1. Thank you Chair for the excellent introduction. It is an honour to be invited to the Lee Kuan Yew School of Public Policy to share my views on ASEAN+3 financial cooperation in the last decade. Since its establishment in 2004, the Lee Kuan Yew School of Public Policy has emerged as the most prominent school of choice to study public policy in East Asia. It is a great privilege to be here, to speak to the current and future generations of leaders.
2. I was a Visiting Fellow at Princeton University’s Woodrow Wilson School of Public and International Affairs from 2002-2004. In 2002, the Woodrow Wilson School of Public and International Affairs requested that I speak on regional financial cooperation in East Asia. Thus, this is a topic close to my heart, and I am very pleased to be giving a speech today on the development of regional financial cooperation since then.
3. Before I begin, I would like to state that the findings, interpretations, and conclusions expressed in my speech represent my personal views and are not necessarily those of the ASEAN+3 Macroeconomic Research Office or its member authorities. Neither the ASEAN+3 Macroeconomic Research Office, nor its member authorities shall be held responsible for any consequence of the use of the information contained in my speech. The reason for me saying this is that our Office has not yet become an international organisation, and our capacity is thus limited. For your information, we will become an international organisation in the near future as our member economies are going through their respective domestic ratification processes, even as I speak.
4. Our Office, the ASEAN+3 Macroeconomic Research Office (also known as AMRO) is the regional macroeconomic surveillance unit of the Chiang Mai Initiative Multilateralisation (CMIM) of ASEAN+3 members. AMRO was established in Singapore as a Company (Limited by Guarantee) in April 2011, following the agreement by ASEAN+3 Finance Ministers to set up an independent regional surveillance unit to promote objective economic monitoring in 2009. The CMIM is a multilateral swap arrangement among ASEAN+3 members, which 3 became effective in March 2010, having developed from the Chiang Mai Initiative bilateral swap network.
5. AMRO and the CMIM are direct products of ASEAN+3 financial cooperation, and were born from the lessons the region had learnt from the financial crises, namely the Asian Financial Crisis and the Global Financial Crisis. My remarks today will be on the genesis and evolution of macroeconomic surveillance in the region, and its relationship with the Chiang Mai framework. I will also discuss the relationship between global and regional frameworks, and how recent events have led to a change in the way of thinking about the global financial architecture.
The Asian Financial Crisis – How it Begun
6. It is impossible to discuss ASEAN+3 financial cooperation without discussing the impact of the 1997 Asian Financial Crisis on regional authorities. To be brief, the Asian Financial Crisis started with the devaluation of the Thai baht in July 1997, followed by speculation against the currencies of neighbouring countries, namely Indonesia, Malaysia and Korea. Among these countries, Indonesia, Thailand and Korea subsequently requested for IMF-supported programmes. As it is widely known, the high social and economic costs which ensued left a deep scar, and negatively impacted relations with the IMF.
7. In September 1997, after two months of the breakout of the Asian Financial Crisis, Japan proposed to establish an Asian Monetary Fund, comprising Australia, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand, to serve as a regional currency crisis prevention fund. However, the proposal was not supported by the US and IMF. I imagine that they wanted to preserve the centrality of the global financial framework, and were also concerned that a more decentralized global financial architecture would lead to easier money with weaker conditionality for borrowing countries and therefore undercut the IMF’s so-called “conditionality”.
8. As a result, the proposal for an Asian Monetary Fund did not take off, though the thrust of the proposal, that is, the desirability of regional 4 mutual support frameworks against the reoccurrence of currency crises survived. Three years later, we can say that the Chiang Mai Initiative was created from the lessons learnt during the Asian Financial Crisis, namely (i) regional support systems had to be put in place well in advance in peacetime, and (ii) the risk of moral hazard had to be minimized, ideally through the mechanism itself.
9. It is true that there were certain shortcomings in the Chiang Mai Initiative framework at its early stage, but they were gradually remedied over the years.
Overview of the Development of CMIM and AMRO
10. As I briefly mentioned, in May 2000, ASEAN+3 Finance Ministers gathered in Chiang Mai and announced the creation of a network of bilateral currency swap agreements in order to strengthen regional selfhelp and support mechanisms. This network of bilateral currency swap agreements came to be known as the Chiang Mai Initiative, and its aim was to:
(i) address short-term liquidity difficulties in the region
(ii) supplement the existing international financial arrangements.
