Regional Governance Architecture FES Briefing Paper February 2006 Page 1

The Future Role of the IMF: Asian Perspectives

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The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 2

1 Introduction nomic review process, and development of Asian bond markets. There are a few other initiatives The 1997 financial crisis really shook the Asian such as the SEACAN Expert Group on Capital region. The financial system in three Asian Flows initiative, The EMEAP Governors and De- economies collapsed in a few days. The crisis ab- puties Meeting initiative, The APEC Finance Mi- sorbed International Monetary Fund (IMF) and nister Meeting, and the informal ASEAN+3 Fi- lender nations’ funds for liquidity support of US$ nance and Central Bank Deputies Meeting. 17.2 billion for Thailand, US$ 42.3 billion for In- donesia, US$ 58.4 billion for Korea, and US$ 1 In the early stage of its development, the severity billion for the Philippines. The rescue program, of the crisis and the disappointment with the however, was not smooth, and in many cases it IMF mechanism for handling the crisis were the worsened the conditions. cÉêáÇÜ~åìëÉíó~ï~å= main drivers behind regional financial coopera- ~åÇ= ^å~ë= (2000) showed how the IMF’s presc- tion. In the later period, the factors motivating ription to Indonesia made the economy plunge this region to engage in closer regional financial even deeper. The crisis really gave the region a cooperation differed somewhat. China and its very hard lesson on the importance of financial open trade policy are considered an important stability. factor that motivated the region to establish fi- nancial cooperation (Amyx, 2005). The post- The 1997 financial crisis, on the other hand, also crisis growth of the region, China’s open trade created momentum to speed up East Asian in- policy, and its economic performance in particu- tegration. The Asian Development Bank (ADB) lar, made huge resources available that needed reported in 2007 that intraregional trade within to be channeled out of this region. Intensified in- East and Southeast Asia doubled in value bet- tra-regional trade and investment is another fac- ween 1995 and 2004 from US$ 651 billion to tor which demonstrates that regional financial US$ 1,296 billion. Intraregional trade shares a- cooperation remains relevant and needs to be mounted to over 60% of total trade. The region enhanced. also experienced higher trade growth compared to the world average within the period of 1995- At present, with so many initiatives to improve 2004. The growth in intra-Asian trade and Asia’s regional financial cooperation that initially arose trade growth with the world thus far had been as a result of the mismanagement of the 1997 largely driven by market forces rather than by crisis, we need to examine whether these initia- discriminatory trade agreements. Apart from the tives have improved financial cooperation within ASEAN Free Trade Agreement (AFTA), regional the region. How is the progress in achieving the and bilateral trade agreements were at their ini- objective? Should there be a converged initiative tial stages of development. The ASEAN-China or will East Asia be able to muddle through with Free Trade Agreement was put into force in Ja- numerous initiatives to achieve meaningful fi- nuary 2003. Bilateral agreements were mainly nancial cooperation within the region? This pa- concluded later, creating a so called “bowl of per will discuss those issues, the development of noodles.” the regional initiatives to date, and their relevan- ce to the region’s objective to have a mechanism The severity of the crisis and the failure of the for improved crisis management. This paper will IMF in assisting countries in crisis, aggravated by also discus the relevance of those initiatives to disappointment in the slow progress of the re- the IMF reform. form in the Bretton Woods institution, had given rise to the creation of many initiatives aiming to 2 Financial and Monetary Cooperation establish a self-protecting mechanism within the in Asia: The Initiatives region. Economic leaders in the region realized the importance of regional financial cooperation Asian Monetary Fund in preventing another crisis and, should one oc- cur, mitigating its impact. In August 1997, during the IMF meeting in Hong Kong, Japan proposed the creation of an Asian As a result many initiatives arose. Japan, induced Monetary Fund (AMF). However, most of the to do so by báëìâÉ=p~â~âáÄ~ê~, proposed, at the participants were surprised by the idea and re- IMF Annual meeting in Hong Kong in 1997, that jected the proposal. It is important to note that the region should establish an Asian Monetary ASEAN and South Korea were reported to be in Fund. Leaders of the fourteen economies of the support of the initiative (Lipscy 2003; Nasution, Asia Pacific region signed a framework agree- 2005). The purposes of an AMF would be to ment on financial cooperation known as the provide regional grouping for (1) policy dialogue Manila Framework. ASEAN plus China, Japan, and discussions on mutual interests, monitoring and South Korea (ASEAN+3) launched several and surveillance, (2) liquidity assistance, and (3) initiatives, including reserve pooling, an