East Asian Community and East Asian Summit -Concepts, Reality and Opportunities

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East Asian Community and East Asian
Summit -Concepts, Reality and Opportunities

• May 11, 2006
• Regional Anatomy I
• Ken JIMBO

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Review 1) Divergence of East Asia Four
Dimensions

• Historical Background
• China-Centered Tribunal System (Pre-Modern)
• Great Power Imperialism (Modern)
• Cold-War Fragmentation (Post WWII)

• Cultural Diversity
• Language
• Religion

• Political Diversity
• Liberal Democracy
• Authoritarian
• Communism

• Economic Diversity
• Advanced
• Growing
• Under-Developed

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Review2)Regionalization and Economic
Convergence in Asia

• De Facto Economic Integration
• Flying Geese Model (Kojima, 2001)
• Production Networks
• Fragmentation Model
• Production Cycle Model (R. Vernon, 1966)
• Benefit of export-oriented late comer
• Four Drivers to Promote Regionalism
• Governments (APEC / ARF)
• Corporations (Production Networks, Investments)
• Functional Cooperation
• Growing Middle-Class Networks

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Asian Financial Crisis in 1997
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Asian Financial Crisis

• Capital Flows
• capital inflow 93 billion into ASEAN5
  (Thailand, Malaysia, Indonesia, Philippines) and
  Korea
• In 1997 net outflow of 12 gt Large Scale Capital
  Flight
• Abrupt Crisis end-1997
• Currency Devaluations
• Stock Market Collapses

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Asian Financial Crisis

• Spill-over Effect
• From Thailand to Asian Countries
• From Asian to Wide-Stock Markets
• Depreciations of Currencies
• Indonesian Rupiah 75
• Malaysia Ringgit 40
• Philippines Peso 40
• Thai Bahts and Korean Won 50
• gt From East Asian Miracle to East Asian Meltdown?

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Causes of Asian Financial Crisis

• Common Elements Contributing to the Crisis
• Credit-Fueled Investment Boom
• Weak and Unsound Banking Sector and Financial
  System
• Pegged (Fixed) Exchange Rate Regime
• Current account deficits and composition of
  foreign liabilities
• Double-Mismatch (M. Yoshitomi)
• Currency Mismatch
• Maturity Mismatch

Banking Crisis
Deterioration of Balance Sheet
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Masaru Yoshitomi, Capital Account Crisis and
Appropriate Policy Responses
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IMF Rescue Package

• The Rescue Package (P. Krugman, 1998)
• Loan on the condition of economic reform Korea
  US58.4, Thailand17.2, Indonesia 42.3B
• Maintain high interest rates to entire capital
  into staying in the country
• Wait for confidence to return and for the vicious
  circle to turn into a virtuous circle
• IMF Strained Assistance
• Same Old Medicine
• Macroeconomic Policy of Higher Taxes, Reduced
  Spending, Higher Interest Rates
• Damage in Political System
• Korea, Indonesia, Thailand

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IMF Conditionality
Indonesia Korea Thailand
Macro-economic Targets Reduced public subsidies and tax privileges Divestiture of state enterprises Cancellation of some infrastructure projects Macroeconomic targets for 1998 Inflation 20 GDP growth 0 Budgetary deficit of 1 of GDP Current a/c deficit of 2.2 of GDP Official reserves of 5.2 months of imports Selective increase in income and corporate taxes Broadening of VAT base Macroeconomic targets for 1998 Inflation 5.2 GDP growth 2.5 Budgetary surplus of 0.2 of GDP Current a/c deficit of 2.3 of GDP VAT increase Reduced subsidies Divestiture of state enterprises Flexible exchange rate Macroeconomic targets for 1998 Inflation 5.0 GDP growth 3.5 Budgetary surplus of 1 of GDP Current a/c deficit of 3.0 of GDP Official reserves of 4 months of imports
Financial Sector Reforms Comprehensive financial restructuring including closure of troubled banks Strengthening regulatory framework Deposit guarantees for small depositors Comprehensive financial restructuring including closure of troubled financial institution Improving accounting and disclosure rules Consolidated supervisory function Restructuring of financial institutions Improving accounting and disclosure rules Removal of unconditional financial support to insolvent institutions
Real Sector Reform Removal of state regulated monopolies and cartels Abolition of restrictions on marketing arrangements Elimination of trade-related subsidies Removal of restrictive import licensing and FDI rules Promotion of labor market flexibility Enhancing export sector competitiveness through emphasis on education and training
Source Choi, J. Jay ed., Asian Financial Crisis financial, structural and international dimensions, p.69 Source Choi, J. Jay ed., Asian Financial Crisis financial, structural and international dimensions, p.69 Source Choi, J. Jay ed., Asian Financial Crisis financial, structural and international dimensions, p.69 Source Choi, J. Jay ed., Asian Financial Crisis financial, structural and international dimensions, p.69
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Rise of Regional Financial Cooperation
(1997.7-1998.1)

