Date : 19 June 2012

The Germination of Asian Financial Security





     The value of ten Members working together as a group can be best illustrated by their co-operation in finance. Individually, each Member State is tiny in the world market, but together the Association of Southeast Asian Nations (ASEAN) generates synergy among itself and engenders others to share the same platform.

The challenge

     Small developing countries want assurance that the international financial order will protect small economies from financial market instability, provide assistance to strengthen their financial sectors and ensure fairness in the global financial system. These requests are simple and without them the well-being of each citizen may be compromised.

     The Asian financial crisis in 1997 showed that small economies can be bullied by rogue speculators. There was neither protection for these countries from such abuse nor prohibition of such unfair treatment. The quick gains made by these speculators is much smaller than the damage that wrecked these countries and the lives of their citizens. For example, ten years after the crisis, the gross domestic product (GDP) per capita based on purchasing power parity (PPP) at 2008 US dollars for Thailand and Indonesia are still below the pre-crisis level (Figure 1).


Figure 1: Purchasing power parity for Indonesia, Malaysia and Thailand.

     As these countries were recovering from the wreckage and still repaying the huge debts incurred to salvage their financial institutions, they were hit again by the global financial crisis of 2007–2008, which was caused by problems in the financial systems in the developed countries. Nevertheless, it has inflicts harm on the well-being of people in small developing countries. The damage is less than that of the Asian financial crisis because these countries are not at the centre of the quake.

The Frustration

     No single ASEAN Member State can put forward, or even consider doing so, a proposal for changing the global financial order. The main reason is that each country accepts the fate of its size. Each ASEAN Member State is either small or very small, in the context of world GDP. The 2009 GDP of its largest Member, Indonesia, is only 0.84% of GDP in the world – less than 1%. This is a major frustration in dealing with the global financial system (which is governed by two key institutions, the International Monetary Fund or IMF and World Bank) because the voting rights in the IMF and World Bank are very much driven by the size of GDP. 

 Figure 2: Share of ASEAN GDP in the World

      Even working as a group, ASEAN is small. As a group, its share of GDP was only 2.55% in 2009 (Figure 2). And even with a relatively fast economic growth rate for the next five years, its contribution to world GDP will only be 2.82%. ASEAN co-operation in finance, which started in 1986 under the Committee on Finance and Banking (COFAB), focused on co-operation in taxes, and using ASEAN currencies in ASEAN trade and funding of ASEAN joint industrial projects. There were joint requests to obtain technical assistance and funding from the IMF or World Bank, but there was no ambition to jointly lobby the IMF and World Bank for modification of rules and regulation in favour of developing countries.

     COFAB was finally abolished in 1993 because the new structure of ASEAN economic co-operation does not explicitly mention banking and finance. Co-operation in trade and investment has shifted our attention away from banking and finance. At the same time, officers in banking and finance have had their hands full with the work at home, e.g. the establishment of stock markets and regulatory agencies. The intensity of international activities under the IMF, World Bank, Asian Development Bank and other international regulatory agencies also grew rapidly during the economic boom in the late 1980s and early 1990s.

ASEAN Finance Ministers Meeting (AFMM)

     On the sidelines of the APEC Finance Ministers Meeting in Kyoto in March 1996, Dr Surakiart Sathirathai, the then Thai Finance Minister, consulted with me (then a Director of the AFTA Unit, ASEAN Secretariat) about the possibility and protocol of convening an ASEAN Finance Ministers Meeting in Thailand. I explained to him that if there is a consensus among the ministers, this is possible under the ASEAN Framework Agreement on Enhancing ASEAN Economic Cooperation of 1992. He then convened an informal after-dinner meeting to share this idea with other ministers. The proposal was strongly supported, especially by H.E. Anwar Ibrahim (Finance Minister and Deputy Prime Minister, Malaysia) and subsequently by H.E. Robert de Ocampo (Secretary of Finance, the Philippines). The ASEAN leaders collectively believed in the significance of an ASEAN financial co-operation in the face of regional integration and the rapid development in Asia. Subsequently, an informal meeting was held in Manila in April 1996 alongside the Asian Development Bank (ADB) Annual Meeting to agree on the process of establishment and a tentative schedule for the first meeting.

     The first meeting was held in March 1997 in Phukhet, Thailand. Thailand’s new finance minister, Dr Amnuay Veerawan, presided over that meeting. An important feature of the meeting was the consultation with the IMF, World Bank and ADB. It allowed the ten Member States to address their issues directly to the top executives of these global and regional agencies, an opportunity that they would not have individually.

The Asian Financial Crisis: The Turning Point

     By May 1997, signs of the speculative attack on the Thai baht loomed large. In its struggle for help, Thailand discovered that no ASEAN Member State could help. It was beyond the capability of its fellow ASEAN Members. At the same time, they were also vulnerable to an attack. A Member, who had experience, advised Thailand to concede and negotiate a settlement with the speculators. That was the best advice Thailand had, but it was not acted upon.