eco- The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 3 exchange rate coordination. Although the name The core components of the ASP are the ASEAN Asian Monetary Fund was never mentioned in Finance Ministers Meeting (AFMM), the ASEAN the later initiatives in the region, the spirit re- Select Committee, which comprises members of mains, especially under the ASEAN+3 frame- the ASEAN Senior Finance Official Meeting (AS- work. FOM), and the ASEAN Central Bank Forum, where the peer review process is carried out. A The Manila Framework surveillance-coordinating unit was set up at the ASEAN Secretariat, later renamed the Finance Senior officers of the ministries of finance and 1 and Macroeconomic Surveillance Unit (FMSU). the central banks of 14 Asia Pacific economies, The FMSU is responsible for preparing, coordi- who met between 18-19 November 1997 in nating, reviewing, and consolidating inputs and Manila, agreed to develop a framework for coo- information from member states and from inter- peration to deal with the financial crisis in the 5 national as well as regional financial institutions. region, known as the Manila Framework. They This FMSU report will be the main agenda dis- agreed to establish a regional surveillance me- 6 7 cussed during the peer review process. chanism to complement the global surveillance conducted by the IMF, enhance the economic The draft report is circulated in the first stage of and technical cooperation among themselves to the peer review process (the deputy level) for strengthen the financial systems of the countries comments. At this stage, the deputies perform a in the region in particular, and seek the possibili- comprehensive review of the report, touching on ty of cooperative financing arrangements to the technical aspects as much as possible. At the supplement the IMF rescue package. A year later, second stage, i.e. at the ministerial level, the re- ASEAN leaders, recognizing the need to develop view focuses more on recent issues related to a more specific region-based and rapid-response policy. It is important to note that both the ASE- surveillance mechanism, endorsed the Manila AN Surveillance Report and the results of the Framework within the ASEAN region by establis- peer reviews are kept confidential. hing the ASEAN Surveillance Process (ASP) to monitor and review the macroeconomic and fi- nancial development of the member countries. This monitoring process is jointly conducted by the ASEAN Secretariat Surveillance Coordinating review process is conducted at the deputy or senior official level (including central bank officials from Unit (ASCU) and the Surveillance Contact Per- 2 member countries) and includes a thorough review son from each member country. The ASCU process. Ideally, most of the technical aspects should compiles submissions from each member coun- have been settled at this stage, but this is not always 3 try and prepares a consolidated report. The the case. Deputies tend to focus on their own coun- ASCU also prepares regional and global eco- tries’ reports in order to weed out mistakes and/or nomic reports. This, together with the consoli- “sensitive” issues. The second stage of the review is dated country report, is then evaluated in the at the minister level (minister of finance), where policy issues become the focus of the agenda. peer review process4. 5 The FMSU is supported by the ASEAN Surveillance Technical Support Unit (ASTSU) at the ADB. To assist 1 Australia, Brunei Darussalam, Canada, China, Hong the FMSU, each member country must provide a Sur- Kong SAR, Indonesia, Japan, Korea, Malaysia, New veillance Contact whose main task is to submit a Zealand, the Philippines, Singapore, Thailand, and the country report, which will be used as input to prepare United States. the consolidated FMSU Report. 2 Surveillance Contact Persons are generally attached 6 Periodic reports from countries such as Singapore, to the ministry of finance. ASCU work is essentially Malaysia, Indonesia, the Philippines, and Thailand are supported by a regional surveillance network which is available on the websites of pertinent government au- comprised of contact persons and national surveillan- thorities (i.e., ministries of finance or the central ce units which are usually attached to the Central banks/monetary authorities). Banks. 7 The FMSU prepares a bi-annual consolidated as- 3 In many cases, the ASCU was forced to collect in- sessment report (the ASEAN Surveillance Report, ASR), formation from publicly available resources to com- based on the countries’ reports and data sets pro- plement data and reports submitted by Surveillance vided by the Surveillance Contacts as well as on the Contact Persons. data and information gathered by the FMSU from 4 Peer review is a process for reviewing reports pre- other sources. A country report is prepared using the pared by the ASEAN Secretariat and the Surveillance same data sets as those submitted to the IMF by the Contact Persons, as well as reports from IMF, ADB, country in question. The data and reports submitted World Bank, and other related institutions. A Peer re- by Surveillance Contacts are based on a template and view is carried out in two stages. The first stage of the outline circulated by FMSU. The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 4

