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The Consequences of the Global Financial CrisisThe Rhetoric of Reform and Regulation$

Wyn Grant and Graham K. Wilson

Print publication date: 2012

Print ISBN-13: 9780199641987

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199641987.001.0001

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Financial Regionalism after the Global Financial Crisis: Regionalist Impulses and National Strategies

Financial Regionalism after the Global Financial Crisis: Regionalist Impulses and National Strategies

(p.88) 6 Financial Regionalism after the Global Financial Crisis: Regionalist Impulses and National Strategies
The Consequences of the Global Financial Crisis

William W. Grimes

Oxford University Press

Abstract and Keywords

The Global Financial Crisis has severely weakened the legitimacy of the US-led global financial system. This has not only led to efforts to remake the global system through the G20 and related process but has also aroused interest in regional alternatives to the global architecture. Considerable attention has understandably been focused on Europe, but the global crisis also has profound implications for East Asia. Clichés about the ‘rise of East Asia’ obscure the very real contest now being fought over the shape of regional financial cooperation in East Asia, particularly through the ASEAN + 3. This chapter investigates the impact of two variables that theories predict will be of particular importance going forward: (a) the increasing desire of East Asian neighbors to contain Chinese influence in the region and (b) the increased number of ASEAN + 3 participants that have also become official participants in the global-level discussions due to the formation of the G20. The chapter concludes that these changes are likely to increase the tensions inside ASEAN + 3, even as the demand for regionalist solutions increases.

Keywords:   Global Financial Crisis, ASEAN + 3, G20, East Asia, rise of China

The Global Financial Crisis (GFC) of 2008–10 was an enormously important event for the world economy. It led to serious slowdowns and massive loss of wealth around the world, temporarily reversed the growth of world trade, and forced financial rescues on an unprecedented scale, involving the International Monetary Fund (IMF), the European Union (EU), and the world’s major central banks. It may have been even more momentous from an international political economy point of view. Various analysts have observed the loss of legitimacy of the US–UK vision of self-regulating financial markets,1 a loss of confidence in developed country economic governance and financial institutions, the relative rise of emerging market economies (whether China or East Asia as a region or the BRICs), and the weakening of the legitimacy and effectiveness of eurozone institutions.2 On the other side of the ledger, states have also demonstrated cosmopolitan tendencies, including efforts at increased international cooperation through the creation of the Financial Stability Board (FSB) and the G20; also, governments by and large resisted urges toward protectionism in the face of domestic dislocation and pain.3

Importantly, the effects of the crisis varied considerably across countries and regions. The effects were greatest on the United States and western Europe, as well as Europe’s near peripheries (e.g., Iceland, Estonia, Turkey), that were most tightly entwined in globalized finance.4 Elsewhere, the main effects were transmitted through real economy channels, as developed country economic slowdowns led to reduced demand for manufactured goods produced by emerging markets (although there were also temporary problems related to emerging markets’ difficulty in obtaining trade financing).

(p.89) And then there was East Asia, where governments and central banks responded so effectively that the emerging markets of the region actually saw positive growth for most of the crisis period. While China’s massive monetary and fiscal stimulus packages got most of the attention of the Western media, prompt and effective stimulus packages were seen throughout the ASEAN + 3.5 A variety of observers contrasted the economic resilience of China and its neighbors in the crisis with the economic weakness of the United States, Europe, and Japan, leading some to argue that the global economy’s center of gravity was shifting decisively across the Pacific. The strong economic performance of East Asia (ex-Japan) coincided with and accelerated efforts to strengthen regional cooperation, particularly in the financial realm. In the midst of the global crisis, the ASEAN + 3 agreed to a significant expansion and institutional enhancement of their signature regional bailout fund, the Chiang Mai Initiative (CMI), creating a $120 billion reserve pooling arrangement (CMI Multilateralization, or CMIM) that some observers predicted would displace the IMF in future East Asian crises.

The GFC and differential economic growth patterns have contributed to a renewed focus on regional solutions to common problems not only in East Asia but elsewhere as well. The failure of global standards to prevent the crisis has reinforced discomfort with US leadership at the same time that emerging economies around the world have been accumulating greater and greater amounts of foreign currency reserves. The sheer scale of bailouts in the wake of the GFC has also contributed to the need for cofinancing in many of them, increasing the role (and thus influence) of regional groupings.6

Despite the apparent triumph of a regionalist approach to financial crisis management in East Asia, however, a number of questions remain unanswered. CMIM and other regional arrangements face significant challenges in terms of monitoring and enforcement, managing rivalries over leadership, and charting an appropriate relationship with the IMF and global governance mechanisms.7 Political and economic developments during and after the GFC highlight two other potential challenges to East Asian financial cooperation that will be explored in this chapter: the increasing uneasiness of East Asian governments other than Japan about the rise of China, and the expanded participation of ASEAN + 3 participants (China, Indonesia, and South Korea, in addition to G7 founding member Japan) in global financial governance via the G20.

