sign in sign up
<<
Home , Arab Monetary Fund

East Asian Monetary Cooperation*

Chalongphob Sussangkarn Thailand Development Research Institute

The Need

As an outcome of the economic crisis that first started in Thailand in 1997, countries in East Asia have demonstrated clear commitments toward greater development cooperation, including monetary and financial cooperation in order to protect the region from a similar crisis that may recur in the future. The ASEAN+3 group first made a formal Joint Statement on East Asia Cooperation at the ASEAN+3 summit held in November 1999 in Manila. This subsequently led to the Chiang Mai Initiative, which was announced after the ASEAN+3 finance ministers meeting held in May 2000 in Chiang Mai, Thailand. The Initiative’s rationale is to strengthen the self-help and support mechanisms in East Asia by working toward the establishment of a regional financing arrangement to supplement existing international facilities. “The Initiative involves an expanded ASEAN Swap Arrangement that would include all ASEAN countries, and a network of bilateral swap and repurchase agreement facilities among ASEAN countries, China, Japan and the Republic of Korea.”1 Subsequently, expansions of the ASEAN swap facilities have been agreed by ASEAN central banks, and details of the expanded swap facilities to include the +3 countries are being worked out and likely to be submitted to the ASEAN+3 summit to be held in November 2000 in Singapore.

Within the ASEAN context, many areas of financial cooperation have been discussed and identified for further action. These include:-

• The ASEAN surveillance process;

• Capital flow monitoring;

* Paper presented at the 7th Conference on Asia-Pacific Cooperation in the Global Context: “Regionalism and Globalism”, September 29-October 1, 2000, Hakone, Japan. 1 Quoted from The Joint Ministerial Statement of the ASEAN + 3 Finance Ministers Meeting 6 May 2000, Chiang Mai, Thailand.

1 • Capital market development;

• The promotion of ASEAN currencies for intra-ASEAN , and even the mention of the use of a single ASEAN currency and exchange rate system.

These various cooperative undertakings and initiatives presumably arose from dis- satisfaction within the region stemming from issues related to the inherent reasons behind the crisis and the international responses to the crisis. A listing of some of the key areas would include:-

• Financial liberalization leading to a proliferation of short-term foreign capital in the crisis countries; the volatilities of short-term capital; the lack of institutional infrastructure to deal with the risks arising from the volatilities, together with insufficient prior understanding of the risks.

• The volatilities of currency trading and speculation; difficulty in establishing an appropriate exchange rate regime in light of such volatilities, especially with rapid exchange rate movements between the major international currencies (US$, Yen, Euro) and the push from the international financial community for financial liberalization.

• Initial lack of support from outside the region when the crisis first hit Thailand (particularly from the United States and the European countries).2 This underlies the need for self-help mechanisms within the region.

• Little influence from within the region on the design of appropriate adjustment policies; IMF conditionalities appeared to be dictated by Western powers, and some of the conditionalities seem to favor fire-sale measures to the benefit of foreign investors.

• Non-traditional direct market intervention responses, such as those by Malaysia and Hong Kong, have illustrated alternative policy choices that

2 Supplementary funding from various countries to the IMF program for Thailand came exclusively from countries in East Asia and Australasia.

2 could be effective in dealing with crises, but IMF programs continue to ignore such alternatives.

While cooperative activities and concrete agreements within the ASEAN+3 group are still in the infancy stage, I believe that what has been achieved thus far is nevertheless very significant. Given vastly different socio-economic situations of countries in the region, and sensitive issues stemming from the region’s history, the speed at which these developments have come about indicate the seriousness that countries in the region attach to the need to work much more closely together on financial and monetary matters for the interest of the region as a whole. Some see this as a clear emergence of East Asian regionalism.3 I tend to agree with this view, and believe that this is the appropriate direction for East Asia’s long-term interests. In fact, the economies of East Asian countries have become increasingly interlinked. On the trade side, about 55% of total ASEAN exports, 50% of Japan’s exports and 55% of China’s exports were to countries within East Asia in 1997. 4 In addition, the business sector in many countries are linked through networks of people with Chinese origin, and Japan has substantial investment interests through out East Asia. What the crisis may have shown is that financial and monetary cooperation within the region needs to be developed in line with trade and investment linkages in order to lay the foundation for truly sustainable development of the region as a whole.

Regional Monetary Cooperation Schemes

When the idea of setting up an Asian Monetary fund was first suggested by Japan during the early stage of the crisis, the idea was quickly shot down. The main argument was that it would overlap with the IMF and lead to increased moral hazard. The impression I had at the time was that a regional monetary organization is something very new, and therefore great care is needed in thinking about setting up such an organization. However, later it turned out that there already exists regional monetary organizations, whose objectives and scope of activities do not differ so much from what an Asian

3 For example, Fred Bergsten; “East Asian Regionalism,” the Economist, July 15, 2000. 4 Including Hong Kong and Taiwan.

3 Monetary Fund might do. Two such organizations are the Arab Monetary Fund (also AMF) and the Latin American Reserve Fund (LARF).

The Arab Monetary Fund was set up by the Economic Council of the League of Arab States in 1976.5 Its principal aims are to: promote the stability of exchange rates among Arab currencies and render them mutually convertible; correct disequilibria in the balance of payments of member states, e.g. by providing loans; coordinate the monetary policies of member countries and the liberalization and promotion of trade and payments, as well as the encouragement of capital flows among member countries. The AMF also aims to promote the capital market of the region, and more recently, in 1995, the Inter- Arab Rating Company (IARC) was set up in partnership between the AMF, the International Finance Corporation and Fitch IBCA, in order to promote and set up local rating agencies in various Arab countries. The eventual aim of the AMF appears to be the promotion of the use of a common currency, the Arab Dinar, and the economic integration of its members.

