Recent trade disruptions and the dollar’s dominance have led ASEAN countries to renew the call for a regional multilateral alternative to the IMF. While prior efforts failed, shifts in regional power configurations could finally enable major Asian economies to take collective action.

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 programs 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, 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" - characterized by a shift in the global economy's center 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 programs during the previous decade. Trade liberalization, bank restructuring, and labor-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% of GDP since 2000, and an average inflation rate of just above 2% - 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 Multilateralization 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.

To succeed, an AMF needs to learn from the IMF's current identity crisis. The Fund, caught between the US and China, is drifting, rudderless. Multilateralism and inclusiveness - engaging influential players like Japan and China - must be prioritized above all else; otherwise, a major power could easily dominate the institution.

Furthermore, an effective AMF must clearly define its mission and avoid policy objectives, such as climate change, that other institutions are better equipped to address. Ideally, it would focus on providing a financial safety net to countries in distress, while cooperating with other international institutions.

It remains to be seen how an AMF's lending conditions would differ from the IMF's, and whether recipient countries will be prepared - politically and psychologically - to receive advice from their neighbors. Another uncomfortable question concerns the dollar's role as the dominant global reserve currency. De-dollarization seems unlikely, given Asia's lack of deep and liquid financial markets. For the renminbi to become a reserve currency, China must either back it by dollar reserves or move to an open capital-account system.

While not all ASEAN members are currently on board with an AMF - Indonesia has expressed its reluctance - the idea no longer looks like a pipe dream. Including Japan will be critical, but China is now Japan's biggest trading partner, and their bilateral ties have deepened in recent years. If all Asian leaders can come to the table, the region may finally be able to free itself from the IMF.

From The Project Syndicate

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