In this chapter, I will argue that the GFC has not fundamentally shifted regionalist preferences in East Asia, despite the weakened legitimacy of US-led global institutions and standards and the increasing weight of East Asia in the global political economy. While the crisis has undoubtedly hastened CMIM and the decision to move forward with efforts at regional surveillance, the problems of political leadership in the face of fundamental collective action (p.90) problems remain. New opportunities for East Asian states at the global level are unlikely to reinforce regional cooperation. Meanwhile, the “rise of East Asia” itself—particularly that of China—will make it even more difficult to create functional regional autonomy in terms of surveillance and balance of payments crisis management.

Analytical Approach to Understanding East Asian Regionalism

Much of the analysis to date of East Asian regional cooperation has been dominated by functionalist or constructivist writers. This chapter, in contrast, follows a realist paradigm in which power and interests are paramount. This approach will be explicated following a brief review of the other approaches.

The “functionalists” are primarily economists and technocrats who have focused on how to create institutions of cooperation. For example, economists affiliated with the Asian Development Bank Institute have devoted considerable attention to devising effective surveillance mechanisms and governance rules to ensure that the twin goals of ensuring credibility and reducing moral hazard can be met.8 A key technical challenge for these writers has been to devise means of measuring the risk of balance of payments crises based on macroeconomic policies and supervision of domestic and cross-border finance. The political challenge is how to minimize moral hazard—in other words, how likely creditors can ensure that governments that have brought crises on themselves will be required to accept strict policy conditionality in order to receive bailout funds. All of the solutions depend on some sort of institutional delegation by the participating states to an autonomous body. The problem, of course, is that delegation is difficult, especially in the context of a small group without a clear single leader. I have argued elsewhere that this problem is essentially insurmountable except through an IMF trigger.9

Constructivists have focused their attention instead on how ideas have made regional cooperation more or less effective. On one side sit the majority, who argue that East Asia has increasingly become a coherent region that has a sense of commonality of interest and has sharply distinguished itself from a US-led “West” whose interests are represented by market fundamentalism, global financial conglomerates, and an IMF that supports and embodies those elements.10 As former Singaporean Prime Minister Lee Kuan Yew is often quoted as saying, the aspiration for a meaningful East Asian regional identity is “the idea that would not die.” Calder and Ye, writing in a related vein about Northeast Asia, argue that regional cooperation

…involves at its core an increasing economic and psychological connectedness within Northeast Asia that is ultimately replete with political implications. Visions (p.91) of a common Northeast Asian identity, with positive historical roots obscured by bitter memories of war and colonialism, have re-emerged, after lying dormant for more than half a century…those visions gained renewed life and credibility following the 1997–98 financial crisis.11

In contrast, a minority profess skepticism about many if not most regionalist efforts, on the basis of enduring animosity and mutual suspicion among East Asian countries.12

While both the functionalist and the constructivist approaches can provide valuable insights into the direction and pace of development of regional institutions, I have argued that power and interests are the key factors in the development (or lack thereof) of East Asia’s regional financial institutions. Three power games are particularly relevant.13 First, a basic characteristic of emergency liquidity facilities is that likely creditors have an advantage over likely borrowers in the design and functioning of those facilities. In East Asia, this focuses our attention on the power asymmetries between Japan and China on the one hand and the ASEAN-4 countries on the other.14 Second, there is the contest between East Asia as a region and the global system as personified by the United States and IMF. This contest has been memorably characterized by Richard Higgott as the “politics of resentment” and draws on the experience of the Asian Financial Crisis of 1997–8, in which regional governments felt that the US/IMF view of how to handle the crisis proved injurious to the region.15 The third power game has been the contest between Japan and China for regional leadership, which has been driven in turn by mutual distrust.

The GFC has shifted the terms of these power games, both by accelerating China’s relative rise in power and confidence and by providing a new set of venues for contestation. Even such a sober-minded observer as Martin Wolf of the Financial Times wrote in the spring of 2011: “The centre of the global economy is shifting towards Asia…The speed and scale of China’s rise is breathtaking.”16 Raising the apparent stakes further, Ambassador Charles Freeman, a leading expert on US–China relations, stated in a speech to the Naval War College: “In some disturbing ways, Sino-American competition is beginning to parallel the contest between us and the Soviet Union in the Cold War. This time, however, the United States is in the fiscally precarious position of the USSR, while China plays the economically robust role we once did.”17

While I believe that much of the press coverage and commentary has been exaggerated, it remains an inescapable fact that China’s economy is growing more rapidly than its developed country rivals and that corporations and governments around the world are looking increasingly to a future in which they will be dealing with Chinese suppliers and consumers. There is evidence that China is taking advantage of that position by implementing an increasingly mercantilist (p.92) set of economic policies.18 Meanwhile, China has been continuing its two-decade-long military modernization campaign, and by some estimates will have denial capabilities vis-à-vis even the US Navy (albeit in limited theaters of conflict) within another ten years. China’s improvements in economic and military power have been accompanied by increasing assertiveness in its relations with trading partners and—especially—with regard to territorial disputes.19

Meanwhile, China has formally ascended to the top ranks of global policymaking—not just in the UN Security Council but also in terms of economic governance, as seen in its membership in the G20, FSB, Basel Committee, International Organization of Securities Commissions (IOSCO), and others. China’s growing role is also personified by the appointment of individuals to key positions in leading international organizations, including central banker Zhu Min as a special advisor to the managing director of the IMF and Justin Yifu Lin as chief economist of the World Bank. China’s expanded role in global governance is clearly justified by its increasing role in world politics and the global economy. It also accords with the professed desire of the US government to promote Chinese involvement in global governance as a “responsible stakeholder.” Naturally, though, China will sometimes differ in its preferences from what the United States or other governments may consider to be “responsible.”

