The Future Role of the IMF: Asian Perspectives
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Regional Governance Architecture FES Briefing Paper February 2006 Page 1 The Future Role of the IMF: Asian Perspectives = qfqfh=^k^p=L=abkf=cof^t^k= = = = = = = 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.