Anyone near the corner of 18th & K Streets last week would immediately align themselves with remarks attributed to Singaporean leader Lee Kuan Yew regarding air conditioning’s role as the breakthrough technology that helped transform Southeast Asia’s post-colonial commodity-dominated economies into some of the world’s fastest-growing financial and industrial markets.

In addition to enabling ASEAN leaders’ economic plans to be realized, nuclear power can play a significant role providing electricity for running those air conditioners. Adopting safe new-generation nuclear power plants should be a major area for U.S.-ASEAN cooperation. It is an effort that supports our mutual economic and national security interests.

There is no operational nuclear power plant in ASEAN today. However, of the 10-member nations comprising ASEAN, all except Brunei and Laos have active plans for adding nuclear power into the electricity generating mix. In terms of scale, Vietnam has the most aggressive nuclear power ambitions. It recently announced plans to build eight plants by 2030, producing 15,000 to 16,000 megawatts (MW) of electricity. Indonesia plans to have four nuclear plants producing 6,000 MW by 2025. Thailand has plans to develop two nuclear plants to generate 2,000 MW by 2022. Singapore, which generates the majority of its power from increasingly scarce gas, has a feasibility plan for nuclear power under way. Other countries are developing similar plans.

Nuclear power is an important option for ASEAN, whose electricity demand is estimated by the International Energy Association (IEA) to increase 76 percent between 2007 and 2030 at an average annual rate of 3.3 percent growth, compared to an estimated 2.5 percent annual growth in demand in the rest of the world over the same period. Meeting the ASEAN countries’ electricity demand will require investing more than $1.1 trillion in the next 25 years.

Contemplation of nuclear energy for ASEAN countries is not new, but today, with growing demand for imported fossil fuels and concerns over the environment, it is much more serious. ASEAN nations are bound by the Treaty on the Southeast Asia Nuclear Weapon-Free Zone signed in Bangkok, opened for signature on December 15, 1995, and entered into force on March 28, 1997. The treaty states that there will be no prejudice toward the peaceful use of nuclear energy (Article 4). It also states that prior to embarking on nuclear programs, political buy-in is needed from the International Atomic Energy Agency (IAEA) and from other ASEAN nations.

Nuclear nonproliferation concerns and safeguards will be very important as ASEAN proceeds in developing its nuclear power capabilities. Only one ASEAN country, Burma/Myanmar, is alleged to be developing any plans for nuclear weapons. Those allegations are being investigated by the IAEA and are denied by Burma’s military leaders.

Under the Nuclear Non-Proliferation Treaty (NPT), the IAEA established safeguard standards suitable for application to both simple nuclear activities and to complex nuclear fuel cycles, i.e., a system applicable to reactors and to conversion, enrichment, fabrication, and reprocessing plants that produce and process reactor fuel. Under IAEA guidelines, when a safeguards agreement enters into force, a state has an obligation to declare to the IAEA all nuclear material and facilities subject to safeguards under the agreement. The state must update this information and declare all new nuclear materials and facilities that subsequently become subject to the terms of the agreement. (Source: Treaty on the Non-Proliferation of Nuclear Weapons entered into force on March 5, 1970, as amended and date signed).

The IAEA has clear accountancy and monitoring rules for tracking declared nuclear material. To be effective, this system requires a high level of confidence, trust, and transparency. These are guidelines ASEAN governments would have every interest in following, but strong engagement from the international community would be helpful. In fact, there is already a strong alliance between the United States and Japan in the new nuclear power plant designs.

ASEAN nations must also negotiate bilateral civil nuclear cooperation agreements with the nuclear supplier countries (including the United States, Japan, France, Russia, Canada, and Australia, among others) before they can receive nuclear reactors, fuel, equipment, services, and technology. Some ASEAN countries already have such agreements in place. As part of this process, ASEAN countries will need to demonstrate their commitment to maintaining international standards of nuclear safety, security, and nonproliferation.

Given the Obama administration’s interest in building international partnerships and consensus on nuclear nonproliferation and climate change, and the president’s commitment to engage ASEAN at new and substantive levels, the nuclear energy field seems a logical area for immediate and expanded cooperation. This engagement is also consistent with the Obama administration’s goal of doubling U.S. exports in the next five years. American companies are among the world’s leaders in various aspects of nuclear power from design/build to energy-related services, but face stiff competition from France, Russia, and Japan. Further, the president has capable leaders to lead this effort. Dr. Stephen Chu, the U.S. secretary of energy, has a strong technical background and mandate to work on related issues. President Obama could initiate this process in the broader context of U.S.-ASEAN energy cooperation, which could include a wide range of issues from renewable energy to energy conservation. One format for such cooperation could be a U.S.-ASEAN Energy Bilateral that would be a step toward the U.S. energy secretary participating in the annual ASEAN Ministers for Energy Meeting (AMEM).