11. In 2005, it was announced that ASEAN+3 economic surveillance would be integrated and enhanced into the Chiang Mai Initiative framework to enable the early detection of irregularities and swift remedial policy actions, with a view to develop effective regional surveillance capabilities which would complement the existing work of international financial institutions. To put it differently, prior to 2005, there was no link in discussions on the provision of financial support under the Chiang Mai Initiative framework and economic surveillance. The recognition was that such a link was needed in order to prevent moral hazard. Also, ASEAN+3 Finance Ministers initiated a study of the Chiang Mai Initiative’s multilateralization in 2005, that is, to shift to a single agreement instead of a network of agreements.
12. Subsequently, in 2006, ASEAN+3 Finance Ministers announced the adoption of collective decision-making procedure to ensure the effective activation of the Chiang Mai Initiative swap network, which comprised of 5 16 bilateral swaps then. In that year, ASEAN+3 Finance Ministers also instructed that regional surveillance capacities were to be enhanced. Let me now turn to the lessons of the Global Financial Crisis.
Lessons from the Global Financial Crisis
13. When the Global Financial Crisis struck in 2008, no bilateral swap agreements were activated, even though some ASEAN+3 members had concluded bilateral swap lines with the Fed, which offered these in fall 2008. Also, no ASEAN+3 member requested for the IMF’s financial assistance program, such as the Standby Arrangement and Flexible Credit Line (formed in spring 2009).
14. It was during this period of great economic uncertainty that ASEAN+3 Finance Ministers gathered in Thailand in February 2009. It was five months since the outbreak of the Lehman Brothers collapse. There, they:
(i) reaffirmed their commitment to the single contract, multilateralized Chiang Mai Initiative, and
(ii) announced that an independent regional surveillance unit would be established to monitor and analyze regional economies and support the CMI multilateralization. Thus, the crisis again accelerated the work of the regional authorities to enhance the regional financial safety net.
15. The CMIM came into effect one year later, in March 2010. Two years later, AMRO was established in Singapore in April 2011.
16. The establishment of the CMIM and AMRO represent a significant milestone in ASEAN+3 financial cooperation, and illustrated two important components which deserve to be highlighted:
a. Emphasis on economic surveillance – AMRO was established with the purposes of (i) monitoring and assessing the macroeconomic status and financial soundness of the ASEAN+3 region and, (ii) contributing to the early detection of risks, ensuring the swift implementation of remedial actions and assisting in the effective decision-making of the CMIM; and
b. Importance of multilateralization – this reflected the recognition of the short-comings of the network of 16 bilateral swap agreements, 6 in particular, the feasibility of activation during times of crisis in view of the different terms and conditions of each bilateral swap agreement.
17. Considering the commonly observed slow pace of decision-making in this region due to the diversity of views and interests, I would say that the development of the CMIM and AMRO unfolded relatively quickly. It is important to note two things:
(i) one, this came about in the midst of the Global Financial Crisis and European sovereign debt crisis, which reinforced the region’s commitment to develop its own regional arrangement and surveillance unit to enhance its own self-reliance, and
(ii) two, ASEAN+3 had started to work on this since 2005.
18. In fact, ASEAN+3’s commitment to self-reliance and AMRO’s objectivity is enshrined in the AMRO Agreement. Article 2 (Purpose) states, “The purpose of AMRO is to contribute to securing the economic and financial stability of the region through conducting regional economic surveillance and supporting the implementation of the regional financial arrangement; while Article 5(c) (Operations) states that “AMRO, independently and without undue influence of any member, shall prepare such reports as it deems desirable in carrying out its purpose and functions, and communicate its views informally and confidentially to any member on any matters arising under this Agreement that may affect such member”.
Relationship between Global and Regional Frameworks
19. Having laid out the genesis and evolution of macroeconomic surveillance in the region, I would like to discuss our challenges. Today, I will talk about the relationship between the global and regional frameworks, and what this means for the global financial architecture in the future.
20. As mentioned earlier, the US and the IMF had opposed Japan’s proposal for an Asian Monetary Fund back in 1997. The recent and unfortunately ongoing European sovereign debt crisis served as a turning point in how policymakers around the world viewed the relationship between the global and regional frameworks.
