The ASEAN Surveillance Process and the East Asian Monetary Fund

Abstract

I. Lessons from and Responses to the East Asian Financial Crisis The East Asian financial crisis of 1997-98 provides several valuable lessons for all parties concerned, including governments, the private sector, and international financial institutions that came to the region's rescue. It highlights how vulnerable small, open (capital account) economy is to an adverse shift of capital flows. It also demonstrates how quickly investors' confidence can erode and how their panic can spread contagion to neighbouring countries. The international financial rescue of 1997-98 came in slightly too late, and its initial liquidity support was too small to provide sufficient cushion for the magnitude of capital outflows. The rescue consequently failed to calm the market, resulting in continued outflows of capital and depreciating exchange rates. Policy prescriptions also failed to recognize the negative effects of austerity measures imposed on the already worsening economies and the welfare of their people, plunging crisis-affected countries deeper into recession. (1) As noted by Bird and Rajan (2001), there exists trade-off between the severity of adjustment in the short run and the availability of international liquidity in the event of crisis. In particular, the shortage of liquidity led to quicker and more intensive economic adjustment that resulted in much larger output losses compared with previous crises. In August 1997, Japan, together with several ASEAN countries, proposed the idea of an Asian Monetary Fund (AMF) to provide financial support for Thailand. It aimed to raise US$50 billion to US$60 billion from six ASEAN countries, Korea, China, Hong Kong, and Taiwan, and another US$50 billion from Japan. It was designed to be independent and would take up some IMF activities, such as regional surveillance. (2) However, the AMF proposal never got off the ground due to strong opposition from the United States and the International Monetary Fund (IMF). It was argued that such an arrangement would both create problem of moral hazard and, in competing with the IMF, double standard. (3) II. The Manila Framework A similar idea but significantly toned down--and with recognition of the IMF's central role in the international monetary system--emerged few months later when ministry of finance and central bank deputies of fourteen Asia-Pacific economies met on 18-19 November 1997 in Manila to discuss concerted approach to restoring financial stability in the region. (4) They came up with new initiatives under the so-called Manila Framework, that included regional surveillance and regional financing arrangement. In particular, the Framework called for: 1. mechanism for regional surveillance to complement the global surveillance of the IMF; 2. enhanced economic and technical co-operation, particularly in strengthening domestic financial systems and regulatory capacities; 3. measures to strengthen the IMF's capacity to respond to financial crises; and 4. co-operative financing arrangement that would supplement IMF resources. The announcement made on 19 November 1997, which is an agreed summary discussion of the meeting, highlighted the need for the IMF to quickly mobilize its financial assistance on a scale sufficient to restore market confidence. (5) In that context, the deputies also agreed to explore ways to supplement IMF and other international financial institution resources through cooperative financing arrangement in the region. III. The ASEAN Surveillance Process At their special meeting in Kuala Lumpur few weeks later, the ASEAN finance ministers concurred with the proposals of the Manila Framework and decided to implement it. The first initiative of the Framework--a mechanism for regional surveillance--was deliberated further at the Second ASEAN Finance Ministers Meeting (AFMM) on 28 February 1998 in Jakarta, where it was agreed that the ASEAN surveillance mechanism should be established immediately, within the general framework of the IMF and with the assistance of the Asian Development Bank (ADB). …