning success in economics, has had success in politics, and those successes are now being recognized at the international level.

When Jonathan Tepperman first approached me about participating in this project, I actually told him I wasn't really sure, you know, I should do it, because in some ways, the talk about Korea as an emerging market is a bit of an anachronism. Korea today has a per capita income of $25,000. It's a trillion-dollar economy.

Now, it is a very open economy. Exports plus imports exceed national income. Trade ratio is more than 100 percent. And that means that South Korea is unusually vulnerable to shocks. And in that sense, it is a riskier economy in which to invest than, say, the United States or Japan or Canada. So in that sense, there is this kind of aspect that it is -- it has not completely made the transition into a kind of emerged economy. There is still an emerging economy aspect to it.

That said, in the last couple weeks, when investor concerns have really been roiling markets, the impact on South Korea has been nothing, for example, compared to the impact on Turkey. So it seems like investors are really putting it in a different basket.

Challenges moving forward is that growth is slowing. For the first time in history, trend growth is probably something on the order of 3 percent to 3.5 percent, which actually means it's growing slower than the world average for the first time.

And South Koreans put a lot of demands on their government, so the government has recently begun -- this month announced that they're going to have a three-year plan. They've established some very ambitious goals. They want to have per capita income get from $25,000 to $30,000. They want to raise the rate of growth to 40 percent. They want to raise the labor participation rate to 70 percent, which would imply substantial increases in labor participation by women and young people.

So it's a very ambitious set of targets. They haven't actually released the plan. The plan is supposed to come out this coming month. But they've identified three strategies that they want to use. The first is, there's an emphasis on building a more competitive economy. And what exactly does that mean?

South Korea's been really successful economically, but part of that success has been that it is a kind of unbalanced economy. Very, very large conglomerates account for a lot of the economy. And while the manufacturing sector has obviously done very well -- everybody in this room is familiar with Samsung and Hyundai -- the service sector has really lagged and is highly regulated. And in particular, there's a whole plethora of state-owned enterprises or government-sponsored enterprises or parastatals -- I'm not exactly sure how you'd describe them all -- but there is a sense that they can operate not exactly conforming to market rules. And, in fact, there's a lot of concern about the debts that these organizations are running up. So the first part of the plan is try to level out the playing field to have a more competitive economy.

Second is an emphasis on creativity. I suppose everybody in this room is familiar with, you know, "Gangnam Style" and, you know, the whole boom in South Korean cinema. And so that's kind of a code word for shifting away from manufacturing and towards services. How you do that is not so clear.

And, finally, there's an emphasis on rebalancing away from external demand to domestic demand. But, again, if you actually listen to what President Park Geun-hye has been saying over the last month, she's actually been talking about really ways of milking external demand a little more, not such clear ideas on how to shift towards domestic demand, although the National Assembly is bringing forward some expenditures.

Final thing. So far, everything I've said is pretty conventional. I mean, the Korean story is outstanding, of course. But it's all kind of comprehensible. There is one thing that sets South Korea apart, that is the world's largest contingent liability, North Korea.

And one of the really curious things in the last month, not only in South Korea, but then at Davos, President Park has been talking about unification. And she's been talking about unification in very positive terms. She's described it as a jackpot, as a bonanza.

Now, personally, I think there are many reasons to look forward to Korean unification. I mean, I look forward to the disappearance of the current North Korean regime. Stimulus to the South Korean economy is not high on my list of reasons about why I am looking forward to that.

But between interesting developments in the economy and potentially enormous developments with respect to North Korea, I think South Korea remains a very interesting and exciting country.

ROSE: OK. My son is 13 and is having his bar mitzvah in two weeks, and you can tell that Korea has come of age because Psy, the "Gangnam Style" pop star, is actually on the New York bar mitzvah circuit. And you can check on Instagram. He is available. You can have Psy do "Gangnam Style" at your child's bar mitzvah, if you're prepared to pony up, which is something that I don't think was ever the case in previous kinds of things. True story.

Mitch, you know, 20 years ago, the idea that Poland would be featured at a panel like this would have been laughable. And 70 years ago, there wasn't a Poland. So explain how Poland went -- as in the title of your piece -- from tragedy to triumph?

ORENSTEIN: Yeah, well, thank you so much. I wanted to -- the previous speaker, Marcus Noland, drew a kind of interesting contrast between South Korea and North Korea. And as I was writing the piece, I thought about Foreign Affairs' trajectory that you mentioned and the way that it tries to encompass -- I mean, its tradition is geopolitics, and trying to bring that geopolitical angle into thinking about the economy.

And so I was thinking, well, what are some interesting contrasts you could draw with Poland? And I was thinking, well, you know, maybe you could compare Poland to South Korea and have Belarus as their sort of North Korea, you know? I decided not to go that route...

ROSE: Good choice.

ORENSTEIN: ... but -- but I will bring up another contrast that's extremely relevant today, which is Ukraine. As we look at Ukraine -- and I know a lot of us in this room are following the events in Ukraine -- one's looking at the past of European politics, that one's looking at a country riven by serious geopolitical fault lines, one in which the politics are extremely tenuous as a result, one in which the economic progress has, therefore, been extremely muted in comparison to Poland.

So when people ask me about my piece, which is very bullish, very optimistic on Poland, and they say, why are you so optimistic about Poland? I say, well, look at Ukraine.

