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ASEAN+3 & the IMF: The Need for a Marriage of Convenience
By Ramon Pacheco Pardo, Pradumna B. Rana

Can the Association of Southeast Asian Nations plus China, Japan and South Korea (ASEAN+3) prevent and resolve financial crises without external help?


Following the Asian Financial Crisis of 1997-1998, policy-makers in ASEAN+3 launched several “self-help” regional mechanisms, mainly because of the slow response of the International Monetary Fund to the crisis. Yet, these mechanisms were not used when the global financial crisis hit East Asia in 2008. The countries in the region seeking outside help resorted instead to their bilateral swap arrangements with the US Federal Reserve. Since then, existing regional mechanisms have been strengthened and new ones developed, in the hope that they will be used in the future, if necessary. The introduction of a strengthened regional financial safety net (RFSN) would suggest that eventually the IMF would be irrelevant in East Asia.


Yet, there is an ongoing discussion regarding the relationship between regional safety nets and the global financial safety net of which the IMF is a central part. Several authors have argued that global and regional nets should complement each other, while others have noted that they should be standalone and independent. Focusing on the case of the ASEAN+3 safety net and the IMF, we argue that the two must complement rather than duplicate each other for greater efficiency. However, the present ad hoc method of promoting complementarity between ASEAN+3 and the IMF is not adequate to stem the newer types of crises associated with financial globalization. A more structured form of co-operation between ASEAN+3 and the IMF is needed, similar to the one in Europe. At least for the time being, ASEAN+3 does not have an independent crisis prevention and solving capability.


The current state of play


In their May 2000 joint statement, the ASEAN+3 ministers stipulated that the regional safety net in East Asia should “supplement the existing international facilities.” The way this was promoted in the Chiang Mai Initiative Multilateralisation (CMIM) — and its predecessor, the Chiang Mai Initiative (CMI) — was by requiring the existence of an IMF-supported program to provide assistance in excess of a certain percentage of the maximum access to the currency swaps in the regional safety net. Initially, only 10 percent of this maximum access was readily available, with 90 percent linked to an IMF program. The size of the delinked portion was subsequently increased to 20 percent in 2005. The link to the IMF was intended to address the moral hazard problem in lending and the lack of independent surveillance capacity under the CMI. By 2008, the ASEAN+3 countries had signed 16 bilateral swaps among each other amounting to a total of US$86 billion.


In the aftermath of the severe credit crunch that the region experienced because of the 2008 global financial crisis, the CMI bilateral swaps were not used. This was because of the small size of the swaps — including the delinked portions — and the absence of a rapid response mechanism to trigger the swaps, given that each bilateral swap had to be activated one at a time. For example, the Philippines and Thailand had two swaps each with Japan and South Korea for US$2.5 billion and US$4 billion, respectively, and it would have taken several weeks or even more to activate them.


Since then, ASEAN+3 has taken a number of actions to increase financial resources available from its regional safety net and to clarify the disbursement procedures. These include multilateralising the CMI to CMIM, doubling the size of the CMIM; increasing the delinked portion to 30 percent with a view to increasing it further to 40 percent, subject to review; establishing the ASEAN Macroeconomic Research Office (AMRO); and agreeing to a decision-making process and operational guidelines (see box opposite). Are these actions sufficient to ensure that the CMIM will be used when the region faces the next crisis? Probably, not.


Under the new agreement, five ASEAN members (Indonesia, Malaysia, the Philippines, Singapore and Thailand) can borrow a maximum of approximately US$23 billion each from the CMIM with an IMF program in place — one third of which will be the delinked portion — under a single contract at one go. Meanwhile, Japan and South Korea are entitled to borrow a maximum of US$38.4 billion from the CMIM with an IMF program in place. China can borrow about US$35 billion, Vietnam US$10 billion, and Cambodia, Laos, and Myanmar about US$1 billion each. These amounts are large compared to the old CMI bilateral swaps, but still inadequate to prevent and manage the newer types of capital account crises associated with large inflows and sudden withdrawal of short-term financial capital. As an example, two separate packages of US$167 billion and US$142 billion (in today’s dollars) were put together for Greece during the recent Eurozone crisis. Even the bailout package for Cyprus, one of the smallest economies in the EU, totaled US$13 billion in today’s dollars.


It is unlikely that the ASEAN+3 countries will increase their commitments to the CMIM and raise the percentage of the delinked portion without strengthening the capacity of the ASEAN Macroeconomic Research Office for regional surveillance and for designing conditions under which funds can be loaned out. Otherwise, there could be moral hazard. Although AMRO has come a long way, as a relatively new institution it still lacks the research capacity, human resources and experience to serve as an “independent surveillance unit” for the CMIM.


