It is a matter of course that prevention is better than cure. But an Asian financial safety net, designed to fight off future financial crises, cannot be relied to prevent them. Instead, it may be used to take action only when a financial crisis is confirmed to have dealt a blow to a country.
This weakness in the Chiang Mai Initiative Multilateralization (CMIM) program, a $120 billion pool of funds to be tapped through currency swaps in times of financial crisis, will soon be addressed, as agreed by finance ministers from member nations of the ASEAN Plus Three ― Korea, China and Japan. The accord is undoubtedly one step forward in the pursuit of cooperation among the 10 members of the Association of Southeast Asian Nations and the three Northeast Asian countries.
The finance ministers, meeting on the fringes of the Asian Development Bank’s annual congress in Hanoi, also agreed to take other measures, which will certainly have great implications on regional solidarity. Among the accords are:
― The launch of the ASEAN Plus Three Macroeconomic and Research Office, better known by its AMRO acronym, this month. AMRO, an agency to monitor the financial situation in the region, will determine the amount of currency swaps needed to deal with financial turmoil. As the ministers said in a statement, AMRO’s surveillance function will be an “effective tool to prevent a financial crisis in the region.”
― The inclusion of governors of the central banks in the future meetings of finance ministers. This accord is an unmistakable indication what the ASEAN Plus Three is pursuing ― greater coordination in monetary policy among the member nations. The reinforced format for policy debate is patterned after those of Group of Seven and Group of 20 talks on global finance.
― Research on the proposed “regional settlement intermediary.” The proposal aims at boosting the Asian Bond Market Initiative ― an effort to develop efficient and liquid bond markets in Asia and, by doing so, utilize Asian savings for investments in Asia. The finance ministers also agreed to discuss the possibility of expanding the Asian Bond Market Initiative into an Asian Capital Market Initiative as a means of dealing with equities, derivatives and other financial products as well as bonds.
Each accord is of great importance on its own. But when all accords are implemented, they certainly will produce synergy, bringing CMIM closer to what was once proposed to be an Asian version of the International Monetary Fund ― an Asian Monetary Fund.
CMIM originates in the Asian financial meltdown. Shortly after a financial crisis developed in Thailand in 1997, Japan proposed to launch an Asian Monetary Fund, initially with $100 billion in a central reserve placed under the joint control of the contributors for the purpose of lending to countries in financial trouble. But the proposal did not fly in the face of strong opposition from the United States.
The idea was revived when finance ministers gathered at the annual ADB congress in Chiang Mai, Thailand, in May 2000. CMIM came into being when the underlying accord, signed in December 2009, took effect in March 2010.
Still, questions are raised about whether or not CMIM will serve its intended purpose ― averting a regional financial crisis. It is pointed out that the CMIM pool of money would be woefully small to fight a second Asian financial crisis. As such, it will have to work, not alone, but with the IMF. Moreover, financial ministers are already discussing the idea of doubling the amount of swaps.
The chances are virtually nil that CMIM will evolve into an Economic and Monetary Union anytime soon. But who knows if it will be remembered as an Asian version of the European Coal and Steel Community several decades down the road?