World Bank Press: Support Deal 'Could Become Asian IMF'

World Bank Press: Support Deal 'Could Become Asian IMF'

The currency swap agreements in East Asia providing mutual protection from financial emergencies could develop into an Asian monetary fund (AMF), Masahiro Kawai, a leading Japanese proponent of regional financial integration, said yesterday, The Financial Times reports.

Agreed after the 1997-98 Asian financial crisis, and known as the Chiang Mai Initiative, the $39 billion in bilateral support arrangements between Japan, China, South Korea and 10 south-east Asian countries are expected to double in value and may be transformed into a multilateral system, Asian finance ministers said on Wednesday. "The Chiang Mai Initiative has the potential to become an Asian monetary fund," said Kawai, a former Japanese finance ministry official and World Bank economist who will head a new regional financial integration office at the Asian Development Bank (ADB). He was speaking in Istanbul, where the ADB was holding its annual meeting until Friday. Kawai is an adviser to Haruhiko Kuroda, the ADB president who has made it his mission to promote financial co-operation in Asia.

The suggestion of an AMF is controversial because it was proposed by Japan and others after the Asian crisis but rejected by the US and the International Monetary Fund. Critics argued that a regional fund would duplicate the IMF's work and might be unwilling to impose the harsh financial conditions on Asian governments that could be required in an emergency. Kawai said the idea of a secretariat for the Chiang Mai Initiative - a first step in the creation of a fund - was "clearly on the table", although there would inevitably be arguments about where it should be based.

East Asian governments have already begun loosening their adherence to IMF "conditionality". The finance ministers agreed this week to double the proportion of emergency funds that could be disbursed without the beneficiary implementing an IMF program to 20 percent from 10 percent. Kawai acknowledged that the Chiang Mai states did not yet have the bureaucratic structure to conduct the sort of detailed economic surveillance done by the IMF.

Despite receiving multi-billion dollar bail-outs, some Asian governments criticized the IMF for its handling of the 1997-98 crisis, and Kawai said the IMF's expertise in monitoring national economies could be complemented by a fund with an understanding of the region and how it interacted. "The Asian crisis experience told us that this purely country-focused approach doesn't work, because of contagion (between one crisis-hit country and another)," Kawai said. Among the next steps suggested by Kuroda and Kawai was the creation of a mechanism to link Asian currencies, as the European currencies were in the run-up to European monetary union.

Kyodo (Japan) reports that East Asian countries achieved a major milestone on a long road to a European Union-type regional monetary union at the ADB Annual Meeting. A principal pillar of their agreement is to substantially increase the total amount available for bilateral currency swaps. Ministers said in a joint statement that they agreed on a "significant increase in the size of swaps" and that they "favored an enhancement of up to 100 percent increase of the existing individual arrangements."

"When it comes to expanding the size, we must try to conclude bilateral negotiations as soon as possible, because we need to send a clear message that we will never let a crisis like the Asian crisis, or a liquidity crisis, happen again," Japanese Finance Minister Sadakazu Tanigaki said. Another is to evolve the network of currency swaps into one to be operated multilaterally, rather than bilaterally, so as to prevent any future financial crisis in one country from spreading into a regional one.

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Prudent Investor says…

It would be natural for the US to oppose any form of regional financial integration, considering that its economy, particularly the consumers which makes up about 70% of the country’s GDP, have been indirectly subsidized by Asian Central Banks. With more than a trillion dollars in cumulative foreign exchange reserves, the purported financial integration means less demand for US dollars which also translates to diminished economic, financial and political hegemony.

On the other hand, Asia stands to benefit from increasing trades and growing capital flows within its borders, which could be accentuated by the proposed integration.

In a nutshell, the denouement of the current wealth redistribution from the US to Asia would take its form via Asia's economic and financial integration.