SEOUL – East Asia could learn two valuable lessons from the eurozone crisis.
First, do not rush the process of financial and monetary integration; and,
second, develop adequate institutional frameworks before proceeding.
In fact, East Asian countries are
unlikely to move toward a regional fixed exchange-rate system or a monetary
union with a single currency in the immediate future, owing to the region’s
great diversity in terms of economic and political conditions. Perhaps, in a few
decades, the region’s countries will develop institutions to promote financial
integration, such as a single bank supervisory agency of the type that the
European Union is now creating.
Nevertheless, Asian policymakers
should improve cooperation mechanisms designed to prevent and manage crises.
Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the
ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus
China, Japan, and South Korea. This $120 billion regional reserve pool was
launched in 2010 to provide short-term liquidity to members in an emergency.
The ASEAN+3 is now strengthening
the CMIM by doubling the total fund size to $240 billion. The group also agreed
to enhance the CMIM’s flexibility by reducing the minimum portion of crisis
lending to be tied to the International Monetary Fund’s lending program from
80% to 70%.
The CMIM has yet to be tested in
a crisis. In its infancy, it might not be able to provide adequate emergency
support in a timely and flexible manner. The $240 billion fund is small,
amounting to only about 1.5% of the region’s GDP. European experience suggests
that large-scale systemic shocks call for greater financial support.
Unlike the IMF or the European
Stability Mechanism, CMIM contributions are self-managed by the respective
country’s authorities. And countries may choose not to contribute to a swap
request. This suggests that the CMIM could be especially constrained amid a
systemic shock or political disputes among member countries.
Moreover, an “IMF stigma” remains
among those countries in the region that were discontented with the Fund’s role
during the 1997-1998 Asian financial crisis. IMF conditionality for the
activation of the majority of their borrowing could make countries reluctant to
turn to the CMIM for support.
Another challenge is the CMIM’s
limited capacity for economic surveillance and monitoring. Last year, ASEAN+3
established a regional surveillance unit, the ASEAN+3 Macroeconomic Research
Office (AMRO), to monitor regional economies, detect emerging vulnerabilities,
and support effective decision-making by the CMIM. But it is unclear whether
AMRO has sufficient capacity and expertise to monitor 13 countries effectively.
Indeed, East Asian countries may
find it difficult to conduct candid surveillance of one another’s policies and
enforce firm policy conditionality. The example of Greece before and during the
eurozone crisis shows that it is often hard for countries to be tough on their
neighbors.
The ASEAN+3 must continue to
increase its resources, enhance its independence and improve its operational
procedures. A fully capable regional financial safety net could contain the
contagion of financial shocks emanating from individual economies and prevent
disruptions to the region’s key growth drivers – intra-regional trade and
investment. The CMIM could help East Asian countries to reduce their reliance
on accumulating, as a form of self-insurance, costly reserves that fuel global
imbalances.
With greater resources and an
improved governance structure, AMRO could play a more effective role in
regional economic surveillance and monitoring, without which moral-hazard risks
associated with financial safety nets would rise. Enhanced regional control
would contribute to better information-sharing and decision-making as well,
implying that the IMF-linked portion of CMIM crisis lending could be reduced in
step with the strengthening of AMRO’s capacity and performance.
The ASEAN+3 should aim to develop
the CMIM into a full-capacity regional financial safety net supported by AMRO
as a capable and credible secretariat – a de facto Asian Monetary Fund,
possibly with broader membership. But, until the CMIM and AMRO are fully
developed, their close cooperation with the IMF is desirable. Indeed, at the
Cannes G-20 Summit in November 2011, leaders agreed on principles for cooperation
between the IMF and regional financing arrangements, including open
information-sharing and joint missions.
In particular, the IMF and
ASEAN+3 financing arrangement should establish a regular channel of dialogue to
facilitate information exchange and prepare concrete guidelines for cooperation
and an appropriate division of tasks. Establishing constructive and effective
guidelines could help to prevent the sort of conflicts and confusion over
lending conditions during crises that we have seen among the IMF, EU, and the
European Central Bank in the eurozone. Given the “IMF stigma” in Asia, a
co-financing facility that provides precautionary credit lines without policy
conditionality to qualified member countries would be useful.
Asian countries have learned from
their region’s own crisis in the 1990’s, as well as from the eurozone’s ongoing
crisis, that effective management of cross-border capital flows requires
well-constructed national, regional, and global responses. To respond
effectively to crises, East Asian countries must continue to improve the
regional financial safety net and surveillance mechanism, while strengthening
their cooperation with the IMF.
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