Multilateral Cooperation Aims to Fend Off Regional Crisis
It is encouraging news that 13 Asian countries have signed a $120-billion currency swap deal to better cope with short-term liquidity volatility arising from external shocks. On Monday, finance ministers and central bank governors of 10 states of the Association of Southeast Asian Nations (ASEAN) plus South Korea, China and Japan announced the signing of the regional cooperation pact.
The agreement calls for a multilateral financial support program that is scheduled to make its debut on March 24. It is based on the Chiang Mai Initiative in which Korea, China, Japan and five ASEAN countries agreed in 2000 to support each other with dollar liquidity on a bilateral basis in times of crisis. The eight countries agreed on the $78-billion currency swap deal after the outbreak of the 1997-98 Asian financial turmoil.
The initiative was a direct reflection of the Asian turbulence that forced several countries including Korea, Thailand and Indonesia to go cap in hand for rescue packages arranged by the International Monetary Fund (IMF). Since then, countries in Asia felt the urgent need for regional cooperation to cushion external financial shocks. So, they launched the initiative, but it somehow felt incomplete due to participation by only a limited number of countries.
The new multilateral agreement is designed to step up collaboration by including the five other ASEAN states. If the pact is implemented as scheduled, its signatories will be able to strengthen their capacity to safeguard against increased risks and challenges from the globalized and integrated financial and economic system. Each country is entitled to swap its local currency with the U.S. dollar for an amount up to its contribution multiplied by its respective purchasing multiplier.
It is noteworthy that China and Japan have taken the lead by contributing $38.4 billion each to the deal with their respective share equally amounting to 32 percent. This equal share means that the two Asian economic powers should refrain from racing for regional hegemony in the cooperative grouping. South Korea has committed to provide $19.2 billion, representing 16 percent of the total. The remaining 20 percent will be shouldered by the 10 ASEAN members.
Through this, it can be inferred that Korea can play an important role in the smooth operation of the currency swap alliance. The nation needs to act as a mediator between China and Japan as well as between the regional powers and the ASEAN states. Korea accounts for 8 percent of the combined total gross domestic product (GDP) of the 13 Asian countries. Its foreign exchange reserves represent 6.4 percent of the signatories' total. By making up 16 percent of the contributions, Korea can exert considerable influence in the multilateral venue.
The currency swap agreement amounts to being sort of a loose currency union. The participating nations still have a long way to go to realize their dream of an Asian Monetary Fund resembling the IMF. For now, they should do their best to help fend off currency speculation, liquidity crunches and financial turmoil in the region. Then they need to take a step-by-step approach toward a full-fledged monetary union.