Is There Any Value-Added in the ASEAN Surveillance Process?

Abstract

I. Introduction The East Asian crisis was remarkable for its rapid spread, its severity, and for generally catching unaware international investors, governments, and societies at large. It has severely tested the existing surveillance mechanisms in Southeast Asia and found them wanting. Thus, one of the key policy initiatives agreed upon by authorities in Southeast Asia, in the soul-searching that inevitably followed the onset of the crisis, was to call for enhanced surveillance for the region,(1) More concretely, the Association of Southeast Asian Nations (ASEAN) surveillance process was formally established in late 1997 as a collective response to the financial crisis. The ASEAN surveillance and monitoring mechanism occupies pride of place as the primary regional institution to oversee the task of crisis prevention. By institutionalizing the process of consultation and early warning to spot impending shocks, it is hoped that future crisis could either be averted, or that its costs are mitigated if ever one occurs. For these reasons, the initiative has been endorsed at the highest political levels in ASEAN. This article reviews the case for surveillance and monitoring in Southeast Asia, highlights the merits and limitations of the ASEAN surveillance and monitoring mechanism, and suggests ways for the surveillance mechanism to proceed in the context of the lessons learned from the regional financial crisis of 1997. II. The Case for a Regional Surveillance and Monitoring Mechanism A standard argument for international economic co-operation is that international financial and economic stability is a public good.(2) All countries benefit from a stable financial environment regardless of whether they contributed to it. But it also means that a country can easily disregard the potential negative spillover effects it can create, if it adopts unsustainable policies in pursuit of certain national objectives. As Crockett (1987) emphasizes, international co-operation in surveillance is important to the extent that it helps national authorities internalize the spillover effects in their decision-making processes. Partly for this reason, various international institutions such as the G7 or the European Union (EU) have institutionalized regular policy consultations to exchange views on the economic policies of members, and occasionally to engage in coordinated intervention when speculative pressures threaten financial market stability. Surveillance is routinely carried out by different institutions and at different levels. National surveillance is ordinarily the purview of central banks or specific agencies in the Ministries of Finance. A multilateral agency such as the International Monetary Fund (IMF), on the other hand, carries out its surveillance activities on bilateral and multilateral levels. Bilateral surveillance refers to the Article IV consultations with individual member economies, whereas multilateral surveillance pertains to the systematic analysis (including identification of risk factors) and forecasting of the world economy, of which the IMF's Worm Economic Outlook and International Capital Market Report are the main vehicles. Private companies, such as credit rating agencies, also perform surveillance when they make country risk assessments in the course of assigning sovereign ratings. Specialized global institutions such as the Institute of International Finance (IIF) monitor capital flows and assess investment risks in emerging markets. The Bank for International Settlements (BIS) holds regular consultations among central bank governors on matters affecting financial stability. A review of current surveillance mechanisms reveals active work on the levels of global and national surveillance. In contrast, there were few monitoring activities at the regional level in Asia prior to the crisis.(3) Of course, there was no perceived need for such a mechanism at that time. …