Asian finance ministers gather in Bali to decide on whether to transform the Chiang Mai Initiative into an Asian Monetary Fund. But a regional fund must be designed to complement and not compete with the IMF.
The Asean+3 finance ministers are gathering in Bali, Indonesia to consider whether to transform the Chiang Mai Initiative (CMI) into a commonly administered fund. The world recession and financial crisis dramatically raise the stakes in their decision. It is not clear as of this writing whether they will make this commitment, but a choice to do so would be a very important shift in the global financial architecture.
Asean+3 governments have been developing regional financial arrangements gradually over the last decade, but have not yet activated their CMI swap agreements. The present crisis is a moment of truth for East Asia: are these governments serious about financial cooperation? Can they overcome rivalries and make the difficult political decisions to advance it? Will they adhere to or break from international financial institutions such as the IMF?
The Chiang Mai Initiative
After the Asean+3 finance ministers launched the CMI at a meeting in Thailand in May 2000, they established a network of bilateral swap arrangements (BSAs) between the north-east and south-east Asian members. These BSAs have grown to 16 in number, amounting formally to $90 billion but more realistically to about $60 billion when eliminating double counting. Distinct from the large liquidity swaps recently extended by the Bank of Japan and Peoples Bank of China, the CMI swaps can also provide medium-term balance-of-payments support. They potentially mobilize funds that are a multiple of the IMF quotas for Indonesia, Malaysia, the Philippines, Thailand and South Korea.
As we consider the establishment of a common fund, keep four aspects of the CMI in mind. First, in addition to the CMI, East Asian governments also self-insured against a repetition of the Asian financial crisis of 199798 by accumulating large reserves of US dollars and other foreign currencies. These governments thus collectively command more than enough resources to fight financial crises together if they were willing to commit some of their reserve holdings to a regional fund.
Second, the CMI is not independent from the IMF. All governments were cognizant of the regions experience under IMF programmes during the 199798 crisis, and none wanted to repeat that experience. But the potential creditors within the group also perceived a need to attach conditions that the region was not yet capable of defining. As a result, borrowers can activate 20% of their BSAs without a Fund programme but must agree with the IMF on such a programme to receive the remaining 80% in most cases. The CMI is thus largely a parallel line of defence to IMF financing.
Third, Asean+3 also launched a regional surveillance mechanism called the Economic Review and Policy Dialogue. Many officials hoped the mechanism would identify financial and economic vulnerabilities, and provide a foundation for regionally defined conditionality in the event that the BSAs were called upon. But, Asean+3 surveillance has strengthened only gradually and is not yet up to the task of setting appropriate conditions for medium-term balance-of-payments lending by the region.
Fourth, East Asian governments evolved their arrangements with an eye to reforms within the IMF. In particular, they hoped to see changes to Fund facilities, policy conditionality and governance, especially with respect to granting them larger quotas and thus voting rights in the Executive Board and Board of Governors. The reforms so far agreed fall short of Asian hopes. But the expansion of the array of facilities, including the creation of the Flexible Credit Line (FCL), the increase in Fund resources, and modifications to conditionality go a considerable distance in addressing Asian demands.
The objective of multilateralizing the CMI by which Asean+3 officials mean collectivization on a regional basis has been a consistent theme of the communiques of the finance ministers since May 2005. Before any agreement on multilateralization can be reached, however, the Asean+3 governments must address critical issues regarding the design of the fund and its governance in essence the same set of issues confronted by the architects of the Bretton Woods institutions.
Form of reserve pooling Early discussions centred on whether to earmark reserves for a common fund, retaining them in the accounts of national central banks and finance ministries, or pooling them in a single account. The 2007 Kyoto communique announced they would seek agreement on a self-managed reserve pooling arrangement or an SRPA. Recently this term has been replaced by Chiang Mai Initiative Multilateralization, or CMIM, but SRPA is more descriptive. Nonetheless, if the Asean+3 members were to take this step, these funds, while held separately, would be administered under a joint decision-making process a common fund in effect.
Size Given that Asean+3 governments collectively hold the equivalent of roughly $3.5 trillion in foreign exchange reserves, the region could clearly create a robust fund with just a small portion of its total reserves. Meeting in Thailand last February, the finance ministers declared that the CMIM, if it were finally agreed, would be $120 billion. Asean+3 could decide to increase this amount in the future.
Members contributions The three north-east Asian members would contribute 80% while the 10 south-east Asian members would contribute 20% of the common fund. However, Asean+3 has yet to decide on the allocation of contributions within these two groups. The shares of China and Japan are particularly important, because they will determine the relative influence of the two countries. Which country would have the larger share or whether the two would have equal shares is probably the most important and difficult question facing Asean+3 negotiators.
