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WorldOctober 1 2013

Doing its own thing: does Asia need the IMF?

Lingering resentment over its role in the Asian crisis of the 1990s and complaints that the continent is under-represented in its senior positions mean that the IMF's popularity throughout Asia is low. But will this sense of injustice lead to the forming of an Asian Monetary Fund that will push the IMF to the sidelines in the region?
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Doing its own thing: does Asia need the IMF?

Many people in Asia are still bitter about the harsh medicine the continent was forced to swallow during the Asian financial crisis, and resentment toward the International Monetary Fund (IMF) lingers in some parts of the region. And now there are claims that Asia’s voice is still not being heard in Washington, DC – despite the region’s growing economic clout – which has led many to question whether the IMF is still relevant to Asia.  

Plans to establish an Asian Monetary Fund – to either rival or complement the IMF – have been discussed for years, but now there are signs that Asia is taking small steps toward that goal, with some arguing that the ultimate purpose is to create economic integration in the region. 

Lingering resentment

Why would Asia want to create an alternative to the IMF? “Bad memories,” says Barry Eichengreen, professor of economics and an advisor to the IMF during the 1997-98 Asian financial crisis. The scars of the IMF’s handling of the crisis remain, and in South Korea this period is referred to as the ‘IMF crisis’ – rather than the Asian financial crisis or IMF bailout – as if the country's collective subconscious holds the IMF responsible for its financial distress. 

Masahiro Kawai, dean of the Asian Development Bank Institute (ADBI), explains that with the IMF’s response to the crisis in Thailand, Indonesia and South Korea, “some of the programmes were not quite appropriate”, and there is a commonly held view that the IMF’s actions actually worsened the crisis. “That experience led many policy-makers in Asia to believe that Asia needs its own monetary fund,” says Mr Kawai. 

And there is also the sense that Asia is not being represented at the IMF in a way that reflects current economic realities. Andrew Sheng, president of the Fung Global Institute and a former central banker, notes how Asia missed out when yet another European – former French foreign minister Christine Lagarde – was appointed to the position of managing director in 2011.

Mr Sheng is not hopeful that major changes will occur in the near future, but Domenico Lombardi, director of the global economy programme at think tank the Centre for International Governance Innovation, strikes a more positive note. He points to the reforms regarding the IMF’s quotas and governance that were agreed in 2010, which gives greater representation to developing countries. Also, he says that the 2011 appointment of Zhu Min to the post of the IMF's deputy managing director – the first time a Chinese person has held such a senior position at the fund – is a positive sign that things are moving in the right direction.

Mr Eichengreen believes that greater Asian representation at the IMF will come in time. “The other thing Asia needs is for countries and their representatives to step up and really explain what they want to see the IMF doing and not doing,” he says. 

Mr Lombardi agrees that the systemic economies in Asia need to be more assertive, and he notes that the governance reforms are also important to the IMF, not just Asia. “The IMF without the assertiveness of the Asian members will be hampered in its effectiveness,” he says. 

Becoming an irrelevance?

Some would go further and say that the IMF risks becoming irrelevant if Asia is not better represented. And in terms of Asia creating its own monetary fund, there are signs that the continent is already moving in that direction. 

Mr Kawai explains that at the time of the Asian financial crisis, Japan proposed the creation of an Asian Monetary Fund, but the idea was shelved. Mr Sheng adds: “The idea was rejected during the Asian crisis because we can never set up a new fire engine during a fire.” 

Since then, swap arrangements between five countries in the Association of South-east Asian Nations (Asean) were expanded into the Chiang Mai Initiative (CMI), which was created in 2000. Under this initiative, the bilateral swap arrangements were extended to Asean+3, which includes China, Japan and South Korea. In 2009, the CMI was multilateralised (to be known as the CMIM) to create a pool of liquidity for Asean+3. The CMIM is not a fund in the sense that there is a centralised pot of money that the members can draw on. Instead, the CMIM is a series of promises to supply liquidity in a crisis. The amount available was increased from $120bn to $240bn in 2012. 

Michael Plummer, professor of international economics at Johns Hopkins University, says" “$240bn sounds like a lot, but keep in mind that Japan and China have $5000bn [between them] in foreign exchange.” Mr Kawai adds: “The CMI is in my view a transition to a more fully fledged Asian Monetary Fund.” Mr Sheng argues that such an Asian Monetary Fund can be a regional complement, but not a substitute, to the IMF. However, Mr Lombardi says: “Even within Asian members, there is not widespread agreement whether the CMI is alternative or complementary to the IMF.”  

