[NSP Report 47] East Asian Financial Governance After the Global Financial Crisis

Professor of Political Science and International Relations, Chung-Ang University. Professor Lee Seung-joo graduated from the Department of Political Science and International Relations at Yonsei University and obtained a Ph.D. in Political Science from the University of California at Berkeley. He served as a researcher at the Institute for 통일 (Unification) Studies, a postdoctoral researcher at the APEC Study Center at UC Berkeley, an assistant professor in the Department of Political Science at the National University of Singapore, and an assistant professor in the Department of International Relations at Yonsei University. His recent works include Northeast Asia: Ripe for Integration? (co-edited, Springer, 2008) and Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions (co-edited, Springer, 2010). He has also published numerous articles in journals such as the Korean Political Science Review, Comparative Political Studies, The Pacific Review, and Asian Survey. His main research areas include East Asian regionalism, global FTA networks, and the development strategies of East Asian countries in the era of globalization.

I. Introduction

Having experienced the unprecedented event of the 1997-98 Asian financial crisis, East Asian countries faced the global financial crisis again just ten years later in 2008. The difference was that while the past crisis originated in East Asia, the global financial crisis originated in the United States. Because the crisis originated in the U.S., East Asian countries did not become direct victims of the financial crisis, but they were by no means free from its impact. East Asian countries were indirectly affected by the global economic downturn caused by the crisis, leading to decreased exports and economic recession. This rendered claims that the economies of Western developed countries and East Asia had begun to decouple unconvincing, while once again confirming the fact that the economic coupling between the two had continued. Furthermore, in the process of identifying the causes of the crisis, East Asian countries faced criticism from the U.S. that large current account surpluses were the fundamental cause of the global financial crisis (Wolf 2008).

The global financial crisis led to a change in global governance, primarily represented by the G20 Summit. Unlike global governance structures like the G7, which were centered around developed or Western countries, East Asian countries such as South Korea, China, Japan, and Indonesia participated extensively in the formation of the G20. Moreover, the G20 Summit led to a basic agreement on the reform of the International Monetary Fund (IMF) and the World Bank, resulting in a significant increase in the decision-making power of East Asian countries, including China. In this regard, the global financial crisis expanded the avenues for East Asian countries' participation in global governance.

The global financial crisis brought about significant changes not only at the global level but also at the East Asian level, particularly in the East Asian financial order. Unlike the Asian financial crisis, which was faced with a lack of regional institutional mechanisms, East Asian countries implemented regional responses to the global financial crisis relatively swiftly. This is the result of East Asian countries' efforts to promote financial cooperation over the past decade. Following the Asian financial crisis, East Asian countries strengthened financial cooperation, including the Chiang Mai Initiative (CMI), a bilateral currency swap arrangement. Due to this experience of cooperation, East Asian countries were able to achieve a higher level of financial cooperation, the Chiang Mai Initiative Multilateralization (CMIM), during the global financial crisis, despite obstacles such as the strategic competition between China and Japan.

This chapter aims to examine the changes in East Asian financial governance following the global financial crisis, and to explore the possibilities, limitations, and future prospects of the new financial governance. To this end, the following aspects will be examined in depth: First, the development of the East Asian financial order in the 2000s after the Asian financial crisis will be reviewed. Second, the changes in global governance after the global financial crisis will be considered. Third, the responses of East Asian countries to the global financial crisis will be analyzed at both national and global levels. Fourth, the impact of the global financial crisis on East Asian regional cooperation and financial order will be examined. Fifth, a forecast for the future of the East Asian financial order after the global financial crisis will be presented.

II. Development of East Asian Financial Governance Since the 2000s

The nature and scope of East Asian regional cooperation have been influenced by regional or external events such as the 1997 Asian financial crisis and the 2008 global financial crisis. After the Asian financial crisis, existing regional organizations such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) revealed fundamental limitations in their ability to respond to the financial crisis at a regional level. From this period, the necessity of cooperation with East Asia as the regional scope began to be seriously raised (MacIntyre et al. 2008). ASEAN Plus Three (APT), launched in 1997 with the participation of ASEAN countries, South Korea, China, and Japan, emerged in this context (Stubbs 2002). ASEAN Plus Three (APT) played a key role in shaping East Asian financial governance in the 2000s.

