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					              The Integration Misunderstanding
                         Asian Economic Cooperation Reinterpreted




University of Leiden, the Netherlands
Name: Maurits van der Vegt
Master: Economic History
Student-id: s0506508
Seminar: South East Asia & the Asian Crisis
Submission date: 15th of January 2010
E-mail: maups_adres@hotmail.com
Maurits van der Vegt                                Asian Economic Cooperation Reinterpreted

Contents


Introduction                                                  2

Chapter One: The Process                                      3

Chapter Two: Lessons Learned                                  8

Chapter Three: Cooperation gaining speed                     13

Chapter Four: Conclusion                                     26

Bibliography                                                 27


Tables

Table 1:
Free Trade Agreements by East- & Southeast Asian countries   23




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Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted

Introduction

“Human beings can get used to anything,
they can get used to poverty,
they can get used to disease,
they can get used even to war,
the one thing they never get used to is change.”
(Jonathan Sacks)1

        Stability is one of those properties that not only individuals prefer, but is also preferred by
organisations and even countries. Like individuals can stabilise employment prospects with long-
term contracts and by keeping their skills up-to-date, so can companies stabilise their business with
long-term contracts and by updating their product portfolio towards their clients‟ wishes. So will
governments try to stabilise macro-economic performance through regulations and specific
policies.
        Besides stability there are other things to desire. An employee might change jobs and
therewith lose his long-term contract if the extra pay, or other benefits, are high enough.
Governments are not only interested in stability, which in itself can mean different things like
economic stability or social stability. High growth will have political benefits, either by specific
interest groups or by large supporter base. But higher growth will also entail higher risks like
inflation or asset bubbles. So specific situations will determine the trade-off between the desirables
and the governments level of risk aversion.
        This search for an optimal policy combination becomes even more difficult if international
aspects enter the equation. For example, domestic high growth can be created through a successful
export strategy. An overvalued currency might result in troubles for this kind of strategy, but a
competitive devaluation of the currency will probably result in devaluations by other direct
competitors, which sterilize the effect and can have far more devastating effects (for example,
tariff wars, protectionism, capital flight, etc).
        Governments can and should take action to reduce the risks, while at the same time they
need to have an optimal domestic outcome. International economic cooperation aims to reduce the
uncertainty in the international environment, but is also used to promote economic development.
Lowering tariffs can result in lower import prices or better export prospects and therefore stimulate
economic growth. Cooperation can also lead to evading negative policy effects as governments
make their actions complementary to each other.
        Southeast Asia has seen growing cooperation over the last decades and much has been
written about what has happened or what should still be done. This thesis will focus on the driving
forces behind the need for economic cooperation. Much research has focused either on specific
countries, specific areas or specific events. Almost all researchers consider the furthering of
cooperation as a one-dimensional process towards regional integration into an economic and
political union, mostly referring to the European experience. This paper will argue that there can
two processes be identified, one for economic integration and one for economic security.
        Identifying these two underlying currents as the driving forces behind regional cooperation
will have specific results for future prospects of Asian cooperation, which will be of a different
kind than many predict nowadays based on the one-dimensional process they use as an analytical
framework. My opinion about the future prospects will be given in the conclusion of this paper.




1
    TV series (dutch tv): “wat overkomt ons” Nikon & LUX (5 januari 2010)


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Maurits van der Vegt                                               Asian Economic Cooperation Reinterpreted

Chapter one: the process

        As I have mentioned in the introduction most articles and books lump all research into
Asian international monetary processes together under a single header: cooperation and
integration. In this chapter I will go into detail to make clear why these processes are different and
that there are not only different incentives behind these processes, but also different outcomes. I
will start with analyzing stability as an important motive and then add the international context in
which this stability must be maintained. These two parts give the incentives that I think are the
core of the economic cooperation in Asia. Then I will turn my attention to the central question,
namely: economic integration versus economic security.

Stability
        I will introduce here three underlying factors, that are connected with stability, of which
two of them that can end a period of stability.
        The first one is through sudden severe shocks, the other is volatility. The severe shock or
economic crisis is an exceptional event. In statistical terms we talk about once-in-a-life time event
or even less frequent2. Such an economic crisis is so severe that even a whole country goes into
default and social unrest is rising due to mass bankruptcies, lost money and high unemployment.
The economic structure might be so under distress that a total collapse is possible. Outside help is
necessary (normally the IMF) and the crisis is very costly. Decades of development can be lost and
future growth paths might be in jeopardy. These crises do occur, and more often than economists
sometimes predict3. But they are rare enough to keep politicians from taking unpopular, but
necessary, precautionary actions because of the cost of these actions. The benefits of avoiding an
unknown crisis is difficult to assess and will be hard to phantom, and even harder to sell to wary
voters.
        The second factor, volatility, needs some explanation as it is a more ambiguous term.
Besides avoiding these once in a life time crises, there is also a need to lower the volatility of the
long-term growth trend. Long-term growth trends, at least five to ten years, indicate the future
prospects of the economy, while short-term trends have less predictable value. Therefore is short-
term volatility not very relevant for policy actions and will not be part of our focus.
        The last thing that brings stability is, paradoxically, growth. In economic terms no growth
means stagnation. Slow and steady economic growth, in combination with a low but positive
inflation figure4, is good. It is predictable, avoids strains on the economic infrastructure, while the
gains can keep the society satisfied (as long as the majority have part of it).

International context
        I will view the international context from an Asian perspective. East and Southeast Asia all
pursue an export-led growth strategy, in contrast to the US or the European Union. The importance
of the export sector has some specific consequences for reaching stability. First, the international
economic conditions become much more important than before to take into account for domestic
policies. As the Asian crisis has shown, contagion effects can also push neighbouring countries
into a crisis, as happened with relatively well governed Malaysia after the crisis started in
Thailand5. The contagion effect is further affected by the dollar-standard in the region6. Not only
do countries peg (linking of the exchange rate to the US dollar) their currency directly to the dollar

2
  D.W. Hubbard, The Failure of Risk Management. Why It‟s Broken and How to Fix It (Hoboken 2009) 153
3
  Idem
4
  O. Blanchard, Macroeconomics (Upper Saddle River 2006) 534-539
5
   J.L. Tongzon, The Economies of Southeast Asia. Before and After the Crisis (Northampton 2002) 155-157
6
  G. Schnabl, „Capital markets and exchange rate stabilization in East Asia: diversifying risk based on currency
baskets‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia
(Northampton 2009) 267-289, 267-268


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Maurits van der Vegt                                              Asian Economic Cooperation Reinterpreted

or through some kind of „dirty float‟, most trade is invoiced in dollars. To make matters worse
most lending in the region is in dollars, as the market for local currency bonds are not well
developed, while borrowers are not able to cover the currency risk for the same reason of
underdeveloped local currency markets. This makes the whole region especially vulnerable to
global market swings in either trade or currency markets.
        Also the choice of export sectors can influence success. Many Asian countries compete in
the same technology exports. Not only does this bring severe competitive pressures (although that
will also drive efficiency), but makes the whole region vulnerable for demand volatility in these
sectors (as happened after the dotcom crash in 20017). Furthermore many countries are still
dependent on commodity exports like minerals and agricultural products, which are historically
prone to heavy volatility in prices.
        Export sectors are also not developed by luck. Besides some commodity sectors, most
sectors need foreign multinationals to open factories. This Foreign Direct Investment (FDI) is not
necessarily wanted for the capital inflow, but the technology transfer and knowledge transfer is
crucial8. This needs a friendly economic structure to lure multinationals, that can choose from
many countries in the region. Multinationals are lured with tax exemptions, ambitious
infrastructure projects, special zones with regulation specifically adjusted for these companies,
etc9.
        The best protection against external induced crises, is the development of a domestic
market. For some countries with big populations this is a possibility. But many countries,
especially in South-East Asia have a small population (at least too small, exacerbated by its
underdevelopment, for it to cushion export volatility). This is for many countries in the region the
most important reason to vow for a common market in Asia like the European example. But this is
a long-term project, as I will show hereafter.

Economic integration versus economic security
        As seen above integration can lead to more stability, but that is not the prime reason for
integration. The development of common markets and monetary unions are driven by factors like
efficiency and optimal allocation and use of production inputs of capital, land, labour and
entrepreneurship. The main benefits are lower consumer prices and optimal wealth creation10. But
integration also benefits trade, a common currency would increase trade against the pre-common
currency period levels11.
        Economic security wants to avoid crises and volatility, but has no need to give up any
sovereignty per se. Through international cooperation, information costs (like monitoring or
research) can be brought down, stability enhancing regulation can be implemented without
competitive disadvantages (as it is being done throughout the region), and most importantly
macro-economic and monetary policy can be adjusted to each other, so it renders optimal effects
and lowers negative spill-overs12.




7
  J.A. Chan-Lau, I. Ivaschenko, „Asian Flu or Wall Street Virus? Price and Volatility Spillovers of the Tech and Non-
Tech Sectors in the United States and Asia,‟ IMF Working Paper (2002) 11-13
8
  D. Held, A. McGrew, D. Goldblatt, J. Perraton, Global Transformations. Politics, Economics and Culture (Stanford
1999) 280-281
9
  Ibid. 259
10
   R.J. Langhammer, R. Schweickert, „EU integration and its implications for Asian economies: What we do and do
not know,‟ Journal of Asian Economics 17 (2006) 396-399
11
   U. Volz, „Three cases for monetary integration in East Asia,‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards
Monetary and Financial Integration in East Asia (Northampton 2009) 195-221, 199
12
   M. Kawai, „East Asian economic regionalism: progress and challenges,‟ Journal of Asian Economics 16 (2005) 30-
31


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Maurits van der Vegt                                           Asian Economic Cooperation Reinterpreted

        Economic integration in East Asia will create a huge domestic market, which will lower (or
even eradicate) the region‟s dependence on the United States and Europe for final demand. Japan,
as a candidate for integration into the regional market will enhance this capacity as it already acts
as a huge final-demand market for the region13. But integration is still a long way off and in the
preceding period the region remains susceptible to the same ills from the Asian crisis (see next
chapter).
        It is important to note that the countries do not make an exclusive choice between
integration or security. Both processes work simultaneously and independently. The two
processes will hereafter be separately discussed into detail, so we will be able to discern the
processes.

