Author: C. Randall Henning, American University
European debt crises and the expansion of international financial arrangements during the global financial crisis have dramatically elevated the importance of cooperation between regional institutions and the International Monetary Fund.
While the case for coordination between regional and multilateral institutions is generally accepted, the need to organize it on an ex ante basis is not fully appreciated. The relatively successful cooperation among the European Commission, European Central Bank and IMF on recent financial rescues is not likely to be easily replicated in joint programs for countries in other regions, and the costs of coordination failure could be very large. As ASEAN+3 officials meet around the annual meetings of the Asian Development Bank in Hanoi in early May, they would do well to lay the foundation for a solid working relationship between their newly strengthened regional financial and surveillance mechanisms and the IMF.
Although the IMF has coexisted with various bilateral, regional, and other multilateral financial facilities for decades, three developments prompt a reexamination of its relationship with regional financial facilities now. First, ASEAN+3 has made the Chiang Mai Initiative Multilateralisation (CMIM) operational and is now creating its new surveillance unit, the ASEAN+3 Macroeconomic Research Office (AMRO), in Singapore. Second, as evidenced by the European debt crises, the stakes in mixed rescue packages have now become enormous. Third, the IMF has conducted a review of its own financial facilities, expanded their scope, and launched an effort to engage regional financial arrangements through them.
The case for cooperation among regional financial arrangements and the IMF rests principally on four rationales. First, the existence of multiple institutions lends itself to forum shopping and institutional arbitrage. Competition among institutions might be desirable in some areas, but this does not extend to specification of the adjustment measures that might be necessary in country programs; coordination avoids institutions’ attaching conflicting conditions to their financial support. Second, while some redundancy might be desirable, any duplication should be deliberate and minimised. Third, interinstitutional coordination helps to ensure that resources provided at one level are additional rather than a substitute for resources provided at the other. Finally, there are mutual gains to be derived from division of labour and specialisation along lines of comparative advantage at the two levels.
The IMF and European institutions have successfully cooperated on joint programs in Central and Eastern Europe, Greece, Ireland and now Portugal. But that cooperation has been ad hoc and forging it in the heat of crises is becoming increasingly risky. When the Greek crisis struck, European authorities struggled over whether to respond on a regional basis or jointly with the IMF. The delay in turning to the IMF during February–April 2010 was expensive: The size of the Greek package required to calm the markets rose from about €30 billion to €110 billion and a package that was roughly equivalent in size to the United States’. Troubled Asset Relief Program (TARP, which was $700 billion) became necessary in an effort to stem contagion elsewhere in the euro area.
Cooperation between the Fund and the European Union is not likely to transfer easily to cases outside Europe. Europe is well represented in the IMF—many would argue that it is overrepresented even after recent reforms—and Europeans still dominate the Executive Board numerically. The present managing director is not only a European but, as the finance minister of France during the launch of the euro, was integrally involved in the construction of the institutions of the monetary union. These factors greatly facilitated EU-IMF cooperation but also distinguish Europe from the other regions.
Although East Asia has been relatively isolated from the financial problems afflicting the euro area, and standard balance-of-payments problems are likely to be rare, ASEAN+3 officials would be wise to prepare a contingency plan for financial instability generated by asset-price bubbles, over-extended financial institutions and volatile capital flows. Such a plan would involve the IMF’s cooperation with AMRO and its cooperation with CMIM.
AMRO has the potential to bring added value to the surveillance of member countries above and beyond what the IMF already offers by providing contrasting assessments of vulnerabilities within the region and updating them more frequently than the annual cycle for IMF Article IV consultations permits. Providing a greater sense of regional ownership, AMRO might permit Asian officials to be more candid with one another than in the presence of officials from outside the region.
Nonetheless, at least at the outset, AMRO could well face significant resource and information constraints and will consequently benefit from associating with the IMF in a couple of ways. First, the IMF can provide technical advice during the establishment of AMRO, just as the ADB, ASEAN secretariat and other Asian institutions are also likely to do. Second, the IMF can brief the ASEAN+3 deputies at their surveillance discussions from time to time, as it has done in the past. Third, AMRO would do well to consult with the Fund on the timing, sequencing, and even the substance of the Article IV consultations, perhaps going so far as to join the Fund’s surveillance missions.
Cooperation between the IMF and CMIM is already bolstered by the ‘IMF link’, the provision under which 80 per cent of the funds available from the ASEAN+3 partners would be tied to the borrower negotiating an adjustment program with the IMF. Before any joint program were possible the IMF and ASEAN+3 officials would have to establish clearly the channels of communication and decisionmaking process for approving it, as well as the negotiating modalities, terms of lending and mechanism by which they would resolve conflicts over any of these matters, including policy conditionality.
The IMF and ASEAN+3 have made progress on this agenda, but practical cooperation will require further movement. The IMF has moved toward addressing Asian preferences by creating the Flexible Credit Line (FCL) and Precautionary Credit Line (PCL), among other reforms. ASEAN+3 could take another step forward by deciding that a member’s qualification for an FCL or PCL by the standards of the IMF would satisfy the IMF link, making the member eligible for disbursements under CMIM. ASEAN+3 officials should also clarify how they collectively represent themselves to the IMF and other third parties.
Some ASEAN+3 officials wish to build an “Asian Monetary Fund” that could underpin regional financial stability without relying on the IMF and they might eventually succeed in this long-term project. Although CMIM and AMRO provide a foundation on which to build, they are not yet sufficiently endowed to provide the functional equivalent of an AMF. Even Europe’s comparatively robust regional institutions have been insufficient to obviate resort to IMF assistance. The IMF, for its part, has a strong incentive to work with East Asian partners to ameliorate the stigma associated with it since the late 1990s. Ironically, therefore, the futures of the IMF, CMIM and AMRO now depend on cooperation among them.
Randall Henning is Professor of International Economic Relations at American University and Visiting Fellow at the Peterson Institute for International Economics. This essay is adapted from the recently released report, Coordinating Regional and Multilateral Financial Institutions issued by the Peterson Institute for International Economics with the support of the Asian Development Bank (project 7501).