Governance Any common fund would require a collective body to make decisions on, for example, activation and the terms of lending the functional equivalent of the executive boards of the IMF and World Bank. Asean+3 would have to agree not only on the balance between China and Japan but also on the balance between the potential creditors and debtors under the arrangement. Agreement could also founder on the sensitive political questions of what body would make decisions, the decision rule, weight to be given to each member and delegation to a secretariat.
IMF link The disbursements of any common fund created by Asean+3 would be linked to IMF programme lending as would any disbursements under the BSAs. The potential creditors, including especially Japan, have conditioned a softening of the link on improvements in regional surveillance and, given the present capacity, the IMF link will be retained. But several potential borrowers would like to see the link reduced. The full group is committed to reviewing it periodically, and the finance ministers recently indicated that it could be reduced in the future.
Place in the Global Financial Architecture
Multilaterization of the CMI could be a major contribution to the global financial architecture as well as regional cooperation in East Asia. It could supplement the resources of the IMF and streamline the process of negotiating parallel lines of defence in a financial rescue, among other benefits. But this harmonious result depends upon coordinating the construction of the regional fund with the existing international financial institutions, especially the IMF. This requires accommodation by both global and regional arrangements.
First, while in principle one might imagine a regional institution that could mount financial rescues of East Asian countries independently of the IMF, Asean+3 has not yet and probably will not soon have the capacity to do so prudently. Even the European Union, with a well developed analytical capacity, has cooperated closely with the IMF on recent financial packages for Latvia, Hungary and Romania. East Asian governments are therefore wise to continue to link the existing swap arrangements and any multilateralized CMI to IMF surveillance and lending programmes. One constructive way to do this would be to make qualification under the IMFs new Flexible Credit Line (FCL) a sufficient basis for activating the BSAs or CMIM.
Second, the Asean+3 finance ministers should follow through in a robust way on their February decision to establish an independent surveillance unit to promote objective economic monitoring. Management of the surveillance process should be clearly delegated to a secretariat with a mandate to collect information, analyse it, present its conclusions to the group, and lead peer-review sessions at deputies and ministerial meetings. It should draw upon and supplement, rather than duplicate, the surveillance mechanism of the IMF, in which these countries participate, by taking advantage of its geographical proximity and (presumably) greater acceptance of peer pressure from neighbours. Its conclusions should identify economic vulnerabilities in and desirable policy adjustments for the countries under review. This secretariat could also staff a new common fund but should strengthen regional surveillance irrespective of any decision on multilateralization.
Third, East Asian financial cooperation deserves the support of the rest of the world. The United States and Europe cannot legitimately object as a matter of principle because, among other reasons, they maintain their own balance-of-payments and liquidity facilities. Nonetheless, the US and European facilities have been coordinated with the IMF, and non-Asians are right to raise specific questions about how the CMI and CMIM relate to the IMF. Asean+3 officials should not wait until they are at the threshold of a disbursement under the CMI before consulting with the IMF on technical details of activation and sequencing.
Fourth, more ambitiously, the international community should adopt a set of principles to guide the relationship among the IMF and regional financial facilities. The members of the IMF should agree to a set of criteria that differentiate acceptable regional financial arrangements from unacceptable ones and agree to submit all regional financial arrangements to the Executive Board for review at the time of their creation and periodically thereafter. Regional financial facilities, by these criteria, should create no substantial conflict with members obligations in the Fund, be at least as transparent as Fund facilities and programmes, and adopt conventional rules of emergency finance and sound conditionality so as to complement rather than compete with the IMF. Such guidelines would have the benefit for East Asia of protecting well-designed facilities from arbitrary objections by outsiders. Establishing such guidelines should be a high priority in present discussions over reform of the global financial architecture.
It is not necessary for all balance-of-payments financing to be channelled through the IMF. The IMF does not have a monopoly on economic wisdom, and intellectual competition over the quality of analysis is healthy for the IMF and its staff. But the terms of financing should be determined on the economic merits, not by bureaucratic competition among alternative facilities. Provided they adhere to a common set of principles, though, regional groups that wish to lend to countries confronting crises should not be blocked by the broader international community.
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C Randall Henning is visiting fellow at the Peterson Institute for International Economics and a member of the faculty of American University. This article is adapted from his Peterson Institute Policy Brief (No. 09-5), The Future of the Chiang Mai Initiative: an Asian Monetary Fund? © Peter G Peterson Institute for International Economics