From: The Asian Wall Street Journal (Hong Kong)
Date: Sept 26, 2000
Keeping a Bad Idea Alive
An Asian Monetary Fund would most likely undercut the market-based
reforms that are crucial to long-term economic health.
By Salil Tripathi
Bad ideas that give a false sense of security have a tendency to resurface
when reform setbacks occur. As the Philippine peso and the Thai baht have
sunk, and the Indonesian rupiah remains listless, the region's policy makers
have begun to talk warmly again about an Asian Monetary Fund. They would
better off putting this initiative back on the shelf where it belongs.
An AMF would be like placing a Band-Aid on a slow-to-heal fracture. It would
distract Asia from biting the bullet on difficult market-based reforms, like
corporate and bank restructuring and reducing barriers to international
trade and investment. And even if such a fund were launched, it would likely
be too small to be meaningful, leading to an enormous waste of precious
Former Japanese Vice Minister of Finance Eisuke Sakakibura first mooted the
idea of an AMF to foster regional currency stability in the wake of the 1997
Asian financial crisis. But the proposal was wisely withdrawn in the face
opposition from the United States. Most recently, however, Thai Minister
future Director General of the World Trade Organization Supachai Panichpakdi
has given the proposal a new lease on life.
Proponents advance several arguments in support of an AMF. First, a regional
monetary fund could provide additional funds, bolstering the International
Monetary Fund's role as a lender of last resort. Second, the governors of
such a fund could respond speedily to an incipient crisis with macro- and
micro-economic advise that is more appropriate for Asian economies, rather
than prescriptions from a one-size-fits-all manual written in Washington.
Mr. Supachai floated the trial balloon last week at a Bangkok seminar
because he believes the IMF's resources may one day not be enough. He said
an AMF would be on the agenda at the upcoming Association of Southeast Asian
Nations economic ministerial meeting in Chiang Mai, Thailand.
The IMF has not quashed the proposal. Last week, the Fund's Managing
Director Horst Koehler said if an AMF ran parallel with the IMF, it would
a positive step. Australia has said it may consider joining such a fund.
Another ringleader is Harvard economist Jeffrey Sachs, a longtime critic
the IMF's response to the Asian crisis. As some Asean currencies--notably
peso and baht--have dropped to levels that bring back nightmares of 1997,
observers believe that this time round there may be greater regional support
for an AMF.
But if an AMF was a bad idea in 1997, it remains one now. Indeed, given the
poor track record of Asian nations at regional institution building, an AMF
would most likely undercut the very reforms crucial to long-term economic
An AMF would require from diverse members a coordinated approach to economic
restructuring and regional turmoil. The 1997 crisis, however, revealed the
inability of the two institutions most responsible for promoting economic
cooperation in Asia--Asean and the Asia Pacific Economic Cooperation
Group--to do either.
Based on the principle of noninterference, Asean members are loath to take
each other to task over economic policies. Meanwhile, APEC has failed
miserably to promote economic reforms or lower trade barriers since it is
committed to a "concerted unilateralism" by which members undertake
agreements unilaterally, rather negotiate formally and sign treaties.
After 1997, an "early warning system" housed at the Asian Development Bank
in Manila was supposed to allow Asean member states to take anticipatory
policy measures to head off any crisis. But that system has not worked
because members wary about sharing economically sensitive data with one
another have balked at transparency requirements.
These practices run counter to the very idea of a regional fund, whose
function would be precisely to interfere, perhaps massively, in the economic
policies of a beleaguered country. Such a fund might ask Malaysia to remove
its capital controls, Thailand to sell its assets faster, Indonesia to allow
failed banks to collapse, South Korea to unravel its conglomerates, and even
Japan to stimulate domestic demand.
But an Asian fund that eschews conflict and avoids making its clients lose
face would be not only redundant, but also possibly a threat to global
economic stability. Particularly, if it means countries would try the AMF
first, and turn later to the IMF, it could allow a crisis to spread more
widely and so require greater international support.
The United States and the IMF rejected the 1997 proposal for an AMF, as did
international bankers, because they feared it would prop up currencies that
should not have been supported in any case. The fear was that
crisis-affected countries would seek seek a quick fix to go on trying to
their currencies while also holding down interest rates. This only drains
national resources while putting off far-reaching structural reforms.
Moreover, under the original proposal the AMF would have disbursed money
help countries absorb macroeconomic shocks and overcome problems of
liquidity due to sudden drop in foreign reserves. The tougher job--economic
restructuring--was not on that agenda.
Clearly, had such a fund been organized then, it could have undermined the
IMF-led program, which was a fairly serious prospect at that time given
Indonesia's intransigence under Suharto. As a softer alternative, an AMF
would have crippled the IMF's ability to apply pressure on countries
dragging their feet on reform.
The idea of an AMF is based, at least in part, on the bogus belief that an
Asian crisis requires an Asian solution. But the East Asian economic
"miracle" wasn't the result of any Asian superiority or monopoly on virtue
and skill; the "miracle" followed sound, outward-oriented trade-and
investment-friendly economic policies.
In the same vein, the best protection against crisis lay in following
universal principles of market-based economic reforms. Diluting them with
regional substitutes might have offered temporary pain relief by postponing
the inevitable, more serious crisis, when international intervention of a
higher magnitude would have become necessary.
The recent fall of baht and peso have probably as much to do with the
strengthening of the dollar and the increase in oil prices as with chronic
domestic factors. A regional fund cannot fight such global forces on its
own. Asean's $200 million currency intervention pool is too small for
credible intervention. The bigger proposed pool of $1 billion would not be
enough for even an afternoon's trading. (It is worth noting that when Japan
had originally proposed the AMF, it had suggested initial capital of $100
billion.) To arrest the euro's freefall, major industrialized countries
committed $10 billion last week, for example.
At a time when the IMF is learning from the lessons of 1997, creating an
would be a step backwards. The IMF has accepted that its role in leading
Asia's recovery was flawed. Realizing it asked too much of many
crisis-stricken economies, it has relaxed many of its demands and supports
the World Bank and the ADB's social safety nets to protect the poor.
The last thing Asia needs is a lender of last resort with less rigorous
standards than the IMF which would bail out bad policy makers. Quick fixes
won't lead to lasting recovery: The sooner Asian policy makers realize that,
the better it will be for the whole of Asia.
Mr. Tripathi, former regional economics correspondent for the Far Eastern
Economic Review, is now a writer based in London.