Home Speeches Strategic dynamism and developments of East Asia Community

Keynote Speech of Mr. Jusuf Wanandi[i] on the NEAT Conference on East Asian Financial Cooperation

Hotel Equatorial, Shanghai, 7-8 April 2007

 Strategic dynamism and developments of East Asia Community

 

I would like to thank the organizers, especially Ambassador Wu Jianmin, to invite me to this important NEAT Seminar, on vital topic for East Asian regional cooperation.

 

As one of the keynote speakers, and as a generalist, I do think that the organizers are expecting some of my ideas on a more general topic. I shall explain as the first part a political background of the East Asian Regionalism and its developments in the future.

 

It will be followed by some thoughts on financial co-operation, and its meaning to the East Asian Community idea.

 

There are two views of East Asia. The more pessimistic view is based on the Realist school in international relations and is supported mainly by Western scholars and think tanks. The more optimistic view is based on close observations of developments in East Asia, where efforts are being taken to establish new regional institutions. Obviously, these observers are mostly from East Asia, and are not only following these developments closely but are also involved in the efforts, particularly through second track activities. They are not overly optimistic in their assessment and some are rather brutal in evaluating developments in the region and in their own countries. However, they are optimistic because they see the great opportunity of, and are given the chance to participate in, an emerging East Asia that might become the center of development and progress in the mid 21st country.

 

The pessimists believe that East Asia has to depend primarily on the balance of power because regional institutions and regional order, like NATO or the EU in trans-Atlantic and European relations and development, are almost non existent in East Asia. In addition, there are also real flashpoints in East Asia that has not been stabilized, such as the DPRK proliferation of nuclear weapon, cross-straits relations between China and Taiwan, and the overlapping claims in the South China Sea.

 

They also recognize that deeper problems might arise from the relationship and competition between the two big powers, namely China and Japan, who for the first time in history are both powerful at the same time. They not only face the problem of competition for leadership, but also problems of disputed maritime border in the East China Sea, and the emotional problem of interpretation of their recent history.

 

Another problem is the future relations between the US as the only superpower and China as the aspiring one. As happened in Europe at the beginning of the 20th century, despite the good and strong economic relations, World War I broke out because the politics were not appropriate in dealing with Germany as the new and upcoming power. This could happen in East Asia, despite deepening economic integration, because of the lack of common norms and credible institutions to cope with a rising great power like China. The pessimists also point to the fact that East Asia regional institutions remain under-developed and are based on “shallow” cooperation.

 

Based on the factors mentioned above, it could be expected that instabilities, tensions and conflicts could arise. Regional instruments and common principles cum norms are necessary to prevent that from happening.

 

The second view is cautiously optimistic about the future of East Asia. It is partly based on some realism but this is tempered by the ideas of regionalism and regional cooperation.  Their vision of East Asia’s future is an East Asian Concert of Powers, involving the US, who still has primacy in the region, and an upgraded East Asian Summit (consisting of the ASEAN 10 and the 6 partners: China, Japan, South Korea, India, Australia and New Zealand).

 

For some time to come the primacy of the US will be the mainstay of East Asia’s stability while an East Asian Community is being established. Therefore, the US has to be incorporated into the East Asian community idea although she has lost some of her soft power and has relatively declined her presence in the region, while the economies of China and India are rising and in China’s case also politically and militarily.

 

The flashpoints in the region are under control, and solutions are being worked out. The six party talks (plus the bilateral talks between the DPRK and the US) are the instrument for resolving the problem of proliferation of nuclear weapons of the DPRK. At last every member of the six party talks is now concentrating on the real issue of overcoming the nuclear weapon of DPRK and thus there is a fighting chance that a solution could be arrived at. Moreover, this is so because the US is willing to provide a quid pro quo that is necessary for the DPRK regime to be willing to give up on her nuclear weapons. This will take some more time and some real efforts, but the objective and the ways are now clear for all parties concerned.

 

On China-Taiwan relations, time is on the side of the Chinese. The two economies are integrating rapidly. To China, the problem is how to win back the hearts and minds of the Taiwanese. China is doing its best and tries to be patient. If the opposition in Taiwan (KMT) could win the 2008 presidential election, the two sides could agree on the status quo and restart the talks towards peaceful reunification. The US can play an important role to keep the policies of both sides stable. Japan, like the rest of the region, has an interest in a peaceful resolution to the conflict. But Japan should not get involved in US policies on the cross-straits relationship, because that will not go well with the Chinese and will only complicate things.

 

On the South China Sea, there is an agreement between China and ASEAN on the principles for a peaceful resolution and establishing a Code of Conduct. Stability has been established temporarily, but the Code of Conduct should be concluded soon to strengthen relations between China and ASEAN.

