Sat, Jun 27, 2009 - Page 9 News List

Can an Asian Monetary Fund accomplish what the IMF can’t?

By Barry Eichengreen

There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. The purpose, of course, is to create an Asian Monetary Fund — a regional alternative to the IMF — whose tender ministrations during the 1997-1998 financial crisis have not been forgotten or forgiven.

So far, however, the CMI has been all horse and no saddle. Its credits and swaps have never been activated. The distress following the failure of Lehman Brothers would have been an obvious occasion. Yet, revealingly, the Bank of Korea — the central bank hit hardest — negotiated a US$30 billion foreign-currency swap with the US Federal Reserve, not with its ASEAN+3 partners.

Now, ASEAN+3 has made another breakthrough: the so-called Chiang Mai Initiative Multilateralization (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool. The goal was set in 2005 and last month ASEAN+3 finance ministers negotiated details. They specified contributions to their US$120 billion pool, set down borrowing entitlements and allocated voting shares.

The agreement on contributions is significant, it is said, because China and Japan will both contribute 32 percent. In previous regional agreements, like capital subscriptions to the Asian Development Bank, China had always been treated as a second-rate power and asked to contribute less. Indeed, China had shunned Japan’s 1997 proposal to create an Asian Monetary Fund precisely because it worried that it would play second fiddle. That China is now acknowledged as a co-equal means that it will not stand in the way of further cooperation.

Also significant, we are told, is the agreement to make decisions by simple majority, with countries’ votes to be roughly in proportion to their contributions. This means that no single country can block action, in contrast to the IMF executive board, which makes decisions by consensus, giving large countries like the US de facto veto power.

But do these new rules really matter? Disbursing more than 20 percent of the credits available to a country still requires that it first reach an agreement with the IMF and 20 percent of a country’s entitlement is actually less than it contributes to the pool. This would appear to nullify the very purpose of the arrangement, which is to free Asia from the IMF. While there is a plan to raise and then eliminate the 20 percent threshold, this is left to some future, unspecified date.

The reason for the contradiction is straightforward. Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid.

But regional neighbors find it hard to criticize one another’s policies and demand course corrections. Political sensitivities run especially high in Asia. Even in Europe, with its long history of cooperation, surveillance and conditionality are outsourced to the IMF. Revealingly, the fund, not the EU, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia.

Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another’s policies and to demand difficult policy adjustments.

Here ASEAN+3 talks the talk. Its agreement last month included a commitment to establish a regional surveillance unit.

This story has been viewed 5623 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top