SouthKorea and the Pitfalls ofEastAsian Monetary Regionalism: Do Neighbors Mean Neighborly Behavior?

Abstract

In the aftermath of theAsian financial crisis, monetary regionalism has been widely advocated as a means to shelterEastAsia from not only the volatility of global financial markets but also from theUS‐dominated International Monetary Fund. While the primary obstacle to deepening regional monetary cooperation centered around theChiangMaiInitiative (CMI) is cogently identified as being political, the existing literature focuses mostly on the rivalry between the likely lenders,China andJapan, and neglects the likely borrowers. Using the case ofSouthKorea, this paper provides a cautionary tale of theCMIfrom a borrower's perspective. Any workable liquidity‐support arrangement, regional or otherwise, requires a robust surveillance mechanism to address the problem of moral hazard inherent to such a lending facility. In turn, an effective surveillance mechanism inevitably implies a significant political leverage for the lenders and vulnerability for the borrowers, an outcome that cannot be assumed to be avoidable by theCMIjust by the virtue of its regional scope. There is little basis to expect that being neighbors necessarily means neighborly behavior; mere geographic proximity does not makeChina andJapan any less self‐interested than theUnitedStates, nor does it makeKorea's potential political costs more tolerable.