As the mercury rises inside the beltway, U.S. policymakers would be wise to take the opportunity to stay indoors, hydrate aggressively, and open a new chapter of U.S.-ASEAN cooperation on nuclear power. The initiative would serve both ASEAN’s and America’s economic and national security requirements.

This article first appeared here at CSIS.

Ernest Z. Bower is Senior Adviser and Director of the Southeast Asia Program, Center for Strategic and International Studies, Washington.

1. Japan’s nuclear crisis sparks concerns over nuclear power in China
2. Nuclear power and spent fuel in East Asia: Balancing energy, politics and nonproliferation
3. Rethinking nuclear power in Asia after Fukushima

China has come to occupy a prominent position on Malaysia’s trade agenda over the past few years and is now Malaysia’s fourth largest trading partner. China currently accounts for about 11 per cent of Malaysia’s global trade, lagging behind the likes of the US, Japan and Singapore.

This was not always the case. Between 1995 and 1999, only about three per cent of Malaysia’s exports moved towards China. Today, about ten per cent of Malaysia’s exports are destined for China. Only about two per cent of imports came from China in 1995, but more recently they have shot up to close to 13 per cent.

With trade figures that are galloping along at this rate, it is easy to see how China cannot be ignored by policy makers and the business community in Malaysia. The ASEAN-China Free Trade Agreement (ACFTA) that was implemented on 1 January 2010 only adds more sparks to these racy developments.

With the introduction of the ACFTA, Malaysia can expect more benefits to pour its way from China. But there is no guarantee that Malaysia will experience unalloyed gains from the ACFTA. Malaysia does not have China’s advantage of an abundant low-cost labour force, and the subsidies that China’s manufacturers enjoy may add to this surplus labour equation. The outcome can be felt even now, with companies in Malaysia feeling the effects of Chinese competitors. Manufactures of industrial valves and steel fasteners are examples of such voices from Malaysia, and they are by no means isolated.

The solution would be for Malaysia to resort to more knowledge-intensive, higher value-added production processes. This is easy to suggest but may be very difficult to implement, at least in the short run. The valve manufacturers in Malaysia have intuitively grasped this problem and are shifting to water valves which require greater technological sophistication. If these companies are to remain competitive, they have to shift to products where they will not be in direct competition with their Chinese counterparts. This is hardly a subtle point, since similar low-technology products from China are between 15 and 20 per cent cheaper than those produced in Malaysia.

The imperative to move up the value-chain, to invest in technological upgrading, and to produce goods that require knowledge-intensive production methods is garishly written all over the wall. As it stands, the major products that are exported to China from Malaysia, using preferential market access under the ACFTA, are agricultural commodities. Compound rubber, mixed vegetable oil, stearic acid and crude palm oil are among these products. In 2008 they were valued at US$1.9 billion worth of exports. This is no trifling sum.

The export of low value-added products may not continue indefinitely. It is likely that the FTA and provisions that are made under the agreement on investment will expedite China’s interest in locating its interests in Malaysia. Perhaps the first investments likely to be considered are those that will process and add value to raw materials and primary commodities. It will make sense to the Chinese to have their own factories in Malaysia to process these commodities and to push them up the value chain.

Events such as this will direct the flow of investments from China into Malaysia. By the same stroke they will also drive up the threshold of competitiveness in Malaysia. While Malaysia will gain from increased trade with China and also from the inflow of direct investment into the country, the ACFTA may also have the effect of edging Malaysia to reconsider its competitiveness in various sub-sectors. The net effect may well be positive, but the transition could be uncomfortable unless Malaysian business and policy makers act proactively.

Shankaran Nambiar is Senior Research Fellow and Head, Policy Studies Division at the Malaysian Institute of Economic Research.

1. Will ASEAN benefit from the ASEAN-China FTA?
2. Foreign direct investment in China: trading competitiveness for access?
3. India and ASEAN: an FTA and beyond

This post looks at the interaction between economic and political institutions.

A theoretical study of a simple strategic complementary game with private and public information among partially informed agents such as central banks shows that initial fundamentals might give rise to different levels of transparency. Empirical studies show that both the economic fundamentals of a country, (such as the reserve ratio of broad money to foreign exchange reserves) and the non-economic fundamentals of a country ,(such as its level of democratisation or its experience through a financial crisis) affect the transparency of central banks. Using this type of analysis when looking at the coordination effect of information in East Asian financial integration, it is found that East Asian financial integration might depend more on political circumstance than on economic fundamentals.

