October 2, 2002
|Contact:||C. Randall Henning||(202) 328-9000|
Washington, DCThe regional financial arrangements recently developed by a number of East Asian governments to supplement multilateral efforts to combat financial crises deserve the support of the international community. Subject to the condition that the East Asian facilities complement the International Monetary Fund, the US, European, and other non-East Asian governments should back the new facilities, according to a new Institute study, East Asian Financial Cooperation, by C. Randall Henning.
Dr. Henning analyzes the network of currency swap agreements that form the Chiang Mai Initiative (CMI) launched by Japan, China, South Korea, and the members of the Association of Southeast Asian Nations, known collectively as the "ASEAN+3." A Japanese proposal in 1997 to create an Asian Monetary Fund (AMF) generated vigorous opposition, particularly on the part of the United States, on the belief that the IMF could be undermined. The present CMI, by contrast, is designed to be broadly compatible with the IMF. Rather than adopting a neutral or opposing stance to ASEAN+3's present arrangements, therefore, governments outside East Asia should welcome them and specify the directions in which the further evolution of the CMI would be desirable.
Dr. Henning proposes that, to promote that key systemic objective, the members of the IMF should formally adopt a set of principles that differentiate between regional financial arrangements that are compatible with the IMF and those that are not compatible. Under his proposed principles, countries participating in regional arrangements would avoid any conflicts with the Articles of Agreement and accept some further obligations. Regional financial arrangements would adhere to sound rules of emergency finance, would consult with the IMF on disbursements, and would not undercut IMF conditionality. These principles would also provide for notification of regional financial agreements to the IMF and review by its Executive Board. The controversy over the AMF proposal of 1997 suggests that such a set of principles is needed.
The study recommends that ASEAN+3 revise its relationship to the Contingent Credit Line (CCL), the facility developed by the IMF to counter contagion but for which no country has yet applied. Under the present rules, prequalification for the CCL is not sufficient for disbursement of funds through the bilateral swaps of the CMI; the IMF would have to disburse CCL funds before East Asian swaps could be activated. This restriction should be removed: CCL prequalification should instead be a sufficient basis for disbursement under the CMI. A country that has prequalified under the CCL should be deemed to have sound policies and to have satisfied the "IMF link."
Linking disbursements under the bilateral swap agreements to CCL prequalification would serve several purposes. First, it would accelerate disbursement of CMI funds in crises driven by contagion through the capital account. Second, it would enhance cooperation between the regional and multilateral levels. Third, it would bring additional resources to the system as a whole, addressing a central criticism made of the CCL. Finally, it would enhance the attractiveness of the CCL for East Asian countries.
The study also recommends that ASEAN+3 make the CMI more transparent by disclosing the details of the bilateral swap agreements and any swap operations, and that they develop a robust surveillance mechanism to complement the financial arrangements. The task of supporting regional surveillance should be clearly assigned to a single organization with a mandate to collect information from national governments and central banks, organize and analyze the information, disseminate it to group members, and lead off the peer-review session at ministerial and deputies meetings.
Should ASEAN+3 build an AMF on the foundation of the CMI? The study argues that the creation of an AMF could eventually be desirable but that such a step would have to satisfy a formidable set of prerequisites and would thus be premature presently and in the near future. Success in the development of surveillance, strengthening of financial arrangements, and specification of high-quality conditionality would help to pave the way for such a fund. Governments of the region would have to enter a political agreement for strengthening regional economic institutions generally, give substantial discretion to a secretariat, and demonstrate a more robust capacity for joint decision making.
Any serious failure, such as a default on the swaps, would cast grave doubt on the wisdom of further movement along this path. If, on the other hand, reform of the international financial architecture proved inadequate, the case for an AMF could be strengthened. If the prerequisites were met, and the AMF respected the principles of financial regionalism presented in this study, the international community would have few legitimate grounds on which to object.
The study argues that regional financial cooperation in East Asia is beneficial on economic, institutional, and political grounds. At the economic level, the region has a commonality of economic interest as defined by the regional integration of markets, reinforced by mutual vulnerability to contagion, which has a strong regional dimension. Regional financial facilities enable countries to economize on reserveswhich are excessive, exceeding $1 trillion in the regionand supplement the resources of the IMF.
At the institutional level, the CMI can help redress the underrepresentation of East Asian countries in the IMF, expedite decision making and disbursements when crises strike, provide a basis on which to build an effective regional surveillance mechanism and contribute to broader economic integration (specifically in the monetary, investment, and trade areas).
At the political level, while financial cooperation cannot transform security conflicts within the region into close friendships, it can provide additional economic incentives to resolve conflicts peacefully. It creates a context into which the emergence of China in particular can be managed. Political support within the United States for multilateral institutions and financial stabilization, moreover, has been questionable at times. Financial cooperation in East Asia reduces the region's vulnerability to deadlock or liquidity shortage at the IMF arising from policy immobilization in key member states.
East Asian Financial Cooperation describes the CMI in detail and compares it to other regional financial arrangements, including the network of bilateral swap agreements operated principally by the Group of Ten during the 1960s and 1970s, the financial facilities that underpinned the European Monetary System in the 1980s and 1990s, and the financial counterpart to the North American Free Trade Agreement (the North American Framework Agreement). The study finds that the CMI is at least as sensitive to the role of the IMF in financial stabilization as these other arrangements. The study also compares the CMI to the Exchange Stabilization Fund of the United States, which has been used most extensively for Latin America.
Critics of the CMI can be found at both ends of the spectrum. Some dismiss these arrangements as innocuous, while others argue that they are potentially disastrous. This study argues that, contrary to these views (which are mutually exclusive), the arrangements are both significant and beneficial. They are significant because they establish important agreements among governments and central banks in the region and mobilize financing in amounts that are potentially substantial. They are beneficial because they reinforce the international safety net for countries experiencing financial crisesat the center of which the IMF remainsand provide a foundation on which regional economic cooperation can grow.
Some opponents conjure a worst-case scenario in which such arrangements separate from multilateral institutions, reject global standards, disburse funds too generously, and thus magnify moral hazard and delay needed policy adjustments. While the 1997 AMF proposal might have carried this danger and such fears still cannot be dismissed completely, the evolution of the CMI to date provides little basis for this worst-case scenario. Moreover, among other things, the interests of regional creditors and the activation procedures of the CMI provide safeguards against misuse. The study thus provides several reasons why officials in the United States, Europe, and the IMF should look beyond such fears and engage East Asia constructively in the further development of the CMI.
About the Author
C. Randall Henning, visiting fellow, is associate professor at the School of International Service, American University. He is author of The Exchange Stabilization Fund: Slush Money or War Chest (1999), Cooperating with Europe's Monetary Union (1997), and Currencies and Politics in the United States, Germany, and Japan (1994); coauthor of Transatlantic Perspectives on the Euro (2000), Global Economic Leadership and the Group of Seven (1996) with C. Fred Bergsten, and Dollar Politics: Exchange Rate Policymaking in the United States (1989); and coeditor of Reviving the European Union (1994), and Governing the World's Money (Cornell University Press, 2002).
About the Institute
The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. Its staff of about 50 focus on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and cover all key regionsespecially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site. In 2001, it celebrated its twentieth anniversary and moved into its new headquarters at 1750 Massachusetts Avenue, NW. The Institute recently helped create the Center for Global Development, an independent but closely affiliated institution that will address poverty issues in the developing countries and policies toward them in the United States and other industrial nations.