CMI and IMF, a thought.

Apparently the G20 has made some break-thru with IMF reform.

One idea, which I read here , suggests that the EU should take a single seat at the IMF rather than have country level representation. Doing so would mean that the IMF would have to be based in Europe, as the law establishing the Fund states.

This would be in exchange for the western european powers giving up their over-representation at the Fund, a patently unfair situtation arrising from historical circumstance and now threatening the legitmacy of the Fund as a whole. Of course, the beneficiaries of a redistributation would be Asian nations. And, in the face of the WFC, keeping the Asian countries in, and invovled, at the Fund is very sensible.

A good idea perhaps, and not beyond the bounds of international law. However, the article further suggested that if the Asians did not like this arrangements they could go and formally establish the CMI.

But infact IMF reform would reduce the chances of the CMI ending its 20% link the IMF. In fact, the whole raison d'etre of the CMI comes crashing down if the Asian nations are granted better access to the Fund and its decision making processes. One might even interpret the CMI as a call for precisely such reform, a call for help. (Of course, there is more going on).

The Asian Develop Bank’s Regional Cooperation and Integration Strategy: Merits and Issues. Part 2

As outlined last week, the ADB’s RCI strategy confronts two problems which the close country focus does not, specifically coordination problems arising from negotiating with multiple actors at once, and the free rider problem. Today I will address one those, coordination.

With regard to the issue of coordination, the ADB has sought to resolve the issue by, in most cases, simply taking the initiative itself.[1] Because it can not be expected that the countries of the Mekong sub-region would be able to design and agree upon a project amongst themselves, the ADB designs (in part or in whole) for them a regional project. The ADB of course would also consider proposals from a regional or sub-regional body, such the Pacific Islands Forum (PIF) , Economic Research Innovation Asia (ERIA) or Central Asian Regional Economic Cooperation (CAREC, humorously pronounced Car-wreck), but even here is it likely that these body would refer to documents which the ADB had prepared in their planning.

While smoothing over the coordination problem, this new function of the ADB invites its own set of risks for the region’s development. By both recommending projects and offering to fund them, the ADB creates a situation in which aid clients might find it difficult to refuse, a sort of moral hazard.

This is because the money offered is ostensibly “free.” The funding for regional projects is sourced not from the countries’ national quota (envelop), but rather from a regional “allowance”. This is due to an institutional innovation which created within each regional department of the ADB a regional cooperation envelope independent of the national allotments. It might be difficult for national governments in these still developing to turn down which they may not have the way withal to soundly judge, and even if they believed that the project might not produce any real gain, explaining such refusal is an unwanted domestic political risk, regardless of regime type. On the flipside of this, moral hazard of a sort also arises because, if any one country turns down a project, it means that its neighbors must also go without. Thus there is the potential for external pressures to shape each country’s decisions. (This might be simply called the fear of being a party-pooper).

Thus the balance of power in the relationship in fact lies with the ADB, as the incentives are structured such that agreeing to any project, no matter its actual utility, is seemingly less costly (economically and politically) than refusal – particularly when compared with the balance of power in negotiations and the incentives structure in the country-level approach. The ADB needs to be aware that its client are, under the rubric of the RCI, more likely to accept any regional proposal made. Thus the ADB must be more careful that what it offers is based on sound judgment of the utility of each regional project and not to become memorized by a regional vision of its own creation. One idea might be to have the World Bank invited in review such cross-border projects and to peer review these projects effectiveness, paying close attention to poverty reduction.

Part 3 will be out soon with the last section.

[1] Mid-term Strategy, Article 39 “the rationale for RCI is premised on significant externalities, benefits that transcend national borders. This requires innovative funding arrangement because the distribution of benefits and costs among the partner countries is not always balanced. In the absence of an honest broker/facilitator, individual countries would not bear the cost of providing public goods from which the benefits would primarily flow to other countries.”

The Asian Develop Bank’s Regional Cooperation and Integration Strategy: Merits and Issues. Part 1

In 2006, the Asian Development Bank’s (ADB) president Kuroda announced a new ‘regional’ platform in the Bank’s development strategy. The Regional Cooperation and Integration Strategy (RCI) as it is known, is now three years old. It is time to reflect on the problems it has confronted and managed, successfully or otherwise, and to examine how it might fare from here on.

