Part 1 of 2: Lessons from E. Asian Financial Cooperation

Part 1 of 2: Lessons from E. Asian Financial Cooperation

Makmur Keliat, Jakarta

There are two official documents we could refer to in tracing
the idea of financial cooperation in Southeast and East Asia. The
first document can be seen in the Terms of Understanding on the
Establishment of the ASEAN Surveillance Process (ASP), signed in
New York in October, 1998.

The second appeared in May 2000 after the ASEAN+3 Finance
Ministers Meeting in May 2000 in Chiang Mai, Thailand. Popularly
known as the Chiang Mai Initiative, ASEAN+3 (Japan, China and
South Korea) reached an agreement to establish a regional
financing arrangement to supplement existing international
facilities and expand ASEAN Swap Arrangements (ASA) by including
the members of the plus three group.

In essence, the basic objective of the ASP was to provide a
forum for policy makers to exchange information on macroeconomic
policy and to improve transparency. The ASP was designed to
prevent a recurrence of the financial crisis and to enhance the
surveillance process already employed by the IMF.

The mechanisms for surveillance are conducted on the basis of
peer review during the twice yearly ASEAN Finance Ministers
Meeting. After the establishment of the ASEAN+3 process in 1999,
there have been ongoing efforts to expand the surveillance
process by including Japan, China and South Korea.

Different from the ASP, the Chiang Mai Initiative has been
primarily aimed at providing liquidity support for countries
facing insolvency problems (countries with insufficient foreign
currency to meet their obligations). It is estimated that the
total amount of financial resources available through the ASA
framework has expanded to US$50 billion from the level of $200
million in 1997. Member countries facing insolvency can utilize
up to twice their contributions unconditionally, to be repaid
within six months and with the possibility of rolling over for a
maximum of six months.

However, this financial support facility cannot be utilized
freely. The conditionality has already been put in place that
only 10 percent of the agreed amount can be utilized without any
linkage to IMF assistance for 180 days. To put it in other words,
if member countries want to utilize more than 10 percent, then
they have to be put under the IMF program first.

In addition to the ASP and ASA schemes, Japan has also taken a
leading role in evolving financial cooperation in East Asia. In
September 1997, the country raised the idea of establishing an
Asian Monetary Fund (AMF) with proposed total funding of $100
billion.

The idea of establishing an AMF was seen as vital to protect
regional currencies from speculative attacks in the future. Japan
was designed to become the main financial provider since the
country had pledged to contribute half of its original proposed
funding, with the rest provided by China and Singapore. However,
the proposal was never realized because of U.S. opposition. One
year later, in 1998, Japan again put forward the idea of
financial cooperation with the so-called Miyajawa initiative.

Distinct from the AMF, however, the Miyajawa initiative was an
aid package designed specifically for countries badly affected by
the financial crisis in Southeast Asia. The total figure of aid
designed to be channeled through the Miyajawa plan amounted to
$30 billion.

Another difference is that while the AMF was opposed by the
U.S., the Miyajawa plan gained strong support from the U.S.,
other G-7 countries and international economic agencies such as
the IMF. The reason behind this support is not difficult to
explain. While the AMF was to be funded primarily by Japan on a
bilateral basis, the Miyajawa plan involved multilateral
cooperation, including from the U.S.

The writer is head of the Center for East Asian Cooperative
Studies at the Department of International Relations, School of
Social and Political Sciences, University of Indonesia.