The ADB continues to call for closer co-operation between Asia’s financial markets, but little significant progress has been made. Has the near collapse of Europe’s single currency clouded that vision?
Source: Reuters/Bobby Yip
Hong Kong players form a scrum during their HSBC Asian 5 Nations rugby match against South Korea in Hong Kong
Even the most enthusiastic proponent of the single currency must now admit that the European model is, at best, flawed. To many Asian observers, looking on from thousands of kilometres away, the system appears broken beyond repair.
As Europe struggles to hold its many members together, Asian policymakers can be forgiven for wondering if a closer economic union is a goal worth fighting for. Indeed, many believe that Europe’s difficulties pale in comparison to the many disparate countries that make up Asia: if the experiment does not work in a wealthy region with members at broadly similar stages of growth, how could it ever work here?
“The lesson from Europe is that, despite greater commitment, a lack of sovereignty and more time, the single currency still hasn’t worked. Without a US-style federal system, the single-currency arrangement is very difficult to sustain,” said Jayant Menon, Lead economist for trade and regional co-operation at the ADB. “Asia is not necessarily committed to that model.”
That is not to say, however, that Asia has completely abandoned its quest for integration. Instead, it may be pursuing a different kind of co-operation.
“Asian regionalism is quite unique. It is very much market driven, institution light and open,” said Menon. “Asian countries see value in maintaining foreign-exchange flexibility. The Asean countries, for instance, move as one, but without the need for any member state to give up control of its own currency.”
Many initiatives
Far from shunning broader integration, there are signs that Asian leaders are, in fact, accelerating their efforts.
The Association of South-East Asian Nations is the longest-running and most successful regional body. It exists as a semi-formal grouping, with an institutional secretariat, but few defined powers – a marked contrast to the institutions at the heart of the European Union.
Member governments, however, have stepped up their efforts to show progress towards their goal of creating an Asean community by 2015. The roadmap calls for the creation of an economic community that will establish Asean as a single market and production base to make the region more dynamic and competitive.
That has spurred the advancement of initiatives such as the US$485.2m Asean Infrastructure Fund, an innovative joint venture with the Asian Development Bank designed to boost infrastructure lending and, at the same time, better utilise the region’s vast savings. The first financial commitments are set to be unveiled at the first shareholders’ meeting during this year’s ADB meeting in Manila. (See Box.)
“Asean took the lead on the financing,” said Arjun Goswami, director of ADB’s regional co-operation and operations co-ordination division, who terms the scheme a “coming-of-age moment” for the association.
“It will accelerate progress towards the Asean Economic Community goal of 2015. The political will is there,” said Goswami.
Other Asean initiatives remain in the works, including a commitment to allow pan-regional share trading on Asean exchanges. Work continues behind the scenes, but the need for dedicated settlement infrastructure has stalled any significant progress.
Asian leaders are also set to confirm the increase of cross-currency swaps under the Chiang Mai Initiative, having discussed doubling the scheme at Phnom Penh in February.
Ministers attending the Asean +3 meeting disclosed plans to double the network of swaps from US$120bn to US$240bn, but analysts are awaiting the final announcement in Manila for confirmation of how much of the programme will be “de-linked” from International Monetary Fund support.
The Chiang Mai Initiative was first conceived in 2002 as a regional safety net to guard against a repeat of the 1997–98 Asian financial crises. It has since been expanded beyond a series of bilateral agreements to the odd-sounding Chiang Mai Initiative Multilateralisation, effectively making it a currency pool that any member state can tap in an emergency.
The doubling of the scheme has been widely welcomed, but economists argue that there is still a long way to go before the CMIM lives up to its billing as Asia’s own monetary fund.
The project has yet to be tested because none of the countries that signed up to the scheme used it in the aftermath of the Lehman crisis in 2008. It is also far from clear if even US$240bn will be enough to act as a safeguard should Asian currencies come under attack, Numbers are not yet available, but most countries will likely be restricted to less than US$25bn in the event of a crisis. South Korea, for instance, sealed a US$30bn swap line with the US Federal Reserve and another Rmb180bn (then around US$26bn) with China to protect its own currency at the end of 2008.
As it stands, countries also need to accept IMF conditions if they borrow any more than 20% of the maximum allowed under the CMIM, restricting the scheme to a co-financing agreement and limiting its appeal in Asia – where IMF policies come with a heavy stigma attached.
Global force
The 20% cap is likely to be increased to at least 30% at this year’s meeting, but the CMIM signatories have a long way to go before they are in a position to remove the IMF supervision completely.
The Asean +3 Macroeconomic and Research Office (Amro), another entity with a catchy name, has since been established to serve the crucial monitoring function, paving the way for further delinking from the IMF. However, many questions remain.
“It’s not just about the money,” said Menon. “Building the surveillance capacity of Amro will mean the delinking process can take place, but, in a crisis, who should lead the rescue package?”
Asia’s regional ambitions are clearly taking a very different form from those of Europe. While Europe’s failings have highlighted some of the risks, institutions like the ADB are keen to encourage policymakers not to lose sight of the benefits to regional integration.
“We’re not looking at the traditional indicators like intra-regional trade. If Asia can become more linked and increase its engagement with the rest of the world, the hope is that will translate growth into poverty reduction,” said Menon.
“The challenge for the region is to move away from a system of self-insurance and towards a regional defence mechanism.”
For all the progress Asian leaders have made, the Chiang Mai scheme and other initiatives pale into insignificance relative to the vast forex reserves in the coffers of the region’s heavyweights. China’s US$3.2trn pot, for instance, could replace even the entire CMIM project – even after its expansion – 13 times over.
Labour movement remains a major hurdle to economic integration, with few signs of any real progress on formalising immigration rules. The Asean community has pledged to pilot a free labour market plan come 2015, allowing specialists and professionals in seven fields – medicine, dentistry, nursing, engineering, architecture, natural resources and geographical exploration, and accounting – to work anywhere across the region. However, political opposition remains fierce, especially from smaller, richer countries that fear the move will trigger an influx of foreigners.
Politics aside, Asia’s best hopes for reducing poverty require a combined effort. Perhaps, the biggest cause for encouragement is that the region has not lost sight of that common goal, despite the near collapse of the European Union – once hailed as the target for a united Asia.
There are also no signs that Asia’s own good fortunes have dampened calls for co-operation.
“The Asean grouping is now important enough to attract a wider following. The Asian +8 discussions, which include the US and Russia, show that things are still moving forward,” said Menon.
