Simon Tay and Hank Lim discuss the reason for efforts towards an Asian Monetary Fund to gather momentum.
By Hank Lim and Simon Tay
This commentary was featured in TODAY (Singapore) newspaper and the South China Morning Post, 30 May 2011.
The spectacular resignation of Dominique Strauss-Kahn as managing director of the International Monetary Fund (IMF) has led to heated speculation over who the next director will be.
The IMF's nearly 70-year-old practice of appointing only a European is being questioned, with some suggesting it is time for an emerging economy, and perhaps Asia, to take the place.
While no final decision has been reached, another European head seems more likely, given the candidates and structure for voting.
In Ms Christine Lagarde, the French Minister of Finance, Europe has rallied around a credible name. Collectively, Europe has almost 30 per cent of the votes in the IMF, with the United States holding a further 17 per cent. The emerging economies have fewer votes and have not unified around a single person.
Does this mean things will not change? What should Asia do?
The fact is that in the new global economy, Asians and others now play a much larger role. This has been recognised with the creation of a G-20, for dialogue to foster cooperation among the largest economies. But reform in the IMF itself has been slower.
Its governance system, quotas, voting rights and procedures have changed little since its establishment in 1944. Currently, the four largest Asian economies add up to only 13.8 per cent of the vote, including Japan with some 6.28 per cent. The promise is that from October next year, Asia will total some 20 per cent.
But the share of votes and, even more, the attitude of Europeans lead to doubts the IMF can sufficiently evolve to reflect the dynamic realities of global rebalancing. Within the next 30 years, some forecast that Asia will have the largest share of world GDP. This shift in economic gravity has accelerated in the global financial crisis, and with the ongoing problems in Europe.
Even now, it is estimated that Asia has US$3.5 trillion (S$4.3 trillion) of foreign exchange reserves. This is about two-thirds of the world's reserves and a stark contrast to the indebtedness in many developed Western economies.
If the IMF cannot change fast enough, Asians will need to look at the available alternatives. One possibility is to revisit the creation of an Asian Monetary Fund (AMF).
The proposal was originally made at the height of the Asian financial crisis in 1997 to 1998. This was quickly shot down by the IMF, the US Treasury and some Asians too. Given the timing then, many questioned the wisdom and moral hazard of taking that step.
Times, however, are changing, and seeds of change are sprouting that can lead to a future AMF. While no AMF was created in the Asian crisis, the finance ministers of ASEAN, China, Japan and Korea (ASEAN+3) agreed to move ahead with the Chiang Mai Initiative. This started a network of bilateral swap arrangements to help members with liquidity problems and currency fluctuations in times of crisis
This has grown to a pool of Asian reserves of US$120 billion, to be made available on a multilateral basis. A key component has also been newly added, with the establishment of a surveillance unit.
The ASEAN+3 Macroeconomic Research Office (AMRO) was started in May and, housed in Singapore, is tasked to conduct due diligence on the region's economic and financial systems.
While still new, the architecture is now in place that can greatly strengthen the region's capacity to prevent future financial crises and manage any that arise.
Other regions have taken similar steps with the Arab Monetary Fund and Latin America Reserve Fund. These initiatives cannot reform the internal workings of the IMF. But they can lead to a more flexible, decentralised global monetary architecture, complementing the IMF and also defusing its importance.
An Asian Monetary Fund will not be easy to establish. Even in the steps taken so far, Asians have struggled to find a formula for cooperation so that leadership is balanced, and acceptable to all. But progress has been made and the overarching logic for AMRO has been accepted so that Asians are now better able to coordinate and head off potential crises.
If Asians and other emerging economies are insufficiently represented in the IMF, while Europeans continue to monopolise the institution even when the crises are in their own backyard, there is every reason for regional efforts to gather momentum.
Hank Lim is a senior research fellow and Simon Tay chairman of the Singapore Institute of International Affairs.