• Asian Monetary Fund (AMF) Initiative
• ? Failure
  (1997.9)
• 10 billion Package (MoF Initiative)
• Opposition from US and China
• Manila Framework (1997.11)
• Economic Surveillance within Asian Countries
• Demand for Technical Support to International
  Finance Organization
• IMF Mechanism to Provide Short-Term Credits

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Rise of Regional Financial Cooperation
(1998.1-)

• New Miyazawa Initiative (Approx. 30 billion)
• Under the New Miyazawa Initiative, Japan is
  prepared to provide a package of support measures
  totaling 30 billion in order to assist Asian
  countries in overcoming their economic
  difficulties and to contribute to the stability
  of international financial markets. The package
  will be set aside as follows
• 15 billion for medium- to long-term financial
  assistance to promote economic recovery (e.g.,
  ODA yen loans and Export-Import Bank of Japan
  loans)
• 15 billion for possible short-term capital needs
  during the process of implementing economic
  reforms

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Rise of Regional Financial Cooperation
(1998.1-)

• The Chiang Mai Initiative (CMI) of May 2000
• Network of bilateral currency swaps among
  countries
• Seen by some as functional equivalent to an
  Asian Monetary Fund
• Japans role as leader and arbitrator of
  intra-regional interests
• Outcome 90 linkage to IMF program in place
  review planned this year
• Key factor limiting greater regional
  independence surveillance capacity

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Basic Elements of Bilateral Swaps Under Chiang
Mai Initiative

• Modality U.S. dollar and local currencies
• Maturity 90 days, renewable for up to 2 years
• Drawing conditions Activation linked to IMF
  programs but up to 10 percent may be disbursed
  without linkage to IMF programs.
• Interest rate Market interest rate premium
• Other Guarantee or collateral provided by the
  Government of country requesting the swap.

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(No Transcript)
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ASEAN3 Process

• Creation Process
• Hashimoto Proposal ASEAN-Japan Summit
• ASEAN Counter-Proposal ASEAN3 Summit
• Asian Crisis Management
• Chaing Mai Initiative
• Joint Declaration of East Asian Cooperation
• Functional Cooperation
• 17 Areas 48 Meetings

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Progress of ASEAN3
Progress of ASEAN3
Related Events

• 1997 Asian Financial Crisis

• 1997 The First ASEAN3 Summit

• 1997 ASEAN Vision2020
• 1998 Hanoi Plan of Action

• 1999 Joint Statement on East Asian Cooperation
  (The Third ASEAN3 Summit)

• 1999 ASEAN3 Finance Ministers Meeting
• 1999 ASEAN10 (Cambodia)

• 2001 East Asian Vision Group (EAVG)
• Final Report

• 2001 September11 Terrorist Attack

• 2002 Koizumi Singapore Speech
• 2002 ASEAN-India Summit Meeting

• 2002 East Asian Study Group (EASG)
• Final Report

• 2003 Japan-ASEAN Special Summit Meeting
• 2003 China-ASEAN Strategic Partnership
• 2003 Bali Concord II

Issue Paper on East Asian Community, Functional
Cooperation, East Asian Summit

• 2004 ASEAN3 Foreign Ministers Meeting
• (Jakarta)

• 2004 Aus-NZ-ASEAN Summit Meeting
• (Vientiane)

• 2004 ASEAN3 Summit (Vientiane)

• 2005 ASEAN Emergency Summit Meeting
• (Tsunami Disaster Relief)

Decision to Hold East Asian Summit
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EAVG and EASG

• East Asian Vision Group (EAVG)
• Korean Proposal (1999)
• EAVG Final Report (2001)
• East Asian Study Group (EASG)
• EASG Final Report (2002)
• 19 Long-term 9 Shot-term Recommendations

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Issue Paper (JPN Government)

• JPN Government Perspectives on EAC and EAS
• Issue Paper (June 2004 / Viantianne)
• East Asian Community
• Functional Cooperation
• East Asian Summit
• On East Asian Summit
• Fundamental Objectives of East Asian Summit
• Aim for Full-Fledged East Asian Community?
• Difference Between ASEAN3 Summit and East Asian
  Summit
• Objectives and Agendas
• Membership
• Organizational Questions
• Who will Take a Lead ? (Who Sits on the Drivers
  Seat?)
• Who will Host the Meeting?
• Who will Chair the Meeting?

