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Can Asia free itself from IMF?
By Barry Eichengreen
Published: June 24, 2009, 22:47
There has never been a question about the ultimate purpose of the Chiang
Mai Initiative (CMI), the system of Asian financial supports created in 2000 in
that Thai city.
That purpose, of course, is to create an Asian Monetary Fund, i.e., a
regional alternative to the International Monetary Fund (IMF), whose tender
ministrations during the 1997-98 financial crisis have not been forgotten or
forgiven.
So far, however, the CMI has been all horse and no saddle. Its credits
and swaps have never been activated. The distress following the failure of
Lehman Brothers would have been an obvious occasion.
Yet, revealingly, the Bank of Korea, the central bank hit hardest,
negotiated a $30 billion foreign-currency swap with the United States Federal
Reserve, not with its Asean+3 partners.
Now, we are told, Asean+3 has achieved another great breakthrough, the
so-called Chiang Mai Initiative Multilateralisation (CMIM), aimed at turning
its bilateral swaps and credits into a regional reserve pool.
The goal was set in 2005, and last month Asean+3 finance ministers
negotiated the details. They specified contributions to their $120 billion
pool, set down borrowing entitlements, and allocated voting shares.
The agreement on contributions is significant, it is said, because China
and Japan will both contribute 32 per cent. In previous regional agreements,
like capital subscriptions to the Asian Development Bank, China had always been
treated as a second-rate power and asked to contribute less.
Indeed, China had shunned Japan's 1997 proposal to create an Asian
Monetary Fund precisely because it worried that it would play second fiddle.
That China is now acknowledged as a co-equal means that it will not stand in
the way of further cooperation.
Also significant, we are told, is the agreement to make decisions by
simple majority, with countries' votes to be roughly in proportion to their
contributions.
This means that no single country can block action, in contrast to the
IMF executive board, which makes decisions by consensus, giving large countries
like the United States de facto veto power.
But do these new rules really matter? Disbursing more than 20 per cent of
the credits available to a country still requires that it first reach an
agreement with the IMF, and 20 per cent of a country's entitlement is actually
less than it contributes to the pool.
This would appear to nullify the very purpose of the arrangement, which
is to free Asia from the IMF. While there is a plan to raise and then eliminate
the 20 per cent threshold, this is left to some future, unspecified date.
The reason for the contradiction is straightforward. Countries putting
money on the barrelhead want assurances that their resources will not be used
frivolously, and they want to know that they will be repaid.
But regional neighbours find it hard to criticise one another's policies
and demand course corrections. Political sensitivities run especially high in
Asia.
Even in Europe, with its long history of cooperation, surveillance and
conditionality are outsourced to the IMF. Revealingly, the Fund, not the
European Union, has taken the lead in negotiating emergency assistance packages
for Hungary and Latvia.
Delinking the CMIM from the IMF will require Asian countries to undertake
hard-hitting reviews of one another's policies and to demand difficult policy
adjustments. Here Asean+3 talks the talk. Its May agreement included a
commitment to establish a regional surveillance unit.
But there is no agreement on where to situate it or how to staff it. It
could be placed within Asean's Secretariat in Jakarta. It could be placed
inside the Asian Development Bank in Manila.
It could be given to the "neutral" Northeast Asian country, Korea. The
outcome matters - which is why governments are fighting over it. Recall how the
fateful decision to situate the IMF in Washington, DC enhanced the influence of
the US Treasury just down the street.
These dilemmas can be finessed by giving both surveillance
responsibilities and the actual power to disburse funds to an independent board
insulated from national politics.
Its members, with statutory independence and long terms in office, could
function like the monetary policy committee of a central bank.
They could issue a Financial Stability Report that bluntly flags weak
policies and financial vulnerabilities. And they could demand policy
adjustments as a condition for disbursing funds. The IMF could then be shown
the door.
This scheme wouldn't solve all of Asia's problems. But it would at least
head off one danger, namely the urge to accumulate even more reserves.
Recent volatility reinforces this temptation. If Asian countries succumb,
global imbalances and all their associated problems will return.
Pooling regional reserves as a way of making them go further is a better
alternative. But making this vision a reality requires further bold thinking.
Barry Eichengreen is Professor of Economics at the University of
California, Berkeley
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