Financial crises often present opportunities as well as challenges. Sometimes they even enable fundamental institutional adjustment despite the political and historical obstacles that otherwise frustrate innovation. In the early days of the global financial crisis it seemed that the new G20 Leaders’ meetings were going to serve as incubators for bold thinking. That has not been the case. Aside from some reasonable statements on the use of capital controls, the G20 has failed to take on the challenge of reforming the deficient global financial architecture.
The next G20 meeting (in Los Cabos, Mexico; June 18-19) is likely to expose further the institution’s stagnation. At this point it is prudent to expect that G20 members will wring their hands over the fate of the Eurozone, say the right things, but fail to launch any major initiatives.
The logjam among the G20 stands in sharp contrast to the dynamism that has emerged in Asia.
The current crisis has motivated incremental though certainly consequential architectural innovation among a significant group of Asian policymakers. Indeed, decisions taken last month by the Association of Southeast Asian Nations, ASEAN, plus China, Japan and South Korea (the so-called ASEAN+3) underscores the way in which the global crisis is stimulating a broadening and deepening of regional financial arrangements despite obstacles that some analysts had previously seen as insurmountable. (Note: ASEAN comprises Malaysia, Singapore, Thailand, Indonesia, Philippines, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia.)
What is it that the ASEAN+3 policymakers have done? Let’s turn first to the East Asian financial crisis of 1997-98, which is where the story begins. Policymakers in a number of Asian (and in other successful developing) countries sought to insulate themselves from the hardships and humiliations suffered by East Asian policymakers at the hands of the IMF during the region’s crisis. They did this by relying on an array of strategies, not least among them self-insuring against future crises by stockpiling official (foreign) currency reserves.
The crisis also turned attention in the region to the creation of a new institution to serve as a counterweight to the IMF. Interest in an Asian Monetary Fund emerged in the summer of 1997, just as the crisis began to unfold. The Asian Monetary Fund proposal was eventually tabled in the wake of tensions between Japan and China, tensions that were exploited adroitly by the IMF and the US Treasury.
The aborted proposal for an Asian Monetary Fund eventually formed the basis in 2000 for what was known as the Chiang Mai Initiative (CMI). This is a set of bilateral swap arrangements among central banks of ASEAN+3 countries. The global financial crisis of 2008-(?) has been a powerful impetus for deepening the CMI in important respects on two occasions. The first time was in early 2009. At that time the CMI was “multilateralized,” such that it is now known as the Chiang Mai Initiative Multilateralisation (CMIM). This involved the creation of a $120 billion regional currency reserve pool from which member countries could borrow during crises. China, Japan and Korea provided (and today still provide) 80% of the CMIM’s resources (with China and Japan each contributing 32% to the pool). The largest economies within CMIM (namely, China and Japan) can borrow an amount that is equal to no more than 50% of their contribution to the fund; Korea can borrow an amount equal to the size of its contribution; better-off ASEAN members can borrow up to 250% of their individual contributions; and the five smallest economies can borrow up to 500% of their contributions.
The transformation of the CMI to the CMIM was significant because it increased the potential scope of central bank currency swaps and reserve pooling arrangements in the region. This introduced the possibility that countries that are members of the CMIM may not need to turn to the IMF when they face liquidity crises in the future. However, at the behest of creditor countries within the arrangement (up until May 2012), disbursals from the CMIM in excess of 20% of the credits available to a country require that a borrowing country must be under an IMF surveillance program. (Smaller disbursals from CMIM did not require a country to be involved with the IMF.)
Scholar William Grimes calls the CMIM-IMF link an “elegant solution” to the difficult political problem of regional surveillance since “it allows the lending governments to elide responsibility for imposing conditions by delegating conditionality to the IMF” [Grimes 2009:12]. In this sense, CMIM’s operation could be seen to reinforce rather than challenge the IMF.
But since the 2009 decision to multilateralize the CMIM, ASEAN+3 members have continued to wrestle with and deepen the arrangement with an eye toward the original vision that inspired it. On January 30, 2012—after much politically fraught discussion—the ASEAN+3 Macroeconomic Research Office (AMRO) was opened. AMRO is charged with conducting IMF Article IV-type monitoring of members (though presumably with a greater degree of regional and national sensitivity).