21. The European crisis started from the problem of data reporting by Greece. This led to a serious deterioration of market confidence in the fiscal sustainability of Greece, and contagion spread to other countries in the Euro area. To restore market confidence, Euro area members sought the IMF’s participation in the rescue package for Greece and some other members who were in trouble. The involvement of the IMF gave rise to the so-called “troika” which comprises the ECB, EC and IMF, as the importance of coordination between regional and global frameworks became a priority.
22. In my view, the reason Europe sought the IMF’s participation was not because Europe did not have the financial resources or, the organizational capacity to solve the issue. Rather, they needed global credibility in order to restore market confidence.
23. The European crisis demonstrated the need for regional crisis prevention and crisis resolution mechanisms to be in place before a crisis strikes. It also underscored the need to strengthen surveillance and monitoring of regional financial markets, as well as to enhance data adequacy and, banking soundness supervision frameworks. These lessons were well noted by ASEAN+3, and in 2012, ASEAN+3 Finance Ministers and Central Bank Governors agreed to further strengthen the CMIM as part of the regional financial safety net by:
(i) doubling the total size of CMIM from US$120 billion to US$240 billion,
(ii) increasing the IMF delinked portion from 20% to 30%, and
(iii) introducing a crisis prevention facility. ASEAN+3 Finance Ministers and Central Bank Governors also emphasized the importance of strengthening AMRO’s role as an independent regional surveillance unit and encouraged AMRO to further enhance collaboration with relevant international financial institutions, such as the IMF.
24. Although the IMF had opposed the establishment of a strong regional initiative back in 1997, through the experiences from the European crisis, the IMF is now keen to establish a close cooperative relationship with regional financial arrangements. The IMF has also recognized that regional surveillance contributes to global economic stability and this has fostered closer ties between the global and regional frameworks.
25. A noteworthy indication of this change is evident in the endorsement of the use of regional financial arrangements as part of the global financial architecture by the IMF and G20. In 2010, the IMFC spoke of the importance for the IMF to cooperate with regional frameworks. In 2011, the G20 endorsed a set of broad and non-binding principles for cooperation between the IMF and regional financing arrangements. In 2013, the IMF and G20 convened a seminar “Regional Financial Arrangements: RFA’s Role in International Financial Architecture and their Cooperation with the IMF” at the sidelines of the IMF and World Bank Spring Meetings.
26. In a sense, AMRO is fortunate that it was established as the European crisis was unfolding and that there was greater willingness on the part of the global framework to cooperate with regional frameworks. In fact, despite the critical situation in Europe, both the EFSF and ESM have been forthcoming in helping us improve our organization through the exchange of best practices, for example. If AMRO had been established a decade earlier, it might have faced strong opposition, like the idea of the Asian Monetary Fund, and would not have gotten the support from regional peers.
27. While the acceptance of regional frameworks into the global financial architecture is a significant milestone, the inherent challenge of integrating the various frameworks – bilateral, regional and global – in a more decentralized world remains. Thus far, the global conversation has been on broad, non-binding tentative principles and guidelines. Important questions, such as how to coordinate surveillance, and the multilayered financial safety nets need to be answered. It is a coincidence, but last night, IMF MD Lagarde said the same thing – that coordination between the global and regional frameworks need to be improved. In East Asia, collaboration between the global and regional financial safety nets also remains very important. Indeed, the European crisis has reminded us of 9 the importance of ensuring good coordination among the different layers of financial safety nets in order to effectively cope with crises and ensure adequate firepower. This is a near term challenge for the CMIM and AMRO.
28. CMIM and AMRO will also have other challenges going forward. I would like to mention four major challenges today.
29. The first one revolves around the subject of how to ensure institutional memory of the CMIM. Currently, the CMIM has no permanent secretariat. Instead, the so-called “Co-Chairs”, one selected from the Plus 3 countries, namely China, Japan, and Korea, and the other one selected from the 10 ASEAN countries, are expected to function as the secretariat for the CMIM’s operations. The Co-Chairs change every year, rotating in alphabetical order within the ASEAN+3 group.
30. One issue I would like to point out regarding this current system of annual rotation of the Co-Chairs is the cumbersomeness and difficulty in preserving institutional memory. The current system could place a too heavy workload on the shoulders of the Co-Chairs. CMIM members could consider entrusting the institutional memory function to a certain organization, which comprise of a group of experts who have sufficient professional knowledge and experiences in the area of the CMIM, international monetary system, and other related fields. AMRO is willing to accept such a role if the CMIM members so decide.
