Stephen Grenville: Policy dialogue in East Asia
What are the criteria for determining the number of groups for policy dialogue in East Asia? And the criteria for
participation?
Talk by Mr Stephen Grenville, Deputy Governor of the Reserve Bank of Australia, to the Australian
National University Conference on Regional Financial Arrangements in East Asia, Canberra,
12-13 November 2001.
The references for the speech can be found on the Reserve Bank of Australia's website.
* * *
I want to begin by clarifying the issues, as I see them. If we can define what we are trying to achieve
with regional co-operation, then we will be in a better position to determine the nature of the regional
groupings needed to achieve this. My brief today is to discuss the relevant criteria for groups which
carry out a policy dialogue in East Asia. In defining the area of interest, I may widen this brief
somewhat, because the sort of regionalism which I hope will develop over time goes well beyond
policy dialogue, and indeed policy dialogue in its narrow sense does not seem to me to be the most
pressing need. Policy dialogue, as it evolved in the post-War period, was largely about
macro-economic policy co-ordination, and this was really only relevant for the largest countries -
essentially the G3. For the rest of us, this was not a case of policy dialogue, but rather monologue -
the G3 did what they could in terms of international co-ordination, and we wore the results, principally
in the form of substantial fluctuation in the G3 exchange rates, which was often inconvenient to many.
So there certainly remains a major issue of international macro policy co-ordination, and perhaps we
might hope to have some input to it from the periphery, but this will not be central to our regional
arrangements.
There are, however, important areas where regional arrangements have the potential to be very
important for the development of policy: these are trade and (less certain) exchange rate
arrangements. The first of these seems beyond the scope and brief of this paper, so I will leave it
untouched: the second is the focus of discussions tomorrow, so that, too, I leave to others.
This still leaves important regional policy issues, including the possibility of policy co-ordination in the
face of a repeat - or variation - of the 1997/98 Asian crisis - I will certainly talk about this. But the much
more general, wider and perhaps more important issue relates to globalisation - how to maintain the
momentum which has brought so much benefit (particularly to this region); how to make it work better
with better rules; and how to get proper representation for our interests in the forums which determine
the parameters - the "rules of the game" - for globalisation. This, in my view, should be a central focus
of regional policy dialogue.
With this general introduction, let me turn to the specifics of what different functions regional
cooperation might serve, grouped under the two omnibus headings of "policy co-ordination" and
"globalisation".
Policy co-ordination
Having downplayed the centrality of macro policy co-ordination in my introduction, let me now try to be
more specific about where a degree of policy co-ordination will still be important. I have left aside
trade and exchange rates, acknowledging the importance of each of these. But beyond these, I do not
see a compelling reason why, say, the countries of Asia should be running similar monetary or fiscal
policies, or even why they should co-ordinate their different macro policies. The heavy-lifting of macro
policy-making is, broadly speaking, a domestic matter.1
There is, however, one aspect of policy-making where regional co-operation might make a real and
substantial contribution - i.e. surveillance. Surveillance is, perhaps, an unfortunate way of describing
the process, because it has connotations of checking up and looking over the shoulder of
policy-making in individual countries, i.e. something more intrusive than is generally acceptable in this
region. When does "peer pressure" become interference? The principal objective of surveillance
should not be to "catch out" and expose any policymakers who are doing the wrong thing, but rather to
act as an advocate of good policies and as a catalyst for reform: the context has to be positive and
supportive, not negative, proselytising, and adversarial.2 Reluctance to be too assertive is, to some
degree, the current characteristic, but the process needs to be given more content if surveillance is to
have a beneficial effect. Perhaps I can explain the point more clearly by referring to the surveillance
process as it occurs in the OECD, and in particular as it occurred in relation to Australia during the
1980s. Each year we faced the interrogation of our peers (the OECD Secretariat and two "examining"
countries), who quizzed us on both macro and micro policies, invariably from the viewpoint of
hard-edged economic analysis. This is not to say that they were always right, but they were always
putting forward the viewpoint and input of best-practice economics. Why was this so valuable to the
policy-making process? It made it easier for the national bureaucrats (who, by-and-large, agreed with
these policies) to get these policies implemented, within a diverse decision-making framework in which
other less-economically-rational views might well have prevailed. The fact that these surveillance
examinations received quite wide publicity and added spice and fire to the policy debate was often
inconvenient at the time (because we bureaucrats had to defend the then-current - imperfect -
policies), but was almost always salutary and useful in moving us towards better policies.