ASEAN+3 Initiatives vember 2000, Japan, China, and South Korea have been negotiating BSAs with each other and A clear political signal for strengthening coop- with the ASEAN countries. As of July 2007, 16 eration among East Asian countries also began BSAs with a total value of US$ 83 billion had right after the crisis hit. The leaders of ASEAN been concluded or were under negotiation in and China, Japan, and South Korea held an in- the framework of the CMI. Japan has been play- formal meeting in Kuala Lumpur in December ing a leading role in terms of both number and 1997, discussing the prospects for the develop- 8 volume. Japan concluded seven agreements , ment of East Asia in the 21st century and the 9 China concluded five , and Korea concluded also deepening of regional economic ties. Since then, 10 five agreements (see Figure 1 on next page). ASEAN+3 countries have held a summit every year at the ASEAN+3 meetings as well as regular In addition to ASA and BSA, the third item of meetings of their finance ministers. At the se- the CMI is the repurchase agreement. According cond ASEAN+3 (APT) leaders meeting in Hanoi to Park (2002), the repurchase agreement was in 1998, South Korean president Kim Dae-jung also developed to supply short-term liquidity to proposed the establishment of an East Asian Vi- contributor members for the sale and buyback sion Group (EAVG) to develop a road map for of appropriate securities. The participating coun- regional cooperation. Afterward, at the third tries finalized the fundamental elements of the APT leader meeting in Manila in 1999, the joint repurchase agreement through bilateral negotia- statement on the East Asia Cooperation was is- tion among the contracting countries. The secu- sued for the first time. This meeting succeeded rities of the repurchase agreement take the form in addressing eight fields of financial and eco- of US Treasury notes or bills with a maturity of nomic cooperation. In addition, the three North less than 5 years as well as government securi- East Asia economies decided to initiate a multi- ties of counterpart countries involved in the re- party study project involving institutions of the purchase agreement. The participating countries three countries to discuss the prospect of can draw on the repurchase agreement for the establishing an FTA among themselves in period of one week and the expiration date can Northeast Asia. Later on, at the fourth meeting be prolonged by agreement between the par- in Singapore in 2000, the prospect of building ticipant countries. The lowest repurchase trans- formal institutional links between Southeast and action amount required is five percent of the to- Northeast Asia and the possible development of tal amount of the repurchase agreement. In an East Asian free-trade area became more each repurchase transaction, the buyer will be apparent. granted a margin of 102% for US Treasury notes and 105% for the government securities of the The APT finance ministers first met on 30 April seller countries. 1999, and since then the ministers have met an- nually. The finance ministers focused on three initiatives for regional financial cooperation, namely the Chiang Mai Initiative for Liquidity Support, Economic Review and Policy Dialogue Process (ERPD), and the Development of local- currency bond markets. The objectives of those initiatives are to prevent another crisis from hap- pening and, should a crisis take place, to enable the region to better manage the crisis.

