The global financial crisis showed the need for a large-scale and effective international financial safety net (IFSN). Although East Asia has had a regional financial arrangement (RFA) since 2000 (the Chiang Mai Initiative1), it was not tapped during the global financial crisis for a variety of reasons.
Our recent study examines the requirements for an effective IFSN. It should have adequate resources to deal with multiple crises, be capable of making a rapid and flexible response, and not be encumbered by historical impediments such as the IMF stigma that would limit its acceptance by recipient countries. Oversight of the IFSN needs to be based on cooperation between global and regional forums, for example, in the case of Asia, the G20 and ASEAN+3.
Such an IFSN should include the IMF and RFAs at a minimum, and the relations between them need to be institutionalized ex ante, rather than waiting for a crisis to develop. This would include having the IMF and other international financial institutions provide mechanisms for facilitating and receiving the collective representation of the regional institutions, possibly having RFAs as members in the IMF. RFAs could also establish their own formal mechanisms, such as an expanded ASEAN+3 Macroeconomic Research Office (AMRO), for dealing with the IMF, rather than simply being represented by their member countries.
However, probably the biggest challenge is to institutionalize the process of policy consensus among member countries of an RFA. The eurozone sovereign debt and banking sector crisis highlighted the difficulties in achieving a consensus among eurozone countries on polices on Greece and other crisis-hit countries.
Cooperation in conducting surveillance activities needs to be institutionalized. RFAs should be included in IMF Article IV consultation missions, and a general structure for sharing information and assessments should be established. The most difficult aspect is to decide the division of responsibilities between the IMF and RFAs. For the foreseeable future, most RFAs are unlikely to have sufficient financial resources and capacities to provide viable independent alternatives to IMF financing and surveillance, especially financial surveillance.
Moreover, the increasing shift to prequalification of borrowers means that standardized schemes for classifying the credit-worthiness of borrowers by both the IMF and RFAs will need to be developed, which will further limit the room for independence of RFAs. The key issue is how to bring their regional expertise to bear in the assessment process. Most likely, the solutions to this issue will need to be developed on a case-by-case basis.
Cooperation in financing activities probably presents the most challenges. First, as with surveillance, the relatively small scale of funding of most RFAs (compared with likely demands for funds in crisis scenarios) means that they are unlikely to be able to take action independently from the IMF, especially in the case of contagion causing several countries to be affected. Second, the shift toward prequalification and precautionary lending programs by the IMF requires the RFAs to follow suit if they are to participate at this stage of the lending process. Both these trends will limit the scope for independent action by RFAs, unless they have sufficient financial resources to operate independently of the IMF, which seems unlikely.2
Finally, there needs to be a consistent approach toward conditionality. The determination of the need for conditionality will rest to a great extent on the assessment that an economy is either an innocent bystander facing a liquidity shock, or it faces deeper structural problems that need to be addressed. This assessment needs to be agreed on by the various entities involved.
The development of an effective IFSN would benefit greatly if central banks can provide hard currency swap lines. However, linking these disparate elements is likely to prove difficult since central banks like to maintain maximum flexibility in their commitments.
Another requirement for an effective IFSN is elimination of the IMF stigma, especially in Asia, where it is strong. Otherwise, Asian economies will still prefer alternative arrangements, such as directly obtaining swap lines from central banks, if they are able to do so. The IMF needs to implement reforms of its governance and mission, and make a thorough and open assessment of its previous surveillance and conditionality activities.
In summary, the Chiang Mai Initiative Multilateralization (CMIM) needs to substantially increase its funding, expand the technical capacity of the ASEAN+3 Macroeconomic Research Office (AMRO) and develop its reputation for independent surveillance, streamline its lending procedures, develop precautionary lending programs and institutionalize its relationship with the IMF. On its part, the IMF needs to establish cooperative relationships with the CMIM and other RFAs, including sharing information and risk assessments, and reform its governance structure to help eliminate the IMF “stigma” issue.
1 The CMI was converted to a multilateral currency swap arrangement (Chiang Mai Initiative Multilateralization) among ASEAN+3 members effective 24 March 2010.
2 The ASEAN+3 finance ministers recognized the desirability of establishing precautionary lending facilities at the 2011 Ha Noi meeting, noting that “…we instructed the Deputies to initiate a study on the design of a possible crisis prevention function for CMIM, including the size, further collaboration with the IMF, and the role of AMRO” (ASEAN Secretariat 2011).
ASEAN Secretariat. 2011. Joint Ministerial Statement of the 14th ASEAN+3 Finance Ministers’ Meeting Ha Noi, 4 May 2011. http://www.asean.org/26280.htm (accessed 5 November 2011).
G20 Secretariat. 2011. G20 Principles for Cooperation between the IMF and Regional Financing Arrangements. 15 October. http://www.g20-g8.com/g8-g20/root/bank_objects/0000005999-G20_Principles_for_Cooperation_between_the_IMF_and_RFAs_PostCannes.pdf (accessed 9 February 2012).
Lamberte, M. and P. J. Morgan. 2012. Regional and Global Monetary Cooperation. ADBI Working Paper 346. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working-paper/2012/02/21/5006.regional.global.monetary.cooperation/
Thailand Business News. 2012. Asean to double funding under the Chiang Mai Initiative. 10 April. http://thailand-business-news.com/asean/37256-asean-to-double-funding-under-the-chiang-mai-initiative (accessed 18 April 2012).