The Integration Process in detail
        The integration process aims to integrate all parts of the economy of all members into one
big market. This means integrating the goods market (trade), the financial market, the labour
market and the currency market. At the end, one regional market will be formed with free
movement of goods, capital and labour. This market will be managed by supranational institutions
for macro-economic policy, like the European council of ministers, and for monetary policy by a
single central bank, like the European Central Bank (ECB). The EU is the main example for other
integration projects like the Asian region, but also for initiatives by countries in the Persian Golf
region, for example.
    The roadbook for the integration process can be found in the influential work of Balassa from
196114 who proposed a process that has almost been completely followed by the EU:
    1) free trade agreements
    2) customs union
    3) common market
    4) economic and monetary union
    5) political union

    Free trade agreements should abolish all trade barriers between members, including tariffs, and
non-tariff barriers. That will stimulate trade between members as it will create one consumer
market for all members. But it will not result in bringing down transactions costs from currency
risks and differences in regulations and other national policies. And without free movement of
capital and labour, there will be no optimal allocation of these production inputs.
         A customs union was probably logical in the period of Balassa, but most countries in the
region have already very open economies with low levels of tariffs. Singapore even has no tariffs
at all, and as it profits from its entrepot function, it will not be willing to introduce new tariffs for
the sake of creating a customs union15. Some scholars therefore suggested the creation of a FTA-
plus (Free Trade Agreement Plus) format, which builds on the free trade agreements towards a
common market16.
         The common market entails free movement of all factors of production within the region.
As this entails bringing very different regulatory systems to converge, the EU has shown that even
an incomplete convergence already has its benefits17. The EU has a much converged goods
market, but labour and even capital are not fully integrated and much distorting regulatory

13
   P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis: Pipedream or possible
reality?,‟ National University of Singapore Working Paper (2002) 27
14
   S.N. Katada, „Trade and Financial Regionalism: structures, sequencing, and linkages,‟ Conference Paper
(September 2009) 4
15
   M.G. Plummer, „An ASEAN customs union?,‟ Journal of Asian Economics 17 (2006) 925
16
   M.G. Plummer, R.W. Click, „The ASEAN economic community and the European experience,‟ in: K. Hamada, B.
Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009) 13-40, 32
17
   Ibid.,33


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Maurits van der Vegt                                              Asian Economic Cooperation Reinterpreted

differences between the members persist. But the continuing drive for further integration brings
growth benefits, so the process itself seems worthy of pursuing.
        The next step, an economic and monetary union, becomes possible and necessary as
economies converge into one single economy. Economic policies, especially macro-economic
policies, need to be for the good of the whole region (which might not be the optimal policy choice
for an individual member). Supranational decision making becomes necessary to ensure this on the
long-term. A monetary union is the optimal monetary cooperation and brings the most benefits to
its members vis-à-vis other intermediate options like exchange trade arrangements between
different central banks18. A supranational central bank though, is a necessary element.
        As the region becomes more and more integrated, a political union also becomes more
interesting. As many important decisions are already taken on a supranational level, the benefits of
a strong supranational level becomes greater, while the cost of giving up sovereignty becomes less
so. The implementation might also be pushed as members with contrarian actions have greater
effect on the whole region, the reason behind the push for majority voting (contrary to unanimous
decision making) was therefore an important part of the European Lisbon Treaty.
        So looking at the process, the integration should result in convergence into one market. So
all economic indicators should converge as well. These economic indicators are the main
indicators we have for convergence, like GDP or intra-regional trade growth in either goods or
services. The FTAs will mainly bring more intra-regional trade. Only with the development of a
true common market we will see prices converge, inflation converge, interest levels converge,
unemployment levels converge, etc. Also the cooperation between members should move towards
supranational institution building, bringing regulations in line throughout the region and bringing
development levels of the countries towards each other. This last one is a prerequisite for
integration in order to avoid too many negative effects19.

The Economic Security Process in detail
         As we have discussed the perceived need for economic security normally comes from the
negative effects of to much volatility in the economic cycle or the experience of an outright crisis.
         To understand what exactly is the problem, information is crucial. In the aftermath of many
crises it is common to find out that there were indications, sometimes long before, of problematic
areas that resulted or exacerbated the crisis20. So better information gathering and more
transparency seems the basic prerequisite.
         The interaction between economies and parts of each economy are complex and constantly
evolving. The regional context, to avoid contagion effects, is important for economic security. To
understand these complex interactions, gathering information is not enough. Research and regional
monitoring is needed to understand all interactions and there is a need to have an early warning
system.
         Information sharing and regional monitoring brings us to the next area, namely regulation.
Lack of sufficient and sophisticated regulations resulted in „Asian cronyism‟21 with wrong
information, dodgy reporting, cronyism and most importantly unawareness to an overexposure to
risk. Cooperation on regulations, for example through „best practices‟ can improve the quality of
information and therefore of research, monitoring and in the end of government actions (as the
actions are based on better understanding of the problems).
         The final part of the economic security process is the safety net. A country should have a
contingency plan for a possible crisis. The swap arrangements before the 1997/98 Asian crisis

18
   A monetary union eliminates transaction costs and currency risks completely, there is also no danger of contagion or
system risk by speculative currency attacks aimed at the weakest link.
19
   P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis,‟ 19-21
20
   S. Yoshikuni, „The Basel Process and Regional Harmonisation in Asia,‟ Pacific Economic Papers (2002) 8
21
   Ibid.9


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Maurits van der Vegt                                           Asian Economic Cooperation Reinterpreted

were far too small to counteract speculative attacks in the relatively small local currency markets.
The only lender of last resort was the IMF, for which countries hesitated to ask for help, as they
wanted to avoid its severe requirements that comes with its loans22, which made the crisis only
worse. The IMF also proved to be not aware of the local conditions and its actions have received,
rightly so, much criticism23.

        Noticeable negative effects, normally a crisis, will set off a process for improving the
financial security. The first actions will involve the reduction of vulnerability, which can even
counteract integration efforts, like the introduction of capital controls to reduce external
vulnerability.
        Also creating a larger domestic buffer can be a reaction as seen in Asia, although that also
can be the result of artificially low exchange rates (more about this in chapter 3), which is of
course also a safety matter as a lower exchange rate improves the export competitiveness
immediately (on a long-term basis negatives might overshadow the positives).
        But information and monitoring are difficult to improve domestically, especially if you are
a developing country with not enough resources and knowledge to implement these improvements
cost effectively. A regional effort to improve information gathering and monitoring will be pushed
for, as well as a growing rise in research within the region to gain knowledge, but also to build
local expertise. As research will point towards problems in regulations and government policies, a
need for cooperation to push for better regulatory regimes and informal talks in order to have
different government policies better geared towards each other, will be perceived as necessary.
        The safety net can be domestic with the shoring up of huge reserves, but this is very costly
and especially difficult for a developing nation that should use this capital to further domestic
improvements. Therefore reserve pooling in a region can be a solution, which can take many
forms. The many swap arrangements are in a way reserve pooling. But better management makes
reserve pooling cheaper, although countries are always unwilling to „give away‟ money (even if its
better or cheaper than their costly domestic solutions). Probably an extensive use of the swap
agreements by a country that has found itself under severe pressure will push the swap agreements
into a more formalised institutional framework. This is because the supporting countries will want
to have a say how the money, especially if it are huge amounts like the IMF had to give during the
Asian crisis, is being called upon. Note that all cooperation is mostly done on informal basis and
that supranational action will only occur with an formalised „safety net‟. There is no need for
integration per se, and the political cost of this kind of insurance is relatively little. Information
sharing might be a problem with some vested interests (as their information is used as a
competitive advantage, or hiding their information brings certain benefits, like the lack of
competition in a highly profitable sector). But most information will not be business specific, but
macro-economic, not very different from what is done in the west by the OECD, BIS and IMF.




22
   G. de Brouwer, „The IMF and East Asia: A Changing Regional Financial Architecture,‟ Pacific Economic Papers
(2002) 25
23
   A. Nasution, „Monetary Cooperation in East Asia,‟ Journal of Asian Economics 16 (2005) 429


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Maurits van der Vegt                                          Asian Economic Cooperation Reinterpreted

Chapter two: Lesson Learned

        The need for more and better cooperation became clear to governments with the
devastating effects of the Asian crisis of 1997/98. Before that event, some cooperation had been
initiated, but these efforts lacked most of the time in effectiveness and implementation. This
chapter will start with a short review of the changing economic cooperation efforts before 1997 as
an introduction. Then I will discuss the issues that have emerged as contributing to the crisis. The
issues will be summarized in the last paragraph. The next chapter, with the framework of chapter
one in mind, will address the efforts that have been initiated from the lessons that were learned
from this crisis.

