15 July 2014
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Fair, inclusive and stable finance in Asia -- a trade union perspective II

This is the second section of a paper I wrote for the trade union group, UNI-APRO, on "Towards fair, inclusive and stable finance in Asia: Advancing a trade union agenda".

Regional initiatives to avert future financial crises

The AFC taught the region many bitter lessons. Systemic financial risk should be monitored and controlled at the regional level, taking advantage of specific regional expertise. Asia should not just rely on the IMF’s surveillance activities, in light of its past mistakes.

Further, the Asian region would seem to have sufficient crisis-response resources for regional liquidity support, given that a substantial portion of the world’s foreign exchange reserves is held in held in the region.

This is the background to the efforts of the ASEAN+3 (China, Japan and Korea) countries to establish a “regional financial safety net”, a sort of Asian monetary fund, known as the “Chiang Mai Initiative”(CMI) -- as well as the ASEAN+3 Macroeconomic Research Office (AMRO), which serves as the independent surveillance arm of the CMIM.

Chiang Mai Initiative Multilateralized

The creation of what is now called the “Chiang Mai Initiative Multilateralized” (CMIM) has been a long and winding round. However, in its current form, still today, it has many limitations, and is arguably unusable.

The first step in this long and winding road began in August 1977 when central banks and monetary authorities of the original five ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand) agreed to establish reciprocal currency or swap arrangements. The ASEAN Swap Arrangement (ASA) was created with an initial maximum total amount of $100 million, which was subsequently increased to $200 million in 1978.

The idea of this swap arrangement was that if a country had a foreign currency liquidity shortage, it would be to acquire some foreign currency from one of the other members by swapping some of its own currency for foreign currency. While this was a commendable idea, it was totally inadequate when the AFC struck. The $200 million was like peanuts in the face of the massive movements of international capital.

So when the Chiang Mai Initiative (CMI) was created in 2000, it was done so by expanding the bilateral swaps of the ASA both in size and membership to include all ASEAN members and China, Japan and Korea.

The initial version of the CMI was very much a half-measure at best, in terms of creating an Asian monetary fund. Its intention was to merely “supplement" the existing financial facilities of the IMF, not replace them. Most of the finance under the CMI was only available if the borrowing country had an IMF program. Once again, the total amount in the CMI was still puny.

So, as discussed above, when the Lehman shock struck in September 2008, and short-term capital quickly exited emerging economies, Indonesia, Korea and Singapore did not seek to use the CMI. They turned elsewhere.

Thus the next step in the long and winding road came in 2009, when the CMI was "multilateralized" to become the CMIM, a self-managed reserve pooling arrangement, governed by a single contract. ASEAN countries would contribute 20%, while the "plus three" countries contributed 80% -- 16% by Korea and 32% each by Japan and China (including Hong Kong). The CMIM came into effect on 24 March 2010 with $120 billion.

What does this mean? How does it work?

Although the CMIM is a common liquidity pool, in reality there is no common or centralized fund. The contributions remain in the central banks of contributing member countries. Thus, the CMIM is a series of promises to provide funds.

In the event of a balance of payments or liquidity crisis, a member government can swap its local currency for US dollars from this pool. Each country's borrowing quota is based on its contribution multiplied by its respective borrowing multiplier. The borrowing multiplier is set at 5 for Brunei Darussalam, Cambodia, Lao PDR, Myanmar, and Viet Nam. For Hong Kong, Indonesia, Malaysia, Singapore and Thailand, it is 2.5, for Korea it is 1 and for Japan and China it is 0.5.

In 2012, the CMIM was doubled in size to $240 billion. A crisis prevention facility was also introduced to provide short-term liquidity support to address sudden but temporary liquidity shortages, called the CMIM Precautionary Line. But this new facility does not increase the total amount of funds available.

It was also agreed that a country can now draw up to 30% (up from 20%) of its quota without being subject to IMF conditionality -- with a possible increase to 40% in 2014. To avail of its full quota, the remainder of the amount to be disbursed must be tied to an IMF program. The conditions for securing a swap are a completed review of the economic and financial situation, compliance with covenants, such as submission of a periodic surveillance report, and participation in the ASEAN+3 Economic Review and Policy Dialogue (ERPD).

What is the overall assessment of the CMIM?

There is no-one better than Dr Masahiro Kawai, Dean and CEO of the Asian Development Bank Institute, to quote: “While the CMIM has made much progress, it is in need of further improvements to serve as an effective regional crisis response mechanism. In my personal view, to strengthen the credibility of this regional financial safety net facility, AMRO needs adequate resources to conduct meaningful regional economic surveillance, the CMIM’s committed amount for each economy needs to be further raised, and the CMIM’s portion of the IMF link needs to be further reduced, ultimately to zero.”

A more blunt assessment is provided by Hal Hill and Jayant Menon: “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.”

