Fund may lead to Fortress Asia
Any form of Asian monetary cooperation that supersedes the IMF's role in international bailouts will face strong resistance, The Nation's Thanong Khanthong writes.
Supachai Panitchpakdi, head of the Democrat Party's economic team, recently called on Asian countries to seriously consider setting up a body to align macro-economic policies.
His proposal represents one of the attempts by countries in this part of the world to pursue regional monetary cooperation in light of the present financial upheaval. He has said the regional body would also be entrusted with a surveillance function by providing early warning to member countries about macro-economic trends.
It remains quite ambivalent how regional monetary cooperation can be effectively established given the economic and political diversity of the Asian countries.
Stanley Fischer, first deputy of the International Monetary Fund, said in Hong Kong last month during the annual World Bank/IMF meeting that if Thailand had faced peer pressure last year to rectify its macro-economic imbalances, Southeast Asia would not have faced the financial turmoil it is now painfully experiencing.
He added that unlike in Europe, there is an absence of a culture for countries in this region to warn each other about macro-economic problems, even though they stand the risk of being affected by a policy error of another country.
The first leader in this region to openly criticise Thailand for its past macro-economic mistakes turned out to be Singapore's Senior Minister Lee Kuan Yew. The grand old man last month said: "Thailand's economic problems are the result of its weak financial sector, unsustainable macro-economic policies with large current account deficits and an inflexible exchange rate regime too closely linked to the US dollar." He added that the lack of stability in the Thai Cabinet and other political problems were the root of Thailand's economic problems.
Thailand's leadership did not respond to Lee's remarks. It is obvious that the country's problems are not only the region's problems but also the world's problems.
The contagion effect from the de facto baht devaluation on July 2 has put an end to the Asian economic miracle. The financial turmoil has pushed the top policy-makers in this region to re-think how they should forge ahead in regional monetary cooperation to prevent future crises and to ensure stable economic growth.
Regional monetary cooperation might not necessary mean monetary integration, at least in the view of Joseph C K Yam, chief executive of the Hong Kong Monetary Authority. "The extent of the diversity in Asia's economies clearly points to the inappropriateness of monetary integration, at least for the time being. Realistically, Asian monetary cooperation will have to be perused in a multicurrency environment. Asian monetary cooperation is not about monetary integration," he emphasised in a recent lecture on a formula for Asian monetary cooperation.
Yam said there is much more enthusiasm among member countries in this region to pursue monetary cooperation in a manner that does not inhibit their freedom to determine their domestic policies. High on the agenda could be how to strengthen the region's monetary defensive mechanisms against attacks on regional currencies, how to enhance the pain tolerance level of the region's financial systems so they can absorb financial shocks more effectively, and how to build more robust financial infrastructures to facilitate effective financial intermediation and to limit the contagion effect of financial crises.
Yam emphasised that Asian monetary cooperation must be considered within the context of global monetary cooperation. "That is, we should not and I believe we are not trying to build Fortress Asia. Second, given the great diversity of the economies in the region, at different stages of financial development Asian monetary cooperation should proceed with flexibility and at a pace comfortable for those wishing to take part in it," he said.
The most recent proposal to enhance regional monetary cooperation is the Asia regional fund, proposed on Sept 20 in Hong Kong by Japan at the meeting of the Group of Seven industrialised countries. The US$100 billion fund was originally designed as a mechanism for countries in this region against currency attacks.
Japan came up with this bail-out fund because it harboured distrust about whether the US and IMF would fulfil their obligations as guardian of the international monetary system. If this region is to go under, so will Japan.
The Asia fund received strong support from Thailand and most other countries in the region, although how the fund is to be administered is the subject of contentious debate. The IMF normally prescribes tough macro-economic targets, through fiscal and monetary tightening, for countries to follow in return for support from its bail-out fund. This makes most countries reluctant to go to the IMF for fears of political repercussions. Thailand has already lost its prime minister, Chavalit Yongchaiyudh, due partly to the economic dislocations and political tensions created by the IMF's tough medicine.
Supachai, who is to take over concurrently as deputy prime minister and commerce minister, said the fund would have to complement the IMF in times of abnormal market conditions and that it would not be a suitable vehicle for correcting structural macro-economic imbalances.
