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Page 1: Chiang Mai Initiative Multilateralization

JOHN D. CIORCIARI

Chiang Mai Initiative Multilateralization

International Politics and Institution-Building in Asia

ABSTRACT

In 2010, the Chiang Mai Initiative Multilateralization agreement established a newAsian financial arrangement to help address potential currency or liquidity crises.This article analyzes the origins and basic features of the new arrangement, whichreflect both progress and the continuing political challenges of building regionalinstitutions in Asia.

KEYWORDS: ASEAN, ASEAN Plus Three, Asian financial cooperation, Chiang MaiInitiative, International Monetary Fund

IN MARCH , AN IMPORTANT NEW Asian financial arrangement came intoeffect. Pursuant to the Chiang Mai Initiative Multilateralization (CMIM)agreement, the central banks of Japan, China, Hong Kong, South Korea,and the members of the Association of Southeast Asian Nations (ASEAN)contributed a total of US$ billion to a multilateral swap facility. The statedgoal of the new facility is to provide lifelines to participating economies inneed. The accord represents one of the most tangible outcomes of more thana decade of diplomatic dealings in Asia’s various multilateral forums. Its devel-opment thus carries significant implications, both for financial cooperationand the broader process of institutionalizing international relations in theAsia-Pacific.

The new facility is not a full-fledged monetary fund. It is an incrementaladvancement on the preexisting network of bilateral swaps established underthe Chiang Mai Initiative (CMI). The incremental nature of the new facility’screation—and the importance that ASEAN + states attach to the diplomaticcreation process—help explain why it was born with an awkward name.

JOHN D. CIORCIARI is Assistant Professor at the Gerald R. Ford School of Public Policy at theUniversity of Michigan. Email: <[email protected]>.

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Its architects refer to it as “CMIM” (usually dropping the definite article),although the words behind that acronym describe a process (multilateraliza-tion) rather than a centralized fund or institution.1

This article analyzes CMIM’s basic institutional features and the interna-tional politics that contributed to them. It argues that the most importantinteractions have occurred between richer and poorer economies, betweenChina and Japan, and between Asian officials and their Western counter-parts, especially at the U.S. Treasury and the International Monetary Fund(IMF). Cooperation and contestation along each of those three axes havecontributed to a financial arrangement that remains lightly institutionalizedand embodies a series of carefully calibrated balances to accommodatediverse intra-regional and extra-regional interests.

FROM CRIS IS TO CRIS IS : THE ROAD TO A MULTILATERAL AGREEMENT

Before , Asian financial cooperation focused mostly on technocraticdialogue and training. Meetings began among selected Southeast Asian cen-tral banks and their peers from Australia and New Zealand, later folding inKorea and Japan. In , central bankers launched an Executives’ Meetingof East Asia Pacific Central Banks including China, and finance ministersbegan to meet through the APEC forum in . Asian central bankers alsoset up currency swaps and repurchase agreements for emergency financialassistance.2 Five Southeast Asian states set up an ASEAN Swap Arrange-ment in , and a number of Asian central banks participated in establish-ing a series of bilateral repurchase agreements coordinated by the HongKong Monetary Authority in . These facilities were small, however,and more important as symbols than as financial safety nets.

A Thwarted Asian Monetary Fund Proposal

The – crisis prompted the first call for a more robust, institutionalizedemergency financial mechanism in Asia. Shortly after the crisis struck, Japan’s

. This semantic device has been used in the region before; Asia-Pacific Economic Cooperation(APEC) likewise bears a name that emphasizes process over institutional concreteness.

. Currency swaps and repurchase agreements are essentially loans. A borrower exchanges hardcurrency for local currency or U.S. Treasuries, respectively, and later reverses the transaction, pay-ing interest.

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Vice Minister of Finance Sakakibara Eisuke proposed creating a $ billionAsian Monetary Fund (AMF) comprising regional reserves to deploy to coun-tries under stress. His plan appealed to many poor Asian states, which fearedcalamity and sought supplements or alternatives to IMF-conditioned loans.Nevertheless, the proposal quickly foundered under stiff opposition fromChina and the West. U.S. Treasury Secretary Lawrence Summers and Under-secretary Timothy Geithner argued that a regional fund could undermine theIMF by lending money with weak or inconsistent policy conditions. SomeWestern and IMF officials also feared that an AMF would threaten their rolesin the region and encourage policies disadvantageous to non-Asian econo-mies. Officials in Beijing feared that their counterparts in Tokyo would usea regional institution to leverage Japan’s immense reserves for political andeconomic gains at the expense of the People’s Republic of China (PRC).They were also loath to antagonize America because they were seeking WorldTrade Organization (WTO) accession.3

An Alternative Approach through the Chiang Mai Initiative

The swift scuttling of Japan’s AMF proposal reflected the difficulty of devel-oping multilateral bodies in Asia. Nevertheless, the – crisis generatedrenewed regional political interest in financial cooperation. The IMF led amajor bailout effort, but recipients bitterly resented its conditions and delaysin disbursement. A generation of Asian economic officials believed that theWest had left them in the lurch, and sought to build stronger regionaldefenses.4 Asian governments sought to insure themselves by stockpilingreserves, imposing indirect currency controls, and reforming domestic bondmarkets, but they also became increasingly interested in establishing a regionalsupport mechanism. Japan launched the New Miyazawa Initiative in October, providing $ billion for regional financial defenses, and China beganto exercise regional leadership by resisting pressure to devalue the renminbi

. Phillip Y. Lipscy, “Japan’s Asian Monetary Fund Proposal,” Stanford Journal of East AsianAffairs : (Spring ), pp. –; and Jennifer Amyx, “Moving beyond Bilateralism? Japanand the Asian Monetary Fund,” Pacific Economic Paper, no. , Australia-Japan Research Center(Canberra), , pp. –.

. C. Fred Bergsten, “East Asian Regionalism,” Economist, July , , pp. –; ShalendraD. Sharma, “Beyond ASEAN and APEC: Towards a New Asia-Pacific Economic Regionalism,”East Asian Review : (Autumn ), pp. –; and Chalongphob Sussangkarn, “A Frameworkfor Regional Monetary Stabilization,” NIRA Review (Autumn ), pp. –.

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during the crisis and otherwise offering support for ailing neighbors.5 Theseevolving political dynamics made possible the birth of ASEAN + —China,Japan, Korea, and the ASEAN states.6 ASEAN + finance ministers metfor the first time in and set three core goals: strengthening regional bondmarkets,7 promoting monetary policy cooperation,8 and creating an emer-gency financing facility. CMIM would emerge from this third goal.

Creating an effective emergency financial mechanism would require sup-port, or at least some assent, from China and Japan, and from weaker statesin the region and key external actors—particularly the U.S. The AMF con-cept had been too dramatic a departure from Asia’s cautious and incremen-tal approach to institution-building. When regional officials returned to thedrawing board, they took a much more modest approach. Rather than try-ing to build a multilateral bailout facility, they began weaving a web of indi-vidually negotiated bilateral currency swaps.9 The size and number of swapsgrew over time; by , swaps were in place with a total notional valueof $ billion (see Figure ).

Using swaps appealed to both prospective borrowers and lenders. Theformer feared speculative attacks or external shocks and sought a quick, reliable

. Alice D. Ba, “China and ASEAN: Renavigating Relations for a st-century Asia,” AsianSurvey : (July/August ), pp. –.