 

Despite the many problems in the relationship between China and Japan, it is not immediately acute for peace and stability because there are countervailing factors that will help maintain some stability. Economic relations are strong, with bilateral trade now amounting to over 250 billion US dollars, and China has become Japan’s biggest trading partner. Investment into China is high. The strong and growing economic relations have helped Japan overcome its recession.

 

People to people relations continue to intensify, with about 4 million Japanese visiting China annually, 70,000 Chinese students studying in Japan, 250-300 cities/prefecture sister relationships, and 700-800 flights a week between China and Japan. During PM Abe’s first visit to China the two sides agreed on an exchange program for the youth, emulating the French-German program (with over 7 million youth exchanges in 25 years), and a joint commission of historians from both countries to reexamine their interpretations. Both sides also strongly support the establishment of an East Asian Community, and they recognize that its establishment hinges on the normalization of their bilateral relations. Normalization of the bilateral relations will not be easy because of a certain sense of competition for leadership in the region. But this is not impossible if there is political will on both sides. In fact, efforts to create an East Asian regional institution could provide a politico-strategic environment that will encourage greater cooperation between the two.

 

The China-US relationship is the most important bilateral relations affecting developments in East Asia. It is a complex relationship between the only superpower and an aspiring future superpower. History shows that relations between two such countries have never been easy, but they need not automatically be confrontational, e.g. the relations between the UK and the US in the 19th and the 20th century.

 

The lessons of Europe at the end of the 19th century and beginning of the 20th century was the failure to structure politico-strategic relations between the major powers. The continuation of conflict into World War II and the Cold War was mainly due to ideological fanaticism of Fascism-Nazism and Communism.

 

The political and strategic environment today could be more serious than one hundred years ago. Relations between China and the US could develop into another “Cold War”, but this could also be prevented. An important aspect in the relationship is China acceptance of the international order and regional order that have been laid down by the US after World War II. Therefore, she is not another USSR that was competing against the US on the basis of a totally different and opposite ideology, politics, economics and social order.

 

That is why Robert Zoellick, former Deputy Secretary of State, has proposed the idea of China as a responsible stakeholder. This idea provides a relevant basis for the relationship. But there are two caveats. First, being a stakeholder China should also take responsibility in and not become a free rider in the development of the global and regional order. This means that China has to abide by the global rules and take an active part in humanitarian affairs because she has become a global (and regional) leader. Second, the US also has to accept some exceptions for China because as a late comer she needs time to adjust to an order that she is ready to embrace but was not involved in its creation. The US should engage in many dialogues with China to allow this to happen.

 

In some instances China has adopted mercantilist policies because she does not know better and has to learn to implement new rules. China should support the US on the issue of Iran’s proliferation as she has done on the DPRK’s. Furthermore, she also has to adopt policies that disprove the excesses of Sudan in Darfur, Mugabe in Zimbabwe and Than Shwe in Myanmar.

 

Hank Paulson, US Secretary of Finance, has implemented this basic attitude towards China by establishing regular dialogue at the ministers’ level to discuss important bilateral, regional and international issues. Similar dialogues on strategic and security issues also need to be held.

 

China realizes that the US is still the only superpower, and that good relations with the US will be instrumental for her modernization efforts. President Bush is perhaps the best US leader they can have on the Taiwan issue because he tries very hard to put the pressures on both not to cross the red line on the straits relations while adopting the traditional ambiguous policy towards both.

 

In fact, with the erosion of President Bush authority due to the war in Iraq and the dominance of the Democrats in both Houses of Congress, China might face more pressures from Congress , and the President as Chief Executive on security and foreign policy could not come to China’s defense as much as before.

 

In view of the fact that relations between the US, Japan and China have become so intertwined, not only in the economic field but also in the political and security fields, a G-8 type of institution for strategic dialogue and cooperation is of critical importance for East Asia.

 

Beyond that East Asia should have an institution that can help the region cope with the emergence of China, to deal with the possible rivalry between China and Japan, as well as the potential adversarial relations of the US as the only superpower and China as the potential new one. This provides the strategic underpinning for the establishment of an East Asian Community.

 

East Asia’s economic integration has been driven by market forces. But it has now reached a level where governments need to take a more active role to sustain and deepen the integration. Governments must take the necessary measures to remove legal and bureaucratic obstacles as well as establish norms and institutions to further organize the region.

 

It should be recognized that ASEAN has a role to play as the catalyst for East Asian regional cooperation, because the two big powers could not do the job, at least for the time being. Questions have been asked whether ASEAN can really be at the driver’s seat, since her economy consist only 10% of the economy of East Asia. This is a temporary effort. In fact, ASEAN’s leadership is mainly in organizing and chairing the meetings, and allows the others to actively set the agenda for cooperation.

