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.
Illustration by Pedro Molina
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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