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East Asian Financial Regionalism in Support of the Global Financial Architecture? The Political Economy of Regional Nesting

Published online by Cambridge University Press:  24 March 2016

William W. Grimes
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Abstract

East Asian financial regionalism has advanced significantly since the rejection of Japan's Asian Monetary Fund proposal in 1997. Key ASEAN+3 initiatives include the Chiang Mai Initiative, which is designed to provide emergency liquidity to economies experiencing currency crisis, and the Asian Bond Market Initiative, which seeks to develop regional bond markets. Surprisingly, these initiatives—despite the assertive “regionalist” rhetoric that has surrounded them and their intellectual origins in the analysis of the 1997–1998 Asian financial crisis—are explicitly designed to complement existing features of the global financial architecture, including IMF conditionality and global financial standards. The nesting of East Asian financial regionalism within the global financial architecture results from the political-economic interests of the leading economies of the region. In the absence of a major change in the political-economic environment, nesting is a stable equilibrium and is unlikely to change.

Keywords

Chiang Mai InitiativeAsian Bond Market Initiativefinancial regionalismJapanASEAN+3institutional designEast Asia
Type
Articles
Information
Journal of East Asian Studies , Volume 6 , Issue 3 , December 2006 , pp. 353 - 380
Copyright
Copyright © East Asia Institute 

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References

Notes

I am grateful to the US Department of Education for a Fulbright-Hays Faculty Research Grant and to Boston University for sabbatical leave in 2005. The Policy Research Institute of the Japanese Ministry of Finance provided an office, logistical support, and visiting scholar status during that time. Thanks are also due to the Japanese government officials, central bankers, and economists who agreed to be interviewed, sometimes repeatedly, on the subject of East Asian financial regionalism. Joseph Grimes, Yves Tiberghien, Stephan Haggard, and two anonymous reviewers provided comments on drafts of this article. Audiences at seminars and lectures in Japan and the United States also offered useful comments and criticism. I alone am responsible for any remaining errors of fact or analysis.Google Scholar

1. There has been considerable debate over how to define or identify “regions” and indeed whether the concept is even useful. Here, I make no effort to problematize the East Asian region. Instead, I define East Asia as core ASEAN+3, which is the locus of self-identified regional financial cooperation.Google Scholar

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5. Or, to follow Aggarwal's categorization, that regional arrangements are “substantively” rather than just “tactically” linked to the global regimes in a nested arrangement. Aggarwal, Vinod, “Reconciling Multiple Institutions: Bargaining, Linkages, and Nesting,” in Aggarwal, Vinod, ed., Institutional Design for a Complex World (Ithaca: Cornell University Press, 1998), pp. 1–31.Google Scholar

6. Japanese authors drawing on the IMF Direction of Trade Statistics state that, as of 2004, intraregional trade in East Asia was 53.4 percent, compared to 65.7 percent in the EU and 43.9 percent in NAFTA. These numbers are somewhat problematic, for three reasons: (1) the EU and East Asia numbers include a larger number of economies than NAFTA, which biases their intraregional totals upward; (2) the East Asia numbers include Hong Kong, much of whose “trade” can best be seen as double-counting, due to its entrepôt role in China; and (3) the East Asia numbers include Taiwan, which is specifically excluded from regional cooperation efforts. However, the general point remains a valid one.Google Scholar

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9. The lack of formal institutions has been widely remarked. See, for example, Pempel, , Unmapping', Katzenstein, , World of Regions; and Doner, Richard, “Japan in East Asia: Institutions and Regional Leadership,” in Katzenstein, Peter and Shiraishi, Takashi, eds., Network Power: Japan and Asia (Ithaca: Cornell University Press, 1997), pp. 197–233. Lincoln, , East Asian, provides a fairly comprehensive, albeit deeply skeptical, overview of regional economic institutions; see especially his Chapter 8 regarding the AFC and institutional responses.Google Scholar

10. This point was made over and over to me in discussions and interviews with Japanese Ministry of Finance officials, academics, and others over the summer of 2005.Google Scholar

