COMPLEX DECISION IN THE ESTABLISHMENT OF ASIAN REGIONAL FINANCIAL ARRANGEMENT

Abstract

Summary: The aftermath of the 1997 financial crisis brings about a strong desire among East Asian countries to develop a regional self-help financial networking in order to stabilize the region’s financial sector. Some progress towards the creation of a regional financial arrangement (RFA) has been made since the announcement of the Chiang Mai Initiative (CMI) that effectively expanded the swap arrangements to include Japan, the PRC and Korea (hence the term ASEAN+3). However, the results are mixed and skepticism remains. One of the unsettled issues relates to w hat should be the precise form of RFA that could effectively stabilize the region’s financial sector. The focus of this paper is to search for the most suitable form of RFA, the process of which involves a complex decision, having to include not just economic rationales but also political and other considerations. Among the alternative choices, three are explored in the paper: (1) RFA with common currency basket; (2) RFA without a uniformed fixed exchange rate system; and (3) RFA that focuses only on effort s to strengthen the financial system. Measuring consistent prioritization of all benefits, costs, risks, and opportunities of different RFAs are conducted by taking into account the feedback effects between some criteria and alternatives, and between the focus of RFA and the criteria. While a comparison of the results with those obtained from using a simple hierarchy without feedbacks indicate that the resulting weights change, the ranking remains the same. .