Currency and Contest in East Asia: The Great Power Politics of Financial Regionalism

Conclusion: Currency and Contest in East Asia

Conclusion Currency and Contest in East Asia Financial regionalism is happening in East Asia. Its pace can be slow and its destination is decidedly unclear, but there is no question that cooperative efforts are expanding and that they will be a key component of East Asian economic regionalism and regionalization more broadly. With East Asia as the home of the world’s second- and third-largest economies, not to mention the bulk of world foreign exchange reserves and vast amounts of net savings, it is essential that we better understand where regional financial cooperation is likely to go. I have argued that financial regionalism can best be understood in the context of great power rivalry among Japan, China, and the United States. In other words, financial regionalism is not just about managing interdependence and surmounting practical obstacles to regional economic stability, important though those goals may be. Regional financial efforts have important political implications both within East Asia and globally, with Japan, China, and the United States all seeking to shape the regional financial architecture in ways that will offer them economic and strategic advantage while limiting their own vulnerability. Driving this phenomenon are two major forces—regional economic integration and the rapid rise of China as an economic and political power—that have fundamentally changed the dynamics and implications of regional cooperation. Regional Financial Challenges and Cooperation Regional cooperative efforts are both functionally and politically driven. In any discussion of East Asian financial regionalism, the Asian Financial Conclusion 205 Crisis looms large as both an economic and a political event. The extent of the crisis, the perceived inappropriateness of the IMF-organized rescue packages, and the often unforthcoming approach of the United States created a major incentive to seek regional solutions. This story is most straightforward for explaining the appearance of regional liquidity provision arrangements, but it also applies to attempts to deepen local-currency financial markets and to stabilize regional currencies. As we have also seen, however, both the economics and the politics are contested in each of these aspects of financial regionalism—it is, to borrow the subtitle of an influential book on monetary politics, a case of “ambiguous economics, ubiquitous politics.”1 The economic uncertainties have contributed to a tendency among analysts of East Asian financial regionalism to focus on problem solving and sequencing. But, practically speaking, they also open up space for politics to enter the fray more directly. In order to understand the regional dynamics, in this book I have sought to address both aspects on their own terms. In liquidity provision, the original AMF proposal was shot down at least partly due to suspicions on the part of the United States and China that Japan was trying to create institutions that would give it de facto regional leadership. Although regional liquidity arrangements returned (with far less overt opposition) in 2000 in the form of the Chiang Mai Initiative, CMI looked very different from the AMF. Most ironically, the inability of Japanese and Chinese authorities to solve the problem of moral hazard through regional means led to their ceding much of the decision-making power to the IMF. Still, CMI constitutes a significant hedge against U.S. and IMF capriciousness ; the over $80 billion committed to the swap network serves not just to augment IMF funds in the event of a crisis but also constitutes an implicit threat of creating an alternative to the IMF. Thus the Chiang Mai Initiative simultaneously serves three purposes: it significantly supplements the resources available to regional economies in the event of another currency crisis, it solves the political problem for potential creditors like Japan and China of how to make liquidity provision more “credible” and less likely to promote moral hazard, and it raises the likelihood that the IMF and U.S. government will act supportively rather than punitively in the event of a future regional crisis in East Asia. Unlike emergency liquidity, bond market initiatives are divisible in nature , allowing member states to proceed at their own paces. In the absence of clear carrots or sticks, ABMI has been based on self-assessment and voluntary action. The amount and impact of official funds through ABMI and ABF has been unimpressive, but then again the amount of funds needed to jump-start bond markets is likely to be very large indeed and would be 1 Kirshner 2003. 206 Currency and Contest in...