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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

5. From the Chiang Mai Initiative to an Asian Monetary Fund

Masahiro Kawai

Following the 1997-98 Asian financial crisis, the ASEAN+3 finance ministers launched several initiatives for regional financial cooperation: (i) the Economic Review and Policy Dialogue (ERPD) to support regional economic surveillance; (ii) the Chiang Mai Initiative (CMI), a regional liquidity support arrangement; and (iii) the Asian Bond Markets Initiative. In this paper the author evaluates the progress of such initiatives—particularly the CMI and the recent launch of its multilateralization (CMIM)—and explore the possible evolution of the CMIM toward a regional monetary fund, called the Asian Monetary Fund (AMF).

The paper argues that for an AMF to emerge, ASEAN+3 authorities need to strengthen regional surveillance and upgrade their capacity to formulate credible conditionality in the event of crisis lending so that the CMIM can be delinked from IMF programs. Specifically, the paper offers the following recommendations:

• Clarify rules for activating CMIM lending, including the possibility of providing precautionary (or precrisis) lending and eschewing policy conditionality in the event of externally- or herd behavior-driven financial turbulence or crises;
• Establish a joint forum for finance ministers and central bank governors to intensify policy dialogue among them;
• Make the newly established ASEAN+3 Macroeconomic Research Office (AMRO) a strong professional secretariat, with the required analytical expertise and policy experience, to enable it to support regional economic surveillance through the ERPD, activate the CMIM, and formulate conditionality independently of the IMF;
• Enlarge the size of the CMIM facility so that a sufficient amount of liquidity is provided to member countries in need; and
• Move beyond the simple “information sharing” stage to a more rigorous “peer review and peer pressure” stage, and eventually to a “due diligence” stage, to improve the quality of economic surveillance.

The paper also argues that there is a case for more flexible use of the CMIM—for precautionary lending without conditions—if the type of external shock that affected the Republic of Korea in the fall of 2008, following the Lehman collapse, were to hit Asia again in the future.

Finally, the paper emphasizes the need for the CMIM—and a new AMF—to work with the IMF to promote Asian financial stability, but this would require the IMF to undertake significant operational and governance reforms so that it regains credibility and trust in Asia. On the operational side, the IMF should focus on macro-financial surveillance of large, systemically important economies—like the United States and the European Union—and to hold them to the same standard as smaller economies. On the governance side, the choice of the IMF managing director—who has always been a Western European—should be based on merit and qualifications and not on nationality. Were such fundamental changes undertaken, then the IMF would likely successfully grasp the opportunity to regain the trust of emerging Asian members, provide them with a sense of ownership, and be regarded as their partner for macroeconomic and financial stability in Asia.