11. Space constraints preclude a detailed treatment here. For a more thorough summary and analysis, see Katada, Saori, Banking on Stability (Ann Arbor: University of Michigan Press, 2001); Amyx, Jennifer, “Japan and the Evolution of Regional Financial Arrangements in East Asia,” in Krauss, Ellis and Pempel, T. J., eds., Beyond Bilateralism: US-Japan Relations in the New Asia-Pacific (Stanford: Stanford University Press, 2004), pp. 198–219; and Lee, Young Wook, “Japan and the Asian Monetary Fund: An Identity-Intention Approach,” International Studies Quarterly 50, no. 2 (2006): 339–366.Google Scholar

12. The Manila Framework Group was created in 1997 as a subgroup of APEC in the aftermath of the AMF proposal. Based on a US initiative, the Manila Framework focused on surveillance and early warning of potential crises. Despite some talk of setting up an emergency financing facility through the group (Henning, , East Asian Financial Cooperation , p. 64), the process was superseded by the Chiang Mai Initiative and essentially withered away.Google Scholar

13. There has been a great deal of writing on this point, particularly by Asian economists. See, for example, the various essays in Ito, Takatoshi and Park, Yung Chul, eds., Developing Asian Bondmarkets (Canberra: Asia Pacific Press, 2004); McCauley, Robert, “Unifying Government Bond Markets in East Asia,” BIS Quarterly Review (December 2003): 89–98; Yoshino, Naoyuki, Kaji, Sahoko, and Asonuma, Tamon, “The Optimal Weight and Composition of a Basket Currency in Asia: The Implications of Asymmetry,” SCMS Journal of Indian Management 2, no. 4 (2005): 74–87; Goldstein, Morris and Turner, Philip, Controlling Currency Mismatches in Emerging Markets (Washington, DC: Institute for International Economics, 2004); and Eichengreen, Barry and Hausmann, Ricardo, eds., Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies (Chicago: University of Chicago Press, 2005).Google Scholar

14. As one recent example, Thailand's minister of finance, Thanong Bi-daya, made the following statement in a symposium in Tokyo in May 2005:.Google Scholar

15. The US responded passively to the Asian Crisis, compared to the speed and effort which it had responded to the Mexican Crisis. In addition, the IMF conditionally was not appropriate to the crisis-effected countries because of the lack of true understanding of the situation and underlying economic condition. Other forums of cooperation such as APEC had played no significant role in solving the crisis. These lessons reminded us of the importance and necessity of a stronger regional cooperation. (“Future of Asia” conference, sponsored by the Nihon Keizai Shimbun, Tokyo, May 25–26, 2005; text of speeches available at www.nni.nikkei.co.jp/FR/NIKKEI/inasia/future/2005/index.html)Google Scholar

16. Lee, , “Japan and the AMF”; Grimes, William W., “Internationalization as Insulation: Dilemmas of the Yen,” in Schaede, Ulrike and Grimes, William W., eds., Japan's Managed Globalization: Adapting to the 21st Century (Armonk, NY: M. E. Sharpe, 2002), pp. 47–76; Grimes, William W., “Internationalization of the Yen and the New Politics of Monetary Insulation,” in Kirshner, Jonathan, ed., Monetary Orders: Ambiguous Economics, Ubiquitous Politics (Ithaca: Cornell University Press, 2003), pp. 172–194.Google Scholar

17. In this sentence, “market efficiency” is used in the microeconomic sense. However, as Stephan Haggard has pointed out in a personal communication, there is a good Keynesian efficiency argument to be made for avoiding sharp capital movements that can have a serious effect on macroeconomic outcomes.Google Scholar

18. Grimes, , “Internationalization as Insulation” and “Internationalization of the Yen.” Google Scholar

19. It should also be noted that the CMI is a relatively simple coordination problem among eight state actors, while the efforts through ABMI and ABF to create bond markets require the development of complex infrastructure and the attraction of a multitude of market participants on both buy and sell sides.Google Scholar

20. Except where otherwise noted, facts about the CMI, ABMI, and ABF are from Japanese Ministry of Finance (MOF) and Bank of Japan (BOJ) briefing documents and interviews with MOF and BOJ officials.Google Scholar