Realists see multiple challenges—to say the least—to regional cooperation. While the more dire warnings in the immediate aftermath of the Cold War that Asia was “ripe for rivalry”20 in a military sense have fortunately not come to pass, the rise of China as a regional (and now global) power has created a series of challenges for its neighbors, particularly Japan. Japan is in the uncomfortable position of being drawn ever closer economically to China, the country that is the main, and growing, potential threat to the security of its territory and sea-lanes of communication; meanwhile, its economic interdependence with the United States has been on the wane even as it increases its reliance on the US–Japan alliance as a guarantor of its long-term security. Japan’s long-time presumptions of regional leadership are also fraying, as China takes an ever more central role in regional economic interdependence. The power transition, although peaceful so far, has contributed to mounting anxiety among the Japanese people.21

As I have argued elsewhere, this dynamic has led to a contest for regional leadership between China and Japan, with considerable ambivalence regarding the role of the United States.22 In terms of regional financial cooperation, the situation is further complicated by China’s financial backwardness (balanced somewhat by its massive reserves); Japan’s combination of financial sophistication and market stagnation; the ever-present global influence of the United States; and the suspicions of Japan, China, and their Asian neighbors about US-advocated policies.

(p.93) The Creation of the G20 and the Prospects for an Asian Bloc

President Bush’s decision to create a G20 Summit and elevate it (at least rhetorically) to a position of primacy in global economic cooperation and governance was a clear statement that the GFC had hastened the arrival of a post-G7/G8 world. Much attention has been paid in Europe and the United States to the G20’s expanded representation of developing economies and previously neglected regional powers, including Brazil, China, India, and South Africa. In East Asia, a point of greater interest has been the inclusion of no fewer than four members of ASEAN + 3 and CMI (China, Indonesia, Japan, and South Korea) plus two potential CMI members (Australia and India).

The G20 thus recognizes in a very concrete way the economic rise of Asia and the need to better incorporate the region’s increasingly important economies into global governance. It also raises the possibility of new coalitions of states working together within the G20 to shift global rules to their advantage. In East Asia, one obvious such grouping was the CMI countries, which (even without adding potential members Australia and India) represented fully one-fifth of G20 membership. Indeed, one possibility often mentioned in regard to the CMI even prior to the GFC was that participating states might form an effective voting bloc within the IMF.23 That in turn could strengthen cooperation within the region, and thus contribute to increasing the functional autonomy of CMIM and the ASEAN + 3 Macroeconomic Research Organization (AMRO) as a regional regime.

Regional–Global Interactions: Virtuous Cycles, Venue Shopping, and the Rise of China

The broadened inclusion of East Asian economies in the G20 process thus offers opportunities for the ASEAN + 3 (or ASEAN + 6) countries to present a unified front and thus increase the regional input into global decision-making. This certainly seems to accord with the way in which European countries have behaved in a variety of international forums and organizations, from the G7/G8 to the IMF to the Basel Committee. (Indeed, in some cases, the commonality of interests among European countries is further supported and ensured by the additional participation of an EU representative, as in the case of the G20.) In thinking about the general implications of relationships between regional regimes and global governance, it is easy to envisage a self-reinforcing cycle, in which regional solidarity in a global institution helps to shape the global institution’s rules and activities to the benefit of the regional institution, which contributes to regional solidarity within the global institution, and so on.

In some ways, the ASEAN + 3 countries might appear to have excellent prospects for presenting such a unified regional front. ASEAN itself has been (p.94) effective at doing so in global forums despite often significant differences in interests and perspectives among member countries.24 Turning to the ASEAN + 3, the participating states have reached a considerable level of consensus on the shape of regional cooperation, as well as having been consistently skeptical of the US-supported “Washington Consensus” (often characterized in East Asia as “excessive market fundamentalism”).25 In this sense, the high degree of ASEAN + 3 representation in the G20 suggests opportunities both to carve out policy space for regional efforts and to increase solidarity within the region.

There is, however, an alternative logic to the relationship between regional cooperation and global representation: venue shopping. The starting point here is that states that consider themselves to be underrepresented at the global level (which, at least until the GFC, clearly held for China, Indonesia, and South Korea, but not Japan, among the ASEAN + 3 states) have few options for affecting decisions made at the global level. One option in principle is simply to opt out of a given regime (“exit” in Hirschman’s terminology),26 but this is not practical for globally integrated economies when it comes to financial rules. Fairly or unfairly, minor financial markets have little choice but to be rule-takers if they wish to participate in global financial transactions. If simply accepting the status quo (“loyalty”) is unsatisfactory to the underrepresented state, its only other option is to cooperate with relatively like-minded states to exercise voice through a state that is able to participate. In East Asia, that state has been Japan, almost exclusively, as a function of its membership in every major global financial decision-making body, from the G7 to the Basel Committee to the former Financial Stability Forum and even to the IMF (where it has the second largest voting share and was, until recently, the only Asian country with its own executive director and one of its nationals as a deputy managing director).