Pre-crisis cooperation
        The Association of South East Asian Nations (ASEAN) is the most significant cooperation
effort in Asia to date. It was established on the 8th of August 1967 by Indonesia, Malaysia, the
Philippines, Singapore and Thailand, who are still the main actors in the now enlarged group
(Brunei joined in 1984; Vietnam joined in 1995; Laos and Myanmar joined in 1997; Cambodia
joined in 199924). Although economic development was one of the reasons behind its formation,
for most of its history it is has been more of an informal political forum (in the beginning against
communist insurgencies in the region)25. But through its economic endeavours ASEAN has been a
driving force for economic integration. In 1976 it started with several regional investment schemes
and in 1977 it introduced the ASEAN Preferential Trading Arrangement to promote a higher level
of intra-ASEAN trade26. Both the investment and trade schemes have had only a marginal impact
at best27. Integration efforts were thwarted by the individual export oriented policies that made the
members regional competitors for export to the advanced economies. With economic regionalism
gaining ground with the formation of the common market in the EU and the formation of NAFTA
in 1992 28, ASEAN had a chance to reinvigorate itself. In 1992 it made structural changes to its
inner workings to make it stronger, but the announcement of the creation of an ASEAN Free Trade
Area was the real step forward29. Also some monetary cooperation started during this period with a
few bilateral swap and repo-agreements between members. But the incentives to regional
cooperation were overshadowed by the success of the „Asian Miracle‟30 and its export-led
development. The exemption list for the AFTA was huge and contained all the important sectors
and products, so the Free Trade Area existed more in name, than in reality31. The 1997 crisis
proved a turn around in thinking about regionalism in East and South-East Asia.
        Of the other cooperation initiatives, the Asian-Pacific Economic Cooperation (APEC) is
also one worth mentioning here. It was established in 1989 and entails the countries from both
sides of the Pacific and is therefore much larger than ASEAN. Although its ambitions are high
with an aim to create a pacific common market, but the „organisation‟ has not moved beyond
talking yet32.
        Finally, the regional central banks had started cooperation during the 1990s as well. In
1991 the Executive Meeting of East Asia-Pacific Central Banks (EMEAP) was established and
24
   J.L. Tongzon, The Economies of Southeast Asia, 199
25
   Ibid., 5
26
   Ibid., 42
27
   Ibid., 51
28
   R. Pomfret, „Sequencing trade and monetary integration: issues and application to Asia,‟ Journal of Asian
Economics 16 (2005) 108
29
   Idem
30
   R. Pomfret, P. Sourdin, „Have Asian Trade Agreements Reduced Trade Costs?,‟ Journal of Asian Economics 20
(2009) 265
31
   J.L. Tongzon, The Economies of Southeast Asia, 49
32
   S.N. Katada, „Trade and Financial Regionalism: structures, sequencing, and linkages,‟ Conference Paper
(September 2009) 16


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Maurits van der Vegt                                            Asian Economic Cooperation Reinterpreted

enlarged in 1996. It is setup to be an informal forum for central bank representatives to discuss
current financial and monetary matters. In 1996 the governor‟s meeting became more frequent and
the group added working groups to support its cooperation efforts.33 I will write more about central
bank cooperation in the next chapter, as it gained much in importance after the Asian crisis.

The Impossible Trinity
    In the 1960s R. Mundell and M. Fleming developed a model to assess the effects of monetary
policy in an open economy34. One of the conclusions was that there might be three desirables for
an country in the international financial system, but they cannot function all three together,
especially the fixed exchange rate and free capital movements do not35:
    1) A fixed exchange rate, which lowers international transaction costs;
    2) Monetary autonomy, which is used to adjust domestic economic imbalances
    3) Free capital movements, which takes care of better allocation of capital
    Through pegging their currencies to the US dollar the Asian countries fixed their exchange rate
to the most important currency in the region (and one of their most important trading partners).
Monetary autonomy had not been given up as the effect of large capital inflows had been
eliminated through monetary sterilization (I will elaborate on this in the next chapter), which had
as effect that there was no arbitration which would have led to the lowering of interest rates36. The
negative effects could have been eliminated with capital controls (although these have some
adverse effects of their own), but the Asian countries needed the international capital. They needed
the capital as several were running current account deficits, which implied that their investments
(or consumption) were larger than their savings. Also pressured by the deregulation zeal of the
Washington Consensus (US government, IMF and Worldbank), the Asian countries deregulated
their capital controls.

    Though there is still much debate about the true negative aspects, as much of the foreign
capital inflow went through the banking system. For example 75 percent of all foreign capital
inflow in Thailand between 1988 and 1995 went through the banking system37, the rest went
mostly to large companies as loans and in the form of foreign direct investment (FDI)38. If the
banking system had been able to hedge the currency risk, the combination of fixed exchange rates
and open capital markets would probably not have had such devastating effects. Others point
towards the successful efforts of monetary sterilization39. Sterilization of foreign capital inflows
can be done through40:
1) open market operations (selling of government bills, so taking out liquidity)
2) changes in legal reserve requirements of the banking system
3) shifting public sector or pension funds from commercial banks to central banks
4) adjusting discount rates at the central bank reserves
5) setting a restricted lending policy
6) capital controls




33
   S. Yoshikuni, „The Basel Process and Regional Harmonisation in Asia,‟ Pacific Economic Papers (2002) 12
34
   O. Blanchard, Macroeconomics (Upper Saddle River 2006) 428
35
   M.P. Hung, „Impossible Trinity, Capital Flow Market and Financial Stability,‟ Kyklos 62:4 (2009) 611
36
   T. Cavoli, R.S. Rajan, „Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of
Monetary Sterilization,‟ Asian Economic Journal 20:4 (2006) 421
37
   Ibid., 410
38
   Idem
39
   R.S. Rajan, A.Y. Ouyang, T.D. Willett, „Managing the Liquidity Effects of Reserve Stockpiling in Emerging Asia,‟
in: R.S. Rajan, Exchange Rates, Currency Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 3-38, 6-7
40
   Ibid., 7


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Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted

        The problem for the affected Asian countries was the combination of current account
deficits, a fixed peg to the US dollar, no capital controls and low foreign reserves. Between 1995
and 1997 the Real Effective Exchange Rate41 (REER) appreciated markedly of the affected
countries, which was the result of the appreciating US dollar versus the Japanese yen. This made
their currencies expensive, affected trade negatively and in the end made a depreciation
inevitable42.

The Current Account Deficit
        The current account is the trade, service and income (dividend and interest) balance taken
together. The affected countries all had current account deficits, which had to be financed by
foreign capital inflows or lower domestic demand (which would improve the trade and/or service
balance and therefore the current account). A sudden reversal of the capital flows, as happened in
1997, can only be financed by the international reserves43. If these are not sufficient to pay for all
the demand for foreign currencies a liquidity shortage on the current account arises and
international support (normally the IMF) is essential. With a floating currency the exchange rate
would depreciate towards such a level so that the current account would become positive and the
capital outflow can be financed through export income. This was exactly the prescription of the
IMF for the affected economies44 (the austerity measures were meant to get the trade balance into
positive territory by reducing imports for consumption). The problem though was that besides the
current account deficit (a liquidity problem) there were so-called „balance sheet effects‟.

The Balance Sheet Problem
        Devaluation, as a perceived solution for the capital outflow, would lead to a sharp increase
in the domestic value of foreign currency debt, which would result in a solvency problem45.
Depending on the location of the foreign debt, it would lead either to failing banks or to failing
companies. In Asia, with highly levered companies (as many were investing heavily in capital
goods) both were effected with a crippling banking system and companies going bankrupt. The
result was further devaluations and further capital outflows, fuelling a vicious cycle46. Devaluation
would lead to a domestic credit crunch, which would lead to a drop in output and the GDP47. The
prescribed austerity measures of the IMF only made matters worse.

The Dollar Standard
       The dollar peg (linking of the exchange rate to the US dollar) has been seen as an important
element in the crisis. The IMF argued for floating exchange rates (as the countries that received
„help‟ were forced to do). But why did these countries fix their exchange rate in the first place? As
already explained the region followed an export-led development policy. But the international

41
   W.H. Branson, C.N. Healy, „Monetary and exchange rate policy coordination in ASEAN+1,‟ in: K. Hamada, B.
Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009) 222-264, 232-
234
42
   Idem
43
   R.U. Mendoza, „Was the Asian Crisis a wake-up call? Foreign reserves as self-protection,‟ Journal of Asian
Economics 21 (2010) 2
44
   G. Schnabl, „Capital markets and exchange rate stabilization in East Asia: diversifying risk based on currency
baskets‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia
(Northampton 2009) 267-289, 267
45
   R.S. Rajan, „How Best to Manage New-Style Currency Crisis?,‟ in: R.S. Rajan, Exchange Rates, Currency Crisis,
and Monetary Cooperation in Asia (Houndmills 2009) 151-179, 162
46
   S. Chung-Hua, R.S. Rajan, „Are Crisis-Induced Devaluations Contractionary? If so, Why?,‟ in: R.S. Rajan,
Exchange Rates, Currency Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 89-109, 93 & J. Garcia-
Solanes, F. Torrejon-Flores, „Devaluation and passthrough in indebted and risky economies,‟ International Review of
Economics and Finance 19 (2010) 43
47
   Idem


                                                                                                            10
Maurits van der Vegt                                            Asian Economic Cooperation Reinterpreted

trade is invoiced primarily in US dollars (others in euros or yen)48. The domestic currencies are not
accepted. Trade credit is therefore naturally also dominated by US dollars denominated credit, also
because the domestic banking sector is not well developed to take up these transactions. If
countries invest heavily and domestic savings are not sufficient or too expensive (high interest
rates), companies (or banks) are forced to borrow from abroad. But developing countries are
unable to borrow in their own currencies as international investors do not accept currency risk in
currency markets with low liquidity (adverse effects of low liquidity are unpredictable and can be
very costly)49. This is called a „original sin‟ problem50. The problem can be exacerbated if the
domestic financial system is underdeveloped and cannot meet the particular domestic investment
needs even if there is a savings surplus.
         The pegging to the dollar also creates a stable environment as these developing countries
import the low inflation environment of the US, as the region does it as a whole they also create a
relatively stable exchange rate regime within the region. This is good for inter- and intraregional
trade.51 Finally the developing countries are very susceptible to so-called Exchange Rate Pass
Through (ERPT). In short this means that changes in the exchange rate have high transmission
rates to export and import prices, which can have devastating effects on trade and even on long
term competitiveness52. In comparison, in advanced economies domestic cost components are
more important and therefore have a low ERPT and a floating exchange rate regime does not have
much effect. Also their debt is in domestic currency.
         Another important part of the problem was the fact that the private sector borrowed in
foreign currencies, predominantly in US dollars. They not only borrowed for short term trade
credit, but even for long-term investments53. The real problem arose when the currency risk was
unhedged, so the domestic companies would take the cost of a devaluation of domestic currency
versus the dollar. The currency risk was perceived to be minimal as the central bank kept a fixed
exchange rate versus the dollar (implicit hedge). Without a well functioning domestic currency
market (as there are almost no participating traders besides the central bank), the companies are
simply unable to hedge the currency risk on the private capital markets and can only rely on the
fixing of the exchange rate.