. See Richard Stubbs, “ASEAN Plus Three: Emerging East Asian Regionalism?” Asian Survey: (May/June ), pp. –; and Douglas Webber, “Two Funerals and a Wedding? The Upsand Downs of Regionalism in East Asia and Asia-Pacific after the Asian Crisis,” Pacific Review :(August ), pp. –. ASEAN + essentially resurrected Mohamad Mahathir’s proposal foran “East Asia Economic Caucus,” which had withered in under opposition from the U.S.,Japan, and other proponents of APEC and “open regionalism.”

. ASEAN + efforts to strengthen bond markets include fostering research and dialoguethrough the Asian Bond Markets Initiative and participating in related regional initiatives suchas the Asian Bond Funds. See Jennifer Amyx, “Regional Financial Cooperation in East Asia sincethe Asian Financial Crisis,” in Andrew MacIntyre, T. J. Pempel, and John Ravenhill, eds., Crisisas Catalyst: Asia’s Dynamic Political Economy (Ithaca, N. Y.: Cornell University Press, ), pp.–.

. Although Japanese officials have promoted the Asian Currency Unit, which now exists as anaccounting unit, monetary policy cooperation has been a controversial objective inside and outsideof the region. See Barry Eichengreen, “What to Do with the Chiang Mai Initiative,” AsianEconomic Papers : (Winter ); and John Williamson, “A Currency Basket for East Asia,Not Just China,” Institute for International Economics Policy Briefs, PB-, Institute for Inter-national Economics (Washington, D.C.), .

. As part of the CMI, ASEAN states increased the size of their pre-existing swap arrangementsfrom $ million to $ billion. Some swaps were largely symbolic, involving reserve-rich statesthat faced no foreseeable foreign exchange shortfalls.

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source of succor. The latter wanted a cheap, politically feasible way to providebailouts and prevent contagion. Swaps were politically easy because centralbanks did not need legislative approval to establish credit lines or disbursefunds; executive orders generally sufficed. Swaps were inexpensive to maintain,requiring only that central banks keep some reserves on hand. Swaps also hadample precedent inside and outside of Asia, making them less threatening topotential objectors inside or outside the region. The U.S. alone has entered intoover swaps since the creation of the Exchange Stabilization Fund in ,including recent swaps with Japan, Korea, and Singapore.10

ASEAN + officials also developed rules and procedures to help manageregional and extramural sensitivities. First, they included measures to levelthe playing field between stronger and weaker participants. The CMIwas negotiated in meetings of the ASEAN + Finance Ministers’ Process,co-chaired on a rotating annual basis by one ASEAN and one + member.At the start of every negotiation, ASEAN and + officials segregate and meet

F I G U R E . The CMI Swap Network as of April

$1b $3b

$3b $3b

$8b $13b

$3b $6b

$0.5b $6b

$4b $4b

ASEAN Swap Arrangement = $2b

Singapore

Malaysia

Philippines

Indonesia

Thailand

Vietnam

Brunei

Myanmar

Cambodia

Laos

Japan

Korea

China $2b

$4b

$2b

$1.5b

$1b

$12b

SOURCE: Author’s compilation, based on Japanese Ministry of Finance, “Network of Bilateral SwapArrangements (BSAs) under the Chiang Mai Initiative (CMI),” April , <http://www.mof.go.jp/english/international_policy/financial_cooperation_in_asia/regional_financial_cooperation/CMI_.pdf>.NOTE: Solid black lines indicate unidirectional swaps. Dashed gray lines indicate bidirectional swaps (e.g.,Japan could borrow $ billion, and Singapore could borrow $ billion). Figures for Korea’s bidirectionalswaps with Malaysia ($.b each), Thailand ($b), Indonesia ($b), and the Philippines ($.b) are omittedabove because of space constraints.

. C. Randall Henning, East Asian Financial Cooperation: Policy Analyses in InternationalEconomics, no. (Washington, D.C.: Institute for International Economics, ), pp. –.

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in separate rooms to coordinate positions before assembling as a whole. Thatprocess manufactures a degree of equality between the two materially unequalsides. It enables individual ASEAN governments to voice concerns firstwith one another, and to speak as a unified group. A strong normativecommitment to consensus within ASEAN helps avoid “stranding” individualmembers, adds to their collective influence, and eases fears that weak South-east Asian states will be steamrolled by their larger northern neighbors.11

Second, ASEAN + has eschewed Western-style institutional formalityin favor of the “ASEAN Way” of consensus-seeking diplomacy. Thisinvolves high-level and technical meetings and ad hoc working groups,but there are no central secretariat, no binding organizational treaty, andno public votes. These features reduced fears that the CMI would forcesome participants to swallow unwanted commitments. Perhaps most impor-tant, consensus-building ensured that the CMI would only move aheadwith all the major states on board.

Third, to signal to lenders and Western observers that the CMI wouldnot be a vehicle for easy money, the swaps were not cheap. Participantscould borrow dollars (or in some cases yen) for renewable -day periodsup to a total of days. The interest rate was .% above the standardLondon Interbank Offering Rate (LIBOR) for the first days, and roseby .% for every -day period thereafter.

Finally, the CMI became the first regional facility to possess an explicitlink to the IMF, which helped allay Western fears that the swaps wouldbe used to provide easy money. The ASEAN + finance ministers’ state-ment introducing the CMI pointedly called it “a regional financing arrange-ment to supplement the existing international facilities.”12 The U.S. TreasuryDepartment and IMF argued that swaps should remain supplementary innature, but they responded more favorably to the CMI than they had tothe AMF proposal in .13 The CMI’s proponents—including Japan, theerstwhile champion of the AMF—carefully avoided expounding ambitious

. T. J. Pempel, “Restructuring Regional Ties,” in MacIntyre, Pempel, and Ravenhill, eds.,Crisis as Catalyst, p. ; and Henning, East Asian Financial Cooperation, p. .

. Joint Ministerial Statement of the ASEAN + Finance Ministers Meeting, Chiang Mai,Thailand, May , , <http://www.aseansec.org/.htm>.

. Horst Köhler, Opening Remarks at the Japan National Press Club, Tokyo, January ,, <http://www.imf.org/external/np/speeches//.htm>; and C. Fred Bergsten andYung Chul Park, “Toward Creating a Regional Monetary Arrangement in East Asia,” Asian Devel-opment Bank (ADB), ADB Institute Research Paper (Manila), , p. .

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long-term aims, which might have mobilized formidable political oppositionfrom Washington.

The IMF link pleased prospective lenders as well. The + countries hadcriticized IMF conditionality in –,14 but none wanted to make largeloans without IMF surveillance and conditionality to improve borrowers’repayment capacity. Japan was consistently the most outspoken defenderof a strong IMF link, emphasizing its obligation to taxpayers.15 In late, CMI participants agreed not to disburse any CMI funds until theprospective borrower entered into an IMF program—i.e., a signed agree-ment between the IMF and the government setting forth the terms and pol-icy conditions of a loan from the Fund. However, under pressure fromthen-Malaysian Prime Minister Mohamad Mahathir and other prospectiveborrowers, the + states agreed that participants could borrow % ofCMI funds without an IMF program for up to six months.16

“Multilateralizing” the CMI

The CMI swap network accommodated political tensions but resultedin a financing mechanism with serious shortcomings.17 Murky operating

. IMF conditionality refers to the policy measures a government agrees to undertake whenborrowing from the Fund. Conditionality’s stated goals are to help correct the problems that ledthe borrower to seek financial aid and to ensure repayment of the loan. However, critics haveargued that IMF conditions tend to prioritize fiscal austerity and liberalization, which benefit theIMF and its powerful Western members at the expense of countries in need. Those critiques wereparticularly powerful during and after the Asian financial crisis. See, e.g., Mahathir bin Mohamad,opening remarks at the th ASEAN Summit, Hanoi, December , , <http://www.asean.org/.htm>; and Joseph Stiglitz, Globalization and Its Discontents (New York: W. W. Norton,). The IMF has since taken measures to respond to those critiques and make policy conditionsmore flexible. IMF, “Factsheet: IMF Conditionality,” March , , <http://www.imf.org/external/np/exr/facts/conditio.htm>.