There is currently a need for an independent regional surveillance institution. This would enable the activation of Chiang Mai Initiative (CMI) credit lines, the first step towards East Asian financial integration. The current Economic Review and Policy Dialogue has been unable to perform as a surveillance function as it is staffed by officials who often feel that revealing financial data is sensitive and typically refrain from pointing fingers at wrong-doers.

An independent surveillance institution could also set a precedent for broader East Asian financial integration. Financial integration among the ASEAN+3 countries currently faces sovereignty and political issues. Based on the Bali Agreement, signed in May this year, the ASEAN+3 countries have already created a panel of experts assisted by the ASEAN secretariat and the Asian Development Bank (ADB). Eventually the ASEAN+3 countries will need their own regional surveillance institution, with its own secretariat that can extract the CMI program from the IMF surveillance process.

An independent surveillance institution can overcome the institutional issues facing ASEAN+3 financial integration. Sovereignty and political issues that the ASEAN+3 countries are currently facing are much more difficult to overcome (than economic issues). Political reforms and democratisation can take decades. To bypass poor political fundamentals that affect the transparency of economic institutions, the introduction of an independent surveillance institution is more efficient than trying to solve sovereignty issues and institute political reforms. If the decision to reveal financial data is left to the discretion of senior officials representing individual countries, they may never reach a level of fiscal transparency sufficient for a program such as CMI credit lines, which are essential for regional financial integration. This aversion to transparency might be abated by the reputation effect. Some of the ASEAN+3 countries are still non- or only partially democratic. Moreover, there is a collective action or a free-rider issue in that no country wants to be the first to become financially transparent even though a broad regional movement towards transparency would make individual nations better off.

Empirical evidence shows that countries that have experienced a financial crisis are more likely to have higher levels of transparency, supporting the conjecture that individual countries do not self-interestedly seek to reveal information: there must be some incentives for them to do so. Hence, if an independent regional surveillance institution can be fully established, it will be a significant step towards institutionalizing an East Asian financial arrangement. Furthermore, transparency through an effective independent regional surveillance institution has a multiplier effect because with such an institution, regional financial arrangement can be institutionalized, which increases economic fundamentals, and this in turn, can increase the incentive for transparency.

Maria Monica Wihardja is an Associate Member of the Centre for Strategic and International Studies, Jakarta (CSIS), and a lecturer at the University of Indonesia.

For further reading see Maria’s full paper on the topic here [pdf].

1. The ASEAN Charter and remodeling regional architecture
2. The ASEAN Regional Forum is a dead-end, so what?
3. ASEAN+8 – A recipe for a new regional architecture

India has recently signed a free trade area (FTA) agreement with the ASEAN nations (Brunei, Singapore, Cambodia, Indonesia, Malaysia, Laos, Myanmar, the Philippines, Vietnam and Thailand). The agreement allows for the reduction of tariffs on so-called highly sensitive items, and special products including palm oil, pepper, coffee and black tea by 2019. Tariff rates on sensitive items with the five ASEAN member states most important to India’s trade system will be reduced gradually until 2016. Tariff rates on Normal Track 1 items will be reduced, and finally eliminated, by 2013, and by 2016 for Normal Track 2 items. Other countries in ASEAN like Cambodia and Myanmar receive three to five years longer to achieve the same tariff goals. There is also an exclusion list, which will be reviewed every year.

According to the study done by ICRIER on this subject in relation to exports to ASEAN countries, it emerged that unlike few other trading blocks, the overall trade of India to ASEAN has not been trade diverting. This is in keeping with the spirit of WTO norms, and thus is expected to further strengthen the multilateralism. Furthermore, from 2000-2008, ASEAN member states’ trade with the rest of the world has doubled (fig1). Thus, the increase in trade between India and ASEAN should be considered in conjunction with the expansion in multilateralism—which is the ultimate goal of a world economy seeking to achieve the optimum level of economic welfare.

Contemporaneously, intra-ASEAN trade has increased from US$ 180.99 billion to US$543.37 billion in 2008—an average annual increase of 18.6 per cent. These figures are impressive, and should provide an indication of what further potential may exist in the region, provided interested parties, like the government of India, take care to expediently defuse any future challenges. It is also true that trade with countries outside ASEAN is more important than intra-ASEAN trade relations for the collective growth and economic welfare of the ASEAN countries.

