JPRI Working Paper No. 55: March 1999
The Case for an Asian Monetary Fund
by John A. Mathews and Linda Weiss

Whatever else the Asian financial crisis showed, it revealed two things all too clearly: the inability of central institutions like the International Monetary Fund (IMF) to prevent investor panic, and the inadequacy of Asia's own regional institutions, such as the Asia Pacific Economic Cooperation (APEC) forum or the East Asian Economic Caucus, to step in to fill the breach. Both center and region were found wanting in the crisis. However, as Act I of the drama saw the countries of Southeast Asia lining up for a classic currency collapse that threatened to translate into an economic collapse, Japan stepped forward with a robust solution: a $100 billion standby reserve monetary fund, announced in July 1997. As is now well known, the IMF and the U.S. Treasury briskly dismissed this proposal, insisting that the IMF be allowed to handle the crisis in its own way.

Act II saw what should have been a financial correction in Asia turn into an economic crash that has rocked the region and sent shock waves throughout the rest of the international financial system. Now Act III is unfolding with continued dithering over reforms to the international financial system, despite its manifest shortcomings, as Asian countries emerge from the crisis with restructured national financial institutions that are still exposed to potential external shocks.

The countries of the region are now coming to terms with the fact that their first test of a regional economic setback has resulted in a failure of collective self-help. Although faced with devastating consequences in terms of financial collapse and severe economic dislocation, the individual countries of the region were unable to mobilize an effective coordinated response or self-help program--once the initial Japanese proposal was suppressed. But the crisis also revealed how global institutions, particularly the IMF, proved to be inadequate in a different way. The IMF responses were in general too slow, too biased towards fiscal issues rather than private debt repayment and liquidity issues, and according to several influential analyses, provoked the very financial crises that they were supposed to be preventing. It is certainly widely agreed that the Asian financial crises were far more severe than would be considered "warranted" by their economic problems in the late 1990s--an outcome that cannot be divorced from IMF actions. In the coming year, then, a key issue for the Asia-Pacific region must be the building of adequate regional institutions, particularly for collective financial security and self-help.

Little wonder then that the idea of an Asian Monetary Fund (AMF) refuses to go away. The case for an AMF remains as strong as ever, and the circumstances needed for its formation grow more propitious. Public endorsement of the idea has come from Asian leaders and from Western scholars. For example, the South Korean Prime Minister, Kim Jong-pil, traveled to Japan in November 1998 and issued a surprisingly strong endorsement of the AMF proposal. In the course of a lecture he gave at Kyushu University, he stated: "Today regional integration is getting stronger in Europe and North America to address any problems taking place in the regions. Asia should not become an exceptional case" (Korea Times, November 30, 1998). The respected Asian analyst Robert Wade and his colleague Frank Veneroso also issued a strong endorsement in an opinion article, "The Resources Lie Within," published in The Economist on November 7, 1998.

Against these positives must be set a tide of negative, doubting, and occasionally insulting commentary that has appeared in the international press. The Asian Wall Street Journal, for example, carried an editorial, "Beware of an IMF clone," in its December 11, 1998, edition. "It's back," stated the AWSJ. "The idea of an Asian Monetary Fund, torpedoed by Washington when it first surfaced last year, is now on the regional radar screen again. It is probably not a workable idea, for a slew of reasons." The reasons the Asian Wall Street Journal advances against the proposal are that it would be difficult to get the countries of Asia to cooperate in its funding; it would be difficult for them to cooperate in its spending; and there's no reason to believe that an AMF "would be any better at addressing Asia's problems than the IMF has been." This last insight is backed up by the observation that moral hazard is deadly "wherever it emanates from."

What then is the proposal for an Asian Monetary Fund and what difference would such a fund make to the countries in Asia and to the international financial system? Is it a workable idea that would help the Asian countries to rebuild their shattered economies? Is it really so threatening to Europe and North America? Or can it be argued that, on the contrary, Europe and North America have everything to gain from seeing Asian countries take steps to calm financial turbulence in their own part of the world? Perhaps an AMF could contribute some much needed stability to an over-excitable international financial system.

This article proposes a model of an AMF with a view to advancing a serious discussion of its effects, both positive and potentially negative. We argue that the fear of "moral hazard" that underpinned much of the earlier discussion is groundless because we believe an AMF would exercise strong control over creditors during a potential currency crisis--much stronger control than is exercised by the IMF. Indeed we believe that an AMF promises to offer an institutional means of dealing with the essence of Asia's financial crises. These have to do not with balance of payments issues and other matters of slow adjustment, but with questions of coordination of creditor demands and the restoration of investor confidence. This is what central banks do in a national context (as exemplified by the actions of the U.S. Federal Reserve in the recent crisis caused by the potential collapse of the hedge fund, Long Term Capital Management). But in the international context there is an institutional vacuum with regard to this vital coordinating role. The IMF has never been allowed, by its board or its executive staff, to play the role of coordinator of creditors during a financial crisis. The proposed AMF promises to play a very different role. By promoting financial calm in the Asian region, and exercising discipline over Asian financial institutions, the AMF would contribute to international financial stability. This is fundamentally why the idea deserves to be taken seriously and supported.