 

Some of the ideas to implement the vision came from the other partners of ASEAN. For instance the creation of the East Asian Vision Group was initiated by South Korea’s President Kim Dae Jung and the Group was chaired by former Foreign Minister Han Sung-Joo. The process was supported by ASEAN. It was followed by the establishment of a group of officials under the auspices of the Korean government to deliberate on the areas that should be given priority.

 

So, was the free trade idea proposed first bilaterally between ASEAN and China by ex PM Zhu Rongji of China, and then later followed by Japan and the Republic of Korea (ROK). To have more credibility ASEAN should cooperate with the ROK to assist her in the process of East Asian regional institution building.

 

Russia wants to be included in the East Asia Summit. Her economic relations with the region are still limited.  And it will take them up to one decade to participate fully in the economy of East Asia, and thus could fully participate in the EAS. Her main attention is now geared mostly towards Europe, including in the energy sector. India is already a member of the East Asia Summit because of her footprint in the region, historically, presently and more so in the future. So too are Australia and New Zealand, who are involved very intensely in the region. The EU is already engaged with East Asia through ASEM, and how she will fit in the EAS as a forum for strategic dialogue should be studied.

 

The emerging institution in East Asia is not likely to become like the one in Europe, which is based on norms and institution and is organized in a top-down manner. Instead, regionalism in East Asia is basically market-driven. Intra-regional trade among East Asian countries has now reached 55% of their total trade. Regionalism involving such diverse countries in East Asia has first to be based on trust and confidence building and promoting the habit of cooperation. An East Asian Community will be a long term goal, and will be reached step by step. Cooperation will first be in the economic and functional fields, and later in the political field, followed by cooperation in the security field. Norms and institutions will come later if necessary. Forming an East Asian Free Trade Area (EAFTA) is one possibility.

 

As has been argued above, according to the cautious optimist, adopting a complete balance-of-power strategy will not be sufficient for East Asia. The primacy of the US role in keeping peace, stability, and progress in East Asia has been eroded because of the relative growth of China and India, and the whole of East Asia. Also, much of US attention has been diverted to the Middle East. In addition, the region needs an institution to be able to deliberate on strategic issues and problems of the region, a kind of G-8 for East Asia.

 

That is why the US primacy should be combined with a regional multilateral East Asian institution that together will become a new Concert of Powers for East Asia. It will take the form of an enlarged East Asia Summit that involves the US. Now that the US has begun to appreciate the importance of an East Asian regional institution and do see her national interest in joining it, it will be not too difficult for her to do so. It is not impossible for the US to sign ASEAN’s Treaty of Amity and Cooperation (TAC) to be able to join the East Asia Summit, because the TAC is mainly a political document. This enlarged Summit could be held once in the two year alternately with the APEC Summit, or it could be held back to back with the APEC Summit. This will make it possible for the US President to attend.

 

Since the East Asia Summit will largely be a forum for strategic dialogue, the agreed policies and actions could be implemented by the ASEAN Plus Three (APT) especially in economic and functional cooperation. This suggests that the APT must be flexible and be open for the participation of other relevant members of the East Asia Summit. For instance, Australia should take part in the Chiang Mai Initiative. Security issues, including CBMs and human security issues, can be handled by the ASEAN Regional Forum (ARF). If the six party talks produce success, it could be the basis for regional cooperation on hard security issues.

 

As stated before, the East Asian Community will be comprehensive in scope, covering economic, political and strategic aspects. First, it is meant to help the region cope with the impact of the peaceful rise of China, which is so dramatic and will change the progress and importance of East Asia to the world. It also will keep China in a regional context and will let the smaller countries feel more comfortable in dealing with such a huge China, if done together. It also will be able to keep China honest, following the agreed rules and norms. This is to guarantee that China’s rise will not disrupt regional peace, stability and progress.

 

Second, East Asian regionalism will create an environment that will be conducive for China and Japan to cooperate for the sake of the East Asian region as well as for their own national interest. Sometimes it will be easier to cooperate together with and in the regional institution than only having bilateral relations. It will be easier also to have a regional context to make some policies palatable to domestic constituencies.

 

Third, if China is a responsible and respectable regional partner in the East Asian Community, it will be easier to convince the US that China is not a revolutionary power that is against international and regional norms as established since after World War II by the US.

 

Having the US presence in the East Asia Summit is important, because with her primacy in the region, although her soft power is declining, she is still a stabilizing factor. She is much more needed inside than outside the regional institution.