Contagion
        One of the experiences of the crisis was that the crisis, which started with Thailand, spread
throughout the region. The reason for this contagion effect had several reasons. The intra-regional
trade links made sure that other countries would be affected by the loss of imports from others54.
Furthermore, most were competing in the same export sectors, which in combination of a
devaluation would mean forcing others to devalue as well (or lose export markets and then be
forced to devalue)55. As the economic structure of the region was very alike, others were as much
affected by a devaluation as Thailand. Finally the growing capital outflow during the crisis has
been attributed to herd behaviour of money managers (due to imperfect information)56, but also to
the large positions of weak Japanese banks in all of the affected countries (a loss in Thailand

48
   G. Schnabl, „Capital markets and exchange rate stabilization in East Asia: diversifying risk based on currency
baskets‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia
(Northampton 2009) 267-289, 268
49
   G. Hale, C. Arteta, „Currency crises and foreign credit in emerging markets: Credit crunch or demand effect?,‟
European Economic Review 53 (2009)760
50
   Idem
51
   M. Kawai, „East Asian economic regionalism: progress and challenges,‟ Journal of Asian Economics 16 (2005) 47
52
   R.S. Rajan, A. Ghosh, „What is the Impact of Exchange Rate Changes on Inflation in Asia?‟, in: R.S. Rajan,
Exchange Rates, Currency Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 39-59, 44
53
   M. Kawai, „East Asian economic regionalism: progress and challenges,‟ 30
54
   S. Chung-Hua, R.S. Rajan, „Are Crisis-Induced Devaluations Contractionary? If so, Why?,‟ 90
55
   Idem
56
   J.L. Tongzon, The Economies of Southeast Asia, 159


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Maurits van der Vegt                                              Asian Economic Cooperation Reinterpreted

resulted in the reversal of capital flows into others as the banks tried to plug the gap created by the
Thai Baht‟s devaluation)57.

Lessons Learned
    From all these issues that contributed to the weakness of the region and the crisis itself have
led to several lessons learned:
    1) current account deficits make the country vulnerable to sudden reversals to capital flows.
    2) The dollar standard, besides its benefits to the region, has transferred the currency risk
        from the rich developed countries to the fragile developing ones.
    3) A rigid fixed exchange rate is no long term viability as the economic circumstances change
        and pressure on currencies rise, but the fragile financial system cannot handle floating
        exchange rate regimes yet.
    4) Fixing the exchange rate (or a „dirty float‟ or crawling peg) to only one major foreign
        currency makes the region vulnerable to volatility between the major global currencies. In
        Asia this was especially the case for the yen-dollar exchange rate.
    5) The lack of capital markets dominated in domestic currency has some severe effects.
        Private companies are unable to hedge for currency risks and are unable to borrow in
        domestic currency. It also keeps the countries dependent on foreign financial institutions,
        as they control foreign currency markets, with the result that the domestic financial system
        stays underdeveloped.
    6) The surprise of the crisis, as the countries were first hailed as the Asian Miracle, was partly
        due to insufficient monitoring. Pressures were clear before the crisis hit, but the lack of
        research made these issues only clear afterwards.
    7) The lack of knowledge of the IMF concerning this region astounded many. The IMF
        overlooked the „balance-sheet effects‟ completely, by which it made the crisis worse
        instead of better. Many countries argued they better do it themselves, and wanted better
        research and information gathering within their own region.
    8) The contagion effects and high costs of the crisis argue for regional monetary cooperation
        as most countries are too small or underdeveloped to perform these actions on their own.




57
  S. Brana, D. Lahet, „Capital requirement and financial crisis: The case of Japan and the 1997 Asian crisis,‟ Japan
and the World Economy 21 (2009) 98


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Maurits van der Vegt                                            Asian Economic Cooperation Reinterpreted

Chapter three: Cooperation gaining speed

        This chapter will focus on several initiatives for cooperation in East- and Southeast Asia
after (sometimes during) the Asian crisis. To keep this chapter structured, I discuss each item in its
own paragraph and I will first discuss monetary issues, than financial issues and ending with more
general economic issues. Each paragraph will be separated in two parts. In the first part I will
explain the issue in detail. The second part (in italic) will be used to make my argument if the item
has been driven by a need for economic integration or economic security. The chapter will end
with a paragraph summarizing the findings.

Asian Monetary Fund
        While the Asian countries were in their first months of the crisis, Japan officially proposed
in September 1997 to establish a regional monetary fund, the Asian Monetary Fund or AMF58. It
was supposed to be funded by 10 regional members (Japan, China, South Korea, Indonesia,
Malaysia, Thailand, the Philippines, Hong Kong, Singapore and Australia) with up to 100 billion
US dollars59. The most significant part was its exclusion of the United States and that it apparently
was set up to challenge the IMF and not complement it60.
        The problematic role of the IMF during the first stages of the crisis, as mentioned in the
previous chapter, was probably not the reason behind the proposal. Japan already started lobbying
for the proposal as soon as Thailand openly ran into trouble61. Why than did Japan propose the
AMF? There were three alleged incentives for Japan to have done so. The first is that Japan saw it
as an opportunity to gain political and economic clout in a region it was already heavily invested
in62. This leads us to the second incentive namely, that Japan was merely looking to defend its
investments in the affected countries63. Especially as the lenders were the Japanese banks, who
were already struggling to survive on their home market. The third argument was that Japan,
whose economic structure is similar to the long-term relationship based economic structure
dominant in the region (the so-called Asian development model), wanted to avoid the destruction
of this system through the conditionality requirements attached to the loans from the IMF64. These
conditionalities are based on the Anglo-Saxon laissez-faire models, better known as the
Washington Consensus.
        As to be expected, the United States were not pleased with this proposal, not the least
because of its own economic interests in the region (even though it was very reluctant to give a
helping hand)65. Especially the fear of ultimately paving the road for a yen-bloc, instead of the
prevailing US dollar standard, scared the United States66. But the real failure of the Japanese was
that, even though it received preliminary welcome gestures from ASEAN countries, that its
diplomatic efforts failed to consult for strong support, especially from China. The Chinese seem to
have been caught off guard by the AMF proposal and were very suspicious of Japanese
intentions67. The United States had an easy task to convince China that Japan was trying to gain
regional leadership and thereby having China withholding its support. The United States did try to

58
   H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation. The Chiang Mai Initiative,‟ Asian
Survey 49:3 (2009) 456
59
   G. de Brouwer, „The IMF and East Asia: A Changing Regional Financial Architecture,‟ Pacific Economic Papers
(2002) 24
60
   H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation. The Chiang Mai Initiative,‟ Asian
Survey 49:3 (2009) 456
61
   Idem
62
   Ibid., 457
63
   Idem
64
   Idem
65
   G. de Brouwer, „The IMF and East Asia,‟ 2
66
   H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation,‟ 458
67
   Ibid., 459


                                                                                                          13
Maurits van der Vegt                                           Asian Economic Cooperation Reinterpreted

accommodate some of the opposition to its policies and the IMF‟s policies by pushing the region
towards the Manilla Framework, a forum for surveillance and assistance, but with a meagre 20
billion US dollar and most importantly subordinated to the IMF68.
        With hindsight it seems a loss that the AMF did not succeed. It might have improved
cooperation within the region, spurred development of financial systems (more in following
paragraphs) and maybe even have made the crisis milder. The AMF is in first instance all about
economic security. The integration benefits (cooperation in a supranational institution) were
probably more detrimental to the regional acceptance than the main incentive, especially on the
political issues, with much mistrust regarding Japan‟s intentions.

