On July 5, 2011, Christine Lagarde assumed command as the 11th managing director of the International Monetary Fund (IMF). Lagarde may be the IMF's first female appointee, but otherwise it's business as usual: She is not only the fourth French national to head the IMF, but also the 11th consecutive European to do so. Despite substantial pushback from emerging economies, neither the U.S. nor EU wanted to dislodge the gentleman's agreement forged at the genesis of Bretton Woods covenant that gave each other virtual primacy in governing the global economy.
Times have changed, but the institutions that govern the global economy have not. The imprint of Anglo-American ideas and the weight of their interests and power bear heavily on the global economic governance architecture. Though emerging economies and emerging-emerging economies are in many respects steering the global economy through today's choppy seas, they have yet to solidify their presence, participation, and say within global economic institutions.
The unrepresentative and unaccountable character of the global economic governance architecture is more than merely "unfair." Critically, it risks undermining the legitimacy and functionality of global economic institutions by accelerating the emergence of regionally structured economic arrangements that endeavour to be more representative of and responsive to emerging economies' interests.
Momentum on this front has been spurred in East Asia, where the creation of the ASEAN +3 Macroeconomic Research Office (AMRO)—a Singapore-based regional monetary surveillance apparatus—embodies the implications of an unrepresentative global economic establishment that impels the rise of regional modes of governance to tackle tomorrow's economic challenges.
Having a regional body undertake macroeconomic surveillance with its own set of indicators and criteria has many advantages in a historically nationalist Asia—it institutionalizes a regional process, institutes a solid foundation for coordinating macroeconomic policies, instils macroeconomic discipline, and advances the diffusion of economic norms and principles. Eventually, it may also eliminate the need for a global lender of last resort—a role currently fulfilled by the IMF.
If the AMRO progresses steadily, it will constitute a major shift of financial and geopolitical heft to the East; a shift that many already deem irreversible. This transition is not occurring in a vacuum nor is it being driven by Asians intent on creating indigenous alternatives at any cost. Rather, it is the result of Western powers' stubborn refusal to further democratize global institutions like the IMF. In this respect, the AMRO is a clarion call for Washington and Brussels: democratize global economic institutions or risk further delegitimizing their current guardianship of the global economy.
The State of Global Economic Governance
One of the few positives to accrue from the 2008-09 global financial crisis was the impulse to globalize the burdens and costs of macroeconomic coordination amongst leading economies. The G-20 grew in stature and its summits were well attended and widely publicized. For a while, the IMF, too, found a new lease of life, lending billions to ameliorate the global credit crunch. Yet, three years in, the global thrust palpable in Pittsburgh and London has fizzled and fissures between northern and southern economies have widened.
Reform in the IMF itself has also been a non-starter; its governance apparatus—votes, quotas, and procedures—is proving to be remarkably immutable and blatantly unrepresentative of the era we live in. Currently, the four largest Asian economies add up to a meagre 14 percent of voting strength despite holding reserves that exceed every other country's coffers. The EU alone holds 32 percent of the votes on IMF structure, despite accounting for just 20 percent of global GDP. To change such quotas, a staggering majority of over 85 percent of countries must be established—a figure which does not bode well for either China or India.
Moreover, some of the justifications offered for sustained European control of the IMF do not hold. For instance, Lagarde’s candidacy was justified on the grounds that, in the next year or two, Europeans would have to largely depend on the Fund’s largesse to rescue them from insolvency, thus having a European at the helm would help ease the process of obtaining political consensus within the EU. But it is precisely for this reason that a European should be avoided, to ensure that short-term tranches drawn from global reserves are handled and delivered without political influence or interference. Surely, had countries like Argentina or Malaysia offered a similar defence in the 1990s when they faced financial crises, their pleas would have been expediently ignored.
Birth and Development of the AMRO
At this critical juncture, for many emerging nations global economic governance is derelict and the institutions that form the core of the system are illegitimate. This pervasive incapacity to restructure globally oriented institutions has led to an array of governance innovations at different levels (regional, trilateral, plurilateral) to manage salient economic and political issues. Some examples include: BRICs forum, India-Brazil South Africa Trilateral forum (IBSA), ASEAN plus Three (Japan, China and South Korea), Shanghai Cooperative Organization (SCO), et cetera.
This trend is vividly illustrated by the latest regional mechanism to emerge—AMRO. The AMRO was officially established and christened in early 2011 by the Ministries of Finance, Central Banks, and Monetary Authorities of the ASEAN and China (including Hong Kong), Japan, and Korea—the ASEAN+3 countries. Its task is to serve as a regional economic surveillance mechanism, monitoring macroeconomic irregularities and trends that could potentially trigger a financial crisis. By doing so, it operates as the principal institutional vehicle of the Chiang Mai Initiative (CMI), a currency swap agreement between ASEAN countries, signed almost a decade ago.
Once nations hit fiscal roadblocks or encounter balance of payment issues, they will have access to the $120 billion fund marshalled by the ASEAN+3 under the CMI framework. Here, macroeconomic surveillance conducted by the AMRO is expected to reduce the information asymmetries that might otherwise impede bilateral or regional lending within the ASEAN +3. Vigilant surveillance would allay any fears countries have of lending to neighbours mired in financially perilous circumstances. In effect, the AMRO stands to evolve into the regional lender of last resort and pave the way for an Asian common currency.