31. The second challenge is about expanding the scope of business of AMRO. While great efforts have been made to improve the quality of AMRO’s surveillance products during the last four years, there is still room for further improvement. During the course of our surveillance activities in the last four years, we have observed that improving data adequacy of member countries is one of the key areas for further improving the quality of our surveillance products. The experience in Europe, where the crisis started with the problem of data reporting by Greece, has also given emphasis to the importance of this task. Indeed, several member countries have requested for AMRO to help them improve their capacity for producing macroeconomic and financial 10 statistics, in particular BOP statistics. As part of our efforts to further improve the quality of our surveillance products, AMRO has started the feasibility study for establishing our own framework to provide technical assistance to member countries.
32. The third challenge for the CMIM and AMRO going forward would be to continue to explore measures to enhance the CMIM. Taking the size of the CMIM, for example. It is closely related to the reality of our global economy – for example, regional macroeconomic policy and the level of foreign reserves. CMIM is also a type of insurance, so questions such as ‘how much is enough’ are what we need to keep asking ourselves. I think that this would depend on the global economic situation.
33. Another way of enhancing the financial capacity of the CMIM would be to use local currencies in extending financial support under the CMIM. Apparently, this can be done without increasing the size of the USD holding in CMIM members’ reserves, while posing questions of its effectiveness.
34. Finally, let me briefly touch on one issue that needs to be discussed in a medium to long-term horizon. Under the current CMIM mechanism, members are obliged to exchange letters of commitment to provide actual USD liquidity support or swap line when CMIM is actually activated, but the exchange of letters of commitment itself does not involve any lending or borrowing of the USD between members, and no USD is centrally pooled under the current CMIM system for its activation. This is consistent with the agreement in 2007 to have a self-managed reserve pooling arrangement, instead of a centrally pooled system. While the current self-managed system has merit in producing efficiency in reserve management, central pooling of a certain portion of the USD holding could enhance assurances of financial support under the CMIM and contribute to quicker provision of the USD liquidity. The benefit of central pooling will increase if we accumulate experiences in activation of the CMIM. I think that this issue would warrant attention and consideration by CMIM member countries in the medium to long run.
35. As I mentioned at the outset, I was invited to give a speech “An Unexpected Outcome of the Asian Financial Crisis: Is ASEAN+3 a Promising Vehicle for East Asian Monetary Cooperation?” at Princeton University’s Woodrow Wilson School of Public and International Affairs thirteen years ago. I commented on the slow progress at that time in regional surveillance, which was a challenge which the region had to address in order to give its regional framework ‘teeth’. I observed that “governments in the region have not done much to promote and enhance the policy dialogue process. They are not capable of defining their own policy conditions for swaps, nor has a permanent institution been established”.
36. Today, I stand before you and am very pleased to report that ASEAN+3 authorities have successfully set up its own permanent institution to this end. I would like to qualify that my appointment as AMRO Director is just a coincidence, and not because of my speech thirteen years ago. AMRO is now a reality, and enjoys the strong support of members legally, financially and in terms of human resources. ASEAN+3 authorities’ commitment and support to our Office has been overwhelming, and has spurred us to accelerate our efforts to sharpen our macroeconomic surveillance analysis, and to better support the CMIM mechanism design and strategy in view of the evolving global economic challenges.
37. Over the last four years, we have tried our best to give ‘teeth’ to regional macroeconomic surveillance. It is true that we have received very critical comments from member authorities from time to time. It has certainly brought about more lively policy discussions among ASEAN+3 policymakers, and has hopefully contributed to the prevention of crises.
38. It is therefore important for ASEAN+3 authorities to continue studying the long term agenda of AMRO and the CMIM. The road ahead will not be easy, but I have confidence that ASEAN+3 authorities will be able to tackle this issue effectively. The good progress made since 2009 is a testimony to their dedication and determination to strengthen the resilience of the ASEAN+3 region, and to ensure strong, sustainable growth and prosperity for all.
39. Before concluding, I would like to once again state that the findings, interpretations, and conclusions expressed in my speech represent my personal views and are not necessarily those of AMRO or its member authorities. Neither AMRO, nor its member authorities shall be held responsible for any consequence of the use of the information contained in my speech.