The Long and Winding Road to Asian Monetary Union

Thursday, May 22, 2008

The Long and Winding Road to Asian Monetary Union

With European Monetary Union celebrating its ten year anniversary with well-deserved fanfare [1, 2], Asian countries on the outside looking in have looked at the European example with envy. It is true that the political economies of Asia are far more diverse than those of Europe, ranging from freewheeling bastions of enterprise to (at least de jure) socialist regimes. Nevertheless, strides are being made towards establishing an Asian Monetary Union. At the recently concluded Asian Development Bank meetings in Madrid, Asian finance ministers have agreed to further formalize bilateral swaps of the previous Chiang Mai initiative to a regional arrangement to combat future balance of payments crises in Asia. If you will recall, the United States shot down an effort by Japan at the height of the Asian financial crisis to create an Asian Monetary Fund. It was, of course, a dual power play for regional influence by Japan and the US; the latter wanted to keep its regional influence, while the former wanted to have a greater stake in regional affairs.

Fast forward to 2008 and we are again on the brink of an Asian Monetary Fund (AMF). In contrast to a decade ago, however, Japan is not the only big player in the mix as China has amassed even larger reserves than China in the meantime. Here is the description of the bulked-up arrangement care of Reuters:

East Asian finance ministers are set on Sunday to agree an upgrade to an $80 billion currency swap scheme to fight regional financial crises, a deal taking them a step closer to creating a full scale Asian monetary fund. "The meeting was successful and we agreed on key elements about upgrading the existing arrangements," South Korea's Finance Minister Kang Man-soo told reporters after a meeting with his counterparts from Japan and China. Kang's deputy, Shin Je-yoon told reporters separately that the currency swap scheme "will be upgraded to at least $80 billion".

The deal -- more than a year in the making -- will replace the existing arrangement of mainly bilateral currency swaps, called the Chiang Mai Initiative (CMI) and transform it into a more powerful self-managed reserve pooling mechanism governed by a legally binding single contract. The broad terms are set to be agreed later on Sunday at a full meeting of finance ministers from the so-called ASEAN+3 group -- the 10 members of the Association of Southeast Asian Nations plus Japan, China and South Korea.

The talks, taking place on the sidelines of the Asian Development Bank's annual meeting in Madrid, will finalise terms to pool foreign exchange reserves for use in emergencies in any of the signatory economies. Japan, China and South Korea are expected to provide 80 percent of the total, ASEAN countries the balance, South Korea's Shin said.

Loans will be made in U.S. dollars against local currency collateral provided by the borrowing nation, either via a currency swap or a promisory note. Loans will cost between 150 and 300 basis points above the London Interbank Offered Rate (Libor) and be provided for three months, renewable for up to two years. Borrowing costs will be reviewed every five years.

Finance officials say the agreement will be a significant step forward for the 13 nations involved in the bilateral swap deals that were created in the wake of the 1997-98 Asian financial crisis, taking them closer to a full scale regional equivalent to the International Monetary Fund.

"This will play a role of supplementing existing international financial stability schemes," Shin told reporters. "This will show to the world that Asia is making a concerted push about securing financial stability." The finance ministers said they were determined to work together to secure financial stability in Asia and would create a forum in which to discuss policies required to do so.

"We've decided to hold a gathering of finance ministers, financial supervising authorities and central banks from the three countries within this year because it is important (for) authorities who are responsible for macroeconomic policy and financial market stability to exchange views," Japan's Finance Minister Fukushiro Nukaga told reporters. Japan has been a leading advocate for the creation of a regional forum that brings together policymakers, supervisors and central bankers to promote financial stability, similar to the Financial Stability Forum backed by the Group of Seven industrialised nations.

Calls for an Asian monetary fund were made during the depths of the Asian financial crisis when IMF-led bailouts worth around $100 billion came attached with conditions for unpopular austerity programmes and economic reforms.

But Naoyuki Shinohara, Japan's vice finance minister for international affairs, said ahead of the ADB meeting that any deal agreed would not be about creating easy money. "We don't want it to be a mechanism to give out easy money," Shinohara said. "The most important issue is how to strengthen surveillance," he added.

Complicated factors remain to be negotiated, such as how to activate currency swaps while making sure borrowing countries would return the money after a crisis ends.

Another step to further regional integration is the development of deeper capital markets in the region. ASEAN has more notes on this from the Madrid proceedings under the so-called Asian Bond Markets Initiative (ABMI):

Along with the effort and progress made under the ABMI since 2003, the Asian bond markets have recorded remarkable growth in terms of size and diversity of issuers. We also took note of other progress and effort under the current ABMI such as studies on new securitized debt instruments, credit guarantee and investment mechanism, the suty on Asian Bond Standard and enhancing the credibility of the domestic credit rating agencies.

To further develop the Asian bond markets, we endorsed the New ABMI Roadmap. This new roadmap shows our renewed strong commitment to the concrete progress of ABMI, on the occasion of its fifth anniversary.

