Asian Monetary Fund: origins, purpose, and regional development

Asian Monetary Fund - What is it? Why is it important?

What is Asian Monetary Fund?

The reform measures of International Monetary fund amidst severe economic crisis of East Asia, particularly, since the Second World War were considered as too imposing and too stringent. This led many to seriously think of mild reforms to eradicate the possibility of future economic exigencies. Some others inclusive of Japanese Finance Minister Kiichi Miyazawa and South Korean Prime Minister Kim Jong-Pil went to the extreme and argued that IMF is quite incapable of healing the ailing Asian economics. They advocated the constitution of Asian Monetary Fund as an alternative to IMF reforms. The prevailing economic disaster in Asian regions has made the Asian institutions vulnerable to serious flaws as well as their responsive towards informality and consensus. The creation of Asian Monetary Fund was first proposed by Japanese Vice-Minister of Finance Eisuke Sakakibura during the year 1997. (Asian vs. International: Structuring an Asian Monetary Fund)

However, the proposal was withdrawn subsequently not withstanding the opposition from America. Several policy proposals have been formulated by the regional leaders in order to incorporate the idea. South Korean Prime Minister Kim Jong-Pil urged Tokyo publicly to reiterate the proposal of Asian Monetary Fund. Japanese Finance Minister Kiichi Miyazawa recommended again for supplementation of IMF loans through some type of regional currency support mechanism duly funded by the member countries of the region which consider themselves dependent on each other in the fields of trade and investment and that are exchanging their views constantly on the policy directions. The emergence of Asian Monetary Fund was thought of from two basic facts, first that a regional monetary fund could provide added funds, strengthening the role of IMF as the lender of the last resort and second that a regional fund could entail macro- and micro-economic advice more suitable for Asian economics. The second objective cannot be undermined since it is felt greatly significant that the regional monetary fund must encourage macro economic reforms to regain the confidence of the investor and microeconomic reform to foster economic growth so as to effectively resolve the regional crises. (Asian vs. International: Structuring an Asian Monetary Fund)

New momentum for Asian Monetary Fund was generated when during May 2005, the Asian economic integration took the initiative in terms of renewed talk of an Asian Monetary Fund -- AMF following the announcement of ten members of the Association of Southeast Asian Nations -- ASEAN along with China, Japan and South Korea, about their motive to strengthen the Chiang Mai Initiative -- CMI. Such announcement coincided with the annual board meeting of Asian Development Bank, while the new President of ADB was Haruhiko Kuroda, one among them who first proposed of an Asian Monetary Fund amidst Asian financial crisis during 1997. Even since his resuming office President Kuroda is of the opinion that economic integration should be an objective for any regional bank. In April he created the office for Regional Economic Integration and deployed Masahiro Kawai to lead it. In the following ADB summit Kawai could able to say that CMI has the capability to become the Asian Monetary Fund. (New Momentum for an Asian Monetary Fund)

The decisions taken by ASEAN+3 groups are somewhat self-effacing. The measured include increasing the size of currency swaps to double under the CMI from their present level of U.S.$39 billion; enhancing the amount of emergency liquidity available without IMF stipulations from 10% to 20% and converting the bilateral swaps into two-way swaps with an intention to making them multilateral. All this combined however, do not meet the expectations of Kuroda and Kawai, who were desirous of expanding the swaps to U.S.$400 billion. Such reforms could replicate the considerable economic, financial and political barriers that restrict any fast development towards the path of economic integration. Not withstanding this, the announcement astonished many who had thought that the CMI that developed in 1997 during the time of the financial crisis had become greatly irrelevant. The proposed AMF replicates the extensive acceptance of the fact of progressive economic integration in the region, emphasizing that the trade between ASEAN+3 members is now higher than 40% of their total trade and is progressing comparative more rapidly than that of the EU or NFTA intra-regional trade. (New Momentum for an Asian Monetary Fund)

Japan is also influenced by the threats of economically dominant China and the institution of AMF being dominated in Yen is expected to fetch Japan a dominating role in the regional monetary policy and prevent China gradually overthrowing Japan as the economic leader of East Asia. The Chinese opposition to the creation of an AMF denominated in Yen stems from the fact that it was a Tokyo-led proposal. China considers any Asian monetary institution or common currency has a very long-time to go and that gradually entails the inevitability of the Chinese leadership of Asian economic integration. ASEAN nations preferred to concentrate on such unresolved tension between the two economic giants and attempted to make the most out of a regional self-help method in the wake of future crises, particularly amidst growing speculations that the IMF is seen to be mostly controlled by the U.S. And European interests did not co-operate suitably during the time of the Asian Crisis.

