Over the past 30 years of ASEAN s

Essay ASEAN and ASEAN+3 in Postcrisis Asia by Denis Hew and Mely C. Anthony Over the past 30 years of ASEAN s existence, the association has successfully forged close political cooperation among its members and created an environment of peace and stability in the region. This has allowed its member countries to concentrate on nation building and economic development. As a result, countries such as Malaysia, Thailand, Singapore, and Indonesia could achieve impressive economic growth, increased prosperity, and improved living standards in the 1980s and 1990s. The international community lauded these dynamic ASEAN countries as the East Asian Miracle because their economies seemed to have the winning formula for sustainable economic growth. ASEAN s efforts at maintaining regional peace through closer political and security cooperation and its accompanying economic success earned the recognition of ASEAN as one of the world s most successful regional organizations. That all changed dramatically, however, when the Asian financial crisis struck in July 1997. The speed and severity of the crisis were traumatic and devastating for the ASEAN region. Economic gains achieved by ASEAN countries over the past decade were essentially wiped out in the succeeding 12 months. The Asian financial crisis posed the greatest challenge to regional cooperation because many observers would argue that ASEAN s cohesiveness during this period was undermined by the financial turmoil. Therefore what ASEAN does over the next decade in the postcrisis period will be critical to its future as a viable regional institution. THE EFFECT OF THE CRISIS ON ASEAN COUNTRIES By October 1998, fifteen months after the onset of the crisis, ASEAN currencies depreciated 12 to 68 percent against the U.S. dollar, and stock markets plunged 20 to 63 percent over the same period. The wealth loss effect was clearly sizable; distressed banks with their rising nonperforming loans 21 NIRA Review

withdrew their credit lines. The resultant credit crunch starved the corporate sector of working capital and drove many companies into bankruptcy. The more-affected ASEAN nations, such as Thailand, Indonesia, and Malaysia, experienced severe economic recession, rising unemployment, and poverty. In Indonesia, it has even led to social and political upheaval, culminating with the Jakarta riots and, subsequently, Suharto s resignation as president of Indonesia in May 1998. INFLUENCE ON REGIONAL COOPERATION Some academics have argued that if ASEAN had shown more solidarity in responding to the financial crisis, it might have reduced the severity of the crisis. For example, although many initial coordinated efforts were made by ASEAN central banks to defend the baht in May 1997 all evidence of practical solidarity disappeared. 1 It must be highlighted, however, that ASEAN central banks lack the financial capability to defend ASEAN currencies over a long period because hedge funds have a huge war chest of capital they can raise for speculation. This leaves ASEAN and other East Asian central banks nearly defenseless in protecting their currencies, especially if there is collusion among the hedge funds. Nevertheless, the different approaches in dealing with the Asian financial crisis among the ASEAN countries also make a collective response very difficult. For example, IMFassisted ASEAN countries such as Indonesia and Thailand have macroeconomic policies requiring adherence to IMF conditionalities, while Malaysia partially closed its economy by THE ASIAN FINANCIAL CRISIS POSED THE GREATEST CHALLENGE TO REGIONAL COOPERATION BECAUSE MANY OBSERVERS WOULD ARGUE THAT ASEAN S COHESIVENESS DURING THIS PERIOD WAS UNDERMINED BY THE FINANCIAL TURMOIL imposing selective capital controls. The Asian financial crisis posed a serious challenge to ASEAN s ability to respond adequately to a crisis of this kind and size. The crisis also projected a lack of cohesiveness among members in dealing with it because crisis-affected member countries were too preoccupied with their own economic recovery plans, and were thus too inward looking at the time. It must be noted, however, that unlike the European Union (EU), ASEAN is not an economic union and therefore had no formal coping mechanisms to deal with the crisis as a regional bloc. It was therefore only to be expected that ASEAN member countries would give more priority to resolving the financial crisis in their own backyard first before dealing with the crisis on a regional basis. The severity of the economic and political effects of the crisis also cast doubts on regional security, since new uncertainties relating to domestic stability in some crisis-stricken states and spillover effects such as massive labor migration and regional restiveness have emerged. The crisis in Indonesia is a case in point. In ASEAN, economic stability underscored regional stability and security. The notion of national resilience as the basis for regional resilience mainly through economic stability had been a de facto ideology in ASEAN. But the crisis threatened the very foundations of this regional resilience. More important, the legitimacy of most ASEAN leaders has been based on delivering the goods in terms of economic growth and economic security, which is sometimes referred to as performance legitimacy. Once 1 Wesley, M. (1999). The Asian Crisis and the Adequacy of Regional Institutions. Contemporary Southeast Asia, Vol. 21, No. 1, April. Autumn 2000 22

