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Issues in Monetary & Financial Cooperation & Integration in Asia & Trans-Pacific Partnership Agreement
Dr. Mah-Hui LIM
Senior Visiting Fellow
Penang Institute
CIER, Taipei
January 24, 2014
International Context
G20 has not shown leadership in restructuring international economic and financial architecture
Makes regional cooperation all the more necessary and urgent
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Areas for Financial Cooperation
1. Liquidity Support and Management – Chiangmai Initiative (CMIM) & AMF
2. Trade Financing & Facilitation
3. Asian Reserves for Development
4. Regulatory Cooperation/Coordination
5. Trans Pacific Partnership Agreement
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I- Liquidity Support & Management – Chiangmai Initiative & SAARC Swap Arrgt
CMIM has expanded since inception in 2001. As of May 2012 -
$240 billion fund
Multi-lateralized
40% not subject to IMF conditionality
AMRO established Apr 2011
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CMIM Swap Lines in Dec 2009
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Short-comings
Why has never been used despite Korea and Indonesia liquidity problems in 2008 financial crisis?
Still a self-managed pool of reserves, i.e., the request process is multi-lateralized but not the contribution
Size not adequate
60% borrowing quota still linked to IMF conditionality
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Korean Experience Oct 2008
Korea strong macro economic fundamentals but high ST external debt, free capital flows, high level of foreign equity & bond holdings
Had $260 billion reserves – 6th largest in the world
Spent $60 bn to defend won but couldn’t stop self-reinforcing vicious downward spiral with decline in reserves 7
Korean Experience
Only $30 bn US swap line stemmed the confidence crisis
Plus also had $30 bn bilateral swap lines each with PBOC and BOJ
Why didn’t access CMIM?
Why swap line with PRC and Japan outside of CMIM framework?
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Suggestions
Increase size of fund and draw-down quota
Reduce conditionality quota
Multi-lateralize approval process
Strengthening AMRO critical
Adequate duration of swap
Diversify away from US$ swap line
Adequate space for counter-cyclical
Expand participating countries 9
Swap lines in local currencies for trading purpose
Set up regional export-import banks
Provide back up lines of credit for trade during crisis period
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II - Trade Financing & Facilitation
III- Utilization of Asian Foreign Reserves – Bond Markets
Some costs of developing bond markets to recycle regional savings for regional investments
Trade-off btw liquidity of cap mkts & financial & economic stability
Vulnerability to sudden inflow & outflow
Unable to regulate capital flows & exchange rates
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Std View - Financial Integration = Dev of Bond Mkts
AFC crisis – over dependence on bank finance –double mismatch
Maturity mismatch
Currency mismatch
Bond Mkt supposed to over come this problem
Bond Mkt to mobilize & recycle Asian reserves for regional invsts
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Bond Markets Performance – 8 East Asian countries 2000-2010
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2 issues - Bond Mkts :(a) efficient allocator; (b) liquidity
Tobin-4 Meanings of Mkt Efficiency
Information-Arbitrage Efficiency
Arrow-Dubreau’s full insurance efficiency
Fundamental valuation efficiency (DCF)
Functional or social efficiency
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Social Efficiency
UNCTAD (2009) – Financial mkts do decent job at processing transactions efficiently & low costs but do not contribute to long run growth.
