Development

While CMI was more symbolic than truly effective, the need for a liquidity support mechanism for the region appeared to become less urgent as the region gradually recovered from the financial crisis. The main macroeconomic adjustments of the crisis-affected countries were through currency depreciation and the export engine. The role of the export sector became more and more important after the crisis, and the ratio of exports to GDP increased significantly. For example, in the case of Thailand, the ratio of exports of goods and services to GDP increased from about 40% prior to the 1997 crisis to about 75% in recent years. Most East Asian economies ran current account surpluses after the crisis, and also had large net capital inflows. Nevertheless, the authorities actively intervened in the foreign exchange markets to prevent their currencies from appreciating too much in case this would negatively affect the export engine. As a result, East Asian economies have been accumulating foreign reserves at a very rapid pace (see Table 3 [ PDF 35.2KB | 1 page ]). By the end of 2008, East Asian economies had accumulated more than US$4 trillion of foreign reserves, which accounted for more than 55% for the world's foreign reserves.

The large accumulation of reserves provided an effective self-insurance against the kind of crisis that occurred in the region in 1997-98. This was not so much the result of a conscious strategy to accumulate these reserves. (Indeed, reserves accumulation can lead to problems with sterilization and often negatively affect the central bank's balance sheet.) Rather, the accumulation of reserves to a greater extent was the outcome of exchange rate intervention to keep the local currency from appreciating too much and from negatively affecting the export sectors. Whenever large capital inflows led to currency appreciation, export businesses complained strongly to the government, and as the export was a major engine driving the economy, or even the only engine in some cases, the political pressure for the central bank to intervene to keep the currency from appreciating too much can be huge. In Thailand's case, for example, even large interventions could not prevent the baht from appreciating rapidly in the second half of 2006. The authorities imposed strong controls on capital inflows in December 2006, which led to a stock market crash the next day, and some of the measures had to be reversed, resulting in a loss of credibility for the authorities and also created undesirable capital market distortions.

Apart from the accumulation of reserves, better self-insurance also resulted from lessons learned from the 1997/98 crisis about the danger of letting short-term foreign debt become too large. As a consequence, most countries in the region carefully monitored their amount of short-term foreign debt and tried to keep the ratio of short-term foreign debt to official reserves relatively low. For example, in the case of Thailand, the ratio of short-term foreign debt to official reserves had been in the range of about 25-30% for most of the last decade. Another difference compared with the pre-crisis situation was that most countries had been using some form of a managed float exchange rate regime rather than a fixed rate regime. While as indicated above, most countries also actively manage the exchange rate so that it will not appreciate too much compared with their competitors (who are also mostly in East Asia), the ability to let the exchange rate depreciate when conditions warrant it also provide another valuable instrument for the authorities that lessened the risk of a 1997-98 style crisis. This was particularly relevant during the sub-prime crisis when there were large capital outflows from the region, putting depreciation pressures on many countries' exchange rates. The countries concerned were able to use both currency depreciation and sales of foreign reserves to manage capital outflows in an orderly way.

Even though a regional foreign exchange liquidity mechanism appeared to be less urgent for the reasons indicated above, the momentum to evolve the CMI into a more effective mechanism remained. The fact that reserves accumulation provided greater self insurance for each economy also meant that the cost of providing some reserves for a regional liquidity mechanism declined as the countries in question still had plenty of reserves left for its own self-insurance. Although progress was slow, the region finally agreed on the principle of converting the bilateral schemes of the CMI into a multilateralized self-managed reserves pooling scheme governed by a single contractual agreement, or the Chiang Mai Initiative Multilateralized (CMIM), at the 10th ASEAN+3 finance ministers' meeting in May 2007 in Kyoto, Japan. The Joint Ministerial Statement said “…we unanimously agreed in principle that a self-managed reserve pooling arrangement governed by a single contractual agreement is an appropriate form of multilateralisation…..We instructed the Deputies to carry out further in-depth studies on the key elements of the multilateralisation of the CMI including surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism.”¹⁴

One year later, at the 11th ASEAN+3 Finance Ministers' Meeting held in Madrid, Spain, progress was limited. It was agreed that the total size of the reserves pool would be at least US$80 billion, and that 80% of the amount would be contributed by the Plus 3 countries (PRC, Japan, and Korea), with the rest provided by ASEAN countries. More substantive agreements were reached at the 12th ASEAN+3 Finance Ministers' Meeting in Bali, Indonesia on 3 May 2009. The Joint Media Statement included the following passages:

“On the Chiang Mai Initiative (CMI), we have reached agreement on all the main components of the CMIM, including the individual country's contribution, borrowing accessibility, and the surveillance mechanism. The agreed components of the CMIM, which is a framework of mutual assistance among ASEAN+3 countries, are consistent with its two core objectives : (i) to address short-term liquidity difficulties in the region and (ii) to supplement the existing international financial arrangements.

…We agreed to implement the CMIM before the end of this year. In this regard, we tasked our Deputies to work out the operation details and implementation plan, particularly the legal documents that will govern the CMIM.

…We agreed that an independent regional surveillance unit will be established as soon as possible to monitor and analyze regional economies and support CMIM decision-making….”¹⁵

The attachment to the statement gave details of the contributions. The total size was to be US$120 billion, with 80% contributed by Plus 3 countries and the rest by ASEAN countries, as had been agreed in Madrid. A table Table 4 [ PDF 32.1KB | 1 page ]) showed individual country contributions and the borrowing multipliers (borrowing quota equals contribution multiplied by the borrowing multiplier). The broad decision making mechanism of the CMIM was also indicated. Fundamental issues (review of size, contributions, and borrowing multipliers, re-admission, membership, terms of lending, etc.) will be decided through consensus of the members of ASEAN+3, while the lending issues (lending, renewal, default) will be decided by majority vote.

The issue of individual country's contributions, particularly among the Plus 3 countries, was especially difficult and took longest to resolve. Countries naturally tended to think of contributions as being related to the voting weights that they will have in the new institution. Thus, each country does not want to be outdone by the others. Many formula could have been adopted with different implications for the contributions. For example, if contributions were based on a country's level of foreign reserves, PRC would have the largest contribution. If, however, they were based on the size of GDP, then Japan would have the biggest contribution (at least until the size of PRC's economy overtakes that of Japan). Korea, of course, was concerned it would be dominated by PRC and Japan. The final agreement seems a reasonable compromise. Among the Plus 3 countries, PRC (including some contributions from Hong Kong, China) and Japan will contribute 40% each, with Korea contributing 20%. Equal contributions from PRC and Japan seem to make good sense, as each would have found it difficult to accept if the other was to contribute more. And while Korea only contributes half of the other two, this should not matter in practice as Korea is likely to hold the swing vote between PRC and Japan on many important issues. The participation by Hong Kong, China, as part of PRC's contribution to the CMIM is also significant. It means that Hong Kong, China will be a full part of key activities that will take place under the CMIM umbrella. While these activities remain to be developed, some key areas of cooperative activities under the CMIM are proposed below.

The other important remaining issue that had to agreed on is the establishment of an Independent Surveillance Unit (ISU). It would be difficult to see how the CMIM could operate without a dedicated institution to carry out economic surveillance and coordinate the mechanism. The final issue to be resolved, apart from the details of the unit's scope of work and operations, was where to locate it, with a number of countries wishing to host this new institution. It has now been decided that the ISU will be located in Singapore. It will be called the ASEAN+3 Macroeconomic Research Office (AMRO), and is due to start operation by May 2011. The CMIM officially became effective on 24 March 2010.

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