The Chiang Mai Initiative (CMI) The Chiang Mai Initiative was agreed upon in May 2000. It established regional reserve poo- ling among the ASEAN+3 member countries. The CMI expanded the existing ASEAN Swap Ar- rangement (ASA), originally including the ASEAN 5 member countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand), to include 8 with Korea, China, Indonesia, Malaysia, the Philip- all the ASEAN members and augmented it with pines, Thailand, and Singapore 9 with Korea, Indonesia, Malaysia, the Philippines, a network of bilateral swap arrangements (BSAs) and Thailand. among ASEAN countries, China, Japan, and Ko- 10 with China, Indonesia, Malaysia, the Philippines, rea. Since the ASEAN+3 summit meeting in No- and Thailand The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 5

maximum of 300 basis points. The maximum Kawai and Houser (2007) reported that under amount of automatic disbursement = 10% of the CMI BSA members requesting liquidity sup- BSA. Additional assistance can be provided to port can immediately obtain short-term financial members requesting it under an IMF program or assistance for the first 20 percent of the com- an activated Contingent Credit Line. mitment fund, while the remaining 80 percent is linked to the IMF program. The amount of un- Economic Review and Policy Dialogue (ERPD) conditional short-term financial assistance has increased compared to the early years of the The ASEAN+3 Economic Review and Policy Dia- CMI. However, the CMI does not have any per- logue (ERPD) was established in May 2000 to at- manent institution to manage the fund. The a- tain several objectives, including identifying pos- gent bank rotates among the members and has sible financial crises and preventing them, moni- the task of confirming a request for liquidity and toring regional capital flows, strengthening the assessing and processing it quickly in consultati- banking and financial systems, reforming the in- on with other member banks. Member banks ternational financial architecture, and enhancing are allowed to swap their own currencies for the self-help and support mechanism in East A- major international currencies for a period of up sia. h~ï~á= ~åÇ= eçìëÉê (2007) elaborated that to six months and for a sum up to twice the the ERPD processes include: amount committed by the member under ASA. • assessment of global, regional and national General terms of borrowing for BSA are: maturi- economic conditions ty of 90 days; renewable up to a maximum se- • monitoring regional capital flows and cur- ven times. Interest rates are based on LIBOR plus rency markets a spread. For the first drawing and first renewal the spread is 150 basis points and 50 additional • analyzing macroeconomic and financial risks basis points for every two renewals, subject to a The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 6

• strengthening banking and financial system veillance focusing on GDP, the price of BPO, and conditions long- and short-term interest rates. • providing an Asian voice for the reform of On 2 June 2003, the EMEAP announced the the international financial architecture. launch of the first Asian Bond Fund (ABF), which However, ASEAN+3 ERPD has not been able to has an initial size of about US$ 1 billion. The ABF exercise surveillance on a daily basis, and thus its invests in a basket of US-dollar-denominated effectiveness remains limited as it lacks a formal bonds issued by Asian sovereign and quasi- 12 institutional structure. sovereign issuers in EMEAP economies . The ABF is managed by the Bank for International 13 Asian Bond Market Development (ABMD) Settlements in a passive style . EMEAP extended the ABF concept with the launching of the Asian In an attempt to reduce the region’s high relian- Bond Fund 2 (ABF2) in December 2004. Imple- ce on short-term banking financing, the APT fi- mented in April 2005, ABF2 invests in local- nance ministers adopted the ABMD in August currency bonds issued by sovereign and quasi- 2003. It aims to develop efficient and liquid sovereign issuers in EMEAP economies14. It con- bond markets in Asia, enabling better utilization sists of two components: a Pan-Asian Bond In- of Asian savings for Asian investments and is ex- dex Fund (PAIF) and a Fund of Bond Funds (FoBF). pected to mitigate currency and maturity mis- 11 PAIF is a single bond fund index investing in so- matches in financing . Under the ABMD, there vereign and quasi-sovereign local-currency are four working groups which work on the de- bonds issued in eight EMEAP economies. FoBF is velopment of new securitized instruments, es- a two-tiered structure with a parent fund in- tablishing a regional credit-guarantee mecha- vesting in eight Single-market Funds, each of nism, exploring an Asian settlement system, and which will invest in local-currency sovereign and strengthening Asian credit-rating agencies. A- quasi-sovereign bonds issued in their respective part from the ABMD, which is an initiative focu- markets1516. sed more on information sharing and capacity building to develop the bond market (supply si- SEACEN Export Group on Capital Flows de), the EMEAP initiative for developing the Asi- an Bond Market is more demand side, as explai- SEACEN (South East Asia Central Banks) research ned in the next section. and training center was established in 1982 with 8 members: Indonesia, Malaysia, Myanmar, Ne- Informal ASEAN+3 Finance and Central Bank pal, the Philippines, Singapore, Sri Lanka and Deputies Meeting Thailand. Currently, the membership includes Korea, China Taipei, Mongolia, Brunei and Fiji. The ASEAN+3 Finance and Central Bank Depu- The center reviews and analyzes financial, mone- ties (Informal AFDM+3) have met informally twi- tary, banking, and economic development. The ce a year since its first meeting in 2002. There is SEACEN’s main activities deal more with capac- no regular secretariat – the chair country acts as ity building, such as training and research. How- a virtual secretariat. ADB presents macroecono- ever, it also conducts surveillance. The SEACEN mic and structural issues in the world economy Expert Group on Capital Flows was established and in regional and individual countries.