 

Fourth, the East Asian Regional Cooperation and Community is critical important for ASEAN, because ASEAN needs the support of the big powers of East Asia (US, Japan and China) particularly for her economic and political development. And above all, she needs peace and stability to be able to develop well in the future.

 

East Asia Community is not only for economic cooperation, but also for political and strategic cooperation. And if it needs institutions and norms in the process, then it should be established.

 

At this juncture, differences of values still exist. These include such values as liberal democracy and political development as well as norms for regional institutions. That is why a step by step approach and a long term plan should be established and agreed upon, starting in the economic field, which is already integrating fast. But convergence on norms and values are also happening everyday: civil liberties, rule of law, good governance, democracy (or political space and freedoms), and capitalism.

 

The younger generation in East Asia is the critical mass for the future and already begins to define the new values and norms that are converging. In tandem with this is the need for a new model of development for East Asia, where problems of resource and energy security, water and the environment could be handled jointly by the region.

 

Since East Asia is going to become the next important region, the responsibilities of the East Asian regional institutions in delivering and supporting global common goods should also be considered as an important part of the rise of the region.

 

Financial cooperation in the context of East Asian community building

 

The ASEAN+3 process will be 10 years old this year. It has become the main intra-regional and inter-governmental process in East Asia that encompasses cooperation in a wide range of functional areas. The ASEAN+3 process can be described as promoting regional community building through functional cooperation.

 

The annual ASEAN+3 Summits are at the core of the process as major initiatives to promote regional community building are usually launched at these Summits. One of the most important initiatives by the leaders was the establishment in 1998 of an East Asian Vision Group (EAVG) to develop the vision of an East Asian community. The Vision Group envisions “East Asia moving from a region of nations to a bona fide regional community where collective efforts are made for peace, prosperity and progress.

 

At the Summit in 1999 the leaders discussed various ways to promote cooperation and to cope with the new challenges of the 21st Century. They adopted a “Joint Statement on East Asian Cooperation”, suggesting cooperative measures in various areas including security, economy, culture, and development strategy. East Asian cooperation was given a very broad agenda. This agreement led to the launching of ASEAN+3 meetings of finance and economic ministers in addition to foreign ministers.

 

It should be remembered that the ASEAN+3 process grew out of the 1997 financial crisis that affected several countries in the region. The slow global response to the Asian financial crisis and the regional contagion that characterized the crisis have all raised the awareness of the need to create regional mechanisms for effective prevention, management and resolution of financial crises. It is to be expected, therefore, that financial cooperation will be an important driver of the ASEAN+3 process.

 

However, financial cooperation in East Asia cannot be pursued in isolation of cooperation in other fields. Its prospects are also influenced by developments in other fields. A most interesting question is whether regional financial cooperation can be at the forefront in building an East Asian community. It has been suggested that perhaps a “new monetary regionalism” was emerging in East Asia, and the region might well become the first region that builds a grouping based on monetary and financial cooperation rather than increased inter-regional trade concentration.

 

The prevailing wisdom, drawn from the European experience, suggests the importance of proper sequencing with trade cooperation coming before financial and monetary cooperation. The argument for focusing on trade cooperation is that the benefits from financial and monetary cooperation increase with the level of trade integration. On the other hand, proponents of financial and monetary cooperation argued that this kind of cooperation does not require potentially destabilizing socio-political measures that accompany more traditional forms of regionalism. Moreover, financial and monetary cooperation could provide participating members more opportunities for “win-win” situations, since it does not involve loss of competitiveness vis-à-vis trading partners and trade diversion as could cooperation in trade and investment.

 

In any case, the EAVG proposed that the economic field, including trade, investment and finance, be seen as the catalyst in the comprehensive community-building process. The EAVG recommended the formation of an East Asia Free Trade Area (EAFTA), the establishment of an East Asia Investment Area (EAIA), and greater financial integration.

 

The Summit in 2000 established an East Asia Study Group (EASG), consisting of officials, with the mandate to assess the recommendations of the EAVG when they become available. The EASG was to sort out a practical number of concrete measures that should be given priority and are relatively easy to carry out. The EAVG recommended 57 concrete measures encompassing six areas of cooperation. Of these, the EASG proposed 26 “implementable” measures, 17 for immediate implementation and 9 for possible implementation in the medium- or long-term.

 

A major shortcoming of the ASEAN+3 process is the absence of some kind of an annual progress report on the implementation of the above measures that is accessible to the wider public. This kind of report also helps to ensure that the momentum for regional cooperation in the various functional areas be sustained.

 

Before I venture into providing an assessment of the progress in financial cooperation as viewed from the broader perspective of regional community building, it would be useful to refresh our understanding of why we have embarked on community building in East Asia in the first place.

