Asia learnt a few lessons in 1997. The most important of these was self-reliance. The 1997 Asian financial crisis was an eye-opener for both ?tigers? and ?cubs?. It impressed upon the region that the IMF couldn?t be relied upon as a lender of last resort. It also drove home the weakness of multilateral surveillance, particularly the inability to forecast contagions. The regional economies also realised that while links with Western markets will boost trade, they won?t help in tackling downturns. The hearth could be kept burning only through home fuel. Thus there was no option but to become self-reliant.
The desire for self-reliance gave birth to the Chiang Mai Initiative (CMI). The CMI was a combined effort of ten Southeast Asian and three East Asian economies. It comprised the Association of South East Asian Nations (Asean) and China, Japan and Korea. The grouping was popularly christened Asean + 3.
The CMI created a corpus enabling bilateral currency swap arrangements between members. The idea was to allow members to avail other members? currencies if their own currency came under speculative attack. The synchronised collapse of Southeast Asian currencies in 1997 triggered by the run on the Thai Baht was a catastrophe the region didn?t want to witness again.
Twelve years after the Asian crisis, the region is grappling with a global crisis.
Irrespective of the relevance of the ?decoupling? notion, the imperative of becoming self-reliant has again dawned upon Asia. This has led to an upscaling of CMI. The Asean + 3 have agreed to increase the size of CMI to $120 billion. Asean will contribute 20% of the corpus. China and Japan will lead the donor pack by contributing 32% each. Korea will contribute 16%.
Will the initiative be strong enough for minimising adverse effects of the crisis in the region?
A larger CMI corpus should not be seen as a growth stimulus. This is probably the biggest mistake most analysts are likely to commit. The Initiative was conceived as a safety measure and continues to be so. The overriding assumption driving the initiative is probably future expectations regarding the US dollar.
What will happen to the US dollar if China stops buying US Treasury paper? It is not for nothing that China has been speculating about an alternative to the US dollar. The bailout spree and liquidity expansion in the US cannot be an unending saga. Once they stop, China and other Asian fund managers might not look at dollar-denominated assets as safe havens for parking funds.
A fall in the US dollar will provoke major disruptions in the global financial system. It is likely to induce a rise in gold and other commodity prices. Monetary policies will have to realign their counter-cyclical postures. The possibility of such disruptions leading to panic runs on some Asian currencies cannot be ruled out. An enlarged CMI corpus can help in overcoming such exigencies.
There are other ?extra-crisis? implications of the current CMI advance. With China contributing as much as Japan, the economic balance of power in the region will be influenced. Japan has announced an additional support of $61.4 billion for its neighbours. The emerging configuration in the regional economic order will be interesting to watch.
From a broader regional integration perspective, CMI still remains Asean+3. It is yet to acquire the larger Asean+6 profile by including India, Australia and New Zealand. The Asean+6 are nothing but the East Asia Summit (EAS). Out of India, Australia, and New Zealand, which belong to EAS but not in CMI, India and Australia are members of G20. The role of EAS members in G20 is becoming increasingly significant as a result of changes in the global economic order.
The latest global initiative in financial surveillance is the creation of the Financial Stability Board (FSB). It is indeed surprising that some Asian members of the FSB are missing from CMI. And CMI, ironically, is a key part of regional financial architecture and surveillance!
?The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views