EMEAP Governors and Deputies Meeting 12 other than Japan, Australia, and New Zealand EMEAP Governors and Deputies meetings (the 13 http://asianbondsonline.adb.org/regional/ executive meetings of East Asia Pacific central asean%203_asian_bond_markets_initiative/ related _initiatives/emep_asian_bond_fund.php , accessed bank) form a cooperative organization of central October 27 banks and monetary authorities in the East Asia 14 other than Japan, Australia, and New Zealand and Pacific region. Members are eleven econo- 15 The structure of ABF2 is detailed in Appendix 1 mies, including Australia, China, Hong Kong, In- 16 PAIF and the eight Single-market Funds are pas- donesia, Korea, Malaysia, New Zeeland, the Phi- sively managed by private fund managers against lippines, Singapore and Thailand. Central bank benchmark indexes16. PAIF, with an allocation of governors meet to exchange ideas and informa- US$ 1 billion, is managed by State Street Global Advisors. Another US$ 1 billion is invested in the tion regarding recent economic and financial de- eight Single-market Funds investing in sovereign velopments in the region. The discussion is main- and quasi-sovereign local-currency-denominated ly about policy issues and macroeconomic sur- bonds in their respective markets. (http://asianbondsonline.adb.org/regional/asean%2 03_asian_bond_markets_initiative/related_initiative 11 asiabondonline, accessed Oct 20 2007 s/emep_asian_bond_fund.php) The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 7 in 2000, responding to the concern expressed by In the following, we will review financial coope- the SEACEN governments over the need to ration under the ASEAN and ASEAN+3 frame- manage capital flows to ensure stability in the works and disappointments with the level of a- regional financial markets. The SEACEN surveil- chievement under these two frameworks. lance system is also not equipped with an early warning system. ASEAN

Table.1. The Initiatives: A Summary ASEAN financial cooperation, as mentioned abo- ve, is aimed at providing monitoring and peer Initiatives Type of Cooperation review for economic development in the mem- Asian Monetary Fund Policy dialogue, liquidity ber countries. However, both the monitoring support(,) and exchange- and peer review processes are not adequate for rate coordination crisis prevention and management.