In this model, regional cooperation is encouraged by the lack of representation of most regional states at the global level. Differing interests and preferences are overcome by the lack of alternatives for participating in consequential global discussions. In contrast, access to new opportunities for voice, such as through expansion of membership of existing regimes or the creation of new ones, will have the effect of reducing the costs of disagreement with regional partners. This implies that regionally based balancing against global powers in the new order would become less attractive unless preferences happen to cohere more on a regional basis than on other bases (e.g., level of economic development, regime type, relationship with other participants in the forum). That is not the case for East Asian participants in the G20.

The variable that drives the differing results of these two models is the value that regional states place upon collective action at the regional level. To operationalize this a bit more clearly, it is worth thinking about where various (p.95) countries’ interests lie in a policy space. If regional preferences tend to cluster within the policy space, additional opportunities for voice should lead to an approximation of the first model. Since we are dealing with functional cooperation, the core of this analysis should rightly focus on the policy space surrounding the relevant issue-areas, but it is also important to bear in mind that there can be spillovers from other issue-areas. The EU is an excellent example, in which the multiple and overlapping sets of mutual interests and cooperative measures can help to maintain a common front at the global level even in issue-areas in which there is considerable disagreement among EU states. That justification for regional solidarity is less salient in East Asia, however, where it is generally agreed that the regional “architecture” is fragmented and inconsistent.27

While new opportunities for voice can offer opportunities for greater or lesser cohesion, depending on regional governments’ proximity in terms of preferences within a multidimensional policy space, changes in relative power within the region can actually change governments’ preferences for cooperation. There are two modal cases, which have opposite results. The first story points to the attractiveness of having a rising power in the neighborhood. In this case, the increasing capabilities of the rising power can be used to provide regional public goods (or to enforce provision of regional public goods by states that might otherwise free-ride). In this case, regional participants in the global processes have greater incentive to act as a regional unit, even if their interests do not align perfectly with regard to the issue-area in question. Alternatively, the rising power can be seen to pose a threat to neighbors. In this case, they may be driven to try to balance against the rising power, either by banding together with other states within the region that feel threatened or by relying on a powerful outsider. In this case, regional participants in the global processes are more likely to pursue ad hoc coalitions based on issue-area interests, or perhaps even to subordinate their issue-area preferences to some extent to align with their external protector.

This logic has obvious implications for East Asia, in which there has been long-term ambiguity about the benefit or threat posed by China (or, previously, Japan) and deep ambivalence about the US role as (sometimes self-interested) guarantor of regional stability.

The Shape of East Asian Regional Financial Cooperation

Before addressing the empirical question of whether these hypotheses are supported by the evidence, I will briefly summarize developments in East Asian regional financial cooperation, as they are not widely known. Prior to 1997, there was essentially no meaningful regional cooperation at all in East (p.96) Asia with respect to either financial market development or balance of payments crisis management. The Asian financial crisis of 1997–8 triggered a series of proposals and counterproposals for such cooperation, including the famous Japanese proposal to create an Asian Monetary Fund separate from the IMF.28 While I will not review that history here, suffice it to say that within a couple of years, the ASEAN + 3 countries had agreed to a framework for supporting financial development, economic monitoring, and emergency liquidity provision that has been the template for cooperation ever since. Some of these efforts have accelerated significantly since the GFC began in 2008.

The best developed of the regional ventures is the CMI, created in May 2000 as a mechanism for emergency liquidity provision. Over the dozen years of its existence, CMI has grown from a network of bilateral swaps totaling $40 billion in commitments to a multilateral reserve pooling arrangement totaling $120 billion as of 2011. Perhaps the most important moment since the creation of CMI was in the spring of 2010, when “multilateralization” officially came into force. The new CMIM introduced specific voting shares, drawing rights, and procedures for disbursement of funds. At the same meeting where ASEAN + 3 finance ministers agreed to CMIM, they also agreed to enhance regional surveillance mechanisms, particularly through the creation of an autonomous monitoring unit called the ASEAN + 3 Macroeconomic Research Organization (AMRO).29 AMRO was originally scheduled to begin work by early 2011. In the event, a leadership dispute between China and Japan delayed AMRO’s actual establishment; however, with the agreement as of April 2011 that the organization would be headed by Wei Benhua, the deputy head of China’s foreign exchange reserves management office, AMRO was expected to begin operations in Singapore sometime in the autumn of 2011.30 (Obviously, the dispute over whose citizen would lead AMRO raises some doubts about how autonomous it is likely to be from regional governments.)

