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The Chiang Mai Initiative’s multilateralisation: A good start

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In Brief

On March 24 the agreement reached in May of 2009 at the ASEAN Plus Three Finance Ministers Meeting (ASEAN+3-FMM) in Bali and signed in December of last year on the ‘Chiang Mai Initiative Multilateralization’ (CMIM) agreement will come into effect. While this will represent the first successful regionalist project of the ASEAN+3 grouping, transforming a complex network of Bilateral Swap Agreements (BSAs) into a single, uniform facility to help with managing regional financial crises, the CMIM is best understood (even after 10 years of negotiations to get to this stage) as only a good start.

The CMIM as an institution has a great deal to offer the region. But what are some of its problems?


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First, there is the problem of who will control the CMIM – China or Japan? This Sino-Japanese rivalry was the principal cause of the failure to multilateralise (and insititutionalise) the CMI before now. Indeed, it took an external threat in the form of the Global Financial Crisis for Japan and China to finally settle their differences and work out a compromise on contributions and, implicitly therefore, voting weight. This rivalry has hardly disappeared however, and continues to be a factor inhibiting the development of the CMIM.

Second, a schism continues to exist between potential borrowers (Korea and ASEAN) and loaners (Japan and China), which can lead to defections. Indeed, this is an issue in which China and Japan find themselves on the same side, and underlies the also the next two problems discussed. Put simply, Korea and ASEAN wish to be able to access their larger neighbours’ foreign exchange reserves more quickly and more easily than Japan and China are really comfortable with. The outcome of this is a defection by one of the borrowers away from the CMIM and even away from the region. One example is the extension to Korea of $30 billion by the US treasury in October 30, which in turn triggered both China and Japan to make similar offers on December 12 at the trilateral summit. These ad hoc bilateral initiatives are extremely effective, but on the flip may have the effect of undermining the CMIM process.

Third, even in its current form the CMIM does not promise to provide anywhere near sufficient resources to stave off a financial crisis in the ASEAN countries. The largest ASEAN members of the CMIM can access roughly US$11 billion via the CMIM, yet these same countries required between $40 – $60 billion during the Asian Financial Crisis in 1997-8. Moreover, that is even assuming that the IMF has got a stand-by agreement in place, without such an agreement CMIM members can only access 20 per cent (USD2.4 billion) of the their total. Thus, the CMIM should not be considered a facility capable of de-linking Asia from global architecture, indeed China and Japan have thus calculated the ‘required’ CMIM resources based on the assumption of IMF involvement.

Fourth, CMIM conditionality is overly strict. For borrowing members of the CMIM (ASEAN and Korea), accepting short-term financing via the CMIM is probably not the cheapest option, at least on average. CMIM funding is charged at higher than market rates and is non-differentiated. This means that Korea and Burma would both attract the same conditionality (interest rates), a state of affairs seemingly divorced from economic reality which significantly reduces the utility of the CMIM to its members.

Advancing the CMIM is matter of priority for East Asia, and financial stability is a clear common regional interest. One solution, although inadequate in and of itself, to advance the CMIM is to bring in wider East Asian countries such as India and Australia, although again not immediately. The addition of more states capable of acting, at least on balance, as lenders in a crisis will take some of the weight off Japan and China, and serve to lower somewhat the political stakes between the two giants.

Additional lender countries would be in Korean and ASEAN’s interests, and as Japan has extended a BSA to India with CMIM-compatible conditionality, it is likely that Japan would be interested in bringing at least India on board and would probably not object to Australia. Indeed, Australia’s interests in sound regional financial surveillance would probably help Japan in its quest to construct such a facility at the CMIM, a precondition for differentiating loans under the CMIM, which is in turn a net plus for borrower members. Australia’s pledging of assistance and support for the IMF package for every crisis-stricken country in East Asia in 1997-8 demonstrates its strong basic interests in being involved.

One response to “The Chiang Mai Initiative’s multilateralisation: A good start”

  1. To my knowledge, CMIM should be (eventually) de-linked from the IMF surveillance program. An independent regional surveillance unit (ISU), agreed at the Bali May 2009 meeting, should become (again, eventually) the surveillance body for the CMIM. Of course, without an independent ASEAN+3 secretariat yet, ISU may take sometimes to establish and become fully operational. Second, the stance of Japan to favor ASEAN+6 instead of ASEAN+3 is, to my view , already very clear.

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