Asian economic surveillance, and AMRO

AMRO -- the ASEAN+3 Macroeconomic Research Office -- was established in Singapore in April 2011. It is slowly moving into action -- but too slowly.

AMRO -- the ASEAN+3 Macroeconomic Research Office

AMRO -- the ASEAN+3 Macroeconomic Research Office -- was established in Singapore in April 2011. It is an independent regional macroeconomic surveillance unit to monitor and analyse regional economies and support Chiang Mai Initiative Multilateralisation (CMIM) decision-making.

AMRO is slowly moving into action -- but too slowly. This is a great pity in light of the importance of its potential contribution to financial stability in Asia.

The CMIM is a multilateral currency swap arrangement among ASEAN+3 members, which became effective on 24 March 2010, having developed from the CMI bilateral swap network. Its core objectives are (i) to address balance of payment and short-term liquidity difficulties in the region, and (ii) to supplement the existing international financial arrangements. The total size is US$240 billion. But today, applicant countries are only allowed 30% of their quota without an IMF program.

AMRO’s purposes are to monitor and analyse regional economies and to contribute to early detection of risks, swift implementation of remedial actions and effective decision-making of the CMIM. While economic and financial market integration is progressing rapidly, increasingly fast and erratic global capital inflows and outflows may give negative impacts at times, even undermining the economic fundamentals, no matter how good economic policies the authorities are pursuing.

AMRO conducts its work by the following approaches. In "peace time" it prepares quarterly consolidated reports on the overall macroeconomic assessment of the ASEAN+3 Region as well as on individual ASEAN+3 countries.

In "crisis time", it does the following: (i) provides an analysis of the economic and financial situation of the CMIM Swap Requesting Country; (ii) monitors the use and impact of the funds disbursed under the CMIM Agreement; and (iii) monitors the compliance by the CMIM Swap Requesting Country with any lending covenants to the CMIM Agreement.

Since December 2011, AMRO has submitted on a quarterly basis a set of surveillance reports. The first set comprises individual country (bilateral) surveillance reports on all fourteen economies of the ASEAN+3 (including Hong Kong, China).

In addition, the ASEAN+3 Regional Economic Monitoring (AREM) report is produced quarterly to assess and monitor developments in the global economic environment and its impact on ASEAN+3 economies (multilateral surveillance perspective). In each of these country surveillance and AREM reports, the emphasis is more on short-term potential risks and vulnerabilities, and less on medium to longterm structural challenges.

AMRO is at this stage a very small organization, with only 12 professional staff. And yet, it has a top-heavy system of governance. AMRO is governed by an "Executive Committee" of deputy finance ministers and deputy central bank governors of the ASEAN+3 countries, and an Advisory Pane to provide strategic, technical and professional guidance to AMRO.

Can AMRO help safeguard the ASEAN+3 countries from global challenges and ensure their economic prosperity? Can it effectively detect such risks and contributing to the swift implementation of remedial actions and effective decision-making of the CMIM?

Could AMRO become a credible partner for the IMF? After all, the CMIM aims, in times of need, to provide supplementary financing to that of the IMF.

AMRO needs to develop the capacity to assess applications for liquidity support under the CMIM. In this regard, it should establish a centralized and integrated surveillance approach, and also a establish a framework for conditionality. Until it does this, it will not be possible to delink the CMIM from IMF programs, an ultimate goal of many Asian observers.

Moreover, as bilateral swap agreements become the major form of financial safety net in Asia, AMRO should develop the capacity to coordinate bilateral swaps with the CMIM, and create synergies between them.

Like all new organizations, AMRO is still on a learning curve, and needs to move more decisively to cruising speed.

At present, AMRO is being run by a small staff complement of 12 professional staff, and there are plans to expand to 16 in the near future. This is tiny by comparison with organizations like the IMF or OECD which have hundreds working on multilateral surveillance, and all the necessary statistical collection and economic modelling.

In other words, AMRO still lacks the research capacity, human resources, experience, and the institutional setup to effectively serve as a professional secretariat to the CMIM. Its surveillance has been described as still largely a venue for information-sharing at best, and a beauty contest at worst, with weak peer review or policy coordination.

To be an effective secretariat for the CMIM, AMRO would need to be independent. But this seems hardly the case.

The first director, from China, came on a one year appointment, barely sufficient time to make a meaningful contribution. The second director comes from the Japanese finance ministry on a two year appointment, to which he will presumably return to continue his career. How strict will be his surveillance of the Japanese economy, whose financial stability is becoming ever more precarious?

Further, these directors are merely "senior officials", not former ministers like the case of the IMF, meaning that their capacity to deliver hard messages to countries under their watch is also greatly compromised.

For the AMRO to perform its function "as an independent regional macroeconomic surveillance unit to monitor and analyse regional economies and support Chiang Mai Initiative Multilateralisation decision-making", it needs to be very substantially strengthened. But there are no signs that the member countries have any intention of doing this.

Economic Review and Policy Dialogue process

The ASEAN+3 finance minister have pursued an Economic Review and Policy Dialogue process since May 2000. In reality, this is held at the ASEAN+3 Finance and Central Bank Deputies Meeting (AFDM+3) level twice a year to discuss economic and financial developments in the region and is reported to the ASEAN+3 Finance Ministers’ Meeting (AFMM+3) which is held annually.

The ERPD is a regional economic surveillance process, designed to contribute to the prevention of financial crises through the early detection of irregularities and vulnerabilities and the swift implementation of remedial policy actions. Its modality is information exchange, policy discussions, and peer reviews, which are the basis for enhancing regional monetary and financial cooperation. The IMF, the ADB and now AMRO provide inputs to the ERPD.

The ERPD process has not been as successful as initially expected, though gradual improvements have been made over time. Indeed, according to one commentator (Menon), the current ERPD process is still largely a venue for information-sharing at best, and a beauty contest at worst, with weak peer review and surveillance.

One of the problems has been the absence of central bank governors in the process, although central bank deputies have been participating in ASEAN+3 Finance Deputies’ meetings. This has now been corrected with Central Bank Governors now joining the ASEAN+3 finance ministers meetings from 2012 in order to strengthen regional economic monitoring and to enhance regional financial cooperation. This gathering is now called "ASEAN+3 Finance Ministers' and Central Bank Governors' Meeting".

This is an important step forward and the next step should be to invite Finance and Capital Market Regulators to form an Asian Financial Stability Dialogue. Such a dialogue would bring together all the financial authorities in the region to discuss regional financial market vulnerabilities, regional financial and capital flows, common issues affecting financial sector supervision and regulation, and efforts to strengthen regional financial integration. This would provide an important complement to efforts by the Financial Stability Board at the global level.

The other problem has been the lack of a competent secretariat in charge of the process -- hence the need to beef up AMRO. Until this is done, and an effective ERPD process is created, it will not be possible to have a meaningful and functional CMIM.