Despite the significant accomplishment represented by the creation of CMIM and AMRO, the current setup is far from being—or even necessarily presaging—an autonomous regional bailout fund. Disbursement of the bulk of CMIM funds remains linked to crisis countries entering into bailout negotiations with the IMF, making CMIM a supplement to rather than a substitute for the IMF. Moreover, it is by no means clear whether AMRO will be able to act as a politically independent monitoring agency, what standards it will use, or how competent it will be (absolutely or relative to the IMF).31 The woes of the eurozone in 2010–11 in dealing with Greece and other members that required large-scale bailouts have also significantly reduced the attractiveness to East Asian countries of counting on regional processes to monitor economic policies and conditions and to enforce appropriate policies.

(p.97) Nonetheless, the implicit threat of exit from the global regime has been useful for the ASEAN + 3 countries. While there is a great benefit to CMI’s leading creditors in leaving the most difficult aspects of monitoring and conditionality to the IMF, the sheer size of CMI funds available to participating states (for most of them, far in excess of what they would be likely to receive directly from the IMF in a bailout) as well as the nascent CMI decision-making structure, provides a viable alternative if they are unhappy with the terms of IMF behavior in a crisis. Indeed, some authors argue that has already happened with regard to post-Asian Financial Crisis changes in IMF procedures and the creation and expansion of new facilities that offer faster and cheaper access to funds as well as fewer conditions for well-managed economies that get caught up in crises.32

Empirical Analysis

It is still early days both for East Asian states’ expanded participation in global financial governance and for CMIM and AMRO, so it is not yet possible to make definitive statements about the likely effects on East Asian regional financial cooperation. We do, however, have considerable evidence regarding preferences as well as preliminary evidence about behavior. So far, there appears to be little or no evidence of an East Asia bloc in the G20 on any of the substantive agenda items, let alone on the G20 agenda as a whole. While this constitutes a blow to the cherished wishes of regionalism advocates and constructivist analysts who have been predicting the emergence of a regional identity, it is not particularly surprising from the point of view of either economic interests or political rivalry.

Economically, Yves Tiberghien has argued in a preliminary analysis that the individual interests of the East Asian economies in the G20 agenda diverge significantly across most issue-areas.33 This reflects their varying levels of economic and financial development as well as their differing perspectives on each others’ currency management practices and current account positions. Tiberghien’s analysis is in accordance with the views of other analysts (including my own) of how East Asian governments perceive their interests in financial regulation.34 This is not to say that the ASEAN + 3 economies disagree on issues of financial regulation and macroeconomic policy across the board; indeed, regional economic integration has been built on the creation of extensive regional production networks, which have required a generalized openness to trade and foreign direct investment.35 But those are also the points of agreement within the G20 as a whole. The ways in which the general principles have actually been put into practice have varied among East Asian countries based on local needs, and these vary enormously among the (p.98) ASEAN + 3.36 Divergence of interests is perhaps even greater if we focus on political rivalry. For example, many analysts have highlighted the phenomenon of “historical memory” (mostly related to Japanese behavior as a colonizer and conqueror) as a barrier to regional cooperation.37

The remainder of this chapter examines the regional–global dynamic across the following dimensions: management of balance of payments crises, standards for financial regulation and supervision, global surveillance of current accounts, and currency politics. While there are some areas in which East Asian participants in the G20 appear to be working together, there is no evidence of more generalized cooperation, or of use of the G20 to strengthen East Asian regionalism.

Crisis Management

The element of global financial governance that is most immediately relevant to East Asian financial regionalism is crisis management. Since the Asian Financial Crisis, regional financial cooperation has been driven by the desire to prevent, or at least to more effectively manage, future crises. To date, and surprisingly to many observers, CMI and CMIM have delegated most of the decision-making about triggers and conditionality to the IMF through the mechanism of the “IMF link.”38 As C. Randall Henning notes, “Despite being inspired in substantial measure by antipathy toward the IMF in East Asia, the CMI and CMIM are more explicitly linked to the IMF than any of the other important regional facilities.”39

The IMF link is made necessary by the reluctance of regional states to punish each other for economic mismanagement. It has been, nonetheless, a matter of considerable concern not only for potential CMI borrowers that they might face painful conditions, but also for likely creditors (i.e., Japan and China) that misguided IMF conditions may make matters worse, as they arguably did in 1997–9.

While regionalism advocates have called for enhancement of CMIM and regional surveillance as the way out of that conundrum, the leading states (particularly Japan, which has been in a position to affect the terms of the debate directly since CMI’s inception) have been at least as active in attempting to solve the problem by changing the way the IMF behaves instead of focusing on weakening the relationship between CMI and IMF. The IMF appears to have heeded these calls, with the establishment of a variety of facilities that offer much greater access to funds with far fewer conditions and less onerous monitoring than what were available in the late 1990s. Although neither Japanese “voice” nor the threat of “exit” that the CMI and CMIM represented can be given full credit for the changes, it does appear that they were important in focusing the attention of IMF staff and major participants.40 As it turned out, the successes of the IMF in addressing the GFC owed (p.99) in no small part to the existence of those new facilities, and Japan and its ASEAN + 3 partners have continued to advocate for pushing the envelope of IMF-funding mechanisms, such as through expanding the Precautionary Credit Line (PCL) and supporting the establishment of the proposed Global Stability Mechanism.41 Both of these initiatives have grown from G20 discussions.