And indeed, this argument came up, as I understand, in Davos recently. There were a couple tweets that I picked up from Davos showing a nice chart of the trajectory of Poland's GDP growth, which has doubled in proportion to E.U. average, whereas Ukraine has more or less stagnated for the last 20 years. And the result is now that you have a GDP in Poland which had been quite similar to Ukraine historically is now about three times on a per capita purchasing power parity basis. So...

ROSE: Do the Poles make Ukrainian jokes?

NOLAND: They probably do, yeah. They probably do. Although I think today they have largely a very hopeful outlook on Ukraine.

So Poland is a country that was in that type of Eastern European past, that had extreme political turmoil. It has an enormously tragic history. One can't step far in Poland without encountering that sort of history on one side or another. And yet it's managed to overcome that in the last 20 years to become one of the most successful economies in the world. It's now the 20th-largest economy -- or 24th-largest economy in the world. It's on its way to being the 20th-largest.

It's a country which has utterly changed its geopolitical fate. It's no longer a Ukraine. It's a Poland. And it has really entered -- it's on the verge of entering the core of the European Union. It will need to adopt the euro at some point to make that happen. But it's a core -- it's becoming a core economy of Europe, just as Britain is sort of moving out of that sort of status.

So how did it do this? Well, I think part of the answer -- there's a number of answers one could give to that, but I think that one should go back to geopolitics to really understand the core of it. One of the key answers I give in the piece is that Poland has become a Western nation by virtue of the fact that its borders were, in fact, moved at the end of the Second World War. I had a nice little chart to show this, but I think a lot of people know the basic outlines.

Poland existed several hundred miles to the east up until 1945. It was an Eastern-facing country, a country with an Eastern empire. In fact, when it got its nationhood in 1918, practically the first thing it did is keep marching further east and try to grab some more territory away from the Soviet Union in 1920 to 1922, at the time of the civil war in the Soviet Union.

And after the Molotov-Ribbentrop Pact, which took most of eastern Poland into the Soviet Union, Poland was compensated at the end of the war with a whole lot of German territory which was seized. Those are the big areas of Pomerania, Silesia and East Prussia. And so the map of Poland today is -- I want to say -- more than a third former German territory.

And I have one line that I thought was going to be controversial in the piece saying, you know, Poland today is, to a large extent Germany inhabited by Poles. And that, of course, came about because of dramatic expulsions, extremely devastating expulsions of people, where some millions of Germans -- say, I think, 5 million or 6 million Germans were expelled out of Poland into Germany and 2 million or 3 million Poles were expelled out of the Soviet -- the eastern Polish territories, which are now Gud Lviv (ph) and Vilnius, and move to the west, to the emptied west of Poland.

That for Stalin was a great move. It effectively punished the Germans after the war. It expanded the territory of the Soviet Union and in a way punished the Poles, also. But what I don't think he looked at, at the time, and what's become evident now, is that it made Poland a Western nation. And where Poland had always vacillated, always been a sort of marching ground for armies in a sort of tug-of-war between Russia and Germany, it effectively planted Poland in this terrible history as firmly in the German sphere of influence. And that's where it's come to at this moment.

So the reason to invest in Poland, the reason to look at Poland as a serious world economy is because of its extremely tight relationship with Germany. When you look at sort of the European story -- you mentioned we talk a lot about European stagnation, obviously the country that's not stagnating and is actually doing quite well in all of this is Germany. Germany -- the German economy is doing great. The strategy that...

(UNKNOWN): Testing. This isn't working.

ORENSTEIN: ... they're pushing for the rest of Europe is one that's really working for Germany. And it's also working for Poland. Poland, in contrast to other emerging markets, has just had its growth outlook upgraded, so it's now looking at 3 percent growth or 4 percent growth this year. Why?

Well, because Poland has become a -- has become a low-cost platform, low-cost, high-quality platform for production of European, but largely German goods. This is really across-the-board, if you look at any industry, but the primary one is the auto industry, where companies like Volkswagen employ thousands of workers in Poland, producing all sorts of German automobiles, from trucks to cars to luxury cars, not just cheap cars.

Hugo Boss, the fashion-maker, makes a lot of its products -- mainly its shoes -- in Poland. MAN, the bus-maker, makes its stuff in Poland. And now they're starting to employ nearly as many workers in Poland as they are in Germany. In fact, one recent analysis by one of the major investment banks showed that nearly -- I think was 30 percent or 40 percent of Poland's exports to Germany end up as Germany's exports to the rest of the world. So those German exports are including a huge component of Poland.

So in this, it's interesting that Poland was able to pull this off at a time when China was rising in the global economy. And obviously, China became Eastern Europe, and Poland in the foremost their main competitor. You know, they were trying to attract capital at the same time as Asia, Asian competitors, like South Korea and China are taking off. And so they had to really prove that they had a value proposition.

So what was that value proposition? The value proposition was that you could make goods cheaper in Poland than you could in China, not every good, not very lightweight goods, but heavy industry, things that have substantial transport costs involved with them, such as automotive, such as white goods, where actually -- have become actually cheaper to produce in Poland than to produce in China. And that's really, I think, the -- you know, the sort of bottom line.

In addition to that, of course, you have a much more stable political environment by virtue of the E.U. You have the massive E.U. investment in Poland, which is building the highways, the autobahn that Poland never had, correcting a lot of their infrastructure problems, tying them in much more closely to Western Europe.

