Monday, November 24, 2014

Euro Lessons for East Asia

SEOUL – East Asia could learn two valuable lessons from the eurozone crisis. First, do not rush the process of financial and monetary integration; and, second, develop adequate institutional frameworks before proceeding.

In fact, East Asian countries are unlikely to move toward a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions. Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating.

Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises. Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea. This $120 billion regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency.

The ASEAN+3 is now strengthening the CMIM by doubling the total fund size to $240 billion. The group also agreed to enhance the CMIM’s flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s lending program from 80% to 70%.

The CMIM has yet to be tested in a crisis. In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner. The $240 billion fund is small, amounting to only about 1.5% of the region’s GDP. European experience suggests that large-scale systemic shocks call for greater financial support.

Unlike the IMF or the European Stability Mechanism, CMIM contributions are self-managed by the respective country’s authorities. And countries may choose not to contribute to a swap request. This suggests that the CMIM could be especially constrained amid a systemic shock or political disputes among member countries.

Moreover, an “IMF stigma” remains among those countries in the region that were discontented with the Fund’s role during the 1997-1998 Asian financial crisis. IMF conditionality for the activation of the majority of their borrowing could make countries reluctant to turn to the CMIM for support.

Another challenge is the CMIM’s limited capacity for economic surveillance and monitoring. Last year, ASEAN+3 established a regional surveillance unit, the ASEAN+3 Macroeconomic Research Office (AMRO), to monitor regional economies, detect emerging vulnerabilities, and support effective decision-making by the CMIM. But it is unclear whether AMRO has sufficient capacity and expertise to monitor 13 countries effectively.

Indeed, East Asian countries may find it difficult to conduct candid surveillance of one another’s policies and enforce firm policy conditionality. The example of Greece before and during the eurozone crisis shows that it is often hard for countries to be tough on their neighbors.

The ASEAN+3 must continue to increase its resources, enhance its independence and improve its operational procedures. A fully capable regional financial safety net could contain the contagion of financial shocks emanating from individual economies and prevent disruptions to the region’s key growth drivers – intra-regional trade and investment. The CMIM could help East Asian countries to reduce their reliance on accumulating, as a form of self-insurance, costly reserves that fuel global imbalances.

With greater resources and an improved governance structure, AMRO could play a more effective role in regional economic surveillance and monitoring, without which moral-hazard risks associated with financial safety nets would rise. Enhanced regional control would contribute to better information-sharing and decision-making as well, implying that the IMF-linked portion of CMIM crisis lending could be reduced in step with the strengthening of AMRO’s capacity and performance.

The ASEAN+3 should aim to develop the CMIM into a full-capacity regional financial safety net supported by AMRO as a capable and credible secretariat – a de facto Asian Monetary Fund, possibly with broader membership. But, until the CMIM and AMRO are fully developed, their close cooperation with the IMF is desirable. Indeed, at the Cannes G-20 Summit in November 2011, leaders agreed on principles for cooperation between the IMF and regional financing arrangements, including open information-sharing and joint missions.

In particular, the IMF and ASEAN+3 financing arrangement should establish a regular channel of dialogue to facilitate information exchange and prepare concrete guidelines for cooperation and an appropriate division of tasks. Establishing constructive and effective guidelines could help to prevent the sort of conflicts and confusion over lending conditions during crises that we have seen among the IMF, EU, and the European Central Bank in the eurozone. Given the “IMF stigma” in Asia, a co-financing facility that provides precautionary credit lines without policy conditionality to qualified member countries would be useful.

Asian countries have learned from their region’s own crisis in the 1990’s, as well as from the eurozone’s ongoing crisis, that effective management of cross-border capital flows requires well-constructed national, regional, and global responses. To respond effectively to crises, East Asian countries must continue to improve the regional financial safety net and surveillance mechanism, while strengthening their cooperation with the IMF.

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    1. CommentedJonathan Lam

      Gamesmith94134: The IMF’s Half Step

      In recent months, Hong Kong government interrupted the US dollar inflow to Hong Kong twelve times, the treasury brought in large sum of US dollars to reserves in order to maintain its pegged 7.75 Yuan to a dollar, and $600 billion took a 20% rise in real estate and bouncy Hang Sen exchange 18000 to 22000. It was a bad indicators for growth and it is money laundering for the EQII and entrapment on the CNY and CNH to a currency war. It was only the second wave after the EQ I after the tightening of the real estate market with higher marginal taxes and levies.
      However, there is only issue the IMF is accountable on the reserves and the system restore the integrity of its currencies and currently the change of the global economy have evolved in changing the throw weights of its reserves that the accountability is no longer relevent to the growth and sharings to the internastional trade and finance.

      Perhaps, if the original five major currencies are dominant and each soveriegnty is bending over to accommodate in term of the throw weight or its exchange to the local currencies; even for the renimbi of China or the emerging market nations. In assumption, the rule on its reserves became obsolete, especially for those are holding with foreign reserves.