This is an example in which voice at the global level is clearly attractive to individual ASEAN + 3 governments, particularly likely creditors like China and Japan, as well as economically well-managed potential borrowers that would be harmed by entering into condition-laden bailouts, such as South Korea. For the borrowers, greater certainty and fewer conditions are attractive; for regional creditors, having the IMF fund bailouts rather than having to dip into their own resources is equally attractive. As long as CMIM funds are linked to the IMF, there is no obvious downside for the likely regional creditors from this point of view. If an autonomous regional fund were truly a major goal of the ASEAN + 3 members of the G20, it would make more sense to focus global efforts on relaxing the relationship between IMF and CMIM. This has not been an apparent priority at the global level. Nor has there been such a push by the leading CMIM states regionally.42 As the Asian Development Bank (a major supporter of regional initiatives that tends to strongly reflect the views of key ASEAN + 3 governments) notes in a generally enthusiastic account of regional surveillance:

AMRO will allow the CMIM to rely more on its own assessments when making lending decisions—about both the amount and any conditionality—reducing moral hazard and mitigating concerns that problems leading to balance-of-payments difficulties may require structural adjustments.

However, the AMRO is not meant to replace the IMF, but to enhance economic monitoring, supplementing the IMF, especially given its new short-term liquidity facility, which enables certain countries to borrow without conditions.43

Japan and, to a lesser extent, China have also been very supportive of the IMF itself in the face of the global crisis. Japan’s proactive decision to lend $100 billion to the Fund in the fall of 2008 spurred similar pledges by the United States, European countries, and China (and other BRICs).44 The decision by Japan and China to augment global resources at a time when it appeared likely that their East Asian partners might need assistance was striking indeed.

Financial Regulation

Financial regulation is an issue-area in which the ASEAN + 3 economies share only the most general of interests. Japan is big: it is the home of the world’s second largest stock exchange and is the world’s largest government bond issuer, and its banks, securities firms, insurance companies, investment funds, (p.100) and trading companies are massive users, issuers, and traders of all manner of financial products. Its markets are open, sophisticated, and liberal. China is also big, but its markets are at an early stage of development; there are significant barriers to cross-border financial flows and to the entry of foreign financial institutions, and the state is a dominant player throughout the financial system (although Hong Kong is an exception to each of these points). Indonesian markets are peripheral to regional and global markets, financial institutions are weak, and supervision is well below global standards. South Korea’s financial system is more like Japan’s than like Indonesia’s, but macroeconomic authorities remain wary of excessive liberalization, particularly in terms of international capital flows. All four are in favor of ensuring adequate financing for trade and cross-border investment and all four want to minimize the risk of hot money flows creating inflation, asset bubbles, and crashes. But this is pretty minimal common ground, to say the least.

The ASEAN + 3 economies have nonetheless been involved in regional cooperation on financial regulation for nearly a decade, primarily through the Asian Bond Markets Initiative (ABMI).45 However, the reality of ABMI has been that it is self-paced and voluntary. While Japan has sought to use the process to liberalize its neighbors’ financial markets and to lock China into global standards, China and other emerging market governments have gone at their own pace while taking advantage of ABMI’s working groups to work through specific problems and regulatory issues of their own choosing.

At the global level, Japan has been involved for decades in financial decision-making through the Financial Stability Forum (the predecessor to the FSB), Basel Committee, and other bodies, but there is no apparent evidence that it has ever sought to represent the interests of its neighbors. Now that China and other East Asian neighbors are more involved in the global process, there has still been only the most minimal of cooperation among them, and that cooperation has been mostly to try to carve out exceptions to global capital and liquidity rules on the basis of national differences. While this does in some ways seem to support regional interests, the East Asian participants are also working in at least tacit cooperation with other emerging economy participants like India, Brazil, and Turkey. And there appears to be no evidence at all that the East Asian governments are bringing their successes home to reinforce ASEAN + 3 regulatory cooperation. (In fact, it would be hard to do so, since their common premise is that there should be national exceptions to uniform global rules.)

Payments Imbalances and Surveillance

One of the major missions of the G20, particularly from the US point of view, has been to begin to address global payments imbalances. The justification has been that large, persistent current account imbalances are unsustainable for (p.101) the economies involved and therefore unstable for the global economy. Many policymakers and economists point to the “Bretton Woods II” system, in which US deficits helped to fuel the development of economies such as China’s, as one of the factors that contributed to the GFC.46 Similarly, there have been a variety of concerns about the yen (and, following the Federal Reserve’s decision to implement quantitative easing, the dollar) carry trade as a destabilizing factor in the global economy. Imbalances have also been presented as having a negative effect on global growth, the argument being that US demand cannot remain the global engine of growth indefinitely, and so more rapid domestic demand growth in surplus countries like China, Japan, and Germany has become a necessity.