The additional area where policy co-ordination may well be relevant is in crisis response. Other
sessions at this conference will be looking at this issue in more detail. Specifically, the main area of
co-operation here will be in the pooling of foreign exchange reserves. Building up large foreign
exchange reserves has been the clearly demonstrated response to the crisis: faute de mieux,
international capital flow volatility will be handled by substantial reserve-holding. This rather inefficient
response can be made less inefficient by pooling. It is also true that regional groups share enough
self-interest to encourage them to go beyond simple altruism: we are all going to be readier to help our
neighbours than to participate in some kind of collective action for a more distant region (which argues
for regional arrangements to supplement the IMF, rather than the more universal approach of the New
Arrangements to Borrow). Rather than anticipate the later debate on this issue here, let me quote, with
approval, Yung Chul Park (2000): "One development that has encouraged the regional cooperation in
East Asia has been the slow progress of the reform of the international financial system. The urgency
of reform in the G-7 countries has receded considerably with the rapid recovery of East Asia. ... As
long as the structural problems on the supply side of capital are not addressed, the East Asian
countries will remain as vulnerable to future crises as they were before. Instead of waiting until the G-7
creates a new architecture, whose effectiveness is at best questionable, it would be in the interest of
East Asia to work together to create their own system of defence.".
Globalisation
As I foreshadowed, my feeling is that the issues of globalisation are even more important to regional
co-operation than is policy co-ordination. Let me record briefly some of the characteristics of
globalisation, to try to establish why policy must be attuned to the needs of this new globalised world,
in order to foster globalisation and - at the same time - ensure that we all get maximum benefit from
it. First, a point which is close to tautology, but full of policy implication nevertheless: globalisation
means that an increasing part of our economic relations are with external parties (for many of the East
Asian economies, foreign trade (exports and imports taken together) far exceeds GDP.
Foreign Trade (per cent to GDP)
Australia 36
China 42
Hong Kong 255
Indonesia 79
Japan 18
Korea 84
Malaysia 202
New Zealand 54
Philippines 99
Singapore 296
Thailand 108
United States 20
Domestic
trade and investment is subject to myriad controls and regulations, even in the most "free
market" economies. In contrast, international relations are lightly regulated. "The dilemma we face as
we enter the 21st Century is that markets are striving to become global while the institutions needed to
support them remain by and large national." (Rodrik - quoted in The Economist, 29 September 2001,
page 19 of 'A survey of globalisation'). Is this disparity in regulatory density reflecting some innate
characteristic - that these relationships are, say, simpler - or does it reflect the greater difficulty of
regulating across sovereign borders? It seems to me to be the latter, and we should address this
deficiency.
The need for "rules of the game" seems, if anything, to be greater in a globalised world than in a less
integrated world. One of the defining characteristics of globalisation is the importance of scale, as
technology drives the optimal business units larger and larger in a number of important areas. The
other defining characteristic is "winner takes all", and its related concept of "first mover advantage".
These characteristics combine together to produce areas where monopoly or quasi-monopoly will be
important. The old response to monopoly - to break it up and force competition - will be precluded or
restricted because of the inefficiencies that would result from this action. So the alternative channel will
be to achieve a network of rules which addresses the issues raised by these imperfectly competitive
firms.
Given the increasingly international nature of enterprise, what is needed to complement this
development are international rules, not specific to any one country, but developed in a uniform way
and acceptable to all. These would address issues such as monopoly, intellectual property rights, and
legal issues. Prudential supervision, capital flows, taxes and "industry policy" may also be suitable
cases for treatment. In short, as closer relations impose greater need for uniformity (e.g. in tax or
investment regimes), the need is to develop these in a collective international environment.