this arrangement broke down, as in Indonesia and Thailand, political leadership was in turmoil, and this has had regional repercussions. ASEAN S MEASURES TO RESOLVE THE CRISIS In November 1997, ASEAN officials met in Manila and formulated the Manila Framework, which was later adopted by APEC. The core principle of the framework was to establish a regional surveillance mechanism that would support the global surveillance system of the I M F. 2 In February 1998, ASEAN finance ministers agreed to set up a peer surveillance system, which is a collective monitoring and early warning system, based on a G7 model, to supervise macroeconomic policies, financial regulation, and transparency of member countries. An ASEAN Surveillance Process (ASP) was established at a special meeting of ASEAN finance ministers on October 4 1998. The ASP was supported by the ASEAN Surveillance Coordinating Unit (ASCU), based at the ASEAN Secretariat in Jakarta, and the ASEAN Surveillance Technical Support Unit (ASTSU), based at the Asian Development Bank in Manila. The ASP provides a framework in which ministers exchange views and information on the economic situation and policy measures for economic recovery. Since the ASP is voluntary and not compulsory, some observers fear that member countries will not comply and disclose the necessary information for the surveillance system to be effective. In the sixth ASEAN Summit in Hanoi in December 1998, a statement of bold measures was announced to address the Asian financial crisis and to undertake measures that will enhance economic recovery and promote growth within the region. The Hanoi Action Plan (HPA) was launched in December 1998 as part of a series of action plans to achieve the ASEAN Vision 2020: to create an ASEAN that is outward looking; living in peace, stability, and prosperity; bonded together in partnership in dynamic development; and consisting of a community of caring societies. The HPA, which has a six-year time frame of 1999 to 2004, will address the current economic situation in the region, especially the effect of the Asian financial crisis, and it will implement initiatives that will hasten economic recovery and address the social and economic influences resulting from the crisis. The main problem with the HPA is that it is all-embracing, covering a wide range of issues. Thus the action plan appears overly ambitious. It is therefore necessary for initiatives in the HPA to be given priorities and to be achieved within specific deadlines before 2004. For example, the HPA could focus on key economic and financial initiatives relating to crisis prevention: Encourage the use of ASEAN currencies in trade settlements and reduce o v e r d e p e n- dence on the U.S. dollar. Examine the feasibility of an ASEAN currency and exchange rate system. Structure orderly capital account liberalization. Strengthen financial systems and develop ASEAN capital markets. Strengthen the ASEAN Surveillance Process. Strengthen the regular monitoring of capital flows. Promote the liberalization of the financial services sector. Improve corporate governance, transparency, and disclosure. Accelerate regional economic integration via the process of the ASEAN Free Trade Agreement (AFTA) and the ASEAN Investment Area (AIA). CONSTRUCTING A REGIONAL FINANCIAL ARCHITECTURE Under the current environment of regional recovery, this period is critical for ASEAN to build and strengthen existing institutions that will forge closer regional cooperation. The global financial system remains imperfect, and 2 Soesastro, H. (1998), ASEAN During the Crisis, ASEAN Economic Bulletin, Vol.15, No. 3, December. 23 NIRA Review

the G7 appears to lack the will to initiate serious reforms to the existing financial architecture. Therefore instead of waiting for the G7 and the IMF, ASEAN should move ahead with the construction of a regional financial architecture that would be more resistant to future financial crises. To reform the existing international financial architecture, the following measures are proposed: a) Promote the Asian Monetary Fund ASEAN governments from Indonesia, Malaysia, the Philippines, Singapore, and Thailand have recently agreed to expand an existing foreign exchange swap arrangement (currently US$200 million). ASEAN finance ministers are also supportive of a recent Japanese proposal that would very likely include Japan, China, and South Korea to further enlarge the currency swap arrangement. But such a swap arrangement on a bilateral basis (between Indonesia and Singapore, for example) may not be effective against a massive onslaught of currency speculation. A bolder initiative would be to set up a multilateral funding agency focused on the East Asia region with a larger pool of