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Asia's answer to the
IMF
By Alan Boyd
When
Haruhiko Kuroda was named in November as the new
chief of Asia's most influential development
agency, central bankers knew it would not be long
before the career technocrat shifted the agenda
back to the delicate issue of monetary union. And
the timing could not be any better, given the
dollar's free fall, concern over the sick US trade
and fiscal accounts and the risks these entail for
the region's blossoming free trade agreements.
But the more pertinent questions being
asked have less to do with the economics of
convergence than its political ramifications: who
has the most to gain and what does Japan in
particular want out of it? Kuroda, who officially
took over at the Manila-based Asian Development
Bank (ADB) on February 1, knows what he wants. His
introductory statement to staff referred to
integration as "a special and unique mission of a
regional development bank".
In follow-up
interviews, Kuroda has spoken of his mission to
promote economic stability through intraregional
cooperation in trade and exchange systems and of
the advantages of achieving a single Asian
currency. A weighty tome on foreign exchange
stabilization published on Friday quotes the
British-trained economist as specifically calling
for the establishment of an Asian Monetary Fund
(AMF) that could take on the role of reforming
financial systems in much the same manner as the
International Monetary Fund (IMF).
Japan
has taken its cue from the wake-up call of the
1997-98 East Asian economic turmoil. As
vice-minister for international affairs at the
Japanese Finance Ministry, Kuroda helped prepare
Tokyo's $30 billion rescue package for Indonesia,
Thailand and Korea, later overseeing the
rehabilitation process when he became a special
adviser to Prime Minister Junichiro Koizumi. While
the original AMF concept was devised by Eisuke
Sakakibara, the charismatic architect of Japan's
1990s monetary strategy, much of the groundwork is
believed to have been done by a team under Kuroda.
Tokyo first presented the proposal to a
stunned meeting of central bankers as the three
East Asian countries were exhausting their
offshore reserves in an ultimately fruitless
effort to prevent currency meltdowns. It wasn't
supposed to come out until there had been
regulatory reforms of exchange regimes, especially
a dismantling of the inflexible dollar-linked
currency baskets that were eroding offshore
confidence as the appreciating greenback made East
Asian exports uncompetitive.
But the
Japanese were unhappy over the austerity measures
forced on the afflicted economies by the IMF and
the World Bank in return for a financial bailout,
fearing - rightly, as it transpired - that an
overly conservative approach would push them into
a full-blown recession. The financial mandarins in
Tokyo wanted fiscal pumping and low interest rates
so Asian exporters could trade their way out of
the quagmire - and protect billions of dollars
worth of Japanese investments in the region.
A deeper motivation was that Japan saw an
opportunity to reduce the massive pressures
exerted by the dollar in trade and exchange
markets, which were correctly viewed as a prime
cause of structural instability. More than 90% of
East Asian trade was transacted in dollars at the
onset of the crisis, and the greenback was widely
believed to comprise at least 80% of the weighting
in adjusted currency baskets even though Japan was
the region's leading trading partner and a crucial
source of foreign capital.
Sakakibara's
predicament was that Japan's global standing was
at its lowest ebb for a decade or more, tarnished
by its stagnant domestic economy and historic
impotency within the IMF, which has a tradition of
alternating leadership between the United States
and Western Europe. Japan is automatically
accorded the chairmanship of the ADB, but still
has to defer to the IMF when it comes to the big
decisions on financial infrastructure. Regionally,
Tokyo's clout relies heavily on bilateral credits
that don't carry the same weight.
It was
no surprise that the IMF reacted with hostility to
the AMF plan, but Tokyo appeared to be less
prepared for the harsh response from Washington,
which was already under siege from the imminent
launch of a euro zone in Western Europe.
"Realistically, the dollar is going to dominate
international commerce as long as the US economy
remains dominant, but it is not in Washington's
interest to have the IMF's global reach usurped or
undermined by regional monetary cooperation," said
a diplomat. "And of course Tokyo made it easy for
everyone by failing to do its homework."
Poorly researched, possibly because it had
been rushed out to suit a particular economic
situation, the AMF was generally greeted with
skepticism and just as quickly vanished. But its
legacy was felt in other ways. Despite US
resistance, the 10 members of the Association of
Southeast Asian Nations (ASEAN) linked their
international reserves with Japan, China and South
Korea in May 2000 as part of a currency swap
framework that became known as the Chiang Mai
Initiative. An Asian Clearing Union (ACU) has been
functioning since 1975 to settle intraregional
trade transactions in local currencies, and ASEAN
has had a currency swaps arrangement since 1977 to
deal with temporary international liquidity
problems.
At a surveillance level, the
Executives' Meeting of East Asia and Pacific
Central Banks (EMEAP) was set up in 1991 to
monitor financial market developments and exchange
information on perceived threats. More recently,
Thailand has instigated an Asian Bond Fund as a
part of the Asian Cooperation Dialogue, with the
objective of developing domestic capital markets
and reducing reliance upon speculative inflows
from abroad.
The Chiang Mai Initiative has
particular potential. As a deliberate strategy of
insulating exchange systems through current
account surpluses, it has seen Asia's currency
reserves swell by 20% a year since the 1997
crisis. But it is a long way from Sakakibara's
vision of monetary union. With much of Asia -
including the entire Indian subcontinent - left
outside, Japan and China together account for
almost 60% of combined reserves. And most are
still dollar holdings.
In the meantime,
Japan has been polishing up the AMF formula and,
reverting to its traditionally more pragmatic
approach, has shifted the battleground to the
diplomatic front. Two years ago, the ADB launched
a scathing attack on the IMF's role in the global
financial architecture by floating the idea of
"credible emergency financing from official
sources, with less strings". In language that
clearly was aimed at Asia's central bankers and
monetary chiefs, the institute's Japanese dean,
Masaru Yoshitomi, called for "collective measures
to restore systemic currency stability, including
joint interventions".
Simultaneously,
Kuroda's predecessor at the ADB, Tadao Chino,
began to challenge the World Bank's function as
the final arbiter of global development policy by
setting the agency on a more independent footing.
ASEAN countries have given warm, if qualified,
support for monetary union, even awarding the ADB
Institute a contract several years ago to conduct
regular surveillance of the members' economies, in
a pointed intrusion into the IMF's turf.
But as Kuroda has acknowledged, monetary
integration is not going to happen overnight,
especially as barriers remain at the trading
levels through restricted flows of labor, capital
and financial services. Liberalization pressures
from the World Trade Organization and regional
blocs like ASEAN and the Asia Pacific Economic
Cooperation are forcing the exports market open,
but the deals are still couched in dollars.
Neither the yen nor the yuan has the regional
recognition as an acceptable alternative; the
Chinese currency is directly pegged to the
greenback, while the yen's recent history of
weakness has hindered East Asian export growth.
While suspicions will linger over Japan's
intentions, some analysts believe the debate will
eventually come down to a numbers game: unlike the
euro zone, Asia simply doesn't have the money on
the table to achieve a viable level of currency
self-sufficiency. "It is easy to forget that it
took two decades or more for the euro zone to come
into being, even with the backing of such vibrant
economies as Germany, France and the UK. I think
they need to develop the swaps arrangement further
... it is going to take at least another US$50
billion to create an effective safety net ," said
a European banker. "Japan has its own reasons for
keeping the issue alive, but one would have to say
it is largely a symbolic exercise at this point in
time."
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