Chiang Mai Initiative
        With the dissatisfaction about the IMF‟s faulty actions, its lack of garnering support from
the US and Europe, and the trashed AMF, the finance ministers during an ASEAN+3 meeting
(ASEAN plus Japan, China and South Korea) in Chiang Mai in May 2000, decided to limit the
immediate need for assistance from the IMF69. This proposal became the Chiang Mai Initiative
(CMI), which through a series of bilateral swap agreements a provision would be created to
support countries with an immediate liquidity problem70. Members were able to withdraw 10
percent, later adjusted to 20 percent, of their drawing rights before they had to seek formal
assistance of the IMF71. The need to seek IMF assistance made the CMI acceptable to the US. The
swap arrangements have reached a total amount of 84 billion dollars, mostly through commitments
by Japan, China and South Korea72. These are the countries which also have the largest foreign
reserves and are therefore easily able to make these funding commitments (their combined
reserves totalled to 3.2 trillion US dollars in December 2008)73.
        The CMI commitments have never been tested in a regional crisis. It also is nothing like an
new AMF yet, as it has a narrow institutional core and is mostly bilateral based instead of a
multilateral organisation.
        Recent developments in the direction of multilateralism and more independence from the
IMF (the doubling of the „free drawing‟ rights is a significant step) point towards a renewal of the
earlier AMF proposal74. Japan is again the main driver behind these initiatives, but now they are
better in their diplomatic endeavours, especially towards China. Its bilateral swap agreement with
China reveals its earlier incentives. Instead of US dollars, Japan‟s side is denominated in Japanese
yen, which is the result of a Japanese push to promote the yen as the currency of choice in the
region75. But China‟s growing economic power has not stayed unnoticed as well, a reason for that
country to bolster its regional influence as well76.
        As the Chiang Mai Initiative is effectively the AMF without the multilateral institution it is
even more driven by Financial Security, mostly based on fear for contagion effects and dislike of
the IMF‟s actions during the crisis. The CMI is based on informal non-binding multilateral
cooperation combined with bilateral swap agreements for funding. It is probably the deepest
cooperation that was possible, while still gaining financial security. Economic integration is
absolutely not part of this process.

68
   G. de Brouwer, „The IMF and East Asia,‟ 15
69
   M.G. Plummer, R.W. Click, „The ASEAN economic community and the European experience,‟ 23
70
   Idem
71
   M. Kawai, „East Asian economic regionalism: progress and challenges,‟ Journal of Asian Economics 16 (2005) 42
& H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation,‟ 465
72
   H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation,‟ 459
73
   Idem
74
   M. Kawai, „The role of an Asian currency unit,‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and
Financial Integration in East Asia (Northampton 2009) 304-322, 315
75
   H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation,‟ 461
76
   Idem


                                                                                                         14
Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted


The Asian Foreign Reserves
        The massive foreign reserves within the Asian region regularly surface in Western news
items. These huge reserves are in one way a new phenomenon and in another way they are not.
During the 1980s Japan was amassing huge foreign reserves (which it still does), but the rest of the
Asian region has been stockpiling reserves only recently. The biggest growth in absolute value has
only occurred since 200177. One of the reasons given is that it is a sort of insurance policy against
speculative attacks, as seen in 1997, although the current level of reserves seems excessive for just
that purpose78.
        Where do these reserves come from? A current account surplus seems important, as you
earn more foreign currency than you have to pay. Earning foreign currency on current account
items can be a result from exports of either products or services, or from interest of loans to
foreigners (or dividends on foreign investments). To have a surplus it is essential that your imports
have a lower value than your exports (for example commodity imports that go into producing
high-value products for exports). But imports, especially in developing countries are usually in
capital goods for investments79. This leads us to another important factor to get a surplus in foreign
cash flows, namely having savings being larger than investment80. Here some cracks in the
reasoning come to the forefront. Developing countries are still poor and need large investments to
develop, so a savings surplus is not to be expected (not the least because investing in growth areas
seems a good business case). That was the explanation for the current account deficits in many
countries before the Asian crisis81. Of course withholding income from your citizens can also
create artificial savings, as seems the case in China, where the State Owned Enterprises (SOEs)
have huge savings, while normal workers do not share in the big profits82. These savings do not
trickle down in either higher wages or through dividends83. It also needs to be noted that allowing
more investments might overheat the economy, as was sometimes the case in Asia before the
Asian crisis. Another important factor are the low exchange rates in the region vis-à-vis the major
currencies. These low valuations create an artificial competitive advantage for Asian companies84.
In other words, this is the argument that can compete on the global market with low prices due to
the undervalued currency. This mercantilist perception seems very alive in Asia, with their
emphasis on export-led growth. It makes imports not and exports very competitive, creating
automatically a trade balance surplus.
        Many Western countries have attacked the undervalued currencies in the region, especially
those of China and during the 1980s that of Japan85. But even though we have funny comparisons
like the Economist‟s Big Mac index, still it is impossible to make precise arguments of relative




77
   R.U. Mendoza, „Was the Asian Crisis a wake-up call?,‟ 2
78
   R.S. Rajan, J. Li, „Can High Reserves Offset Weak Fundamentals?,‟ in: R.S. Rajan, Exchange Rates, Currency
Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 180-189, 180
79
   R.S. Rajan, R. Siregar, G. Bird, „Examing the Case for an Asian Reserve Pool,‟ in: R.S. Rajan, Exchange Rates,
Currency Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 193-214, 194
80
   Idem
81
   Idem
82
   R. Tyers, F. Lu, „Competition Policy, Corporate Saving and China‟s Current Account Surplus,‟ Australian National
University Working Paper (2009) 21-22
83
   Idem
84
   M.P. Dooley, D. Folkerts-Landau, P. Garber, „East Asia‟s role in the revived Bretton Woods system,‟ in: K.
Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009)
141-158, 141
85
   R. McKinnon, G. Schnabl, „Current account surpluses and conflicted virtue in East Asia: Chian and Japan under the
dollar standard,‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia
(Northampton 2009) 159-191, 159


                                                                                                            15
Maurits van der Vegt                                               Asian Economic Cooperation Reinterpreted

valuation with our current economic knowledge86. It can also be argued that the country is not
„stealing‟ from the West, but from its own citizens as they are not able to spend the surplus they
are earning with the exports. All in all, easy answers should always be received with some
scepticism.
        Much discussion is about the exact factors behind the huge foreign reserves. As so many
factors are in play, there is a high probability that it will be a complex interaction of all these
factors. But the reserves are here and huge. So the risk of speculative attacks seem rather subdued,
but speculative attacks always start at the weakest link87, so there is a case for regional cooperation
to use the foreign reserves against contagion within the Chiang Mai initiative. Another reason for
cooperation is that the cost of these huge reserves are high88. These funds need to be managed,
they are not used for developing your own economy per se (mostly not), their income might be
low (especially if you invest them in low yielding US Treasuries instead of high yielding domestic
investments). By creating a reserve pool the region might be better able to absorb the savings
surplus by better allocation within the region, but also the management cost of combining reserves
might bring down the cost of holding these reserves. As will discussed below reserve pooling
might also be beneficial for the development of the currently weak regional financial system.
        The creation of foreign reserves are of course individual decisions and not part of
multilateral or even bilateral agreements. But the creation of reserves do have some integration
aspects: 1) the low exchange rates are part of a regional, non formalised, fixed exchange rate
regime. It is therefore sometimes called Bretton Woods II89. There is an aspect of monetary
cooperation needed to keep the system stable (like avoiding competitive devaluations and peer
pressure to have good macro-economic and monetary policies to avoid devaluations; 2) the
benefits of reserve pooling go beyond economic security as they might foster financial
convergence as financial systems are developed alike (see paragraph „Development of Financial
System‟). But whatever the side-effects might be, the foreign reserves are there to avoid
speculative attacks to protect the export-led growth model. In a way the region has created space
to make some errors in their hectic drive towards Western development levels. It is again driven by
economic security, not economic integration.

The „Basket‟ Proposals
        One of the problems that caused the crisis was the existence of the „Dollar Standard‟ and
the risk this poses to regional stability. But many not affected countries have kept a fixed dollar
peg, while the rest have either returned to a fixed dollar peg or have opted for a dirty float/crawling
peg vis-à-vis the dollar90. An exception is perhaps Japan, although it also still intervenes regularly
in the foreign exchange market when it thinks the yen becomes to cheap91. Several proposals to
challenge the weaknesses in this dollar based system have been put forward. Entirely free floating
seems not possible for developing countries with a fragile financial system, while a return to



86
   Y. Cheung, M.D. Chinn, E. Fujii, „The illusion of precision and the role of the renminbi in regional integration,‟ in:
K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009)
324-356, 347
87
   K. Hamada, I. Lee, „International political conflicts and economic integration,‟ in: K. Hamada, B. Reszat, U. Volz
edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009) 61-84, 76
88
   R.S. Rajan, R. Siregar, G. Bird, „Examining the Case for an Asian Reserve Pool,‟ 195
89
   M.P. Dooley, D. Folkerts-Landau, P. Garber, „East Asia‟s role in the revived Bretton Woods system,‟ 141
90
   E. Ogawa, D.Y. Yang, „The dilemma of exchange rate arrangements in East Asia,‟ Japan and the World Economy
20 (2008) 227
91
   It has been noted that Japan does not target inflation, but an exchange rate. With its export-led growth model it
wants a cheap yen vis-à-vis its major export market. This policy though makes it a weak replacement for the US dollar
in the Asian region as a anchor currency with the US federal reserve pursuing an inflation target and with it creating an
anchor.