Tom Friedman (1999) has called such rules the "Golden Straitjacket", which captures two important
characteristics of the process - the degree of uniformity which globalisation will impose; and the
generally beneficial nature of these rules.3
Rules to govern global relationships will generally need to be on a uniform multinational basis, but this
does not preclude the need for important regional input, in order to ensure the applicability of the
universal rules to all countries. A good set of rules requires recognition of the great diversity of
circumstances and institutions between countries. One specific example here is the rules on prudential
supervision. It seems quite likely that the rules relevant to banks in this region would be somewhat
different (reflecting the different degree of complexity and make-up of banks). We certainly would not
want a set of international rules which unfairly penalised banks in this region, simply on the grounds
that they were not the same as banks in London or New York.
At the general level, the collective wisdom of worldwide experience needs to be incorporated into the
Golden Straitjacket more effectively than it has been to date. It is now part of the conventional wisdom
that there were various deficiencies of perception and analysis in the international response to the
Asian financial crisis. The "one size fits all" approach came out of earlier Latin American experience,
and was a poor fit for East Asia in 1997. To some extent these deficiencies were driven either by
inadequate representation, or by inability to have our voice heard above the confident assertions of
those whose policy prescription was driven either by doctrinal interests, vested interests, or sometimes
simple ignorance.
Regional groupings are the principal way of addressing this "democratic deficit". There seems little
room for debate that this region is inadequately represented in many of the forums which determine
the important issues of globalisation. There seems little doubt, also, that the region pays a price for
this. East Asia, with an IMF quota of less than 15 per cent, accounts for more than 20 per cent of world
GDP, almost a quarter of world trade, and almost half of world foreign exchange reserves. Prominent
American economist David Hale (2001, p. 8) has observed: "In the past, the U.S. government has only
supported major (IMF) interventions for countries in which the U.S. had a military base. During the
Asia crisis, for example, the U.S. acted aggressively to support Korea, but played a much less
significant role in Thailand and Indonesia.".
The case I want to make here is that much of our efforts in regional groups should be directed towards
correcting this. There have been very important improvements in international financial architecture
since the crisis. The IMF has added new lending facilities that should be better able to handle the
demands of capital account crises. The Fund has also started to pay greater attention in its work to
financial markets and financial systems and has been critically examining both its policy prescriptions
and its general approach to conditionality. Representation has greatly improved, with an additional
eight Asian countries gaining membership of the BIS. The creation of G20 (with six Asian members) is,
potentially, a good breakthrough. At a more detailed level, the negotiation of Basel II involved a degree
of consultation entirely missing from Basel I (which had been tailored specifically for G10). There has
been a push from the FSF, the IMF and the G20 to improve countries' resilience to crises by
promoting adherence to standards and codes and there has been much discussion of ways to secure
a greater role for the private sector in crisis prevention and resolution.
Within central banking circles, there had been some support for the formation of an Asian BIS given
the Eurocentric focus of the existing organisation. In the event, this has been satisfied by the
settingup of a BIS office in Hong Kong and the creation of the Asian Consultative Council (ACC) of the BIS,
which will give Asian central banks a greater say in the operation of the organisation. Some Asian
countries have also been invited to attend some of the Basel/G10 committees associated with the BIS,
although sadly not on a permanent full-member basis.
But the issue of ensuring that our voice is heard remains unresolved, with the IMF still giving
inadequate place to this region, and other more representative groups (such as the G20) still to find a
role for themselves in a world which is crowded with competing and overlapping institutions, none
ready to diminish their own status and power, and many governed by inadequately representative
views. Who should be represented in the councils of the world? This should not simply depend on
GDP - this is important, but an equally important issue is what contribution each participant can make
to the debate, and to the production of a universally acceptable set of rules. To be more specific, the
G10 representation is deficient not just because of its limited numbers, but because of the uniformity of
view of its European-dominated membership - too many people with the same viewpoint.4
The development of the Globalisation Rules should be a two-way process - the regional groups give
input into the rule-making, and then act to put these rules in place in their individual countries (or at
least adapt their own rules to fit the straitjacket). The regional groups "spread the word" in order to
improve policy. This is closely related to the idea that policy improvement can come out of the
surveillance process, but it adds the extra point that better policy can also come out of a process of
swapping ideas and simply observing the way other countries go about doing things. The process of
globalisation is forcing a degree of uniformity or similarity on policies, and to the extent that this is
"best practice", the quicker we all adapt to it the better.