. Japanese officials were eager to lead a regional financial arrangement, as evident in the AMF proposal, but were not as keen to try to enforce discipline when lending to regional neighbors.William W. Grimes, “The Asian Monetary Fund Reborn? Implications of Chiang Mai InitiativeMultilateralization,” Asia Policy (January ), pp. –. It is not clear how the AMF’s Japaneseproponents would have handled surveillance and conditionality if that project had taken flight.

. Bergsten and Park, “Toward Creating a Regional Monetary Arrangement,” pp. –;Amyx, “Moving beyond Bilateralism,” p. ; and idem, “Regional Financial Cooperation,” p. .

. Former Thai Finance Minister Chalongphob Sussangkarn has described the CMI as “moresymbolic than truly effective.” Chalongphob Sussangkarn, “The Chiang Mai Initiative Multilater-alization: Origin, Development, and Outlook,” Asian Development Bank Institute (ADBI) (Manila),ADBI Working Paper, no. , , p. .

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rules and decision-making processes undermined trust in the system. Forexample, under the CMI’s proportional draw-down system, a borrowerwas required to draw funds proportionally from all of its bilateral swap part-ners in a crisis. That rule sought to prevent borrowers from picking amonglenders for political reasons, but lenders could opt out of the proportionaldraw-down with little justification, raising doubts that money would bedeployed effectively in a time of need.18 No swap was ever activated. Lackingconfidence in the CMI, participating central banks continued to stockpilereserves to insure themselves.19

ASEAN + technocrats involved in the process sought to make the CMImore usable by taking steps toward a more organized and credible arrange-ment. ASEAN + finance ministers agreed, and in May they announcedtheir intent to “multilateralize” the CMI as a way to make regional financialcooperation “more organized and disciplined.” They created technical work-ing groups to hammer out the details. The change that ASEAN + financeministers envisioned was incremental—they did not plan to build a robustregional monetary fund overnight. The incremental nature of the proposedchange was a key to securing political approval.

Political shifts along the three key axes created the opportunity to take theincremental step of multilateralizing the CMI. First, Sino-Japanese relationsevolved during China’s dramatic economic rise. In , the PRC frownedon the idea of an AMF, partly from fear that Japan would dominate the fund.By , China was the world’s largest reserve holder, and an increasinglycentral cog in the regional economy, which gave its officials greater confidenceand willingness to lead alongside Japan. China’s rise encouraged someJapanese officials to redouble their efforts to lead the construction of anAsian regional economic order while they retained a financial upper hand.20

Second, Chinese growth also contributed to booming trade with Southeast Asia,adding to the PRC’s incentives to invest in regional economic cooperation.

. Yung Chul Park and Yunjong Wang, “The Chiang Mai Initiative and Beyond,” WorldEconomy : (January ), pp. –; and Yung Chul Park, “Whither Monetary and FinancialCooperation in East Asia?” Asian Economic Papers : (Fall ), pp. –.

. Barry Eichengreen, “Fostering Monetary and Exchange Rate Cooperation in East Asia,”paper prepared for the East Asian Monetary Cooperation Forum Conference on Monetary andFinancial Cooperation in Asia (Seoul), August , <http://www.econ.berkeley.edu/users/eichengr/fostering_monetary.pdf>.

. Hyoung-kyu Chey, “The Changing Political Dynamics of East Asian Financial Coopera-tion: The Chiang Mai Initiative,” Asian Survey : (May/June ), p. .

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Alongside the Sino-ASEAN Free Trade Agreement and enthusiastic partic-ipation in efforts to strengthen Asian bond markets, the PRC became moreinterested in mechanisms to help avert regional crises.

Third, with the return of robust growth in Asia, relations betweenASEAN + and the IMF shifted. Led by the + states, Asian governmentsclamored for changes in the IMF’s governance structure, which still skewedvoting and capital shares heavily toward the West.21 At the same time,China, Malaysia, and other ASEAN + states increasingly signaled that theywere willing to go their own way if IMF reforms failed to address their con-cerns.22 Although incremental, CMI multilateralization was a symbolicallyimportant indication of that willingness.

It was notable that in the same year it announced the CMIM process,ASEAN + raised the share of funds available through CMIM without anIMF program. South Korea, Thailand, and Indonesia—which had recentlygraduated from IMF programs—were not eager to return to the Fund andbecame more sympathetic to Malaysia’s push for looser CMI linkage with it.Japan continued to favor a strong nexus to the IMF to ensure repayment, andChina and Korea reportedly concurred. But in , the + states agreed to raisethe share of funds available without an IMF program from % to %.23 Boththat decision and the intent to multilateralize the CMI raised a few eyebrowsin the U.S. Treasury Department and the IMF, but the incremental nature ofthe change and continued IMF link dampened concerns in Washington.

The global financial crisis of – added wind in the sails of theASEAN + effort, focusing attention on financial defenses and perhaps low-ering bureaucratic hurdles. In , ASEAN + finance ministers tasked theirdeputies with developing a multilateral reserve arrangement under a singleoperating contract. Some Asian officials also began to express support for amore ambitious financial arrangement, reflecting both the idea’s momentumwithin the region and greater Asian confidence vis-à-vis the ailing West.Japan’s Sakakibara, who had proposed the AMF in , in late advo-cated reviving the idea. Supachai Panitchpakdi, the Thai head of the U.N.

. See “Asian Nations Seek Bigger Voice at IMF,” Korea Herald, May , ; and RobDelaney, “China, Japan, South Korea Call for Greater Asian Say in IMF,” Bloomberg, May , .

. See Anthony Rowley, “Moves for Greater Asian Say in Running of IMF,” Business Times(Singapore), August , .

. Joint Ministerial Statement of the th ASEAN + Finance Ministers’ Meeting, Istanbul,Turkey, May , , para. (IV), <http://www.aseansec.org/.htm>.

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Conference for Trade and Development, also voiced support for a robustregional fund, and China adopted a more favorable view of the concept.24

In May , ASEAN + finance ministers announced their agreementon the basic features of a new financial arrangement and told their deputiesto draft a contract to govern and implement it.25 Seven months later,ASEAN + finance ministers and central bankers (including the head ofthe Hong Kong Monetary Authority) signed the CMIM agreement. Centralbanks contributed their allotted sums when the agreement took effect inMarch , resulting in a US$ billion facility, about one-sixth the pres-ent size of the IMF.26

FEATURES OF THE NEW ARRANGEMENT

The full text of the CMIM agreement has not been made public; Asianofficials have played their cards close to their chests to avoid airing intramuralsquabbles and inviting criticism from outsiders. Nevertheless, most of thearrangement’s basic features have become clear. Participating economies con-tributed various sums of reserves according to a politically negotiated formula.Economies facing liquidity or balance-of-payments crises will be able to enterinto coordinated currency swaps with other participants. By doing so, a par-ticipant can borrow an amount of U.S. dollars equal to a negotiated multipleof its financial contribution.