Irrespective of the fact that U.S. And the IMF have official sanctions for the CMI, the proposal for constitution of an Asian Monetary Fund is not convincing to them. Creation of such a fund is feared to deprive the U.S. Of its conventional dominance in dictating stipulations and loan amounts through the IMF. Taking into consideration the critiques of East Asia of IMF the fund might also give rise to a greater application of state supported interventions that are not in alliance with U.S. treasury policies. The U.S. is apprehending to confront a loss because of its political dominance in the region and the influence of its economic policies. The only way out to deter the formation of an Asian Monetary Fund is for the U.S. And the IMF to reform and revise the IMF to enable the Asian members of the Bank to replicate their prevailing economic condition in a better way. The necessity of such reforms is evident in the declaration of the ASEAN+3 groups when they served the notice to review the current quota of IMF to highlight the present quota. (New Momentum for an Asian Monetary Fund)

What is its purpose?

The prime objective of the constitution of an Asian Monetary Fund was to entail a general pool of funds to the member nations for quick disbursal in terms of emergency support of balance of payments for the crisis-hit economies. A considerable portion of the fund is to come from Japan while it received promises of contributions from Hong Kong, Taiwan and Singapore. During 1998-99 the potential mobilization capacity of the fund was estimated to be of U.S.$100 billion. Then the U.S. apprehended it to be a threat to its influence in Asia and pulled out all the hurdles to put the proposal to an end. Currently it has been revived when the Malaysian Prime Minister, Mahathir bin Mohamad emphasized it again at an East Asian Summit organized by the World Economic Forum in Singapore. He conceived AMF to be a small compact of regional funding agency that would intensively and constantly involved in East Asian monetary cooperation and associated day-to-day problems. Currently, the ASEAN ministers provided a description of the AMF proposal in their recent informal summit at Manila. (Examining the case for an Asian Monetary Fund)

The Manila framework was conceived of in terms of four broad headings: - i) A mechanism for regional economic surveillance to supplement the global surveillance of IMF; ii) Increased economic and technical cooperation for encouraging domestic financial systems and control systems; iii) steps to encourage the capacity of IMF to react effectively to the financial crises of the region; and iv) as a coherent financing mechanism that would provide supplementation of the resources of IMF. The Manila convention however, has been conceived of as an irrefutable victory for the IMF centered strategies of the U.S. The framework has no institutional element of the regional orientation of an AMF and the core prescriptions are worked out to encourage instead of decreasing the role of the IMF. (Japan's Asian Monetary Fund Proposal)

Irrespective of the fact that the moment Japan initially proposed for the AMF is considered not conducive, still this cannot undermine its potential effectiveness. Many reasons have been advanced in favor of such a regional-based organization. To begin with, the bailout packages in Latin America and East Asia are conceived to be regional in nature. About 50% of the total U.S.$42 billion financial assistance assured to Indonesia through the IMF was considered in terms of bilateral aid, of which most was by regional economies in East Asia. Taking the case of Thailand it is seen that about one-third of the U.S.$34 billion package was bilateral, all of which was raised from the regional economies. The contributions of U.S. In these cases were only U.S.$5 billion to South Korea, U.S.$3 billion to Indonesia and zero to Thailand. (Examining the case for an Asian Monetary Fund)

Alternatively, the East Asian economies like Japan and Singapore entailed bilateral assistance to the crisis hit regional economies in some other forms. Secondly, the East Asian crisis appeared to have accorded due emphasis on prevalence of 'demand' by dominating regional members for some form of regional cooperative alliance, while the actual prospective 'supply' of such a regional arrangement appears in little doubt. Thirdly, there were prevailing channels and organizations in East Asia and others which promote regional economic cooperation in other arenas with the monetary facility being an inherent amplification of such measures. Fourthly, the necessity for some sort of geographically concentrated arrangement is felt that would enable the regional economies to work collaboratively to have a larger opinion in international monetary affairs as has been effectively attained in the global arena. (Examining the case for an Asian Monetary Fund)

Taking into account the prevailing conditions Rowley pointed out during 1999 that no ASEAN country other than Indonesia has been included in the G-20 finance ministers forum for restructuring the international financial architecture as they were considered 'systematically unimportant countries'. Fifthly, the absence of a strong regional hegemony and a regional monetary institution is felt among the Asian nations particularly in view of U.S. dominance and attainment of successful monetary integration in Europe. Finally, it is felt that the economic policy slippages in any one economy can do echoed rapidly into other economies in the region in terms of contagious currency crises with hazardous influences on the real economies. The establishment of a sort of regional facility to address and deal with these contagious effects effectively is felt extensively on a larger scale.

The prospective role of an AMF is conceived not in terms of crisis management as that of the IMF but envisages a comparative advantage of preventing a crisis. The AMF will come to the rescue of regional currencies that may be vulnerable to the speculative pressures. So as to become an efficient barrier against such attacks the monetary facility must be enormously huge with adequate contributions from member economies. The AMF is required to stipulate necessary conditionality to the member economies with regard to maintaining some pre-determined standards of macro economic and financial stability. The AMF should also make the member economies forced to subject themselves to regional peer influences to bring about the required policy adjustments. As Bagehot opines the lending must be automatic, fulfilling and expensive and comparatively short-term so as to infuse subtle but a critical equilibrium between instituting market confidence at the same time deterring excessive moral hazard from developing on the other. (Examining the case for an Asian Monetary Fund)

What effect does it have on the U.S. economy?