What does this mean for the shape of regional arrangements?
As a preliminary to these issues, we need to note that international dialogue takes place at the
multilateral, regional and bilateral levels. We should not be surprised or concerned at this "layering".
Nor should we be overly concerned if there is a fair degree of overlap between groups and meetings. If
an issue is important, then it probably needs to be discussed in a variety of forums, each of which will
bring different insights to bear. Checks and balances are important. Groups are not simply about
getting together to make decisions: they are often about getting together in order to learn about
decisions or discussions which have taken place elsewhere. So we should not be surprised to see, for
example, Finance Ministers meeting together separately from Central Bankers, and then, separately,
the two will meet collectively.
We certainly should not allow some ill-defined principle of "territorial exclusivity" to constrain dialogue
which would otherwise be useful. When the Asian Monetary Fund was proposed after the onset of the
Asian crisis, some people argued that it would overlap with the IMF (and this no doubt coloured the
views not only of the Fund itself, but those who had a more prominent position within the Fund than
they would have had within an Asian Monetary Fund). We should recall that, in many countries, there
are three levels of government, each with its own contribution to make, and each interacting with the
others in ways that should be fruitful - passing up regional issues which have been digested (in the
sense of having achieved a degree of consensus), and passing down more nation-wide macro views
to the regional levels. Petty territorial jealousies have no place in working out the proper number of
organisations and their relationships: the issues should relate to bringing together groups with
commonality of interest, and ensuring that they are linked (both upwards and downwards) in fruitful
ways. This commonality of interest is the most important criterion for useful interaction. This does not
mean that all the participants have to be at the same stage of development, but it probably does mean
that they should be travelling along much the same path, albeit at different distances and speeds
along that path. This commonality of interest allows the possibility of an effective consensus, which
can be passed to the next level, representing the group as a whole.
What are the right numbers for a group? If the issues revolved around trade or currency unions, then
economic analysis can offer useful guidance on which countries should be included. Who are (or
potentially could be) good trade partners? What countries meet the criteria for an optimal currency
area? The original APEC membership, for example, makes economic sense as a trading group
because of established trading ties.5 But we have suggested here that some fruitful dialogue is more
general and nebulous. At one level, one might ask whether it matters: the membership of European
single currency was indeterminate until the last minute - it turned out to be much more numerous than
most people had expected, and looking ahead it will probably become far more numerous than the
original proponents envisaged. That said, there seems to be a lot to be said for keeping numbers
down to manageable levels, which for practical purposes might be defined in terms of how many
people can comfortably sit around the same table (I am tempted to add "and communicate with each
other without the use of microphones"). What we know is that when we get to the size of universal
"one country one vote" representation (as seen in the UN), effective decision-making becomes
extraordinarily difficult and "lowest common denominator" outcomes often prevail. To give a concrete
example of a response to the vexed issue of numbers: the G20 was, at one stage in its evolution,
rather larger, but it was recognised that it had to be contracted. For surveillance, the relevant point will
be that smaller groups can have much more candid (and therefore useful) discussion than can larger
groups. "Small may well be beautiful". If, over time, the various participants develop knowledge,
empathy and understanding of the practical policy constraints, then so much the better.
When it comes to the task of developing rules (see the discussion above on globalisation), the
important thing is for the rules to be developed by experts or technicians - those who know the nuts
and bolts of a particular issue rather than the arm-waving generalists. If the degree of detail in
domestic rules and regulations is any indication of what it takes to ensure good and efficient
commerce within countries, why should international dealings require less complexity? These rules
may well be the same ones which apply in domestic jurisdictions, but it is only the technicians who can
give an accurate reading on whether this is appropriate or not. When compromise is needed, the
compromise will be on the basis of technical and expert issues, and not on the basis of voting power at
the table.
5
See Garnaut (1993, p. 308).