And so you have the political thing and then, of course, the proximity, which is that a German manager can, you know, drive over to the factory in Poland, take a look, walk around, see it. So you have -- you have a whole system which is much more monitorable and much more easily compatible with European ways of doing things than a factory in China.

So I would say that Poland, for these reasons, for its political stability, which is rooted in the geopolitical situation, for the strong linkages, the close ties, the way it's embraced Germany is really an economy that's going to be on the upswing for quite a long time, and probably will do better over the next 10 or 20 years than the forecasts even think.

ROSE: What are the challenges?

ORENSTEIN: Well, the challenges, I think, are still political. So some of you may -- some people will note that the current government is on the verge of losing its majority its parliament. It's facing elections where it's uncertain to win. And as -- like a lot of countries in Europe right now, the far-right or the more populist right in Poland is rising. And they typically have a more populist economic platform, to some extent. They're more welfarist, in particular.

And people always raise questions about this and wonder, you know, what's going to -- what the effect is on the economy. And you may remember the disputes about the Kaczynski twins and their sort of statements about Europe and others. So that kind of politics could emerge as dominant in Poland again. My personal view on it, though, is that it's probably not going to have such a huge effect on the economy, which is why I remain optimistic.

Obviously, geopolitical turmoil, you know, that -- unresolved in Ukraine or, you know, the relations with Russia are, you know, potentially issues. But I guess those are really the main potential blockages, that there's something that takes it off this train that's zooming towards Europe.

"The value proposition was that you could make goods cheaper in Poland than you could in China."
—Mitchell Orenstein

ROSE: Steve, a couple of years ago, Turkey would have been a no-brainer for something like this. In fact, it was -- there were people who suggested adding it to the BRICs, or various kinds of -- you know, almost moving it up into the super-stratosphere in developing economies. It's cooled off a little bit, and there's political turmoil. So what are the -- why did Turkey do so well? And where is it going now? And what are the challenges?

COOK: Thanks, Gideon. And thanks for including me in this, because I did not contribute to this package, but have been thinking and writing about Turkey, including for Foreign Affairs, for a while. I also want to thank you. For the last 10 minutes, I'm sorry, I didn't pay any attention. I've been replaying my bar mitzvah with Psy in it. Totally the oddest thing I could -- anyway...

ROSE: Other ones this year have include Lorde and Imagine Dragons, all on the Instagram circuit. It's really ridiculous.

COOK: In any event, look, you know, Turkey -- and you're absolutely right. In the last decade, Turkey certainly would have been a no-brainer. And I think a lot of people tried to work the T into the BRICs. And the Turks certainly wanted the T in there and often talked about how they should be included among those countries.

And I think that the genesis of the kind of great 2000s Turkish economic boom goes back to the economic crisis of 2000 and 2001, when a government prior to the Justice and Development Party, before Tayyip Erdogan came to power, undertook some very serious and painful reforms. Those reforms are authored by Kemal Dervis, our colleague from the Brookings Institution, and despite some expectations, after the Justice and Development Party came to power in 2002 that they would pursue a populist economic policies and not stick to the very kind of stringent conditions that the IMF had imposed, they were basically responsible stewards of the economy.

So take that, they were able to instill confidence in investors by sticking to an IMF program, add it to a large, young population, a country that does have a manufacturing base. Talking about automotive manufacturing, if you're going to buy a Ford in Europe, it was manufactured in Turkey.

Then you have location. Turkey sits at an important location, access both Central Asia, Eurasia, the Middle East, Europe, the Balkans, the Eastern Mediterranean, extraordinarily important. And over the course of this decade, you had the rise of new Turkish entrepreneurs, these kind of fearless entrepreneurs which show up everywhere around the world wanting to trade.

I remember just by an anecdote, I was having dinner with one of these representatives from one of the Turkish trade associations. And he was aware of my interest in Egypt and Egyptian politics and Egyptian economy. And he said, oh, we have a very small investment in Egypt. I said, oh, really? You know, how many? He said, oh, well, we employ 70,000 people in Egypt. I thought that was pretty extraordinary.

So you have the combination of, I think, good economic stewardship, a young and growing population, a manufacturing base, to some extent, good location, and then this kind of bubble about, you know, Turkey as a liberalizing, democratizing country.

I mean, one of the advantages that Turkey really had in the 2000s was that it wasn't Turkey in the 1990s, where you had a series of unstable governments that didn't make sense. You had a coup d'etat. The Turks, you know, kind of bristle at the idea that it was a coup, but they call it the blanc (ph) coup, the postmodern coup. The fact of the matter is, is that the military pushed a government out of power, produced a significant amount of political instability.

Tayyip Erdogan and AKP come to power in 2002 and 2003. And you suddenly don't have the need for coalition governments. You have a strong leader. And the AKP, different from previous governments, looked out to the world. This was the party, this was the government that was going to bring Turkey to the world.

Turkey historically had been very insular, inward-looking, a kind of prickly nationalism. Foreign investment was there, but not in the kind of way then when the AKP opened up the country.

I think the reason why Turkey has cooled off is because, despite all the great promise and these factors that have led to -- that led to the great, you know, boom of the 2000s, is that, one, the country's largely dependent on financing a current account deficit through foreign investment. And that's essentially hot money. Turkey has no energy resources to speak of and must import all of its gas, and the only way to finance that is through foreign investment. Current account deficit is a structural problem.

