Building Asian economic cooperation
Pana Janviroj, The Nation, Asia News Network, Bangkok
Is a key mechanism of Asian cooperation about to face a showdown? Something big is about to happen in the development of the Asian financial market, at least if recent signs are to be believed. And the effects are becoming apparent within one of Asia's boldest forms of cooperation.
First, there have been news reports about the reluctance of the Japanese finance ministry to support the bilateral currency- swap arrangements that the country has with a number of other Asian nations. These agreements were put in place to forge a system for Asian nations to help one another in times of financial crisis.
Then there was the strongly worded article opposing the creation of the Asian bond market -- which Thailand has championed -- by the two academics who co-founded the Asian Shadow Financial Regulatory Committee.
Herald Benink, a professor of finance at the Rotterdam School of Management, and Ghon Rhee, a professor of finance at the University of Hawaii, co-authored a Financial Times article saying that the Asian bond initiative is understandable, but misguided. They said Asian nations would do better concentrating their efforts on becoming more integrated with global markets.
The two professors argued their position on the grounds of efficiency, specifically, cost. The Asian bond vehicle, they argue, is not cost effective and will be self-defeating. But supporters of the Asian bond argue otherwise.
They say that there is no better way to bind nations together than being investment partners. And in a world of financial volatility, in which market mechanisms are allowed to freely operate, what options do nations have to save themselves from sudden isolation caused by the herd instincts of investors, bankers and hedge fund managers?
Thailand could easily claim that building up an Asia bond fund or getting bilateral currency swaps to come together to form a regional pool would be well worth the cost. It's a simple question of when the crunch comes, what can you fall back on? The 1997 Asian crisis is a case to point.
Former U.S. president Bill Clinton admitted in his memoirs that neglecting to come to Thailand's aid during the crisis was one of the biggest mistakes of his presidency. The politics within the International Monetary Fund, meanwhile, also made it difficult for the global lender of last resort to think outside the box in terms of the conditions surrounding the Thai economy at the time. Thailand needed a different kind of medicine than the one prescribed.
So, emerging Asian nations have toyed with the idea of starting an Asian Monetary Fund of their own; a set-up which would only be possible if China could establish an amicable relationship with Japan. As this political breakthrough was not possible at the time of the financial crisis and continues to be impossible today, other avenues have been explored.
These other avenues include the so called Chiang Mai Initiative for bilateral currency swaps among Asian nations (launched by the Chuan government), the Asian Bond Fund (launched by the Thaksin government) and, more recently, the call for a single Asian currency (made by the Asian Development Bank's president).
Haruhiko Kuroda, the special adviser to the Japanese cabinet, has suggested that there are five major steps that must be taken in the quest for a single currency:
1 The Chiang Mai Initiative, which was put in place by the Asean-plus-three finance ministers in May 2000, must be strengthened.
2 The greater regional bond market must be developed.
3 There must be more trade cooperation through free-trade agreements (FTAs) in conjunction with the fourth step;
4 There must be more cooperation to ensure the stability of intra-regional exchange rates.
5 Asian countries must develop policy-convergence criteria and introduce a single currency.
Certainly, it will take time to establish a single currency. The key challenge at this time is political rather than economic. Asian nations, unlike their counterparts in the Western world of "survival for the fittest", can implement competitive partnerships, a concept that might be alien to others. Also, Asian nations can afford to sacrifice some of the efficiency championed by people like professors Benink and Rhee in favor of cooperative efforts to build the Asian Bond Fund into a meaningful mechanism. It has already accumulated more than US$2.1 trillion (Bt86.9 trillion) in reserves.
The benefits await: Understanding neighbors willing to help you out when you face short-term capital flows; a shot at the possibility of creating an Asian currency, which would help ease risk and the sort of peaceful co-existence that comes when interests become intertwined.
The Asians may err. Of course, efficiency will continue to assert itself as the most pressing concern when it comes to allocating resources in this increasingly capitalist world. This is a harsh reality for failed economies. The 1997 crisis taught us not to leave it all to the markets, even at the cost of efficiency.