Last month CMIM members took a number of important steps to expand its size and scope. Together these changes move CMIM further toward the Asian Monetary Fund proposal that is its intellectual antecedent. The following critical decisions on CMIM were announced at the May 3, 2012 ASEAN+3 meeting:
(1) The size of the currency swap pool was doubled, to $240 billion.
(2) For 2012-13 the need to be under an IMF program does not become operative until the swap drawn equals 30% of the maximum for the country (and 40% in 2014, pending discussion and conditions at the time).
(3) The maturity of both the IMF-linked and the de-linked swaps were lengthened.
(4) And, for the first time, a “Precautionary Credit Line” facility was introduced to CMIM. The Precautionary Credit Line allows members to draw on swaps of the size governed by the country-size formula that already exist in CMIM (based on what appear at this time to be vague macroeconomic criteria). The Precautionary Credit Lines, too, have IMF-linked and de-linked components.
The May 2012 decisions underscore the dynamic character of the process of financial regionalization among CMIM members. They also highlight the continued and complex efforts to build an institutional framework that reduces the role of the IMF in the region.
Writing before the May 2012 decisions, some long-time analysts of power politics in Asia such as William Grimes  and Benjamin J. Cohen  suggested that great power rivalries and regional security tensions are so deep seated that the IMF will continue to be seen as a necessary “neutral third party in CMIM matters.” In addition, many CMIM skeptics note that the swaps available under both the CMI and now the CMIM have yet to be activated. Instead, CMIM members are negotiating bilateral swaps between their own central banks and those of non-CMIM member countries (such as the US), while continuing to hoard official reserves on a national basis.
Another oft-cited obstacle to the full realization of the CMIM is the link to the IMF. The IMF link means that governments in the region will not utilize CMIM resources owing to experiences during the Asian crisis. Certainly the decisions taken in May 2012 in regards to loosening the IMF link is a step in the right direction.
A final criticism concerns the size of the CMIM swap pool. Many analysts have previously noted that the pool is small relative to the likely need during a crisis. For example, Gregory Chin [2012:6] noted (before the May 2012 decisions) that CMIM resources represented just 2.4% of the almost $5 trillion in international reserves held by central banks in Asia the end of 2011, and were relatively small as well when compared to the $586 billion crisis-response package deployed in China in November 2008. Indeed, recognition of the limited firepower of CMIM (a fact made plain by the Eurozone crisis) led many analysts and officials over the last two years to call for a significant expansion in the size of its resources. This call was heeded in May 2012.
In my view, there is reason to take seriously the real obstacles involved in breaking the CMIM-IMF link, particularly since this is rooted in deep-seated historical experiences. But if the current crisis reveals anything, it is that unexpected developments happen when the need arises. Moreover, CMIM and AMRO are new, and as recent developments make clear, there is no good reason to believe that their scope is fixed. It is therefore premature to conclude that the CMIM will fail to adapt as the demands placed on it evolve. That its swaps have yet to be activated and the central banks of the region’s larger economies continue to accumulate official reserves ought not be taken as indicators of failure.
The May 2012 expansion of CMIM’s scope and size underscores the dynamism of the arrangement and policymakers’ continued commitment to push its boundaries. CMIM may therefore best be understood as a vital part of an evolving process of regionalization and experimentation, one that may ultimately lay the groundwork for more significant cooperation among central banks in this and other regions.
Developments in Europe may give CMIM the boost it needs to develop further along the lines of the vision that inspired it. The evident costs of the EU’s failure to resolve the surveillance matter may well give CMIM members the motivation to accelerate their efforts. In fact, the scale and intractability of the Eurozone’s problems in 2012 likely played a role in recent decisions taken by CMIM members. The IMF’s (and the “Troika’s”) actions in Mediterranean Europe surely resonate with Asian policymakers, given their experiences with the IMF. And recognition that the IMF’s resources are insufficient to handle the fallout in Europe may have driven the decision to double the size of the CMIM pool.
It is now clear that the East Asian and the current crisis have created the conditions for new patterns of resource accumulation and a renewed interest in creating denser, multi-layered and more inclusive financial architectures. Until now the G20 has failed to take up these important challenges. Fortunately, Asia has responded differently—embracing the need for architectural reform.
The Triple Crisis blog invites your comments. Please share your thoughts below.