By Zhang Bin
Following the 1997 Asian financial crisis, much
progress has been made towards East Asian cooperation. To date this has included
a strengthening of monetary and financial cooperation. Meanwhile the debate
has been increasing on future options for regional monetary and financial
cooperation. There have been significant new developments particularly in
the fields of economic intelligence and crisis management.
In general, regional surveillance
mechanisms exist to provide timely and accurately analysis of macroeconomic
information and early warning of a crisis. The systems rely on peer monitoring
and review and depend in no small way on information disclosure by member
states.
In October 1998, the Finance Ministers of the Association
of South East Asian Nations (ASEAN) signed the Terms of Understanding that
established the ASEAN Surveillance Process (ASP). Based on principles of peer
review and mutual interest among members the overall purpose of the ASP is
to strengthen policymaking capacity within ASEAN.
Surveillance Activities
Under the ASEAN Surveillance Process, member countries
have agreed to strengthen regional macroeconomic and financial cooperation
through three key activities:
(i)
Monitoring global economic and financial developments
and analysing their impact on ASEAN.
(ii)
Monitoring and exchanging views on the economic and
financial development of member states.
(iii)
Discussing and formulating through a peer review process,
a response to any adverse developments or issues arising from the monitoring.
Surveillance Concerns
ASP is already operating. Whether or not it can be really
effective is still a matter of concern due to three factors:
(i)
There is a potential weakness in the lack of transparency
in economic and financial data and reports published by ASEAN countries. Governments
in developing countries are often reluctant to provide definitive information.
They may prefer to view economic data as a strategic tool rather than as a
something to be published for general use.
(ii)
The Realpolitik, that is to say the politics of power
and expediency rather than ideals, is a constraining factor within ASEAN.
There is considerable asymmetry in economic size and development among ASEAN
countries. There is an agreed principle of non-interference in the domestic
affairs both economic and especially political, of other members. This militates
against effective implementation of the regional surveillance process. For
instance, criticism of another country’s economic policy however much deserved
would likely be considered inconsistent with the “ASEAN Spirit”.
(iii)
Although there is support from the Asian Development
Bank (ADB), it is difficult for ASEAN to establish and maintain an effective
surveillance mechanism. The Secretariat is under-funded and too small and
ASEAN itself is a relatively loose organisation.
Nevertheless ASP is still an important development. If
it were to prove effective in practice it would augur well for the development
of a similar surveillance mechanism within an East Asia 10+3 co-operative
framework. That is to say in the context of the ten ASEAN nations + China, Japan and the Republic of Korea.
In fact, a financial surveillance mechanism is already taking shape within the 10+3
framework. The first peer review meeting was held alongside the May 2000 annual
meeting of the ADB in Hawaii. The 10+3 Finance
Ministers’ meeting reconfirmed the goal of establishing an early warning system
in East Asia and it was agreed to work
towards this.
Crisis Recovery
The Asian financial crisis has strengthened
the recognition by East Asian countries that it is imperative to establish
regional financial co-operative mechanisms. Financial rescue mechanisms are
particularly important. Japan first proposed that an
Asian Monetary Fund should be set up. However this fell through due to lack
of support. Real progress was then made in regional monetary swap arrangements.
At the ADB annual meeting in Chiang Mai, Thailand in May 2000, Finance Ministers
from 13 East Asian countries agreed to establish a monetary swap arrangement
to be used to help tackle any future financial crisis. This regional financial
Cupertino (co-operative networking
mechanism founded in policy) will provide for bilateral monetary swap and
repurchase agreements between participating countries in the region. This
offers a means of protection for the currencies in the event of a speculative
attack.
The Chiang Mai Initiative is generally
considered to be a milestone achievement on the road to an Asian regional
monetary and financial Cupertino. East Asian countries
have already signed a series of bilateral monetary swap agreements following
Chiang Mai.
However, the Chiang Mai Initiative
still contains many elements that are still merely symbolic and further development
will be necessary. It will also be necessary to increase the scale of the
monetary movements in the future.
Long-term Prospects
The process and goals of an East Asian
monetary and financial Cupertino must be closely integrated
into those of any wider East Asian cooperation. Long-term goals for cooperation
in the region as a whole are needed to provide the context for a monetary
Cupertino. A report by the East
Asia Vision Group has clearly proposed the establishment of an East Asian
community.
Their vision of an East Asian community
is not for another European Community. It is not their wish to work towards
a supranational organisation at regional level. Rather their aim is one of
gradually deepening Cupertino and co-ordination among
the countries of the region. They wish to see further establishment of co-operative
mechanisms in the economic, political, social and cultural fields. For example,
in the area of trade and investment their ultimate goal is the establishment
of a free trade and investment area.