First, the new ABMI Roadmap focuses on the four key areas: i) promoting issuance of local currency-denominated bonds, ii) facilitating the demand of local currency-denominated bonds; iii) improving regulatory framework and iv) improving related infrastructure for the bond markets. The Steering Group will be established to monitor and coordinate the activities of the four Task Forces in charge of those areas.

Second, we agreed to make further voluntary efforts to contribute to more accessible regional bond market development in a concerted manner. In this regard, each country will make periodic self-assessments of its progress in line with the objective of ABMI. The reference will be introduced for this purpose.

Third, we recognized that the private sector plays an important role in the development of bond markets. In this regard, we welcomed the launch of a group consisting of private sector participants to discuss the cross-border bond transactions and settlement issues.

And finally, let us discuss the Holy Grail: regional economic integration. Yes, China, Japan, and to some extent Korea are all engaged in a three-ringed battle for regional hegemony. Yes, most Asian countries don't get along with each other for deep-seated sociohistorical reasons. Yes, the disparities in economic progress among Asian economies are truly eye-opening. Despite it all, both the Asian Monetary Fund and the Asian Bond Markets Initiative demonstrate a willingness to cooperate on pragmatic grounds. Such grounds may eventually result in Asian Monetary Union. I certainly don't rule out seeing it in my lifetime. When that happens, the Asian century will truly be upon us. In the end, Hirst and Thompson may well prove to be right in arguing that regionalization, not globalization is the predominant trend of our times. Bill Pesek analyzes the situation, though I am more optimistic than he is on the prospects for further integration:

There's a certain irony to the Asian Development Bank holding its annual meeting in Europe. The Manila-based lender did so this week in Spain, one of the 11 nations that in 1999 embraced a single European currency. The euro area has since grown to 15 members and many in Asia want to replicate the enterprise. Much of the talk in Madrid surrounded accelerating that process.

There's no firm timetable, nor do Asian leaders regularly refer specifically to an Asian euro. They prefer to couch it in terms such as ``regional integration'' and ``economic interconnectedness.'' The ultimate goal is a common Asian currency shared by as many as 16 economies. That ambition made the location and timing of this year's ADB meeting strangely apropos, just as the euro suffers tensions of its own. There's much Asia can learn from Europe's experience.

The euro improved economic efficiency in a region with output comparable to the U.S.'s. Exchange-rate volatility has been eradicated and financial markets are deeper and more flexible. Intra-European trade has blossomed. The euro is becoming a viable alternative to the dollar, which has fallen roughly 45 percent over the last six years…

It took Europe 30 years of planning, negotiation and hard work to create a single currency. The process unfolded amid relative trust after World War II. The continent was endeavoring to maintain peace and build prosperity at a time when the U.S. and Soviet Union were engaged in an arms race.

Asia lacks anything approaching that trust. Tensions over the past mean its three biggest economies -- China, Japan and South Korea -- are barely on speaking terms. Hu Jintao's trip to Japan this week is the first by a Chinese president in a decade and marks an important step forward. Asian relations still have a long way to go.

In Europe's case, political will to integrate helped overcome economic hurdles. In Asia, politics are a big hurdle. ``I can't see any political will within Asia for the creation of a totally independent monetary authority like the ECB,'' says Simon Grose-Hodge, strategist at LGT Group in Singapore. ``None of them would agree to such an organization unless they ran it.''

Asia's economies are far more disparate than Europe's. Take the 10-member Association of Southeast Asian Nations, or Asean, which exists to promote regional growth and cooperation. It includes economies that aren't remotely comparable. Singapore's per-capita income is about $29,000, while Cambodia's is $500 and Myanmar's is so low that the World Bank doesn't even list it.

The region also lacks a European Union-like structure, a NATO-like alliance or an Organization for Economic Cooperation and Development to push integration. Still, officials at the ADB are working to catalyze the process.

In Madrid this week, finance ministers from 13 Asian nations agreed to create a pool of at least $80 billion in foreign- exchange reserves to be tapped by nations in case they need to protect currencies. ``Asia is coming together slowly, but surely,'' says Masahiro Kawai, dean of the Asian Development Bank Institute in Tokyo. ``There is very clear momentum in that direction.''

The wildcard is how the current food-price crisis affects cooperation. Jong-Wha Lee, head of the ADB's office of regional economic integration in Manila, says the events of 1997 brought Asia together. ``The crisis was a watershed,'' he says. ``It sharply focused the region's attention on its interdependence and shared interests.''

The question is whether surging commodity prices and resulting increases in poverty will hinder regional integration. Will the increasing scarcity of food, energy and other commodities fuel a return to an every-nation-for-itself mindset? Only time will tell.

None of this means an Asian euro is doomed. Yet the idea that Asia can achieve what Europe did anytime soon is fanciful. And given the challenges Europe faces, one wonders if it can muster the will to try.

SKorea's Lee apologises, urges MPs to pass US free trade pact

SEOUL (AFP) — South Korea's president apologised on Thursday for failing to ease "mad cow" fears over US beef imports, but urged legislators quickly to pass a broader free trade pact with Washington.

"The government has not made enough effort to seek understanding and listen to public opinion (about the resumption of the beef imports)," Lee Myung-Bak said in a nationally televised statement.