In principle, this would be an attractive opportunity for regional cooperation in the global sphere. ASEAN + 3 leaders have talked for years about the potential for macroeconomic policy coordination, and it is hard to imagine what such coordination would mean if not demand management. Decisions made about macroeconomic policy at the regional level could lead to common positions among ASEAN + 3 countries at the G20, and then the ASEAN + 3 process could take the resulting global actions into account in coordinating regional responses.

None of this is happening. Major surplus countries like China, Japan, and Germany are simply resisting the global current account indicator proposals without seeking to coordinate with regional partners back home. Meanwhile, there appears to be a consistent denial that the regional processes have anything to do with the global payments issues. This has been particularly evident in German actions, which appear to work to the detriment of the eurozone’s deficit countries; in East Asia, the goals of macroeconomic coordination have never actually been clearly stated, presumably because of unwillingness of any country to agree that it should not run a substantial surplus.

Currency Politics

Finally, one of the most controversial areas of G20 debate (not to mention global debate since well before the crisis began) has been currency politics. The major tussles have been over the value of the Chinese renminbi (RMB), ultra-loose monetary policy on the part of the developed economies (particularly the United States but also to a lesser extent Japan), and the legitimacy and efficacy of use of capital controls by emerging economies.

In the case of capital controls, there actually has been a general consensus among the East Asian countries for decades that capital controls are appropriate policies in some cases, as long as they are not used to unfairly manipulate currencies. During the Asian financial crisis and for several years thereafter, Japan was nearly a lone voice among the leading financial powers in favor of judicious use of capital controls. The inclusion of additional East Asian economies, (p.102) as well as other emerging economies, in the G20 appears to have broken the logjam in discussing capital controls.47 Thus, capital controls appears to be an instance in which the changes wrought by the financial crisis have strengthened East Asia’s regional voice.

The currency manipulation debate is a different story, however. Japan and other East Asian states have long been wary of US efforts to address imbalances by pushing for appreciation of trading partners’ currencies.48 There has also been a decade-long discussion among the ASEAN + 3 countries about currency cooperation and the creation of an Asian Monetary Unit (AMU), with Japan as the leading advocate.49 However, the AMU debate has led to no meaningful action. Nor have any major ASEAN + 3 governments joined the Chinese calls for de-emphasis of the dollar in favor of SDR or other synthetic currency instruments.50 Meanwhile, regional economies that have floating currencies (especially Japan and South Korea) are concerned about the undervaluation of the RMB, further reducing the possibility of commonality of interests. And Japan has been unwilling to join China and Brazil in criticizing US quantitative easing since it is attempting to do the same thing in a continuing effort to stimulate its own domestic economic growth. Given the limited degree of consensus on the issue-area and the fact that Japan has good reasons not to wholeheartedly support either China (its regional partner) or the United States (its global ally), it is not surprising that currency politics has not been a fertile area for regional cooperation in the global policy space.


The GFC has shaken the legitimacy and effectiveness of the existing global financial architecture, particularly the privileged position of the developed economies of the G7. At the same time, it has accelerated the relative “rise of the rest,” particularly China and its East Asian neighbors. Those states were already in the midst of an ambitious program to develop regional financial institutions. The most notable was the CMI, for which a roadmap to multilateralization had already been planned. Not surprisingly, soon after the arrival of the crisis, discussions began in earnest among the ASEAN + 3 countries to accelerate CMIM and the enhancement of regional surveillance efforts, and agreement followed quickly to establish CMIM and AMRO. Meanwhile, four of the leading ASEAN + 3 states found themselves in the center of global financial governance as members of the G20.

Despite the simultaneous rise of regionalism in East Asia and the rise of East Asian participation in global financial governance, however, there is little evidence to suggest that ASEAN + 3 governments are taking advantage of their global influence to reinforce financial regionalism. Rather, the evidence (p.103) suggests that East Asia’s G20 participants are pursuing their own individual preferences within the context of the evolving postcrisis global financial architecture. The pattern that we have seen to date fits well with the realist approach to financial regionalism, which emphasizes the possibilities for contest rather than just the potential collective goods that remain underprovided. Greater representation has made more apparent the differing preferences of the ASEAN + 3 states, and regional concord has moreover been undermined by increasing concern about the goals of a rising China.

The analysis in this chapter highlights the need to analyze in greater depth both regional dynamics and the interests of individual states before making any broad statements about the relationship between regionalism and global governance. For some regions, it is reasonable to expect greater cohesion in the aftermath of the GFC, but this is by no means assured. The problem of providing collective goods in the absence of clear leadership or a high level of confluence of individual states’ interests will be difficult to surmount, even where overall regional demand for such collective goods remains high.

With regard to regional financial cooperation, this analysis suggests that the attractiveness of decoupling from the global regime (in particular, the leading role of the IMF) will not be as attractive as it may first appear. And for a region like East Asia, where the lead states are also increasingly influential at the global level, it may well be more attractive for them to pursue their goals globally rather than locally.


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(1.) Warwick Commission (2009). See also the testy back and forth between Timothy Geithner and Andrew Wheatley about the failures of UK and US regulation. “Wheatley Attacks Geithner on Regulation,” Financial Times, June 8, 2011.

