A New Era of Financial Cooperation
by Ulrich Volz
Posted June 2, 2009
On May 3, the finance ministers of the Asean Plus Three group—which consists of the 10 member countries of the Association of Southeast Asian Nations as well as China, Japan and South Korea—agreed in Bali on the governing mechanisms and implementation plan for the multilateralization of the Chiang Mai Initiative (CMI). What at first might sound rather unspectacular is in fact a major milestone on the road toward East Asian financial and macroeconomic cooperation.
The CMI was launched in May 2000 in Chiang Mai, Thailand, as a response to the Asian financial crisis. The idea was to provide short-term financial support for neighboring countries which experience balance of payments problems. The CMI consists of the Asean swap arrangement and a network of bilateral swap arrangements among Asean Plus Three countries. The Asean swap arrangement is now $2 billion in size, while some 16 bilateral swap arrangements have been successfully concluded among eight countries with a combined total size of $90 billion.
These bilateral currency swap agreements will now be transformed into a single regional pooling arrangement, comprising at least $120 billion of reserves. 20% of the funds will be provided by the 10 Asean members and the remaining 80% by the Plus Three countries. The Asean Plus Three finance ministers also agreed to create an independent surveillance unit to monitor and analyze regional economies and support CMI decision-making processes.
The Bali agreement is a major step forward in East Asian financial cooperation as it bundles the results of a three-year negotiation process and clarifies the remaining details necessary for the actual launch of a regional reserve pool. Most importantly, the finance ministers have agreed on the distribution of voting rights, which are allocated to prevent any of the Plus Three countries, or Asean as a group, from holding veto power. The decision-making process was split into fundamental issues, which require consensus among all Asean Plus Three countries, and lending issues, which will be subject to majority ruling. Last but not least, the Bali agreement defines the maximum amounts of borrowing for each member country.
Asean Plus Three has now effectively established a system for regional cooperation that is self-governed and goes beyond simple information-sharing or peer-review. It entails a collective decision-making mechanism and the creation of an independent regional surveillance agency. As such, the new reserve pooling arrangement—while stopping short of being a full-fledged Asian Monetary Fund—epitomizes the region’s commitment to regional cooperation (something critics have frequently doubted).
It is particularly noteworthy that the region’s two dominant powers, China and Japan, which have a notoriously difficult relationship, have come together under the umbrella of the Asean Plus Three and that they have agreed on a cooperative framework that goes far beyond previous initiatives like the Economic Review and Policy Dialogue that the Asean Plus Three established in April 1999. With 32% each, China and Japan both contribute identical shares to the reserve pool. South Korea’s share is 16% and Asean’s 20%. A little trick was applied to have equal contributions by China and Japan: China’s share comprises the contribution of Hong Kong, which will now join the CMI. China and Japan hence share joint leadership, while the smaller countries gain a larger weight in the governance structure of the CMI compared to their relative economic size. This approach to the distribution of power may signify a persuasive precedent for future economic cooperation initiatives in East Asia.
Critics of the CMI claim that while it may have worked as a deterrent to prevent speculators from attacking regional currencies, none of the swap agreements signed since 2000 has ever been invoked. For example, during last year’s credit crunch, when Indonesia, South Korea, and Singapore needed to secure liquidity, they sought assistance from the Federal Reserve, the Bank of Japan, and the People’s Bank of China, instead of activating the CMI. A reason for not resorting to the CMI might be the so-called IMF-link, which stipulates that only 20% of the CMI credit lines can be disbursed without the borrowing country having a lending program with the International Monetary Fund. Given that the Fund is still hugely unpopular across East Asia, many governments would risk extinction if they were to enter an IMF program.
For the time being the IMF-link will be maintained, as the Asean Plus Three currently lack the expertise and human resources to conduct surveillance of regional financial markets on a level that would match the standards set by the IMF. Once the agreed mechanism for macroeconomic and financial monitoring under the CMI becomes fully functional, the portion of CMI loans that can be disbursed without IMF lending will most likely be increased. But irrespective of whether the IMF-link will be dismantled and whether or not the CMI will be eventually turned into a proper “Asian Monetary Fund,” it need not be regarded as a substitute to the IMF. The IMF undoubtedly has an important role to play in the surveillance of global financial markets and as an emergency lender to member states, a role that has been reaffirmed at the G-20 summit in London in April. Regional pooling arrangements like the multilateralized CMI have proven their worth in other regions and should be welcomed as complements to the IMF.
The Bali agreement on the multilateralization of the CMI has opened a new chapter of macroeconomic cooperation in East Asia. While the Asean Plus Three still have to work on details, like the shape that the new regional surveillance agency shall take as well as its location, they have demonstrated their commitment to regional financial cooperation, which could lead the way also for other areas of regional economic cooperation.
Ulrich Volz is a senior economist at the German Development Institute.
