No. 13 — March 31, 2000


Weekly Review

--- by Marc Castellano

Finance and central bank officials from the member countries of the Association of Southeast Asian Nations, the People's Republic of China, Japan and South Korea agreed March 24 to establish a regional fund that could be tapped during times of financial and/or economic crisis. East Asian financial officials, who had gathered in Bandar Seri Begawan, the capital of Brunei, for the annual "Asean+3" meeting, decided that such a facility was needed to protect their countries' economies from currency speculators, widely believed to have been a chief cause of the region's 1997-99 turmoil.

The idea is controversial. Opposition from Washington and the International Monetary Fund had forced Tokyo to shelve a similar 1997 proposal (see JEI Report No. 47A, December 19, 1997). Then-Finance Minister Hiroshi Mitsuzuka had suggested creating an Asian Monetary Fund at the September 1997 meeting of Group of Seven finance ministers and central bankers in Hong Kong. Japanese officials envisaged a facility able to disburse funds quickly and unconditionally. Moreover, because it would be managed by Asians, a high level of regional expertise would be available. A self-help mentality also would be encouraged, proponents argued.

The IMF contended, however, that its role would be undermined and its leverage to effect change in troubled developing Asian economies would be reduced by having an alternative source of emergency funding available. Washington, the IMF's largest and most influential shareholder, agreed. Then-Secretary of the Treasury Robert Rubin explained that he was concerned that the AMF's lack of conditionality would amplify the problems of moral hazard. The proposal was effectively killed in November 1997, when Asian and Western nations agreed to drop it.

Nonetheless, attempts to revitalize the idea have become a perennial activity. In December 1998, Finance Minister Kiichi Miyazawa, labeling the IMF's response to East Asia's upheaval inadequate, suggested that the region needed another crisis-response mechanism and that the plan to create an AMF should be reconsidered. At a July 1999 Asia Pacific Economic Cooperation symposium, East Asian officials expressed support for such an initiative. Malaysian Prime Minister Mahathir Mohamad has been a longtime advocate, and in October 1999, he called directly for the establishment of an East Asian monetary fund.

Support for an AMF-type facility has gathered momentum in recent months. During deputy ministerial-level talks held ahead of last November's Asean summit in Manila, regional leaders agreed to explore the possibility of an AMF (see JEI Report No. 45B, December 3, 1999). Tokyo's special Asian economic task force, set up to discuss such issues, continued to advance the dialogue at its third session, held in January. Former Vice Finance Minister for International Affairs Eisuke Sakakibara added his voice to the chorus, pitching the idea in a speech he delivered in Singapore in early March.

The Asian Development Bank also has offered somewhat qualified support for the establishment of an AMF. A March 17 report emphasized the need for serious consideration of this option, characterizing it a way to promote cooperation and boost confidence in the region. Soon after the report's release, however, the ADB announced that this opinion represented the views of its authors, not necessarily the bank.

Despite the recent wave of interest, IMF officials and Washington policymakers remain skeptical. Nonetheless, a senior Asean official concluded at the Bandar Seri Begawan meeting that "there is a general consensus that we should have such a fund." Of course, since most of the details still need to be worked out, it will take time to launch this mechanism.

Tokyo previously had assured Washington that the White House would be included in the development of any kind of regional emergency fund. Consequently, a senior Ministry of Finance official took a cautious stance after the Asean+3 talks, saying that the discussions currently are "very general and abstract." Yet, another Japanese policymaker commented that Tokyo must pursue the possibility of an AMF-like facility and warned that it may end up being similar to Japan's 1997 proposal.

Asean officials have insisted that they are not attempting to revive that ill-fated idea. In fact, they said, the crisis-financing vehicle would not be called an Asian Monetary Fund because such a name would imply that it was an Asian version of the IMF. Moreover, Asean officials blasted the Western media for reporting that their plan essentially called for the establishment of the Japan-envisioned AMF.

As part of their Washington-directed selling campaign, Asean officials have argued that the proposed regional fund would not duplicate the role of the IMF; instead, it would function as a supplement. Moreover, safeguards would be built in to address concerns that it might lead to lax fiscal policies. Because the nations that make up the Asean+3 grouping have combined international reserves worth more than $700 billion, financing should not pose a problem. Japan is expected to contribute to the fund, but it will not be putting up a disproportionate share of the money.

These disclaimers notwithstanding, Western officials continued to pour cold water on the idea. Thus, when Asean financial officials met by themselves March 25 and March 26, they backpedaled on the March 24 proposal. The participants decided to focus instead on enhancing an existing currency-swap arrangement, an option that would not involve the creation of a new institution. In January, Asean central banks renewed an agreement on currency swaps to provide short-term liquidity to ease temporary balance of payment crises. If China, Japan and South Korea were to be included, the envisioned regional support facility would have ample economic weight. Moreover, it might be more acceptable internationally than an Asian monetary fund.

Whatever its fate, the proposal for an AMF-like mechanism is part of Asean's larger plan to boost regional financial cooperation and to avert a recurrence of the 1997-99 crisis. Indeed, most of East Asia is interested in greater economic independence, but achieving such a goal will involve curbing the influence of Western institutions, still the chief source of outside support for much of the region. Asean finance ministers will revisit the issue at an early May meeting in Thailand.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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