As the monetary policeman of the world, the IMF has objected to the Asian fund from the outset, as has the United States. The IMF sees itself as an appropriate guardian of stability in the international monetary system, fearing the Asia fund will supercede its role.
Rather than duplicating the IMF's function by setting up the regional lending facility, the IMF has called on the Asian countries to enhance their monetary cooperation through surveillance. "There is a need for a framework where countries can encourage one another to pursue [appropriate macro-economic] policies," said Michel Camdessus, the IMF's managing director. "Every country has indeed the obligation to keep the house in order and work with its neighbours ... so that they can anchor each other and exert peer pressure to pursue sound policy."
However, there is a sense of distrust among the Asian policy-makers that the US, a financial powerhouse itself which commands a veto stake in the IMF, might be trying to push the money game to its most advantage, hoping to predominate the global financial services. Apart from trying to get the financial services liberalisation talks completed in the World Trade Organisation, the US and the IMF are also urging countries to further undertake capital account liberalisation.
The present financial turmoils in the region clearly shows how the region is vulnerable to financial shocks and to attacks from hedge funds from the West since the region depends on savings from the US and Europe to finance its economic growth. The reason that the world is coming under financial paranoid is because of the unregulated trading mentality in the currencies market, driven largely by herd instincts and daily sentiments.
The present financial upheaval in Southeast Asia also raises questions as to whether the role of the IMF is adequate or forthcoming in a timely manner to guard the world from financial shocks and whether it is prescribing the right medicine for Thailand. In the end, it appears that Japan has finally given in to the US pressure by dropping the idea of setting up an Asia fund. Reports suggest Japanese bureaucrats are now prepared to propose alternatives that would be less ambitious than a fully independent fund.
One possibility is for Asian countries to set up a regional emergency-rescue facility similar to the IMF's credit lines. Credit countries would not actually deposit all funds on a permanent basis as originally proposed but would instead promise to deliver set amounts when necessary.
Another alternative is for larger nations to provide credit lines to smaller ones. Japan will reportedly propose these alternatives at a Nov 18 meeting in Manila of the Asean top financial and monetary officials.
Implementing the Asia fund might not be easy as it would amount to acceptance that any financial turmoils in this region are "regional" in nature when in fact they are a global issue. The most visible evidence is the damage to the Brazilian economy, half way round the globe, by the spill-over effect in the financial market which is forcing the Latin American country to take painful budgetary measures to restore confidence. The Asia fund might also give the impression that Asia is trying to create a "fortress" of its own.
Another form of monetary cooperation involves a setting up of an exchange rate mechanism, similar to Europe’s Exchange Rate Mechanism. If the US succeeds in consolidating the North, Central and Latin Americas and if Europe proceeds smoothly with its monetary integration, Asia will become a fat target for currency attacks because it lacks any formal monetary cooperation. This fear was conveyed to the European leaders when the Asian finance officials met their counterparts in Bangkok last month.
There is an argument that the Asian fund would be impractical if it is not accompanied by monetary cooperation similar to the currency trading band of the EU's Exchange Rate Mechanism. The currency trading band is vital to force member countries to adopt discipline in their macro-economic policies. This would prevent free riders from using the fund to correct their imbalances in macro-economic policy.
An exchange rate trading band would force countries to adhere to anti-inflation policies and prevent any country from printing money to correct their macro-economic policy. But if Asian countries cannot give assurances they will adopt disciplined macro-economic policies, free riders such as those with high inflation might take advantage of the fund. Moreover, the lack of a disciplined macro-economic policy by any member might make matters even worse as it would erode the credibility of the fund.
Nonetheless, the fact that all the countries in this region rushed to Thailand's rescue by participating in the IMF-brokered $17.2 billion bail-out package reflects the significant step in Asian monetary cooperation. The US did not give a single dollar to help Thailand but agreed to give $3 billion to Indonesia as part of its IMF package.
From this perspective, it remains ambiguous as to where Asian monetary cooperation will move forward from this point amid the indecisive Japan and the elusive US. Despite the setback of the Asia fund, which is not likely to materialise because it leaves the US out in the cold, there will be attempt from the Asian side to propose the Apec fund at the upcoming Asia-Pacific Economic Cooperation summit in Vancouver this month.
By doing so, the US will be encouraged to participate in the financial mechanism to provide stability to the region. A new form of regional monetary cooperation is shaping up.