Resilience and Vigilance: AMRO’s Perspectives on Regional Financial Cooperation
Dr Junhong Chang, AMRO Director
Seminar: “Twenty Years After the Asian Financial Crisis: Achievements and Ways Forward”
4 May 2017, Yokohama, Japan
(As prepared for delivery)
Dear Minister Kihara san, distinguished panelists and colleagues,
Good morning. It is my great honor to be invited to address such a distinguished gathering here today. I would like to start by expressing my appreciation to the Ministry of Finance of Japan, and to the ADB, for co-hosting this seminar together with AMRO, and for the excellent arrangements here today.
Building Resilience after the Asian Financial Crisis
For many of us here today, the Asian Financial Crisis is a landmark event in our region’s history that shook up conventional wisdom of how a crisis can start and spread, and on how – and how not to – manage a crisis. The Asian Financial Crisis jump-started regional financial cooperation and indeed, laid the seed for the establishment of the ASEAN+3 Macroeconomic Research Office (AMRO) a decade later. But before I offer my thoughts on this topic, let me first pay tribute to our distinguished panelists today, who bore heavy responsibilities in crisis management during that turbulent period. I salute them for their resolve and their contributions in steering our region with a steady hand during the crisis.
The Asian Financial Crisis, at that time, was a “new” kind of crisis that has become the norm when we think now about what a crisis is. Whereas the policy focus in the late 1980s to early 1990s was on crises stemming from fiscal deficits and high inflation, the Asian Financial Crisis placed our policy focus squarely on the risks arising from financial markets, balance sheets vulnerabilities, and capital outflows. In addition, the Asian Financial Crisis highlighted the speed and impact of contagion between economies, and caused a vicious cycle as economic fundamentals deteriorated with financial contagion.
The international financial architecture twenty years ago was not equipped to deal with this type of crisis. In particular, the IMF was set up to provide policy advice and financial support on how to close a financing gap resulting from excessive spending but was not set up to deal with issues of plummeting investor confidence and capital outflows. Indeed, many have pointed to the adjustment programs and the associated stigma as exacerbating the loss of confidence. The calls for reform and for broader representation in global financial decision-making led to a revamp of the international financial architecture, with new entities created that are still with us today. Examples are the Financial Stability Forum, which evolved into the Financial Stability Board, and the new G-20 process for finance ministers and central bank governors that became a Leaders’ process after the Global Financial Crisis. Existing standard-setting bodies, such as the Basel Committee on Banking Supervision, also reviewed their frameworks, learning from the Asian and subsequently the Global Financial Crisis.
In tandem with these reforms at the global level, the crisis-hit economies in our region were also undertaking fundamental adjustments after the Asian Financial Crisis, which enabled them to weather the Global Financial Crisis well. Our economies developed more robust monetary policy frameworks against external shocks; undertook financial, fiscal and structural reforms; and adopted macroprudential measures to deal with financial vulnerabilities. These reforms were painful and difficult – and our panelists here would know first-hand how difficult they were to push through politically – but they were necessary. These more responsive policy frameworks allowed our region to remain open to capital inflows that surged after the Global Financial Crisis, and to benefit from the rising tide of growing regional trade and investment integration.
Remaining Vigilant Against Global Policy Uncertainty
Today, twenty years after the Asian Financial Crisis, our region is more confident than before, in its resilience, its capacity for growth, and its macroeconomic policy management. The ASEAN+3 region comprising the ten ASEAN countries plus China (including Hong Kong), Japan and Korea, has expanded to become the largest economic bloc in the world, accounting for more than a quarter (27%) of world GDP in 2016 (at market exchange rates) and almost 30% of global trade. The region has contributed substantially to global demand and growth, especially in the past five years after the Global Financial Crisis, when the region contributed around half of world economic growth.
At the same time, policymakers in the region remain vigilant against external shocks, in view of the significant global policy uncertainty that we now face. The threat of rising trade protectionism in the U.S. continues to dampen the export outlook for our region. With an uncertain trade outlook, economies in the region have to continue rebalancing their growth modality from export-led to domestic demand-led growth, in order to achieve broad-based, robust and sustainable growth in future. With tightening global monetary conditions led by the U.S. Fed rate hike cycle, AMRO would advise to prioritize financial stability in the balance between economic growth and financial stability.
The current global uncertainty is a challenge to the macroeconomic management capacity of the diverse economies in the ASEAN+3 region. I am sure that our distinguished panelists have much wisdom and experience to share with us, and I would like to pose some questions for discussion:
- First, in the midst of many external and domestic pressures, how can policymakers best maintain policy discipline and build resilience in their economies against risks?
- Second, how can our region collectively enhance policy cooperation and speak with one voice against threats such as the rise in trade protectionism and other risks?
- Third, how can economies maintain a steady potential growth trajectory with rising productivity, given the near-term challenges mentioned above, and also structural challenges such as ageing populations?
A Robust Regional Safety Net to Support Regional Integration
Let me conclude with AMRO’s perspective on regional financial cooperation. The ASEAN+3 region has reaped tremendous benefits from regional integration while at the same time, remaining open to the rest of the world – in what I would call “regional multilateralism”. Businesses have found it profitable and worthwhile to form global value chains within the region, and policymakers have supported private sector initiative by creating more physical infrastructure linkages and reducing regulatory barriers. This momentum in trade and investment integration has occurred organically, with support from policy actions, and is something to cherish and safeguard. I would like to propose that having a robust regional safety net is a natural outcome of greater regional financial cooperation and integration, and indeed, is an important element to safeguard the fruits of regional integration.
This idea of “regional multilateralism” can be applied to safety nets as well. As Director of AMRO, I am often asked how we see regional safety nets co-existing with the global safety net centered around the IMF. Certainly, the stigma of borrowing from the IMF during the crisis period motivated the ASEAN+3 countries to set up the Chiang Mai Initiative in 2000, a loose network of bilateral swaps between central banks that was multilateralized into the CMIM in 2011. I would emphasize, however, that we do not see AMRO and CMIM as replacing the IMF in terms of surveillance and financing. Since the Asian and Global Financial Crises, the IMF and the ASEAN+3 region have both changed and evolved. Taking the lessons from the Asian Financial Crisis to heart, the IMF has become more transparent and accountable. It has sought feedback from its members and reviewed its policy advice in programs and lending facilities. ASEAN+3 economies, on the other hand, have strengthened their macroeconomic fundamentals, built up buffers, and become more confident of their ability to manage risks and external shocks. AMRO was set up in parallel to provide the necessary secretariat and intellectual support to the CMIM so that it is operationally ready at all times.
As the product of regional financial cooperation, I can assure you that AMRO will continue to be one of the “anchors” to advocate for greater regional cooperation and integration. In my view, in this current uncertain global environment, policymakers’ affirmation of their commitment to regional economic and financial cooperation would help anchor market expectations and provide a solid foundation for the region’s continued growth and development. With this, I look forward to learn from our distinguished panelists, and I wish you all a stimulating and insightful discussion.
Thank you very much.