 

There is, I must admit, still a great deal of confusion about what an East Asian Community entails. Generically speaking, the word Community could be used to indicate a construct, in fact any construct, which is formed by the consent of the respective parties to achieve a common goal.

 

An Economic Community is a distinct phase in the process towards deeper economic integration. It has been given a rather precise meaning in many textbooks. It is a phase in economic integration that is short of the end phase of economic integration, namely the creation of an Economic Union in which there is monetary union. Textbooks have been inspired by the evolution of regional economic integration in Europe. There is a logical sequence in the different phases towards the creation of an Economic Union, beginning with a Free Trade Area (FTA), followed by a Customs Union, a Common Market, and subsequently an Economic Community. This sequence reflects some order of liberalization. However, there is no reason why any other region should follow the path of the European Union (EU). In Europe, several countries formed the European Free Trade Area (EFTA) and have not gone beyond this. Another group of countries immediately formed a Customs Union and moved towards deeper integration while expanding the members and today becomes the EU of 25 countries. There is also no reason why the word Community should be understood as that used by Europe. It could be a matter of agreement amongst the parties forming a Community.

 

In East Asia the desire to form a Community (with a capital C) may have its origin in the concept of “regional community building” (community with a small c). Regional community building can be seen as a post-Cold War approach in Asia to create a regional order. This regional order goes beyond the traditional concept of a balance of power. During the Cold War, a regional order was imposed upon East Asia, and that regional order was largely influenced by the East-West divide. East Asia now wants to craft a regional multilateral order that promotes peace and prosperity through mutual trust and respect and in the spirit of cooperation. The new regional order, including the regional economic order, will be built on voluntary decisions and not as imposition by any power as was the concept of an East Asian greater co-prosperity sphere of some seventy years ago.

 

Asia Pacific Economic Cooperation or APEC is the first product of this post-Cold War era which involves East Asian economies. In fact, East Asian economies form the core members of APEC.  When foreign and economic ministers of 12 Asia Pacific countries gathered in Canberra, Australia, seventeen years ago they embarked on a process of regional economic cooperation as a means to promote “regional community building.” From the outset East Asian participants recognized the importance of involving the United States in the process. Although the United States is not an Asian power, its critical role in the region’s security earns her a legitimate place in East Asia. In addition, her economic involvement in the region is huge. The term “Asia Pacific” has been created to capture this geopolitical and geo-economic reality, and is used to justify the incorporation of the United States into this process.

 

In the United States the concept of “regional community building” is not readily understood and accepted as it is in East Asia. This creates tensions within APEC that will not be resolved easily. The United States can understand what a Community is, as used by the Europeans, but it does not see the desire to turn APEC into such a Community. Some Americans have focused on its more “limited” version, namely the creation of a Free Trade Area of the Asia Pacific (FTAAP). This proposal has been tabled in APEC for the past three years or so, but no agreement on it has been reached. NAFTA (North American Free Trade Area) is the type of the more limited integration. It is also not about regional community building, something which is not in the American lexicon. The United States is said to want to bring up this proposal in the coming APEC meeting in Hanoi. It is unlikely that it will ever see the light of the day.

 

Given the different views and acceptance of the concept of community building among its members, APEC will continue to have to struggle with the implementation of the concept. Some have suggested that APEC should abandon this concept all together. However, this will take away the main attraction of APEC to East Asia. APEC’s main challenge is to show that the “soft” approach of regional community building can produce concrete results. An examination of options for APEC to do so is beyond the scope of this presentation. It should be noted, however, that APEC has been designed as just one of the pillars of a regional order for the Asia Pacific, the other being the ASEAN Regional Forum (ARF) that promotes a multilateral approach to regional security. Initially the United States was strongly opposed to this approach as its security relations with the region is based on bilateral military and defense alliances with several countries in the region. As the ARF is not meant to replace the web on bilateral alliances but introduces a multilateral layer as an additional security blanket for the region, the United States has come along. Here too, ARF’s challenge is to show that by this approach the process can move up from confidence building measures to preventive diplomacy and eventually to conflict resolution, especially in the non-traditional fields.

 

Recently a great deal of attention is given to promoting free trade arrangements as a means for regional community building. Building a regional community is the big vision that drives the process of regional cooperation and integration efforts in East Asia. It needs to be admitted that regional community building is a broad and open-ended concept. Therefore, the process towards this goal tends to be all embracing and often lacks a clear focus. The appeal of free trade arrangements (FTAs)  is that it is a concrete construct with clearly defined targets and timelines, and as it is a binding agreement its details have to be carefully negotiated.

