Jeffrey Lewis is a Research Assistant in the Political-Military Studies Department at the Center for Strategic and International Studies (CSIS) in Washington, DC. His work focuses on arms control and institution building in Asia and the Pacific Rim.

In the wake of East Asia's worst economic crisis since the Second World War, virtually everyone agrees that the International Monetary Fund (IMF) reform measures were too sudden and too harsh. Vast disagreement, however, exists over how to prevent another round of mistakes should another crisis occur. Many observers, including the IMF itself, suggest mild reforms to prevent future policy mishaps. Others, including Japanese Finance Minister Kiichi Miyazawa and South Korean Prime Minister Kim Jong-Pil, advocate a more radical cure, arguing that the IMF is incapable of ever treating ailing Asian economies. Instead of IMF reform, Miyazawa and others advocate an alternative Asian institution ­ the so-called Asian Monetary Fund (AMF). The current debate surrounding this issue is particularly important because the choices made now will influence the pattern and structure of economic activity in the Pacific basin for decades to come.

The histories of previous regional institutions demonstrate that an AMF would be incapable of responding effectively to regional crises or dispensing tough but necessary economic advice. The recent economic crisis has exposed serious flaws in Asian institutions, including their tendencies toward informality and consensus. Rather, than creating an Asian alternative to the IMF, the Pacific community can reform existing regional institutions like ASEAN and APEC, while expanding participation in global structures like the IMF and the WTO. Such participation could include a regional complement to the IMF, which would address concerns in the Asian community about the IMF without undermining the IMF's authority.

The role of the IMF in East Asia

The IMF acts as a global lender of last resort, offers macroeconomic policy advice to regain investor confidence, and promotes microeconomic reform that might otherwise be politically unacceptable. These three roles are absolutely crucial to resolving crises occurring in the present and averting those that might occur in the future.

Although much has been written on the failure of the IMF in East Asia, the Fund did many things right during the crisis. First and foremost, the IMF acted as a lender of last resort to prevent debt default among Asian economies. Unlike Mexico in the 1982 crisis, Indonesia, Thailand and South Korea all maintained access to international credit. Second, the IMF was successful in promoting many important macro- and micro-economic reforms that will improve the long-term economic prospects of many countries in the region. In South Korea, for example, the political leadership accepted the necessity of reform and, as a result, economic growth appears to have rebounded. 

Critics are correct, however, to point out the Fund's failures. In Indonesia, IMF prescriptions triggered a panic by closing a series of banks before deposit insurance had been installed. The IMF also eliminated subsidies for food and fuel, sinking much of the population into poverty. The economic rationale for both policies was sound, but the Fund mishandled the timing and pace of the reforms. Throughout Asia, the IMF also failed to foresee the depth or regional nature of the crisis. As a result, the fiscal austerity packages it proposed were too strict.

Part of the IMF's problems in dealing with the crisis was a result of the lingering effects of systemic corruption. In Indonesia, for example, the family and political cronies of Suharto engaged in massive capital flight from the country, and this further undermined both the currency and the local financial system. Asian governments, with the exception of the Philippines, failed to request IMF assistance until the situation was desperate. After the IMF had been called in, governments failed to construct social safety nets to ease the pain of restructuring. All of these factors combined to undermine public support for the programs.

In response to these problems the IMF has substantially eased the demand for fiscal austerity. Indonesia will be permitted to run a 1999 budget deficit of US$ 58 million. Last year, the budget deficit was equivalent to 10% of its Gross Domestic Product (GDP), a far cry from the balanced budget the IMF demanded in January 1997. Thailand is launching a US$ 3.5 billion economic stimulus package, with new spending and generous tax cuts. The IMF has admitted that it acted too precipitously in Indonesia, where the timing of much-needed reforms exacerbated the crisis. Although the implementation has been flawed, the underlying approach of the IMF has been proper to correct structural inefficiencies within the economies in order to re-attract capital and lay the foundation for future economic growth. Overall, the IMF has contributed to the stabilization of East Asian economies. Economic growth resumed in Thailand and Korea this year, while Malaysia and Indonesia should experience economic growth next year.

An Asian Monetary Fund

Although the IMF has recognized that in some cases it asked too much of crisis-stricken economies and has recently relaxed many of its demands, many Asian governments suggest that the IMF remains incapable of dispensing proper advice to Asian economies. They advocate that an alternative institution ­ an Asian Monetary Fund ­ be created to replace the IMF in the Asia-Pacific.