The Asian financial crisis also had a significant impact on the substantive aspects of East Asian regional cooperation. Until then, East Asian regional cooperation had primarily focused on trade liberalization, but the crisis led to a rapid acceleration of efforts in financial cooperation (Amyx 2004). As the crisis that began in Thailand in 1997 rapidly spread to other East Asian countries, regional countries reached a consensus for the first time on the need for regional responses in the financial sector. The International Monetary Fund (IMF)'s stringent restructuring requirements for bailout loans to crisis-stricken East Asian countries further heightened the need for intergovernmental cooperation at the regional level. Following the Asian financial crisis, East Asian countries shared the following perceived needs regarding financial cooperation: the need to supply prompt liquidity to prevent the crisis from spreading throughout the region if it recurred, to seek regional cooperation for exchange rate stability and surveillance among regional countries, and to avoid excessive dependence on the IMF or the United States to maintain financial stability in East Asia (Higgott 1998).

Following the Asian financial crisis, East Asian financial governance has generally developed in four directions: (1) provision of emergency liquidity through the Chiang Mai Initiative (CMI); (2) fostering regional bond markets through the Asian Bond Market Initiative (ABMI) and the Asian Bond Fund (ABF); (3) cooperation towards the introduction of a common currency, such as the Asian Monetary Unit (AMU); and (4) enhancement of communication among regional countries through surveillance, policy dialogue, and Track II exchanges (Grimes 2009). The ASEAN Plus Three (APT) Summit in November 1997, immediately after the outbreak of the Asian financial crisis, was the starting point for discussions on the launch of the Chiang Mai Initiative (CMI) (Amyx 2004; Park and Wang 2005). After several rounds of discussions, the Chiang Mai Initiative (CMI), aimed at preventing the recurrence of future financial crises and establishing systematic responses, came into effect at the ASEAN Plus Three (APT) Finance Ministers' Meeting in May 2000 (Chey 2009). The Chiang Mai Initiative (CMI) is a bilateral currency swap arrangement signed by the central banks of 16 regional countries. It was initially launched with a size of US$36.5 billion and has continuously expanded, reaching US$92 billion by June 2009.

As shown in [Figure 1], the Chiang Mai Initiative (CMI) was officially a bilateral currency swap arrangement, but it actually adopted a diversified structure. First, currency swap agreements totaling US$8 billion and US$6 billion were signed between South Korea and China, and between China and Japan, respectively. The exchange method involved both parties equally swapping US$4 billion and US$3 billion, but using their own currencies rather than the US dollar. Second, the currency swap agreement between South Korea and Japan was the largest, totaling US$21 billion, with Japan providing US$13 billion and South Korea providing US$8 billion to the other party. Furthermore, the exchange volume based on the Korean Won and Japanese Yen was US$6 billion, and the exchange volume in US dollars was US$15 billion. Third, significant differences were also observed in the agreements signed between China, Japan, and South Korea, and the ASEAN countries. South Korea, which directly experienced the Asian financial crisis, signed agreements to swap US dollars with major Southeast Asian countries. In contrast, China's arrangement was effectively a unilateral provision of liquidity rather than a bilateral exchange. Japan adopted an intermediate approach, involving currency exchange with some countries and unilateral support with others. Thus, the specific operational methods of the Chiang Mai Initiative (CMI) varied significantly by country.

Another noteworthy aspect of the operational system of the Chiang Mai Initiative (CMI) is the 20 percent rule. This rule grants autonomy by allowing the fund-providing country to provide funds without any conditions for 20 percent of the total swap amount. However, for liquidity provision exceeding 20 percent, an "IMF-link" was established, requiring compliance with IMF regulations. This provision was motivated by the pursuit of a complex objective: to differentiate itself significantly from the IMF, which imposed stringent conditions on liquidity support, while simultaneously ensuring that financial cooperation among East Asian countries was not contradictory to the principles pursued by existing global governance structures such as the IMF... (continued)