     At this point, every country wished that ASEAN had its own regional fund to ward off such an attack. It would have been beneficial to all Members to have protected the Thai baht because financial and trade linkages in region were high. The meaning of the phrase “shared destiny” enshrined in the ASEAN Vision 2020 became very clear.

     When the crisis erupted on 2 July 1997, the value of the baht plummeted like an object free-falling from Hkakabo Razi.  No one knew where the foothill was. Other ASEAN countries watched its fellow Member being shredded into pieces and devoured by a pack of ferocious hyenas. Nothing was forthcoming from the AFMM because there was no tool, no system and also no resources. They could only offer their prayers. A scary thought came to their minds: when would it be their turn? If this could happen to Thailand, it could certainly happen to the rest of ASEAN. 

     The ferocious speculators did not keep these countries waiting for long. Even before licking the bones clean in Thailand, they moved to the next victim, Indonesia. And from there, they marched on to the other countries in Asia. For them, this is a game well won. They split their winnings, gave each other high-fives, and popped open the champagne to celebrate their victory. They did not care about the bloody trail they left behind.

     Such unfair and selfish acts had not gone unnoticed. Alas, analysis by the IMF and many prominent economists concluded that this was caused by the weak financial sector in these countries. The mainstream economic literature described the Asian financial crisis as “weak financial sector governance”, “contagion” and “herd behaviour” phenomena. The blame was put squarely on the victim. Hence, the recourse would be to strengthen the financial sector in these countries. Opposing views that pointed at the aggressor were either not popular or rejected as speculative. Consequently, no action was taken to contain such speculative behaviour.

     There is no denying that weaknesses existed in the financial sector in the region. Hence, it is not incorrect to help strengthen the financial sector in the small developing economies. However, many scholars were still puzzled as to why many other developing countries in Latin America and Africa with much weaker financial sectors and less stable macroeconomic positions were not attacked.  Unless the real cause of the financial crisis can be determined, strengthening the financial sector may not be sufficient to remove the risk of financial instability.

     Alternatively, it may be clearer to see the Asian crisis as a game played by powerful hands. It is not contagion, but a deliberate movement of some well-funded consortiums of speculators. This is a known fact because these speculators themselves were boasting about their success. It would be naive to think that international financial institutions (IFIs) and scholars were unaware of the existence of such a game and the conduct of this destructive business. If they are brave (since there is no question about their intelligence), they would have pointed out that there is a hole in the international financial regulation that needs to be mended. Then, the remedy would point towards outlawing such speculative attacks or similar unfair acts, especially against small developing countries. With such regulation, strengthening the financial sector in small emerging countries would yield sustainable result.

     Although the AFMM did not avert the financial crisis, it served as a forum to co-ordinate and share experience in addressing crisis management issues and co-ordination of long-term strategies to avoid future crises. The IMF, World Bank and ADB were invited to participate as consultative partners of the AFMM. The dialogues were very useful for both the IFIs and Member States. Small countries like Laos and Cambodia were able to air their concerns and put forward their requests to these international bodies, an opportunity that would only be available at the AFMM. The IFIs had the opportunity to obtain a collective request, instead of visiting individual countries, and the peer enforcement gave some assurance of implementation.

     An important role that the AFMM played then was to present an alternative view from small developing economies. For the first time, in April 1999, ASEAN drafted a “Common ASEAN Position on Reforming the International Financial Architecture” which outlined key features of the reform ASEAN is seeking. The 12 points included the recognition of the specific needs of small economies, closer monitoring of short-term capital flow, and reforming the IFIs to protect the poor. While no serious action was taken, the fact that this group of countries had stood up to call for fairness caught the attention of many.

     It is interesting to note that all points raised by ASEAN in 1999 were echoed in the Action Plan to implement the principle of reform which is part of the Declaration of the Summit on Financial Markets and the World Economy, endorsed by the G20 Summit in London in November 2008, especially the reform of IFIs. I cannot help but think that had these requests by ASEAN been heeded 12 years ago, the current financial crisis could have been averted.

Light at the End of Tunnel

     The Asian financial crisis shook the confidence of not only small developing countries; large developing countries such as China, India and Russia were also concerned about being attacked. They felt the need to be protected locally, not only by the IMF. Many developed countries like Japan and South Korea were also keen to find alternative protection systems beyond the IFIs.

     The only mechanism in Asia available at the time was the AFMM. Although ASEAN is small, it serves as a perfect lynchpin for bigger economies such as China, Japan and South Korea to work cohesively. This is why the ASEAN Plus Three (China, Japan and the Republic of Korea) finance ministers met for the first time in April 1999 and became a very intensive ministerial forum very quickly.

     ASEAN Plus Three realised that the best way to reform the IFIs is not only by changing the voting rights at IMF and World Bank. Moreover, the IFIs are too busy with many other problems. The most effective and practical way is to build a technically capable, reliable and regional financial governance unit in Asia to focus on issues in the region and to interact with IFIs.