A proposal for an Asian Monetary Fund was first advanced by Japanese Vice Minister of Finance Eisuke Sakakibura in 1997, but was withdrawn later that year in the face of American opposition. Regional leaders have incorporated the idea into several policy proposals. For example, South Korean Prime Minister Kim Jong-Pil publicly asked Tokyo to revive its plan for an AMF. In December, Japanese Finance Minister Kiichi Miyazawa again suggested complementing IMF loans through "some kind of regional currency support mechanism . . . funded by countries in the region that are strongly dependent upon each other in the fields of trade and investment and that are conducting continuous dialogue with each other on their policy directions."

Proponents advance two arguments in support of an Asian Monetary fund. First, a regional monetary fund could provide additional funds, bolstering the IMF's role as a lender of last resort. Second, such a regional fund could dispense macro- and micro-economic advice more appropriate for Asian economies. The second function is often overlooked, but remains extremely important. To successfully resolve crises, a regional monetary fund must promote macroeconomic reform to regain investor confidence and microeconomic reform to promote economic growth. Both can be painful in the short-run, but they are crucial to the long-term health of the economy.

A Crisis in Asian Institution Building

The historical record of Asian institutions suggests that an AMF will undercut economic reform. There is a distinct Asian approach to building institutions that emphasizes informality, consensus-building and non-confrontational bargaining styles. This contrasts with the adversarial posturing and legalistic procedures evident in Western multilateral negotiations. The emphasis on informal consensus-building rather than confrontational negotiations was pioneered by ASEAN in the 1960s and 1970s to build cohesion in a desperately poor region filled with historical animosities, economic disparity, and cultural antagonism. The success of ASEAN inspired APEC in the early 1990s to adopt similar approaches to unite erstwhile cold war adversaries with vastly different economic structures.

Although excellent at promoting cohesion among diverse members, the "Asian approach" is far less successful at encouraging economic reform or responding to crises. The recent currency crisis laid bare the institutional failings of the economic, political, and security architecture of the Asia-Pacific Rim and left the two institutions most credited with promoting economic cooperation in Asia ­ ASEAN and APEC ­ in disarray. The troubles experienced by these two institutions bode ill for the future of an AMF.

A Bangkok daily, The Nation, asked the provocative question "Can ASEAN survive the regional crisis?" and then suggested that the "economic and financial turmoil of the past 12 months . . . is causing the regional bloc to crumble." The flagging economic fortunes of many Asian economies have intensified political tensions within and among member states. In the midst of growing instability, ASEAN has failed to remedy either the political or economic effects of the crisis.

ASEAN has been unable to formulate a response to the crisis because the members are unwilling to bind themselves to regional agreements. Although a series of "bold measures" agreed to at the ASEAN meeting in Hanoi includes a heralded package of incentives to attract manufacturing investment, each ASEAN country is permitted to implement the measures individually (with any modifications deemed necessary) and on a case-by-case basis. Ultimately, the new package offers little to attract foreign investors frightened off by political and economic instability at a time when new investment is desperately needed to re-capitalize the ailing Asian economies.

At the recent ASEAN-Europe meeting (ASEM), one ASEAN minister lamented the inability of the ASEAN nations to coordinate agendas and speak with one voice. As a result, the meeting accomplished very little, suggesting that ASEAN remains far from a cohesive entity capable of responding to crises. Until ASEAN demonstrates that it can respond decisively to regional turmoil, the international community should remain skeptical of an Asian Monetary Fund.

ASEAN has been unable to stop backsliding on free trade or promote transparency, suggesting that an AMF will be unable to encourage members to keep markets open in times of crisis. Although regional leaders agreed to implement the ASEAN Free Trade Area (AFTA) one year ahead of schedule, the agreement permits sufficient flexibility to cast doubt on the sincerity of the promise. While pledging to expand free trade in the long run, many ASEAN nations are looking to increased tariffs and non-tariff barriers to protect local industries now. The Republic of the Philippines, for instance, is considering whether to "temporarily" raise tariffs to protect local industries and suspend all tariff reductions until AFTA formally takes effect. AFTA permits such "temporary" measures for almost 12% of all ASEAN imports. Progress on a regional surveillance mechanism to detect impending regional economic crises has also been slow. Malaysia and Indonesia have expressed apprehension regarding the organization's transparency requirements even though countries will only be required to submit the same information they already provide to the International Monetary Fund.

