Lessons from East Asian Financial Cooperation
\nJP\/6\/MAKMUR<\/p>\n
Part 2 of 2<\/p>\n
Lessons from East Asian Financial Cooperation<\/p>\n
Makmur Keliat
\nJakarta<\/p>\n
What lessons can we learn from the evolvement of such regional
\nfinancial cooperation? First, the idea of regional financial
\ncooperation seems to have been a belated response to crisis. The
\nidea only became fashionable after the regional financial crisis
\nstruck in mid-1998. Before the financial crisis, the focus of
\neconomic cooperation in the region was mainly directed at trade
\nand investment.<\/p>\n
In so far as financial cooperation is concerned, the main
\nissue in the minds of policy makers is not the question of how to
\ncontrol capital flow and stabilize exchange rates, but how to
\nattract as much foreign capital as possible by reducing
\nrestrictions on capital movement. There is no vision that
\nfinancial liberalization has great potential to negatively effect
\neconomic growth<\/p>\n
Second, the idea of strengthening regional financial
\ncooperation can be considered a \"middle-way\" strategy. This can
\nbe seen from its tendency not to take sides with two contending
\nexplanations of why the financial crisis occurred in the region.<\/p>\n
While the first explanation puts great emphasis on domestic
\nproblems, the second explains the origins of the crisis from a
\nglobal perspective.<\/p>\n
The proponents of the first explanation, known as
\n\"globalists\", argue that the crisis was a natural by-product of
\npoor macroeconomic policy such as over-borrowing, and also
\nbecause of close political connections between the political and
\nbusiness communities, or cronyism.<\/p>\n
By contrast, those who support the latter explanation, called
\n\"domesticists\", mainly explain the crisis as the result of an
\nabsence of a financial regime at the international level through
\nwhich measures to control capital movement can be taken and
\nspeculative actions and panics in international financial markets
\navoided.<\/p>\n
While policy prescriptions offered by the holders of the first
\nview tend to differ from one country to another, relying on a
\ncase-by-case approach, the second view suggests that financial
\ncrisis can only be avoided if there is a structural reform of the
\nglobal financial architecture. It seems the IMF bases its policy
\nprescriptions on the first approach, as reflected in its signing
\nof letters of intent it bilaterally drew up with Indonesia,
\nThailand and South Korea.<\/p>\n
However, it appears that financial cooperation in East Asia is
\nneither inspired by \"globalists\" or \"domesticists\".<\/p>\n
Third, financial cooperation in East Asia has so far achieved
\nlimited progress. In conceptual terms, the scope of financial
\ncooperation can be traced through three stages. The first stage
\nis the setting up of a financial surveillance process and crisis
\nrescue mechanisms, followed by establishing an exchange rate
\nregime and then constructing regional financial organizations.
\nThe ASEAN Surveillance Process (ASP) and ASEAN Swap Arrangements
\n(ASA) can be categorized as falling in this first stage. The
\nsecond form of cooperation (establishing an exchange regime) and
\nthe third form (constructing regional financial cooperation) seem
\nto have a long way to go.<\/p>\n
Fourth, efforts to expand the scope of financial cooperation
\nto a large extent will be determined by political dynamics either
\nat the domestic or international levels. Regional financial
\ncooperation does not exist in a political vacuum. Let us take as
\nan example the idea of a single rate exchange regime. In East
\nAsia exchange rate policy is different from one country to the
\nnext, ranging from a fixed exchange rate policy (such as in
\nMalaysia) to a floating exchange rate policy (such as in
\nIndonesia).<\/p>\n
The main question then is what should be done in order to
\nencourage countries in the region to adopt a single exchange rate
\npolicy. This problem is not easily resolved because the decision
\nto employ a particular exchange rate policy cannot be reached
\nmerely by technical deliberation, as most economists may think,
\nbut is also shaped by political considerations.<\/p>\n
In this regards it is worth mentioning the case of Indonesia
\nunder Soeharto in the wake of the financial crisis in 1998. The
\nidea to fix the exchange rate of the Indonesian rupiah against
\nthe U.S. dollar could not be executed because of strong domestic
\npolitical opposition. This was certainly totally different from
\nthe case of Malaysia when Mahathir was still in power.<\/p>\n
Similarly, the idea to form a regional financial organization
\ncannot be realized because of political dynamics at the
\ninternational level. Whether we like it or not, the failure to
\nestablish the Asian Monetary Fund (AMF) clearly indicates that
\nthe U.S. will remain with us in the future.<\/p>\n
Fifth, there is a need to design realistic proposals if East
\nAsian countries seriously want specific financial organizations
\nin the future. Whatever proposals we have in mind, exclusionary
\nstrategies are out of question. Due to their political and
\neconomic clout, the U.S. and international economic agencies,
\nsuch as the IMF, must be involved. The fact that Japan did not
\ninsist on establishing the AMF in the face of opposition from the
\nU.S. and international economic agencies conveyed the clear
\nmessage that there has been no substantial change in the U.S.-
\nJapan relationship. Japan remains reluctant to sacrifice its
\nspecial relations with the U.S.<\/p>\n
Lack of political trust among countries in the region is a
\nfactual reality. There had been fear that Japan, through the AMF,
\nwould behave like the U.S. through the IMF. With the exception of
\nMalaysia, the idea of the AMF as proposed by Japan received a
\nlukewarm response from the region. China, as the second largest
\neconomy in the region, did not give very strong support to the
\nidea.<\/p>\n
Since there is a notorious lack of political solidarity
\nbetween countries in the region, financial cooperation is like
\nthe soft belly of the entire framework of regional cooperation in
\nEast Asia. That is one of the reasons why we need to understand
\nthe idea of the East Asian community not in geographical terms
\nbut more in functional terms, to enable countries from outside
\nthe region to join the community.<\/p>\n
The writer is head of the Center for East Asian Cooperative
\nStudies at the Department of International Relations, School of
\nSocial and Political Sciences, University of Indonesia.<\/p>",
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