The Latin American Reserve Fund (LARF) was established in 1991 as the successor to the Andean Reserve Fund (ARF). LARF’s aims are to assist in correcting payments imbalances through loans with terms of up to four years and guarantees extended to members; to coordinate their monetary, exchange, and financial policies and to promote the liberalization of trade and payments in the Andean sub-region.6

It can be seen that the objectives of these regional monetary organizations appear similar to what such an organization for the East Asian region might strive for. The key point is that this type of organization already exists and has been functioning for some time. Obviously, they have worked out modes of operations that can complement the role of the IMF. This makes it rather incomprehensible to me why the Asian Monetary Fund suggestion should have been regarded so negatively by the IMF and the United States (and may still be regarded as such). Given these examples, strong objections against a regional

5 There are 22 members of the AMF: , , , , , , , , , , , , , Palestine, , , , , Syrian Arab Republic, , , and the Republic of . 6 There are five members of the LARF: Bolivia, Colombia, Ecuador, Peru, Venezuela. Details of the AMF and LARF can be found on the IMF web site http://www.imf.org/

4 monetary organization for East Asia are much less creditable, and work should actively continue in the context of ASEAN+3 to explore the setting up of such an organization.

Scope of Focus

I have written elsewhere on possible functions for an East Asian monetary organization.7 While the current concrete focus for monetary cooperation is on currency reserves safety net, such as the Chiang Mai initiative, which could help to manage severe instabilities of currency movements, I would particularly like to see such an organization focus also on measures that countries in the region can take to prevent the reoccurrence of another economic crisis. Functions could include:-

• Surveillance and dialogues on policy coordination supported by technical analyses at the country and regional level.

• Technical and cooperative work on the promotion of intra-regional long- term financing for development. The aim is to recycle the large saving surplus within the region in the form of long-term investment financing for countries with saving deficits. The development of regional stock markets can also be included, as well as the promotion of regional credit rating capabilities and standards.8 These will lessen the reliance of saving deficit countries on short-term debt and lessen the risks from their inherent instability.

• Regional framework on the monitoring and management of short-term capital flows.

• Promotion of regional currencies or indices of regional currencies for trade and investment within the region, including currency settlement systems. This should redress the situation where most of the trade and investment within the region actually relies on currencies from outside the region, particularly the US$; for example, 54% of Thai imports from Japan and

7 Chalongphob Sussangkarn. A Framework for Regional Monetary Stabilization. Paper presented at a workshop on the Framework for Regional Monetary Stabilization organized by the Institute for International Monetary Affairs (IIMA), July 7, 2000, Tokyo, Japan (a revised version is to appear in NIRA Review).

5 88% of Thai imports from within ASEAN are settled in US$. The Bilateral Payment Arrangements (BPAs) that has been suggested among ASEAN member countries are of this nature. Recently, a suggestion has also been made for the establishment of Pure Clearinghouses for countries in ASEAN to carry out net settlements in their trade with each other. This will considerably lessen the demand for international currencies compared to the normal gross settlement of trade at the present time.9

In the longer term, technical work of the organization should aim to support closer monetary integration (as well as trade and investment integration) of the region. While this appears to be very much an East Asian regionalism focus, there is nothing wrong with this. In my view, closer integration between countries in East Asia, whether in terms of trade, investment, finance or monetary matters, is desirable, and I would say inevitable. While trade negotiations at the global level through the WTO should lead to a more liberalized trade environment globally,10 and the trend toward greater financial liberalization is still unabated, there is no reason why there should not be special relationships at the regional or sub-regional levels. Indeed, free trade agreements at the sub-regional level abound, and more continue to be negotiated. These sub-regional free trade agreements may not necessary be impediments to expansions of inter-regional , but it seems clear that they tend to create impetus for rapid expansion of intra-regional trade and investment. The trend is for intra-regional trade and investment within East Asia to continue to increase in importance, and increased monetary cooperation and integration would complement this trend on the financial side. Other parts of the world have also moved rapidly toward sub-regional integration; the EU, of course, but also the Free Trade Area of the Americas (FTAA). With such regional groupings, there is no need for East Asia to be shy about its regionalism ambition.

8 Note that this is also what the Arab Monetary Fund has been trying to do. 9 See Pakorn Vichyanond et al. Policy Recommendations on the Use of ASEAN Currencies for Trade Settlements and Regional Business Transactions. Paper presented at the workshop on ASEAN Economic Recovery and Financial Cooperation, ASEAN Secretariat, Jakarta, Indonesia, 15-16 August 2000. 10 Although one has to wary of potential embedded trade barriers in these negotiations.

6 Next Steps

Interest in regional monetary cooperation has increased rapidly over the last year or so. Many, many conferences have been held. Much research, albeit at a fairly general level, have been carried out, with many organizations still embarking on numerous ongoing research projects. I believe that we need now to consolidate all the thinking and findings and develop a long-term road map and concrete action plans on steps that could be taken. Whether a new institution needs to be set up at this stage to be the focal point for this is an open question. Nevertheless, if East Asia continues to show commitment toward greater monetary cooperation, the scope of work needed to support this objective will rapidly expand, and a new regional monetary organization will need to be established. I am sure that there will continue to be plenty of objections to such an idea. However, the presence of other regional monetary organizations that have been in operations for many years should calm fears that somehow having a similar organization for East Asia will create serious chaos for the world’s monetary system.

7