Although some of the concerns voiced by Kuala Lumpur and Jakarta were resolved in an October gathering of ASEAN finance ministers, ASEAN nations will likely remain reluctant to use information garnered from increased transparency to influence the economic policies of neighboring countries. A regional monetary fund can ill afford reluctance among members to comment on the domestic policies of member-states. Yet, when the Thai Foreign Minister during the most recent round of ASEAN meetings last July in Manila suggested replacing ASEAN's traditional insistence of noninterference in the internal affairs of member nations with a policy of "flexible engagement" which would allow ASEAN members to comment on domestic policies of neighboring countries that have regional implications, his proposal only drew the support of the Philippines and generated a tremendous backlash. The Malaysian Foreign Minister noted that such a policy would "usher in a divided ASEAN and, consequently, an enfeebled ASEAN."

Not coincidentally, APEC is now experiencing similar difficulties as a result of the economic turmoil. Asiaweek recently summed up the troubles faced by APEC by noting that "about the only thing going for [the most recent] meeting of the Asia-Pacific Economic Cooperation (APEC) forum in Kuala Lumpur was the fact that it met."

APEC has failed to promote economic reform or lower trade barriers because it is committed to "concerted unilateralism" or the notion that members will undertake agreements unilaterally, rather than negotiate formally and sign treaties. Because negotiation and pressure are deemed too confrontational, there is little incentive for countries to reduce informal trade barriers or promote the kind of transparency that reveals structural inefficiencies and corruption. Instead, APEC is locked in crisis as many regional leaders promote trade barriers and capital controls.

Four years ago in Indonesia, APEC lauded trade liberalization as the organization's main objective. This year, the summit floundered on Japanese opposition to cutting tariffs for fish and forestry products. To underscore the impotence of the APEC approach, the disagreement was sent to the World Trade Organization for resolution.

ASEAN and APEC symbolize the old approach to economic cooperation in Asia, which emphasized informal cooperation and consensus building. Dramatic economic growth papered over the drawbacks of this approach. Once economic crisis set in, cooperation vanished amidst what Fred Bergsten of the Institute for International Economics described as a deflationary race to the bottom that was "totally unnecessary and violated every norm of international cooperative behavior." The cutthroat practices, "reminiscent of the 1930s," were the direct result of inadequate economic institutions.

There are a number of reasons to be skeptical of an Asian Monetary Fund ­ including questions about the leadership of such an organization. Past experience with institution building in East Asia should inform future policy. An Asian alternative to the IMF would import the same structural difficulties into the regulation of international finance that APEC and ASEAN are currently suffering. The experience of APEC and ASEAN demonstrates that Asian institutions as currently conceived are structurally incapable of performing the role provided by the IMF. An Asian Monetary Fund would eschew conflict with Asian governments, while its offers of aid would undercut the IMF's ability to pressure intransigent economies into mounting difficult but essential economic reforms.

In fact, the appeal of an AMF largely appears to be a desire to avoid difficult reforms required by the IMF. Although the IMF is derided for demanding too much of Asian economies once the crisis hit, international institutions also failed to demand reforms prior to the crisis that might have limited the damage or avoided it altogether. The World Bank's independent Operations Evaluation Department released a scathingly self-critical report that concluded: "While the government's development strategy has had remarkably positive results, issues of poor governance, social stress and a weak financial sector were not addressed and contributed to the depth of the crisis." An AMF will find it more, not less, difficult to demand tough reforms on the part of wayward economies.

ASEAN's experience with "flexible engagement" and the reluctance to construct an effective early warning mechanism demonstrates that Asian leaders are loathe to interfere in the economic policies of neighboring countries, while the failure of APEC to mediate trade disputes suggests that formal negotiations remain anathema. An Asian Monetary Fund would encourage the same dangerous lending practices that contributed to the economic crisis in the first place, rather than demanding good governance and transparency.

The structural weakness of the institution is likely to be reinforced by political weakness. There is little evidence that Japan ­ which would presumably lead an Asian Monetary Fund ­ can effectively replace the leadership exercised by the United States through the IMF. Japan's reluctance to lower tariffs and other trade barriers at the APEC forum signals a Japanese reluctance to bear the burdens of leadership. Furthermore, the Japanese government is in no position to provide large amounts of financial assistance to foreign countries. Almost a decade of futile economic stimulus packages has pushed Japan's gross debt to US$ 4.6 trillion. Gross debt is expected to climb over the next three years and could rise to almost US$ 6 trillion. Bailouts to rescue insurers, the banking sector and unfunded pensions could cost an additional US$ 5.4 trillion.

Tokyo's failure to reform the Japanese economy also leaves lingering doubts about what sort of "economic reform" would be required of aid recipients. A US$ 30 billion assistance plan promoted by Finance Minister Kiichi Miyazawa appears to be an attempt to stimulate demand in Asian markets for Japanese goods because much of the aid is tied to the procurement of Japanese goods and services. Tokyo also views the opportunity to provide loans in yen as part of an effort to "internationalize" the Japanese currency.