Of course, some might wonder how significant this new RCI approach is in terms of actual effect on the ADB’s operations and overall development strategy. In fact, the RCI is a very significant departure from the ADB’s prior practice. In the 2012 Strategy paper the ADB declared its intention to have 30% of its operations “regional” in the near future. Since the ADB loaned roughly four and a half billion dollars to East Asia in 2008, nearly twice that of the World Bank, thus we should be expecting at least one billion in regional projects annually. This is a lot of money in both relative and absolute terms for East Asia, and it is important that the regional strategy deliver at least as much as a national strategy, if not more.

Let it also be noted that the RCI is itself a new idea. The World Bank, the basic reference point for economic development thinking and practice, has favored a so-called country-level approach; under which each country has its own development strategy and applies for/receives loans independently of its neighbors. There are benefits to prescribing individual remedies to individual aid clients, and while a great deal of work (especially poverty reduction) can be achieved with such a close-country focus, there are costs. The most obvious cost is that under such an heuristic, cross-border infrastructure or technical assistance, which can have a great (and cost-effective) impact on economic development and living standards might be missed. To see such opportunities a different pair of glasses are needed, specifically those with a ‘regional’ tint.

This is where the RCI approach has its value added. While the World Bank continues to be, rightly so, the leading development bank at the individual country level, the ADB has an opportunity, indeed a responsibility, to find those worthwhile projects hidden in the spaces between its regional member countries. This function is even laid out in the Charter of the ADB, although it has until now played down this role.

However, a regional strategy is by its nature more complicated and difficult to manage than close-country approach such as the WB favors. Whereas a country focus would limit the number of actors at the table to two (ADB and client), a regional strategy necessarily involves bringing more actors to the table. This is a case of “two is company, three is a crowd”, as the addition of even one extra country at the table significantly complicated negotiations.

Let us take the example of a road construction project. If the road were to be country-level project then only the ADB and client would have to agree, for a total of one agreement. If however the road were to link two countries, such as the southern economic corridor from Thailand to Cambodia, then Thailand and Cambodia must agree, Thailand and the ADB must agree and Cambodia and the ADB must agree (total of three agreements). Let us say the project involves another country, the road also passes through Laos say, then the total number of agreements required is six. Thus, each additional country involved exponentially increases the complexity, costs and risks of negotiations. This is a “coordination problem” as it is know in the literature.

Moreover, since each country will benefit to differing degrees, each country wishes only to pay its “fair” share. Or put another way, no country wishes to subsidize others’ costs. In addition to whatever local political problems of distrust that might exist, this fear of a “free rider” (while strictly rational) will likely prevent real cooperation. This is because without some guarantee that any loss incurred in the regional project will be covered (insured?) by the winners, each country is unwilling to commit its resources. Let us not forget that these countries are genuinely poor, and will therefore jealously guard their meager resources, certainly in preference to gambling on the good faith of neighbors. This is a sort of “free rider” problem (or perhaps a “stag hunt”).

So how has the ADB sought to resolve these two issues; coordination problems arising from negotiating with multiple actors at once, and the free rider/stag hunt problem implicit in the new RCI strategy? And how much success has the ADB had? The answers to these questions are to be found in Part II, due Monday.

The ASEAN regional forum is a dead-end, but so what?

I have recently been examining the reports and minutes from the ASEAN Regional Forum’s Inter-Sessional Group on Confidence Building and Preventative Diplomacy, the ISG-CBMs. This group is the litmus test of mutual trust in East Asia. More than that, it is window into the thinking of the members’ nations on the prospect of regional inter-state violence, up to and including, war.

While East Asia’s recent moves towards more and deeper regionalism, driven in part by uneasiness inspired by the Bush administration’s unilateralism and inattention to the region, would suggest a greater level of trust between the regional countries – the results of the ISG-CBMs are less than inspiring. Indeed, on reading what was being claimed as a CBM, I lost some confidence that Asia could learn from Europe and find its way to a true peace predicated on trust rather than a cold, or at least cool, peace based on the US hegemonic stabilizer and functional elite relations overlying popular fear and mistrust.

Indeed, the flurry of regionalism at the economic level is perhaps due in large part to the inability to achieve more difficult political cooperation. This should not be surprising. The rush towards Free Trade Agreements (FTAs) in East Asia is one such example. Greater political cooperation would envisage a single regional FTA, rather than the so-called “noodle bowl” (some say network, others hodge-podge) of bilateral trade agreements now crisscrossing the region. Likewise, I have already discussed trust in regional financial arrangements.

But returning to the ISG-CBMs, I will quote at length from the text of the 2009 report – at which the group discussed the future of the ARF.

