The agreement on contributions is significant, it is said, because China and Japan will both contribute 32 per cent. In previous regional agreements, like capital subscriptions to the Asian Development Bank, China had always been treated as a second-rate power and asked to contribute less. Indeed, China had shunned Japan’s 1997 proposal to create an Asian Monetary Fund precisely because it worried that it would play second fiddle.
That China is now acknowledged as a co-equal means that it will not stand in the way of further co-operation.
Also significant, we are told, is the agreement to make decisions by simple majority, with countries’ votes to be roughly in proportion to their contributions. This means that no single country can block action, in contrast to the IMF executive board, which makes decisions by consensus, giving large countries like the US de facto veto power.
But do these new rules really matter? Disbursing more than 20 per cent of the credits available to a country still requires that it first reach an agreement with the IMF, and 20 per cent of a country’s entitlement is actually less than it contributes to the pool. This would appear to nullify the very purpose of the arrangement, which is to free Asia from the IMF. While there is a plan to raise and then eliminate the 20 per cent threshold, this is left to some future, unspecified date.
The reason for the contradiction is straightforward. Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid.
But regional neighbours find it hard to criticise one another’s policies and demand course corrections. Political sensitivities run especially high in Asia. Even in Europe, with its long history of co-operation, surveillance and conditionality are outsourced to the IMF. Revealingly, the Fund, not the European Union, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia.
Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another’s policies and to demand difficult policy adjustments. Here ASEAN+3 talks the talk. Its May agreement included a commitment to establish a regional surveillance unit.
But there is no agreement on where to situate it or how to staff it. It could be placed within ASEAN’s Secretariat in Jakarta. It could be placed inside the Asian Development Bank in Manila. It could be given to the “neutral” Northeast Asian country, Korea. The outcome matters – which is why governments are fighting over it. Recall how the fateful decision to situate the IMF in Washington, DC enhanced the influence of the US Treasury just down the street.
These dilemmas can be finessed by giving both surveillance responsibilities and the actual power to disburse funds to an independent board insulated from national politics. Its members, with statutory independence and long terms in office, could function like the monetary policy committee of a central bank.
They could issue a Financial Stability Report that bluntly flags weak policies and financial vulnerabilities. And they could demand policy adjustments as a condition for disbursing funds. The IMF could then be shown the door.
This scheme wouldn’t solve all of Asia’s problems. But it would at least head off one danger, namely the urge to accumulate even more reserves.
Recent volatility reinforces this temptation. If Asian countries succumb, global imbalances and all their associated problems will return. Pooling regional reserves as a way of making them go further is a better alternative. But making this vision a reality requires further bold thinking.
Barry Eichengreen is Professor of Economics at the University of California, Berkeley.
This article was first published at Project Syndicate
In terms of location for such an Asian financial institution, Hong Kong may be a good candidate.
Although Hong Kong is part of China, it and Macau all have a special status of special administrative regions in China. It requires “Hong Kong” Visa to visit and even mainland Chinese people are not free to visit without an appropriate travel document.
It was a British colony for a long time. It is a more neutral place than any other places in East Asia.
Hong Kong has also been a regional financial centre. So there are both physical and human infrastructures there. It is also located in the middle of East Asia geographically.
Why not make Hong Kong a permanent place for Asian institutions? Why not China and other countries negotiate to make Hong Kong such a neutral place for all Asians to benefit, with China retaining its sovereignty, but otherwise letting Hong Kong be a place as it is now for the future to come?
With huge land, it could be possible for China to make more land available for such a special region.
I think all stakeholders should consider Hong Kong as a perfect candidate.
I have two additional comments. The first one is about the voting mechanism and the other on policy monitoring.
Firstly, on voting mechanism. While the majority voting mechanism is better and more efficient than consensus, it still does not have a strong feel of a close community, if it is based purely on countries’ shares of their contributions.
A better voting mechanism would be able to balance two important things. First, it recognises countries’ contributions so to be accountable. Second, it can foster a closer community feel and recognise each member country as an important constituent.
In that light, an alternative voting mechanism to the purely share based majority voting is to have a combination of this voting with a simple country member voting, as I have proposed elsewhere. That is to say, for example, to have the contribution based voting for half of the total vote and the other half to be determined by the number of member countries.
If this alternative voting mechanism is adopted, any country irrespective whether it has contributed to the funds or irrespective to its size will have a vote for half of the total vote. This will make every country more respectable and thus will be more democratic. At the same time, the contribution of any country is also valued and its interest is reflected in the voting.
Secondly, on policy monitoring. Rather than handing this role to IMF bureaucrats that have little to do with this Asian institution, why not outsourcing it to an independent research or academic institution to do it? Such an institution could organise a group of eminent people from the region with the relevant expertise to undertake that monitoring task.
It does seem that the CMI is a vehicle to build an Asian Monetary Fund by stealth and thus to de-link Asia from the IMF. Only it is not terribly stealthy. Eisaku Sakakibahara who proposed the first AMF has talked at length (both in English and Japanese) about his aspirations for the CMI, to whit the realization of the AMF. But if this is Japan’s intention, which it seems very likely that it is, I am unsure that others in the region share quite the same dream. Institutionalizing the CMIM into an AMF will take time. And this is for the same reason that the AMF proposal did not come to fruition back in 1998, namely concerns about Japan dominating the body and using it to lock-in its current financial advantages. So the challenge of the CMIM to the IMF’s relevance and centrality is only potential and not actual. But the CMIM is still a threat, and thus should be perhaps understood as a warning shot across the bow of the IMF.
With regard to the last paragraph, I am not sure, but I think that the CMIM is not in fact designed to make the foreign reserves of its membership (in particular China and Japan) go further necessarily. It seems as the motivation rather lies with the excess of USD in their central banks and CMIM members (esp. Japan and China) looking for new and creative ways to use/unload them. I would invite comment here.