The result is that Japanese officials are less worried about promoting real economic reform in Asia than they are promoting the use of Japanese funds. As part of a propaganda effort to promote the Miyazawa initiative, officials from the Ministry of Finance suggested that IMF conditions were not sensitive to the "social" costs of financial and corporate restructuring. Meanwhile, Japan is happily extending credit to Malaysia, which will likely be ineligible for IMF assistance after the imposition of capital controls. An AMF designed to promote Japanese interests will compete with the IMF in an effort to garner clients in need of economic assistance. The result of monetary fund competition is likely a "race to the bottom" of falling conditions on financial assistance.

Even if Japanese motives are sincere, serious doubts remain about whether the policy prescriptions peddled by Tokyo will improve Asia's flagging economic fortunes. The disastrous effects of Tokyo's refusal to embark on real economic reforms are evident in the stagnating Japanese economy. Although Japan has pursued almost a decade of fiscal stimulus packages, the structural flaws in the Japanese economy such as de facto cartels, inefficient domestic industries protected from competition and lifetime-employment practices that disguise unemployment and hamper restructuring have left the Japanese economy moribund. If Tokyo refuses to suffer the costs of economic reform at home, how likely is it to place discouraging conditions on important export markets? In an article titled "To Japan's Credit," the Straits Times of Singapore notes:

Surely, there cannot be a peculiarly 'Asian way' out of the crisis that somehow circumvents financial discipline, good governance and transparency. If the AMF is to work, Japan must first show that these virtues are not the West's monopoly. Otherwise, the AMF, far from being a supplement to the IMF, will serve as just one vast regional alibi for avoiding tough reforms.

Myriad other possibilities exist for negative interactions between an Asian and an International Monetary Fund. Competition might arise out of mutually exclusive macro-economic policy prescriptions (for example, whether to tighten or loosen monetary policy in the face of economic crisis), forcing governments to choose whether to alienate global lenders, investors, and trading partners or regional ones. Competing policy advice might divide investors, undermining confidence in both institutions. An alternative Asian institution would also provide a convenient excuse for elements in the United States Congress opposed to IMF funding.

A Proposed Economic Architecture for the Asia-Pacific

Rather than expending political capital on constructing a new Asian institution that is at best redundant and at worst a threat to international economic stability, Pacific basin policy-makers should concentrate on reforming APEC and ASEAN and cooperating with existing global economic organizations. Asian nations have successfully participated in a number of Western-style multilateral negotiations such as the GATT/WTO process, suggesting that more formal modes of cooperation could take root in the region. Until then, Asian nations should expand cooperation with the IMF, WTO and other global economic institutions.

ASEAN needs to move beyond the principle of non-interference, especially when the actions of a government threaten regional stability. Reforming existing institutions before building new ones is a much wiser investment of limited political capital. APEC needs a mechanism to effectively coordinate an unwieldy membership that is too large and diffuse. Furthermore, APEC's commitment to unilateralism should be replaced with formal trade negotiations.

Although commentators have suggested that ASEAN and APEC may evolve into more formal arrangements, the failure of either group to respond boldly to the economic crisis suggests this change will take a considerable amount of time. A regional solution must wait until regional organizations demonstrate a capacity to respond to economic and political threats. In the meantime, policy-makers should continue to use global institutions to respond to economic crises, while promoting reform within existing regional institutions. Efforts to implement an AMF would divert political attention and effort away from much needed reform within ASEAN and APEC, undercutting this crucial task.

Over time, there is a role for an Asian complement to the IMF that would lend only in conjunction with IMF programs. Some economists advocate an organization that would respect the primacy of IMF requirements while performing a complementary role that focuses on early warning and action. A regional complement to the IMF would provide a larger war chest and provide an avenue for Asian leaders to exercise leadership within the existing international economic framework.

A regional complement to the IMF would also be a better surveillance mechanism than the current ASEAN proposal, which would administer peer-surveillance through either the ASEAN Secretariat or the Asian Development Bank. Because neither institution considers economic surveillance to be its primary mission, neither is likely to excel in this role. A regional complement to the IMF however, could be created with this function as its primary mission.

Although the events of the last two years have tarnished the image of Asia's "miracle" economies, the Asian economies may again surprise the world with hard work, insight and prudence. In the long run, this crisis may result in better regional institutions that will avert future catastrophes and propel Asia back into the leading ranks of the global economy. By reforming existing regional institutions and working in concert with global ones, Asian nations can work with ­ rather than against ­ the world community to assure peace and prosperity.