emergency funds, that is, an Asian Monetary Fund. In late 1997, Japan proposed the establishment of such a regional fund, but it was immediately rejected by the United States for fear that it would undermine the IMF. In retrospect, if the AMF had been successfully set up, it might have deterred further short selling of ASEAN currencies and alleviated the severity of the financial crisis on the real economy. Japan s Miyazawa Initiative, which was announced in 1998 with an aid package totaling US$30 billion for crisis-affected East Asian countries, could perhaps serve as a prototype that could evolve into a permanent funding agency with standby regional financial support mechanisms. An institution of this kind could quickly provide liquidity to financially troubled hot spots around the region. b) Build and Strengthen Regional Institutions The capabilities of the ASEAN Secretariat should be further strengthened to enable it to effectively coordinate and monitor the progress of ASEAN s economic and other initiatives. Building the capabilities of this administrative body entails staffing it with highly qualified and competent individuals who can interface effectively with ASEAN governments and help push ASEAN projects forward. Although the decisions to implement ASEAN projects and initiatives lie only with member governments, the ASEAN Secretariat, through its coordinating functions, can help to facilitate and expedite regional projects. Consistent with ASEAN s plans to develop a regional bond market, ASEAN should consider setting up a regional debt ratings agency. International ratings agencies such as Moody s have been criticized for being Western biased and politically motivated. Another criticism of Moody s was the lack of analysts based in Southeast Asia. An East Asian-centric ratings agency would provide more detailed information for each Asian country about its financial, economic, and political structures, which are vital in evaluating sovereign credit rating. One financial initiative in the HPA is to review the existing exchange rate policy and examine the feasibility of an ASEAN currency. This would require establishing a supranational central bank, however, that coordinates regional monetary policies and exchange rates such an institution would eventually pave the way toward a single ASEAN currency. Thus setting up an ASEAN Central Bank modeled along the lines of the EU s European Central Bank should be discussed in the ASEAN Central Bank Forum meetings. c) Exchange Rate Policy No single parsimonious solution exists to resolve the financial crisis in regard to an exchange rate policy. Decisions on this policy in ASEAN would very much depend on the level of financial development and the size of the member country s economy. Although Autumn 2000 24

creating a single Asian currency has been much talked about, it is a long-term initiative. One possible solution in the short-term is to have a currency band that might deter currency speculation because it creates some uncertainty about which exchange rate to target. The currency band appears to offer a middle way the best of both fixed and flexible exchange rate systems. That is, it offers the exchange rate stability of a fixed exchange rate but still provides sufficient flexibility to withstand external shocks. Government and central bank credibility in maintaining the currency band is nevertheless critical for this form of intermediate exchange system to be effective. d) Cross-Border Listings The financial reforms that can strengthen the existing financial architecture include promoting cross-border listings. As the most developed country in East Asia, Japan can play a role by promoting the Tokyo Stock Exchange as the main stock market for top Asian companies and by encouraging cross-border listings of East Asian companies. This would result in a mutual benefit: It would enhance Tokyo as an international financial center, and it would provide a bigger capital market for Asian companies to source much-needed capital. e) Promote Venture Capital to Develop High- Tech Industries ASEAN could also encourage the growth of venture capital to develop domestic high-tech industries and create an environment that will attract foreign multinationals involved in new technologies. The development of high-tech industries, especially in information and communications technologies, will provide new sources of economic growth for ASEAN in the new century. Perhaps ASEAN should consider developing Malaysia s Multimedia Super Corridor on a regional scale. f) Asian Bond and Derivatives Markets A need also exists to develop Asian bond and derivatives markets, but the development of these markets in Asia will be a long and costly process. Nevertheless, both forms of capital markets are critical if another regional financial contagion is to be avoided. A wellbalanced financial system with developed capital markets and a strong banking system will provide financial stability and buffer against the destabilizing effects of volatile capital flows. Multilateral institutions such as the IMF, the World Bank, the Bank of International