More important is the speed and efficiency with which requests for assistance can be met. The operational guidelines for the CMIM note that a decision based on a two-thirds majority should be made within two weeks of the swap request. This is unlikely to happen, because the CMIM is not a centralized fund but a “self-managed” arrangement where contributions are held by individual central banks and monetary authorities. Also, the decision rests with a non-resident body and there is uncertainty regarding the nature of information and the analysis required to facilitate the decision-making. In contrast, bilateral swaps with countries such as the US are disbursed fast and come without explicit conditions, since they are well collateralized.


Achievable co-operation


ASEAN+3 has therefore taken important steps to enhance the region’s safety net, but these are still insufficient to prevent and solve a financial crisis. Structured collaboration with the IMF could significantly strengthen financial crisis prevention and resolution in the region, bringing both the CMIM and AMRO to the center of efforts to foster financial stability in East Asia and beyond. For its part, the IMF would also benefit from co-operation with ASEAN+3. This would ensure that it does not become irrelevant in one of the biggest and most economically dynamic regions in the world.


There are three areas in which co-operation between ASEAN+3 and the IMF is achievable in a relatively short period of time.


First, as in Europe, ASEAN+3 countries seeking financial resources should be required to apply simultaneously to both the CMIM and the IMF, and AMRO and the IMF should jointly analyze and evaluate the applications. Currently, the analysis and evaluation by the two institutions are separate, with AMRO responsible for CMIM funds. But AMRO’s capacity is limited and it will take a long time to strengthen it.


Involving both AMRO and the IMF in the analysis and evaluation process would increase its robustness in two ways. First, experts from outside East Asia would support an understaffed AMRO, which would nonetheless arguably be less politicized than any meeting of CMIM members. Decisions on applications could therefore be made more rapidly, and would involve IMF staff who, at least in theory, should feel more dispassionate about the country requesting a CMIM package. A crisis triggering an application for CMIM funds would need a decision in the shortest period of time and with the smallest moral hazard possible. AMRO and IMF intervention in the decision-making process would help both.


In addition, joint application to both the CMIM and the IMF would help address the IMF stigma in East Asia. Given the experience of Indonesia, South Korea and Thailand during the 1997 Asian Financial Crisis, it would be very difficult politically to sell an IMF program anywhere in East Asia. Having a joint process together with an ASEAN+3 institution — namely, AMRO — would eliminate the potential duplication in terms of applications, while also lessening the political fallout of any program the IMF might want to impose.


The second area in which co-operation would be relatively easy to develop is joint financing and supervision of CMIM-approved liquidity provision programs. Currently, financing would only come from the CMIM pool, which, as already explained above, would probably be insufficient to avert the spread of a financial crisis. Combining the resources of the CMIM together with those of the IMF would substantially increase the resources available for ASEAN+3 to deal with a financial crisis. As the experience of joint EU-IMF programs shows, the percentage of a total rescue package coming from the regional safety net and the IMF can be negotiated on a case-by-case basis. This model would give ASEAN+3 countries the flexibility to decide how much to ask the IMF for.


Meanwhile, joint supervision of any approved liquidity provision program would be the natural consequence of joint approval and financing. Yet, even if approval stayed separate and financing were to remain solely in the hands of ASEAN+3, joint supervision would make sense. At present, supervision in theory would be doubled. AMRO would supervise compliance with the terms of the delinked portion of any program, with the IMF dealing with the portion linked to its adjustment program. It seems clear that the country receiving a rescue package would find it more difficult to address two different supervision regimes, especially at a time of economic stress. A joint supervision process would significantly ease the burden on a government that should be more worried about the actual implementation of a crisis-resolution program.


Finally, there is a third area in which co-operation between ASEAN+3 and the IMF would be beneficial for both, but especially for the former. This is complementary financial surveillance of ASEAN+3 members, a crucial crisis prevention mechanism. Since its establishment in April 2011, AMRO has been tasked with producing quarterly assessments of each ASEAN+3 economy, as well as a macroeconomic report for the whole region. On paper, member reports are not very different from the annual reports published by the IMF, following consultations under Article IV of the Fund’s Agreement. The main differences relate to their frequency — quarterly vs. annually — and the fact that AMRO reports are not made public, which according to some finance and central bank officials of ASEAN+3 countries fosters a more honest discussion.


Given that AMRO and IMF reports have the common goal of ensuring that signs of financial stress are caught well enough ahead of time to prevent a possible crisis, it would make sense for the two institutions to combine their capabilities. AMRO, as already noted, has a small staff. But they all come from ASEAN+3 member countries, giving them familiarity with one or more countries in the region, including relevant language skills and cultural understanding. For its part, the IMF is better-resourced and has staff with knowledge about financial systems in different parts of the world. Pulling their resources together through joint AMRO-IMF missions and analysis would strengthen the surveillance mechanism.


Europe and the IMF: A Blueprint for Co-operation?


