Monday 23 Jul 2018 | 15:55 | SYDNEY
Monday 23 Jul 2018 | 15:55 | SYDNEY

Crisis-proofing East Asia: IMF, AMF or self-insurance?


Mark Thirlwell

6 May 2008 11:16

A quick glance at some of the reporting of the ASEAN - 3 Finance Ministers meeting in Madrid last weekend shows that the dream of an Asian Monetary Fund (AMF) is still with us. Meanwhile, the original version – the IMF itself – is having a tough time of it, forced to implement an austerity package of its own. One source of the IMF’s problems has been the effective withdrawal of many East Asian economies from reliance on Fund support. But is East Asia now about to come up with a workable, regional alternative?  

The 1997-98 financial crisis in East Asia was referred to as the ‘IMF crisis’ in Korea, and the description has turned out to be as prophetic as it was caustic: the Asian meltdown has indeed turned into a crisis for the Fund. A major and lasting legacy has been a deep distrust of the IMF among many of the region’s politicians and officials, manifested partly in the form of a policy self-insurance through the accumulation of huge stocks of foreign exchange reserves intended to ensure that regional economies will never again find themselves at the mercy of the Fund in the way they were just over a decade ago. The IMF’s influence and reputation in the world’s most economically dynamic region has never fully recovered from the 1997-98 meltdown, and this has been an important contributory factor to the current malaise.

The official announcement from the Madrid meeting doesn’t contain anything quite as spectacular as a new AMF. Instead, it confirms the Ministers’ plans to continue with the development of the region’s reserve pooling arrangement – the Chang Mai Initiative (CMI) – as set out in the previous year’s meetings. More specifically, Ministers agreed in May 2007 to multilateralise the CMI by converting the existing system of bilateral currency swaps into a self-managed pooling arrangement, governed by a single contractual agreement. They had instructed their Deputies to ‘carry out further in-depth studies on the key elements of the multilateralisation of the CMI including surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism.’ Last weekend, they agreed to move this process on a bit: they announced the size of commitment involved (at least US$80 billion, split 80-20 between the Plus three and ASEAN) along with some other elements, and pledged to continue work on those areas yet to be nailed down, including the contentious issue of conditionality. 

The original proposal for an AMF came from Japan’s Ministry of Finance in August 1997, shortly after Thailand had succumbed to exchange rate crisis. The idea was opposed by the US and China, among others, and subsequently shelved.  But the view taken by many in the region of the Fund’s subsequent performance during the crisis meant that the idea never completely disappeared, and the concept got something of a second life in May 2000, when a meeting of the ASEAN - 3 Finance Ministers in Chiang Mai, Thailand, agreed to establish a system of swap arrangements – the CMI – to provide liquidity support for members in the event of a currency crisis.  For some observers, this looked like the AMF reborn.

Yet for those regional economies looking for an Asian alternative to the IMF, the CMI initially provided pretty thin gruel. Not only was the amount of funding that individual economies could access quite small relative to the scale of funds needed to credibly deter or defend a speculative currency attack, but more importantly, the swap arrangements were still linked to IMF conditionality, with disbursement of more than 10% of the maximum allowable requiring the country in question to accept an IMF program. In line with this, the formal rhetoric around the agreement stressed that the CMI was intended to complement – not replace – existing multilateral institutions.  (This kind of commitment is still present in the Madrid communiqué.)

Still, since its formation there has been a process of sustained, gradual upgrading for the CMI. The Finance Ministers instituted a review in May 2004 which covered a number of areas, including the size of the swap arrangements, the role of country surveillance, the nature of the linkage to the IMF, and the bilateral nature of the swap arrangements. Subsequently, each of these areas has received at least some attention. For example, in 2005 the ceiling for disbursements without the requirement for an IMF program in place was raised from 10% to 20%, and there was a substantial increase in the size of the bilateral swap arrangements. Ministers also agreed to integrate the ASEAN-3 Economic Review and Policy Dialogue (ERPD) process into the CMI framework in order to strengthen the latter. And of course the drawbacks involved in running a series of bilateral swap agreements have prompted a series of moves aimed at multilateralising the CMI.

Despite the progress, this still leaves East Asia a long way off developing a credible regional alternative to the IMF. This in turn makes the current state of relations between the Fund and some regional economies even more unfortunate. Granted, huge piles of foreign exchange reserves and large current account surpluses mean that most of the region looks immune to any simple re-run of the 1997-98 crisis. But this might not always be the case, and financial crises also have a nasty habit of mutating into new forms. So a healthier relationship between the region and the Fund would be a good thing. For its part, the IMF is trying to help with this by taking measures to strengthen its legitimacy among its emerging market members. However, the moves to date are pretty modest, and regional scepticism remains strong. All of which means that the CMI looks set to proceed with its slow evolution towards an AMF, while in the meantime the region will continue to focus on self-insurance, despite the drawbacks involved.