July 7: Regional Monetary Funds? (The Asian Monetary Fund)

1. July 7: Regional Monetary Funds?(The Asian Monetary Fund) Lipscy, Phillip Y. 2003. Japan's Asian Monetary Fund Proposal. Stanford Journal of East Asian Affairs 3 (1):93-104.

2. Discussion groups:What have you learned? • Which of the following is not a condition for borrowing countries used by the IMF? Fiscal, monetary, devaluation (democracy) • How does the us maintain its dominant power in the IMF? 17% of the vote, veto power, “consensus” • What are the different views on the effects of IMF programs? Left- bad policy, right- policies ignored, moderate- partial reform tool to help domestic elites • What kind of regime use international arrangements to “lock-in” future governments? Weak democracy… • What happened between 1870 & 1944 that led to the creation of the IMF? Fall of monarchies and growing # of democracies • What are some ways to reform the IMF? More transparency, balance of power among major shareholders (China-US) • When BW collapsed, what facilitated mobile capital? Floating XR • Which of these names of analytical tool’s does not fit? Time-inconsistent pref problem, commitment problem, .present-bias (prisoner’s dilemma) • What happened to capital mobility when monarchy failed in the late 19th cent? dropped. • .What’s the diff between “arrangement” and “agreement”? How do they differ in processing international politics? Domestic ratification

3. Asian Monetary Fund Proposal? • Going back to the aftermath of the US/IMF bailout of Mexico in 1995 • Japanese policy-thinkers/makers begin thinking about an “Asian Monetary Organization” ($20 billion) • Why? Believed that the US would not act as vigorously in the event of a crisis in Asia • East Asian Financial Crisis • http://www.xtimeline.com/timeline/Asian-Financial-Crisis

4. Aug 1997 • Japan facilitates bilateral commitments towards the IMF rescue package for THAILAND • Japan commits $4 billion out of the $17.2 billion package (as much as the IMF’s contribution) • US – conspicuously absent! •  “Asian sense of solidarity”

5. AMF vision • $100 billion • 10 members: • Australia, China, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand • NOT the United States • Secretary of State Summers to MOF official Sakakibara: • “I thought you were my friend!”

6. US argument • Moral hazard •  • postpone adjustment • Duplication • Add little to the pre-existing IMF system

7. US enticements • Offer Asian countries increased IMF quotas • What does this get them? • More votes… and more rights to borrow • New arrangements to borrow • CHINA: lobbied regarding “Japanese hegemony”

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

9. Why did Japan propose the AMF? • Why did the US and the IMF oppose?

11. Donors avoid moral hazard if: • Economic & political ties to the crisis country are weak • Use the crisis as an OPPORTUNITY: • Extract concessions from the crisis country (force it to open up to trade and investment) • Use the crisis country as an example to deter future “moral hazard”

12. Donor States will prefer rapid liquidity provision if: • Economic ties with the crisis-country are dense • Political interests are at stake • Domestic conditions are conducive to providing funds abroad • This approach will provide a quick recovery of the crisis economy • This approach benefits creditors! • Moral hazard costs are borne over the long run by the entire international community.

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

15. Japan vs. US • Japan – largest foreign investor in Thailand • US & Japan – same share of trade • But Japan ran a surplus, the US a deficit • Slowdown in Thailand  hurts Japanese exports • Regarding bank exposure, FDI, & trade, the same goes for Japan’s relationship with the rest of East Asia

16. Tequila crisis (1994) • US bank lending & economic ties to Mexico far exceeded Japan’s • US leaned towards liquidity provision • Put together massive bailout package: $50 billion • Japan provided no liquidity!!!

17. Why an AMF? • Japanese (Asian) interests are under-represented at the IMF • Recall from last time

18. Top 5 members: United States (16.8%) Japan (6.0%) Germany (5.9%) France (4.9%) UK (4.9%) Other important members: China (3.7%) Saudi Arabia (3.2%) Russia (2.7%) Italy? (3.2%) Belgium? (2.1%) Brazil? (1.4%) India? (1.9%) Korea (1.3%) South Africa? (0.9%)

19. Korea and IMF governance • Prior to East Asian Crisis, South Korea’s vote share was below Libya’s • http://www.imf.org/external/np/sec/memdir/eds.htm • http://www.imf.org/external/np/sec/memdir/members.htm • http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) • http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

20. Good ol’ boys in Washington DC “representing” global financial interests

21. American dominance through informal means – DC location… • Easier access for the US • Informal networking • Ideological influence through cultural immersion

22. Japan’s position at the IMF re: Indonesia • Japan opposed major structural reforms (eliminate national projects, reduce subsidies, restructure financial structure) • Japan supported a loan package to stabilize the exchange rate • IMF ignored Japan

23. Discussion • Who would most likely help Korea if the country faced an economic crisis? • Should we support regional monetary funds? Or push for more voice at the IMF? • What is your preference re: liquidity v. moral hazard