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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Viewpoint:
The Case for an Asian Fund

This monetary body would limit Crisis spillover effects

By M.G. Quibria


THE SEVERITY OF THE Asian financial crisis, the speed with which it spread, and the inadequacy of existing international institutions to deal with it have led to wide-ranging debate about the need for a new international financial architecture. Proposals for strengthening the current international financial architecture abound. Published recently, the Asian Development Outlook 1999, the Asian Development Bank's annual examination of development problems facing the region, provides a comprehensive review of the various proposals and blueprints. One proposal that has attracted a good deal of public attention is the establishment of an Asian Monetary Fund (AMF).

In a globalized economy, financial stability is a "public" good. All countries can enjoy the benefits of financial stability simultaneously, and enjoyment of the benefits by some does not preclude it by others. Under decentralized conditions, such public goods are generally under-provided. This provides an argument for global institutions such as the International Monetary Fund (IMF). While the argument may justify the IMF's existence, does it justify the establishment of a regional institution?

Currency and financial crises have strong cross-border spillover effects - instability can fairly easily spread even if neighboring countries' economic fundamentals are sound. The Asian Crisis is a case in point. The emerging consensus among academic economists seems to be that while the Thai crisis was essentially the result of problems with fundamentals, the other countries suffered largely because of contagion effects and the resulting investor panic. Governments' inability to undertake effective action because of structural weaknesses in their financial systems exacerbated the contagion. Thus the possibility of regional spillover effects is the most important justification for setting up an AMF or similar institution.

Another justification is that an institution with a detailed knowledge of the region is likely to be better able to sound an early warning of a crisis through its surveillance systems. And be more effective in getting countries to take the necessary action through peer pressure. This kind of leverage is not generally available to a global institution. Observers often cite the Thai case to illustrate the limitations of IMF surveillance. The IMF was both late in detecting the problem and ineffective in getting the government to act.

Third, for a global organization with more than 180 members, reaching consensus is more difficult than in a regional organization with fewer members. In the larger body, members from around the world may not view a problem in a single region as seriously as a regional institution, which would likely be more receptive, and hence better geared toward early action.

Finally, the IMF had a limited amount of resources available to deal with the Asian Crisis and had to mobilize additional resources from other international organizations and bilateral sources. The larger pool of resources that an AMF would provide on a permanent basis to deal with such crises is an important rationale for setting up such an institution. As the IMF has been pushing for a larger quota, a larger sum of money in the form of an AMF could not be hurtful - and indeed provides an added rationale.

The proposal for an AMF came from Japan in September 1997, before the Crisis had fully unfolded. The initial proposal suggested funding of $100 billion, half from Japan and the rest from other countries in the region. Such a fund, it was argued, would provide sufficient liquidity to forestall speculative attacks on regional currencies. Unlike the IMF's loans, AMF assistance would come without conditionality. Despite regional support, the proposal did not get off the ground. The main economic objections were two-fold. Financial support without conditions attached would increase the risk of moral hazard. And, coordination with the IMF might be a problem - a regional body could create the potential for conflict in the international financial system.

These objections, however, are somewhat overblown. First, the global financial market is more unstable now than at any other time in history. Today countries are often punished through financial contagion, but the punishment they receive is out of proportion to their crime of bad policies. Instability may ensue just because of illiquidity, rather than insolvency. A regional institution could help limit such contagion by expeditiously providing funds for this purpose. Second, there is no reason a regional institution could not coordinate its actions with the IMF.

Japan's prime minister recently proposed creating regional currency-support mechanisms to complement the role of the IMF. An AMF would be in line with such a proposal. According to this proposal, such mechanisms could be established in Asia, the Western Hemisphere, and Eastern Europe, and be regionally funded. Countries outside the region but with strong political and economic interests there could also participate. Currency-support mechanisms - or funds - could complement the IMF the way regional development banks complement the work of the World Bank. If established, such funds would be strong pillars on which to build a new global financial architecture.

M.G. QUIBRIA is assistant chief economist (research) of the Manila-based Asian Development Bank. The views expressed here are his own


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