The Asian Crisis and the Adequacy of Regional Institutions

Abstract

The weight of scholarly and official opinion on what measures will best promote an East Asian recovery from the financial crisis advocates reform either at the national or the global level. Those who find the major causes of the crisis in weaknesses in individual East Asian economies stress that recovery will only follow structural reforms at the national level. Those who blame the crisis mostly on uncontrolled global financial flows and the avarice, mispricing of risk, and herd instinct of international investors, argue for action at the global level to regulate these massive financial flows. Between the national and the global, comparatively little attention has been given to responses at the regional level. The lack of attention to regional level responses needs to be redressed for three related reasons. First, the financial crisis is a regional phenomenon, largely confined to East Asia. Secondly, the crisis and responses to it challenge deeply-held values that inform East Asian diplomacy and institutions: regional and national resilience and development; political and social stability; and sovereign independence and non-intervention in the face of IMF (International Monetary Fund) conditionality. Thirdly, it is not unreasonable to expect regional institutions to respond when the countries of the region are hit with a serious common problem. Some regional institutions should be more responsible for reacting than others: a financial crisis and its consequences are more relevant to broadly political institutions such as the Association of Southeast Asian Nations (ASEAN); economic and trade institutions such as the Asia-Pacific Economic Co-operation (APEC); and regional financial institutions such as the Asian Development Bank (ADB), and less relevant to security or functional structures. This article examines the responses of these regional institutions to the Asian financial crisis. First documenting the track records of ASEAN, APEC, and the ADB in responding to the crisis in 1997 and 1998, it then assesses the adequacy of these responses from a number of perspectives: have the responses of these institutions mitigated or alleviated the crisis?; what should regional institutions have done?; and how have regional institutions elsewhere in the world been able to respond to financial crises? This leads to the consideration of why regional action is vital alongside national and global action to respond to financial instability. The final section considers the obstacles and prospects for constructing regional institutions that can play such a role in East Asia. The Response of Regional Institutions to the Financial Crisis ASEAN, APEC, and the ADB responded in four basic ways to the financial crisis in 1997 and 1998: with premonitions of impending danger; co-ordinated policy responses; the use of a collective voice to influence actors outside the region; and institutional innovations for responding to the crisis. Pre-Crisis Premonitions By the mid-1990s ASEAN had begun to voice concern about the volatility of international capital markets. In July 1995, the ASEAN foreign ministers cautioned that the continuing imbalances in the international currency markets might seriously affect financial flows to the region and might have adverse consequences for countries with large foreign debt obligations.(1) In March 1997, ASEAN Finance Ministers concluded a Memorandum of Understanding on financial co-operation, which included a commitment to exchange views on macroeconomic policy and to improve the transparency of financial policies and regulations.(2) At the same time, the process of co-operation and consultation between ASEAN central bankers was deepening; a triumph was registered in May 1997 when their co-ordinated response successfully defended the Thai baht from currency speculators. APEC had also begun to establish co-operative structures relevant to the coming financial turmoil. …