Indian exporters stand to gain additional market access in sectors such as machinery and machine parts, steel and steel products, and agricultural products such as oilcakes, wheat, auto components, chemicals and synthetic textiles as a result of tariff liberalization by ASEAN. Furthermore, as there is huge scope for an increase in trade in engineering and industrial goods between India and the ASEAN countries, India has a unique opportunity to upgrade its products to compete with the likes of Japan, the EU, the US and China within the ASEAN market. The India—ASEAN agreement may also strengthen the Indian economy by reflecting positively on its trade in goods. India—ASEAN trade was worth US$40 billion during 2007-08, about a quarter that of Japan, China or the EU’s trade volume with ASEAN.

Further negotiations between India and ASEAN on trade in services and investment are to be concluded by December 2009. India should look forward to tapping into the vast services market in the ASEAN group. Given India’s comparative economic capability to rise to the occasion vis à vis the other bigger trade partners of ASEAN, it could be a unique opportunity for India to take a further step towards catching up with the likes of China, Japan and South Korea. These agreements should also enhance India’s competitiveness with Japan, the EU, the USA and China. Furthermore, various commercial and industrial institutions within India welcoming this agreement augurs well for its success.

Normally it is believed that an FTA will adversely affect the unorganized sectors, especially the agricultural sectors, as the domestic market will be flooded with cheap imports. This view holds true for India, because of low productivity in these areas. The Indian government must meet this challenge by providing all necessary and reasonable support to the various stakeholders in the trade agreement, especially the unorganized sectors like agriculture, so that their production efficiency is brought in line with those of the other ASEAN countries. Measures should be taken by the governmental and non-governmental organizations, along with self-governed bodies of farmers, to strengthen the competitiveness of India’s agricultural sector.

Fig 1: Intra-ASEAN and Extra-ASEAN Total Trade in billion$ (2000-2008)

Source: Direction of Trade Statistics (IMF)

Vani Archana, is Fellow, Indian Council for Research on International Economic Relations (ICRIER).

1. India and ASEAN: an FTA and beyond
2. The ASEAN-India FTA
3. The Japan-Thailand economic partnership agreement: Utilization and implementation issues from the perspective of Thailand

Examining the reports and minutes from the ASEAN Regional Forum’s Inter-Sessional Group on Confidence Building and Preventative Diplomacy (ISG-CBMs) doesn’t exactly instil much confidence in the ASEAN Regional Forum (ARF). This group is the litmus test of mutual trust in East Asia. More than that, it is a window into the thinking of the member states on the prospect of regional inter-state violence, up to and including, war.

While East Asia’s recent moves towards more and deeper regionalism, driven in part by uneasiness inspired by the Bush administration’s unilateralism and inattention to the region, would suggest a greater level of trust between the regional countries, the results of the ISG-CBMs are less than inspiring. Indeed, on reading what was being claimed as a CBM, one could be forgiven for losing some confidence that Asia could learn from Europe and find its way to a true peace predicated on trust rather than a cold peace based on the US hegemonic stabilizer and functional elite relations overlying popular fear and mistrust.

Indeed, the flurry of regionalism at the economic level is perhaps due in large part to the inability to achieve more difficult political cooperation. This should not be surprising. The rush towards Free Trade Agreements (FTAs) in East Asia is one such example. Greater political cooperation would envisage a single regional FTA, rather than the so-called ‘noodle bowl’ (some say network, others hodge-podge) of bilateral trade agreements now criss-crossing the region. The same politics infects regional financial arrangements.

The text [pdf] of the 2009 report – at which the group discussed the future of the ARF says:

’Thailand briefed the Meeting on the development of the draft ARF Vision Statement…Some delegations expressed their view that the Vision Statement should be a strong statement focusing on…concrete initiatives that ARF should undertake… [Other] members noted that the Vision Statement should [be]…a declaration of ARF principles and…not a plan of action.’

There was no agreement reached on the Vision Statement. That means, there is no shared Vision for the ARF. But with no shared vision there can be no future for the ARF, only an institutional dead-end. Indeed, the fact that the debate is still going on 15 years after the creation of the ARF suggests that the ARF has been in arrested development for a while. But so what? Does it matter greatly that the ARF has been unable to advance a vision, and in particular to advance its CBMs agenda?

Yes, it matters. The failure of the ARF (and specifically the ISG-CBMs) to bring about greater military transparency in a manner similar to the Helsinki Accords of 1975 is arguably the most important factor in driving Japan into the arms of America, and in projecting itself into the region by proposing and signing mini-lateral security agreements (such as with Australia and India). These closed shops will do nothing to ease the heightened Chinese sense of national security; indeed, it is precisely this kind activity which feeds the regional security dilemma. Of course, Chinese resistance within the ARF played an important role in the inability of the ARF to engender habits of cooperation (through diffuse reciprocity) and reach a common political vision. But once another major regional player, such as Japan, defaults to closed-door, zero-sum type external balancing, then trust, and peace, become increasingly unlikely.