Over the course of the decade, as Turks became or believed that they were wealthier, you saw -- again, nobody really wanted to talk about it, but a consumer credit bubble emerging. You know, I'd go back every couple months, and you'd see a neighborhood transformed. You'd see people who -- you know, friends who told me that, you know, the guy -- the neighbor didn't have a BMW two months ago, now had a BMW. There was clearly -- Turks were feeling wealthier and starting to use credit when credit was unavailable to them before.

You also had a very significant real estate bubble. I mean, if you look at the skyline of Istanbul, it's been absolutely transformed over the course of the last decade. Some of that's real. A lot of that has to do with crony capitalism in Erdogan's Turkey and that the construction industry has essentially become a vehicle for patronage.

Add to that an illiberal turn in politics that kind of exploded before everybody's eyes during the Gezi Park protests this summer. Add to that the corruption scandal that's been rocking the country over the course of the last month and you have the problems that Turkey is confronting now, and along with changes in -- or anticipated changes in Fed policies, growth in the United States, people are pulling their money out of Turkey as quickly as possible. And the lira took a massive nose dive.

The central bank last night, in an emergency meeting, hiked the interest rates, seemed to have stabilized the situation, and it was something very, very important. I wrote about this for FA.com a couple weeks ago. Something very important happened. Erdogan had lobbied against this interest rate hike. He has been laying the groundwork for his survival in this very difficult economic environment since the summer by talking about the interest rate lobby, the international bankers, Zionists, Islamophobes. I've been called every single one of these things, by the way, by any number of Turks.

And he lobbied against it, but he said ultimately he had no power to prevent it from happening. To me, that was an -- that's a double-edged sword, because I think in -- I think what prevented, what put the break on Erdogan really putting the screws to the central banker, Erdem Basci, who, you know, many people were holding out a hero for defying Erdogan, but who previously had been seen as kind of a -- you know, too close to the prime minister. I think had it not been this massive fear of what might happen had they not hiked interest rates, Erdogan might have gotten his way.

"The country's largely dependent on financing a current account deficit through foreign investment. And that's essentially hot money."
—Steven Cook

And I think that what that speaks to -- and I think this is a fundamental weakness in Turkey -- is perverse institutions, either weak or perverse institutions, in which at crisis moments, political leaders either use them for their own non-democratic agendas or go around them. And I think that, had there not been this massive, massive fear about what might happen had there not been an interest rate hike, it would have been business as usual and Erdogan would have applied as much pressure on the central bank as possible not to have the interest rate hike.

ROSE: So are you completely bearish? Or is there any bullish aspect to it?

COOK: You know, it's hard to see where -- you know, there are -- you know, there have been some, you know, positive -- there was positive investment in real things in Turkey. There was a recent big investment in the dairy industry, which seems like the right thing, but a lot of the investment has not been towards productive, real kind of investment.

I think that, you know, when Turkey comes out on the other end, there has -- you will see that, you know, the AKP record is not all bad. There's been significant improvement in infrastructure, airports built, high-speed railways, highways, and so on and so forth. But basically, this economy has been, you know, jacked up by fiscal policy and hot money and reputation for a government that's stable, and suddenly it doesn't look as stable as it once was.

I'm not talking about, you know, Egypt instability, but we're talking about a significant amount of political ferment for the foreseeable future, and I think that's what the markets are responding to. I don't see a way out. Nobody's going to give up in this struggle in Turkey, and I think it will -- there will be iterations of this ongoing.

ROSE: It's funny. You talked about the acronym and trying to get Turkey into the BRICs. When we were putting together the package, we thought about an acronym, and I actually came up with one that was our temporary internal name for the package, which was the GEMs, the growing emerging markets. And my staff ultimately vetoed that and said the acronyms are stupid, don't do acronyms, and so forth and so -- so, fine, we didn't. OK.

Well, this has been great. Let me take one question from the chair before I turn it over to our members and participants. If we had Shannon here, if we had Karen Brooks here, who talked about, you know, the Philippines, we talked about Mexico, one of the questions we'd be asking is about the role of leadership. So you have Aquino in the Philippines or Pena Nieto in Mexico who managed to turn their countries around and pull off reforms that their predecessors hadn't either been interested in or able to.

Have leadership -- and I see that -- to a certain extent, we see this in Turkey with Erdogan playing a negative role, leadership being important there, not just on the upside, but then screwing it up. In Poland and in South Korea, and to one extent in Turkey, too, how much of a crucial variable has personal leadership been in driving successes?

NOLAND: Well, in the case of South Korea, South Korea has a form of government where the president is quite strong, and so the quality of leadership has made a big difference. But I think it -- and I think that people probably underestimated President Park Geun-hye, including the North Koreans, and I think probably part of this was related to the fact she's a woman. And she's turned out to be a tougher, kind of more committed, harder, you know -- she's a more forceful and stronger leader than I think some people expected.

But I think another aspect of it -- and I was really reminded of this listening to Steve -- if you compare South Korea and Turkey right now, there are -- there are two big differences, the reason why Turkey's gotten hit with this financial -- emerging financial crisis and South Korea really hasn't. First of all, South Korea is running a trade surplus; Turkey's running a deficit.