“Thailand briefed the Meeting on the development of the draft ARF Vision Statement…Some delegations expressed their view that the Vision Statement should be a strong statement focusing on… concrete initiatives that ARF should undertake…[Other] members noted that the Vision Statement should [be]…a declaration of ARF principles and …not a plan of action.”

There was no agreement reached. Let me repeat, there was no agreement reached on the Vision Statement. That means, there is no shared Vision for the ARF. But with no shared vision there can be no future for the ARF, only an institutional dead-end. Indeed, the fact this is debate is still going on fifteen (15) years after the creation of the ARF, suggests that the ARF has been in arrested development for a while. But so what? Does it matter greatly the ARF has been unable to advance a vision, and in particular to advance its CBMs agenda?

Yes, it matters. The failure of the ARF (and specifically the ISG-CBMs) to progress military transparency in a manner similar to the Helsinki Accords of 1975 is arguably the most important factor driving the Japan into the arms of America, and in projecting itself into the regional by proposing and signing mini-lateral security agreements (such as with Australia and India). These closed shops will do nothing for the Chinese sense of national security; indeed, it is precisely this kind activity which feeds the regional security dilemma. Of course, Chinese resistance within the ARF was a factor no doubt in the inability of the ARF to engender habits of cooperation (ie diffuse reciprocity) and reach common political vision. But once another major regional player, such as Japan, defaults to closed-door, zero-sum type external balancing, then trust, and peace, become increasingly unlikely.

So yes, it matters.

Is the DPJ eating a crazy woman’s breakfast?

Oh dear. The DPJ are in a spot of entirely predictable policy trouble. We were all aware that if the DPJ got in then there would be a “period of adjustment”, in which the DPJ would go from proposing things which might win an election to things which might actually work.

These two things sometimes are at loggerheads. And just now the DPJ finds itself arguing for two contradictory policies; the policy aimed at reducing Greenhouse gas emissions by 30%, and the policy to reduce the toll on freeways to zero. I am not sure how many others have caught onto this one, but at a minimum this is (further) evidence that the DPJ does not yet have a unified vision for the country. Taxing petrol and discouraging private road use is a good way to drive down greenhouse gas emissions, and the link between these two policies is so obvious that one wonders why the DPJ did not detect it themselves.

One only hopes that Kan Naoto as the head so-called “national strategy” will be able to harmonize the DPJ’s disparate policies. If this kind of oversight does not occur then the DPJ will not be able to deliver a better Japan than LDP likely would have, something the voters will punish later on. Indeed, the honeymoon for Hatoyama and the DPJ is fast fading.

Currency Diplomacy, now and then.

Time is like a river, and history repeats. Japan’s ‘novel’ idea of a currency union for Asia, is modelled partly on the experience of the Euro. But in fact a closer match for Asia’s current political-economy might well be Europe of 19th Century, rather than the 20th. Even then, in 1865, the idea of common regional currency was being debated in Europe, and its outcome is instructive for today’s currency politics in Asia.

In mid-1800s, Napoleon III of France launched a project to tie other European currencies to the Franc in what was called the Latin Monetary Union (LMU). At this time, France fixed the Franc to contain a certain quantity of silver (4.5 grams) and proposed that other currencies adopt its standard. Doing so, the French argued, would facilitate international trade by removing risks and transaction costs associated with exchanging one currency for another, or indeed due to movements within the bimetallic exchange rate. Harmonising the currencies of Europe was rational, scientific (metric!) and civilised argued the French. Notwithstanding the limits of the eventual agreement, (private persons/ Banks were not obliged to accept foreign minted but LMU-consistent coinage), the LMU did gather significant support – indeed lasting until the 1920s.

The French were particularly keen for the British to sign onto the scheme. And indeed, although Britain was on the gold standard rather than bimetallism, a minimal adjustment of the quantity of gold within the pound and a (much needed) technical reform (decimalising the currency) and the British could have joined the LMU, if they had wanted to, relatively easily. But here politics got in the way of economics. Britain had little love or trust for the revolutionary French, whatever the potential benefits. In fact, the British believed the LMU was a rouse, a part of the French master strategy to secure its economic hegemony in Europe and to wrestle away from London its status as a financial centre. With Britain refusing to sign on, the LMU was confined to France’s poorer, southern neighbours for whom the marginal cost of aligning their currencies to the French mint’s standards was perceived worthwhile in order to “facilitate international trade, import a better internal currency, acquire monetary credibility and gain access to international [French] financial markets”, see Einaudi.

