Asia's recent doubling of its financial safety net looks impressive. But it's more icing than cake. It is, in fact, unusable.
There is no fund but a series of promises, the institutional mechanisms to replace International Monetary Fund-type surveillance and conditionality have not been established, and there are no rapid-response procedures to handle a fast-developing financial emergency.
With much fanfare, three East Asian countries of [People's Republic of] China, South Korea and Japan and 10 finance ministers of the Association of Southeast Asian Nations - Asean+3 - last month announced a package of initiatives designed to ensure their economies do not succumb to another balance of payments crisis.
They relate to the Chiang Mai Initiative Multilateralisation (CMIM), a self-managed reserve-pooling mechanism for its member economies. The new arrangements double its size to US$240 billion, and increase the "delinked" portion - the threshold before involvement by the IMF - from 20% to 30% of a country's quota. The implementing agency, the Asean+3 Macroeconomic Research Office (Amro), is already up and running in Singapore.
This looks impressive - another reason to subscribe to the "Asia rising" thesis - in contrast to the European imbroglio and the shaky US fiscal position.
But look deeper and the achievements are less impressive. Asean+3 might appear to have its own regional insurance but in practice it does not. In the event of another crisis, it would be back to a series of ad hoc bilateral swaps or the much-maligned IMF.
This is a controversial assertion-particularly with Asean+3. But a brief look at the history of the CMIM and the agreement's fine print proves the point. It also reveals some things that need to be fixed.
The CMIM evolved from the 1997-98 Asian financial crisis, and the IMF's management of it. The IMF quickly became extremely unpopular, not just for the prescribed bitter medicine in Indonesia, South Korea and Thailand, but also for having misdiagnosed the problems - which it later acknowledged.
The result was a resurgence of nationalist sentiment that grew regional. The Japanese government proposed an alternative Asian Monetary Fund but, neglecting to consult China first, there was insufficient regional support to counter predictable US opposition. Notwithstanding this, the first step was taken soon after with the Chiang Mai Initiative in May 2000.
The initiative's first test came in September 2008 when, following the Lehman Brothers collapse, short-term capital quickly exited emerging economies. But the Chiang Mai Initiative was unusable. Given its small size and absence of rapid-response mechanisms, affected countries resorted to bilateral swaps with the United States, Japan, Australia, and the multilaterals. Realising its impotency, Asean+3 replaced the series of bilateral swaps with a single agreement in December 2009, and established Amro in May 2011.
But it is still unlikely that the CMIM will ever be used as long as it is linked to the IMF. How can you remove the IMF stigma if access to the lion's share of your quota requires an IMF programme? The recent introduction of a precautionary credit line is also unattractive because it retains the IMF link.
If Asean+3 is serious about financial safety nets, it should do three things: First, Amro needs to be reformed. It currently has no funds to disburse - as the pooled contributions remain in national coffers. It must build a strong, credible, and independent surveillance capacity, of the stature that - for all the problems - the IMF arguably does possess. This will allow it to determine whether a country in crisis is insolvent or illiquid. As constituted now, the CMIM is designed only to deal with a liquidity crisis.
Second, swap quotas are inadequate for all but the smallest members. During 1997/98, some $40-60 billion in emergency liquidity was needed by each crisis-hit country. Yet, the original Asean members can access about $23 billion each, and 30% of this without an IMF programme.
For Asean's newer, smaller members, although the full quotas are a substantial share of individual reserves, they may still be insufficient for a bail-out. That the CMIM was never intended for use by its biggest contributors - China, Japan and South Korea - is reinforced by the bilateral swaps between themselves announced virtually in tandem with the doubling of the CMIM.
Third, they should broaden membership, regardless of how complicated that process might be. This could enlarge and diversity the fund, from countries less immediately connected to East Asian business cycles. The obvious candidates would be those originally joining Asean+3 in the East Asian Summit - Australia, New Zealand and India.
Although all three reforms are desirable, they are not equally important. If Amro could gain credibility, then the small size or membership of the CMIM would be less binding constraints. After all, even the IMF relied upon other partners to fund the bail-out in Asia in 1997-98 and now Europe. But the IMF led the rescue and set the terms, and this is what matters. Amro needs to be able to do the same.
Without these changes, and still wary of the IMF stigma, Asean+3 has nowhere else to go in case crisis strikes - which explains why countries continue to self-insure with excessive reserves. If Asean+3 wants a co-financing facility with the IMF, then it has one in the CMIM. If it wants its own regional safety net, then it has a long way to go. The hope is that by highlighting the current flaws in design, they may be fixed before the next crisis hits.