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East Asian Summit Political Process I
?Modality A?(Oct 2004) 2005 Host C Malaysia
2007 Host C China (Chinese
Proposal)
Bi-Annual Meeting Alternative Host ASEAN /
Non-ASEAN Membership ASEAN 3 ASEAN3 Summit
Coexist

• ?JPN Counter Proposal?(July 2004March 2005)
• East Asian Summit should be Co-hosted by ASEAN
  and Non- ASEAN Member States. The First Meeting
  in Kuala Lumpur should be Co-hosted by Malaysia
  and Japan
• Australia and NZ should be invited to EAS as
  Dialogue-Partners (two-tier approach)

?Philippines Response? Philippines will be a
chair country for ASEAN in 2007. If China holds
EAS in 2007, ASEAN3 Summit in Philippine will
be deteriorated. (cf. Myammer has given up
their chairmanship in 2006) ?Indonesian
Response? ASEAN should focus on
ASEAN-integration rather than EAC (SBY)
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East Asian Summit Political Process II
?Criteria on EAS Membership? 1) Dialogue
Partner of ASEAN 2) Accede Treaty of Amity and
Cooperation in Southeast Asia (TAC) 3)
Having Substantive Relations with ASEAN New
Member Australia, New Zealand, India
ASEAN33 16 Member States
?Modality B? (April 2005) 2005 Host C
Malaysia 2006 Host C ASEAN
Mod B. Approval Singapore Indonesia Vietnam
Additional Approval
?JPN Counter Proposal?(July 2004March 2005) 1)
East Asian Summit should be Co-hosted by ASEAN
and Non- ASEAN Member States. The First
Meeting in Kuala Lumpur should be Co-
hosted by Malaysia and Japan 2) Australia and NZ
should be invited to EAS as Dialogue-Partners
(two-tier approach)
?Agreed Modality? 1) ASEAN sits on a Drivers
Seat 2) Inclusive Membership 3) Co-exist with
ASEAN3 Summit
Bi-Annual Meeting Alternative Host ASEAN /
Non-ASEAN Membership ASEAN 3 ASEAN3 Summit
Coexist
?Modality A?(Oct 2004) 2005 Host C Malaysia
2007 Host C China (Chinese
Proposal)
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Some US Responses Another Side of Coin

• My view is this is a thinly veiled way to make
  the point that the United States is not totally
  welcomed in Asia. I think that's a real mistake.
• "But it's the direction. What worries me
  about it (is) if it's the beginning of an
  erosion.""It seems that China is quite willing
  to be involved
• in fora that don't include the United
  States,"
• -Richard Armitage, Asahi Shimbun May 1, 2005

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East Asian Summit (Dec 14, 2005)Joint Statement I
SHARING the view that the East Asia Summit could
play a significant role in community building in
this region FURTHER RECOGNISING the need to
support efforts to build a strong ASEAN Community
which will serve as a solid foundation for our
common peace and prosperity DO HEREBY
DECLARE FIRST, that we have established the
East Asia Summit as a forum for dialogue on broad
strategic, political and economic issues of
common interest and concern with the aim of
promoting peace, stability and economic
prosperity in East Asia. SECOND, that the
efforts of the East Asia Summit to promote
community building in this region will be
consistent with and reinforce the realisation of
the ASEAN Community, and will form an integral
part of the evolving regional architecture.
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East Asian Summit (Dec 14, 2005)Joint Statement
II
THIRD, that the East Asia Summit will be an
open, inclusive, transparent and outward-looking
forum in which we strive to strengthen global
norms and universally recognised values with
ASEAN as the driving force working in partnership
with the other participants of the East Asia
Summit. FIFTH, that Participation will be based
on the criteria for participation established by
ASEAN The East Asia Summit will be convened
regularly The East Asia Summit will be hosted
and chaired by an ASEAN Member Country that
assumes the ASEAN Chairmanship and held
back-to-back with the annual ASEAN Summit and
The modalities of the East Asia Summit will be
reviewed by ASEAN and all other participating
countries of the East Asia Summit.