Term Paper: Asian Monetary Fund What Is it Why Is it Important

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Asian Monetary Fund - What is it? Why is it important?

What is Asian Monetary Fund?

The reform measures of International Monetary fund amidst severe economic crisis of East Asia, particularly, since the Second World War were considered as too imposing and too stringent. This led many to seriously think of mild reforms to eradicate the possibility of future economic exigencies. Some others inclusive of Japanese Finance Minister Kiichi Miyazawa and South Korean Prime Minister Kim Jong-Pil went to the extreme and argued that IMF is quite incapable of healing the ailing Asian economics. They advocated the constitution of Asian Monetary Fund as an alternative to IMF reforms. The prevailing economic disaster in Asian regions has made the Asian institutions vulnerable to serious flaws as well as their responsive towards informality and consensus. The creation of Asian Monetary Fund was first proposed by Japanese Vice-Minister of Finance Eisuke Sakakibura during the year 1997. (Asian vs. International: Structuring an Asian Monetary Fund)

However, the proposal was withdrawn subsequently not withstanding the opposition from America. Several policy proposals have been formulated by the regional leaders in order to incorporate the idea. South Korean Prime Minister Kim Jong-Pil urged Tokyo publicly to reiterate the proposal of Asian Monetary Fund. Japanese Finance Minister Kiichi Miyazawa recommended again for supplementation of IMF loans through some type of regional currency support mechanism duly funded by the member countries of the region which consider themselves dependent on each other in the fields of trade and investment and that are exchanging their views constantly on the policy directions. The emergence of Asian Monetary Fund was thought of from two basic facts, first that a regional monetary fund could provide added funds, strengthening the role of IMF as the lender of the last resort and second that a regional fund could entail macro- and micro-economic advice more suitable for Asian economics. The second objective cannot be undermined since it is felt greatly significant that the regional monetary fund must encourage macro economic reforms to regain the confidence of the investor and microeconomic reform to foster economic growth so as to effectively resolve the regional crises. (Asian vs. International: Structuring an Asian Monetary Fund)

New momentum for Asian Monetary Fund was generated when during May 2005, the Asian economic integration took the initiative in terms of renewed talk of an Asian Monetary Fund -- AMF following the announcement of ten members of the Association of Southeast Asian Nations -- ASEAN along with China, Japan and South Korea, about their motive to strengthen the Chiang Mai Initiative -- CMI. Such announcement coincided with the annual board meeting of Asian Development Bank, while the new President of ADB was Haruhiko Kuroda, one among them who first proposed of an Asian Monetary Fund amidst Asian financial crisis during 1997. Even since his resuming office President Kuroda is of the opinion that economic integration should be an objective for any regional bank. In April he created the office for Regional Economic Integration and deployed Masahiro Kawai to lead it. In the following ADB summit Kawai could able to say that CMI has the capability to become the Asian Monetary Fund. (New Momentum for an Asian Monetary Fund)

The decisions taken by ASEAN+3 groups are somewhat self-effacing. The measured include increasing the size of currency swaps to double under the CMI from their present level of U.S.$39 billion; enhancing the amount of emergency liquidity available without IMF stipulations from 10% to 20% and converting the bilateral swaps into two-way swaps with an intention to making them multilateral. All this combined however, do not meet the expectations of Kuroda and Kawai, who were desirous of expanding the swaps to U.S.$400 billion. Such reforms could replicate the considerable economic, financial and political barriers that restrict any fast development towards the path of economic integration. Not withstanding this, the announcement astonished many who had thought that the CMI that developed in 1997 during the time of the financial crisis had become greatly irrelevant. The proposed AMF replicates the extensive acceptance of the fact of progressive economic integration in the region, emphasizing that the trade between ASEAN+3 members is now higher than 40% of their total trade and is progressing comparative more rapidly than that of the EU or NFTA intra-regional trade. (New Momentum for an Asian Monetary Fund)

Japan is also influenced by the threats of economically dominant China and the institution of AMF being dominated in Yen is expected to fetch Japan a dominating role in the regional monetary policy and prevent China gradually overthrowing Japan as the economic leader of East Asia. The Chinese opposition to the creation of an AMF denominated in Yen stems from the fact that it was a Tokyo-led proposal. China considers any Asian monetary institution or common currency has a very long-time to go and that gradually entails the inevitability of the Chinese leadership of Asian economic integration. ASEAN nations preferred to concentrate on such unresolved tension between the two economic giants and attempted to make the most out of a regional self-help method in the wake of future crises, particularly amidst growing speculations that the IMF is seen to be mostly controlled by the U.S. And European interests did not co-operate suitably during the time of the Asian Crisis.

Irrespective of the fact that U.S. And the IMF have official sanctions for the CMI, the proposal for constitution of an Asian Monetary Fund is not convincing to them. Creation of such a fund is feared to deprive the U.S. Of its conventional dominance in dictating stipulations and loan amounts through the IMF. Taking into consideration the critiques of East Asia of IMF the fund might also give rise to a greater application of state supported interventions that are not in alliance with U.S. treasury policies. The U.S. is apprehending to confront a loss because of its political dominance in the region and the influence of its economic policies. The only way out to deter the formation of an Asian Monetary Fund is for the U.S. And the IMF to reform and revise the IMF to enable the Asian members of the Bank to replicate their prevailing economic condition in a better way. The necessity of such reforms is evident in the declaration of the ASEAN+3 groups when they served the notice to review the current quota of IMF to highlight the present quota. (New Momentum for an Asian Monetary Fund)

What is its purpose?

The prime objective of the constitution of an Asian Monetary Fund was to entail a general pool of funds to the member nations for quick disbursal in terms of emergency support of balance of payments for the crisis-hit economies. A considerable portion of the fund is to come from Japan while it received promises of contributions from Hong Kong, Taiwan and Singapore. During 1998-99 the potential mobilization capacity of the fund was estimated to be of U.S.$100 billion. Then the U.S. apprehended it to be a threat to its influence in Asia and pulled out all the hurdles to put the proposal to an end. Currently it has been revived when the Malaysian Prime Minister, Mahathir bin Mohamad emphasized it again at an East Asian Summit organized by the World Economic Forum in Singapore. He conceived AMF to be a small compact of regional funding agency that would intensively and constantly involved in East Asian monetary cooperation and associated day-to-day problems. Currently, the ASEAN ministers provided a description of the AMF proposal in their recent informal summit at Manila. (Examining the case for an Asian Monetary Fund)

The Manila framework was conceived of in terms of four broad headings: - i) A mechanism for regional economic surveillance to supplement the global surveillance of IMF; ii) Increased economic and technical cooperation for encouraging domestic financial systems and control systems; iii) steps to encourage the capacity of IMF to react effectively to the financial crises of the region; and iv) as a coherent financing mechanism that would provide supplementation of the resources of IMF. The Manila convention however, has been conceived of as an irrefutable victory for the IMF centered strategies of the U.S. The framework has no institutional element of the regional orientation of an AMF and the core prescriptions are worked out to encourage instead of decreasing the role of the IMF. (Japan's Asian Monetary Fund Proposal)

Irrespective of the fact that the moment Japan initially proposed for the AMF is considered not conducive, still this cannot undermine its potential effectiveness. Many reasons have been advanced in favor of such a regional-based organization. To begin with, the bailout packages in Latin America and East Asia are conceived to be regional in nature. About 50% of the total U.S.$42 billion financial assistance assured to Indonesia through the IMF was considered in terms of bilateral aid, of which most was by regional economies in East Asia. Taking the case of Thailand it is seen that about one-third of the U.S.$34 billion package was bilateral, all of which was… [END OF PREVIEW]

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