21. Two caveats to the conditionality point apply. First, IMF support typically involves a range of conditions, and CMI funds can be seen as piggybacking on those conditions; however, in the period between activation of swaps and final IMF agreement, there are in fact no conditions. Second, if crisis countries refuse to go to the IMF, they are limited to 10–20 percent of the amounts of their swap agreements, and access to funds is at the sole discretion of the lending government. This might create de facto conditionality. See below on the IMF link.Google Scholar

22. Amyx, Jennifer, “A Regional Bond Market for East Asia? The Evolving Political Dynamics of Regional Financial Cooperation,” Pacific Economic Papers, No. 342 (Canberra: Australia-Japan Research Centre, Australian National University, 2004), p. 5.Google Scholar

23. Japanese policymakers and analysts tend to focus on improved surveillance as the key to advancing regional financial cooperation (e.g., Nemoto, Yoichi, “An Unexpected Outcome of the Asian Financial Crisis,” Princeton University Program on US-Japan Relations Monograph Series, No. 7 [2003], pp. 23–24). Following the Asian financial crisis, there were a number of attempts to come up with objective criteria that would be particularly appropriate to predicting currency crises in East Asian economies, on the premise that the IMF had basically misunderstood both the crisis and the precrisis situation. See, for example, the reports of the Kobe Study Group, commissioned by Asia-Europe Meeting (ASEM) in 2001. Institute for International Monetary Affairs (IIMA), Executive Summary of Research Papers and Suggestions of Kobe Research Project (Tokyo: Institute for International Monetary Affairs, 2002), available at www.mof.go.jp/jouhou/kokkin/tyousa/tyou058.pdf. These efforts have been unsuccessful to date.Google Scholar

24. The currency mismatch has been mostly eliminated in recent years in the ASEAN+3 economies, according to their “aggregate effective currency mismatch indexes” see Asian Bonds Online, a service of the Asian Development Bank, http://asianbondsonline.adb.org. There is some debate over the proper measurement of mismatches, as discussed in Goldstein and Turner, Controlling Currency Mismatches, especially Chapters 2 and 3. It is beyond the scope of this article to evaluate the appropriateness of the ADB figures, but there has clearly been significant improvement.Google Scholar

25. This claim is debatable, as Park and Park argue. Park, Yung Chul and Park, Daekeun, “Creating Regional Bond Markets in East Asia,” in Ito, Takatoshi and Park, Yung Chul, eds., Developing Asian Bondmarkets (Canberra: Asia Pacific Press, 2004), pp. 16–66. However, there is a clear consensus among those economists and policymakers actually involved in ABMI that lack of local-currency bond markets contributed to the crisis. See also McCauley, , “Unifying Bond Markets” Goldstein and Turner, Controlling Currency Mismatches; Eichengreen, Barry, Hausmann, Ricardo, and Panizza, Ugo, “Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why It Matters,” National Bureau of Economic Research Working Paper No. 10036, October 2003.Google Scholar

26. Statistics on composition, maturity, and turnover are available at Asian Bonds Online.Google Scholar

27. Ministry of Finance mimeo, “Ajia saiken shijō ikusei inishiatibu” (Asian bond market initiative), June 2005.Google Scholar

28. Personal interviews with JBIC and MOF officials; “Role and Recent Development: JBIC International Financial Operations,” JBIC mimeo, July 2005; “JBIC Provides Thai Baht Two-Step Loan: First Asian Currency Loan Under ABMI,” JBIC press release, September 15, 2005, www.jbic.go.jp.Google Scholar

29. For a study of Japanese financial institutions' preferences in this regard, see Institute for International Monetary Affairs (IIMA), “Ajia ni okeru saiken shijō kenkyūkai” (Asia bond markets study group), Tokyo, March 2005.Google Scholar

30. As of this writing, there have been only four ABMI private sector bond issues, two in 2004 and two in 2006. Three involved JBIC secondary credit guarantees on bond issues by Japanese companies' subsidiaries in Thailand, Malaysia, and Indonesia. The other was a yen-denominated collateralized debt obligation of the receivables of a group of South Korean SMEs, guaranteed by the Industrial Bank of Korea and JBIC and issued in Singapore in December 2004. As a further cautionary tale, in June 2005, the Thai government reversed its plan to issue a dual-currency (yen-baht) bond in favor of a straight yen bond because of pricing concerns caused by lack of enthusiasm among its target purchasers in Japan.Google Scholar