The new Asian arrangement is not the first mechanism designed to bolsterfinancial defenses on a regional basis. In addition to the swap arrangementsmentioned above, two regional funds exist: the Arab Monetary Fund (ArMF),created by Arab League states in , and the Latin American Reserve Fund(FLAR), a successor to the Andean Reserve Fund created in .27 The new

. “Asian Monetary Fund Proposal Revived to Address U.S. Meltdown: Supachai,” TheNation (Thailand), September , ; Anthony Rowley, “A Monetary Fund by Another Name,”Business Times (Singapore), December , ; and idem, “Japan May Begin Push for AsianFund,” ibid., November , .

. Joint Media Statement of the th ASEAN + Finance Ministers’ Meeting, Bali, Indonesia,May , , <http://www.aseansec.org/.htm>.

. In , the IMF Board of Governors decided to double the IMF’s total quotas to approxi-mately $ billion. The Fund also has access to funds from participating central banks throughborrowing arrangements. See Where the IMF Gets Its Money, IMF, March , , <http://www.imf.org/external/np/exr/facts/finfac.htm>.

. The ArMF is normally abbreviated “AMF,” but this article uses the acronym “ArMF” toavoid confusion with the Asian Monetary Fund idea. The ArMF’s Arab League members are

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Asian facility is nevertheless sui generis in some important respects. Itsmultilateral structure differentiates it from other swap agreements, but it ismuch less formally institutionalized than the ArMF or FLAR and has a nar-rower initial mandate. These unique features reflect the international politicalcontext in which the CMIM agreement was forged, as well as the need toaccommodate diverse intra-regional and extra-regional concerns.

A Modest Initial Mandate

The CMIM agreement spelled out a narrow, conservative mission. The IMF,ArMF, and FLAR all offer functions well beyond liquidity support, providingmedium-term structural adjustment loans and promoting financial and mone-tary policy cooperation. By contrast, CMIM’s initial stated objectives werelimited to the following: “(i) to address balance-of-payments and short-termliquidity difficulties in the region and (ii) supplement the existing internationalfinancial arrangements.”28 The first provision reassured observers that theAsian facility would focus on providing short-term financial aid rather thanpursuing controversial efforts at monetary policy coordination, which almostcertainly would have encountered opposition. The second provision—thatCMIM will supplement existing facilities—was an even clearer effort to putthe IMF, U.S. Treasury, and other possible skeptics at ease.

Institutional Lightness

The CMIM agreement did not establish a single fund per se. It created acontractual arrangement under which participating economies agree tocertain collective principles and procedures. CMIM does not have a largebrick-and-mortar hub or sizable secretariat like the ArMF does in AbuDhabi or FLAR does in Bogotá; it has just a small regional surveillance officein Singapore. CMIM’s governance structure is very protective of individualmembers’ sovereignty. ASEAN + finance ministers decide “fundamental

Algeria, Bahrain, Comoros, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya (suspended),Mauritania, Morocco, Oman, the Palestinian Authority, Qatar, Saudi Arabia, Somalia, Sudan,Syria, Tunisia, United Arab Emirates, and Yemen. The FLAR was established by a agreementand includes Bolivia, Colombia, Ecuador, El Salvador, Peru, and Venezuela.

. Joint Press Release on the Establishment of the Chiang Mai Initiative Multilateralization,December , , <http://www.mof.go.jp/english/if/press_release.pdf>.

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issues” by consensus, such as changes in financial contributions, basic rules, orparticipating economies. Beneath them is an Executive Level Decision Mak-ing Body (ELDMB) comprising deputy-level ASEAN + finance and centralbank officials. The ELDMB oversees the surveillance unit and votes onwhether to activate particular swaps.29 CMIM’s institutional structure, whichgives very little independent power to the surveillance unit, reflects a contin-ued effort to build the facility in a gradual, incremental manner that putspotential objectors at ease.

CMIM is also relatively decentralized from a financial standpoint. It is aself-managed reserve pooling arrangement. Participating central banks con-tribute to the facility by issuing commitment letters, but only transfer fundsonce a specific swap request has been approved.30 This “promissory notemodel” enables contributors to manage their reserve contributions indepen-dently, and differentiates CMIM from the ArMF and FLAR, where mem-bers hand over checks and have their respective funds invest the money.The issue of reserve management created heartburn because of the differinginvestment priorities of Asian central banks.31 Self-management removedone possible stumbling block to CMIM.

China, Japan, and the Leadership Question

Sino-Japanese cooperation is a sine qua non for building genuinely multi-lateral institutions in Asia, and determining their respective roles was a keyto designing CMIM. Some analysts argue that a multilateral economicinstitution cannot thrive without a clear leader to overcome collectiveaction problems, set and enforce rules, and dispense public goods.32 This

. Aladdin Rillo, “Chiang Mai Initiative Multilateralization (CMIM): East Asia’s RegionalLiquidity Support,” presentation to the Union of South American Nations (UNASUR) FinanceMinisters’ Meeting, Quito, Ecuador, February , , <http://www.bce.fin.ec/documentos/Eventos/Economicos/Aladdin%Rillo%ASEAN.pdf>.

. Banco Sentral ng Pilipinas, “Chiang Mai Initiative Multilateralization,” December , ,para. , <http://www.bsp.gov.ph/downloads/Publications/FAQs/CMIM.pdf>.

. For example, the Bank of Japan has long emphasized prudence and invested in safe, highlyliquid assets, while the People’s Bank of China has begun to test higher yield, higher risk invest-ment strategies.

. See Benjamin Cohen, The Geography of Money (Ithaca, N. Y.: Cornell University Press,), pp. –; and Walter Mattli, The Logic of Regional Integration: Europe and Beyond(Cambridge: Cambridge University Press, ), pp. –.

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builds on Charles Kindleberger’s notion of “hegemonic stability.”33 Notall functional institutions have a dominant actor. FLAR lacks a singledominant power; Venezuela, Colombia, and Peru have similar sharehold-ings. In the European Union, two or more countries—usually France andGermany—often form ententes and lead together. The ADB is another exam-ple, where Japan and the U.S. have equal voting and roughly comparablemanagement clout. Sino-Japanese relations are usually not as cozy as theFranco-German or U.S.-Japan relationships, however. The danger of duelingwould-be hegemons has been a consistent concern in building Asian regionalinstitutions and is a key variable in the CMIM equation.34

According to officials involved in the process, both China and Japansought to provide the largest financial contribution to CMIM and to enjoycorresponding clout. China also pushed to include both the Hong KongMonetary Authority and the People’s Bank of China as part of the PRCteam. Japan resisted, fearing a loss of relative influence. ASEAN + officialsnegotiated a clever solution to the possible impasse. Japan agreed to provide% of the funds and is the “largest single contributor.” China was allowedto bring Hong Kong into the arrangement, and together they contributed%. With Hong Kong as part of its team, the PRC became one of thetwo “co-equal largest contributors.”35 China and Japan will thus put theircombined leadership capacity to the test.

Lender-Borrower Dynamics

If some fear that CMIM will suffer from a lack of decisive leadership, othersfear the opposite problem of suffocation by a Sino-Japanese entente. Indeed,this appeared to be the greater immediate concern to ASEAN officials

. Charles Kindleberger, The World in Depression – (Berkeley: University of CaliforniaPress, ), pp. –.