Joel Rathus is Phd candidate in Asian Studies at Meiji University, Japan and Adelaide University, Australia. This article is also available here on Joel’s blog Eris in Asia.

1. ASEAN Regional Forum confronts difficult issues
2. ASEAN Regional Forum at 18: Dealing with regional flashpoints
3. The ASEAN Charter and remodeling regional architecture

Since the end of the Cold War, many have considered what should be done institutionally to secure peace and prosperity in Asia. Some argue that the existing bilateral military alliances offer the best chance for sustaining peace and prosperity in the region. Others argue that multilateral cooperation mechanisms are a better alternative. Many believe the existing matrix of various bilateral and multilateral arrangements presents the best we can hope for in the region. But some argue that none of these is good enough. Instead, they propose the idea of an alliance of democracies, meaning the US, Japan, India and Australia—an alliance which Japanese Prime Minister Taro Aso described euphorically as an ‘Arc of Freedom and Prosperity‘. So far, the third argument appears to have prevailed.

Australian Prime Minister Kevin Rudd’s proposal to build an Asia-Pacific Community (APC) belongs to the second argument. It has quite a few merits. First, the APC is inclusive in its arrangement. Rather than excluding some, it is supposed to include all countries in the region. Inclusiveness is important, not only in terms of representation, but also in terms of legitimacy and authority for the proposed body. Second, the inclusive nature of the arrangement reduces the risk of division. Unlike some exclusive arrangements like military alliances, it does not create or reinforce an ‘us versus them’ mentality among countries in the region, and thus is good for reducing suspicion and promoting cooperation. Finally, it is future-oriented. No one is very satisfied with the existing cooperative mechanisms in the region. Most people desire that countries in the region will develop a region-wide cooperative mechanism similar to that of the European Union. If the APC can be realized, the region would see fewer summits and more efficiency in cooperation. The proposed APC may be the cooperative medium the region should aim for.

However, despite all these merits, the idea of building a region-wide cooperative architecture, as many have pointed out, will be hard to put into practice. Firstly, as with other efforts to build a region-wide cooperation scheme in Asia, it may be difficult to decide which countries should be included in the ‘Asia Pacific’ category. If you include Australia, you should include all the Pacific Island states. If you include Brazil, you should include almost all the Latin American states. If you include India, you may well need to include such countries as Iran, Iraq and Saudi Arabia, all of which are also Asian countries. As the previous experience with the Asian Summit shows, there may be a way out by developing a mental map in place of the geographical map in constructing regional organizations. It is not clear what Rudd’s mental map of the Asia-Pacific region looks like and whether he can persuade the rest of the region to accept it.

Secondly, it is not clear how Rudd sees the relationship between the APC and the existing bilateral and multilateral arrangements in the region. He has stressed the importance of US military alliances in the region, as other Australian leaders have in the past. Does he envisage an APC replacing these alliances, if not now, then at some later stage? If not, how can one build a viable APC when some of its members are allies and others are not? And what are the implications of an APC for the future standing of other multilateral regional institutions such as APEC, ASEAN Regional Forum (ARF), Asian Summit, and the Shangri La Dialogue? Does Rudd envision their phasing out to make space for the APC in the future? It is not clear how he can persuade countries, especially those with vested interests in these institutions, that the APC would not undermine their national interests.

Thirdly, there is the question of leadership. Who should sit in the driver’s seat? So far, several multilateral institutions in the region see the ASEAN countries taking the lead. Does Rudd want to replace them with the big powers like the US, Japan, China, India, and maybe Australia? If so, can he expect support from the ASEAN countries? If not, can he expect countries other than the ARF members to endorse ASEAN leadership?

Last but not the least, there is the problem of how to develop a decision-making mechanism that is both efficient and also receptive of the views of the smaller states. Rudd thinks that by bringing all the big powers together, the APC would more effectively address regional challenges. However, the smaller states may fear that they would be ignored, and therefore demand a voice. The APC can accommodate smaller states’ concerns by adopting a unanimity voting principle on important decisions. However, the big powers, especially the US, may fear that this would handicap the decision-making process.

These and other problems may make it difficult for Rudd to sell his idea to the people in the Asia Pacific region. However, the proposal has already created the desirable effect, that is, to encourage people in the region to take another serious look at the effectiveness of the existing regional organizations and ways to improve them.

