Asean
Toward a functional Chiang Mai Initiative
Author: Chalongphob Sussangkarn, TDRI
The Chiang Mai Initiative (CMI) is a regional foreign exchange liquidity support mechanism that developed as a result of the 1997–98 Asian financial crisis.
The CMI was designed to be closely linked to the IMF, and later evolved into a multilateralised mechanism, the Chiang Mai Initiative Multilateralisation (CMIM). A regional surveillance unit, the ASEAN+3 Macroeconomic Research Office (AMRO), supports the CMIM. But AMRO is still in its infancy, and will need time to increase its effectiveness and gain market confidence.
The CMIM is a self-managed reserve pooling mechanism of the ASEAN+3 economies, with a total size of US$120 billion. It provides a short-term (90 days) swap facility to economies in need, which may be rolled over a maximum of seven times (as of April 2012). Each economy’s swap quota depends on its contribution to the CMIM pool and its level of development and size. As with the CMI, using more than 20 per cent of a country’s swap quota requires a link to an IMF program. Voting weights for various countries have also been specified. A consensus is required for fundamental issues like membership, contributions and voting weights. And for a swap to be implemeted, a two-thirds weighted majority vote is required.
The CMIM still has many shortcomings and needs to be further developed to improve its effectiveness. First, the IMF link needs to be modified. The traumatic experience of IMF conditionality during the 1997–98 Asian financial crisis left a stigma on the IMF for most countries in East Asia. Because of this, when countries ran into foreign exchange liquidity shortages during the global financial crisis, they preferred to use bilateral swap agreements that had no IMF links rather than go through the CMI or the IMF. It is possible to develop the CMIM as a crisis prevention facility to deal with temporary liquidity shortages without linking to the IMF. When a country faces large temporary capital outflows, it does not make sense to impose IMF-like conditionality on the country; the CMIM’s 90-day swap should be available for the full quota without any links to the IMF. But if the country continues to need to roll over the swap, then the problem is more likely a medium-term macroeconomic structural problem rather than a temporary one. In such cases, it makes sense to link future rollovers to an IMF program. This arrangement would make countries more willing to access the CMIM swap and would also make the CMIM complementary to the IMF.
Second, the size of a country’s swap quota may not be adequate. One way to improve this is to double or triple the size of the CMIM. As the CMIM is a self-managed reserve pooling mechanism, economies do not place their contributions into a common pool. Rather, the reserves remain with the various economies, and a country’s contribution is only used if there is a swap drawing. So the actual cost of increasing the size of the CMIM’s reserve pool would not be that great. Another way to increase potential quotas available to countries would be to allow the addition of bilateral swaps from member countries linked to a CMIM swap. This would be similar to countries contributing to an IMF package.
Allowing the addition of bilateral swaps could also be used as a way to expand the number of countries involved in the CMIM process. Expanding the number of countries contributing to the CMIM pool would not be easy, as it would involve changes in voting weights and require a consensus among the current members. But countries such as Australia, New Zealand and India could be made ‘contributing partners’, where they can contribute their bilateral swaps to CMIM swaps. As contributing partners, they would also be allowed to participate in various financial cooperation activities under the CMIM umbrella, such as surveillance and initiatives to support deeper financial cooperation in the East Asian region.
Finally, for the CMIM to be effective, it is essential that AMRO becomes stronger and more capable. Building up AMRO’s capability and credibility is now the biggest challenge for increasing the CMIM’s effectiveness. AMRO needs to develop close links with other regional organisations, such as the Asian Development Bank and the ASEAN Secretariat. It should also have close links with international financial institutions, such as the IMF, the World Bank, the Bank for International Settlements and other monetary organisations around the world. In the longer term, AMRO should not simply act as a research office; it should evolve into a regional monetary organisation for East Asia, supporting the CMIM as well as carrying out technical activities to support financial cooperation in the region. This may include macroeconomic policy cooperation and coordination, a focus on regional financial regulatory frameworks and capital market development, as well as working to support the region’s longer-term financial and monetary integration.
Chalongphob Sussangkarn is a distinguished fellow at the Thailand Development Research Institute.
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Toward a functional Chiang Mai Initiative
Asean
ASEAN weathering the COVID-19 typhoon
Author: Sandra Seno-Alday, Sydney University
The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.
Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.
Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.
Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.
A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.
Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.
Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.
ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.
In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.
This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.
What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.
It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.
Over the longer term, ASEAN is faced with the question of whether it should seriously look…
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