The trauma of the 1997 Asian crisis spurred Asian nations into deeper regional cooperation. The most visible outcome was the ‘Chiang Mai Initiative’, which established a network of bilateral currency swap agreements among the region’s central banks (Henning 2009). The arrangement was multilateralised in 2010 and relabelled as the Chiang Mai Initiative Multilateralization – a self-managed reserve pooling mechanism for its member economies.
With much fanfare, three east Asian ministers (China, Korea, and Japan) and ten south-east Asian finance ministers – or ASEAN+3 – last month announced a package of initiatives designed to ensure their economies do not succumb to another balance of payments crisis.
- The new arrangements double the arrangement’s size to $240 billion;
- The ‘delinked’ portion – the threshold before IMF involvement – was raised from 20% to 30% of a country’s quota;
- The implementing agency, the ASEAN+3 Macroeconomic Research Office (AMRO), is already up and running in Singapore.
This looks impressive – another reason to subscribe to the 'Asia rising' thesis – in contrast to the European imbroglio and the shaky US fiscal position.
A deeper look suggests doubts
Look deeper into the realities of the arrangement and the achievements start to look less impressive. ASEAN+3 might appear to have its own regional insurance but in practice it does not. In the event of another crisis, it would be back to a series of ad hoc bilateral swaps or the much-maligned IMF. In fact, Asia’s financial safety net is unusable.
- There is no fund, rather it is a series of promises to provide funds;
- Funds can only be dispersed subject to surveillance and conditionality, but institutional mechanisms to replace IMF surveillance and conditionality have not been established;
- There are no rapid-response procedures to handle a fast-developing financial emergency (Menon 2012).
This is a controversial assertion – particularly with ASEAN+3. But a brief look at the history of the Chiang Mai Initiative Multilateralization and the agreement's fine print proves the point. It also reveals some of the things that need to be fixed.
Multilateralisation and beyond
Chiang Mai evolved from the 1997-1998 Asian financial crisis, and the IMF’s management of it. The IMF quickly became extremely unpopular, not just for the prescribed bitter medicine in Indonesia, Korea, and Thailand, but also for having misdiagnosed the problems – which it later acknowledged.
The result was a resurgence of nationalist sentiment that grew regional. The Japanese government proposed an alternative 'Asian Monetary Fund' but, neglecting to consult China first, there was insufficient regional support to counter predictable US opposition. Notwithstanding this, the first step was taken soon after with the Chiang Mai Initiative in May 2000.
The Initiative’s first test came in September 2008 when, following the Lehman Brothers collapse, short-term capital quickly exited emerging economies. As it turned out, the funds were unusable. Given its small size and absence of rapid-response mechanisms, affected countries resorted to bilateral swaps with the US, Japan, Australia, and the multilaterals. Realising its impotency, ASEAN+3 multilateralised the series of bilateral swaps into a single agreement in December 2009, and established the ASEAN+3 Macroeconomic Research Office (AMRO) in May 2011.
But it is still unlikely that the Chiang Mai Initiative Multilateralization will ever be used as long as it is linked to the IMF. How can you remove the IMF stigma if access to the lion’s share of your quota requires an IMF programme? In the IMF’s defence, at least the activation procedures for support are clear, quick and they release funds – none of which is certain given the untested Initiative. The recent introduction of a precautionary credit line is also unattractive because it retains the IMF link. Even the IMF is having difficulty getting countries to use this instrument.
Making the Initiative operational: What needs to be done?
If ASEAN+3 is serious about financial safety nets, it should do three things:
- First, AMRO needs to be reformed.
It currently has no funds to disburse – as the pooled contributions remain in national coffers. It must build a strong, credible, and independent analytical capacity, of the stature that – for all the problems – the IMF arguably does possess. This will allow it to determine whether a country in crisis is insolvent or illiquid. As currently constituted, the Chiang Mai Initiative Mulitlateralization is designed only to deal with a liquidity crisis. It should also avoid mission creep and focus on surveillance activities. Recent suggestions that it should introduce a Regional Monetary Unit (Kawai 2010; Rana et al. 2012) are premature and could derail the building of core competencies.
- Second, swap quotas are inadequate for all but the smallest members.
During 1997-1998, some $40-$60 billion in emergency liquidity was needed by each crisis-hit country. Yet, the original ASEAN members can access about $23 billion each, in today’s dollars, and 30% of this without an IMF programme. For ASEAN’s newer, smaller members, although the full quotas are a substantial share of individual reserves, they may still be insufficient for a bailout. That the Chiang Mai Initiative Multilateralization was never intended for use by its biggest contributors – China, Japan, and Korea – is reinforced by the bilateral swaps between themselves announced virtually in tandem with the doubling of the Initiative.
- Third, membership should be broadened, regardless of how complicated that process might be.
This could enlarge and diversity the fund, from countries less immediately connected to East Asian business cycles. The obvious candidates would be those originally joining ASEAN+3 in the East Asian Summit – Australia, New Zealand and India (Sussangkarn 2010).
If nothing else, the Research Office needs to be strengthened
Although these reforms are desirable, they are not equally important. If the Research Office could gain credibility, then the small size or membership of the Initiative would be less binding constraints. After all, even the IMF relied upon other partners to fund bailouts in Asia in 1997-98 and now Europe. But the IMF led the rescue and set the terms, and this is what matters. The Research Office needs to be able to do the same.
Without these changes, and still wary of the IMF stigma, ASEAN+3 has nowhere else to go in case crisis strikes – which explains why countries continue to self-insure with excessive reserves. If ASEAN+3 wants a co-financing facility with the IMF, then it has one in the Chiang Mai Initiative Multilateralization. If it wants its own regional safety net, then it has a long way to go. How long is still unclear but, hopefully it can be made workable before, rather than because of, the next crisis.
The views expressed in this column are those of the authors alone.
Henning, C Randall (2009), The Future of the Chiang Mai Initiative: An Asian Monetary Fund?, Peterson Institute for International Economics, Policy Brief PB09-5.
Kawai, M (2010), “Reform of the International Financial Architecture: An Asian Perspective”, Singapore Economic Review, 53:207-292.
Menon, Jayant (2012), “Regional and Global Financial Safety Nets”, Paper presented to the Conference on The Evolving Global Architecture: From a Centralized to a Decentralized System, Nanyang Technological University and ADB Institute, Singapore, 26-27 March, 2012.
Rana PB, Chia WM and Y Jinjarak (2012), “ASEAN+3 Monetary Integration: Perception Survey of Opinion Leaders”, Journal of Asian Economics, 23:1-12.
Sussangkarn, C (2010), “The Chiang Mai Initiative Multilateralization: Origin, Development, and Outlook”, ADBI Working Paper Series 230, July, Tokyo: ADBI.