The roots of the AMRO's birth can be traced to the 1997 East Asian financial crisis. Faced with substantial debt burdens (in U.S. dollars), countries across the region were forced to swallow tough medicine from the IMF in exchange for liquidity. Vowing never to be left in such a situation again, Asian policymakers launched a series of deliberations and discussions to build the regional capacity to mitigate and manage financial crises as they arise, ideally through a regional reserve. Several breakthroughs followed to realize this objective—the Chiang Mai Arrangement (CMI) and the ASEAN Bond Markets Initiative (ABMI), among others.
Following this initial thrust, regional momentum dissipated as differences mounted. This dithering persisted until the onset of the 2008-09 global financial crisis, which acutely reinforced the impotence of existing regional arrangements, in particular the CMI. Regional policymakers could not muster the courage to activate the CMI arrangement to exchange liquidity, since many countries were oblivious of each other's domestic economic conditions, refusing to lend to one another as economic troubles came ashore.
Having learned the perils of an ineffectual regional resolve, the ASEAN +3 leapt to action. At their Bali meeting in 2009, the CMI was multi-lateralized and activated with a $120 billion regional fund. On May 4, 2011, plans were formally laid out to operationalize the AMRO with the appointment of Wei Benhua, the former vice-head of China's State Administration of Foreign Exchange, as the AMRO's founding director. In doing so, they took a major step towards the creation of a full-fledged regional financial entity. The AMRO is now the gatekeeper of the CMI's $120 billion.
The birth and operationalization of regional institutions like the AMRO have potentially significant implications not only for the IMF, but for global economic governance as a whole. Yet before the AMRO can be considered a serious regional alternative to global economic institutions, it will be forced to confront a number of challenges, which, if left unresolved, will stymie its utility in the years ahead.
First, if the AMRO is to ensure that the IMF's structural imbalances will not simply be replicated on a regional scale, it will have to institute equitable power-sharing arrangements among its members. China won the bid to appoint the head of the AMRO. It remains unclear, however, whether Chinese leadership will generate the confidence and cooperation necessary in a region deeply unsettled by China's rise. Indeed, AMRO's fate is tethered to Chinese support, given that Beijing shelled out 32 percent of the $120 billion, that is, $38.4 billion. But there is no guarantee for smaller Asian states that China will not use the AMRO to advance its own agenda—most notably by further internationalizing the RMB within Asia, enabling Beijing to further reduce their dependence on the dollar. It remains to be seen whether Chinese leadership runs roughshod over the interests of other ASEAN nations or if it functions as an effective regional convenor, raising and acting on regional financial concerns within the AMRO. Equally critical is the Sino-Japanese relationship within this equation and Tokyo's ability to function as an effective bulwark to Beijing's hegemonic inclinations. Despite its technocratic nature and status as a surveillance mechanism, AMRO's future efficacy will no doubt be determined by the politics of monetary governance in East Asia. Therefore, it becomes incumbent on ASEAN +3 representatives to devise more sustainable institutional protections that reflect the interests of all member countries.
Second, the AMRO has to find a way to cohere with the IMF, rather than merely compete with it. While the AMRO can potentially fulfill some of the IMF's traditional tasks, such as macroeconomic surveillance, it cannot dethrone the IMF’s role—at least not yet. Hence, AMRO must strive to establish a solid working relationship with the IMF, in a manner that exists between the EU's monetary institutions and the IMF. Otherwise, the costs of coordination failure between the AMRO and IMF could be significant. Institutional synchronization is thus critical.
Another challenge that will inevitably arise is compliance. As the AMRO advances and its portfolio and responsibilities expand, it could conceivably reach a stage where the AMRO would have to impel East Asian states to set their fiscal house in order and/or to undertake reforms to improve their economic standing. Indeed, such a scenario is imminent if East Asian nations hope to avail themselves of the $120 billion fund. Still, equipping the AMRO with the mechanisms necessary to secure compliance with its policy recommendations will likely prove difficult. In a region extremely sensitive to questions of national sovereignty, surrendering financial prerogatives to a foreign body—even a regional one—will require enormous trust and courage. Lacking the IMF's size, funds, and established conditionality mechanisms, the AMRO will no doubt struggle to secure a smooth compliance process.
In spite of the aforementioned challenges, the AMRO's emergence does portend a renewed confidence amongst East Asian nations to further institutionalize and bind together their economic fates to shield themselves from the vagaries of globalization and the unrepresentative nature of global economic institutions. However, a troubling aspect of this new regional solidarity is that it tends to further decouple Asia from the global economic order and the institutions within that ambit, likely imperilling the prospect of sustainable Asian contributions to that global order. Unfortunately, this fault line could further expand given the fiscal and political quagmires that the United States and Europe find themselves in, which have just climaxed in the downgrading of American debt, leading to convulsions within global financial markets.
This scenario could very well inhibit the capacity of global governors such as the IMF and G20 to devise remedies for problems that can no longer be exclusively tackled at the national level. Reforming the institutional features of global economic governance, as a result, is critical, necessary, and long overdue.
More decentralized governance at the regional level is inevitable if reform is not forthcoming. Given the inherent difficulties in governing economic affairs globally, regional alternatives might become increasingly attractive. Several other regions are currently exploring or have already dabbled with some sort of regional monetary coordination—the Arab Monetary Fund and the Latin America Reserve Fund. Although these mechanisms may never wholly replace the IMF, they herald the rise of a new multi-polar era of governance exemplified by institutional diversity at many different levels.