Asia needs to fix financial safety net

Ministers and governors posing for a picture after the 15th Asean + 3 Finance Ministers and Central Bank Governors meeting in Manila May 3, 2012last month. China, Japan and South Korea agreed on Thursday to boost cross-investment in government bond markets, worth nearly a combined US$15 trillion, in a move that will better prepare the countries to protect their financial markets from external shocks. Reuters pic announced a package of initiatives designed to ensure their economies do not succumb to another balance of payments crisis. Reuters pic

ASIA'S recent doubling of its financial safety net looks impressive. But it's more icing than cake. It is, in fact, unusable.

There is no fund but a series of promises, the institutional mechanisms to replace International Monetary Fund (IMF)-type surveillance and conditionality have not been established, and there are no rapid-response procedures to handle a fast-developing financial emergency.

With much fanfare, 3 East Asian (China, South Korea and Japan) and 10 Southeast Asian finance ministers, or Asean+3, last month announced a package of initiatives designed to ensure their economies do not succumb to another balance of payments crisis.

They relate to the Chiang Mai Initiative Multilateralisation (CMIM), a self-managed reserve-pooling mechanism for its member economies. The new arrangements doubled its size to US$240 billion (RM761 billion), and increased the "delinked" portion -- the threshold before IMF involvement -- from 20 per cent to 30 per cent of a country's quota. The implementing agency, the Asean+3 Macroeconomic Research Office (AMRO), is already up and running in Singapore.

This looks impressive -- another reason to subscribe to the "Asia rising" thesis -- in contrast to the European imbroglio and the shaky US fiscal position.

But look deeper and the achievements are less impressive. Asean+3 might appear to have its own regional insurance but in practice it does not. In the event of another crisis, it would be back to a series of ad hoc bilateral swaps or the much-maligned IMF.

This is a controversial assertion -- particularly with Asean+3. But a brief look at the history of the CMIM and the agreement's fine print proves the point. It also reveals some of the things that need to be fixed.

The CMIM evolved from the 1997-98 Asian financial crisis, and the IMF's management of it. The IMF quickly became extremely unpopular, not just for the prescribed bitter medicine in Indonesia, Korea and Thailand, but also for having misdiagnosed the problems, which it later acknowledged.

The result was a resurgence of nationalist sentiment that grew regional. The Japanese government proposed an alternative "Asian Monetary Fund" but, neglecting to consult China first, there was insufficient regional support to counter predictable US opposition. Notwithstanding this, the first step was taken soon after with the Chiang Mai Initiative (CMI) in May 2000.

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Asia needs to fix financial safety net