The Original AMF Proposal

The Japanese proposal for an Asian Monetary Fund dates back to July 1997, when the Thai crisis was at fever pitch and the IMF was belatedly being approached for assistance. The Thai government was understandably reluctant to throw itself on the mercy of the IMF, given the conditionality clauses that would be invoked, entailing deep intervention into the Thai economy by IMF officials seeking to impose their "one size fits all" approach. Japan then exercised its regional leadership credentials by proposing, behind the scenes, an Asian Monetary Fund that would function like the IMF but in a more forceful and rapid manner, without the IMF-type conditionality clauses. This proposed fund was to be a multilateral revolving facility, involving other Asian countries, notably China, Hong Kong, Taiwan and Singapore as well as Japan. It was to be backed by funds of $100 billion, drawn from the combined reserves of the major Asian countries.

Japan took this unexpected step in regional leadership because of its reading of the international response to the Thai crisis. The IMF package finally accepted in August by Thailand, after its foreign reserves were exhausted and its currency had collapsed, involved a supporting line of credit of $17 billion, contributed partly from the IMF and partly from countries in the region, notably Japan (and Australia). This package, and the whole rescue effort, conspicuously lacked any involvement by the U.S. Japan assumed that this absence of the U.S. from the Thai rescue package was a signal that a Japanese initiative would be tolerated.

This however turned out to be far from the reality. The proposal quietly made the Asian diplomatic rounds in August and September of 1997, but it came out into the open at the meetings of the IMF and World Bank held in Hong Kong in October. At these meetings, the IMF and the U.S. Treasury Department fought strenuously to prevent the alternative AMF from being established. The public arguments used (in addition to the private pressures brought to bear) were that the AMF would duplicate the functions of the IMF and that the relative absence of conditionality would enhance the "moral hazards" associated with countries drawing from the Fund.

Japan backed down on its proposal, and by the time of the G7 meeting in Ottawa in November, its Ministry of Finance spokespersons were stating that any Asian fund would work in cooperation with the IMF, and as a supplement to it. By the start of 1998, nothing more was being heard in public about the AMF.

Three factors make the case for an AMF much stronger in 1999 than in 1997, when it was first proposed. First, the European Monetary Union has been declared, and the Euro launched. This event provides a clear precedent for financial cooperation to be undertaken at a regional level, without it being seen as a threat to the world financial order. (The proposed AMF is of course very different in its institutional design from the EMU. The point is that these are both examples of regional cooperation for financial ends, on the model of existing cooperative arrangements for the more familiar trade and military security issues.) Second, the IMF has manifestly failed the countries of Asia, and arguably turned what would have been a severe financial jolt into a protracted slump. Its inappropriate and poorly timed directives have only made the case for a more context-sensitive regional body that much stronger. Third, the world financial community has dithered in making changes to the architecture of the global financial system, thus underlining the need for countries to make regional arrangements of their own.

Why an AMF?

The case for an AMF is clear and straightforward. Such an institution, as outlined by the Japanese Ministry of Finance in July-September 1997, would provide an effective remedy for Asian nations threatened with currency collapse or sudden financial dislocation through external forces. It would provide a collective financial security umbrella, through its provision of standby credits and its credible threat of intervening in currency or other markets to ward off speculative attacks. For the Asian countries themselves this protection would be superior to that offered currently by the IMF, in at least two ways. First, the AMF would act with a greater promptness and better scale of intervention, so that a potential panic might be nipped in the bud--which is what all central banks do for their national economies in times of internally generated crises. Second, the proposed AMF would act without imposing IMF-style "conditions" on any standby credits granted. It would act in each instance on the merits of the case.

Of course, an AMF would not be in the business of dispensing charity or handouts. Since the Asian countries themselves would provide the reserves, they would not look kindly on these being disbursed for inappropriate reasons. Thus the concerns raised by Western nations, particularly the U.S., to the 1997 proposal on the grounds of "moral hazard" are misconceived. If anything, the AMF would likely be much stricter with creditors within the Asian region than the IMF has proven to be. We shall explore why this is likely to be the case below.

But the case for an AMF has wider implications. In itself, it would represent a significant achievement for the Asian countries, and would clearly demonstrate their capacity to cooperate and act for themselves, as a regional grouping, without needing to be protected by Western institutions such as the IMF. The creation of the AMF would also substantially improve the credit-worthiness of Asian borrowers in international capital markets, because it would signal the region's financial soundness and maturity.