     AFMM Plus Three started to put in place a concrete work programme for strengthening its financial sector. These activities included, for example, the Asian Bond Market Initiative (ABMI) and the Chiang Mai Initiative (a US$120 billion regional swap arrangement). At the same time, the consultation process among the finance ministers, central bank governors and regulatory agencies were created under the Economic Review and Policy Dialogue (ERPD). The degree of comfort gradually increased among the policy makers in the ASEAN Plus Three.

     A landmark decision was made during the ASEAN Plus Three Summit, held in October 2009 in Cha-am, Thailand, which endorsed the proposal of the AFMM Plus Three to establish a surveillance unit by the end of 2009. This unit will provide technical support to build a strong and modern financial sector in the region, including a regional bond market. It will monitor and help to co-ordinate macroeconomic policies among Member States in Asia. It will oversee the management of a multilateral swap arrangement – the Chiang Mai Initiative Multilateralisation (CMIM).

     Aside from this intra-regional work, it will assist its Members in interactions with the IFIs. The unit will study and prepare ASEAN Plus Three contributions to the G20 to ensure that the changes in global rules and regulations for the finance sector take into account the diversity and needs of the small developing countries, especially in Asia. At the same time, it should prepare new recommendations on international rules and regulations that would accommodate the growing role of Asia in the future.

     For this unit to be effective, it should have access to important strategic information for each country. This will be a necessary hurdle to cross during the formative years of the unit. Each Member will need to change its legislation in order to allow access to such information.

     The closer linkage of the Asian economy means that the transmission of the impact of a crisis in one country to others in the region will be faster and more intense. A centralised unit that ensures regional stability would mean less flexibility for each country to pursue its own policies.

     The achievement in the ASEAN Plus Three process was recognised internationally. Prime Minister Abhisit Vejjajiva was invited to the first G20 Summit in London in 2008 as the Chairman of ASEAN to participate in the deliberation on the global financial crisis. The experience of ASEAN and Asia in the activities of the ASEAN Plus Three for the region will have a bearing on the global financial market and vice versa.

     To have a seat at the G20 Summit means that ASEAN (with its 2.66% of global GDP) can voice its concerns to global decision makers and contribute to building a sound global finance architecture where the interests of small developing economies will be taken into account. ASEAN has come a long way since 1999 (and its 12-point declaration). ASEAN and the Plus Three countries must build on this achievement to ensure a more stable future for the next generation of people in this region.

Asian Monetary Fund?

     At the special Finance Ministers Meeting in Bangkok in August 1997, between some angry words calling for punishment of the speculators and the consoling words of “let bygones be bygones”, there were some forward-looking proposals, especially, the establishment of an Asian Monetary Fund (AMF) to be a counterpart of the IMF. Most countries were in favour of the idea but they could not reach a consensus. The idea was not merely shot down, it was condemned.

     However, the economic environment is very different now because the concept that each region should be taking care of its own security (political, economic and social) issues has gained more support. It is certainly more practical and efficient for a regional institution to gear its service towards the needs within the region. Global institutions pay more attention to the global rules and standards and issues, leaving the implementation to regional bodies.

     Such a movement towards more regionalisation of global financial governance would also reduce the financial and moral responsibilities of the central global institutions. At the same time, the needs of each country will be better served.

     The establishment of an Asian Monetary Fund may not be a question of yes or no but a question of when. That time is drawing near and at a faster pace as the global economy rebalances. The establishment of the ASEAN Plus Three surveillance unit could be the seeding of a future AMF.


     I would rank co-operation in finance as the most critical area of economic co-operation in ASEAN because it benefits each Member and it also serves as a forum for other countries in Asia. This is a symbiotic relationship. ASEAN is too small in the international financial arena. ASEAN needs bigger countries to join its effort to provide financial stability and to influence change in global financial rules and regulations to accommodate the needs of small developing countries. China, Japan and also South Korea need a platform to work together. Hence, ASEAN Plus Three is an ideal platform for co-operation in finance. Soon, this platform will have to include India, Australia and New Zealand.

     Given the dynamics of global economic and financial volatility, it is not beyond the capability of the current global financial institutions to ensure global financial stability. There is a growing consensus among the academic and policy makers that it is not possible to say that there will be no more financial crises.  To minimise the chances of more crises occurring and to control the damage from the next episode, a new global financial governance design will be needed. Central in that design would be the role of regional institutions. Regional institutions would be both more flexible and effective in co-operating with the IFIs in governing the global financial market.

     In the coming decade, ASEAN Plus Three and AFMM Plus Three will play a central role in providing financial stability in Asia. Many new challenges are emerging as this region assumes the role of global growth engine. What we call this new institution is not important. What is important is to set up this regional institution as quickly as possible, building upon the existing work plan. One important principle should guide this regional institution: it should serve the small developing countries for this is where its strength lies.

     The ASEAN “ten rice stalks” together are becoming a pillar of financial and economic stability not only for ASEAN; it will also become the backbone for other Asian countries to build their financial and economic stability on.



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