Asian surveillance
The deputy finance ministers of 14 Asian-Pacific nations that met in Manila early this week opted for the ideal that it was much better preventing a fire than having to extinguish one.
Several weeks before the senior officials gathered in the Philippine capital, the central issue raised in various forums had been the urgent need for an Asian emergency fund to bail out countries in financial distress.
But the Manila meeting devoted much more attention to setting up a framework of measures to prevent the kind of economic crisis currently hitting East Asia. They did cover the need for a rescue mechanism, but seemed quite comfortable with the existing one around the International Monetary Fund-led bailout package.
The framework of preventive measures, which can serve as a building block against currency crises, include technical cooperation in strengthening domestic financial systems, regulatory capacities and initiatives to enhance economic transparency and a mechanism for regional surveillance.
The reality of an increasingly global marketplace seems to have made the 10 Asian nations and the U.S., Australia, Canada and New Zealand fully aware of the need for regional surveillance.
The devastating spread of the financial crisis from Thailand in early July to Indonesia, Malaysia, the Philippines and South Korea, has served to further strengthen the warning that the International Monetary Fund's global surveillance needs to be supplemented by a regional surveillance mechanism.
Most analysts, including those from the IMF and the World Bank, have concluded after in-depth analyses of the current financial crisis in East Asia that regional surveillance is indeed the most important preventive measure and early warning system that has been missing in the region.
Regional surveillance and peer pressure could help identify potential risks to growth and financial stability and advise appropriate policy responses to reduce those risks. But the problem thus far has been the uneasiness of Asian countries to tell their neighbors what to do, as such an act could be detested as interference into internal affairs.
Most countries have now realized that each has an obligation to keep its house in order and to work with its neighbors so that they can anchor each other and exert peer pressure to pursue sound policies.
By maintaining the central role of the IMF as coordinator, Asian countries would be comfortable with the planned regional surveillance as none of them would have to take the initiative in telling others to straighten up. The IMF, internationally recognized as the global economic policeman, could use its persuasive powers to straighten out errant member countries.
The senior finance officials should also be commended for finally recognizing the lack of transparency in the financial sector as one of the main reasons behind the reverse of capital flow in Southeast Asia. This realization hopefully will enhance their cooperation in strengthening their financial systems.
Obviously, all these preventive measures cannot guarantee that a financial crisis will not break out in the future. Hence, a bailout mechanism is still required.
It is again quite encouraging that the 10 Asian nations that took part in the Manila meeting did not push ahead with their proposal for setting up a US$100 billion Asian emergency fund, as presented by Japan during the annual meeting of the IMF and World Bank in Hong Kong in mid-September. The finance officials instead agreed that the Indonesian bailout was the model for future rescue programs.
Under the Indonesian package, finalized early this month, the IMF, World Bank and Asian Development Bank provided most of the funds which have served as the first line of defense. Other countries, such as Singapore, Malaysia, Brunei and Australia, have pledged standby loans which together serve as the second line of defense.
Under the scheme decided on in Manila, each of the 14 nations is free to decide on a case-by-case basis whether to participate in a rescue plan and how much to contribute.
The original plan of the Asian emergency fund had been widely criticized, notably by the U.S. and the IMF itself. It was feared that Asia's booming economies would not have the incentive to get their houses in order if they knew they could get financial help without having to go to the IMF and its tough lending conditions.
Such a fund could also be used by governments as an excuse to avoid "making hard decisions", and perversely, provide a tempting target for speculators to draw down significant amounts from the pool itself.
Hopefully, the ministerial meeting of the Asia Pacific Economic Cooperation (APEC) forum currently underway in Vancouver will fine-tune the general framework already agreed on in Manila and will not waste time on redebating the merits and demerits of an Asian emergency fund.