1. Rudd in Singapore on the Asia Pacific Community idea
2. An Asia Pacific Community: an idea whose time is coming
3. Kevin Rudd’s multi-layered Asia Pacific Community initiative

There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. That purpose, of course, is to create an Asian Monetary Fund, i.e., a regional alternative to the International Monetary Fund (IMF), whose tender ministrations during the 1997-98 financial crisis have not been forgotten or forgiven.

So far, however, the CMI has been all horse and no saddle. Its credits and swaps have never been activated. The distress following the failure of Lehman Brothers would have been an obvious occasion. Yet, revealingly, the Bank of Korea, the central bank hit hardest, negotiated a $30bn foreign-currency swap with the US Federal Reserve, not with its ASEAN+3 partners.

Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called Chiang Mai Initiative Multilateralisation (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool. The goal was set in 2005, and last month ASEAN+3 finance ministers negotiated the details.
They specified contributions to their $120bn pool, set down borrowing entitlements, and allocated voting shares.

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

1. The Chiang Mai Initiative: China, Japan and financial regionalism
2. The financial crisis and East Asia
3. Will Asia have common interests in global monetary system reforms at the G20?

Twenty years ago, Japan and Australia spearheaded a drive to create a forum for the states of the Asia Pacific to collectively consider how to advance their shared interests in a more liberal trading regime. This became Asia Pacific Economic Cooperation or APEC, the first official (or Track One) multilateral acronym in the region (other than the sub-regional Association of Southeast Asian States – ASEAN – which dates from 1967). Establishing APEC was a major, and difficult, accomplishment. The Asia Pacific was (and, of course, still is) a vast and diverse region. Moreover, it had little pedigree in, and weak instincts to, surrender of any sovereign rights to multilateral processes. The difficulties are manifest in the title of the forum – four adjectives in search of a noun, as one wit observed – and in the fact that it was a gathering of member economies, not of states, in order to finesse Taiwan’s participation. But APEC has endured. Since 1993, at the initiative of the US, it has involved Heads of Government. Even though its formal mandate has remained confined to trade liberalisation, HOGs have found the opportunity for low-key bilateral negotiations to be sufficiently attractive to continue to turn up.

Over the ensuing two decades, the hesitancy about multilateralism gradually eroded and we now have a rather rich menu of processes, principally, the ASEAN Regional Forum, the ASEAN Plus Three, the East Asia Summit (also ASEAN-led), together with more geographically specialised bodies like the Shanghai Cooperation Organisation and the Six Party Talks.

Still, it would be fair to say that there is an awareness that there has not been a commensurate development in the productivity and effectiveness of these processes. The number of processes has proliferated but the net outcome sometimes seems to be less than the sum of the component parts. The region, it would seem, has danced around the question of creating processes with the clear purpose and the weight of authority to actually require states to do something more than or different from their unilateral preferences to accomplish larger collective outcomes. As the Obama administration’s nominee for Assistant Secretary of State for East Asia and Pacific Affairs, Dr Kurt Campbell, put it in his confirmation hearings, multilateral processes in East Asia remain ‘very shallow’. Campbell went on to suggest that the United States would endeavour to harness the continuing interest in finding the right formula and try to direct it in ‘appropriate ways’.

If we could start over, if we can imagine we knew in 1989 what we now know, how might we have proceeded? A plausible answer would be that the skeleton or backbone of the multilateral dimension, to the set of tools for the management of regional affairs, would comprise three interdependent processes:

(1) A leaders’ forum to address all the global and regional issues of common interest and concern;

(2) A forum headed by Foreign and Defence ministers to address the security and defence agenda; and

(3) A forum headed by Trade and Finance ministers to address the economic and trade agenda.

As earlier contributions (including my own) to this dialogue suggest, the first process is a key part of Rudd’s Asia Pacific Community proposal. Hadi Soesastro’s most recent post also picks up this theme as well as canvassing some interesting practical options to take matters forward.

One would not hold one’s breath while the existing processes are rationalised to accommodate such a vision. States are extraordinarily possessive of the acronyms they are identified with, all the existing processes can point to beneficial outcomes, and, as must obviously be acknowledged, not all states in the region are discontent with the present arrangements. Still, it may be useful to bear such a skeleton in mind as an architecture to be approximated (or simulated) if opportunities arise or can be created to adapt the existing processes.

Ron Huisken, Strategic and Defense Studies Centre, ANU

1. Architectural momentum in Asia and the Pacific
2. Realizing the Asia Pacific Community: geographic, institutional and leadership challenges
3. Kevin Rudd’s multi-layered Asia Pacific Community initiative

On the 3rd of May, the ASEAN + 3 Finance Minister’s Meeting (APT-FMM) met in Bali. Expectations were high that, at last, an agreement might be reached on the multilateralization of the Chiang Mai Initiatives, or CMIM. An agreement, were it reached, would allow the members of the CMI to tap a regional pool of Foreign Exchange Reserves to better fend off a financial crisis.