But the more important point is that Turkey -- a lot of that deficit is -- what you had in Turkey was you had Turkish banks borrowing from European banks in euros short and lending to construction firms in Anatolia and so forth in lira long. And that's created both term and currency mismatch. And that's very dangerous.

And a lot of people initially were concerned that the problem would emerge in Europe, that if something happened in Europe and the European banking system contracted, they'd cut the Turks off and Turks would be in trouble. It hasn't worked out that way, but that created a dangerous situation.

In South Korea, South Korea got into some trouble in the global financial crisis. The won fell by 45 percent. They were subject to a sudden stop. And one of the things the South Korean financial regulators recognized was that South Korean banks and South Korean firms were doing things to indirectly create the same sorts of mismatches, and they stepped in and put a stop to it.

And so the point I would emphasize is, the thing about South Korea, South Korea, like any other country in the world, has the capacity to screw things up. But one of the things that's really striking about South Korea is they learn from their mistakes. And -- and you have not only the quality of leadership at the presidency level, but you have a quality of leadership in governing institutions more broadly that they change, they adjust, and so the financial regulatory authorities in Korea now act with greater prudential activism than they did several years ago. And that's -- it's helped them in this emerging situation the last couple of weeks.

ROSE: Mitch, has leadership played a particularly significant role in Poland?

ORENSTEIN: Yeah, I mean, this is a great question, a very controversial one with regard to Poland. There's a number of leaders, economic leaders who claim all the credit for Poland's success. And I tend to be rather skeptical of those claims. But one wouldn't want to say that leadership's unimportant.

I think like in South Korea, where you're talking about leadership goes very deep, right, it's not only at the top level, but we're talking about the bureaucracies, we're talking about multiple decision-makers. Poland's a country that's gone through -- I can't even count the number of governments since 1989. I mean, I think it's like dozens, you know, or at least over a dozen, anyway.

It's a government where -- it's a country where the reformist government that was put in, in 1990 lasted only about a year and then was succeeded by a very populist right-wing government. It was succeeded by a left-wing government. It was succeeded by another liberal government, by another populist government, and it keeps on going. A lot of political change.

So what's interesting about Poland's transformation is that it's been carried forward by the entire political class. This -- remember, this happened -- this sort of thing used to happen in the United States, too, right, where there was like a bipartisan sort of, you know, agenda going forward? Well, Poland has that.

And what I would call that is not leadership. I would call that social consensus. I would call that maybe an elite consensus that there's only one direction to be going, and that direction is towards the West. Whether you like it or not, whether you're comfortable or not with all aspects of it, it's been widely recognized in Poland that that is the game in town and that you'd better play it.

And I think that makes it -- that's why I talk about this in a more geopolitical space. Why did that consensus emerge? I think that's the thing that's been missing throughout Polish history. Poland's famous for what's called the liberum veto. Back in the 1500s, Poland was organized in a quasi-democratic arrangement of nobility, but any one person could veto whatever the policy was of the day, and that was what ultimately led to the demise of Poland as a state.

How did this country develop such a strong consensus on Westernization, where its neighbors, its near neighbors, Ukraine has not, Belarus has not? And I think it had to do with a specific historical juncture they were at and a sense among the broad elite that they couldn't mess this up, it was a unique opportunity to get to the West, and they were going to do that.

So I think that one should look skeptically on claims of particular individual leaders who claim a great deal of credit for this. I see many, many people there who can claim a lot of credit.

ROSE: Steve, a few words about leadership in Turkey, pro and con?

COOK: You know, I would -- I would agree with, you know, Mitchell's last point that, you know, you have to be skeptical of these claims about a single leader. After all, as I said, many of the reforms that put Turkey on the path of growth in 2000 were put in place by Kemal Dervis and a previous government.

But there is something about Tayyip Erdogan. First of all, he is the best politician I have ever seen this side of Bill Clinton. He just has this innate ability to connect with Turks and understands what Turks -- what makes Turks tick. And it is absolutely magnetic.

And, you know, it's -- it took that kind of leadership, that kind of political skill, I think, to undertake some of the really difficult reforms that, particularly in the political sphere, that led to this decade of stability. It took Tayyip Erdogan to bring the military to heel.

Now, it hasn't ended up as well as it might have, but it took this type of personality to kind of wrench Turkey out of that malaise and that instability of the 1990s. The question is, now has the time passed for Erdogan? Because he now is creating his own distortions, because of a certain arrogance of power, because of concern -- starting back as far as 2007, concern that the system was going to strike back. He has resorted to a series of authoritarian measures to establish control and institutionalize the power of the party. That has now clearly caught up with them, and that's why the markets are pricing all of this risk into Turkey.

So he may have been appropriate, he may have been necessary in the early 2000s and through the first decade of the 21st century, but the question is, is he the appropriate leader to bring Turkey? I don't know. But, again, I'm skeptical of these, you know, great man kind of arguments.

ROSE: OK. At this point, let's bring all of you into the conversation. So stand, state your name after I call on you, and wait for the microphone. This is on-the-record, unlike usual Council sessions, so let's start out over here. Yes?

QUESTION: I'm Glen Fukushima with the Center for American Progress. I have a question for my friend, Marcus Noland. Before I put my money into South Korea, I have two questions. Number one, is the contingent liability you talked about, North Korea -- how would you assess the impact of unification, say, over the next 5 or 10 years with the case of Germany? And what impact do you think that unification will have on the South Korean economy, in terms of investment?

