Toward normative fragmentation: An East Asian financial architecture in the post-global crisis world

ABSTRACT

This article argues for a pluralist, integrative, ‘post-Washington Consensus’ view of an East Asian financial architecture in the post-global crisis world. What are the key architectural problems and how might such problems be resolved? The article aims to address these general questions and to develop a policy-applicable theory about a post-crisis regional financial architecture by focusing on the case of East Asia. The generic problems identified in the study include sovereignty, power struggles, structural diversity, collective action problems and weak regional identity and norms. Herein, I present a conceptual model of logically possible solutions to such problems, which comprises principled minimalism and host regulation, decomposition and issue linkage, and informal intermediaries. The proposed solutions reflect and reinforce the normative fragmentation and decentralization of global financial governance in the twenty-first century.

KEYWORDS:

• Asian regionalism
• post-Washington consensus
• global governance
• financial co-operation
• normative fragmentation
• institutional design

ACKNOWLEDGEMENTS

The author would like to thank the editors and two anonymous reviewers for useful comments and suggestions.

Notes

1. Skeptics of Asian financial regionalism tend to compare East Asia today with Europe in recent times – not the initial stage of European monetary co-operation – to highlight, if not exaggerate, the variation in the level of institutionalized co-operation, ignoring the different time span. Effective European monetary co-operation emerged only in the mid-1980s, after more than the decade of negotiation or bargaining among key countries (Moravcsik, 1998: 238–313). In fact, the late 1970s and early 1980s were widely perceived as an era of Euro-pessimism.

2. For analytical purposes, this article differentiates three theoretical perspectives – simplified versions or ideal types of theories. It is noted, however, that these perspectives are likely to be intermingled in the real world and used in combination by many writers on this subject.

3. A familiar liberal perspective, the domestic politics approach, is not discussed herein. This approach focuses on how domestic societal interests and bureaucratic incentives can influence national preferences for regional co-operation. However, relatively little of the literature (with the notable exception of Amyx [2004]) features such an approach with regards to Asian financial co-operation, compared to other economic areas such as trade policy. This may be related to the complexity of financial issues, the less obvious distributional consequences and the substantial autonomy of central banks from legislative assemblies.

4. One possibility is that East Asia's enthusiasm for exchange rate stabilization could be boosted by the continuing dollar weakness and the prospect of a currency war, if the history of European monetary integration is any guide. Germany repeatedly initiated or supported exchange rate stabilization and thereby encouraged European monetary co-operation during periods of dollar weakness, such as those from 1969 to 1973 and from 1977 to 1979, in part out of its concern that a weak dollar generated unpleasant upward pressure on the German mark and hurt Germany's export competitiveness. This hypothesis is consistent with one variant of realist logic, namely, that East Asia's discussion of the ACU and other exchange rate stability issues may signify the region's interest in insulating itself against the possibly destructive exchange rate policy of the US, as well as a preference for gradual disengagement from the US dollar.

5. For a similar discussion of whether macroeconomic convergence should precede monetary integration in the early stage of European monetary integration, see Dyson (1994: 65–67).

6. The empirical analyses of Walter (2010) and Katada (2010) suggest that China and Japan have not taken a strong stance in pressing for international regulatory change during the recent global financial crisis.

7. Space limitations preclude the provision in this article of a comprehensive review of all of the logically possible solutions. Thus, for instance, this article does not consider relatively familiar solutions, such as transparency, which is a typical liberal solution to collective action problems. In the liberal view, strengthening the surveillance and monitoring functions of the Economic Review and Policy Dialogue (ERPD) would be one possible solution.

8. It is conceivable that the competition among states to attract international capital could lead to lax or poor regulation (i.e. ‘race to the bottom’ and ‘regulatory arbitrage’) in the absence of strong international standards. However, such legitimate concerns should not be overstated. Under principled minimalism, host-country national regulation can be co-ordinated regionally to address competitive pressures. For example, the ASEAN+3 Bond Market Forum (ABMF), comprising Asian financial experts, was established in 2010 and is expected to play a key role in co-ordinating regionally the regulations and practices of Asia's local currency bond markets. In addition, as the transnational private financial sector has become more divided and weaker today than it was in the pre-crisis world (Helleiner and Pagliari, 2011: 179), its political pressure or capacity would be relatively less significant than the advocates of the universal international standards might conjecture.

9. As discussed earlier, the IMF significantly revised its policy on conditionality, as reflected in its recently introduced Flexible Credit Line, which permits some IMF loans without prior review or ex ante conditionality. In this respect, the delinking of the CMIM from the IMF program may become a less divisive issue between East Asia and external economic powers in the post-crisis world. In the early stage of the CMI, however, there was a strong political imperative for East Asia to avoid antagonizing the US and its G-7 allies, who could have opposed the CMI lacking the IMF linkage and thereby frustrated Asia's regional initiative as in the case of the aborted Asian Monetary Fund in 1997.