31. International Index Company is a joint venture of ABN Amro, Barclays Capital, BNP Paribas, Deutsche Bank, Deutsche Börse, Dresdner Kleinwort Wasserstein, HSBC, JP Morgan, Morgan Stanley, and UBS Investment Bank.Google Scholar

32. ABF 2 funds are split between the regional fund (Pan Asia Bond Index Fund, or PAIF) and a Family of Bond Funds (FoBF) comprising the eight country funds. The structure may appear to be unnecessarily complicated, with PAIF essentially replicating the FoBF. However, the hopes for private sector participation differ by type of fund. PAIF is meant to provide an overall Asian-currency index product denominated in US dollars that will encourage investors to see the East Asian bond markets as a coherent unit. Since it is listed in Hong Kong, there are no restrictions on sales, purchases, or repatriation of proceeds. The country funds are denominated in local currencies and are meant to provide a low-cost vehicle for those who prefer to make their own allocations across economies. Potential investors are subject to applicable local laws. Investor differentiation among country funds could also be a spur for countries with less attractive bond funds to seek to improve their offerings. As for central bank holdings, both PAIF and FoBF holdings are meant to be reallocated among country funds on a periodic basis. Ma, Guonan and Remolona, Eli, “Opening Markets Through a Regional Bond Fund: Lessons from ABF 2,” BIS Quarterly Review (June 2005): 81–92; “EMEAP Central Banks Announce the Launch of the Asian Bond Fund 2,” EMEAP press statement, December 16, 2004; State Street Global Advisors, “Prospectus: ABF Pan Asia Bond Index Fund,” June 28, 2005; personal interviews with BOJ and MOF officials.Google Scholar

33. Personal interviews.Google Scholar

34. Ma, and Remolona, , “Opening Markets”; personal interview with BOJ official.Google Scholar

35. On the relationship between market size and liquidity, see McCauley, , “Unifying Bond Markets,” pp. 92–94.Google Scholar

36. See, for example, Takatoshi, Itō, “Ikinai kawase antei e zenshin” (Progress toward regional currency stability), Nihon keizai shimbun , July 29, 2005. See also the Asian Monetary Unit project of the Japanese government's Research Institute of Economy, Trade, and Industry, at www.rieti.go.jp/users/amu/en/index.html.Google Scholar

37. Aggarwal, , “Reconciling Multiple Institutions.” Google Scholar

38. It is true that the governments participating in the General Agreement to Borrow (GAB) and the New Agreement to Borrow (NAB) have in some ways created a parallel IMF for the developed countries. But the unlikelihood that the world's richest countries would have to draw on such cooperative arrangements or on the IMF to defend their currencies means that GAB and NAB are fundamentally different from the CMI. The European Exchange Rate Mechanism, in both its iterations, also differed in that respect. See Henning, , East Asian Financial Cooperation , pp. 69–74.Google Scholar

39. Haruhiko, Kuroda, Tsūka no kōbō: En, doru, yūro, jinmingen no yukue (The rise and fall of currencies: The fate of the yen, dollar, euro, and renminbi) (Tokyo: Chūō Kōronsha, 2005); Kawai, Masahiro, “East Asian Economic Regionalism: Progress and Challenges,” Journal of Asian Economics 16, no. 1 (2005): 29–55. The idea is also contained in a de facto form in ASEAN+3's road map for CMI (MOF mimeo). The second stage of CMI (the current level of negotiation) calls for a “collective decision-making mechanism,” and the “future regional cooperation” entry calls for “enhanced surveillance” and “multilateralization,” both of which are essentially code words for the creation of an autonomous institution without the IMF link. Efforts to create an ASEAN+3 secretariat within ADB are related to this goal as well.Google Scholar