Settlements (BIS), and the International Financial Corporation (IFC) can play important roles by providing technical assistance in the area of financial development in Asia. EXPANDING REGIONAL COOPERATION: THE ASEAN+3 The development of an East Asian regional grouping such as the East Asian Economic Caucus (EAEC) should be strongly promoted. The EAEC was originally proposed in 1990 by Malaysia s prime minister, Dr. Mahathir Mohamad. The EAEC would be an East Asian regional body to promote economic cooperation among member East Asian countries. Because of its exclusion, the EAEC was strongly opposed by the United States even though the U.S. plans to promote the formation of a huge free trade area within the Americas by 2005, namely, the Free Trade Area of the Americas (FTAA). To compete in this new century with regional superblocs such as the EU and FTAA, ASEAN and other East Asian countries must press ahead with the EAEC process, with or without U.S. approval. The first ASEAN+3 Heads of State/Government Summit held in Manila in November 1999 appears to be a positive step toward institutionalizing the EAEC process. In the Joint Statement produced at the end of the Summit, the leaders of ASEAN, China, Japan, and South Korea agreed to strengthen cooperation with the view to advancing East Asian collaboration in priority areas of shared interest and concern even as they look to future challenges. Among issues of agreement in economic cooperation, for example, they agreed to strengthen efforts in accelerating trade, investments, and technology transfer; in 25 NIRA Review

encouraging technical cooperation in information technology and e-commerce; in promoting industrial and agricultural cooperation; in strengthening SMEs; in promoting tourism; and in encouraging participation in the development of growth areas in East Asia, including the Mekong River Basin. 3 While financial initiatives are currently under way within ASEAN, monetary and financial self-help and support mechanisms could gain momentum within the framework of the ASEAN+3. Note that ASEAN+3 can evolve into a formidable regional economic bloc rivaling the United States and the European Union. Its economic and potentially political clout is further enhanced because of the combined foreign reserves of East Asian economies: more than US$800 billion. However, the success of increasing its influence as an expanded regional group would to a large extent depend on Japan and China putting aside their differences and historical baggage and forming a close alliance. ASEAN as a regional institution can be the building block and act as the linchpin to regional integration. Furthermore, ASEAN should be able to tap the potentials of having Japan and China in the grouping and to work on optimizing the synergy of the members of ASEAN+3. In this regard, a strong ASEAN is crucial to enable it to play a pivotal role in moving this process forward. In the meantime, ASEAN should persist with its own plans for economic integration. Although ASEAN countries vary in economic development, two-tier economic integration could initially be implemented, whereby richer ASEAN countries will integrate their markets first, before the poorer member countries. This kind of economic integration has already begun with the decision to allow Vietnam, Myanmar, Laos, and Cambodia to participate in AFTA beyond 2003. CONCLUDING REMARKS As East Asia recovers from the Asian financial crisis, the challenge for ASEAN is to undertake bold measures that will hedge it against future shocks. The much-discussed rapid recovery in the region is still very fragile, and several external factors could easily cause an economic relapse: A slowdown of the U.S. economy and increased volatility in U.S. stock markets. A lack of progress in financial and corporate restructuring in Japan threatening to dampen domestic demand and keep Japan in its recession. China s growing economic problems, especially high unemployment. The inability of countries such as Indonesia to expeditiously address their economic and political problems, which could have tremendous negative effects on the region. A worsening situation in Northeast Asia, for example, tensions between China and Taiwan. Potential reverberations in the South China Sea. Because of its experience with the Asian financial crisis, ASEAN appears to recognize that it needs to rethink its existing mechanisms and reassess its role as a regional organization in postcrisis East Asia. This is reflected in its approach to establish ASEAN+3, an expanded form of regionalism. Therefore as a new regional enterprise, ASEAN+3 must be further nurtured and strengthened to meet the challenges of the new millennium. Note: The views expressed in this paper are entirely the writers and should not be taken as bearing institutional support. Denis Hew and Mely C. Anthony are senior analysts at the Institute of Strategic and International Studies (ISIS), Malaysia. E-mail: denishew@isis.po.my and manthony@isis.po.my 3 See Joint Statement on East Asia Cooperation, 28 November 1999, (http://www.aseansec.org/summit/inf3rd/js_eac.htm). Autumn 2000 26