A realistic option?

On the question of how realistic it is for Asia to create a fully fledged monetary fund, Mr Eichengreen says: “Asia has the money and financial resources [to create its own fund] but it does not have the political capacity.”  

The biggest hurdle, he says, is that a lender needs to impose conditions on the borrower, and in Asia there is a tradition of not wanting to criticise one’s neighbour. “If one Asian country lends to another through the CMIM, or future Asian Monetary Fund, who is going to set down the conditions to reassure the lender and not antagonise the borrower?” asks Mr Eichengreen. He argues that even in Europe, which has an economic and political union, the IMF had to be called in to impose conditions on Greece. Mr Kawai, however, argues that in the case of a liquidity problem it is not necessary to bring in an outsider and the IMF would only need to be brought in where serious structural reforms are necessary. 

Mr Plummer, a former advisor to Asean, points to the delicate political relationships in Asia – which have been known to flare up in the form of territorial disputes – and says of the countries in Asia: “The last thing they want to do is engage in tough love.”  

Awaiting activation

The Asean+3 Macroeconomic Research Office was established in 2011 to provide the monitoring mechanism for the CMIM. As it stands, its surveillance role has not been tested and the CMIM has not been activated. 

During the financial crisis, Mr Eichengreen argues that South Korea missed an opportunity to activate the CMIM when it chose to get liquidity assistance from the US Federal Reserve by arranging a swap line of up to $30bn. Of the CMIM he says: “It is there to provide liquidity in a crisis and it would have demonstrated that it is a real thing and not a paper tiger. It does no good if it is not going to be activated.” Mr Eichengreen adds that if the CMIM had been used, it would have been a step toward creating an Asian Monetary Fund. 

Part of the issue is that the CMIM is linked to IMF conditions, and South Korea is still haunted by the stigma of IMF assistance. Countries are restricted to drawing 30% of their quota before the IMF gets involved and imposes conditions on the country using the CMIM. Mr Plummer says the CMIM was purposefully designed in this way so that the countries in the agreement do not have to police their neighbours, and the IMF can be brought in as the independent third party. “They do not want to have to be ‘heavies’ – it is politically very difficult to do,” he says of the Asian countries involved in the CMIM. 

Given the small size of the CMIM, when compared to the foreign reserves in Asia, and the fact that it has never been activated, there remains speculation about what the ultimate goal of the CMIM is. Mr Plummer argues that its main purpose is that it is part of a movement toward closer economic co-operation in Asia. 

Greater co-operation?

Does this mean that Asia is moving toward the European model of integration? Mr Plummer says: “It would have been difficult to talk about co-operation without talking about the financial crisis.” For this reason, in Asia the discussions of economic co-operation could not merely be limited to topics such as the free flow of goods and services before moving on to discussions of financial co-operation.

In light of the eurozone crisis, some say that there is little point in trying to emulate Europe’s model of economic co-operation. The European project, however, has been decades in the making and is still being worked out. “It took Europe 50 years to agree on the European Economic Community and there is less than 15 years’ experience with the euro,” says Mr Sheng.

Asia is more diverse in terms of its stages of development and shares no common institutional platform, whereas Europe has a longer history of mutual engagement, says Mr Sheng. He adds that the eurozone crisis exposed the importance of a centralised fiscal, monetary policy, and macro-prudential arrangement. “If the eurozone cannot arrive at a fiscal, monetary and regulatory union any time soon, we should not expect the Asian community or common currency to happen any time soon,” he says. In the past there has been talk of creating a single currency for Asia, but “the European crisis put paid to that idea,” says Mr Sheng. 

Mr Plummer says that even though Asia’s situation is different, it does not mean that Asia cannot learn from the European experience and just because there have been problems in the eurozone it does not mean that closer economic cooperation in Asia is not feasible. 

Mr Lombardi points out that intra-regional trade is increasing in Asia, which will give Asian countries additional incentives to strengthen regional relationships and cooperation. Developing this kind of cooperation into fully fledged economic integration, or into a fully fledged Asian Monetary Fund, however, is still a long way off. 

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