. Grimes, “The Asian Monetary Fund Reborn?” pp. –; Webber, “Two Funerals and aWedding,” pp. –; Haruhiko Kuroda and Masahiro Kawai, “Strengthening Regional FinancialCooperation in East Asia,” Pacific Economic Paper, no. , Australia-Japan Research Center(Canberra), , p. ; Henning, East Asian Financial Cooperation, pp. –; and O. G. Dayaratna-Banda and John Whalley, “Regional Monetary Arrangements in ASEAN + as Insurance throughReserve Accumulation and Swaps,” CIGI Working Paper, no. , Center for International GovernanceInnovation (Waterloo, Ontario, Canada), , p. .

. See Richard Pomfret, “Regionalism in the Asia-Pacific Region: How Wide, How Deep?”Journal of the Korean Economy : (December ), pp. –; and Chaklader Mahboob-ulAlam, “The Chiang Mai Currency Initiative,” Daily Star (Dhaka), November , .

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involved in the negotiations. This helps explain why one Japanese officialcarefully stressed in that ASEAN would remain “in the driver’s seat”of Asian regional integration initiatives.36 Some ASEAN officials involvedin the process privately express the view that a degree of Sino-Japanese ten-sion is desirable because it enables smaller members to gain leverage andpunch above their weights. The effort to balance lender and borrower inter-ests is evident in CMIM’s capital and voting allocations, lending rules, andsurveillance practices.

Shares and Voting Power

CMIM could have required participants to provide a fixed percentage oftheir total reserves, and adjust periodically.37 It could also have based con-tributions on gross domestic product (GDP) or a trade-weighted measureof economic importance that would favor highly connected economies.However, by any such measures, China and Japan would provide more thanfour-fifths of the money and wield overwhelming influence. To addressASEAN concerns, Japan and China agreed to be significantly “underweight”relative to GDP. China will also be underweight relative to its immensereserve holdings. In addition to their respective % contributions, SouthKorea contributed %, and ASEAN collectively gave % (see Figure ).

This negotiated quota system has ample precedent at other monetaryfunds. The IMF quota system has a more complicated set of determinantsbut similarly keeps its largest members underweight. Some provision ofpublic goods by the largest members has generally been necessary to obtainweaker countries’ support for multilateral financial institutions.

Voting power was a contentious issue as well. Although ASEAN + willdetermine fundamental decisions such as the size of CMIM and amounts ofmember contributions by consensus, day-to-day decisions will rest with thedeputy-level ELDMB. Japan reportedly favored granting each countryvotes in proportion to the size of its financial contribution. This would mir-ror the practice at the executive boards of the IMF, ArMF, and multilateraldevelopment banks. However, smaller ASEAN participants feared that

. Anthony Rowley, “Japan Hosts First of Regular Tripartite Summits,” Business Times(Singapore), December , .

. Olarn Chairavat, “Towards a Regional Financing Arrangement in East Asia,” WorldEconomy : (August ), pp. –.

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the + countries would dominate decision-making in any weighted shareallocation system. Participants discussed the possibility of a “double-majority”voting scheme in which both a majority of countries and majority of voteswould be required for decisions.38 Such a scheme would have given ASEANan effective veto.

Instead, the negotiated result was a majority two-thirds voting system thatgrants each participating economy . basic voting shares plus additionalvoting shares based on the size of its financial contribution.39 The + stateshave nearly % of the voting power, enough to decide ELDMB votes ontheir own (see Figure ).

Former Thai Finance Minister Chalongphob Sussangkarn has warnedthat “allowing the Plus countries to push through conditionality or other

F I G U R E . Weighting of CMIM Reserve Contributions

42%

58%

32%

38%

22%

32%

13% 14%20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nominal GDP FX Reserves Contribution toCMIM

ASEAN

South Korea

Japan

China (withHong Kong)

7% 6%

16%

SOURCE: Author’s compilation, based on the ASEAN + Joint Ministerial Statement, Attachment, andEnd- data from the IMF, <http://elibrary-data.imf.org/>, accessed May .

. Author’s interview with a former senior Japanese Finance Ministry official, Palo Alto, Calif.,February , .

. Joint Ministerial Statement of the th ASEAN + Finance Ministers’ Meeting, Tashkent,Uzbekistan, May , , Annex , para. , and Attachment, <http://www.aseansec.org/documents/JMS_th_AFMM+.pdf>. The only exception is Hong Kong, which gets no basic votes—a way tokeep Japan even with China and Hong Kong collectively. Author’s interviews with ASEAN Secretariatofficials, Jakarta, May -June , .

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issues requiring weighted majority vote[s] by themselves may create frictionswith ASEAN countries.”40

Borrowing Rules

ASEAN + officials also had to take competing interests into account whenestablishing borrowing rules. Prospective borrowers sought relatively quick,automatic, and cheap loans. Likely lenders and extra-regional observersagreed on the need for quick support but cautioned that too much easymoney could undermine discipline, disincentivize reforms, lead to defaults,and sometimes encourage even larger crises. The CMIM agreement reflectssome compromise. Each participant may borrow a specified multiple of itscapital contribution. For example, the ASEAN- economies—Indonesia,Malaysia, the Philippines, Singapore, and Thailand—may borrow up to. times their capital contributions, and smaller ASEAN economies mayborrow up to five times their more modest contributions.41 The sums

F I G U R E . CMIM Voting Power

25.4%

3%

28.4%

14.8%

28.4% China

Hong Kong

Japan

Korea

ASEAN

SOURCE: Author’s compilation, based on the ASEAN + Joint Ministerial Statement, Annex .

. Chalongphob Sussangkarn, “Note on ChiangMai InitiativeMultilateralization,” paper for a con-ference on Reforming the Global Monetary System, Beijing, March –, , <http://policydialogue.org/files/events/Chalongphabs_Note.pdf>.

. Joint Press Release, “Chiang Mai Initiative Multilateralization Comes into Effect on the thof March ,” <http:// http://www.bot.or.th/Thai/PressAndSpeeches/Press/News/ne.pdf>.

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available to prospective borrowers rival the resources that the same countriescan draw from the IMF, but funds available without an IMF programremain relatively modest (see Figure ). Like the CMI, CMIM limits bor-rowers to % of funds without an IMF program.42

Participants may request funds from the CMIM Coordinating Countries,which are the two rotating chairs of the ASEAN + process in any given year.If ASEAN + officials in the ELDMB approve that request, a borrowerwill have access to renewable -day loans for up to days (with some flex-ibility). Participating central banks will deliver funds to a borrower bilaterallyrather than using a central administrator.43 As noted above, CMIM funds willbear an above-market interest rate equal to .% above LIBOR, increasing by.% each days to a maximum of LIBOR + %.44 Lenders will have the

F I G U R E . Selected CMIM Borrowing Limits

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Korea Thailand Indonesia Singapore Malaysia Philippines Vietnam

From the IMF(cumulatively)

From the IMF(annually)

From CMIM (with IMFprogram)

From CMIM (20%without IMF program)

SOURCE: Author’s compilation, based on the ASEAN + Joint Ministerial Statement, Attachment,and end- data from the IMF. Figures in billions of U.S. dollars.NOTE: An IMF member can borrow up to % of its quota annually and up to % cumulatively.Additional funds can be obtained in exceptional circumstances. Figures above are based on the May ,, dollar/SDR exchange rate.

