The Sub-prime Crisis and East Asian Financial Cooperation
Chalongphob Sussangkarn
To counter the current global economic crisis triggered by the sub-prime loan fiasco, I urge East Asian economies to push ahead with financial cooperation and other measures initiated in response to the 1997/98 Asian currency crisis.
These measures bolster the ability of countries in the region to shore up their economies in the short term, shift their growth path to be less dependent on exports in the medium term, and strengthen the region's economic and financial resiliency and protect itself from future crises in the medium to long term.
It is now clear that the indirect impact of the economic crisis on the region through trade channels will be very severe. Exports have declined sharply for most economies in the region.
Large-scale layoffs can be expected, and the situation may trigger social problems bigger than those in the aftermath of the 1997/98 crisis.
In the previous crisis, the affected countries could export their way out of trouble, aided by their depreciated currencies. But this is not a feasible option in the current situation.
In the short term, governments have been vigorously using the fiscal pump while pursuing rapid monetary easing. However, many financial cooperation measures at the regional level are needed to supplement country-specific measures.
First, all countries must avoid protectionism, otherwise global fiscal stimulus efforts will be less effective in generating global multipliers to boost individual stimulus measures.
It is also very important for export-dependent countries to avoid competitive depreciations, which would not benefit anyone. Such moves would make it more difficult to structurally adjust economies to ones that are less reliant on the export engine.
Investment projects that will be needed to move toward a more balanced growth path will also become more expensive.
In the short term, fiscal expenditures to counteract the downturn and provide social safety nets for the poor are needed. For countries already in strong fiscal positions, domestic financing of these expenditures should be sufficient.
However, many countries face or will face fiscal constraints given the stimulus packages that have already been committed. For these countries, the role of external financing is very important.
Both multilateral and bilateral sources should be made available to the countries in need, and the ability to quickly disburse these funds will be essential.
After 1997, Thailand found it very difficult to swiftly disburse loans from multilateral agencies to cushion the social impact because of various rules and regulations of the lenders.
We were very grateful that the Japanese government came forward with the so-called Miyazawa Initiative, providing financial assistance in a way that could be disbursed very quickly.
Currently, Japan has scaled up ODA loans to Asian countries in response to the sub-prime crisis. This is very helpful. Other donor countries should follow, although their own fiscal positions have been hurt by the crisis.
In the medium term, countries need to increase domestic sources of growth. Public infrastructure investment can be an important growth driver over the next three to five years.
However, given liquidity constraints in the global financial system, or a lack of space for further fiscal expenditures, many countries may need new regional or global assistance to facilitate financing of public investment.
For Asia, the already-approved capital increase for the Asian Development Bank should be very helpful.
Initiatives to set up an Infrastructure Fund have been under discussion in East Asia for a couple of years.
The 2007 ASEAN finance ministers meeting in Chiang Mai, which I chaired, agreed to explore an infrastructure financing mechanism for ASEAN.
No concrete agreement has been reached yet, but now is a good time to seriously explore this at the East Asia level. Given the savings surpluses and large foreign reserves in East Asia, recycling investment funds within the region can also help countries with financing constraints.
Further development of the Asian Bond Markets (through the Asian Bond Markets Initiatives and the Asian Bond Funds) can provide important support to countries seeking to increase fiscal stimulus measures.
East Asia also needs to strengthen its Regional Financial Architecture (RFA), a regional financial system, to supplement the Global Financial Architecture (GFA), or global financial system. The current GFA has proved inadequate time and again for preventing financial crises, whether in emerging market economies or in advanced economies.
Important reforms of the GFA have been suggested following previous crises, particularly the need to regulate highly leveraged institutions and scrutinize the role of credit rating agencies. But nothing substantive was done. These institutions are again at the very heart of the current economic crisis.
An important step in strengthening the RFA is a quick conclusion of the multilateral Chiang Mai Initiative (CMI), moving from a series of bilateral swap agreements to a reserve pooling mechanism. This was already agreed to, in principle, two years ago at the 2007 ASEAN plus 3 finance ministers meeting in Kyoto, which I co-chaired with my Chinese counterpart.
There are a number of steps to be taken. First, countries need to agree on the size of contributions. The total amount is $120 billion, with 80 percent from the Plus 3 countries (China, Japan and South Korea) and 20 percent from ASEAN countries.
Because countries tend to think of their contributions as quotas (or voting power) in the new mechanism, agreement has been rather slow.
However, an agreement was finally reached at the 12th ASEAN plus 3 finance ministers meeting in Bali on May 3, 2009.
The next step is to flesh out the mechanism for implementation, particularly how countries can make use of the pool. One particularly contentious issue at present concerns the need to link to an IMF program if a country uses more than 20 percent of its quota.
No government of any country that went through an IMF program during the 1997/98 crisis can survive if it enters another IMF program.
The CMI should be delinked from the IMF. Countries should also be able to carry out a swap agreement with the CMI, similar to swap agreements that South Korea and some other countries have with the U.S. Federal Reserve.
In addition, funds from the CMI can be combined with supplementary contributions by various countries for specific borrowing programs.
Another important step needed to effectively implement the mechanism is to set up a monetary organization for the region to coordinate the program.
I am sure there will be some who will raise the "moral hazard" issue, as was done when the idea of an Asian Monetary Fund (AMF) was suggested a decade or so ago. However, in the current context, this would be ludicrous.
One hardly hears any strong protests about the huge moral hazards being created in various U.S. bailout programs, but moral hazard was raised so often during the 1997/98 crisis. It would indeed be doubly hypocritical for those in the West or in the IMF to use this argument to try to block the establishment of such an organization again.
In my view, an Asian monetary organization would be an essential part of a new GFA that can provide better regional and global surveillance to prevent future crises and more balanced crisis-resolution mechanisms.
East Asia, as one of the largest creditor regions, needs to play a much more proactive role in global surveillance, particularly of the largest debtor countries (where the creditor nations have invested their assets) to protect their investments.
The current GFA lacks adequate institutions and mechanisms for effective surveillance when problems arise from advanced economies, such as in the current crisis. An Asian monetary organization, apart from its regional role, can also contribute to filling this gap at the global level.
■The author is a former finance minister of Thailand and is currently a distinguished fellow at Thailand Development Research Institute.
