An Asian Monetary Fund? Jianhai Bi Outlines Asian Efforts to Protect Their Economies during the Global Financial Crisis and Predicts Long and Difficult Negotiations

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The on-going global financial crisis has affected East and South-east Asia while raising the question of how to reform the monetary systems in the region and the world. Ten ASEAN countries and three East Asian countries--China, Japan and South Korea--have set up a multilateral currency pool. This could eventually form a regional financial institution and have a significant impact on the international financial system.

In recent years, the thirteen East and South-east Asian countries have increasingly expanded trade ties and economic exchanges, a development which sheds light on the need to increase financial cooperation and regional integration.

The Asian financial crisis of 1997-98 caused extensive damage in East and South-east Asia. The region suffered from a lack of close financial co-operation and a monetary institution. ASEAN countries were deeply distrustful of the International Monetary Fund and the harsh terms imposed on them during the crisis. The IMF extended large fiscal and monetary bailout packages to Thailand, Indonesia and South Korea in the crisis, but at great cost to their economies. In addition, they complained that the IMF failed to sound the alarm or provide diagnosis, let alone remedies, when problems occurred in them. This lesson made the East and South-east Asian countries acutely aware of the need to promote regional financial co-operation to prevent another crisis. Since then, they have endeavoured to launch a regional organisation for financial co-operation. Shortly after the 1997-98 Asian financial crisis, Japan proposed the establishment of an Asian monetary fund. The proposal did not receive a warm response from the region, but it did promote the formation of a joint currency pool.

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The thirteen Asian countries, meeting in Chiang MMai, agreed to set up a mainly bilateral currency swap scheme known as the 2000 Chiang Mai Initiative (CMI) to protect their currencies from turmoil in the future. In 2004, the thirteen countries agreed to explore ways of enhancing the effectiveness of the initiative. In 2005, they agreed to integrate and enhance ASEAN Plus Three economic surveillance into the C/VII framework; define the swap activation process and adopt a collective decision-making mechanism; significantly increase the size of swaps; and improve the drawdown mechanism. In 2006, they agreed to complete the strengthening of the regional liquidity support network; explore ways to further strengthen surveillance capacity in the region; and set up a 'new task force' to further study various possible options to move towards an advanced framework of the regional liquidity support arrangement (CMI multilateralisation). In 2007, they agreed to establish a self-managed reserve pooling arrangement governed by a single contractual agreement; and carry out further in-depth research on the key elements of the multilateralisation of the CMI, including surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism.

Currency pool

On 4 May 2008, on the sidelines of the annual meeting of the Asian Development Bank in Madrid, the finance ministers of the thirteen East and South-east Asian countries agreed to set up a pool of foreign-exchange reserves. They decided on the creation of a pool of at least $80 billion of the region's foreign reserves to fight regional financial crises. The members' contributions to the pool would depend on the size of their economies and their ability to pay. Of the funds, 20 per cent were to be provided by the ten ASEAN members, and the remaining 80 per cent by the 'Plus Three' countries (China, Japan and Korea). (1) The agreement replaced the eight-year arrangement of bilateral currency swaps made in 2000 under the Chiang Mai Initiative, and transformed it into a self-managed reserve pooling mechanism governed by a single contract. Under the initiative, only bilateral currency swaps were permitted, which meant a country seeking to swap multiple currencies had to obtain permission from each individual partner country, a time-consuming process. …