ASEAN Regional surveillance me- On monitoring, the data template provided by chanisms and increased the FMSU is not comprehensive and detailed e- economic and technical nough. As Atje and Anas noted, the FMSU gives cooperation too much discretion to the Surveillance Contacts to tailor the details of their country reports. As a ASEAN+3 Chiang Mai initiatives result, the reports show significant variations in (Swap facility) terms of the breadth and the format of the re- Economic Review and Pol- port, thus rendering it difficult to conduct cross- icy Dialogue country comparisons. Generally, the more ad- vanced member countries provide more elabora- Asian Bond Market Devel- te reports than the developing ones. opment (supply side) On peer review, the mechanism allows “sensitive Informal ADFM+3 (In- Information exchange issues” to be filtered out at the technical level, formal ASEAN+3 Fi- hence the peer review process might end up re- nance and Central viewing only good news while the bad news re- Bank Deputies Meet- mains hidden. Consequently, the idea of peer ing) review becomes meaningless. In other words, Executive Meeting of Exchange of Information the peer review process under the ASEAN policy East Asia Pacific Cen- at the governor and dep- of non-interference in domestic policy is ineffec- tral Bank (EMEAP) uty levels; established tive in putting pressure on member states to a- Governors and Depu- working groups to work dopt certain policy recommendations. ties Meeting on financial issues; Asian On structural issues, there are several issues Bond Fund which might hamper the effectiveness of the SEACEN Expert Group Surveillance ASEAN Surveillance Process. First, ASP lacks a on Capital Flows reward and punishment scheme for ensuring that member states perform well. Second, the 3 The Initiatives: An Assessment FMSU itself does not have enough resources, human resources in particular, to carry out the Ten years after the crisis, East Asia has already surveillance task. brought about a number of initiatives that have attempted to improve financial cooperation a- ASEAN+3 mong countries in the region. Under the ASEAN framework, regional surveillance mechanisms ASEAN+3 has three initiatives which comple- have been put in place. Under the ASEAN+3 ment each other. Like ASEAN with ASA, ASE- framework, regional surveillance mechanisms AN+3 has ASA plus bilateral swap facilities. A- have also been set up. In addition to that, swap part from that, it has the Economic Review and facilities were made available and Asian Bond Policy Dialogue (ERPD) to monitor the develop- Market Initiatives were also implemented. E- ment of the macroeconomic and financial condi- MEAP has pooled resources in the Asian Bond tions of the member countries. It also works on Fund and invested in the region’s sovereign the development of the bond market. Although bonds. However, analysts were rather disappoin- ASEAN+3 financial cooperation has a wider co- ted with the level of achievement in improving verage of activities than the ASEAN framework, regional financial cooperation within this region. it is still far from being perfect. The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 8