 

In its report, the EASG was of the view that an East Asia Free Trade Area (EAFTA) will help boost intra-regional trade and investment. It also stated that the establishment of an EAFTA should take into account the differences in economic development of East Asian countries. The Report of the EASG placed the formation of an EAFTA as “a long-term goal, taking into account the variety of differences in developmental stages and the varied interests of the countries in the region.” The officials could not hide their cautious stance in endorsing EAFTA. They proposed that East Asian governments conduct a study on the impacts of an EAFTA on the region.

 

However, the suggestion was taken up at the ASEAN+3 Summit in Vientiane in November 2004. Leaders exchanged views on the establishment of an EAFTA and welcomed the decision by the APT Economic Ministers to set up an expert group to conduct a feasibility study of EAFTA. A Joint Expert Group (JEG) for Feasibility Study on EAFTA was established in 2005. The JEG Report, Towards an East Asia FTA: Modality and Road Map, was submitted to ASEAN+3 Economic Ministers in July 2006. Reports suggest that the recommendations of the JEG were not well received. ASEAN Economic Ministers are of the view that they should first complete the ASEAN+1 FTAs before they will embark on a region-wide EAFTA. This suggests that ASEAN Economic Ministers need to build some degree confidence before engaging in the region-wide venture. It should be noted that the total size of the ASEAN economies is only about one eighth of that of their Northeast Asian neighbors.

 

Confidence building is an important step towards community building. Functional cooperation in the primary vehicle for confidence building in the region. This is as valid in the area of financial cooperation as much as in other areas.

 

As stated before, the financial crisis provided the impetus for regional cooperation in East Asia, in particular in the financial field. ASEAN and APEC appeared to have been helpless, and there was great resentment with the way the International Monetary Fund (IMF), in conjunction with the US Treasury, handled the crisis. The ASEAN+3 process was seen as the best vehicle for developing a strategy to dealing with future crises. This opened the way towards more pro-active regional cooperation and integration efforts in the financial field in East Asia.

 

The EAVG recommended financial cooperation as one of the six core areas. It proposed that East Asian governments adopt a staged, two-track approach towards greater financial integration: one track for establishing a self-help financing arrangement and the other for coordinating a suitable exchange rate mechanism among countries in the region. Key recommendations by the Group included the following: (a) establishment of a self-help regional facility for financial cooperation; (b) adoption of a better exchange rate coordination mechanism consistent with both financial stability and economic development; and (c) strengthening of the regional monitoring and surveillance process within East Asia to supplement IMF global surveillance and Article IV consultation measures.

 

The EASG recommended that financial cooperation be placed amongst the medium- and long-term measures. They proposed that APT should undertake further study (with high priority) on (a) the establishment of a regional financing facility; and (b) the pursuance of a more closely coordinated regional exchange rate mechanism. They left out the EAVG’s recommendation on strengthening the regional surveillance and monitoring process. This is perhaps because such a process is already in place. Indeed, a number of initiatives to promote financial cooperation and integration have been taken by ASEAN and ASEAN+3. The main areas of financial cooperation in East Asia are: (a) information exchange and surveillance processes; (b) resource provision mechanisms; and (c) the development of the Asian Bond market. They form the three pillars of regional financial cooperation in East Asia.

 

The first regional surveillance process, the Manila Framework Group (MFG), was established in November 1997. The Group consisted of deputies from the finance ministries and central banks from 14 Asia Pacific countries. In addition to surveillance their agenda included other initiatives such as the development of cooperative financial arrangements to supplement the resources of the IMF and other international financial institutions. It has been proposed that the MFG was not a very successful mechanism for regional financial cooperation for the following reasons: (a) it did not clearly specify the objective of information exchange and surveillance; (b) there was no actual peer review process; and (c) issues relating to financial sector reform were not adequately discussed. The MFG was dissolved in November 2004, in part because the ASEAN+3 finance ministers instituted their own Economic Review and Policy Dialogue (ERPD) Process. Another regional body, the Executives’ Meeting of East Asia-Pacific (EMEAP) Central Banks, is also involved in reviewing recent economic and financial developments in member economies.

 

Strengthening the surveillance process is a key task for further financial cooperation and integration. This is definitely an exercise in confidence building. It effectiveness depends on the degree of mutual confidence that members can develop. There have been suggestions to create a joint forum amongst the two most important groupings for policy dialogue in the region, namely the ERPD and the EMEAP, in order to improve the quality of economic surveillance and regional financial cooperation. I was told that an obstacle for this is the fact that in some countries the Central Bank is under the Finance Ministry. However, ways must be found to overcome this problem.

