Monetary and Financial Cooperation in East Asia: Lessons from Europe
Remarks by
Tadao Chino
President
At the 4th ASEAN Finance Ministers' Meeting
Copenhagen, Denmark
5 July 2002
I would like to focus my remarks on two areas: first, major developments in monetary and financial cooperation in East Asia; and second, lessons for East Asia from the European experience.
I. Monetary and Financial Cooperation in East Asia
Since the 1997 Asian financial crisis, monetary and financial cooperation in East Asia has gained increasing importance. These efforts fall in three broad categories: (i) information exchange and economic surveillance; (ii) regional financing arrangements; and (iii) coordination of macroeconomic and exchange rate policies.
There have been three major undertakings in information exchange and economic surveillance. First, the Manila Framework Group was formed in November 1997, to support regional surveillance. Second, the ASEAN Surveillance Process was established in October 1998, to strengthen policymaking capacity within ASEAN. And third, the ASEAN+3 Economic Review and Policy Dialogue (formerly called the ASEAN+3 Surveillance Process) was established in November 1999. ASEAN+3 involves the 10 ASEAN countries plus the People's Republic of China, Japan, and Republic of Korea. Through these mechanisms, officials meet regularly to exchange information, discuss issues, and coordinate policies, all based on the principles of peer review and mutual interest.
Among regional financing arrangements, the most important is the Chiang Mai Initiative, adopted by the ASEAN+3 Finance Ministers at their May 2000 meeting in Chiang Mai, Thailand. The Chiang Mai Initiative aims at extending ASEAN swap arrangements to all ASEAN member countries, while also setting up a network of bilateral swap arrangements among ASEAN+3 countries.
And there are also efforts beyond the Chiang Mai Initiative to coordinate macroeconomic and exchange rate policies. An ASEAN Task Force on ASEAN Currency and Exchange Rate Mechanism was established in March 2001 and the Task Force will issue its report soon. The Kobe Research Project is providing stimulus to this work through studies exploring ways and means to improve regional monetary and financial cooperation.
II. Lessons from Europe
Although progress in monetary and financial cooperation in East Asia has been encouraging, much remains to be accomplished. Allow me to focus on lessons East Asia can learn from the European experience.
A first lesson is that success in monetary cooperation takes time, especially if the target is a single currency. Europe experimented with regional monetary cooperation for decades before adopting a monetary union. Starting from trade agreements, European integration underwent a long process of cooperation, coordination and harmonization. Cooperation has been effective because of consensus on needs and on policy objectives to be pursued.
Compared with Europe, East Asia has greater political, cultural and economic diversity. Achieving monetary and financial cooperation will be more challenging. However, East Asia has a proven capacity for "time compression," which should not be underestimated. As you know, over recent decades, some East Asian countries achieved phenomenal economic advances. Earlier this year, despite the Asian crisis and the global economic downturn, the ASEAN Free Trade Area was established, much ahead of the original deadline of 2008. These are two examples of "time compression."
A second lesson relates to sequencing¾how to implement measures necessary to achieve objectives. What should come first? Should it be trade cooperation before monetary cooperation? Or the other way around? Or can they be done simultaneously?
In Europe, the sequence has been trade integration, then exchange rate stabilization, capital openness, and creation of a monetary union. Closer trade integration raised the need for closer monetary cooperation. Monetary integration, in turn, facilitated trade integration.
In East Asia, monetary and financial cooperation is more a response to new economic and financial risks emerging from globalization and cross-border capital flows. However, after years of slow progress, trade cooperation in East Asia is also advancing rapidly.
Since the start of this year, the ASEAN Free Trade Area has been in place among the original ASEAN members. Newer ASEAN members are to join within 2-5 years. Negotiations between the People's Republic of China and ASEAN are exploring a PRC-ASEAN Free Trade Area. If the European experience is a guide, these initiatives, along with increasing trade integration, are likely to provide a significant boost to monetary and financial cooperation.
East Asia must pursue a sequence oriented to its own needs and circumstances. The East Asian experience may indeed show that trade integration and monetary integration can proceed simultaneously. This type of sequencing is gaining support in new economic research.
A third lesson is that institution building is crucial. Strong institutions play a pivotal role in Europe's continuing integration. Institutions such as the Council of Ministers; the European Council, Commission, Parliament, Court, and Investment Bank; and, more recently, the European Central Bank, have been and remain catalysts for integration. By moving the debate from the political sphere to a technical level, institutions foster objective assessments and help avoid mistakes. They also provide analysis that may not be undertaken otherwise, and can prepare blueprints to be put to use as needs arise. At critical points, the European Union has created new institutions or re-engineered existing institutions, to enable Europe to continue to achieve its goals.
Institutions such as those in Europe do not yet exist in East Asia. East Asian countries have coexisted more as "good neighbors." If East Asian countries do use the EU model, the region would need to establish necessary institutions and engage appropriate expertise.
A fourth and final lesson is that initial conditions are important, but are not key factors for successful integration. In early European integration, some countries had lower per capita incomes than others, but all became a part of the European Union. Several countries of eastern and central Europe at varying levels of development now are applying for EU entry. These countries will have to meet convergence criteria before entry. Nonetheless, it is important that economic disparities not block integration.
Ladies and gentlemen. We know from the European experience that East Asia has some way to go toward achieving monetary and financial cooperation. At the same time, of course, East Asia is not Europe, and models and approaches must be developed that are appropriate to the region. Differing circumstances and the differing comparative advantages of East Asian countries must be addressed.
The Asian Development Bank recognizes the importance of East Asian monetary and financial cooperation. Supporting and helping expand the processes of cooperation and integration is one of ADB's responsibilities. We will help the region to build upon what has already been established, and move the process forward.
Thank you.
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