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.