Does East Asia Have a Working Financial Safety Net?

• DOI: http://doi.org/10.1111/asej.12022
• Published date: 01 March 2014
• Author: Hal Hill,Jayant Menon
• Date: 01 March 2014

Does East Asia Have a Working Financial

Safety Net?*

Jayant Menon and Hal Hill

Received 14 November 2012; accepted 18 September 2013

Financial safety nets in Asia have come a long way since the Asian financial crisis

(AFC) of 1997/1998. With Asian countries not wanting to rely solely on the IMF

again, the Chiang Mai Initiative (CMI) was created in 2000. When the CMI also

proved inadequate following the global financial crisis, it was first multilateralized

(CMIM), and then doubled in size to US$240bn, while the IMF de-linked portion

was increased to 30 percent of the available country quotas. A surveillance unit, the

ASEAN+3 Macroeconomic Research Office, was set up in 2001. These are impres-

sive developments, but are they enough to make the CMIM workable? Without

clear and rapid-response procedures to handle a fast-developing financial emer-

gency, we argue that it is unlikely that the CMIM will be used even as a comple-

ment to the IMF. To serve as a stand-alone option, however, its size or the IMF

de-linked portion of funds needs to be further increased, as does its membership, to

add diversity. Only if the ASEAN+3 Macroeconomic Research Office can develop

into an independent and credible surveillance authority would it then perhaps be in

a position to lead the next rescue.

Keywords: regional financial safety nets, Chiang Mai Initiative, ASEAN+3, Asia,

Asian monetary fund, IMF.

JEL classification codes: F32, F33, F34.

doi: 10.1111/asej.12022

I. Introduction

The impetus for strengthening regional financial safety nets among members of

ASEAN was the Asian financial crisis (AFC) of 1997/1998. Although there was

an existing insurance mechanism in the form of the ASEAN Swap Arrangement

(ASA), which had been used a couple of times in the early 1990s, but not really

*Menon (corresponding author): Office of Regional Economic Integration, Asian Development

Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Email: jmenon@

adb.org. Hill: Crawford School of Public Policy, ANU College of Asia and the Pacific, Australian

National University, Canberra, ACT 0200, Australia. Email: Hal.Hill@anu.edu.au. We are grateful

to Charles Adams, Jagdish Bhagwati, Chia Wai Mun, Masahiro Kawai, Sabysachi Mitra, Ng Thiam

Hee, Pradumna Rana, Reza Siregar and two anonymous referees for comments and useful sugges-

tions. Anna Cassandra Melendez provided excellent research assistance. Any remaining errors

are our own. The views expressed in this paper are those of the authors and do not necessarily

reflect the views and policies of the Asian Development Bank, or its Board of Governors or the

governments they represent.

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Asian Economic Journal 2014, Vol. 28 No. 1, 1–17 1

© 2014 The Authors

Asian Economic Journal © 2014 East Asian Economic Association and Wiley Publishing Pty Ltd

in a crisis context, the ASA proved miserably inadequate when it came to the

huge amounts of financing required by countries affected by the AFC. Even

with pledges of external support from other countries in the region, the AFC-

affected countries were eventually forced to turn to the IMF for massive bail-

outs. Hence, the decision was taken to pursue a regional safety net that could

provide a real alternative to relying on the IMF. The Chiang Mai Initiative

(CMI) was established in 2000, and expanded the bilateral swaps of the ASA,

both in size and membership, to include three additional members: China, Japan

and Korea. The CMI’s first major test came in September 2008 when, following

the Lehman Brothers collapse, short-term capital quickly exited emerging

economies. However, members of the CMI that required liquidity support did

not utilize the CMI, but instead rushed to secure bilateral swaps with and

support from the USA, China, Japan, Australia, regional development banks

and multilaterals.

Once again, the regional financial safety net had failed its members. This

failure brought about a significant change, the multilateralization of the CMI

(CMIM) in 2009, with the many swap lines now governed by a single agreement.

This was soon followed by a number of other important changes, including the

doubling of the CMI’s size to US$240bn, increasing the share available without

an IMF program to 30 percent of a country’s quota and the setting up of an

independent surveillance unit, the ASEAN+3 Macroeconomic Research Office

(AMRO), in 2011. These are impressive developments, but are they enough to

ensure that the CMIM will be called upon when the next crisis strikes? This is

the key question that this paper attempts to answer. If these developments are

not sufficient, what are the issues that still need to be addressed to make the

CMIM viable, either as a co-financing facility with the IMF or as a stand-alone

alternative?

The remainder of the paper is divided into five sections. Section II traces the

evolution of the ASA from its early beginnings and examines the CMI and its

expansion. In Section III, we describe the basic structure and features of the

CMIM and the AMRO. Some of the most significant modifications to the CMIM

have taken place in the aftermath of the global financial crisis, and these are

discussed in Section IV. Section V addresses the key question of whether these

changes are sufficient to make the CMIM operationally viable. We argue that the

CMIM is still unlikely to be used during a crisis, and we canvass areas that need

to be reformed, separating what is needed for it to work as a complement to the

IMF from what more needs to be done for it to serve as a real alternative to relying

on the IMF. Section 6 concludes.

II. Early Beginnings: From the ASEAN Swap Arrangement to the

Chiang Mai Initiative and its Expansion

While the impetus for strengthening regional financial safety nets among ASEAN

countries was the AFC of 1997/1998, the first step toward establishing a regional

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© 2014 The Authors

Asian Economic Journal © 2014 East Asian Economic Association and Wiley Publishing Pty Ltd