                                                                                                                16
Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted

capital controls also is not seen as very favourable92. The best options seem to be the „basket‟
proposals. There two kinds of baskets. The first is to create a currency basket peg of the three main
currencies, namely the US dollar, Japanese yen and the euro. This will reduce the instability
created by volatility between the major currencies as experienced by a simple one-currency peg.
The weighting ratio within the basket of each currency is the biggest issue, as it can be based by
total trade destination (trade with US, Japan and Europe), it can be done by trade invoiced, it can
be done on only export or import values, other proposals point towards using FDI (China has
mentioned that it uses this item in addressing its exchange rate93), which give more importance to
the capital balance instead of the current account94. The second form of basket would be an Asian
Currency Unit (ACU), equal to the ECU used by the Europeans before the introduction of the
euro. Again weight factors need to be established, most probably based on GDP values95.
         The value of a basket lies in its use. For example the ACU can see the same failed future of
the ECU, which was hardly used, either in European trade, European loans, and other regional
denominations. Besides the use as a transactions unit, the ACU could be used to stabilise not only
to the dollar, if the fixed peg is still in place, but also to stabilize intra-regional rates96. Although
the main instrument in Europe was the European Exchange Rate Mechanism (ERM), and not the
ECU. The problem of the ACU is that it mostly serves to replace the dollar standard in regional
trade and financing, which without other converging efforts is doomed to fail. Unstable exchange
rates within the region would destabilize the ACU97. Since the 1997 crisis the region has seen less
convergence in exchange rate cycles than before (as before everyone had a hard peg)98. Without
economic convergence and monetary convergence an ACU is not possible99. There is one other
possible way to introduce a regional currency based basket. An ACU based bond, especially if it
included the yen, would diminish currency risks for international investors in local bonds.
Nowadays local bonds are denominated in US dollars, with the currency risks placed with the
borrowing developing country, which is unable to hedge. The ACU bonds would make it possible
to lend and borrow in a regional currency with which exchange rate volatility would affect the
region much less than with US denominated bonds100.
         The use of a multi-currency basket to peg the currency is a better way to avoid the
problems of volatility between the major currencies. The implicit hedge of a rigid dollar peg will
be removed, but it would make the peg far more stable and the currencies less vulnerable to
speculative attacks101. Another loss entails the strong anchor price level, which is possible with a
dollar peg, but less with a common basket102. If chosen for a basket, researchers argue that the use
of a common basket instead of individual baskets result in a higher level of stability and is the
preferable option. A common basket will also reduce intra-regional exchange rate volatility103. But
again, economic convergence will be necessary with a common basket or else the implicit system

92
   R.S. Rajan, „Financial Crisis, Capital Outflows and Monetary Policy Responses: Simple Analytics with reference to
East Asia,‟ in: : R.S. Rajan, Exchange Rates, Currency Crisis, and Monetary Cooperation in Asia (Houndmills 2009)
110-133, 126-128
93
   J. Williamson, „Asian currency baskets,‟ in: K. Hamada, B. Reszat, U. Volz edit., Towards Monetary and Financial
Integration in East Asia (Northampton 2009) 291
94
   Idem
95
   R.S. Rajan, V. Pontines, „Is There a Role for an Asian Currency Unit?,‟ in: : R.S. Rajan, Exchange Rates, Currency
Crisis, and Monetary Cooperation in Asia (Houndmills 2009) 227-238, 230
96
   J. Williamson, „Asian currency baskets,‟ 298
97
   D. Kim, „An East Asian currency union? The empirical nature of macroeconomic shocks in East Asia,‟ Journal of
Asian Economics 18 (2007) 848
98
   E. Ogawa, D.Y. Yang, „The dilemma of exchange rate arrangements in East Asia,‟ 221-223
99
   Idem
100
    M. Kawai, „The role of an Asian currency unit,‟ 315-317
101
    Ibid., 305
102
    A. Nasution, „Monetary Cooperation in East Asia,‟ 438-439
103
    P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis,‟ 30


                                                                                                             17
Maurits van der Vegt                                           Asian Economic Cooperation Reinterpreted

of exchange rate management will make the system unstable as some countries will have more
difficulty holding the peg than others during specific periods in time (for example as one country
is in a recession while the other is not) . It also needs to be noted that either a common basket, or
the ACU will not eliminate the risk of a speculative attack, it will make it less likely104.
         The case for an ACU implies economic integration and that is probably the whole problem,
as it can only be introduced if the region is far more integrated and financial indicators have
converged far more than is currently the case. The other uses of the ACU and a common basket
are driven by the need to avoid either volatility risk (common basket) or the need to lessen the
regional currency risk (with ACU denominated bonds). These are clearly needs for economic
security, and again the integration efforts seem to be more of an obstacle.

Asian Monetary Union
         The best way to eliminate the dollar standard is to create an Asian Monetary Union with an
Asian Monetary Unit like the eurozone. It would probably create a regional capital and currency
market with enough depth and liquidity for regional actors to hedge against currency risk. It would
also eliminate the risk of competitive devaluations, automatically lower regional transactions costs,
and will foster intra-regional trade. More advances are also possible as the lowering of inflation,
and economies of scale for foreign reserve holdings, among others. So why hasn‟t there been any
real progress towards a monetary union Besides some discussion about the possibility of creating
one?
         Therefore we have to look for what is necessary for making a monetary union possible. The
best known research tool is the Optimal Currency Area (OCA)105. Much indepth literature exists,
but in short there is a strong necessity to have this region to converge on all kinds of indicators.
The inflation, economic cycles, trade figures, unemployment, GDP growth, per capita income
levels, these all need to converge. So the region has to become one economy instead of a group of
economies. Of course this is an ideal-type, as even the US and the eurozone do not represent
perfect optimal currency areas106. But within the East and Southeast Asian region no specific
grouping of countries has converged meaningful enough107 and an OCA seems only possible in the
distant future. But the European countries did not converge much more than Asian countries seem
to have done either, and it has been argued that the level of intra-regional trade is the same as it
was in Europe when they decided to go forward on creating the eurozone108. But this level-criteria
does hide some facts. The Asian intra-regional trade is mostly in semi-manufactures that are
assembled in China for re-export to the developed countries, mostly the US (61% of the regional
exports are destined for re-export to the so-called G3)109. In Europe the same level consisted of
trade in final capital goods or final consumer goods, not for re-export to another region. Besides
the fact that most regional countries have not converged sufficiently in order to have an monetary
union. An alignment of Asian politics is needed to achieve that and besides the economic
problems, giving up independence in policy making, and perhaps even giving up sovereignty in
certain areas seems a bridge to far. Besides some distant wishes for an Asian Monetary Union and
lots of research into the subject, no steps towards creating one have been taken110. The European
countries already were part of an exchange rate regime since the 1970s in a regional setting, just
years after the collapse of the global exchange rate regime of Bretton Woods. The Asian countries


104
    J. Williamson, „Asian currency baskets,‟ 302
105
    H. Dellas, G.S. Tavlas, „An optimum currency-area odyssey,‟ Journal of International Money and Finance 28
(2009) 1118
106
    P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis,‟ 18-19
107
    D. Kim, „An East Asian currency union?,‟ 865
108
    P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis,‟ 20
109
    D.H. Brooks, C. Hua, „Asian Trade and Global Linkages,‟ Asian Development Review 26:1 (2009) 112
110
    M. Kawai, „The role of an Asian currency unit,‟ 304


                                                                                                          18
Maurits van der Vegt                                            Asian Economic Cooperation Reinterpreted

wish for a Monetary Union can only be taken serious if a step towards official cooperation will be
taken.
        With the call for integration by ASEAN, the example of the European Union and the fact
that a monetary union might solve the dollar standard, do not make a monetary union a viable
option in the near future. The OCA might be a hard measure that even the United States haven‟t
reached yet in certain perspectives. But convergence in either GDP growth, per capita levels and
since the Asian crisis even in exchange rate, makes an Monetary Union a very unstable solution at
this time. This is though THE integration item, but the cooperation on monetary levels are for
financial security (liquidity reserves, financial development, lowering currency risk), not towards
economic integration, especially as no precursor to a monetary union has been proposed or
implemented.

Asian Bond Market
        Besides the most common monetary problems, another problematic area was the
underdeveloped domestic financial system and capital markets. The financial systems were almost
completely bank based and no domestic bond market exists as local savers prefer foreign
investments and foreign investors shy away from the domestic ones111. These foreign capital
inflows proved very uncertain as they switched from inflow to outflow almost instantly in 1997,
creating the Asian crisis. A bond market is far more stable than the short-term money markets that
the domestic bank system borrowed from112. But with current high foreign reserves the risk of a
new liquidity based crisis is less apparent, but nowadays the need for bond markets seem to come
from the intermediation mismatch, as the high reserves are still invested abroad and locals still
borrow abroad and bond market development is still premature113. Most problematic in these local
markets is still the lack of liquidity for bond markets, but problems with sufficiently developed
regulatory frameworks have also been depicted as obstacles to the creation of bond markets. The
lack of bond markets was already noticed in the early 1990s by the Asian Development Bank
(ADB), who introduced so-called, dollar denominated, Dragon Bonds114. The aim was to attract
Asian investors, but failed due to a lack of sufficient liquidity115. After the Asian crisis, the need
for financial development became more urgent and the ASEAN+3 grouping set out to develop
Asian bond markets with the Asian Bond Market Initiative (a working group)116. Creating a
regional/domestic bond market also will have some monetary policy benefits. It offers an
alternative for the need to invest in US treasury bonds, and it can be used, in the future to influence
regional money demand and supply without relying on the US market. The ASEAN+3 group has
focused on improving the financial infrastructure that is needed for well functioning bond
markets117. So it promotes the development of long-term investors like pension funds and
insurance companies. Also it argues for improving the transparency and accountability of potential
borrowers, with improving underdeveloped accounting standards, fiscal rules and most parts of the
legal framework (transfer, title, trust and other regulations). Either because of the large official
reserves, the savings surplus or better regulatory framework the domestic bond markets have
grown threefold in total volume, although the private market has lagged somewhat behind118.
        EMEAP has also taken action to stimulate regional and domestic bond markets, but have
taken a more pro-active stance than ASEAN+3. In 2003 it launched the Asian Bond Fund 1, which

111
    G. Ma, E. Remolona, „Learning by doing in market reform: lessons from a regional bond fund,‟ in: K. Hamada, B.
Reszat, U. Volz edit., Towards Monetary and Financial Integration in East Asia (Northampton 2009) 87-103, 88
112
    T. Cavoli, R.S. Rajan, „Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited,‟ 410
113
    G. Ma, E. Remolona, „Learning by doing in market reform,‟ 88
114
    K. Tourk, „The political economy of east Asian economic integration,‟ Journal of Asian Economics 15 (2005) 859
115
    Idem
116
    M.G. Plummer, R.W. Click, „The ASEAN economic community and the European experience,‟ 23
117
    Idem
118
    G. Ma, E. Remolona, „Learning by doing in market reform,‟ 89