Yet, ever since the agreement to proceed with multilateralization was reached at the 2005 Hyderabad Conference, the CMIM has faced difficulty in reaching a decision about contribution levels. This problem was political; boiling down a simple question of whether China would succeed in persuading Japan to accept an ‘equal firsts’ solution, or whether Japan would succeed in making its case that it should to be the largest single contributor.

The results are in, and miraculously both Japan and China have got their wish. Japan will contribute 32per cent of the total to the CMIM, or US$38.4 billion of the US$120 billion pool. The PRC will contribute 38.4b in total; US$34.2b from the mainland and US$4.2b from Hong Kong, China. Thus, Japan is the ‘single largest single contributor’ while at the same time the PRC (including Hong Kong) and Japan are the ‘largest co-equal contributors’.

This agreement is a symbol of how far China has come since the beginning of its charm offensive a decade ago. The phenomenon of China’s rise, and the consequent eclipsing of Japanese power, is also on display. Compared to the other regional institutions it had joined earlier such as the Asian Development Bank, China’s presence (and potentially its formal voting weight) as a ratio of that of Japan’s has increased from under a half to near parity.

This agreement is also significant because as CMIM becomes increasingly institutionalized, it will need to have put in place a sound decision-making process for the provision of funds in a crisis. There is already a basic consensus within the CMIM that this decision-making should be made on a weighted voting system, similar to the IMF. If this is the case, then it is likely that the schedule of contributions agreed at this years APT-FMM will roll over into voting weight, with perhaps a percentage of the voting weight being equally distributed. Independent of any adjustments made, it is clear that China and Japan will together be able to approve, or block, any application to the CMI. There is, therefore, the possibility that these two powers will learn to cooperate with each other within the confines of a regional institution, even when bilaterally relations are tense.

Problems still remain.

In the first instance, there is still a possibility that the CMIM will flounder during the negotiations over the founding documents. In particular, there remain significant differences between China and Japan over issues of economic surveillance. In November of 2001, a Japanese Ministry of Finance backed proposal for a surveillance facility at the CMI was flatly rejected by China, leading to the creation of the a less formal mechanism, the Economic Review and Policy Dialogue (ERPD) in April 2002. In 2005, participation in the ERPD process became a condition for release of funds from the CMI. But despite such strengthening the ERPD is still incapable of providing the level of economic surveillance, monitoring let alone due diligence after disbursal. In fact, the ERPD process is apparently mostly prized as an opportunity to discuss with China events happening within its border.

There is also the related problem of where to establish the CMIM’s secretariat. Prior to multilateralization, the CMI process as a network of Bilateral Swap Agreements did not require a secretariat – in fact, the reason for this network approach was to sidestep this issue. Now it will need to be faced. It is unlikely that the default option of nesting the CMIM secretariat within the ASEAN secretariat will work this time around. Not only are the costs of running the CMIM secretariat likely to be high, but is it unlikely that ASEAN can provide the technical elements required. In addition, compared to previous attempts at regional coordination by ASEAN, the Northeast Asian countries collectively have got a lot more at stake, Northeast Asia having contributed 80 per cent to the total. This leaves the ADB, which has been active in promoting the CMI process from the outset, or the creation of new separate secretariat. In fact, a decision on where to place the CMI secretariat was due in December 2008, but no conclusion was able to be reached. It is an important decision because it will affect the locus of regional economic cooperation more broadly.

The need for greater financial cooperation in Asia has been brought into sharp relief by the global financial crisis. Indeed, it seems likely that the agreement reached last week between China and Japan was only made possible because of this external shock. Where the CMIM goes from here is not set in stone but the trajectory over the short term is clearly towards further institutionalization.

1. Affordable delays for the Chiang Mai Initiative?
2. Are the Philippines equal before the Chiang Mai Initiative?
3. Chiang Mai Initiative: China takes the leader’s seat

Chaos in Thailand, a controversial new PM in Malaysia, uncertainty in the Philippines, ASEAN as an institution searching for a role in the crisis. Hal Hill and Gregore Lopez ask: how serious is the crisis in Southeast Asia?

Even though the recent East Asian Summit was aborted in dramatic circumstances, this initiative underlines the diplomatic clout of the 10-member Association of Southeast Asian Nations, ASEAN. Put bluntly, Australia would not have a seat at this table if ASEAN had not acquiesced. ASEAN will also be critical to the success of Prime Minister Rudd’s proposed Asia Pacific Community.