"I express regret before the people."

Opposition lawmakers are refusing to ratify a sweeping free trade agreement (FTA) with the United States unless Lee renegotiates a separate deal opening the Korean market to American beef.

They claim the government has not secured adequate safeguards against the dangers posed by the human form of mad cow disease. Thousands of protesters, often motivated by rumours on the Internet or mobile text messages, have staged street rallies in recent weeks against the resumption of the imports.

Lee called on the opposition-dominated National Assembly to "overcome partisan interests" and cooperate in passing the FTA before lawmakers end their current session on Friday.

This would be "a major achievement in our political history," he said.

A new parliament dominated by Lee's conservative party takes over in June, but procedural reasons mean it could take months to pass the trade pact.

Seoul wants to act quickly to put moral pressure on the US Congress, which must also ratify the deal.

Lee's government sees the FTA as crucial in putting the Korean economy on a more competitive long-term path.

"From now on, the government will be more humble in approaching the people," said Lee, who was nicknamed "The Bulldozer" for his forceful style when he was a business executive.

"The shortfalls that have appeared so far in the beginning of this administration are all my fault."

He reiterated promises to halt US beef imports immediately should there be any threat to public health.

The US says its beef is totally safe and refuses to approve the FTA until the beef market reopens.

Sohn Hak-Kyu, head of the main opposition United Democratic Party, met Lee Tuesday but refused to support the FTA unless the beef deal is renegotiated. He urged the president to apologise for the controversy.

Total trade between South Korea and the US is worth an annual 80 billion dollars. Some studies show this could eventually rise by up to 20 billion dollars under a free trade regime.

Bush Sez This is "World Trade Week 2008"

A few days ago, our good friends at the World Trade Law blog had a post entitled "McCain Goes After the Free Trade Vote." This, of course, made me wonder if there is such a thing as a free trade vote in America, or a meaningful voting bloc positively motivated by trade issues. Let me be perfectly blunt: Selling the free trade cause in America at the present time appears to be as easy as hawking Cosmopolitan subscriptions to the Taliban (now that would be the ultimate expression of free trade ;-) Despite the quixotic nature of the cause, it is notable that another thing which binds Bush and McCain aside from Iraq is, well, free trade. Call it senseless, call it "he doesn't care no more 'cause he's a lame duck," but Bush has just declared this week to be "World Trade Week 2008" for what it's worth. That it received virtually zero press coverage just goes to show the status quo. Read it and sleep. From the White House:

Free and fair trade helps secure a future of freedom and promise. During World Trade Week, we recognize the positive effects of opening markets around the world. Open markets play an integral role in America's economic progress, creating better-paying jobs, expanding consumer choices, and providing increased opportunities for American workers and employers. Free and fair trade also increases economic growth among our trading partners.

My Administration is committed to expanding economic freedom worldwide. We will continue to seek an ambitious outcome in the Doha Round that will reduce and eliminate tariffs and other barriers on goods and open new markets for services trade. The Doha Round provides a once-in-a-generation opportunity to advance open markets, strengthen economic growth, and help millions rise out of poverty.

We also encourage the Congress to approve our pending trade agreements with Colombia, Panama, and South Korea. Our free trade agreement with Colombia is important, because it will support one of our closest allies in the Western Hemisphere currently under assault from a terrorist network. Congressional approval of this agreement would make clear America's unshakeable commitment to advancing the benefits of free markets and the interests of free people.

Today, nearly 250,000 U.S. firms export U.S. products. Ninety-seven percent of those exporters are small- or medium-sized businesses. The number of U.S. small business exporters has more than doubled since 1992. Those businesses have surpassed a quarter of a trillion dollars in annual export sales.

Free and fair trade helps reinforce our Nation's commitments to democracy, transparency, and the rule of law. This week and throughout the year, we recognize the importance of trade in promoting prosperity and freedom in the United States and around the world.

NOW, THEREFORE, I, GEORGE W. BUSH, President of the United States of America, by virtue of the authority vested in me by the Constitution and laws of the United States, do hereby proclaim May 18 through May 24, 2008, as World Trade Week. I encourage all Americans to observe this week with events, trade shows, and educational programs that celebrate the benefits of trade to our Nation and the global economy.

IN WITNESS WHEREOF, I have hereunto set my hand this fifteenth day of May, in the year of our Lord two thousand eight, and of the Independence of the United States of America the two hundred and thirty-second.

GEORGE W. BUSH

Counterfeit goods

Dodgy trade

The booming trade in fake viagra, and other counterfeit goods

CUSTOM seizures of counterfeit goods rose by 17% in the EU last year, according the European Commission. The number of cases has grown rapidly since 2003, but fewer fake articles were confiscated last year than in 2006—perhaps because internet sales have boosted the number of small consignments. Indeed, 70% of cases involved air-express courier or mail. Cigarettes and clothing accounted for more than half the sham gear seized. China was the source of almost 60% of dodgy goods. Switzerland and India account for three-quarters of the trade in fake drugs, which rose by 51% last year. Treatments for erectile dysfunction—phoney Viagra pills—were the most common counterfeit medicines.