                                                                                                           19
Maurits van der Vegt                                            Asian Economic Cooperation Reinterpreted

invested 1 billion US dollars pooled together from the foreign reserves within the region119. This
bond fund was more of a test case of pooling reserves and keeping intermediation within the
region. The central banks were the only investors and they invested in US dollar denominated
bonds from sovereign or quasi-sovereign entities120.
        In 2005 EMEAP came with another initiative, called the Asian Bond Fund 2 (ABF2),
which actually was very different from the first fund. EMEAP set up a more complex system to
invest in local bond markets denominated in local currencies, instead of US dollars121. The ABF2
invests again in sovereign and quasi-sovereign bonds through its Pan-Asian Bond Index Fund
(PAIF), but now in domestic currency denominated bonds. The second track of the ABF2 invests
in eight separately created single-country funds to invest in local bond markets denominated in
domestic currencies. Another innovation is that the EMEAP work together with private parties.
The nine single-country funds are direct copies of existing bond index funds from a private party.
Private sector fund managers have been appointed to manage the bond funds, including the PAIF,
and may invite private investors, so it will not be restricted to the central banks to participate. The
ABF2 initiative has had two important results. First it provided the liquidity and support to
develop local bond markets denominated in local currency. It is therewith an important step to
lower the regions dependence on the US dollar. Furthermore by creating real funds it became clear
where the obstacles in the regulatory framework existed122. Through cooperation between the
EMEAP and local representatives of finance ministries and securities regulators they were able to
promote and implement reforms. The ABF2 made clear that „learning by doing‟, as one researcher
called it123, has been a very effective method in developing the financial system.
        The Asian Bond Initiatives and Bond Funds are a successful development. They are
creating domestic capital markets with possibilities to grow, so more liquid markets that can
withstand shocks that might appear one day. It also diversifies the regions capital markets away
from the, also underdeveloped, local banking system. And last, but not least, it lowers the
dependence on western capital markets, whose priorities might not always align with those of the
region. Although these initiatives are entirely based on regional cooperation between finance
ministers in the ASEAN+3 group and the central bankers in EMEAP there is no integration
incentive within the initiatives. The Bond Funds can easily exist without any integration beyond
the cooperation needed to guarantee technical support and liquidity.

Development of Financial System
         Not only did the region heavily rely on the banks, the banks themselves were often weak
institutions. Many were part of large conglomerates with no separation between management and
ownership124. Though some first steps have been taken, the Asian banking system is still in its
infancy. A good yardstick will be the implementation of the Basel II norms, which only Japan
really has to implement (only international banks have to comply to the most strict norms, the rest
can follow voluntarily)125. To address the concern of Asian financial institutions the Bank of
International Settlements (BIS, a forum for all central banks based in Switzerland) have set up a
representative office in Hong Kong in 1998 and has been actively involved in regulatory assistance




119
    K. Tourk, „The political economy of east Asian economic integration,‟ 860
120
    G. Ma, E. Remolona, „Learning by doing in market reform,‟ 91
121
    Ibid., 91-96; entire working of ABF2 based on Ma & Remolona
122
    Idem
123
    Idem
124
    K. Hamada, I. Lee, „International political conflicts and economic integration,‟ 64-65
125
    D. Sherman, C. Neale, „Banking: Asian Banking Gains --- Better Shape: Basel II Signals Change for Asia‟s
Banks,‟ Far Eastern Economic Review (2 March 2007) 2


                                                                                                           20
Maurits van der Vegt                                               Asian Economic Cooperation Reinterpreted

in the region126. The Basel accord makes risk management the central theme in banking, which
will be for Asian banks and their relationship banking the first turnaround127.
         The effective implementation of the Basel norms will be even harder. The Basel II accord
is based on three pillars128. The first pillar deals with calculating capital adequacy levels in relation
to perceived risks (credit, market, currency, operational risk, among others). Pillar two focuses on
supervision and bank management. Pillar three set the norms for public disclosure of information.
         Most Asian banks, besides Japan and some large multinational banks, do not have systems
to calculate the risk components of the banks‟ balance sheet129, besides the fact that many
regulators do not have this knowledge as well. The specialists who can perform these
mathematical and model-building exercises are especially scarce within this region130. But much of
the data needed for good risk-management is also not gathered by the banks (for example data on
defaults, profit margins, market volatility, yields, etc)131, so besides the introduction of credit-
management systems, the bank‟s culture needs to change towards this way of thinking as well in
order to have good information gathering and credit risk assessments. Public disclosure will be
way off, as many banks even do not have internal disclosure due to lack of information gathering.
But the intention by many banks and regulators within the region to implement the Basel II
requirements (although no clear implementation period has been given) supports the hope that
financial development in Asia is moving towards international standards.
         With Basel norms implemented within banks and regulatory frameworks and supervision, a
stronger financial system will arise. This system will be better able to absorb adverse shocks like
the Asian crisis. It will also create more efficient and comprehensive financial intermediation so
that reliance on foreign capital markets and institutions will be reduced. This will eventually pave
the way for eliminating the dollar standard (Besides the monetary improvements needed). Besides
these economic security benefits, these changes might also benefit integration on a long-term base.
Basel sets out to harmonize international financial regulation in order to create a level playing
field in global capital markets132. By adopting these rules a harmonized Asian financial system
will be helpful in making economic integration better feasible.

Financial Monitoring, Surveillance and Research
        The lessons from the crisis like undetected risks, unknown economic structures, patched
knowledge about policy effects and the catastrophic effects of contagion has made information
sharing, monitoring, surveillance (against agreed norms) and economic research far more
important. The perceived problems with the IMF made the region also wary of International
Financial Institutions (IFIs), most with the Washington Consensus as ideological background133.
        The first regional monitoring initiative was the Manilla Framework Group, although the
effective monitoring (and subsequent reporting) was done by the IMF134. As to be expected the
MFG died an early death with ASEAN taken matters in their own hand. Their Secretariat
published monitoring reports using the Regional Economic Monitoring Unit (REMU) of the ADB
in 1998135.




126
    S. Yoshikuni, „The Basel Process and Regional Harmonisation in Asia,‟ 3
127
    D. Sherman, C. Neale, „Banking: Asian Banking Gains,‟ 1
128
    Idem
129
    Idem
130
    Idem
131
    Idem
132
    Idem
133
    A. Nasution, „Monetary Cooperation in East Asia,‟ 435-436
134
    H. Chey, „The Changing Political Dynamics of East Asian Financial Cooperation,‟ 458
135
    P. Wilson, „Prospects for Asian Monetary Cooperation after the Asian financial crisis,‟ 12


                                                                                                    21
Maurits van der Vegt                                              Asian Economic Cooperation Reinterpreted

         With the establishment of the ASEAN+3 forum this was extended into the Economic
Review and Policy Dialogue (ERPD), with the REMU effectively doing the monitoring and
reporting136.
         Of course other IFIs still produce reports on the region, which might still have more direct
value than the ERPD reports. The IFI conclusions normally have specific effects, like the grading
by international credit agencies for borrowing costs, or Worldbank and IMF reports for access to
their financing facilities.
         Although the ERPD is a first important step, not the least as it develops local knowledge
and makes the region less dependent on Western policy advice and support. But the information
needed is still very difficult to get hold of, Singapore for example does not share many of its
economic statistics137. Furthermore the ERPD is far from independent and its conclusions are
prone to political interference138. Here the blame of the IMF comes back to haunt the region. The
IMF did warn governments in the region for problems arising in their economies and giving policy
advice to solve the problems139. These advices were more often ignored than followed by the
governments140. Also the IMF most of the times did not publish its assessments and policy advices
in fear of retaliation by the defiant governments and of fear creating a market panic141.
         Another problem is the missing link between surveillance and possible effects. Currently
no policy failures are linked to the CMI funds. These kind of conditions are avoided for the
region‟s dislike of the IMF conditions. But now cheating, corruption, nepotism and other
damaging actions bear no cost for the member doing it142. When a regional crisis does occur in the
future, this lack of accountability will reappear and maybe even dislodge all the good intentioned
cooperation initiatives. For example, if the Philippine government did not follow up on any advice
and thereby created a crisis of their own making, is it than likely that China will bail them without
any conditions?
         Maybe these regional initiatives of monitoring, information sharing, surveillance and
research show best how far removed the region is from meaningful integration. The problems of
sharing even simple trade statistics, the reluctance to implement any conditions to surveillance
and swap agreements show the mistrust that still exists on a political level. The strongest
arguments against regional integration come from cultural analysis143. This argument is
strengthened by the argument that many regional cooperation efforts are driven by integration
efforts in other regions (notably the EU and NAFTA). The combined political power is especially
needed as an counterforce for the smaller countries in the region (or anybody but China, Japan
and India). The cooperation on this level of information sharing does not have to mean integration
in any form, as it can take the institutional form of an Asian OECD, BIS, or likewise institution.
But the ADB isn‟t even giving enough room, resources, and independence, to eventually reach this
meaningful form of structure.




136
    M. Kawai, „East Asian economic regionalism: progress and challenges,‟ 43
137
    A. Nasution, „Monetary Cooperation in East Asia,‟ 436
138
    M. Kawai, „East Asian economic regionalism: progress and challenges,‟ 43
139
    A. Nasution, „Monetary Cooperation in East Asia,‟ 436
140
    Idem
141
    Idem
142
    M. Kawai, „East Asian economic regionalism: progress and challenges,‟ 43
143
    See Katsenstein and Eichengreen research, who seem very critical of regional cooperation in the short-run.