. Hong Kong, which is not an IMF member, is the only ASEAN + participant exempt fromthe % limit.

. Banco Sentral ng Pilipinas, “Chiang Mai Initiative Multilateralization,” para. .. Rillo, “Chiang Mai Initiative Multilateralization.” ASEAN + finance ministers announced in

May that they had agreed on other operational details—such as mechanisms for fund activation andcoordination with the IMF—in a document entitledOperational Guidelines for Enhancing Effectiveness ofCMIM. Joint Ministerial Statement of the th ASEAN + Finance Ministers’ Meeting, Hanoi,

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ability to opt out of a particular swap before the vote on swap activation istaken, if they obtain ELDMB approval—or in exceptional cases such as forcemajeure or domestic legal prohibitions.45 If one or more participants opt outand the swap is still approved, others must make up the difference (providedthat they do not exceed their contribution limits).46 This opt-out arrange-ment, which builds on the similar provision in the CMI, provides ASEAN+ officials with the reassurance that they will not be roped into making loansthey have legitimate reasons to oppose. This provision reinforces the relativeinstitutional weakness of CMIM vis-à-vis national capitals, and distinguishesit from the IMF, ArMF, and FLAR.

ASEAN + officials have carefully avoided the term “conditionality,” pri-marily to assuage Southeast Asian sensitivities. Potential borrowers have signedonto CMIM partly because their reserve-rich neighbors have soft-pedaled theissue of attaching policy guidance to financial lifelines. IMF conditions—which aim to eliminate borrowers’ need for sustained balance-of-paymentssupport—often generate intense political opposition; they certainly did in Asiaduring the – crisis. The IMF’s approach to conditionality has evolvedconsiderably since then, most notably after a sweeping review in . Still,public protests in Greece in following the government’s adoption of aus-terity measures show that conditionality seldom wins friends, even when it iseconomically justified and has a buy-in from the borrowing country.

Prospective ASEAN + lenders are well aware that string-free loans can bedangerous and that any lending arrangement needs to steer between imposingexcessive (or ineffective) conditions and dispensing easy money. They are alsoaware that CMIM borrowers would likely resist policy conditions fiercely andwould apply intense political pressure on lenders, a risk that ASEAN +

officials have recognized from the start.47 Such pressure can be particularlyacute in regional organizations; the ArMF and FLAR have both found itdifficult to impose conditions that satisfy lenders for that reason.48 Efforts

Vietnam, May , , para. , <http://www.mof.go.jp/english/international_policy/convention/asean_plus_/as_.pdf>. Penalties for late repayment have not been disclosed.

. ASEAN + Joint Ministerial Statement, Annex , para. .. ASEAN Secretariat officials interviews.. Chalongphob, “A Framework,” p. .. Masahiro Kawai and Shinji Takagi, “Towards Regional Monetary Cooperation in East Asia:

Lessons from Other Parts of the World,” International Journal of Finance and Economics : (April), pp. –.

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to negotiate and impose conditions could also lead to divisions betweenChina and Japan and between Asia and the West in the likely event ofdisagreement regarding the conditions to be imposed. To date, the +

countries have largely passed the buck on conditionality by maintainingthe IMF linkage.49 At the same time, they have focused on other waysof limiting moral hazard as they attempt to build an attractive financialsafety net.

Surveillance

Rather than concentrating on conditionality, ASEAN + officials have at-tempted to reconcile competing interests by focusing on the need for en-hanced surveillance. In international financial parlance, “surveillance” meansmonitoring and consulting with prospective borrowers. It helps creditorsdetect vulnerabilities at an early stage and helps borrowing countries strength-en policies and institutions to avoid crises. It also helps lenders make decisionson whether to give loans and assists all parties during a crisis by providingtimely information.

The IMF is the clear leader in macroeconomic and financial surveillance,leading annual policy consultations with members,50 analyzing global andregional trends, and issuing critiques and sometimes unpopular policyadvice to its member states. Surveillance has been a key concern for officialsin the IMF, U.S. Treasury, and elsewhere who are wary of an Asian facilitythat could hand out easy money and undermine economic discipline andreform. It has also been a priority for prospective ASEAN + lenders, espe-cially Japan. Former Japanese Deputy Finance Minister Shinohara Naoyukimade that point clearly by saying: “We don’t want [the fund] to be amechanism to give out easy money. The most important issue is how tostrengthen surveillance.”51

. William Grimes refers to this as a “nesting strategy”—nesting CMIM in the global regimeto offload tough choices and mitigate the risk that exacting tough conditions will lead to politicalgains for a rival lender. See Grimes, “The Asian Monetary Fund Reborn?” pp. –.

. Under Article IV of the IMF’s Articles of Agreement, its staffers annually consult with eachFund member—collecting information, discussing economic policies, preparing a report for the IMFExecutive Board, and providing the member with views from the board and staff. See IMF, “IMFArticle IV Staff Reports,” August , , <http://www.imf.org/external/ns/cs.aspx?id=>.

. “Crisis Fund for Asian Currencies Approved,” International Herald Tribune, May , .

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Asia’s other existing surveillance mechanisms are inadequate. In ,ASEAN + officials set up an Economic Review and Policy Dialogue (ERPD)to facilitate voluntary information exchange and lead peer reviews. However,member countries often submit late or incomplete information and followno common template, making it difficult to share and compare data. Differentlevels of official participation and a general reluctance to criticize make the peerreview process awkward, and variance in central bank independence tends todegrade the quality and impartiality of analysis. The EPRD also lacks a dedi-cated bureaucracy, relying on small, overstretched groups of staffers at theADB and ASEAN Secretariat.52

In , the ASEAN Secretariat established a Macroeconomic and Finan-cial Surveillance Office (MFSO) that writes reports on member economies,but the office is grossly under-resourced and faces serious political obstaclesto effective surveillance. Member countries are free to revise reports and oftendelete or modify criticisms. The MFSO has no official mechanism of appeal,greatly reducing the value and credibility of the reports. Discussions hosted byAPEC, the Bank for International Settlements, the ADB’s Office for RegionalEconomic Integration, the Financial Stability Board, the Executives’ Meetingof East Asia Pacific Central Banks, and the Southeast Asian Central Banksforum add to the mix, but none serves as a clear locus for regional surveil-lance. These groups tend to borrow heavily from the IMF’s data and analysis,and their functions are often redundant.

A key part of the CMIM negotiations revolved around establishing astronger independent surveillance unit. ASEAN + officials have not jetti-soned the ERPD and continue to work with the MFSO on regional eco-nomic trends and issues, but they are focusing most of their energy onbuilding a new regional unit. In May officials unveiled plans to createan ASEAN + Macroeconomic Research Office (AMRO) in Singapore to“monitor and analyze regional economies” and thus contribute to “the earlydetection of risks, swift implementation of remedial actions, and swift decision-making of the CMIM.”53

Politics was important in choosing a site for the unit. Officials agreedthat it would be located in Southeast Asia. Placing it in Tokyo or Beijing

. See Kuroda and Kawai, “Strengthening Regional Financial Cooperation in East Asia,”pp. –; and Amyx, “Regional Financial Cooperation,” pp. –.

. ASEAN + Joint Ministerial Statement, para. .

