The Hindu Business Line : Asian Monetary Fund — A monetary physician with a human face

At the recent Istanbul meeting of the ADB, its President, Mr Haruhiko Kuroda... His interest and Japan's initiative should see the Asian Monetary Fund become a reality.

SOME TIME back, I had commented in this column on a suggestion mooted by Mr Haruhiko Kuroda, then President-designate and now President of the Asian Development Bank, regarding the setting up of arrangements to create an Asian Currency Unit, on the lines of the European Currency Unit that preceded the creation of European Monetary Union and the euro. This idea was mooted on the basis of the concept that it will avoid the volatility of intra-Asian currency markets and create a currency, which can well be one of the principal currencies of the world. The idea got a further boost at the meeting of the Asian Development Bank held recently at Istanbul.

The Financial Times of London has highlighted the innovative idea as emerging from the influential sources, such as Mr Kuroda. The news item further points out that Mr Masahiro Kawai, a former Japanese Finance Ministry official and World Bank economist, is slated to head a new Regional Financial Integration Office at the ADB. This follows on the arrangements initiated after the Asian Financial Crisis in 1997-98, known as the Chiang Mai initiative.

It now involves the governments of China, South Korea and 10 South-East Asian countries. The swap arrangement totalled $39 billion in bilateral support arrangements.

These arrangements are intended to help member-countries in case any one of their currencies comes under speculative attack. The sums involved may easily double, says the news report.

The influential Mr Kawai is quoted as having said that the Chiang Mai initiative has the potential to become an Asian Monetary Fund.

The concept of such a Fund was suggested earlier by influential Japanese Ministry of Finance officials following the Asian financial crisis and the tardy response of the Washington-based IMF to it. It had then been opposed by the US and the IMF itself, on the basis of weak arguments, such as that an Asian Monetary Fund could not be expected to as credible as the Washington-based institution in surveillance of Asian countries. Indeed, strong suspicions were voiced that an Asian Monetary Fund would be more relaxed in reviewing and criticising fiscal and monetary policies of its members. This suspicion looks comical in the background of continued lack of specific action on the part of the IMF itself, faced by the US in respect of fiscal and current account imbalances.

The objection to an Asian Monetary Fund was almost hysterical because it meant that Asia could solve its own problems without as much as by your leave from Washington. The argument that an Asian Monetary Fund would be too relaxed in its attitude to monetary and fiscal mismanagement is ridiculous. Ultimately, the Asian Monetary Fund will succeed or fail based on its governance, its economists, its protocol of supervision and surveillance.

The turf-war between the two institutions, if they both existed, would have really helped to keep both on their toes, in regard to competence in financial forecasting, advice and surveillance, besides increased sensitivity to country concerns. Above all, an Asian Monetary Fund would not be bound by the rigid requirements of Congressional approval of the US House of Representatives and Senate, which import the US' geo-political considerations into the IMF's policy advice at various times — as Dr Joseph Stiglitz famously noticed and countered.

The Asian Monetary Fund would have the advantage of being closer to the countries in the region and thereby would have had a better understanding of their economic and social conditions. An Asian Monetary Fund could be a useful associate of the ADB, the Manila-based financial institution that has been responsible for aiding much of the development of industry and infrastructure in Asian countries. The emphasis on the Asian Currency Unit as part of the Chang Mai initiative seems to have led to the new idea being viewed in a different context so far as policy-makers in Delhi are concerned.

They are obviously not too much in a hurry, understandably, to "surrender" the Indian rupee to an Asian Currency Unit. But this is missing in India's realism in the emphasis on the important element of an emerging Asian Monetary Fund. It seems to me that Mr Kuroda and his lieutenant are more keen on creating an Asian Monetary Fund rather than merely creating an Asian Currency Unit (ACU). They should be aware that an institutional backing, which the Asian Monetary Fund will provide, can be critical for launching an ACU or an Asian Monetary Union.

Students of economic history could not but note that ADB had played a critical role in helping various Asian countries, even more than the World Bank and the IMF. In particular, I recall clearly how the ADB helped India in the critical years 1991-92 and 1992-93 by coming to its aid with a loan for bank restructuring, without insisting on India declaring that we will privatise the State Bank of India.

ADB was quite satisfied with the important changes in provisioning norms, capital adequacy rules and the reform of banks initiated as a result of the Narasimham Committee's recommendations. The World Bank had, in contrast, stalled its offer of help since Lew Preston, its President, was a former banker and saw public sector banks as enemies of progress. The ADB, nurtured in the Japanese tradition of a mixed economy, was quite tolerant of our public sector giants and did not let ideology stand in the way of critical aid disbursements.

The Asian Monetary Fund can be a critical new ingredient of the coming Asian century. It can help India play a useful role in Asian economic development as well as in global economic growth. It is, therefore, important that Indian economists and civil servants get on board the ADB's efforts to create an AMF.

After all, there is no harm in joining the Asian economic super powers, Japan and China, in their effort to create a new institution which utilises their large forex reserves — at least a part of them — for the greater good of Asia and the world. It would be a pity if India stands aloof and treats the effort as purely a Japanese/Korean initiative. It will be hard to get in once the preliminary framework is set.

It is worth recalling that when the ADB was set up, besides Japan, India also played an important role. India's C. S. Krishnamoorthy helped to draft its constitution and financial structure. He ended up being appointed to serve as an effective and well-remembered Vice-President of the ADB for many years.

To take an effective role in the evolution of the new AMF, we have to take steps to formulate our own priorities clearly. Main questions are: "Do we want to invest a part of our reserves in the capital of the new institution?

Do we need a strong presence on its governing board and management? What kind of relationship should the AMF have with the IMF, the World Bank and the ADB?" It is important that we think out clearly the various possibilities and arrive at a reasonable understanding of a consensus with our Asian neighbours as well as with the world powers, such as the US and the UK, which will undoubtedly desire to have a say, albeit limited, in the new institution.

Whether the AMF will be a prelude to an Asian common market is a different question. Let us recall that the IMF did not lead to a common market for the world or to a common currency, although Keynes did desire both in some form.

The IMF turned out to be purely a cooperative for currency assistance and adjustments. I also visualise the AMF starting out as a clearing house for ideas on currency adjustments and helping in times of crisis. It will take definitely some time to build up the economic bureaucracy to staff the new Fund.

Let us hope that while it will be tough as nails in assessing economic policies, it will not inherit the IMF's reputed insensitivity to human concerns. The AMF can be a monetary fund with a difference. It can be a monetary physician with a human face.

There are many steps ahead before AMF becomes a reality. I would bet that given Japan's initiative and Mr Kuroda's interest, the idea will bear fruit sooner than later. Sensitive issues will call for decisions. Among these include location of headquarters, composition of management, and choice of chief executive and his powers. India would do well to take the initiative in thinking out possible choices and getting aligned with allies and partners in Asia.

I do not underestimate the hard bargaining, the host of jealousies and misperceptions that India will have to encounter in this task.

All the more, it is necessary to form a task force involving the Ministries of Economic Affairs, Finance and Commerce to deal with the new AMF initiative.

Let it not be said that New Delhi let pass a golden opportunity to leave an imprint on the emerging new institution, the Asian Monetary Fund, the herald of the new Asian century.

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