Two historical analogies
The obvious model for policy co-ordination in the broad sense is Europe, which over a period of four
decades has progressed to economic union despite a history of hostile relations between members.
Europe's success can be attributed to two main factors. Firstly, the economic dynamic: exploiting the
obvious economic advantages which follow from geographic proximity. A second important factor in
Europe's success was the underlying political imperative - a firmly held view on the part of a number
of politicians of the need to pursue greater integration so as to reduce the prospects of future conflict.
This was actively supported by the United States.
The G10 had a much more specific genesis, formed from the countries that agreed to provide a loan
facility to back up the IMF's resources in 1962. These resources were to be made available in the
event of potential impairment of the international financial system, and therefore only to the G10
countries themselves. Over the intervening years, the G10 has come to be central to issues governing
the world financial system, both in the context of the IMF and the BIS. The enormously influential
Basel Rules for Prudential Supervision were developed by (and, initially, for) the restricted club of the
G10. The point to emphasise here is that groups which form for one purpose can metamorphose into
new functions - in this case, far more important than the initial function. (We note that the G10 is also
an illustration of why it is important to gain a seat at the table from the outset, since the incumbent
members - particularly the smaller ones - will try to avoid having their power diluted.) The group's
effectiveness over an extended period probably reflects a relatively small and focused membership.
However, as the world has developed, the G10 has looked increasingly unrepresentative of the global
economy, giving a disproportionate say to small European economies and no say to the rapidly
developing countries of Asia and Latin America.
A couple of lessons might be drawn from the historic experience:
• groups need specific tasks to weld them together - "frank and fruitful exchanges of views"
are good but not enough. The Europeans started with the Coal and Steel Community: i.e.
something of real substance;
• patience is not just a virtue: it is a necessity in a world where it takes time to build
institutions. Progress is not steady: it may stall for a time, and the group has to hold together
waiting for the tide to turn;
• is
there a sense of community and common interest stemming from geographic contiguity,
which goes beyond simple economic linkages.
If progress towards closer international relations is important, then institution building will be an
important element. "Virtual" secretariats may have their place, but real bricks-and-mortar institutions,
with effective and active secretariats, will be needed. Charles Wyplosz (2001) makes a compelling
case that the progress of European integration was hugely assisted by the presence of Europe-wide
institutions, which could provide some on-going momentum and in particular could "pull a plan out of
the drawer" when the country representatives were ready to discuss the next step. It is only if there are
bureaucrats with an on-going vested interest in pushing forward that such plans will be ready - waiting
in the "bottom drawer" - to put on the table when circumstances are propitious.
How well do current groups "fit"?
In the detailed discussion here, I have put to one side the issues of trade and exchange rate
coordination. But now, when we turn to see how the existing regional institutions meet these needs, we
should put the full range of regional arrangements on the table.
• APEC is the broadest regional grouping, bridging, most importantly, East Asia and North
America, but also incorporating the likes of Chile, Mexico and Russia. Its predominantly
trade focus has seen its fortunes wax and wane with developments in global trade, although
the addition of Finance Ministers' and Leaders' meetings have broadened its coverage. Its
principal achievement to date has been the Bogor Declaration under which developed
countries agreed to strive for free trade and investment by 2010 and developing countries by
2020. However, even this has shown the tensions inherent with a relatively disparate group,
with initial calls by some countries for a binding and measurable process significantly
watered down. The Finance Ministers' process has focused on encouraging regional
dialogue and promoting capacity building and may not be suited to a more substantive
agenda, particularly given political tensions between China and Taiwan.
• The Manila Framework Group has a broadly similar East Asian-North American structure. It
had its genesis in the push for an Asian Monetary Fund in the midst of the Asian crisis. It is
seen as proving one of the better surveillance mechanisms among the regional groups and
also takes an interest in global architecture issues. It could be (but is not yet) the forum for
developing regional positions which are then taken to world forums such as IMFC and G20.
One of its main initial functions was to provide a co-operative financing arrangement to
supplement IMF resources. This was initially reflected in the second line of defence facilities
offered to Indonesia and Korea. More recently the idea has been revived, with discussions
underway on the possibility of a more formal on-going arrangement.