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would likely have raised ASEAN objections and touched on Sino-Japanesesensitivities. The ADB in Manila and the ASEAN Secretariat in Jakartawere possibilities, but placing the unit in the latter would have suggestedASEAN’s primacy, while using the ADB might have become complicatedbecause it is led by the Japanese and the Americans. Singapore, KualaLumpur, and Bangkok were the shortlisted candidates. In the end, Thailand’sdomestic instability reportedly weakened its claim, and Singapore appearsto have edged out Kuala Lumpur by offering excellent facilities, pledgingfinancial and technical support to the unit, and emphasizing the Lion City’sidentity as a financial hub that could help attract talent.

The process of selecting a director for AMRO also raised political sensi-tivities and the Sino-Japanese leadership question. The decision was slatedfor November , but China reportedly opposed the Japanese candi-date.54 In April , the Chinese and Japanese governments agreed toshare the post for its first three-year term. Wei Benhua—a senior PRCofficial who has served in the People’s Bank of China, the ADB, and theIMF—will hold the post for the first year. Nemoto Yoichi, a counselor atthe Japanese Finance Ministry, will serve for the final two years of the term.55

AMRO opened for business in early May . Its director is responsible forhiring its six to staff members on the basis of merit, though some balanceof regional representation is doubtless also being considered. A group of “wisemen” serve as an advisory panel, three from ASEAN and three from the + states.

ASEAN + officials generally view an effective AMRO as a key toCMIM’s success, but the job of the research office will not be easy. Surveil-lance is technically difficult in Asia because of the extraordinary diversityof the area’s economies, but the greater challenges are political.56 AMROwill need the independent authority to demand information and takegovernments to task, but it will not win that authority easily. Host countryofficials often resent requests for privileged information and unwanted

. Siti Rahil, “China, Japan Vie for East Asia Financial Surveillance Post,” Kyodo NewsAgency, December , .

. Takashi Fukuyama, “Japan Cedes to China on Top Asian Monetary Post for Now,” AsahiShimbun, April , ; and “Japan, China Continue Rivalry for Asian Leadership at ASEAN + ,”Nikkei.com, <http://e.nikkei.com/e/fr/tnks/NniDJFA.htm>, May , .

. See Kuroda and Kawai, “Strengthening Regional Financial Cooperation,” pp. –; andBergsten and Park, “Toward Creating a Regional Monetary Arrangement,” pp. –.

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criticism or policy advice. Strong regional surveillance rubs uncomfortablybeside Asian norms of non-interference and consensus-based diplomacy.A senior Chinese official said in , “We should prevent [AMRO] fromintervening in other countries’ internal affairs” and limit its activities to “aperformance tracing role,”57 a term of art that suggests an effort to maintaina relatively non-confrontational, consultation-based approach.

CMIM and the IMF

CMIM retains a strong official link to the IMF. The need for strong surveil-lance is the clearest reason why Japan and others have insisted on the link,but potential borrowers are less enthused and continue to push for a greatershare of untied funds. Japan has not closed off the possibility of weakeningthe linkage but has indicated that it would do so only when stronger region-al surveillance measures are in place.58 Many ASEAN + officials expect thefraction of delinked funds to grow over time.59 In a crisis, political pressureto sever the IMF linkage entirely will be intense, if Asian countries in crisissee CMIM as a less onerous lender.

The relationship between CMIM and the IMF will also be contingent onthe reform of IMF policies and governance. ASEAN + states—which nowhold more than half of global reserves—are actively seeking enhanced leader-ship roles in international economic governance. Indeed, one possible pur-pose of CMIM (which Asian officials generally deny) is to boost Asia’sleverage in seeking additional IMF votes and capital shares.60 In their state-ment announcing plans for CMI multilateralization, ASEAN + financeministers called for “an urgent review of the quota of the Asian countriesin the IMF to properly reflect the current realities and their relative positionsin the world economy,” which would “strengthen the mutual understandingbetween Asia and the [international financial institutions.]”61

. Ding Wenlei, “Pooling Resources,” Beijing Review, April , (quoting Zheng Xiaosong, asenior Finance Ministry official).

. Author’s interviews with a former Japanese official and officials at the ASEAN Secretariat,May -June , .

. Author’s interviews with a former Japanese official; and interview with Bank of Thailandofficials, Bangkok, January , .

. Amyx, “Regional Financial Cooperation,” pp. –.. Joint Ministerial Statement of the th ASEAN + Finance Ministers’ Meeting, para. .

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Modest IMF quota reforms in began to rebalance the Fund, givingmore shares to four states that were acutely underrepresented relative totheir size: China, South Korea, Mexico, and Turkey. In , the IMFagreed to more substantial realignment, giving more than % of sharesto “underrepresented” countries, including many in Asia.62 In December,then-IMF Managing Director Dominique Strauss-Kahn announced anend to the traditional practice of appointing an American to head the WorldBank and a European to lead the IMF: although Christine Lagarde ofFrance has since become the latest managing director, an Asian leader ofthe Fund is quite possible in the near term.63 In a sign of Asia’s rising clout,two of Lagarde’s four deputy managing directors are from Asia—ShinoharaNaoyuki from Japan and Zhu Min from China, whom Lagarde appointedas part of a campaign pledge to promote the role of China and other emerg-ing economies at the Fund.64 Asian leaders continue to hedge their betsby cultivating a regional option, but the international political dynamicsbetween East and West have changed fundamentally since .

Overall: A Limited Arrangement

CMIM remains an embryonic arrangement. Although it streamlined some ofthe mechanics of swap activation under the CMI and added to the rudimentsof a regional surveillance framework, it has limited powers and faces consider-able challenges. During the May ASEAN + ministerial meeting, SouthKorean Finance Minister Yoon Jeung-hyun called for doubling CMIM’s size,while other ministers urged unspecified increases. CMIM’s size is still relativelymodest when set beside recent international bailouts—such as the $ billioninternational package for Greece or $ billion package for Ireland—or the$ billion temporary swap lines that the U.S. Federal Reserve opened withJapan, Korea, and Singapore during the – financial crisis.65

. IMF, “Factsheet: IMF Quotas,” November , , <http://www.imf.org/external/np/exr/facts/quotas.htm>.

. “IMF Says Successor Should Be from Outside U.S., Europe,” Agence France-Presse,December , ; and Anthony Rowley, “Asia’s Man to Helm the U.S.-based IMF?” BusinessTimes (Singapore), March , .

. Binyamin Applebaum, “U.S. and Chinese Officials Named to I.M.F. Post,” New YorkTimes, July , .

. C. Randall Henning, “The Future of the Chiang Mai Initiative: An Asian MonetaryFund?” Policy Brief, PB-, Peterson Institute for International Economics (Washington, D.C.),

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In its current form, CMIM is apt to have only modest economic impact.Although it improves on the CMI by establishing a more orderly disburse-ment procedure, participating states are unlikely to rush to it for help. Theregion weathered the – storm much better than the tempest,and no economy there is in imminent need of a bailout.66 Vast reservesinsulate many Asian economies from currency or liquidity shocks, andmacroeconomic fundamentals are generally stronger across the region thanthey were in the late s. Moreover, Asian governments will likely fearthat drawing on CMIM funds will signal weakness, spook investors, andprecipitate large capital outflows. With only % of CMIM funds availableabsent an IMF program, prospective borrowers are apt to be shy aboutrequesting funds.

AN EFFORT TO CREATE AN ASIAN MONETARY FUND?