And, second -- the second question is, when I was in Davos at the World Economic Forum last week, a number of the South Koreans there expressed some real concern about the fact that Korea is caught among the trilateral giants of China, Japan and the United States. The relationship with the United States is going very well, but with Japan, with the comfort women issue, with the Yasukuni Shrine, with Dokdo Island, Takeshima Island, all these history issues and territorial issues, that's a real problem. With China, there's closer economic relations, but politically there's not necessarily consistency. So how do you see South Korea navigating among these three giants?

NOLAND: So how long are we going to go? Two hours? OK, on the first question, Korean unification would -- OK, assuming it all went smoothly, didn't involve detonation of nuclear devices or anything like that, if you just -- a very nice, comfortable, you know, East German-style collapse, right, no mass violence, the Korean case would be much bigger and more daunting that the German case. North Korea is much larger relative to South Korea than East Germany was to West Germany. It is my poorer relative to South Korea than East Germany was relative to West Germany. It's probably a more screwed up, distorted economy and has a -- you know, all due respect to the Stasi, even a more screwed-up political culture than East Germany. So this will be a big deal.

People like me who model this, we need some sort of end point to kind of anchor our models. So a typical way of modeling this is to say, how much money would it take to raise North Korean incomes to 60 percent of those of the South, 60 percent being rough difference between the poorest and richest U.S. state, rough difference between the poorest and richest South Korean province, until recently, roughly different between the richest and poorest parts of the E.U.?

And it turns out that -- you know, that depends partly on how fast you can absorb new technology and how many people migrate across the border and so on and so forth. But a rough ballpark estimate, plausible set of parameters, it's going to cost more than $1 trillion over, say, a 10-year period. And that means that this transitional period is going to be long, you're going to have to do something about population influx control, you're going to have to do something about voting rights for the current residents of North Korea, how you integrate them into the political system. So it's not going to be a walk in the park.

It could be really, really good for South Korean construction companies, right? There's going to be a lot of work. Depending on how much of the money comes in from abroad and how the exchange rate behaves, it may not be so good for South Korean manufacturing exercises.

So the bottom line is, if you're a South Korean construction magnate with money to, you know, invest in unification bonds, unification could be very, very good for you. If you're a blue-collar worker in a traded goods sector, you know, manufacturing something for export, and now you suddenly have to compete against your cousins up north, absent some compensatory policies, that could be a pretty tough thing, leading to increased wealth and income inequality.

The geopolitical point, yeah, I mean, South Korea has a tough situation. Right now, as you know, the relations with Japan are fairly acrimonious. What's interesting about South Korea in the economic sphere, at least, is that the South Koreans are using the kind of acrimony against Japan to spur their own internal reforms. I mean, high-level people, the finance minister, the head of Korea development, have got up in public and said things like, you know, Japan's gone through two decades of nothing, the third arrow of Abenomics is going to fail, we don't want to do that, so we've got to start structural reforms today, right now, seriously. So they use their rivalry with Japan as a spur. And the fact that it's gotten a little more heated recently just means it's a better spur.

The other thing that's curious is this. South -- the yen -- the Japanese yen has really depreciated against the South Korean won. And that's hurt South Korean manufacturers who compete against the Japanese directly or indirectly. I've been struck by the Park government has not ridden the yen down, that they have said, no, we are going to do restructuring, we are going to promote the service sector and creative economy, we are going to shift demand towards domestic demand and not rely so much on export markets.

And thus far -- this may not -- if we have this meeting in a year, I may not be able to say this -- but thus far, they have abjured the kind of quick fix of letting the won go down.

Now, I know that doesn't get into all the geopolitical issues you represented, but we've got two other people here, and they want to talk, too.

ROSE: Great, thank you. I would say that we actually have a piece on Korean unification in the May-June issue coming up that will be a look at sort of how it might play out, what its effects might be, and so forth, so look for that one.

Yes, over here.

QUESTION: I'm Mitzi Wertheim with the Naval Postgraduate School. I want you to look into the future. How do you think 3-D manufacturing is going to affect all of these economies? Frankly, it scares the devil out of me, but anyway. I mean, I go to these meetings and listen to mercs talk about they won't have any jobs because all the 3-D creation will be done at home and we won't have to transport anything.

ROSE: Are any of you up on digital fabrication and could you speak authoritatively to that point?

NOLAND: I think it's like Clint Eastwood said in one of those movies. A man's got to know his limitations.

(LAUGHTER)

ROSE: You know, it's interesting...

ORENSTEIN: I think you exceeded mine.

ROSE: The next issue has a lot of stuff on tech in it, including stuff on the Internet of things, by -- one of the co-authors is Neil Gershenfeld, who wrote about digital fabrication. And this was actually a subject at Davos that was talked about a lot. And the question about employment and machines and are we in a second machine age, and if so, what's the future, it's actually fascinating.

One of the most interesting discussions that I heard at Davos was an off-site dinner in which Fareed Zakaria and Martin Wolf nearly came to blows about whether the -- whether the U.S. slowness in employment, in terms of the rebound, after the economy rebounded, was a harbinger of a fundamentally new situation in which there's going to be a lower employment plateau and so forth, or whether it was just lack of demand and whether the transition to a new kind of economy will be like old ones.

We're going to cover this kind of issue more. Nobody actually -- Mitch, do you want to talk about that one?