As for monetary and financial
Cupertino, in
the report of the East
Asian Vision Group entitled “Towards an East Asian Community, 2001” the prospect of an eventual single currency is left open. The report merely acknowledges
the possibility that a common currency area could be established given favourable
and mature economic, political and social conditions.
Monetary unification would mean the
abandonment of monetary sovereignty by member countries coupled with a degree
of political integration. This presupposes the existence of strong political
will for closer ties in East Asian countries. However, at present, there are
just too many political and economic differences amongst East Asian countries
so the conditions necessary for monetary unification are not yet in place.
Currently it would be both difficult
and indeed unrealistic to seek to open discussions aimed at monetary unification
for the whole of East Asia. Such discussions would
become feasible if the political obstacles were to be dismantled against a
background of a progressive narrowing of differences in levels of economic
development. This has to be seen as a remote goal probably requiring decades
for realisation.
Proponents of regional monetary unification
argue that if monetary unification in East Asia is adopted as a long-term
goal, planing for this future should commence now. A step-by-step approach
is advocated.
Monetary unification could first be
achieved at a sub-regional level. This could then be gradually extended to
the whole East Asian region. Considering the situation in the region as it
is today and taking account of the potential for development, two possibilities
for common currencies could be thought feasible. One potential grouping would
be within ASEAN and the other centred on mainland China. They would not be mutually
exclusive.
The ASEAN Five
The first of these common currency
possibilities resides within the core countries of ASEAN namely Malaysia, Thailand, Philippine, Indonesia and Singapore (the original ASEAN Five).
Smaller countries may be more inclined
to join a monetary union as they have less to lose. These five states are
already broadly similar in their level of economic development, fiscal deficits,
inflation rates and the like. They have accelerating economic integration
and they share a common strong political will for cooperation. They already
have a relatively sophisticated co-operative mechanism in ASEAN. In many essential
features, the core countries of ASEAN satisfy the criteria for a workable
common currency. They could then progress to closer monetary union at a later
date.
The Brunei currency has special a
relationship with the Singapore dollar so Brunei might also join in with the
first group of countries to adopt a common currency within ASEAN.
The new members of ASEAN (Vietnam,
Laos, Cambodia and Burma) are separated by rather greater differences. They
are relatively backward in their economic development and subscribe strongly
to principles of political sovereignty and non-interference in the domestic
affairs of others. It will be a long time before they would be in a position
to adopt a common currency.
China
The second of the most likely common
currency possibilities centres on a reunified China. Already Hong Kong and
Macao have been returned to China. A free trade area to embrace the mainland,
Hong Kong and Macao would be conducive to monetary unification. Economic and
trade contacts across the Taiwan Straits are strengthening and mutual economic
dependency continues to grow.
In the economic field we find the
full and necessary conditions for monetary unification. Once political reunification
has been realised, the opportunity for and necessity of monetary unification
will surely increase.
The Chinese economy is expanding
rapidly and China’s economic strength will continue its growth. By 2030 China is
expected to be the largest economy in the East Asian region. In the light of
this, the Chinese RMB could well become the leading currency in East Asia. This
would be a major influence on the direction of regional monetary cooperation.
The Next Few Years
We can draw some points on forthcoming
developments in East Asian cooperation from the 2001 conference in Brunei:
(i)
At present and for next few years, the main work for East Asian
cooperation remains to stabilise and strengthen mechanisms to facilitate
political consultation and dialogue in the region. It is still too early to set
long-term goals for East Asian cooperation.
(ii)
Conditions are still not right for promoting a free trade and investment
area for the whole East Asian region. Presently it is sufficiently ambitious to
look towards coexistence coupled with the development of multi-level co-operative
mechanisms.
(iii)
The negative effects of the Asian financial crisis are still being felt.
The main focus of some East Asian countries lies in regaining the momentum of
their economic development.
East Asian cooperation does not involve a clear
political objective like Europe It is founded instead on existing benefits
which have proven to be both in the interests of the economic development
of individual nations and also conducive to regional peace and stability.
For the time being, East Asia does not have the
political basis or impetus for significant regional integration. Therefore when promoting regional functional cooperation,
the most important thing is to build on those opportunities for cooperation
that advance the cause of regional economic development.
The foundations of and impetus for regional integration
can only be developed gradually through the development of co-operative mechanisms.
Cooperation can move forward more easily in some areas than in others.
East Asian cooperation under the 10+3 framework
has already started. This is a process that is unlikely to be reversed. In
the near future, we might see consideration given to the early establishment
of a secretariat for East Asian cooperation. Such a body would be able to
co-ordinate the process of cooperation and investigate the potential for future
developments and closer working. What could be achieved?
(i)
Strengthen Macroeconomic
Cooperation Mechanisms
East Asian monetary and financial stability is based on economic stability and
development in the region. The key item on the agenda of East Asian
monetary cooperation should therefore be to strengthen mechanisms facilitating
macroeconomic dialogue and co-ordination.