A negative attitude towards the Asian Monetary Fund is evident from the U.S. And EU. They were antagonistic towards the East Asian Economic Caucus -- EAEC idea presented in 1990 condemning it on the ground that its purpose was to group against the Western World when they introduced the North American Free Trade Agreement -- NAFTA and EU single market in 1990s. The trend continued to denounce the Asian Monetary Fund -- AMF idea in 1997. The inherent threat to U.S. And EU are thought of in terms of the fact of being removed from the efforts of Asian nations to develop regional grouping. The population of the East Asian people numbering to 2 billion is about one third of the global population. However, the combined Gross Domestic Product of these countries accounts for about $6.3 trillion, accounting for the 20% of the total world GDP. This appears to have little impact on the economy of U.S. And EU, however, the huge economic potential of the Asia has enough reason for the U.S. And EU to be afraid of such regional grouping. (Asia's Monetary Regionalism -In the Post Crisis)

The Asian effort of creation of AMF is considered by many to be very positive in the sense that it strives to work to break the U.S. dominated global fascism that is relying upon its owning the world's reserve asset, the dollar, which contrarily exerts its control of world finance by means of the ancillary institutions like IMF and the World Bank. It has been indicative that the globalization is about to come a cropper. The steel tariffs along with U.S. aggression and the competitive currency devaluation with which the Asian nations are always involved are thought to be the considerable indicators that the globalists have surpassed all the limits. On the eve of the manipulators loosing control of the U.S. economy, and having their shares markets actually running on losses, loosing such controls will be a great set back to the U.S. economy. (Re: [A-List] Asian Monetary Fund)

However, the growing financial weaknesses around the world have significant profound influence over the U.S. To visualize the efforts of Japan in the creation of Asian Monetary Fund which is favorable to the U.S. interests. The emergence of financial crisis in Russia in the summer of 1998, the rescue of a huge U.S. hedge fund Long-Term Capital Management during September 1998 and in the view of serious crisis brooding in Brazil the United States presently accord added significance to international financial system stability in comparison to the more rigid issues. Besides as there is a trend of the expanding financial crisis and accompanying threat of inadequacy of financial resources the efforts of Japan to finance the region is much welcoming on the part of U.S..

Why is it important?

The importance of creation of an Asian Monetary Fund stems from the fact that some sort of autonomous regional facility or arrangement in Asia with limited membership is essential that would concentrate its activities mainly on a method of crisis surveillance and prevention or minimization at a regional level; while the IMF continues to concentrate on a method of surveillance at a global level along with adopting the policies of crisis management and resolution. Any fund distributed through the arena of regional arrangement during a crisis period is considered to be made by means of a complete consultation with the IMF along with the potential recipient following and arguing for the IMF conditionality. Moreover, the AMF as a regional monetary arrangement is considered to be taken as a complement or addition to the IMF in similar way that the regional development Banks like ADB complement the initiatives or activities of the World Bank. In this regard the views of ADB in relation to an AMF proposal as brought out in the latest Asian Development Outlook are that the AMF could play a very significant complementary role to the activities of the IMF in entailing funds to crisis-stricken economies and promoting an early warning system. The implementation of regional institutions like the AMF as a part of the newly emerging financial architecture will help to enhance the efficacy of global financial markets as well as to minimize or prevent systematic risk. (Examining the case for an Asian Monetary Fund)

Other relevant information on the Asian Monetary Fund

While examining the case for institution of Asian Monetary Fund it is not judicious to attempt to solve all the problems by creation of new institutions. It involves much effort in 're-inventing the wheel' and again resolving the inter-institutional conflict. It is evident that this will enhance the transaction costs while the economies are negotiating with more institutions. Against this background it is not always proper to resolve the issue of East Asian Financial Crisis and to prevent a similar one in future through establishment of Asian Monetary Fund. The presumption that an AMF could exert the necessary functions more effectively than the IMF cannot be always true. In absence of the details of its membership and resource and efficient dealings with the politics that would be no doubt be involved there is little validation for asserting that an AMF could pass this tougher test. (Is there a case for an Asian Monetary Fund)

The fact of AMF being ill-positioned to maintain a detailed adjustment responsibility that associates with negotiating conditionality with member countries cannot be avoided. This may give rise to a moral hazard difficulties and institutional conflict. This role can effectively be bestowed with IMF. Not withstanding such facts the institution of AMF could make considerable contribution by making sure that member nations are in agreement with certain standards by means of financial propriety. Such agreement would be conditional for financial co-operation against the background of a crisis, however, itself minimize the probability of such crises. Again the regional grouping of crises is aimed at increasing the ability of an AMF for resource mobilization which is not available to the IMF mostly at times of crisis. In this respect AMF is considered to have been better placed to eliminate the probability of crises in future than the IMF. Moreover, the AMF is seen to be better placed to respond in an urgent manner by entailing the required liquidity. Thus establishment of AMF might assist in soothing some of the financing constraints on the IMF amidst the critiques that IMF conditionality are excessive and might assist in reducing the probability of future Asian financial crises. (Is there a case for an Asian Monetary Fund)