Regional Monetary Funds? Lipscy, Phillip Y Japan's Asian Monetary Fund Proposal. Stanford Journal of East Asian Affairs 3 (1):

September 16: El «Grito de Dolores» 2

Plan Tequila Crisis East Asian Financial Crisis – US vs. Japan preferences on bailouts AMF Regionalism 3

TEQUILA CRISIS 4

Tequila Crisis 1995 US (IMF) helps Mexico – provides liquidity Japan worried about “moral hazard” US preference prevails at the IMF 5

East Asian Financial Crisis 1997 Japan wants to help Thailand, Indonesia,…– provides liquidity US worried about “moral hazard” US preference again prevails at the IMF 6

Japan’s view on Indonesia Japan opposed major structural reforms (eliminate national projects, reduce subsidies, restructure financial structure) Japan supported a loan package to stabilize the exchange rate IMF ignored Japan 7

Why did Japan (not US or EU) lean towards liquidity provision in the East Asian Crisis? 25% of Japanese lending to all developing countries went to Thailand! 8

9 US: Conspicuously ABSENT!

10

The debate Moral Hazard / Conditionality Markets Liquidity States *VERSUS* Is this about “economic theory”? Is this about “ideology”? Or is this about INTERESTS (PREFERENCES)? 11

Political interests are at stake Economic ties with the crisis-country are dense This approach will provide a quick recovery of the crisis economy Benefits creditors Donor States prefer rapid liquidity provision if: 12

Donors are CONCERNED ABOUT MORAL HAZARD if: Economic & political ties to the crisis country are weak The crisis = OPPORTUNITY: –Extract concessions from the crisis country (force it to open up to trade and investment) Use the crisis country as an example to deter future “moral hazard” 13

14

15

16 Images from South Korea during the East Asian Financial Crisis

“Never again!” 17

AMF vision $100 billion 10 members: –Australia, China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand –NOT the United States 18

Treasury Secretary Summers to MOF official Sakakibara: “I thought you were my friend!” 19

US argument against AMF Moral hazard –– –postpone adjustment Duplication –Add little to the pre-existing IMF system 20

US enticements Offer Asian countries increased IMF quotas –What does this get them? –More votes… and more rights to borrow (larger loans) New arrangements to borrow (without conditions) Lobbied CHINA regarding “Japanese hegemony” 21

Regional Finance Minister’s meeting Nov 1997 ASEAN & South Korea support AMF proposal Hong Kong & Australia neutral China – no opinion… sealed the fate of the AMF 22

Thinking Strategically “If Japan knew the chances of the AMF actually existing were very slim, then do you think the reason for trying to establish an AMF was for adjustments to the IMF to give them more resources and liquidity because of the economic crisis?” –Chris Wright ’11 (GOVT 298 spring 2010) 23

Reply from Phillip Lipscy Sounds like you have some really bright students! Based on my conversations with the relevant officials, I think this is indeed part of the story. Within the Japanese foreign policy establishment, there's something of a divide between Asia-oriented and internationally-oriented officials. Sakakibara and Kuroda are more on the Asia-side, and my impression is that they genuinely wanted an AMF that could act autonomously of the IMF. This is also true for potential borrowers in Asia such as Malaysia - they have argued for a CMI/CMIM more autonomous from the IMF. (CMIM=Chiang Mai Initiative Multilateralisation) However, subsequent Japanese policy on the CMI/CMIM has emphasized tying most of the lending to IMF conditionality, and internationalist officials in Japan often mention using the CMI/CMIM as a way to enhance Asia's "voice" at the IMF. So both motivations are at play. Practically speaking, an autonomous AMF would need to have some mechanism for autonomous conditionality. Working out this issue is a major problem for China and Japan, who contribute the lion's share of reserves and don't want to be blamed for imposing conditionality on their Asian neighbors. 24

Why did Japan propose the AMF? Why did the US and the IMF oppose? Why did China oppose then but not now? 25

Japan & China Equal shares 26

Flash-forward: March 2010 Chiang Mai Initiative A multilateral currency swap arrangement Members: Association of Southeast Asian Nations (ASEAN), China (including Hong Kong), Japan, and South Korea ASEAN members: Foreign exchange reserves pool of US$120 billion Launched in March 2010 The initiative began as a series of **bilateral** swap arrangements after the ASEAN + 3 countries met in May 2000 in Chiang Mai, Thailand The big problem: Conditionality Right now, using IMF conditionality as a backup! (yikes) The ASEAN flag 27

Discussion Regional organizations might produce increased MORAL HAZARD But regional organizations make sense if economic ties are the regional level The Invictus Question: –Who are we? –National identity? –Global identity? –Regional identity? – 28

Take-aways SUBSTANTIVE take-aways US preferred liquidity for Mexico, feared moral hazard for East Asia Japan preferred liquidity for East Asia, feared moral hazard for Mexico ANALYTICAL take-aways Moral Hazard v. Providing Liquidity Self-interest vs. Ideology vs. Economic theory 29

Thank you WE ARE GLOBAL GEORGETOWN! 30