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Affordable delays for the Chiang Mai Initiative?

Author: Joel Rathus, Adelaide University While the worst of the Global Financial Crisis may have passed, in East Asia the economic pressures are still mounting. Regional economies are struggling with inflation, asset bubbles and now increasingly volatile exchange rate movements

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While the worst of the Global Financial Crisis may have passed, in East Asia the economic pressures are still mounting. Regional economies are struggling with inflation, asset bubbles and now increasingly volatile exchange rate movements. One mechanism which might aid the regional economies to coordinate their exchange rate policies, to fend off currency speculation and assist with reigning in increasingly problematic ‘hot money’ flows is the Chiang Mai Initiative Multilateralisation (CMIM).

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However, getting Japan and China to agree has proven difficult – especially on the issue of contribution and (therefore) voting weight. This is important because these two are both required to effectively bankroll the CMIM.

The most recent addition to this saga of strained Sino-Japanese political relations hampering the development of regional institutions is the contest over who will head the surveillance arm of the CMIM, the so-called ASEAN+3 Macroeconomic Research Office (AMRO). The original schedule, which was accelerated due to the GFC, called for an appointment to be made in November, however Chinese objections to the Japanese candidate have apparently pushed the timetable back until the next ASEAN Plus Three Finance Ministers Meeting in April 2011.

After the ruckus caused by shifting the AMRO office from Thailand to Singapore due to domestic political instability, can the CMIM really afford to have another internal dispute over the AMRO director?

It is clear why such disputes would arise. AMRO’s function of providing regional surveillance is crucial to the utility of the CMIM as a whole. This is because as long as financial policy coordination remains at the level of policy dialogue, CMIM members will be hesitant to allow crisis-stricken countries access to the pooled reserves. Indeed, the fact that only 20 per cent of the funds can be tapped without an IMF agreement in place reflects the fact that the IMF is continuing to lead – this is due to the IMF’s credibility in providing surveillance under both Article IV and in its actual rescue packages and other assistance programs. The massive expansion of the New Arrangements to Borrow at the IMF announced by the 2009 London G20 Leaders Summit, together with a series of other institutional innovations, is slowly reducing the need for the CMIM to develop its own competencies in this regard – indeed, it is worth recalling that an expansion of the NAB was the policy response initially considered by East Asian governments in the face of the Asian Financial Crisis before discussions moved via the shortly lived Asian Monetary Fund proposal to the CMI. Thus a return to the NAB suggests a shifting of focus away from the CMI, even though both mechanisms have been expanded after the outbreak of the Global Financial Crisis.

Crises are crucial inflection points at which policymakers can question the received wisdom and create new solutions. Many questions remain about how the CMIM will operate. Indeed, despite activation, the CMIM was not used during the GFC, regional member countries preferring to use ‘faster’ bilateral swap arrangement among themselves. And while some such as Korea and Singapore were also willing to engage with the US Fed, Asia as a whole continued to shun the IMF and focussed on building up the CMIM. One should never waste a good crisis, and the Global Financial Crisis provided the impetus to override intra-mural tensions in both North-east and Southeast Asia allowing compromise solutions to emerge.

But continued bickering over largely symbolic roles within the CMIM is running the risk that the crisis will have receded before the institutional arrangements are in place and a new solidarity in East Asia has developed. This would a pity because as de Bouwer has noted in his book, Financial Governance in Asia, the CMIM is not in some form of Gresham’s Law-type competition with the IMF, and would supplement rather than weaken global economic management at a time when this is much required.

Author: Joel Rathus, Adelaide University

Joel Rathus is a recent PhD graduate from Adelaide University and a regular contributor to the East Asia Forum. His other posts can be found here.

  1. The Chiang Mai Initiative’s multilateralisation: A good start
  2. The Chiang Mai Initiative: China, Japan and financial regionalism
  3. Are the Philippines equal before the Chiang Mai Initiative?

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Affordable delays for the Chiang Mai Initiative?

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