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The Long Search for Stability: Financial cooperation
to address global risks in the East Asian region*
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Apr 16th 2020, C.P. Chandrasekhar |
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Forced
by the 1997 Southeast Asian crisis to recognize the external
vulnerabilities that openness to volatile capital flows result
in and upset over the post-crisis policy responses imposed
by the IMF, countries in the sub-region saw the need for a
regional financial safety net that can pre-empt or mitigate
future crises. At the outset, the aim of the initiative, then
led by Japan, was to create a facility or design a mechanism
that was independent of the United States and the IMF, since
the former was less concerned with vulnerabilities in Asia
than it was in Latin America and that the latter’s recommendations
proved damaging for countries in the region. But US opposition
and inherited geopolitical tensions in the region blocked
Japan’s initial proposal to establish an Asian Monetary Fund,
a kind of regional IMF. As an alternative, the ASEAN+3 grouping
(ASEAN members plus China, Japan and South Korea) opted for
more flexible arrangements, at the core of which was a network
of multilateral and bilateral central bank swap agreements.
While central bank swap agreements have played a role in crisis
management, the effort to make them the central instruments
of a cooperatively established regional safety net, the Chiang
Mai Initiative, failed. During the crises of 2008 and 2020
countries covered by the Initiative chose not to rely on the
facility, preferring to turn to multilateral institutions
such as the ADB, World Bank and IMF or enter into bilateral
agreements within and outside the region for assistance. The
fundamental problem was that because of an effort to appease
the US and the IMF and the use of the IMF as a foil against
the dominance of a regional power like Japan, the regional
arrangement was not a real alternative to traditional sources
of balance of payments support. In particular, access to significant
financial assistance under the arrangement required a country
to be supported first by an IMF program and be subject to
the IMF’s conditions and surveillance. The failure of the
multilateral effort meant that a specifically Asian safety
net independent of the US and the IMF had to be one constructed
by a regional power involving support for a network of bilateral
agreements. Japan was the first regional power to seek to
build such a network through it post-1997 Miyazawa Initiative.
But its own complex relationship with the US meant that its
intervention could not be sustained, more so because of the
crisis that engulfed Japan in 1990. But the prospect of regional
independence in crisis resolution has revived with the rise
of China as a regional and global power. This time both economics
and China’s independence from the US seem to improve prospects
of successful regional cooperation to address financial vulnerability.
A history of tensions between China and its neighbours and
the fear of Chinese dominance may yet lead to one more failure.
But, as of now, the Belt and Road Initiative, China’s support
for a large number of bilateral swap arrangements and its
participation in the Regional Comprehensive Economic Partnership
seem to suggest that Asian countries may finally come into
their own.
For
full article Click here
* This article was originally published
in The
Institute for New Economic Thinking on April 15,
2021.
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