One appealing aspect of an AMF as proposed is that it does not impinge on the sovereignty of the Asian nations themselves, nor does it pose a threat to other financial institutions outside Asia. The proposed AMF would be established as a new body, backed by its own reserves as drafted by the founding members, and it would act as a lender of last resort to Asian countries faced with currency or other financial difficulties. Member countries would continue to set their own monetary policies, their own interest rates, and would defend their own currencies with their own reserves. An AMF would provide back-up support and the power of intervention to provide the collective security that has been lacking in times of extreme financial risk--such as Thailand faced in July 1997 and South Korea in November and December 1997. The governance of the reserves controlled by the AMF would be as strict as in the best of the Asian central monetary authorities, such as those of Hong Kong, Singapore, and Taiwan.

The real obstacle in the way of the creation of an AMF is not a question of arguments, pro or con, but of the difficulties involved in mounting collective action in the international domain. It is extraordinarily difficult to get agreement among several countries to act in their own collective interest, even when the benefits may be quite clear as in this case, particularly when they harbor traditional hostilities as, for example, exist between Japan, China, and Korea. It is harder still when the world's superpower explicitly and strongly objects to the proposal. But the evidence indicates that in 1999, the U.S. may be less inclined to make such strenuous objections. And the countries of Asia remain quietly committed to the proposal, with the Korean prime minister in particular going out of his way recently to endorse it publicly.

Would the AMF Be Divisive?

It has been argued that a regional body such as an AMF could undermine existing global institutions and instigate a "beggar thy neighbor" approach to international trade and capital movement issues. But these objections are not well grounded. It is striking how in all the current discussion of reform of the international financial system, it is almost always assumed that reform must start at the global level. But the case for reform at the regional level is just as compelling--and much easier to achieve for a determined group of countries. It surely remains the right of any regional group of nations to take steps to protect themselves against financial destabilization--without asking for global permission to do so. The proposed AMF would offer protection that is superior to that currently offered by the IMF. If the fear is that Asian nations are much more likely to turn to an AMF were they to come under future speculative attack, than to the IMF, this may mean that the IMF would come under pressure to reform its own operations--not necessarily a bad thing for the world community.

The Asian nations have to consider, in establishing an institution like the AMF, whether they are likely to suffer retaliatory action by other nations or regions (i.e., Europe or North America). Retaliatory action would be based on great power considerations, rather than on arguments concerning the validity of the AMF itself. But the very fact of the creation of the EMU in Europe, and the launch of the Euro in 1999, greatly diminishes the likelihood of any such retaliatory action. The U.S. State Department has endorsed the creation of EMU and the launch of the Euro, on the grounds that a "stable and prosperous Europe is good for America." If it is considered unthreatening for Europe to create a huge regional market and regional financial institutions (such as a single currency and a unified central bank) why then should Asian nations not pursue a similar course and create regional financial institutions, with similar benefits for the international community?

An Asian Monetary Fund or an Asia-Pacific Monetary Fund?

Fred Bergsten argues that the AMF would be a good idea if it were expanded into an Asia-Pacific Monetary Fund, in other words an institution that includes the United States. He sees ("Reviving the 'Asian Monetary Fund,'" The International Economy, Nov/Dec 1998) such an APMF as providing a valuable regional complement for the IMF in the same way that the Asian Development Bank complements the World Bank. Mind you, Bergsten does not suggest the U.S. should put up funds as part of this initiative. Its mere presence is perceived as stabilizing, providing the international glue that is seen as being essential if Asian countries are to act in a coordinated fashion. Nor is Bergsten's APMF expected to act contrary to, or prior to, the IMF. Indeed he explicitly calls for it to be subservient to the IMF--to act with the IMF, through the IMF, but not as part of the IMF. In this way, the technical difficulty that Asian countries calling for assistance from the APMF might over-run their IMF quotas is surmounted.

Bergsten's proposals seek to co-opt the vision of an AMF, draw all its teeth, and bring Asian finances--chiefly Japanese finances--to the aid of a new hybrid IMF-APMF. But it misses the core features of the AMF proposed here. First, the AMF we envisage acts quite differently from the IMF. It would have sufficient reserves to provide a credible threat to would-be speculators in Asian currency markets, able to intervene without notice to correct markets and destroy speculative windfall gains, turning them into losses. This the IMF has never done and does not have the power to do. But it is an essential feature of the preemptive role that the proposed AMF needs to have. Second, an AMF also carries a credible threat to intervene in other markets, including Asian stock and bond markets, to correct speculative upheavals. This is what was done by the Hong Kong Monetary Authority in July 1998, to uproars of condemnation by the world's press--but with deadly effect against the hedge funds that were double-dipping by shorting both the HK currency market and HK stock market. That the HKMA was in fact restoring a "level playing field" for all investors and removing a market distortion was not lost on responsible commentators. The proposed AMF would carry the same capability with respect to all the stock and bond markets of Asia.

