The Chiang Mai currency initiative
MOST people in East Asia still remember the 1997-98 financial crisis with horror. It started with what analysts first thought was a conventional currency crisis. That was a mistake. It was much more serious than that. The turmoil in the currency market-- it was a risky policy for Thailand, the Philippines, Malaysia and Indonesia to peg their currencies to the US dollar -- soon mutated into a virulently contagious disease and infected countries, like Korea, which were geographically far away from the above-mentioned South-East Asian countries.
The currency crisis caused export earnings to decline dramatically, which eventually led to a full-scale economic meltdown of the region causing the collapse of domestic asset markets, the failure of many well-established banks and other financial institutions and the liquidation of many prestigious firms. The economy, in general, took a sharp dive. The crisis brought the seemingly invincible East Asian economies to their knees.
Foreign lenders to Asian banks panicked and called in their loans, creating a crisis of confidence in the economies of the region. As the situation deteriorated the Asian countries sought help from the International Monetary Fund to stave off a collapse of the financial system. Unfortunately, the IMF, which usually treats smaller emerging countries with arrogance, imposed severe macroeconomic measures on them. It is, however, true that the crisis forced the East Asian countries to introduce major overhauls that eventually left them "with lower debt levels, more resilient banking and financial systems and often large foreign exchange reserves."
But they did not forget the IMF's humiliating treatment. The Chiang Mai Initiative (CMI) was East Asia's answer to that treatment. The Initiative was taken in 2000 by the central banks of ten members of the Association of South East Asian Nations (Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) plus China, Japan and South Korea, with the purpose of setting up a web of bilateral currency swaps to stave off any future run on their currencies.
Now, after nearly nine years of CMI's existence, the need for greater financial cooperation in Asia has been brought into sharp focus by the shock of the current global financial crisis. At the same time, it has pushed the CMI to have more ambitious objectives. First, the Initiative wants to "multi-lateralise" the existing bilateral currency agreements. Second, with only a fraction of the huge foreign currency reserves at the disposal of countries like China, Japan and Hong Kong -- more than $3.trillion -- the CMI wants to set up a common fund of $120 billion from which the countries in crisis can quickly draw the necessary cash.
A meeting will be held this month in Busan, South Korea, to sort out the outstanding issues and to give formal approval to agreements already reached.
Leaving aside the size of the fund (only $120 billion), which, in my opinion, is too small for so many countries' needs, the most important issues that need to be addressed at this meeting are the exact distribution of voting power, how the decision-making process will function and how to provide economic surveillance and due diligence before and after disbursal.
Here, the rivalry between China and Japan played an important part. While Japan insisted on becoming the largest single contributor, China wanted to be a co-equal first contributor. It seems that an agreement has been reached on contribution levels. Japan will contribute $38.4 billion of the $120 billion pool. Mainland China will contribute $34.2 and Hong Kong will contribute $4.2 billion, making a total of $38.4 billion. Thus the aspirations of both China and Japan will be satisfied. This also shows the willingness of rival powers to compromise for the common good of the region.
Behind the scene, Korea is reported to have worked hard to reconcile the antagonistic positions of these two Asian giants. Japan will be "the single largest contributor" as it always wanted to be while China (together with Hong Kong) will become one of the co-equal largest contributors.
"Multi -lateralisation" of the CMI has enhanced the need for the establishment of a full-fledged secretariat with highly qualified staff. This month's meeting in Busan will most probably confirm Singapore as the place where the CMI secretariat will be located.
The current financial crisis has given an impetus to opening up regional markets in Asia. The truth is that the emerging Asian countries have rebounded faster than the Western economies. So many free-trade agreements have been signed recently among Asian countries that, if this trend continues, it will not be unreasonable to expect the rise of a powerful trading bloc in East Asia, which will not have to depend so much on the Western consumers for its economic stability and progress.
At a recent meeting of the Asean countries in Bangkok, the participants reviewed the progress made towards the fulfilment of their long-cherished goal of establishing the Asean free-trade area (eliminating tariff for 87% of all imports among member countries) and concluded that by January 2010 it would be achieved. The first phase of the Asean free-trade area will thus come into effect in January 2010. It excludes services and does not include labour mobility.
At this meeting, the leaders also talked enthusiastically about establishing an East Asian Community with a common currency. There are many sceptics who think that this is not a viable proposition because of the huge differences in race, religion, culture, political structure, relative wealth and income per capita etc. of the participating countries. But the fact remains that despite all these differences they have until now been successful in working together for the purpose of promoting cross-border economic and technical cooperation in East Asia. Given time and patience, why will they not be able to realise their dream of one day having a European Union-style East Asian Community?