(2.) Kirkegaard (2010) provides a nice exposition on the effects of the EU’s flailing attempts to manage and contain the Greek crisis. In response to such concerns, the Council of the European Union agreed in March 2011 to a reform of the Economic Growth and Stability Pact that would strengthen penalties on euro countries that violated budgetary and current account rules (EU Council, 2011).

(3.) Hufbauer et al. (2010) argue that protectionism did increase among the G20 countries between 2008 and 2010, but this tendency was not as dramatic as previous historical episodes might suggest.

(4.) Japan was also hit hard, albeit through the trade channel rather than by financial contagion. See, for example, Grimes (2009c).

(5.) Fitch (2009).

(6.) Henning (2011).

(7.) Grimes (2011a, 2011b); Henning (2011).


(8.) Kawai (2005, 2009, 2010), Takagi (2010), Girardin (2004), Asian Development Bank (2010). Henning (2011) also seeks a functionalist approach to the problem of coordination between the IMF and regional bailout efforts.

(9.) Grimes (2006, 2009a, 2011a, 2011b).

(10.) Lee (2006, 2008); Mahbubani (2011).

(11.) Calder and Ye (2010: 24). See also Lee (2006, 2008).

(12.) Rozman (2005); Narine (2003).

(13.) For a more extended justification, see Grimes (2011a).

(14.) South Korea and Singapore are in an ambiguous position, while the smaller and/or closed financial systems of Brunei, Cambodia, Laos, Myanmar, and Vietnam are largely irrelevant to the story.

(15.) Higgott (1998); Lee (2006, 2008).

(16.) Martin Wolf, “Manufacturing at Risk from Global Shift to Asia,” Financial Times, May 20, 2011.

(18.) One example is the Indigenous Innovation Policy. See, for example, Ernst (2011).

(19.) Cheng (2010) offers an alarmist view on Chinese military modernization; for the official US government view, see US Department of Defense (2010). US Defense Secretary Robert Gates testified to the Senate Armed Services Committee on January 27, 2009: “The areas of greatest concern are Chinese investments and growing capabilities in cyber- and anti-satellite warfare, anti-air and anti-ship weaponry, submarines, and ballistic missiles. Modernization in these areas could threaten America’s primary means of projecting power and helping allies in the Pacific: our bases, air and sea assets, and the networks that support them.” On territorial concerns, see, for example, Valencia (2011: 8–11).

(20.) Friedberg (1993–4).

(21.) Soeya (2005).

(22.) Grimes (2009a: 5–8).

(23.) Katada (2004); Grimes (2009a: ch. 3).

(24.) Stubbs (2004).

(25.) Sakakibara (1998).

(26.) Hirschman (1970).

(27.) Calder and Fukuyama (2008); Green and Gill (2009).

(28.) For more on such proposals, see Henning (2002), Katada (2004), Amyx (2004), Lee (2006, 2008), Grimes (2006, 2009a).

(29.) “Joint Ministerial Statement of the 13th ASEAN + 3 Finance Ministers’ Meeting,” Tashkent, Uzbekistan, May 2, 2010 (http://www.asean.org/documents/JMS_13th_ AFMM+3.pdf).

(30.) “Joint Ministerial Statement of the 14th ASEAN + 3 Finance Ministers’ Meeting,” Hanoi, Vietnam, May 4, 2011 (http://www.aseansec.org/26280.htm).


(31.) This case is made in detail in Grimes (2011a, 2011b). Henning (2011) does an excellent job of outlining and analyzing the technical, legal, and bureaucratic challenges to surveillance and coordination with the IMF.

(32.) Amyx (2004); Katada (2004); Grimes (2006, 2009a).

(33.) Tiberghien (2011).

(34.) Hiwatari (2003); Walter (2008); Grimes (2009a: ch. 5).

(35.) Munakata (2004); Baldwin (2006); Calder and Ye (2010).

(36.) Walter (2008).

(37.) This debate is effectively covered in Berger (2008, 2010). See also Narine (2003) and Rozman (2005) for discussion of the effects on regionalism per se.

(38.) The IMF link is the provision that only up to 20 percent of CMIM funds can be released without the crisis economy entering into bailout negotiations with the IMF. Even that money is not automatically available.

(39.) Henning (2011: 14).

(40.) Katada, (2004); Amyx (2004).

(41.) Henning (2011: 17–22). Japan was also a sponsor of the PCL’s predecessor, the discontinued Contingent Credit Line, which was created in response to the Asian Financial Crisis.

(42.) My own extensive interviews and conversations since 2005 with government officials involved in CMI suggest little appetite for eliminating the IMF link among creditor states. Surprisingly, I have also come across significant skepticism among officials from likely borrower states.

(43.) ADB (2010: 76).

(44.) Grimes (2009b: 44–5).

(45.) Grimes (2009a: ch. 5); ADB (2010: 67–73).

(46.) Dooley et al. (2003, 2004).

(47.) See Gallagher chapter in this volume, as well as Ostry et al. (2010) and Magud et al. (2011).

(48.) Volcker and Gyohten (1992); Utsumi (1999); Hiwatari (2003).

(49.) Grimes (2009a: ch. 4).

(50.) Zhou (2009).