Most importantly, the idea of an AMF represents a long-overdue expression of a capability for collective action on the part of Asian countries that have long been at loggerheads over ideological or historical issues. This is why it should not include the U.S. We say this not out of any anti-American sentiment. No doubt the U.S. would act responsibly within the proposed AMF. But it loses its symbolic value if the U.S. is there as necessary mediator between hostile Asian powers. There is no suggestion that the U.S. needs to be involved in the European Euro system, as mediator, say, between France and Germany, even though the U.S. is a prime member of NATO. The Europeans simply do not see it as "appropriate" for the U.S. to play a mediating role in their own institution. Neither would the Asians see it as appropriate in the case of the proposed AMF.

Would a world of regional financial blocs be detrimental to world trade and development? An unspoken objection to the idea of an AMF is the fear that it may lead down a path towards regional financial blocs, namely one based on Europe, one on North America, and one on a Japan-led Asia. But regional blocs of this kind are not necessarily an obstacle to the free movement of capital. On the contrary, they may facilitate such flows, by removing many of the present obstacles such as wild swings in currency values and credit ratings.

To see how a regional monetary fund in Asia would work to the advantage of the international financial community, consider the related case of regional trade blocs. These can be either inclusive or exclusive. In the first case, a group of nations agree to lower (or remove) trade barriers among themselves, without erecting further trade barriers against nations outside the grouping. This is what APEC seeks to achieve, and NAFTA as well. In the second case, a group of nations lower trade barriers among themselves but they erect trade barriers against the outside world, such as has been practiced over the past half century by the European Community. Clearly the first kind of regional trade grouping promotes the free movement of goods internationally, because it creates an "island" (in some cases a very large island) of free movement in a sea of obstacles. The second case works to the opposite effect. The trade barriers erected by the Europeans since the 1950s have been a continual obstacle to world negotiations over free trade, because they benefit one group at the expense of the rest of the world.

By contrast, a regional monetary fund, like an inclusive trade bloc, promotes financial stability in one part of the world without inflicting any costs on other parts of the world. It does so in three ways. First, it exercises its capacity to intervene in markets and correct market distortions caused by speculative activity and volatile capital flows; this is its preventive aspect. Second, it promotes financial stability through its capacity to mobilize creditors in a potential debt default situation and to organize an agreed debt rescheduling--a "workout" rather than a "bailout." This is what many commentators have called for (at a global level) in the wake of the Asian crisis. Third, if a country is actually hemorrhaging, an AMF can play the role of lender of last resort, providing stand-by credits or actual loans if needed; this is its curative role. In these three ways an AMF would provide benefits to the Asian countries without inflicting costs on the rest of the world.

It is to the benefit of European nations, and North American nations, that economic activity in Asia proceed without periodic financial crises. (This assumes that Europe and North America look favorably on a prosperous Asia, which would be a sensible attitude on their part, in a world where instability can rapidly escalate towards internal war and international terrorism.) The proposed AMF would help to calm financial markets in Asia, thereby contributing to calming financial markets in general. It would do so without creating an exclusive "Asian financial zone" barred to outsiders.

The AMF as a Symbol of Asian Financial Maturity

The case against the AMF, as voiced by numerous commentators, boils down to either a reluctance to seeing a competitor to the IMF or a false concern with "moral hazard," or a deep distrust of autonomous Asian institutions. The real fear is probably that Asian countries might be successful in creating their own regional institution, thereby weakening the global control of the IMF and, through this, the control of the international financial system by the West. But a more enlightened view would be open to seeing the advantages that regional self-governance in Asia would bring to the international system.

There is little advantage for anyone in going through the horrors of another "Asian crisis." However, the difficulties involved in creating a new institution like the proposed AMF should not be under-estimated. Its creation would call for subtle diplomacy in securing agreement among the founder members, and in soothing the fears of those not included. But the achievement would send a strong signal that Asian financial systems have now evolved to the point where they are self-governing. To launch the year 2000 with a newly established Asian Monetary Fund would indeed be a fitting start to the 21st century.

JOHN A. MATHEWS is associate professor of international management in the Macquarie Graduate School of Management, Macquarie University, Sydney. He is the author of Tiger Technology on the East Asian semiconductor industry (Cambridge University Press, forthcoming). LINDA WEISS is associate professor of comparative politics in the University of Sydney. An excerpt from her most recent book, The Myth of the Powerless State: Governing the Economy in a Global Era (Cornell University Press, 1998), appeared in JPRI Critique Vol. V No. 4 May 1998.

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