These countries are also hugely significant economically and socially to Australia. For example, they are a larger share of our trade, our immigrants, our international student community, our overseas travel destinations and our aid program than is the case for any other OECD member.

Se we have a vital stake in their progress and, in particular, how well they are currently managing during the global financial crisis.

Crisis impacts: Initially there was a feeling in the region that the crisis was a problem for the rich countries. The ASEAN countries had put their houses in order after the deep crisis of 1997-98. As the accompanying table for the six major economies shows, the economies were growing strongly immediately prior to the crisis, in the range 5-8per cent, as they have been for most of this decade. Budget deficits were generally modest. Where they were larger, as in Malaysia and Vietnam, they were funded by buoyant domestic savings or large foreign aid flows. Moreover, all but Vietnam – the one country in the regime displaying crisis vulnerability symptoms – were running current account surpluses, resulting in rapidly accumulating foreign exchange reserves, especially in Singapore and Malaysia. There have been no cases of serious financial collapse or bank runs.

By late 2008, two factors began to quickly undermine these comfortable assumptions. The first was the impact of the rapid decline in international trade volumes. Most of the ASEAN countries, especially Singapore and Malaysia, are highly trade-dependent. The impact is particularly severe in Singapore, where growth has declined from a trend rate of 8per cent to a likely 5per cent contraction this year, the most serious in the country’s history. For the region as a whole, growth will contract sharply from over 6per cent in 2007 (the last full non-crisis year) to about zero this year.

The second factor undermining growth in the region has been the flight to safety in capital markets. Perversely, capital has flowed back to the very countries that caused the crisis, owing to their perceived fiscal capacity to protect their financial sectors. In ASEAN all but Singapore are regarded as ‘emerging markets’, and they have suffered as a result.

Most governments in the region have the flexibility to significantly loosen both fiscal and monetary policy. Fiscal stimulus packages of around 2per cent of GDP, and in some cases more, have been the norm. Inflationary concerns have quickly abated, thus relieving the need to continue with the monetary tightening that was pursued for much of 2008. Exchange rates have been allowed to drift down, although in no major economy have they fallen as far as the A$. In the four countries that experienced a major crisis in 1997-98, most especially Indonesia, there is still some hesitation to let their exchange rates weaken further. This factor, plus the quasi freeze in international debt markets, limits their ability to introduce greater stimulus. It also explains the recent flurry of currency and fiscal support packages. However, it is unfortunate that regional architecture remains under-developed. For example, the much-vaunted ‘Chiang Mai Initiative’, developed in the wake of 1997-98 to crisis-proof the region, is still not functional.

While the short-term effects can be contained, there are potentially worrying longer-term effects, as the already substantial distrust towards globalization and global institutions strengthens. Liberal reformers will find it more difficult to continue the much-needed trade, investment and regulatory reform agenda, as is for example already evident in Indonesia.

Whether the crisis leads to regime change remains to be seen. Ironically, the country that experienced regime collapse during the last crisis – Indonesia under Soeharto in May 1998 – now looks one of the most stable, as illustrated by the successful conduct of nation-wide elections recently. By contrast, two that handled the 1998 crisis adroitly – Malaysia and Thailand – now look shaky, albeit for different reasons, neither particularly related to the global crisis.

The role of ASEAN: ASEAN, now approaching its 42^nd birthday, is the developing world’s most durable regional association, and it has contributed greatly to regional harmony. But the global crisis has again illustrated that ASEAN is not yet capable of playing a major role in difficult and sensitive areas. That it is not adept at crisis management was illustrated during the region’s last serious economic crisis, in 1997-98, as well as in various major political challenges, such as Timor.

The origins of the problem are two-fold: in one way or another, the leaders of all the major countries are pre-occupied with events at home; and the ASEAN Secretariat has been deliberately constructed to be a ‘light-weight’, unable to act decisively and powerfully on any issue of real substance.

In the current crisis, ASEAN could play a major role: it speaks for 550 million people, five of its members have been among the world’s fastest growing economies at various times since the 1960s, and it had two seats at the London G20 summit earlier this month (Indonesia as a member and the Thai prime minister as an observer representing the grouping). However, we have yet to hear an ASEAN announcement, much less a concrete proposal of any significance, on how the crisis issues might be tackled.

ASEAN Economies on The Slide

(f) = forecast; budget is budget balance; current account is current account balance, both as per cent of GDP.

Source: Asian Development Bank, Asian Development Outlook 2009

1. International financial crises and the ASEAN economies
2. The ASEAN Charter and remodeling regional architecture
3. Will ASEAN benefit from the ASEAN-China FTA?