• EMEAP is a narrower group in two senses. It is a purely central bank forum, drawn from the
East Asian core of the above two groups. EMEAP's stated goal has been to strengthen the
co-operative relationship among the central banks of the region, although various members
have held ambitions of the group becoming a more substantial organisation, along the lines
of the BIS. The furthest EMEAP has moved down this track is a system of bilateral
repurchase agreements over US Treasuries, to provide short-term foreign currency liquidity
support. EMEAP's strength is its specialist working groups, which promote good practices
and better understanding at a technical level. This is, potentially, the forum for developing
regional consensus on such issues as capital flows (Chilean-style inflow taxes: dealing with
in extremis crisis resolution). The value of the forum at the highest level is now being tested
by the formation of the BIS Asian Consultative Council, which has drawn Asian countries
more into the mainstream of BIS activities. This is already the forum for developing regional
positions on financial issues, so the close link with the BIS is natural and logical.6
• Compared with other regional groups, there is perhaps a greater uniformity of interests and
views within ASEAN, and it has been going longest. ASEAN has some runs on the board
already with the ASEAN Free Trade Area (which has been strengthened since the crisis) and
a multilateral foreign currency swap arrangement. More recently, ASEAN has set up a
surveillance mechanism, with the assistance of the ADB, in an effort to foresee and forestall
crises.
• The broad agenda of ASEAN+3 covers economic, social and political fields. However, its
most important achievement has been the Chiang Mai initiative, which incorporates, among
other things, a regional financing arrangement (building on the ASEAN arrangements) to
supplement existing international facilities.
The significant momentum in ASEAN+3 may reflect East Asia's equivalent to Europe's "integrate to
avoid further conflict" imperative. There is also a strong belief that the international institutions are not
set up to work in Asia's favour and that Asia must therefore look after itself - particularly given the
large proportion of world reserves held in Asia. This has been felt very strongly since the Asian crisis
and it is no co-incidence that the Chiang Mai initiative grew around those countries that felt most
aggrieved. Similarly, countries in this group have more in common than the groups that bridge the
Pacific. It could also be argued that the size of the arrangement made it a more workable
decisionmaking entity, although it is difficult to determine whether this reflects physical numbers or simply the
greater uniformity of country interests embodied in the group.
Reserve pooling arrangements could have occurred within the Manila Framework Group or EMEAP,
but ASEAN+3 seems to be where the action is at present. Just as G10 gravitated from its original
narrow specific purpose to become the centre of prudential supervision, ASEAN+3 might be where the
more general foreign exchange rate discussions occur. For our part in Australia, we are supportive of
these moves, regardless of the forum in which they evolve. Obviously, we would like to have a seat at
the table, since we believe Australia has much to offer from its own experience and resources. We
also feel our own policy-making has been enriched through our engagement with Asia and we have
certainly appreciated the input of like-minded countries from the region in the difficult international
debates of recent years.
Should the Chiang Mai initiative continue to develop towards an ultimate goal of becoming a regional
monetary fund, my view is that we should support it. If there were major developments in this regard,
participants presumably would want to assess whether the Manila Framework Group, the APEC
Finance Ministers, EMEAP and SEACEN are still playing a unique role.
The bottom line is that it is probably too early to assess which groups will continue to play a useful
role, given uncertainty over a future world trade round, G20's unformed mandate, and the future
directions of ASEAN+3. We should, nonetheless, be critically watching developments among the
regional groupings over the next two to three years with a view to making tough decisions when the
time is right.
Conclusion
I have tried to make the case, here, that the rationale for regional groupings will not be to achieve
macro policy co-ordination. The powerful case is a wider one - we have a commonality of interest
because geography and contiguity still matter, even in a world of globalisation (or even more than
before). It is part of a more general view that "we are not alone". We can learn much from the
experience of those around us, and the gaining of this experience is the often nebulous and formless
process of talking issues through with people of common interests. We meet to discuss a specific
topic, and we end up with wider knowledge, and better general understanding, of each other. If this
view is correct, then regional dialogue is not inimical to globalisation: it is, in fact, its hand-maiden and
ally.