Unfortunately, the collective response of the ASEAN+3 to the current crisis has left much to be desired. During the seventh Asia-Europe Meeting in Beijing last October 2008, the main proposal from the ASEAN+3 leaders was to continue with the process of multilateralizing the Chiang-Mai Initiative. This proposal was formalized last May 2007 and was already being discussed both at the Track 2 and Track 1 levels several years before that. Asian members of the G20 did not even attempt to consult with each other prior to the Washington meeting last November 14-15, 2008.

It is quite ironic that the current financial crisis exposed the fundamental weakness of ASEAN+3 financial cooperation: a lack of political will to overcome institutional, legal and political constraints. There is a fair chance that ASEAN+3 financial cooperation will become irrelevant and simply wither in the wake of ongoing global efforts to address the current crisis. However, this outcome must be prevented because East Asian financial cooperation remains to be useful, especially if discussions at the G20 level fall through.

In order to salvage and sustain ASEAN+3 financial cooperation, it is necessary to lower expectations and focus efforts toward reforming the IFA. These recommendations clearly go beyond short-term measures that are required to mitigate the adverse impact of the current global crisis on ASEAN+3 economies. Such measures have been discussed in other forums.

The following are this writer’s proposals:

1. The ASEAN+3 must pay greater attention to a neglected aspect of regional financial cooperation, i.e. the ability to project their common interests more effectively in a global setting. What should be highlighted by ASEAN+3 leaders are concrete and practical measures to reform the IFA. A study team can be formed to determine which of the proposals are more useful for the economies of East Asia.

This recommendation has the advantage of keeping ASEAN+3 financial cooperation moving without expending a great deal of political capital. It also addresses the deeper causes of the current financial crisis by relating it to the 1997 and other previous crises. Following this recommendation also makes it easier for ASEAN+3 financial cooperation to dovetail with the G20 effort.

2. Events over the past decade showed that a more flexible exchange rate did not generate the benefits predicted by economic theory. Many East Asian economies had to resort to accumulating reserves in response to the weakening of the US dollar and a surge in capital inflows. Inadequate policy coordination among the G7 countries has led to frequent gyrations and misalignments of major reserve currencies. The latter has combined with large swings in capital flows to make it difficult for emerging markets to manage their exchange rates.

One area of ASEAN+3 financial cooperation that received a great deal of interest was exchange rate coordination with a single Asian currency as a long-term goal. This was intended to reduce the adverse impact of volatile exchange rates among the major currencies. However, progress has stalled largely due to institutional and political constraints. A less ambitious alternative would be for ASEAN+3 countries to discuss “measures to discourage short-term capital inflows, particularly when markets have become euphoric and inflows are excessive” (see S. Grenville (2007): Globalization and Capital Flows: Unfinished Business in the International Financial Architecture). These types of measures will be more effective if coordinated at the regional level.

3. The multilateralization of the Chiang-Mai Initiative can be put on hold until the prospects of reform of the IFA under the G20 are ascertained. Continuing negotiations will likely magnify political differences among the ASEAN+3 and derail financial cooperation permanently. ASEAN+3 financial cooperation can instead promote further the development of domestic financial markets and regional financial integration in order to facilitate the intermediation of Asian savings within the region, as well as attract foreign investment in instruments denominated in the domestic currency. Such alternative sources of funding would reduce Asia’s reliance on foreign currency borrowing and concomitantly, the risk exposure of the region to maturity and currency mismatches.

This type of regional financial cooperation has already been initiated in the form of the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund (ABF). However, the ABMI and ABF consider only the financial side of the issue. Regional cooperation can also be useful in identifying infrastructure projects to be funded. Recently, the Network of East Asian Think Tanks proposed the establishment of the Asia Investment Infrastructure Fund (AIIF) which is a mechanism by which infrastructure projects in the region can be prioritized and funded. By considering the “real” side of the issue, more substance and relevance will be given to regional financial cooperation. The AIIF will lead to greater domestic demand and intra-regional trade to offset the decline in exports to industrialized countries. The AIIF will likewise contribute to narrowing the development gap in the region.

President, Philippine Institute for Development Studies (PIDS). Policy brief submitted to the Asian Development Bank Institute (ADBI) as an input to the paper “Asia’s Contributions to Global Financial Stability and Economic Growth: Policy Recommendations to the ASEAN, ASEAN+3, and ASEAN+6”.The usual disclaimer applies.

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Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominant economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines.