This article first appeared in The International Economy, November/December 1998.
© Institute for International Economics. All rights reserved.
Japan proposed an "Asian Monetary Fund" during the early stages of the crisis more than a year ago. The idea was never specified sufficiently to permit objective evaluation. It was nevertheless immediately rejected, mainly by other Asians (most vocally China) but also by the United States and the rest of the G-7, due to fears that it could undermine the leadership role of the International Monetary Fund and foster a split between Asia and North America.
Suitably elaborated and modified to include the United States and several other countries, however, an Asia Pacific Monetary Fund (APMF) could be extremely useful. An APMF could in fact provide a valuable regional complement for the International Monetary Fund in the same way that the Asian Development Bank (and the other regional development banks) complements the World Bank. It would respond to the strongly felt need, on the part of many Asians, for “their own institution” that will be more immediately responsive to their concerns. The subsequent deepening and broadening of the Asian economic crisis underlines the merit of creating such an institution.
The major architectural weakness revealed by the latest crisis, as with the Mexican and other crises before it, is the absence of effective early warning and early action systems. Some of the individual country problems, notably Thailand and Korea, were foreseen by at least some analysts.1 But very few anticipated the Indonesian and Malaysian meltdowns, and no one predicted the regional spread of the downturn.
The world desperately needs effective early warning systems. Such systems can now be constructed on the basis of fairly robust sets of objective economic indicators.2 They can probably be applied most effectively at the regional level, as countries in the neighborhood are much more likely than those farther away to detect emerging problems. An APMF, building on the Manila Framework created a year ago by most members of the Asia Pacific Economic Cooperation (APEC) forum, could provide the institutional locus for such an effort.
revealed by the latest crisis, as with
the Mexican and other crises before
it, is the absence of effective early
warning and early action systems.
Even when looming problems such as Thailand (or Mexico) were correctly identified, however, no preventive actions weretaken. Regional peer pressure, especially in the Asia Pacific, is probably the most promising route to induce anticipatory policy measures. It is now clear, even to the usually reticent Asians, that a country's neighbors can be badly burned by its failure to head off a crisis and that they therefore have a legitimate right to apply such pressure. The eighteen key countries around the Pacific Rim have already been using such techniques to pursue APEC's program of “free and open trade and investment” by 2010/2020, with such notable successes as the Information Technology Agreement in 1996.
The Manila Framework sought to begin such a process on macroeconomic and monetary issues. The southeast Asians are pursuing a similar tack in their Association of Southeast Asian Nations (ASEAN). But those processes have no formal status, secretariat or other institutional foundation and would be much more effective if rolled into an APMF.
In addition, an APMF could provide financial resources to supplement IMF programs in the region. The IMF itself can never provide enough funding for large countries, even when sharply expanding its normal quota multiple as with Korea in December 1997. Hence ad hoc packages must be constructed hurriedly, in the face of crisis, as with the “second lines of defense” that were cobbled together for all three IMF programs in the region (Thailand, Indonesia, Korea) last year.
It would be far better to have such supplementary funding available on a permanent and assured basis. The money could then be mobilized quickly as needed. The burdensharing among the donors could be worked out in advance. Japan's generous offer of a year ago, reportedly reaching $50 billion, would obviously endow the new institution with substantial resources from the outset, as would its recent “Miyazawa plan” pledge of $30 billion if rolled into the proposed regional entity.
APMF credits should be granted only in conjunction with IMF programs, to maintain the primacy of IMF adjustment requirements, though they might be disbursed more quickly to provide essential bridge finance and to counter speculative attacks. Unlike the resources of General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB), however, APMF monies should not be lent via the Fund. The reason is that their availability to any recipient country, as with the IMF's own credits, would then be limited by the Fund's system of quotas for individual members (and whatever multiples can be agreed in a given circumstance). Hence an APMF should lend with the Fund but not to or through the Fund, with the supplementary amounts in individual cases to be agreed in consultation between the two institutions. The ability of the APMF to supplement IMF lending would obviously strengthen the new institution's clout in pursuing its primary responsibilities for early warning and early action.
reticent Asians, that a country's neighbors
can be badly burned by its failure
to head off a crisis . . .
There are three reasons why a regional scheme of this type would work only if its participation were broadened beyond the initial “Asia only” concept. First, no Asian country could effectively lead the effort. Any hint of Japanese domination will be roundly rejected by the rest of the region, as occurred a year ago, and Japan's continued economic weakness precludes its early leadership in any event. China, despite its highly responsible performance during the crisis to date, is not yet ready for such a role (and might not be widely welcomed either). There are no other candidates.
Second, an “Asia only” grouping would risk dividing rather than uniting the two sides of the Pacific. It would thus revive all the risks inherent in Prime Minister Mahathir's “East Asian Economic Group” proposal of a decade ago, which was firmly rejected in favor of APEC by virtually everybody on both sides of the Pacific. It would be especially foolhardy to risk dividing Asia and the Americas at this time of global crisis, with its desperate need for leadership from the United States.
Third, the United States could indeed play a decisive role in making an APMF work. Thoughtful Asians have in fact insisted on American participation in any such scheme, mainly because of its long (if recently tarnished) experience in leading the G-7 and its willingness to speak much more frankly than most Asians, including to other Asians, at this time in history. The United States could also provide a strong link to the IMF and help to ensure that the APMF works in concert with it at all times.
The “new international financial architecture” that will hopefully emerge from the current crisis should thus include an Asia Pacific Monetary Fund. Europe already has a comprehensive regional structure with its Economic and Monetary Union. The Western Hemisphere should create an institution à la APMF to provide an economic and financial counterpart to the pending Free Trade Area of the Americas. Japan receives full credit for initiating the regional concept but the idea needs to be modified along the lines suggested here to ensure that it makes the large contribution to future international financial stability of which it is capable.