The CMI, as a financial arrangement, has several rier to having any of the Plus Three countries act limitations. Asami (2005) argues that the total as the leader of the initiatives. Meanwhile, ASE- amount of swap facilities available under the AN currently lacks leadership. ASEAN+3 framework is not enough for a future Second, currently there are too many initiatives capital account crisis. He also criticizes the high to focus on. It is often mentioned that the regi- dependence of A+3 on the IMF process. on, especially at the government level, lacks re- Although the CMI is a regional monetary arran- sources. Having too many initiatives to work on gement, in reality it relies on the IMF, since 90% with limited resources jeopardizes the quality of of swap funds can be drawn subject to the bor- the initiatives. The region needs to focus on fe- rowing government’s acceptance of IMF conditi- wer initiatives (ideally one) to make meaningful onality. Furthermore, he asserts that the CMI’s cooperation attainable. financial arrangements are inefficient. In the sa- me vein, the North East ASIAN Think Tanks (NE- Third, different levels of income and stages of AT) Working Group on East Asian Financial development make the process rather complex Cooperation (2005) also showed the main and require a more structural effort to map out weakness of the ASEAN+3 framework of finan- the direction. To date, no single initiative has at- cial cooperation. First, the functions of the Chi- tempted to map out a direction that will suit all ang Mai swap agreement would not be able to member countries. meet the expanded need. Second, the size of Fourth, the urgency of having regional coopera- the Chiang Mai swap agreement is inadequate tion for crisis prevention and management no for addressing short-term liquidity problems as longer exists. The crisis was ten years ago and well as preventing and solving other related the Central Banks of the countries hit by the cri- problems in the region. Third, its bilateral ag- sis have already improved their capacity in pre- reement reveals insufficiencies. In addition to the venting and managing such crisis. In addition, above-mentioned weaknesses, ASEAN+3 does countries in the region are building up trade not have institutionalized arrangements, and this surpluses and reserves. does not allow a more frequent and quick as- sessment of the vulnerability of the region and Fifth, no single country is willing to provide sub- disbursement of the liquidity support under the stantial resources to make the initiatives really CMI (Kawai and Houser 2007). The Bond Market meaningful. Regional financial cooperation in Development Initiative has not yet demonstrated East Asia was formed in a rather weak structure. significant improvement on the supply side of There is no single initiative or framework agree- the bond market in the region. Meanwhile, ment supported by a full-time secretariat that ERPD faces obstacles similar to those facing the focuses on achieving the objective of establis- ASP. hing cooperation. We found no evidence that regional financial Last but not least, “non-interference” policy cooperation in East Asia has failed to achieve its influences economic cooperation in East Asia. ultimate objective, as it has yet to be tested in a Most of the initiatives in ASEAN or ASEAN+3 re- crisis. However, if the expectation is to have a ly on the decision-making process of the high- self-help mechanism that can be used in the ti- ranking officers meetings. It appears that the me of crisis, basically the form of the cooperati- meetings are basically friendly exchanges of in- on to date is not sufficient. We observed that formation rather than a peer-pressuring mecha- the slow progress toward achieving meaningful nism. ASEAN+3 high-ranking officials would ne- cooperation within this region lies in a few fac- ver challenge other high-ranking officials, and tors. this might limit the ability of the initiatives to provide objective assessment of the respective First, the region lacks leadership. We can hardly country. see the driver behind this regional financial coo- peration after ten years of effort in establishing 4 The Way Forward meaningful cooperation. Strong leadership is re- quired to enable the region to commit to bold Experts seem to agree that regional financial decisions. In ASEAN, this leadership issue has cooperation is in demand in this region. The re- been there for quite some time and has never gion has huge resources when needed, although been resolved. None of the ASEAN countries the amount committed in the CMI was rather shows willingness to lead ASEAN in achieving limited. It is probably that the form of cooperati- significant progress in economic cooperation. In on now evolving has yet to find its perfect for- ASEAN+3, there is a historical and political bar- mat. Given the lack of urgency for meaningful The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 9 financial cooperation, we foresee that financial one or more countries are committed to provide cooperation in East Asia is going to move for- substantial resources and the political will to see ward rather slowly, much as it progressed in the bold decisions through. We also do not see o- past. We would predict that ASEAN+3 will be ther initiatives as the anchor of the regional fi- the main driver for regional financial cooperation. nancial cooperation, as it will require much more However, to make initiatives under the ASE- effort and political commitment from members AN+3 framework more effective, it would requi- to do so. re a dedicated permanent institution, which Given the lack of urgency and the slow progress should be independent of any of the member of the regional financial cooperation within the countries. A permanent institution should be the region, it appears that the region will rely on the “kitchen” to prepare frequent analysis for the IMF once again should a crisis hit. If ASEAN+3 surveillance purpose, provide an early warning managed to speed up its process and make a system for member countries, and administer bold decision regarding its framework of coope- disbursement of the fund when needed. ration, ASEAN+3 would be a complement me- Although the ultimate decision will rest with the chanism for IMF processes. If ASEAN+3 goes fur- member countries’ leaders, this institution is ther toward achieving an AMF, the IMF will be needed for better management of cooperation. redundant for the region. However, this last sce- It is probably high time to reconsider an Asian nario would not be possible as member count- Monetary Fund minus exchange-rate coordinati- ries appeared reluctant to relinquish information on for the region once again. Although on paper regarding their financial sectors, not to mention the AMF was rejected, at the practical level the to surrender their monetary policies. evolution of the A+3 initiatives minus the institu- tion bears a resemblance to the idea of an AMF. = The region should answer the question whether = it will continue to consider having substantial ^Äçìí=íÜÉ=~ìíÜçêë= (effective) regional financial cooperation as an important part of regionalism. If yes, the region qáíáâ=^å~ë=áë=~å=ÉÅçåçãáëí=~í=íÜÉ=`ÉåíêÉ=Ñçê=píê~J should accelerate the process to be more sub- íÉÖáÅ= ~åÇ= fåíÉêå~íáçå~ä= píìÇáÉë= E`pfpFK= eÉê= ã~áå= stantial; a firm commitment is required. This will êÉëÉ~êÅÜ=ÉãéÜ~ëáë=áë=çå=íê~ÇÉ=äáÄÉê~äáò~íáçå=~åÇ= lead to a bigger amount of resources being poo- áåÇìëíêá~ä=çêÖ~åáò~íáçåK= led, a better surveillance mechanism, and a per- aÉåá=cêá~ï~å=áë=~=êÉëÉ~êÅÜÉê=~í=íÜÉ=aÉé~êíãÉåí= manent institution. The independent permanent çÑ=bÅçåçãáÅëI=`ÉåíêÉ=Ñçê=píê~íÉÖáÅ=~åÇ=fåíÉêå~J institution should create a reward and punish- íáçå~ä=píìÇáÉë=E`pfpFKeÉ=áë=~äëç=~=äÉÅíìêÉê=~í=råáJ ment mechanism since the peer-pressure me- îÉêëáíó= çÑ= fåÇçåÉëá~= ~åÇ= råáîÉêëáíó= çÑ= ^äJ^òÜ~ê= chanism has not been effectively practiced in fåÇçåÉëá~K current initiatives. We do not foresee an accele- rating process taking place in the future unless