                                                                                                                 22
Maurits van der Vegt                                           Asian Economic Cooperation Reinterpreted

Free Trade Agreements
         Besides the enormous foreign reserves stockpiled by the region, another eye-catching event
has been the sharp rise in the number of Free Trade Agreements in the region. Below an overview
of all the FTAs that are in effect, under negotiation and being investigated:

Table 1:




Source: M. Kawai, „East Asian economic regionalism: progress and challenges‟

        As can be seen, there are many different free trade arrangements, some are multilateral
(AFTA), many are bilateral, or a combination (ASEAN with another country). Many are
overlapping agreements, which is complicated by the fact that many are also different in
interpretation, exemptions, tariffs and other conditions144. It is no wonder therefore that the Asian
push for FTAs has been called a „noodle bowl‟145. The FTAs (and EPAs, or Economic Partnership
Agreements) are focused on trade, but many also on FDI and other joint projects.
        There are different opinions about these many FTAs. Some argue that it is too complex for
business to be useful, although research done by the ADB over the period 2007-2008 has shown
that almost a quarter (with a upward trend) of the businesses surveyed use the FTAs preferences in
the entire region146. Some countries do use the FTAs better, and support for domestic businesses in
the possibilities and overcoming administrative hurdles seems essential147. Others argue that the
many bilateral agreements undermine regional integration, while the counterarguments is that
bilateral agreements can be used as a stepping stone towards multilateral agreements. ASEAN‟s
FTA, one of the earlier initiatives, has been fully implemented since 2004. But the list of
exemptions is impressive and the reduction in tariffs that did happen have not been matched by a
reduction of non-tariff barriers to protect perceived strategic sectors and industries148.


144
    R. Sen, S. Shrivastava, „ASEAN's Bilateral Preferential Trade and Economic Cooperation Agreements,‟ ASEAN
Economic Bulletin 26:2 (2009) 209
145
    M. Kawai, G. Wignaraja, „The Asian „Noodle Bowl‟: Is it Serious for Business?,‟ ADBI Working Paper (2009) 3
146
    Ibid., 27
147
    Idem
148
    K. Tourk, „The political economy of east Asian economic integration,‟ 856


                                                                                                         23
Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted

        An important drive behind FTAs seems to be the need to keep access to the markets of
their most important trade and investment partners, where protectionism of regional associations
like NAFTA and the EU threatens their export capabilities149. Intra-regional trade has been mostly
in either commodities or semi-manufactured goods, domestic markets are still protected from
imports of consumers goods150.
        The FTAs, especially AFTA and other ASEAN based agreements (most importantly the
ASEAN+China and the ASEAN+Japan) agreements can be seen as first, but important steps
towards integration and creating a regional common goods market. The direction for integration
though is blurred by the many bilateral agreements that are also negotiated. Also sometimes the
perception arises that the drive towards keeping an entrance into the important export markets
(who move towards protectionism) is the main driving force behind the FTAs and not the
integration based motive of creating one single regional market. So my conclusion is a bit
ambiguous. The FTAs are an indication of integration, as the AFTA especially should, but the
main political focus seems to be with securing export markets, which has more to do with securing
financial security.

ASEAN and the common market
        The AFTA sets out to lower tariffs on traded goods. ASEAN also introduced integration on
the front of investment (the ASEAN Investment Area, or AIA) and on free trade of services (the
ASEAN Framework Agreement on Services, or AFAS). The latter two are either not implemented,
or not very effective151.
        With the ambition of creating an ASEAN economic community in 2020152, the region has
to move forward to make this common market possible. In a common market there is free
movement of goods, services, (skilled) labour and capital. Not surprisingly the great example is
again the European Union, which itself only has partial free movement of these factors. Firstly, it
needs to be mentioned that the effects of AFTA, AIA, and AFAS are limited at best153. It is a step
forward and the region seems to take constant, albeit small, steps towards further integration with
new initiatives. But free markets, even for traded goods is nowhere near completion, let alone for
investments or services (and even less so for labour). With eight years after the declaration to form
an ASEAN economic community, looking at the past achievements it looks unlikely that the
region will reach the minimum requirements of an common market within 10 years. But the
process of moving towards a common market will bring benefits as well and it will be easier to
manage the negative effects of more free trade, especially for the less developed countries in the
region, who will benefit less from integration than the richer members (as capital owners will
receive bigger benefits than labour)154.
        With an AFTA, AIA, AFAS and a long existing political institution, ASEAN seems to be the
most plausible candidate for integration. As the process still moves forward this is the one real
integrating force within the region. The process had some boost with the Asian crisis, and might
get a boost again with the current global crisis, to replace western export markets a regional final
demand market seems very welcome. But again the initiatives move very slowly and the promise of
a common market by 2020 seems impossible to reach at the current pace, or even if they
accelerated their efforts.


149
    M.G. Plummer, R.W. Click, „The ASEAN economic community and the European experience,‟ 16
150
    M. Manchin, A.O. Pelkmans-Balaoing, „Clothes without an Emperor: Analysis of the preferential tariffs in
ASEAN,‟ Journal of Asian Economics 19 (2008) 221
151
    M.G. Plummer, „An ASEAN customs union?,‟ 924
152
    Ibid., 923
153
    R. Pomfret, P. Sourdin, „Have Asian Trade Agreements Reduced Trade Costs?,‟ 265
154
    D. Ariyasajjakorn, J.P. Gander, S. Ratanakomut, S.E. Reynolds, „ASEAN FTA distribution of income and
globalization,‟ Journal of Asian Economics 20 (2009) 331


                                                                                                               24
Maurits van der Vegt                                   Asian Economic Cooperation Reinterpreted


Summarizing the findings
        A lot did happen since the Asian crisis and the economic scenery has changed a lot. Was
the Asian region still seen as a promising, but fragile and still relatively underdeveloped region,
currently it is seen as „the place to be‟ for manufacturers, investors, and maybe even employees.
But the many arguments that the region is moving towards regionalism, integration and even some
sort of union seems a misunderstanding of the underlying process. The many initiatives since the
Asian crisis are not about integration, but about financial security. The end of the road for the
financial security seems to be the, previously shelved, Asian Monetary Union. Other cooperation
efforts are to strengthen the regional economic and especially financial system to make it able to
absorb adverse shocks and avoid future Asian crises. The integration efforts of ASEAN might
have blurred the perception of many researchers, who often only tackle one item of the entire
process. ASEAN is still struggling to have the FTAs move towards real integration, while the other
integration steps from chapter one are all but far fetched dreams. With even the only real
integration effort, ASEAN‟s initiatives, stuck in the first step towards anything like a European
Union, the assessment of integration gaining speed within the region seems far fetched, while it
takes away to attention for the drive for economic security.




                                                                                           25
Maurits van der Vegt                                             Asian Economic Cooperation Reinterpreted

Chapter four: Conclusion

         A lot of research has been done on the Asian region resulting in much needed reports,
articles, proposals and advice. It helps to understand the economic structure of the region better, in
more depth and in all its complex relations (or at least more than before). But even how well many
research has been done, the assessment of a one-dimensional process of integration seems very
simplistic. The paradigm of integration also have resulted in some strange reassessments of the
Asian initiatives like the one by Dieter and Higgot, who argue that the Asian process of
regionalism will divert from the roadmap from Balassa and start with monetary cooperation that
will lead to trade cooperation, that will lead to economic union and finally political union155. They
base their argument on the fast implementation of monetary efforts like the Chiang Mai
Initiative156. I expect that this paper has shown conclusively that this is a wrong assessment (not
the least because the trade cooperation in the region started before monetary cooperation).
         The progress in cooperation within the region has primarily been driven by a need for more
financial security. As I have shown all initiatives, besides the ASEAN integration initiatives, are
driven by security issues as explained in chapter one. A monitoring, surveying and supporting
Asian Monetary Fund will be the end of that process. Ironically it has also been the beginning of
the cooperation for financial security with Japan‟s AMF proposal in 1997.
         Integration in the region seems still primarily driven by the danger of protectionism in the
main export markets. As the region has difficulty to form even a consistent free trade area in the
region, the first step towards integration, researchers should stop arguing that the Asian region is
gaining speed in its integration efforts. Their argument is even weaker as many come to the
conclusion that the region is no way near a regional union, not the least because of political
struggles.

        The future prospects for cooperation will, of course, have two dimensions. The process for
integration will go on, under the banner of ASEAN, but probably in the same slow pace as before.
They will first have to sort out the „noodle bowl‟ of FTAs they are creating, before they will be
able to really make progress on the rest of the integration steps. The incentives for further regional
integration will, as before the crisis, be the need to be less dependent on the US and European
markets, especially if their protectionism becomes to costly for the Asian region.
The other dimension, economic security, will result in building on the current initiatives of
combining the regions resources to develop their financial system and move slowly away from the
dollar standard and its inherent instability. With the CMI and the current swap arrangements it
seems an almost certain possibility, that the AMF will eventually become a reality.




155
    As cited by: S.N. Katada, „Trade and Financial Regionalism: structures, sequencing, and linkages,‟ Conference
Paper (September 2009) 7
156
    Idem


                                                                                                             26
Maurits van der Vegt                                   Asian Economic Cooperation Reinterpreted

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                                                                                              27
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                                                                                             28
Maurits van der Vegt                                  Asian Economic Cooperation Reinterpreted

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Description: Southeast Asia has seen growing cooperation over the last decades and much has been written about what has happened or what should still be done. This thesis will focus on the driving forces behind the need for economic cooperation. Much research has focused either on specific countries, specific areas or specific events. Almost all researchers consider the furthering of cooperation as a one-dimensional process towards regional integration into an economic and political union, mostly referring to the European experience. This paper will argue that there can two processes be identified, one for economic integration and one for economic security.