 

With regard to the regional financing facility, the idea was first proposed by Japan. It was first discussed in Japan in the autumn of 1996 and arose from the 1994 Mexican crisis. The view in the Japanese Ministry of Finance was that if a similar crisis would occur in Asia, the US and the IMF might not respond as swiftly as they did in the Mexican case. Asian countries, with their combined foreign reserves, could respond to such a crisis if a mechanism exists. A tentative proposal was drafted but before it could be discussed with other regional countries, the Thai crisis struck. Japan’s concept of an Asian Monetary Fund (AMF) was discussed at the ASEM finance ministers meeting in September 1997 and informally also at the joint meeting of the IMF and the World Bank in Hong Kong in the same month. The idea received immediate support from the finance ministers of Indonesia, Malaysia, and Thailand, but it was opposed by the US, China, and the IMF. As a result, Japan was unwilling to pursue it further. Instead, the Manila Framework, adopted by a subset of APEC economies in November 1997, was seen as a substitute for the setting up of a regional monetary institution.

 

As the crisis unfolded, the Japanese government pledged large amounts of funds to the crisis-affected countries, mainly through bilateral arrangements under the New Miyazawa Initiative that was launched in October 1998. As part of this Initiative, Japan entered into currency swap arrangements with Malaysia and Korea, which guaranteed the provision of foreign currency reserves in the case of a crisis but without any linkage to IMF conditionality. The second phase of the New Miyazawa Initiative was announced in May 1999. One of its elements was the active use of private sector funds, the other was to build a regional fund-raising system.

 

In May 2000, on the sidelines of the annual meeting of the Asian Development Bank (ADB) in Chiang Mai, Thailand, ASEAN+3 finance ministers met to discuss the need to build a regional financial framework, which led to the adoption of the so-called Chiang Mai Initiative (CMI). The desire to develop mechanisms for resource provision within the region led to the adoption of the CMI. This Initiative called for: (a) an expanded ASEAN Swap Arrangement that would include all ASEAN countries and a network of Bilateral Swap and Repurchase Agreement (BSA) among ASEAN+3 members; (b) use of the ASEAN+3 framework to promote the exchange of consistent and timely data and information on capital flows; (c) establishment of a regional financing arrangement to supplement existing international facilities; and (d) establishment of an appropriate mechanism (the EWS) that could enhance the ability to provide sufficient and timely financial stability in East Asia.

 

In its report, the EASG stated that the CMI should be regarded as a launch pad from which to broaden and deepen ASEAN+3 cooperation and coordination to ensure financial stability. Today, the 16 BSAs amounted to US$ 75 billion, and the ASEAN ASA totals US$ 2 billion.

 

As a key provider of financial resources, the amount available under the CMI will need to be increased and the system multilateralized. In May 2005, ASEAN+3 Finance Ministers agreed to: (a) increase the size of bilateral currency swap; (b) linking CMI to regional economic surveillance (ERPD); (c) raising the level of disbursement permitted without an IMF program from 10% to 20%; and (d) incorporating a collective decision-making mechanism for swap activation – a step towards multilateralization. In the following year, they tasked their deputies to further study various possible options towards CMI multilateralization.

 

Further strengthening requires improvement of the quality of economic surveillance so that independent conditionalities can be formulated in the event of CMI activation. This may require the establishment of a professional secretariat that supports finance ministers and central bank governors in regional economic surveillance, CMI activation and, if necessary, reserve management.

 

As the main supplier, Japan wants to see that ASEAN+3 develops an effective surveillance mechanism in which it can exercise its influence commensurate with its financial contribution. Reports suggest that Japan and China could not always agree on operational matters, including the surveillance mechanism. China’s unwillingness to grant leadership to Japan in East Asia’s financial cooperation efforts could be the most serious roadblock to the further development of the CMI.

 

The Asian Bond Market Initiative (ABMI) is the latest, and so far perhaps the most successful initiative taken by ASEAN+3 in the financial area. The Initiative was endorsed by ASEAN+3 finance ministers in August 2003. Its aim was to develop an efficient primary and secondary bond market. Over time, this scheme should supplement government bond markets with corporate bond markets. This necessitates the development of credit enhancement mechanisms and ratings.

 

The main interest in developing this market is to avoid the double mismatch (maturity and currency denomination) that largely underpinned the recent regional crisis and to exploit the huge savings available in the region. There is also an interest in the region to develop national bond markets. In fact the many efforts at the regional level could be useful in the development of national bond markets. Current efforts are undertaken in the six working groups that have been set up by the ASEAN+3 finance ministers: creating new securitized debt instruments; setting up credit guarantee mechanisms; enabling foreign exchange transactions and settlement; clarifying the issuance of bonds dominated in local currencies by multilateral development banks; local and regional rating agencies; and providing technical assistance.