The Future Role of the IMF FES Briefing Paper 1 | February 2008 Page 10

5 References Asami, Tadahiro (2005). “Chiang Mai Initiative as the Foundation of Financial Stability in East Asia.” ^pbJ ^k=pÉÅêÉí~êá~íK= Atje, Raymond and Titik, Anas (2005). “Economic Surveillance and Policy Dialogue in East Asia: Making the Asian Surveillance Process New.” ^pb^k=pÉÅêÉí~êá~íK Amyx, Jennifer (2005). What Motivates Regional Financial Cooperation In East Asia Today? Analysis From The East-West Center No. 76, February 2005. Eichengreen, Barry (2004). “The Development of Asian Bond Markets.”=_fp=é~éÉêë No 30. Feridhanusetyawan and Anas (2000). “Revisiting Indonesian Economic Crisis,” in bÅçåçãáÅ=`êáëáë=áå=fåÇçJ åÉëá~, edited by Ishida, Institute of Developing Economies, Japan External Trade Organization, 2000. Institute for International Monetary Affairs (2005). “Research Papers and Policy Recommendation on Eco- nomic Surveillance and Policy Dialogue in East Asia.” ^pb^k=pÉÅêÉí~êá~íK Kawai, Masahiro and Cindy Houser (2007). “Evolving ASEAN+3 ERPD: Towards Peer Reviews or Due Dili- gence?”. Lipscy, Philip (2003). “Japan’s Asian Monetary Fund Proposal.” pí~åÇÑçêÇ=gçìêå~ä=çÑ=b~ëí=^ëá~å=^ÑÑ~áêë, No 93, Vol 3, No 1 Spring 2003. Nasution, Anwar (2005). “Monetary Cooperation in East Asia.” gçìêå~ä=çÑ=^ëá~å=bÅçåçãáÅ=16: 422-442. Park, Yung Chul (2002). “Regional Financial Arrangements for East Asia: A Different Agenda from Latin America.” i~íáå=^ãÉêáÅ~L`~êáÄÄÉ~å=~åÇ=^ëá~Lm~ÅáÑáÅ=bÅçåçãáÅë=~åÇ=_ìëáåÉëë=^ëëçÅá~íáçå=(LAEBA) tçêâáåÖ= m~éÉêë=1 (December).

NEAT Working Group on East Asian Financial Cooperation (2005). Report. Pusata Kerjasama Internasional, http://www.pksi.depkeu.go.id/liptn.asp?id=11

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