East Asian Finance Ministers’
meetings should have a strong focus on agreed key issues in economic
development and related fields. The meetings should be institutionalised and
held twice a year. The consensus reached should influence the economic policies
of every country in the region.
(ii)
Strengthen Monetary and
Financial Rescue Mechanisms
The aftermath of the Asian
financial crisis is still with us and the danger of another financial crisis
in East Asia remains. The most urgent task is to further strengthen and quicken
the development of regional financial rescue mechanisms.
The Chiang Mai
Initiative and the monetary swap arrangements were important developments in East Asian monetary cooperation. For the time being this is the best option for a regional financial rescue mechanism and all the bilateral
swap agreements should be put in place as soon as possible. These bilateral
agreements should later be evolved into the basic framework for future
East Asian monetary cooperation.
(iii)
Strengthen Financial Surveillance
and Early Warning Systems
Financial surveillance
is a responsibility of government. In order to maintain the stability of domestic
financial markets and prevent the recurrence of financial crisis, governments
in the region should work to improve their domestic economic policies and
strengthen their domestic financial systems.
In the event of a developing
crisis, interactions across the region carry risks of “contagion” meaning
in this context the spread of the crisis from one country to another. This
emphasises a now imperative need for collective surveillance feeding into
an early warning system at the regional level.
Surveillance and early
warning system are closely related. At present, it would be unrealistic to
seek to set up a specialised regional institution. Efforts should be focused
on the establishment of co-operative mechanisms to operate among central banks
in the region.
A fully functional co-operative
agency should be set up within each central bank. This would enable permanent
liaison and cooperation networks to be formed in East Asia.
In addition, we could
consider the establishment of a framework of East Asian financial surveillance
and early warning mechanisms enabled to issue economic and financial indicators.
This would serve to provide timely and reliable information to help inform both
government policy-makers and the markets.
(iv)
Explore Regional Exchange
Rate Co-ordination Mechanisms
Mechanisms for regional
exchange rate co-ordination require a more advanced level of co-operative
framework. They will follow only on the heels of deepened financial cooperation.
East Asia does not currently
satisfy the conditions necessary for an effective exchange rate co-ordination
mechanism. After the Asian financial crisis, many East Asian countries and areas have abandoned
their dollar-peg systems and rigid exchange rate policies. They now rely instead
on a floating rate.
East Asian exchange rates are still
prone to be affected by any sharp fluctuation in the yen. And what is worse,
East Asian countries have no solutions in place to deal with these knock-on
effects. The situation has seriously undermined the stability of the East
Asian economies. Exploration of regional exchange
rate co-ordination mechanisms must be on the agenda for East Asian
monetary cooperation.
East Asian currencies have therefore
proved to be unsuitable for pegging to either the dollar or the yen. It would
be unrealistic to think of introducing an East Asian Currency Unit for many
years yet.
East Asia should focus instead on
strengthening macroeconomic co-ordination and exploring a floating-rate
target-zone scheme for the regional currencies. Based on principles of cooperation
and commitment, each country or area would propose its own upper and lower
limits within which its currency would float for a specified period of time.
This is the target-zone. This could be conducted under the surveillance of the
regional co-operative mechanism. Target zones might be adjusted in some special
cases but this would have to be notified to the other countries in advance. If
necessary, the range of adjustments could later be narrowed through regional cooperation.
(v)
Explore the Feasibility of a Monetary
Fund
Though the Japanese proposal
for an Asian Monetary Fund (AMF) has been put on the back burner, worthwhile progress has been made within
the framework of the Chiang Mai Initiative. A goal of a regional money swap
agreement has been identified and already there are bilateral monetary swap agreements in place to pave
the way.
A money swap mechanism would clearly
not be the ultimate goal of East Asian monetary cooperation. Fuelled by the
Chiang Mai Initiative, the debate about a regional fund has warmed up again.
The need for economic development is
just as strong as ever and there is no reason at all to close the door on the
AMF concept. Further exploration of AMF feasibility should be encouraged. At present, the East Asian economies have
substantial foreign exchange reserves (see table below) and the funds to
support an AMF would not be a problem. Meanwhile, objections to the
establishment of an AMF from within the East Asian countries and from the wider
international community seem to have diminished.
The road to an Asian Monetary Fund
It could be said that full
implementation of the Chiang
Mai Initiative would go some way to lay the foundations for the establishment
of an AMF. However, the road to AMF would depend on:
(i)
Further
implementation of the Chiang Mai Initiative
and the consequent development of East Asian monetary cooperation mechanisms.
(ii)
Actual
need for a regional monetary fund and other regional co-operative developments.
(iii)
Development
of comprehensive East Asian cooperation. (as evidenced by the negation of the
1997 Japanese proposal).
The author is an associate research fellow with
the China Institute of International Studies
(china.org.cn September 16)