      Perhaps, it was the strategy that many inundated with its foreign capital must restore the level of exchange could buy back the reserves like hong kong and invest in Dow Jones to bloat up the growth issue; then, growing price of the stock or real estates can ensure its developing image. I saw the changing of the EQII limit to 80 BIllions China stopped its inflation inside China, but Hong Kong is more likely jumping to 10 percent in the coming months; including the rising salary in labor.
      EQIII is coming with its $85 billion a month bond buyback plan since the twist made its claim on successfully cut inflation and shifted it to Hong Kong and China. Then, the withdrawal of its dollar to US would leave Hong Kong and china holding the bag and hyperinflation.

      Perhaps, I am alerted by the affordability margin with the galloping price in real estates that turned owners to renters. the price changed dramatically after the houses are being condominiumized with larger scale, but the renter's cost is rising too. I see the pricing is being challenged in the coming six month.
      It would be the case study for the World Bank, ASEAN 10 plus three, and WTO in repealing the IMF's half step on how the PIIGS are being colonized or jeopardnized in its capital control if Zoning for firewall cannot be built.
      Can the 32,000 the currnet pricing on real estate hold after the housing come to a halt or bloat with hyperinflation with its 85 billion releasing by the EQIII?
      I am cynical on the cushion on those can afford to growth with lesser productivity.
      May the Buddha bless you?

    2. CommentedJonathan Lam

      Gamesmith94134: Striking Euro Gold (and Silver) 11032011

      “Milton Friedman’s bimetallic standard inherently more stable than a monometallic (gold-based) regime.”
      When you recieve two bids of Euros, in from Germany and the other from Greece; you would take the bid from Germany over Greece. Would you discount the euros of Greece with 15% just for sake of the confidence vote? Why should you discriminate one over the other as in Euros? It was the deficiency of credit that Greece may bear or the contagion as you may believe. If it is the investment consisted of US dollar and Euro in the open market trading, you would have no choice on the bids. Reluctently, you may have to accept the higher bid, even though you realized that you are under the attack by a raider or hedge fund manager. Suddenly, you may lost your company with the lesser of 51% of the control of it. It is how hedge fund managers or raiders use monetarism to undermine the weaker ones with weak currencies even for sovereignty nations; since the open market system does not provide a gatekeeper to stop the manipulation. Since the investments from aboard may not create growth or productivity if there is not sufficient time to grow in completion of the business cycle or create productivity on the invested with no innovation or products. It is merely exchange of hands for such transaction. It is how the sovereignty debts are created under the influence of the activity of hedging with the cost of living rises; and loss of credit as the pooling of its fund weakens. Therefore, it is advisable to revive the bimetallic standard to create the gatekeeper on the handicaps of the domestic currencies and international currencies; whenever investments are made by the foreign communities or sovereignty debts.

      If the bussiness transaction happens in a community only like London, people buy, people sell within a single circuitry of currency that share the same standard of credits, commodities and culture; such transaction do not affect the value of the its currency or increase on productivity. If a foreign investment is involved; the circuitry expands or contracts for its excesses or shortages in the pooling of its currencies, or commodities. Subsequently, it would create a shortfall or surge in value of the exchange that is not a bottomline to the business cycle or productivity.

      When there is a 3% interest credit charge on the market, I would gain 2% with my 1% interest credit charge even I have my US dollars exchanged to British Pounds, since there is no handicaps on the exchange. It is why many complain on the fiat money and the liquidity traps when the foreign investments are often being manipulated the currency rate changes for a stronger currency to weaken its own that caused inflation of the weaker currency; or withdrew at great mass that cause the shortage of cashflow or credit.

      In term of redistribution of wealth, the middle class of earnings did not match the growth after inflation; because the investment was dislocated while business cycle was not completed; or the productivity was not sufficient for a pay raise in matching the profit growth. Perhaps, we can blame on the competitions, but there is no comparison if there is no foreign investment or import of goods; and if it were a enclosed environment that no export is made. But, if we are taking advanage of the foreign investment or imported goods or resources to create productivities, sovereignty nations must restore the soveignty currencies to safeguard its citizenry from the invasion of currencies or resources that creates hardship for its people and allot resources for the exchange of goods and services from the foreigners. Then, the citizen must not pay for what the banker did; and stop telling me to pay tax my million dollar house that I did not earn. Parhaps, the line is drawn that the politicians must realize they must pay their bills too; instead of raisng our tax for their mishaps.
      As we learn from the recent soveriegnty debt crisis an financial disaster, we are clear at principle of the fiscal and monetary system must sustain both of balance and growth. Free Trade must free of mainpulation of the resources or invasion of others by using currencies or political powers; and each sovereignty nations are entitled to feed its people with domestic currency and trade it goods with the common currency availbale to obtain a better bargain for imported or exported. In addition, I prefer Zones in continents in protection of the weaker sovereignty nations with its neighbors nations to fend off the unwelcomed transaction that would be considered as hostile; because some investments are not solely privatized as it claimed; and free trade must be invited and not broken in or out at free will. If we all play the same rule, the world would be better for the citizens and governments too.

      May the Buddha bless you?