CMIM is often regarded as a resurrection of the AMF idea, and given theregion’s vast reserves and rapid growth, there is a natural tendency to focuson that possibility. In October , roughly three dozen members of theAsian Policy Forum—which includes well-connected academics and think-tank analysts throughout the region—recommended that ASEAN + leaderstake steps to develop “a full-fledged Asian monetary fund.” In a report sup-ported and published by the ADBI—long one of the hubs of the regionalintegration effort—they recommended boosting surveillance capability, even-tually eliminating the IMF linkage, and adding other services (such as precau-tionary lending) to CMIM’s limited function as a crisis lender.67

February . Notably, the South Korean government chose to establish a swap with the U.S.government rather than activating a CMI swap line. Ralf Emmers and John Ravenhill, “TheAsian and Global Financial Crises: Consequences for East Asian Regionalism,” RSIS WorkingPapers, S. Rajaratnam School of International Studies (Singapore), August , , pp. –,<http://www.rsis.edu.sg/publications/workingpapers.asp?selYear=>.

. ADB, Asia Economic Monitor (December ), pp. –; and Khor Hoe Ee and Kee RuiXiong, “Asia: A Perspective on the Subprime Crisis,” Finance and Development : (June ),pp. –.

. Asian Policy Forum, “Policy Recommendations to Secure Balanced and Sustainable Growthin Asia,” report supported by the ADBI (October ), p. , <http://www.adbi.org/files/...keydocs.policy.recommendations.sustainable.growth.asia.pdf>. See also Chalongphob, “The ChiangMai Initiative Multilateralization,” pp. –, suggesting that such a fund should address currencyissues as well.

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As noted above, some Asian officials have explicitly endorsed the objec-tive of a robust regional fund in recent years. Nevertheless, incumbent offi-cials continue to be careful about stating medium-term ambitions. Concernsabout provoking Western and IMF opposition have dissipated somewhatsince , but tensions within the region remain significant. Projectingambitious aims could raise expectations to unwanted levels and jeopardizesupport for the CMIM process by forcing relatively quick decisions on po-litically sticky issues such as surveillance. Even the Japanese government,which has exercised leadership throughout the CMIM process, continuesto take a cautious approach, eager to develop CMIM but wary of dispensingeasy money and creating moral hazard.

At their annual meeting, ASEAN + finance ministers did signal theirintent to develop CMIM in important ways. They instructed their deputiesto study how to “strengthen the legal status of AMRO to constitute an inter-national organization with an international legal personality,”68 which sug-gests using it as the kernel for a more concrete institutional hub. They alsopointed toward an extension of CMIM’s mandate by tasking their deputiesto “initiate a study on the design of a possible crisis prevention function forCMIM”69—suggesting that CMIM may expand to lending functions beyondliquidity crises. Korean Finance Minister Yoon Jeung-hyun indicated thatnext steps could include an increase in the facility’s size and review of its rela-tions with the IMF.70 Further, ASEAN + finance ministers agreed that cen-tral bank governors will take part in future annual meetings, which couldopen the door to considering issues related to monetary policy.71

Despite these developments, the emergence of a robust AMF is far fromcertain. It has taken ASEAN + a full decade to move from a loosely coordi-nated swap network to a slightly more coordinated pooling arrangement. Eventhough IMF andWestern opposition are apt to be less binding constraints thanin the past, lender-borrower questions and Sino-Japanese tension remain un-resolved in Asia, encouraging the + states to punt some difficult functionsto the IMF. The near-term prospects for an active, centralized, and relatively

. ASEAN + Joint Ministerial Statement, para. .. Ibid., para. .. Kim Tong-hyung, “Asian Finance Ministers Urge Stronger Safety Net,” Korea Times,

May , .. ASEAN + Joint Ministerial Statement, para. ; and “ASEAN Plus Three Group

Agrees to Include Central Bank Chiefs in Its Gatherings,” Kyodo News Agency, May , .

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autonomous CMIM are fairly slim—especially one with a meaningful role inmonetary policy. For the time being, Asian technocrats will probably continueto focus more on climbing the next step than on looking toward the top of thestairwell.

CONCLUSION

In the near term, CMIM’s primary importance is likely to be political. In aregion often characterized as “under-institutionalized,” finance has providedsome of the most fertile ground for multilateral Asian cooperation to date.The establishment of a pooled reserve fund was an incremental change,but given the constraints on institution-building in Asia, even incrementaladvances carry important implications about trust. CMIM also sends a mes-sage about the development of a shared regional vision, however early ingestation that vision may be. ASEAN + governments have spoken aboutmultilateralism since the group’s inception, but CMIM sets up a mecha-nism that will require participants to engage in joint activities that go furtherbeyond dialogue than they have in the past, conducting surveillance andpotentially taking votes—which would be a significant departure from the“ASEAN Way” of consensus-based diplomacy.

CMIM’s effectiveness and future evolution will shed light on whetherAsia’s diverse governments are capable of forging concrete multilateral solu-tions to regional problems. ASEAN + officials have kept their deliberationslargely private to date, and that approach has had certain advantages. A low-key, technical, and consensual approach has helped generate dialogue, buildsolidarity, and reach compromises among Asia’s diverse governments,without costly public confrontations. Operating a rule-based contractualarrangement will require some awkward adjustments.72 Voting, imposingpenalties, and insisting on strong surveillance each generate friction be-tween and among lenders and borrowers, particularly in a crisis. The testof ASEAN + ’s ability to adjust will likely come when funds start to be dis-bursed, differences arise, and public stakeholders issue legitimate demandsfor information.

CMIM will also show whether Asia’s twin colossi are capable of leading intandem. Competition between China and Japan could prevent any actor from

. Pempel, “Restructuring Regional Ties,” pp. –.

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driving through necessary decisions and enforcing agreements in a crisis. Inthe worst case, it could precipitate a “race to the bottom” in lending standardsand undermine CMIM’s credibility. Signs that Asia’s leaders cannot cooperateeffectively would undermine economic stability and cast doubts on Asia’sbroader institutional project. By contrast, if officials in Beijing and Tokyowork toward shared objectives, with Korea playing an important third role,the fund will likely gather institutional momentum and functional responsi-bility and have positive payoffs beyond the economic arena.

Lastly, CMIM may provide evidence on how Asian institutions are apt tointeract with global bodies such as the IMF as China and many of its neigh-bors gather power. If CMIM and the IMF emerge as rivals, they could workat cross purposes and provide conflicting guidance to borrowing countries.A step-wise bifurcation of international finance would undermine good gov-ernance and carry real risks for global development and stability. If CMIMand the IMF successfully cooperate, however, they can deploy complemen-tary resources and expertise and solve problems that either would find diffi-cult to address alone.

Although the CMIM process now has some bureaucratic momentum, theaims of ASEAN + officials are certainly not fixed. They are contingent.Inside the region, if technocrats or leaders are able to resolve the surveillancequestion and other key issues, many governments will likely invest addedenergy in the process and consider granting the body greater autonomouspowers. The same is true if global institutions exclude key Asian powers.Conversely, if global institutions perform ably and satisfy legitimate Asianexpectations, most ASEAN + governments will probably be content to leaveCMIM in a subordinate role and offload tough surveillance and conditional-ity functions to the IMF. Conflict in the region—especially involving Chinaand Japan—could quickly bring progress to a halt. The most likely evolutionof CMIM will be a process of fits and (small) starts that reflects the difficultyof satisfying often conflicting interests across multiple political axes.

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