 

Potentials are still great in the region. Total local currency bonds outstanding in emerging East Asia (EEA) grew from US$ 400 billion in 1997 (or 11% of GDP) to US$2,360 billion in mid-2006 (or 54% of GDP). However, it is still small, amounting only 6% of total local currency bonds worldwide (US$ 40 trillion). In addition, market liquidity, as measured by trading volume and turnover ratios, while rising, remains low relative to OECD markets.

 

In addition to the ABMI, the EMEAP group of regional central banks has launched the Asian Bond Fund (ABF) initiative. The ABMI deals with supply side issues, such as new debt instrument offerings, debt instrument rating and enhancements as well as infrastructure improvements, whereas the ABF initiative deals with the demand side. In the years to come, new ideas and new instruments are likely to be developed. Amongst a number of other proposals, there is the idea of an Asian Basket Currency (ABC) bond.

 

One of the most important challenges for East Asia is to mobilize a large pool of regional savings for regional investment, i.e. for infrastructure, corporate and housing investment. Investment for infrastructure in the region is estimated to amount to US$ 300 to 400 billion per year.

 

Further progress on ABMI and ABF to deepen the size and liquidity of local-currency bond markets will be important for the development of sound, resilient financial systems in East Asia. Other efforts would include: (a) stronger risk management capacity of financial institutions, particularly deposit taking banks; (b) early implementation of Basel II; and (c) improved corporate governance of both financial institutions and corporate borrowers.

 

Beyond the three pillars that have been briefly explored above, there is the question of the need for exchange rate policy coordination in East Asia. The rationale for this is the high degree of economic interdependence within the region. However, there is as yet no consensus in the region on a regional exchange rate arrangement. I understand that there are at least two ways to stabilize intra-regional exchange rates in East Asia. One is for each economy to stabilize its currency to a common key currency or a common basket of key currencies. The other is for these economies to jointly create a multilateral, cooperative system similar to the Snake and ERM in Europe.

 

The experts are in a much better position than me to explore those options. Perhaps political relationships in the region are not sufficiently mature to support the creation of a tightly coordinated multilateral system as in Europe.

 

This leads me to return to the issue of regional confidence building. Cooperation processes in the region need to be guided by a clear vision of the East Asian Community. In Japan’s view, the building of an East Asia community must be based on ‘principled integration’. It has proposed four principles, namely: (a) open regionalism, (b) functional –rather than institutional—approach to regional cooperation; (c) respect for and realization of universal values as democracy and human rights; and (d) confidence building in the area of security and facilitation of cooperation in non-traditional security areas. Japan’s concept paper pointed to the desirability of a CSCE/OSCE (Council for Security and Cooperation in Europe/Organization for Security and Cooperation in Europe) for East Asia.

 

Senior Minister Goh Chok Tong of Singapore has his vision for East Asia. To a large extent it conforms to Japan’s idea. He made the following five points. First, East Asian integration must continue to be largely market-driven, namely driven by “the commercial logic of the market that sees in diversity, potentially profitable synergies.” Because of this, the prime responsibility of all governments, irrespective of political system, is to create national conditions that will facilitate and not hinder market flows. Second, East Asian integration will necessarily require a more active role for states. This suggests that various other functional cooperation efforts will need leadership from governments. Third, since regional integration is a strategic imperative for the entire region, the way each state orders its domestic policies can no longer be of purely domestic concern. This suggests that the concept of absolute sovereignty must be abandoned. Fourth, ASEAN’s role in the driver’s seat mandates it to reconcile and to assuage the tensions between the mayor players and their competing interest. Therefore, “ASEAN integration is a vital and irreplaceable part of the entire East Asian project.” Fifth, the architecture of East Asian integration consists of flexible and multiple overlapping networks, rather than institutionalized bureaucracy (like the EU). It is “an architecture of variable geometry and flexible boundaries”, and in some fashion the US should have a part in it. This is an even broader vision of an East Asian community that appears to have been outlined with the East Asia Summit (EAS) in mind.

 

Goh did not suggest that the agenda of ASEAN+3 will be absorbed by the EAS. The two processes are likely going to co-exist for some time. Financial cooperation has also been identified as an item to be promoted by EAS leaders. Duplication of efforts should be avoided. ASEAN+3 has achieved significant progress in this field. Perhaps the best approach for the region is for ASEAN+3 to invite the involvement of such countries as Australia and New Zealand in its financial cooperation programs. The EAS should remain as a dialogue forum to discuss strategic issues and challenges facing the region. Concrete cooperation measures to respond to those challenges can be undertaken by ASEAN+3 or other regional processes, including the ASEAN Regional Forum.



[i] Vice Chairman, Board of Trustees, CSIS Foundation, Jakarta