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

Astonished at the ability of financial markets to limit Bill Clinton's policy options, James Carville, the president's intimate adviser, famously declared, "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."¹ Money indeed is power. Not surprisingly, most governments devote considerable energy to maximizing their nation's financial leverage. Wielded wisely, money and finance can be more powerful than armies or control of scarce resources.

This perspective is the taproot sustaining William Grimes's book. It examines the hard-fisted politics of finance in the specific context of recent East Asian efforts to generate new regional institutions, measures that Grimes characterizes as "the most ambitious project of regional cooperation that East Asia has ever seen" (p. 207). Yet, while underscoring the significance of these cooperative efforts, Grimes remains deeply skeptical about how far they have actually advanced and how collaborative their future might be. The overriding impediments to regional financial cooperation, he argues, are the widely divergent national interests of three key players in the unfolding drama: Japan, China, and the United States.

Grimes begins his analysis from the conventional troika of international relations theories—realism, institutionalism, and constructivism—and unabashedly aligns himself with the realist camp. This view holds that autonomous and strategically minded states, anxious to enhance their power relative to other states, will be the most critical shapers of Asian financial policies. Assuredly, millions of nongovernmental players shuttling trillions of dollars across borders daily are key shapers of financial markets. Certain national governments, however, have the power to be equally gargantuan market movers in addition to being the shapers of the financial architecture itself. Governments will use these powers, Grimes argues, in ways most likely to benefit them and their national interests. The three big powers in Asia—Japan, China, and the United States—are the political titans of Asian finance. And rather than being collaborative members of mechanisms designed to advance the admittedly ambiguous goal of regional cooperation, they remain separated but forceful competitors for regional financial leadership, devoid of any common vision or parallel political goals. The result is that "economic integration in East Asia coexists uncomfortably with the reality of continued political rivalries and suspicion" (p. 10). Skeptical of the extent to which the recent bevy of regional financial movements represents anything more than organizational charts propped up by soaring rhetoric, Grimes suggests that East Asia's regional financial bodies are likely to remain little more than common beds in which multiple participants continue to dream their different dreams … or grapple greedily over the covers.

The book concentrates on three main financial areas: emergency liquidity provision, currency management, and capital market development. In the first of these, emergency liquidity provision, most Asian countries have bolstered their reserve holdings. But they have also sought to mobilize the region's extensive collective resources through a nexus of bilateral currency swaps, known collectively as the Chiang Mai Initiative (CMI). These swap arrangements will ideally allow any country whose currency is in crisis to draw short-term infusions of capital quickly from regional neighbors. The swap amounts are vast and have been increased on several occasions while the originally complicated bilateral swap arrangements are scheduled to be "multilateralized" into a single currency pool, making emergency liquidity easier to access and the regional character of the arrangement tighter.

China and Japan, as the two largest holders of foreign reserves, would be the first lenders and they share an interest in ensuring the rapid provision of emergency funds in any crisis. Simultaneously, however, both wish to prevent the moral hazard problem that would emerge if such funds were provided without strict accounting standards. Collaboration by China and Japan could make CMI a credible regional hedge against overreliance on the...