Making the Asian Monetary Fund a reality

Although the International Monetary Fund has long been the most prominent global institution for promoting financial stability, calls to create regional alternatives are growing louder. During his visit to China in late March, Malaysian Prime Minister Anwar Ibrahim revived the idea of an Asian Monetary Fund (AMF). Pointing to “the strength of the economies in China, Japan, and others,” Ibrahim argued that now was an opportune time to establish an AMF, as well as discuss “the use of our respective currencies.”

This new push for multilateral alternatives to the IMF reflects the US dollar’s dominance, coupled with recent trade disruptions caused by Western sanctions on Russia. Historically, resentment of the Fund peaks during crises, because its loans to countries in financial distress often require fiscal consolidation. The debt crisis of the 1980s, the structural adjustment programmes of the 1990s, and the global financial crisis of 2008 created new economic challenges, widened social inequalities, and, in some cases, undermined countries’ sovereignty, stoking anger at the IMF and its policies.

The AMF was first proposed in 1997 by Japanese financial authorities seeking a regional alternative to the IMF in response to the Asian financial crisis. Japan would take a leading role, and the United States would be excluded from participating. But the initiative was eventually abandoned, owing to a lack of consensus. The US, fearing that an AMF – and East Asian regionalism more generally – would undermine the IMF’s (and thus its own) dominant position, staunchly opposed the Japanese proposal. Later, in 1999, then Malaysian prime minister Mahathir Mohamad fanned the embers by claiming that the Asian financial crisis would not have occurred or been as severe had a regional monetary fund existed.

Nearly a quarter-century later, the context has changed. The Sino-American rivalry has undermined multilateralism. China currently enjoys much stronger trade ties with Asean economies than the US did in the 1990s. And Asian emerging markets’ relatively fast post-pandemic recovery, compared to Western economies, has reinforced the idea of the “Asian century” – characterised by a shift in the global economy’s centre of gravity from North America and Europe toward East Asia.

Equally important, the renewed calls for the creation of an alternative financial order, and optimism about its prospects, reflect the region’s experience following the 1997 crisis. Most Asean countries were able to escape the worst fallout of the 2008 financial crisis because of reforms undertaken under IMF programmes during the previous decade. Trade liberalisation, bank restructuring, and labour-market and corporate-governance reforms had helped these economies to emerge stronger from the Asian financial crisis.

For example, the reforms had a fundamental impact on South Korea’s chaebols, or family-owned conglomerates. Daewoo, the second-largest chaebol at the time, was forced into bankruptcy, while Samsung, Hyundai, and LG were split up into smaller, more manageable entities. Likewise, Thailand has maintained an average fiscal deficit of around 1 per cent of GDP since 2000, and an average inflation rate of just above 2 per cent – comparable to the US. Both the Philippines and Malaysia reined in fiscal deficits, while Indonesian banks went from “opaque dens of cronyism to models of good management.”

Despite the success of the post-1997 reforms, resentment toward the IMF ran deep in Asia, as evidenced by the speed with which East Asian countries paid off their loans. Since then, many economies (and central banks) in the region have amassed significant foreign-exchange reserves to insure themselves against future external shocks without the Fund’s help. This deep anger also underpinned the Asean+3 economies’ creation of the Chiang Mai Initiative Multilateralisation in 2010. Established to provide short-term liquidity in times of economic distress, the CMIM currently has an estimated liquidity capacity of $240 billion, or nearly a quarter of the $1 trillion that the IMF has at its disposal.

The CMIM is widely considered a pilot version of an elusive AMF. But its pledge-based system, which relies on bilateral swaps, renders it less effective in a time of crisis, and no member countries have used it. This underwhelming experience raises doubts about the viability of a pan-regional alternative to the IMF. Nonetheless, Ibrahim is eager to leverage the shifts in regional power configurations and is certain that major Asian economies can be convinced to take collective action.