40. This statement may seem odd, given that I have just identified Kuroda Haruhiko as an important backer of the “regionalist” approach. The solution to the seeming contradiction is that Kuroda's view is no longer dominant within the International Bureau of the Ministry of Finance. From 2004 to 2006, other than the vice-minister for international affairs himself, it would be difficult to identify more than three or four of the dozen or so International Bureau officials who have occupied relevant positions at the office director (shitsuchō) level or higher as pursuing an assertively “regionalist” approach to financial cooperation and only one as anything other than a cautious gradualist. (On the other hand, see Nemoto, , “Unexpected Outcome.”)Google Scholar

41. Personal interviews.Google Scholar

42. Interviewees were reluctant to go on the record about country differences in negotiations, but it is interesting that Malaysia and Thailand have been the most publicly vocal on the need to drop the IMF link. By virtue of both macroeconomic management and reserve positions, by far the most likely economies to fall into crisis in the near future are Indonesia and the Philippines, which have been much less publicly antagonistic to the IMF link.Google Scholar

43. IMF, International Financial Statistics Yearbook. As a note, Singapore is clearly using a significant proportion of its “reserves” as an investment vehicle rather than as a currency defense mechanism.Google Scholar

44. For some countries, such as China and Japan, these reserves can better be understood as a mercantilist attempt to prevent or moderate appreciation of their currencies. This seems not to be a major motivation for the likely crisis economies of Southeast Asia, however. There, the insurance metaphor appears to be more convincing.Google Scholar

45. For a discussion of nationalist sentiment in Thai and Malaysian policy discourse in the wake of the Asian financial crisis, see Hamilton-Hart, Natasha, “Thailand and Globalization,” in Kim, Samuel, ed., East Asia and Globalization (Lanham, MD: Rowman & Littlefield, 2000), pp. 187–208; Murphy, Anne Marie, “Malaysia and Globalization,” in Kim, Samuel, ed., East Asia and Globalization (Lanham, MD: Rowman & Littlefield, 2000), pp. 209–232.Google Scholar

46. There are exceptions, of course. According to Ma, and Remolona, , “Opening Markets,” Malaysia has “essentially restored the regime that was in place before it imposed capital controls during the Asian crisis” (p. 88).Google Scholar

47. IIMA, Ajia. The existence of effective hedging instruments will also invite entry of hedge funds, which will likely be unattractive to many ASEAN+3 financial regulators.Google Scholar

48. MOF and BOJ interviews. The crux of this issue is that, in the absence of well-functioning bond markets and sophisticated ratings agencies in a given country, it will be essentially impossible for domestic banks to execute proper risk weighting. This may make them ineligible for international activities and put them at a disadvantage domestically relative to foreign banks.Google Scholar

49. Katada, , Banking on Stability; Henning, , East Asian Financial Cooperation , p. 74.Google Scholar

50. It might be argued in this regard that Japan would be unlikely to vote against its own interests just for the sake of ASEAN+3 solidarity. But one major objective of weaker states that enter into collective agreements with more powerful ones is exactly to constrain their options. Perhaps more likely, ASEAN+3 solidarity could provide cover for Japan to follow its own preferences if they conflicted with those of the United States.Google Scholar

51. Katzenstein, , World of Regions. Google Scholar

52. Nemoto, , “Unexpected Outcome,” pp. 23–24, suggests this explicitly, albeit with much hedging.Google Scholar

53. Kuroda, , Tsūka no kōbō Sakakibara Eisuke, Keizai no sekai seiryokuzu (Map of world economic power) (Tokyo: Bungei Shunjū, 2005). A theoretically sophisticated political science treatment in this vein of the formation of the AMF proposal can be found in Lee, “Japan and the AMF.” Kawai, “East Asian Economic Regionalism,” also more or less fits into this category. Grimes compares this version of Japan's national interest with domestic political economy and strategic realist alternatives in Grimes, William W., “Japan's Regional Turn to Stabilize the Yen” presented at American Political Science Association Annual Meeting, Philadelphia, September 1, 2006.Google Scholar

54. There are, of course, other possibilities. Miscalculation can never be dismissed as a possibility. Alternatively, given the size of CMI funds, it may become politically unattractive or even unsustainable to continue to cede control over their disbursal to the IMF. But these and other possibilities are harder to treat systematically as outgrowths of a consistent approach to analysis, so I do not pursue them here.Google Scholar