Now, from Napoleon III’s Paris, we leap forward in time and space, roughly 150 years and more precisely 9738km, to Tokyo in the present. Here we find that, over the years since the Asian Financial Crisis, some within Japan have argued for a regional exchange rate mechanism for Asia.

While not identical to the LMU, the diplomacy surrounding the Asian Monetary Union (AMU) as it might be called does share some similar features. In terms of style, Japan’s Ministry of Finance has argued that it is rational for the nations of Asia to adopt a common currency, and a veritable “.pdf” tidal wave of scientific/economic research has been presented to support this vision - much the same way France postured in the mid-1800s minus the modern software. In terms of membership, like the LMU, the most receptive audience is the smaller, poorer nations to the south – in this case ASEAN states rather than Belgium et al.[1] And like the LMU, at least one major regional power is opposed to the scheme. China.

China has little love or trust for the Japanese, regardless of the possible benefits of a common Asian coin. Indeed, China has dismissed some of the proposed weightings for a future Pan-Asian currency which have been raised in various East Asian multilateral fora. This is because, in the first instance, China believes that the whole scheme is a rouse designed to ensure Japan’s economic hegemony and project its position as a financial centre for Asia; and, in the second instance, that as a matter of national pride the Yuan ought to be the most important currency in any “designer” Asian money. Taking its cue from Japan, China has starting arguing that others, including the ASEAN states should place greater weight on the Chinese Renminbi (RMB). Indeed, already smaller states close to the border of China are using the RMB in settling their international (and indeed some internal) trade. Of course, these are the same target states for Japan’s ‘scientific’ common currency proposals.

Of course, Japan is not France, China is not the UK and the AMU proposal is not the LMU. But if a lesson can be drawn from history it is that without a level of trust and cooperation among the major powers of the region, currency coordination efforts are doomed to become a competitive and futile exercise. Much like France of the 19th Century, Japan has not presented a unified vision. Moreover, Japan has copied some of France’s mistakes, linking membership in the proposed AMU to the political alignment of prospective member countries.[2] It is no surprise then that the plan is viewed suspiciously by Beijing. As Balassa suggests, if Japan and China are not even able to conclude a FTA between themselves, then cooperation in the creation of a regional currency is beyond them.[3]


[1] Italy, Switzerland, Spain, Greece, Romania, Austria-Hungary, Bulgaria, Venezuela, Serbia, Montenegro, San Marino and later the Papal States, although the Papal States were later thrown out due to the practice of debasing their coins.
[2] Smaller German not yet part of Bismark’s second Reich looked to the LMU as a way of gaining French support for the independence. Taiwan and Hong Kong are playing similar games, as are countries such as Laos in the Mekong Delta.
[3] Bela Balassa, The Theory of Economic Integration (Homewood: Irwin, 1961).

Yes We Can't!

Today’s Asahi Shinbun carries the results of its spot opinion polling in the wake of Japan’s recent elections. This might be called the morning after poll. And true to form, some voters are looking across at their newly elected leader (and his party) and are wondering, did I do the right thing?

According to the poll, most voters believe they elected the DPJ in the passion of the historical moment, with 81% saying that the DPJ won because the voters wanted (emotionally) a change. Only 38% believe that the DPJ won because of their superior policy platform. In fact, 52% reported that did not believe that the policy platform came significantly into the voters’ decision one way or another.

Perhaps for the DPJ that is for best. Polling on support for big ticket items in the DPJ’s agenda reveals an underlying negativity. Nearly 49% of respondents were opposed to the Child Support policy (compared to 31% who agreed), presumably due to fears of greater suffering in the 40s and 50s demographic. And there was next to no support for the abolishment of tolls on high speed roadways, 65% against to 20% for. One can only assume that voters were even less taken by the LDP’s offering, the trust in that relationship having been broken by the LDP’s four years of instability and the changing face of the man on top of that political machine.

But despite such voter indifference, or even negativity, towards the DPJ’s actual policies, most (74%) of those responding said they hoped that DPJ would do something good for Japan. A vague hope paired with some doubts, as 46% of respondents believed that the DPJ will not be able to make any significant changes.

This contrasts with recent American and Australian experiences. After the upset elections in both the U.S. and Australia, the voters who had supported the winning party were happy for a week, and for some the joy lasted a month or more. In Japan, it seems, the afterglow does not last even one news cycle.