Overall, the CMIM has a long way to go before it could even become a credible partner to the IMF. The IMF has much larger sums of money, systems and methods for dealing with financial crises, and despite past errors, the IMF has immense experience in fighting financial crises.

All of this is a very sad indictment of Asia’s efforts to manage its own destiny in this dangerous world of global finance. There are obviously many factors involved. Pressure from Washington and the IMF to stay with them. Rivalry between China and Japan, and perhaps China’s preference to deal with potential borrowing countries bilaterally. And a lack of trust between Asia’s potential lending and potential borrowing countries.

AMRO -- the ASEAN+3 Macroeconomic Research Office

AMRO was established in Singapore in April 2011. It is an independent regional macroeconomic surveillance unit to monitor and analyse regional economies and support CMIM decision-making.

The roles of AMRO 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. AMRO is slowly moving into action -- but too slowly.

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. 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).

AMRO is at this stage a very small organization, with only 12 professional staff, with 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. AMRO still lacks the research capacity, human resources, experience, and the institutional setup to effectively serve as a professional secretariat to the CMIM.

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.

Regional economic and financial surveillance and dialogue

The ASEAN+3 finance ministers have pursued an Economic Review and Policy Dialogue (ERPD) process since May 2000, which is in reality held at the ASEAN+3 Finance and Central Bank Deputies Meeting (AFDM+3) level twice a year, which reports to ministers.

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, 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. But the next step should be to invite Finance and Capital Market Regulators to form an Asian Financial Stability Dialogue, proposed by the ADB and ADBI. 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 at the global level by the Financial Stability Board, which already includes the membership of China, Hong Kong, India, Indonesia, Japan, Korea and Singapore.

The Asia Pacific Economic Cooperation Business Advisory Council (ABAC) has proposed to APEC Finance Ministers to establish a regional platform, an Asia-Pacific Financial Forum (APFF) to foster collaboration and coordinated action between the public and private sectors, as one way of improving financial development and stability.

The goal of the APFF would be to promote a better understanding of how to design policy and regulatory frameworks that would enable financial markets to help attain the region's development goals, drawing on perspectives from the ground and the cutting edge of innovation in financial services. ABAC will discuss this with Finance Ministers at their upcoming September meeting in Bali, and it is expected that finance ministers will agree to go ahead with this initiative.

IMF and Asia

There is still a great depth of ill-will towards the IMF in Asia due to its inappropriate diagnosis and policy conditionality exacerbated the depth, and extent of the crisis, causing much human pain.

Moreover, despite the IMF being a global organization, its Asian member countries had very limited influence on the IMF crisis resolution measures. The conditions of the bailouts were dictated by the IMF, with the US Treasury and the Federal Reserve pulling the strings behind the scenes.

The IMF has learnt much from the AFC and other crises. It is a much more pragmatic organization, which has softened its policy positions on capital account convertibility and capital controls. It has also made major efforts to win back the confidence of Asian governments and public opinion, by becoming a partner with the region. Even though no Asian country has had an IMF program since the AFC, the IMF is very active in Asia with multilateral surveillance, capacity building and training, and policy dialogue activities.

The IMF is clearly very keen to accepted as a full partner again in Asia. Perhaps the most realistic possibility would be one day as a junior partner of the CMIM and AMRO in tackling a future Asian financial crisis. But that would require both the CMIM and AMRO becoming fully functional, something which seems a long way away.

But it would still be political suicide for most any Asian government to accept an IMF program, with its attendant conditionality. All the more so, given that the IMF has admitted that its work on the European sovereign debt crisis has been less than stellar. Moreover, the IMF is still seen by many to be peddling Wall Street ideology that financial markets are inherently stable and self-regulating.

Financial safety nets in Asia

The Asian region is in a quite unsatisfactory situation regarding financial safety nets to avert future financial crises.

The IMF is basically still persona non grata in the region. The CMIM is not yet functional. Some Asian countries have built up enormous holdings of foreign exchange reserves as protection against financial instability, but it is very costly and distorts international trade and finance.

The region has a growing array of bilateral foreign currency swap arrangements, which can draw on these reserves. For example, the Philippines has bilateral swaps with China, Japan and Korea, Indonesia with China and Japan, and Singapore, Thailand and Malaysia each have swaps with China. Indeed, bilateral swaps are quickly becoming the main instrument in Asia’s financial safety net, even though they are an ad hoc, and potentially unreliable solution.

Asian countries may be now much less vulnerable to financial crises than in the past. Most exchange regimes are now managed floats. And authorities are alert to the dangers of high levels of short-term foreign debt. But history shows that financial crisis can strike when you least expect it -- and that you can have very little time to react.


John West
Executive Director
Asian Century Institute
Tags: asia, finance, trade unions, Chiang Mai Initiative Multilateralized, AMRO, Asian regional economic and financial surveillance and dialogue, Financial safety nets in Asia, IMF and Asia

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