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The Need for an Asian Monetary Fund
Earlier this week, Thailand's Deputy Prime Minister Supachai Panitchapkdi has called for the creation of an Asian parallel of the International Monetary Fund (IMF) in the new millennium to avoid financial crises like the one faced by the countries in East and Southeast Asia. Addressing a conference organised by the Confederation of Indian Industry, Panitchapkdi suggested that the creation of an Asian fund similar to that of IMF would help to prevent liquidity crisis.
This call follows a proposal from the chief executive of Hong Kong's de facto central bank for Asian monetary union. Joseph Yam, the head of the Hong Kong Monetary Authority, has argued that the time may have come to consider the possibility of an Asian currency - perhaps something along the lines of an Asian Currency Unit - that would form an anchor currency for the region.
Speaking at a conference of the heads of central banks from both the developed and developing countries in Manila earlier this month, Yam floated the notion of an Asian version of the 'euro', saying that greater Asian unity in financial markets would make the region less vulnerable to the speculative attacks that hounded the countries in the region.
The proponents of a single currency has some strong arguments in their favour. Citing the example of Europe, they argue that a unified currency would reflect the region's strong trade linkages and also help address problems of intermediating financial resources within Asia. Much of the trade is now carried out in US dollars. At present, central banks in Asia make significant investments in foreign securities, particularly US dollar assets, only to see volatile funds flow back to the region from overseas markets. By investing reserves directly in Asian financial assets, this type of costly and unstable recycling through developed markets could be drastically reduced.
However, we should be careful before joining the bandwagon for such a union as it would face many obstacles and a lengthy gestation period. Asia's disparate economies are at much more disparate stages of development than those of Europe, especially since the financial crisis. Moreover, the disadvantages of such a union may greatly outweigh any possible advantages for the Asian countries. Its success depends on strong political unity and cohesion which is currently absent in Asia. These countries would be better off by taking a wait and see position for now and learning from the European experience.
A more practical idea which deserves close attention is the call for forming as Asian Monetary Fund. It could provide financial resources to supplement IMF programme in the region and play the same complementary role as the Asian Development Bank plays to the World Bank.
The idea of an Asian Monetary Fund was initially floated by Japan in late 1997. Japan's generous offer, reportedly reaching about $50 billion, could have endowed the new institution with significant resources from the outset. But the trial balloon never received much attention as it was immediately rejected by the G-7 countries due to fears that it could undermine the leadership role of the IMF and lead to a split between Asia and North America. Several Asian countries, most notably China, also expressed their initial opposition to such a Fund. But China's opposition was more political than economic. She feared Japanese domination of such an institution.
Setting international politics aside, the creation of an Asian Monetary Fund could be extremely useful for the entire region. It could provide an important regional complement for the IMF in the same way the Asian Development Bank and the other regional development banks complement the World Bank. It would satisfy the strongly felt need of many Asians that an institution of their own would be more immediately responsive to their concerns. The spread of the Asian currency crisis underscores the advantages of creating such an institution.
The major architectural weakness as revealed by the Asian financial crisis is the absence of effective early warning and early action systems. No one predicted the regional spread of the economic downturn that started with the collapse of the baht in Thailand. Given the current surge of globalisation, the world desperately needs effective early warning systems. Once developed, such warning systems can probably be applied most effectively at the regional level, as countries in the neighbourhood are much more likely than those farther away to detect emerging problems. An Asian Monetary Fund could provide the institutional locus of such an effort.
Experience from the recent financial crisis in Thailand show that even when the problem was correctly identified, no preventive actions were taken. Consequently, Thailand's neighbours were badly burned by its failure to head off a crisis. Regional peer pressure is therefore the most promising route to induce anticipatory policy measures. The Thai experience shows that neighbouring countries have a legitimate right to apply such pressure.
The Manila Framework signed by the APEC countries in 1997 sought to start such a process on macroeconomic and monetary issues. The ASEAN countries are also following a similar track. But these processes have no formal status, secretariat or other institutional foundation and would be much more effective if rolled into one organisation as the Asian Monetary Fund.
The ability to provide financial resources to supplement IMF lending would obviously strengthen the Asian Monetary Fund's clout in pursuing its primary responsibilities for early warning and early action.
I mentioned earlier that I see the relationship between the proposed Asian Monetary Fund and the IMF similar to the relationship that exists between the Asian Development Bank (ADB) and the World Bank. In this respect, let me shed some light on the ADB and the World Bank. One could argue quite persuasively that Asia needs the ADB as well as the World Bank since competition in the provision of all services is better than monopoly. Since the ADB is more efficient provider of those services, assuming equivalent quality, there is little cost to the international donor community from the duplication of agencies.
With Washington-based institutions being accused of both policy arrogance and being subservient to US-government interests, the ADB is usually seen as more understanding of its clients' needs. This almost automatically ensures less radical policy prescriptions than the World Bank. The proposed Asian Monetary Fund can enjoy similar advantages.
Moreover, it can also learn from the problems faced by the ADB. One of the major failures of the ADB, which depends on Japan and the US for its major source of funds, has been its reluctance to argue its case effectively to the non-Asian public.
The causes of its failure to do so are two-fold. First, a reluctance of the Japanese authorities to take and maintain a high profile position if it conflicts with monetary US government interests. The ADB, while important to the Japanese, tends to take second place to other issues in the US-Japan policy relationship. Second, the US authorities are more than ambivalent about the ADB developing a high profile that would imply any diminution of their ultimate control.
In order to avoid the mistakes of the ADB, the proposed Asian Monetary Fund needs to broaden its participation beyond the initial 'Asia only' concept. It is clear that no single Asian country could effectively lead the effort. Any hint of Japanese domination will be rejected by many other countries in the region, and Japan's continued economic problems precludes its early leadership. China, despite its praiseworthy performance during the recent financial crisis, is not yet ready for such a role.
Hence countries from outside Asia should be encouraged in participating in the formation of the Asian Monetary Fund. Such a Fund would play an important role in the "new international financial architecture" that will hopefully emerge from the current crisis engulfing the international financial markets.
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