ASEAN+3 and the IMF, therefore, need to develop a more structured form of co-operation to pool financial and technical resources. An example worth considering is the IMF’s co-operation with European regional financial safety nets to resolve the Eurozone crisis. In Europe, countries that are members of both the EU and the IMF request financial assistance simultaneously from the two institutions. In the case of assistance to EU members outside of the Eurozone, discussions are conducted jointly with the government authorities, the European Commission (EC), and the IMF (see table). In addition, the European Central Bank (ECB) participates in the discussions when the borrowing country is in the Eurozone, forming the “Troika” framework among the IMF, EC and ECB.


In designing policies and conditions, there is a clear division of labor, with the IMF focusing on the macroeconomic framework, the EC ensuring that the conditionality is consistent with EU-wide rules and institutions (particularly with the fiscal targets), and the ECB ensuring that the financial sector strategy is sufficiently robust. The Troika members discuss the program among themselves before presenting it to the authorities. Two separate program documents are prepared, one for the IMF board and another for the EC.


Programs are co-financed, with no single rule for burden sharing between the IMF and European safety nets. In Latvia in 2008 and Greece in 2012, the IMF provided about 20 percent of the total financing, while European safety nets provided the balance. On the other hand, in Hungary in 2008 and Romania in 2009 and 2011, the IMF provided over 60 percent of the financing. The IMF’s assessment of this co-operation is that although the difference of views among institutions continues to pose challenges, “on the ground, the Troika structure has enabled effective information sharing, more streamlined program discussions and reviews, and helped ensure that external communications are well co-ordinated.”


The EU-IMF model has not been without its problems. Most notably, politicians and citizens in some of the bailout recipient countries have complained that the austerity measures imposed by the Troika are too onerous. However, from a technical point of view, this model has at least served to make clear who does what, and to whom the recipient country has to answer.


There is no reason to think that this model could not serve as a blueprint for ASEAN+3 and the IMF to strengthen their co-operation. An option would be the joint development of conditionality for financing, with the IMF focusing on the macroeconomic framework and AMRO on regional issues, particularly on matters relating to financial and capital market development — ASEAN+3 has built up competencies in this area because of the ASEAN+3 Bond Market Initiative. A bailout recipient country would therefore have a single set of conditions to meet and only be answerable to a joint AMRO-IMF body.




The present ad hoc method of co-operation between ASEAN+3 regional safety nets and the IMF is unlikely to be successful. A more structured form of co-operation between the two institutions should, therefore, be considered. This framework should involve pooling of financial and technical resources in three areas: (i) joint AMRO-IMF analysis and evaluation of all applications for CMIM liquidity; (ii) co-financing of programs by the ASEAN+3 safety nets and the IMF, with the amounts determined on a country-specific basis; and (iii) complementary surveillance of ASEAN+3 members to prevent financial crises.


The timing is also appropriate for a more structured form of complementarity between the ASEAN+3 safety nets and the IMF. After the Asian Financial Crisis, countries in the region suffered from the IMF stigma that originated from the feeling of being unfairly treated and being forced to accept inappropriate conditions. This is now changing and the IMF is invited to the surveillance meetings of the ASEAN+3 ministers, together with AMRO. The IMF has also engaged in dialogues with AMRO as part of its outreach activities, although it does not have a formal technical assistance program with it. This engagement should be deepened further in a more structured form, as outlined above. The IMF should not reject such offers, because it would be seen as being too Euro-centric. A few years back, former IMF economist Arvind Subramanian, remarking on European domination of the Fund, said the IMF was not an international but a Euro-Atlantic monetary fund.


Regardless of whether policy-makers in ASEAN+3 would like the CMIM and AMRO to be fully independent from the IMF or not, at present this is not the case. Crisis prevention and resolution need to take precedence over independent capabilities for the foreseeable future. Since the IMF has already established links with ASEAN+3 and formally co-operated with the EU, it would not be too complex to institutionalize relations with the CMIM and AMRO. This would be to the benefit of financial stability in East Asia and reduce the contagion to the rest of the world.


Pradumna B. Rana is Associate Professor and Co-ordinator of the International Political Economy Program at the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore. Ramon Pacheco Pardo is Lecturer in International Relations in the Department of European & International Studies, King’s College London.



Back to Issue
    The stringent conditions the International Monetary Fund imposed on Asian countries seeking bailouts during the 1997-1998 financial crisis left a bitter legacy. Countries in the region later banded together to create regional financial safety nets that would begin to give them greater ability to help themselves. That process of building and strengthening regional safety nets is far from over, but Pradumna B. Rana and Ramon Pacheco Pardo argue it’s now time for these regional initiatives and the IMF to co-operate more closely for the good of the global financial system.
    Published: March 2015 (Vol.10 No.1)
    About the author

    Ramon Pacheco Pardo is KF-VUB Korea Chair, Vrije Universiteit Brussel, and Reader in International Relations, King’s College London.

    Pradumna B. Rana is Associate Professor and Coordinator of the International Political Economy Programme at the Centre for Multilateralism Studies of the S. Rajaratnam School of International Studies, and served for 25 years at the Asian Development Bank.

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