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How E. Asia is responding to global crisis
In East Asia, South Korea was the first to be hit by the global crisis
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In East Asia, South Korea was the first to be hit by the global crisis. A report by Citibank in early Oct. 2008 showed that in the region the S. Korean economy was the most vulnerable to external financial shocks, in terms of both the risk of a sudden stop and sudden reversal of financial flows.
Having experienced the 1997/1998 crisis, the region has established currency swap arrangements, known as the Chiang Mai Initiative (CMI), to help each other in the eventuality of another such crisis. Eight years have elapsed, and a crisis is looming, but it remains uncertain as to how this arrangement can be invoked and what would trigger its use.
S. Korea has not attempted to make use of the CMI to prevent a crisis from unfolding. Under the CMI, Korea can exchange a mere US$17 billion with Japan and China, and additional insignificant amounts with other ASEAN countries. In view of the magnitude of the potential problem, the size of the CMI is too small. But perhaps the main reason for not resorting to this arrangement was that the CMI is still "an initiative".
Instead, S. Korea's president turned directly to Japan and China. In early October he proposed a trilateral meeting of the three countries' finance ministers to coordinate policies to cope with the global financial crisis. He also proposed holding a summit amongst the three countries, suggesting that "the three countries can wisely overcome the financial crisis if they join forces".
The most concrete and immediate swap of a significant amount (US$30 billion) was provided to S. Korea by the U.S. Federal Reserve. East Asia itself has accumulated international reserves of close to $4 trillion, but it was still talking about creating a regional fund of sorts.
In May 2008, ASEAN+3 finance ministers agreed to transform CMI into a much stronger Chiang Mai Initiative Multilateralization (CMIM) that can act as a "firewall" in the event of a regional financial crisis. They suggested that the CMIM would at least be $80 billion in size, with 80 percent contributed by China, Japan and S. Korea, and the remaining 20 percent by ASEAN countries. This "fund", as already envisaged in 2007, should be a "self-managed reserved pooling" arrangement that would be governed by a single contract.
At the sidelines of the 7th ASEM in Beijing, leaders agreed to create an $80 billion regional, multilateral fund, based on the CMIM. To work out the funds' details, a technical working meeting was held in Manila on Nov. 20, followed by a meeting of deputy finance ministers in Hakone on Nov. 28. Their recommendations were prepared for a meeting of finance ministers, originally scheduled for mid-December, before the ASEAN+3 Summit, with the expectation to receive the leaders' endorsement for the fund to become operational in May 2009.
The Summit has been postponed to Feb. 24-26, 2009. The finance ministers will meet on Jan. 16, 2009. Their decision will have major implications for the institutionalization of cooperation arrangements in East Asia. To make the fund operational requires a political decision, which will mean settling the following important issues.
First, they must decide on the size of the fund, going beyond the initial suggestion of $80 billion. Proposals that have been aired range from $120 billion (the amount required during the 1997/1998 Asian crisis) to 10 percent of the total amount of the region's international reserves.
Second, they need to agree on how to quickly disburse the fund and minimize conditionalities; for example -- by increasing CMI's 20 percent quick disbursing component to 50 percent.
Third, a strong regional surveillance mechanism will be required for the fund to be able to function. Who can organize an independent and credible surveillance mechanism?
Fourth -- and an equally important concern -- is the desirability of expanding the fund's purpose beyond providing emergency liquidity in case of a foreign exchange crisis to providing liquidity support for (recapitalization of) financial institutions as well as to purchase toxic banking assets. There are other pending issues regarding the pooling structure and escape clause, as well as the inclusion of Hong Kong SAR into the scheme.
East Asia will need to act quickly and forcefully. At the ASEAN+3 Summit in Feb. 2009, they will need to agree on the operation of the CMIM and to a series of coordinated actions, including implementing counter-cyclical fiscal measures. They can invite other members of the East Asia Summit (EAS) to participate in many of their proposed actions.
These proposed courses of action will have wide-ranging implications for East Asia's regional cooperation arrangements. Regional ambitions to develop various cooperation schemes are often hampered by the hard fact of deep-seated, narrowly defined sovereignty issues.
China, Japan and S. Korea held their first self-standing trilateral summit in Fukuoka on Dec. 13. This is a welcome development. In their Joint Statement they reiterated their commitment to work with ASEAN members to expedite the process of CMIM and strengthen the regional surveillance mechanism.
Most importantly, a regular trilateral summit could gradually eliminate the deep-seated reservations amongst them, which have been one obstacle to speedy regional progress.
The other obstacle is a lack of coherence in ASEAN. Independent, track-two regional institutional policy research projects, such as ERIA (Economic Research Institute for ASEAN and East Asia), will be useful to prepare solid studies that can help overcome this problem.
The writer is executive director of the Centre for Strategic and International Studies (CSIS) in Jakarta.