ORENSTEIN: I'll just say a couple words. I mean, I can't -- I can't see it having an enormous impact in Poland. If you can figure out how to print a Volkswagen Golf, then, you know, I guess I would be wrong about that. But I think we're probably a long ways away from that. I don't see us being able to print washing machines.

And I neglected to mention, also, you know, a lot of the industry, a lot of what's happening there is, you know, call centers or back-office support operations. So my guess is that that won't necessarily have an outsized impact on Poland. It's going to be...

QUESTION: Near term.

ORENSTEIN: Yeah, near term, right, right, as far as I can see, you know.

COOK: I'd say the same thing with regard to Turkey, not knowing really anything about digital fabrication, but I know two things, one, the Turkish economy, you know, we're talking about big construction-type of things, cars, you know, infrastructure projects, things like that. Until you can digitally fabricate an airport runway, I thank the Turks are going to be OK.

But I will say this. For a country of Turkey's size and levels of education, they are extraordinarily late adopters when it comes to technology. You know, there is no design fabrication software work really happening in Turkey. There is no kind of dynamic tech-type of sector in Turkey at all. So over time, they may well be left behind.

ROSE: Yes, over here. You two. Second row, then first row. Yes, you first.

QUESTION: Diana Lady Dougan, Center for Strategic and International Studies. I wanted to pick on Steve for a moment because of his expertise on both Egypt and Turkey. And I know we're talking about emerging economies or upper-end economies that were developing countries, but the role of religion and the military in both those countries, and -- and also in Korea, I might add.

And by way of disclosure, I'm one of the producers of a film called "The Square," and involved in also post-production. And I've been so struck by the demographics of change. And when we're looking at the aging of some of these countries -- and I think Turkey average age is about 29, and Egypt's is 25, but they have a very highly educated workforce in Egypt, and there's a lot going on right now.

But I guess I would like to, particularly for you, but for others, to sort of extrapolate where demographics are going to come out in this. And then, also, I can't help but think back to some of your very articulate comments in past years about how much the Egyptian military is the capital of crony capitalism in Egypt and the degree to which this exists elsewhere. Thank you.

COOK: Thank you for the question. I could spend the next three hours talking about all of these things, so...

ROSE: You don't have the next three hours.

COOK: But I'm not going to -- I'm going to get to the core of your question about demographics. And it's funny. When you think about it, you know, for years, people have been talking about these demographic issues, and it seemed like the dog that wouldn't bark, but then suddenly it did bark.

And I think that, looking at Egypt and then looking at Turkey, and looking at the Gezi Park protests, and we cannot -- it was -- I groan every time someone, you know, wanted to make the connection between Gezi, is this the Turkish Spring, as Tahrir Square was -- became representative of the Arab Spring.

But both are, you know, predominantly young, educated, mobilized, but unassimilated into the political process type of movements. But I think that they're somewhat different. First, if there's anything that revolutionary that has happened in Egypt over the course of the three years, and not much, actually, revolutionary has happened, is the fact that you do have this young demographic that is making demands on the political system and articulating those demands in actually the streets in a way that the authorities have no real answer for, other than to employ authoritarian measures. That's not stable, because if their only answer is to more violence, more force, and these people remain, you know, brave in the face of it, it's a recipe for continued political instability.

The same kind of thing happened in Gezi on a smaller scale. Now, more and more people have come into the Turkish political arena, but over time, over this decade, fewer and fewer have been able to contest it. Now, with Gezi, it wasn't just an environmental movement. It wasn't just about the redevelopment of this park off Taksim Square. It was about police brutality, crony capitalism, arrogance of power, the lack of access to the political arena, the inability to contest it, the inability of political parties, other political parties to be effective.

These are -- you know, this is the new reality in Turkey, as well. The question is -- extrapolating now out -- in both Egypt and Turkey is, how do these young, mobilized people now translate that into the formal political arena?

In Egypt, large numbers of them absolutely reject the idea of formal politics and want to stay outside of it. Home is where the streets are. The streets are where home is. The street is where we've been most effective. We will only be co-opted if we go inside.

In Turkey, they're still trying to figure this out. They are -- many of them, these ineffective political parties that exist are trying to co-opt them. Just by way of anecdote, I met a group of them, wealthy, young, mobilized by the Gezi Park protests, at a meeting through mutual friends over this past summer when I was there. And they said to me, "Oh, the leader of the Republican People's Party, Kemal Kilicdaroglu, is going to be here in an hour." I said, "OK, what are your demands? Come on, quick. Let's write up what your demands are." It hadn't even dawned on them that they held an upper hand.

So Turkey, I think, that demographic is way behind where the Egyptians are, and they're going to -- it's going to be a while until they figure out the way forward.

ROSE: Very quick comment on demographics in Korea and Poland?

NOLAND: Part of the Korean success story is they've had the wind at their back. They've had very good demographics for the last 50 years or so. Now it's going into reverse. 2010, the core productive population began shrinking. Next decade, dependency ratio goes up. And if you -- you know, if you extrapolate out current trends, 2050, the population of the country absent Korean unification begins falling.

What it means for the government is, is that old people consume more services and less manufacturers than younger people do. And a lot of -- and services, as I mentioned, is where the economy really lags in terms of productivity. And a lot of services are provided by the state. And so the Koreans understand they need to get service productivity up and -- because that is not only going to, you know, help them in terms of dealing with these demographic changes, but it also could be important in terms of their fiscal position, as well.

