The future of IMF’s regional avatars

The epicentre of this issue is Asia. Regional nations scarred by IMF’s tough policy conditionality for loans during the 1997-98 regional financial crisis are moving back to building up national reserves and regional financial arrangements to wean themselves off the institution’s influence. The Chiang-Mai initiative conceived in 2000 created a network of bilateral swap arrangements in Asia. The arrangement was paralleled by the Asian Bond Markets Initiative and paved the way for discussions about an Asian Monetary Fund. Contributing to the regional drive is Asia’s perceived lack of influence in IMF. Many emerging markets see IMF’s governance structures as unfairly favouring some Western European members.

IMF’s inherently global projection provides three benefits that cannot be replicated by regional schemes. First,for any nation believing in the benefits of sound macroeconomic management both at home and abroad,the Fund provides global policy leverage—something a regional fund delinked from the IMF would not give to the outsiders. Second,the Fund’s surveillance and research on the global economy is something regional funds would not and could not replicate. The Fund is the only institution in the world to credibly serve as a systemic police patrol and alarm bell.

Third,the Fund economises bailouts. Pooling insurance multilaterally makes for smarter policy than hoarding reserves unilaterally or structuring rescues bilaterally or rescuing only regionally.

While Asian countries may have a sufficient kitty for their own monetary fund or a larger Chiang-Mai,in practice they are not ready for a separation from IMF even if the arguments were compelling. First,Asia is still much more integrated with the US and European financial markets than intra-regionally. Second,the regional pool is still small and untested. Third,politics stand in the way. Beijing has grown increasingly enthused about the Asian Monetary Fund and made the case for an Asian Currency Unit,but Japan has a large stake in the IMF and wants to continue playing the role of a leading power in Asia.

The debate over a European Monetary Fund will have implications on the dynamics in Asia. Just as with European integration and the euro,it will likely inspire Asian countries. But discussion of a European fund also presents an opportunity for Europe,along with Washington,to set a precedent for a constructive complementary relationship between regional funds and IMF—one that can be leveraged in Asia. A Chiang-Mai-type link should be viewed as being in the broader interest of Europe in the world economy.

Even if the European Fund does not prosper,the idea of regional initiatives requires careful consideration. Three steps could be taken. First,working particularly with Japan,China,and Korea,the US and Europeans should in the G-20 context fashion a clear set of principles to guide the relationship between IMF,regional financial facilities,and bilateral arrangements. Second,US and European support to Asian financial integration should be conditioned on a continued 20% link to the IMF. A range of further,non-zero-sum mechanisms can be deployed to foster synergies between Asian schemes and the IMF. Third,giving emerging Asia and especially China more power in the Fund is unlikely to undo plans for a regional fund. But it could provide Asian countries with greater incentives to build complementarities between IMF and regional arrangements. The ball is in Europe’s court. A key step is to agree on the 5% share increase for emerging markets,not because it is the only solution,but because it has already been agreed upon.

The author is fellow at the German Marshall Fund in Washington

This article first appeared at http://www.voxEU.org