Global Financial Crisis and Regional Financial Architecture: The Future of the Dollar and the Choice of Asia

The current global financial crisis raises many questions on the international financial order in the post-crisis era. The issues include the instability of the global financial system, the role of the International Monetary Fund (IMF), the function of the US dollar as anchor currency, the expected contribution of the G-20 process, and the implication of the global financial crisis. The conference held on 1 June 2009 in Seoul was organized with the North East Asian Research (NEAR) Foundation to address these issues with emphasis on the consequences of the global financial crisis and the changing international financial order on monetary and financial cooperation in Asia.

The intense one-day conference consisted of five round table sessions. The first session focused on global financial crisis and the role of the G-20 Summit in mitigating the crisis, as well as the role of the IMF. It was noted that the IMF conditionalities are now more flexible than before the 1997 Asian financial crisis. As to the G-20 meeting, the participants agreed that it was absolutely essential and proper to resist trade protectionism even in difficult times, as well as to coordinate fiscal policy and exchange rate policies.

The second session was devoted to discussions on the future role of the US dollar standard, of the euro zone and the euro, and of Asian currencies. Although the US dollar will remain dominant, its role may decline a little; at least in the short-term while the US economy grapples with the crisis.

The third session discussed global imbalances, Asian capital markets, and foreign reserve pooling. With regard to global imbalances, the main issue raised was that the absence of recovery in the US consumption pattern could bring a deflationary pressure on the global economy and that Asian countries could no longer grow by depending on exports alone. On the capital market issue, an Asian bond market has been on the agenda for some years, and has been mentioned as a very desirable way to move forward. On the foreign reserve pooling, the main issue was how to make the Chiang Mai Inititiative Multilateralization (CMIM) more effective to mitigate the external shocks to the Asian region. This is related to the issues of strengthening regional surveillance and delinking the CMIM from the IMF conditionality.

The fourth session discussed alternative approaches to monetary cooperation in Asia, such as harmonized inflation targeting, parallel currency approaches and exchange rate arrangements in Asia; wherein Mr. Barry Eichengreen provided a comprehensive comparative review on these issues and argued that harmonized inflation targeting is the best approach towards encouraging monetary cooperation in the region as monetary cooperation is still in its infancy in East Asia.

The final session summarized the opinions and prospects that ensued in the discussion regarding the global imbalances, Asian capital market development, and multilateral cooperation. It was generally agreed that the global imbalance was not the cause of the current crisis, but rather a mere reflection of economic adjustments of underlying structural reasons, such as investment and saving decisions both in Asia and the US and the pattern of capital flows. But exchange rate risk played a significant role in the crisis and this requires further regional cooperation among East Asian economies. With regard to the prospects of monetary cooperation, Dean Masahiro Kawai pointed out that the road to a regional currency is still a long way, but all the policy efforts toward that direction can make Asian economies stronger, more resilient, and more economically interdependent.