ROSE: Quick?

ORENSTEIN: Yeah, on demographics in Poland, a couple of points. One is that the Solidarity movement was consonant with a big demographic boom in Poland. A lot of kids were born in the 1980s. And as a result, they're a relatively young population in Europe, but that's not going to last. So they, too, are going to succumb to a lot of the declines that Europe in general has been facing. But that won't be until sort of 2030, approximately.

The other -- sorry, one other point to point out here is there's a huge out-migration of Poles in the U.K., prominently...

ROSE: All those Polish plumbers.

COOK: The Polish plumbers.

ORENSTEIN: Yes, primarily to the U.K., Ireland, a couple other places. And one of the big internal issues is, are you going to have those people come back at some point? And if the economy keeps growing, are you going to end up with a labor shortage and to what extent immigration is going to occur into Poland? And that's a very new issue, so I don't think we can really say much about it.

ROSE: Last quick question. Sorry for all those -- we could talk all night on these things.

QUESTION: Robert Warren (ph) from the Foreign Service Institute. Dr. Noland, would you elaborate on points you haven't made, really, and that is on the trade relationship. You have Korea now, I think, as partner in the trade -- the Trans-Pacific Partnership. What's the meaning of this partnership? And how might it impact on us, as well as Korea?

"Part of the Korean success story is they've had the wind at their back. They've had very good demographics for the last 50 years or so. Now it's going into reverse."
—Marcus Noland

NOLAND: We were just discussing this, you know, before we came in here tonight. The basic problem is, is that trade policy has become salient at the domestic level and it's become more pluralistic at the interstate level. And so it's hard to get things done at the global level.

Politics abhors a vacuum, so these people are following the path of least resistance, which is global -- I mean, regional and plurilateral agreements. In Asia, you basically have two. You have one in East Asia centered around ASEAN. Then you have the Trans-Pacific Partnership, which you mentioned.

The issue with the Trans-Pacific Partnership is most of those economies are pretty liberal already, and they already have free trade agreements. I mean, we already have a free trade agreement with South Korea. So the marginal impact is not that great unless you get other participants, such as Japan. But the dynamic impact is important, because if Korea's in, Japan is going to want to be in. And eventually, you're going to end up with a situation in which the United States and China are basically the only countries that are not part of both of those blocks.

So if the United States and China are smart, we would be thinking about designing those agreements in a way that at the end of the day they could be knitted together into one big agreement. Or we're going to have a situation where all the other countries in the Asia Pacific are freely trading with everyone else and then we and the Chinese are the ones kind of, you know, stuck kind of staring at each other.

ROSE: Any comments on trade in your countries?

COOK: Yeah, I think that one of the advantages that Turkey's had over the last decade was Turkey's rise as a trading state and the rise of this entrepreneurial class that wanted to trade with the world, in fact. These traders were kind of the leading edge of a Turkish foreign policy that really spread its wings throughout the decade. The question is what kind of impact that will have -- what kind of -- the current crisis in the political instability will have on this -- on this class? Where will they go? These people were predominantly supporters of the AKP. This political crisis combined with this currency crisis is just at the beginning. I think it's unclear what's going to happen to them.

But at least they have the infrastructure and large numbers of people who are trading, they have things to trade, they have advantages in certain areas, that they could come out on the end with no trouble whatsoever, because that's separate -- those advantages are separate from the political scandal that's happening and the currency issues.

ROSE: And, Mitch, is the -- is Poland's being part of the E.U., but not part of the eurozone the right switch, the sweet spot?

ORENSTEIN: Oh, it certainly has been, yeah. I mean, I would say, obviously, Poland benefits from being part of a big and functional regional free trade -- or regional trade agreement, the European Union. That's obviously a huge advantage for the economy.

But I would say that -- I'm sort of the outlier here, as we talked about earlier. I think we've seen a collapse of the global free trade regime, or the beginnings of a collapse of the global free trade regime, and perhaps that's because I'm looking at it from the vantage point of Europe and not the vantage point of Asia.

But what I see, in Poland's neck of the woods, is that it's part of this big trade bloc called the E.U. and it's right next to another trade bloc that's trying to be built called the Eurasian Union. Notice it has the same initials, too, you know?

And that's a real challenge for a place like Poland. When we see in that region of the world trade barriers going up between those two -- now, those are natural trading partners for Poland, so this is why -- you know, there's the -- it's a big deal for the E.U. to have Russia creating a big alternative trading bloc that will have barriers against the E.U.

So I think that Poland can react as it has by being a Western-leaning state. Maybe it will accentuate that, because that's where it can trade freely, but it's an opportunity cost.

ROSE: In a piece accompanying the package, Ruchir Sharma talks about how the signal mark going forward of the emerging markets will be differentiation, that instead of thinking of the developing world as a giant class in which it will rise or fall as a group, you have to look at the individual countries and their particular circumstances and pick your bets very carefully. And I think that what we've heard tonight confirms that, which is that each of these countries has very specific histories and very specific problems and issues.

And while there are some similarities, you need to have -- you need to drill down on the specifics of each country, with people who know what they're talking about, and we've been very fortunate, I think, to have access to these people. And I want to thank Marcus and Mitch and Steve and thank all of you for coming. And until the next FA Live.

(APPLAUSE)

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