• E02;
  • E44;
  • F33;
  • F36;
  • F55

Sussangkarn's (2011) paper is a very insightful and detailed documentation of the origin, development, and outlook of the Chiang Mai Initiative (CMI). Sussangkarn's suggestions on how regional financial cooperation should proceed are not only instructive but also feasible.

The rallying point of financial cooperation in East Asia was the pooling of foreign exchange reserves of individual countries in the region. As pointed out by Sussangkarn (2011, p. 205), “While East Asian economies running saving deficits had to rely mostly on foreign short-term borrowings to fill their saving gaps, the region as a whole was actually running a saving surplus prior to the crisis, amounting to about US$100 billion annually.” Therefore, a sort of regional lender of last resort based on the contributions of the economies in the region was not only necessary but also possible. Although the Asian Monetary Fund proposed by the Japanese government failed to materialize, economies in the region eventually agreed to sign the Chiang Mai Initiative (CMI), an agreement on swap facilities among Association of Southeast Asian Nation (ASEAN) countries, Japan, China, and South Korea. A few years later, the region agreed on converting the bilateral schemes of the CMI into a multilateralized self-managed reserves pooling scheme governed by a single contractual agreement, or the Chiang Mai Initiative Multilateralization (CMIM).

During the 2008–2009 global financial crisis, East Asia fared much better than during the Asian financial crisis. With more than US$4 trillion of foreign reserves in the region in 2008, compared with US$630 billion in 1997, one would argue that the need for a liquidity support mechanism for the region appeared to become less urgent. However, the development of the global financial crisis shows that this is not the case. As is pointed out by Sussangkarn, foreign exchange liquidity shortages can develop unexpectedly and quickly. Even with more than US$200 billion of foreign reserves, South Korea was not able to cover short-term foreign debt and short-term contingent liabilities from foreign holdings of portfolio investment which were quickly liquidated as a result of the liquidity shortage in the USA. Hence, pulling individual countries' foreign exchange reserves together is still necessary. At the same time, as is pointed out by Sussangkarn (2011, p. 210), “the cost of providing some reserves for a regional liquidity mechanism declined as many countries in the region hold just too much foreign exchange reserves.” Therefore, a regional liquidity mechanism with large financial resources is not only necessary, but also feasible.

With the benefit of hindsight, Sussangkarn is able to attribute the poor performance of the CMI to two shortcomings in the design of the CMI and its more recent version, CMIM. First, the total size of US$120 billion of multilateral swap agreements was far from enough. Second, the link with the International Monetary Fund (IMF) blocked the effective use of the financial facilities provided by the CMI. For example, South Korea could have accessed US$18.5 billion under CMI through its swap agreements with various countries. However, only US$3.7 billion of this (20%) could be drawn without having to be part of an IMF program.

Based on his examination of the evolution of the CMI, Sussangkarn makes four suggestions for improving the CMI. First, the CMI mechanism should be delinked from the IMF. Second, the total size of the available resources should be more like US$400–500 billion and not just the US$120 billion of the CMIM pool. Third, it should be made possible for other members of the East Asian community to participate in CMIM activities, even though they are not yet full contributing members. Fourth, the CMIM needs a strong ASEAN+3 Macroeconomic Research Office (AMRO). All these suggestions, in my view, are reasonable and feasible.

Sussangkarn's outlook for the CMI can be characterized as being cautiously optimistic. Unfortunately, after so many years of frustration, I suspect that East Asian financial cooperation will not be able to go very far. Although economic and financial cooperation can change geopolitics, as we have seen with the creation of the European Union, economic and financial cooperation needs a minimum amount of support of geopolitics in the region. East Asian countries have to make a hard choice among bilateralism, regionalism, and multilateralism. During the East Asian financial crisis, the common grievance against the IMF and Western developed countries gave a great boost to regionalism. However, as soon as normality returned, East Asian countries started to shift toward bilateralism. Currently, the sense of identity among East Asian countries is much weaker than during the Asian financial crisis. The support for inviting India, Australia, and New Zealand to join the CMI or CMIM is a case in point. There is nothing wrong with the invitations, but why not extend the invitations further to Asia–Pacific countries, including the USA and Russia? Where should the borderline be drawn? Open regionalism will lead to pseudo regionalism and finally end up with either multilateralism or bilateralism. It seems that regionalism is on the decline and bilateralism is on the rise in the region. In view of the geopolitical reality of the region, I believe that the CMI will survive, but the survival of the CMI will rely on a resuscitation machine. This prospect is decided by geopolitics, and economists can do nothing about it.


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