From regulators’ perspective, the most relevant criterion is social efficiency – contribution to stable, long-term economic growth, with minimal increase in fin fragility
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Social Efficiency
Asian Financial Crisis and Great Financial Crisis question the claims of mkt efficiency in terms of financial stability and long term growth
Experience in financing in Indonesia
Minsky thesis – financial markets becoming inherently more fragile and unstable moving from hedge > speculative > Ponzi financing
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International Financial Flows & World Fixed Invsts 1970-2009
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Tobin’s conclusion
Market efficient only in first sense – not possible to gain from trading on basis of available public information
Fail in 2nd, 3rd,most miserably in 4th
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(2) Liquidity–Stability Trade Off
Raison d’etre of cap mkts – liquidity
ADB- common trading stds make it cheaper and faster for investors to dip in and out of markets
Keynes – no such thing as liquidity for market as a whole. Liquidity is an individual investor concept not a system concept
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Keynes
“With the development of organized investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes add greatly to the instability of the system”
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Liquidity vs Stability
Problem is exacerbated where investments are from foreign sources and recipient economies are small
Divergence btw benefits of liquidity to investors but macro-economic costs to recipient countries i/t of financial and economic instability as evidenced in AFC and in recent GFC
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Regional Long Term Credit and Development (LTCD)Banks
Set aside small percentage of reserves to fund regional LTCD Banks
Avoid problem of currency & maturity mismatch better, without volatility & instability of bond markets
Take long term view and adopt anti-cyclical policies e.g. build up reserves in good time and lending in difficult time
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Principles of LTCD Bank
More inclusive lending to small economies and SMEs unlike bond markets that just cater to big corporations
Promote long-term stable growth
Government equity but professional and hands-off approach in operation, credit evaluation & loan allocation
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IV - Regional Coordination in Capital Controls
Volatile capital flows from excessive international liquidity a major concern to emerging economies
Individual countries, like Malaysia & Thailand, taking capital control measures faced tremendous market pressures
Such measures more effective if they are coordinated
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V- TPPA (Trans Pacific Partnership Agreement)
Participants in TPPA – 13
Covers 29 chapters – ranging fr intellectual property rights, labor, environment, services, investments, state owned enterprises, govt procurement, trade, SMEs etc
Only 6 of 29 chapters on trade
Trade benefits limited; outweighed by other factors
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Trade Benefits ?
E.g. Msia – avg tariff rates 23% vs US tariff rate of 3.4%, Msia has to cut much higher tariff compared to US
Zero tariffs threaten many local industry & agr. US agr producers rec subsidies > lower prodn cost
E.g. US rice 27c/kilo or 34% below cost; Msia rice tariff, without protection will be destroyed
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Trade Balance pre & post FTA with U.S.
Export Import Trade to US from US Balance Peru 2008 6.2 bil 5.8 bil + 400m 2012 6.4 9.3 - 2.9 bil Chile 2003 3.7 bil 2.7 b + 1 bil 2012 9.4 18.8 - 9.4 bil Spore 2003 15.1 bil 16.6 b - 1.4 bil 2012 20.2 30.5 - 10.3 bil
Investment issues
Liberalization of ownership
Protection of investors rights
Investor-state disputes
Free capital flows
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Definition of investment – very broad
Includes FDI, portfolio invst, financial derivatives, intellectual property, future profits
Committed to open entry to foreign investors to many sectors incldg services; may go up to 100% ownership
Negative rather than positive list
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Excessive Protection rights
National treatment – foreign investors same rights as local investors
Fair & Equitable treatment-stable, predictable invst environt, i.e.no new policies that affect revenue of investor
Expropriation-not only confiscation of property but also changes in contracts, and reduction of revenues due to new policies and regulations.
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Investor-State Dispute Chapter
Private investor can sue governments for losses incldg potential losses resulting fr govt policies
Compromise state sovereignty – ability to enact policies to protect public interest
In last 13 years, number of private suits against govts rose 500% fr 69 to 370
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Examples of Investor-State Disputes
Philip Morris sue Australia & Thailand for billions -requiring plain packaging
Renco sue Peru for $800m for environmental requirements
U.K. co.Churchill sue Indonesia for $2b for revoking mining rights
Disputes must be settled in international arbitration tribunals
Often conflict of interests – lawyers for corps also act as arbitrators
32
Awards Made Against Some Countries (excl. interest/costs)
Ecuador -- US$1,928 mil.
Argentina -- $ 1,140 mil
Libya -- $948 mil
Slovakia -- 896 mil
Mexico – 242 mil
Czech Republic - 483 mil
Lebanon – 266 mil
Sri Lanka – 60.8 mil
Capital Transfer Provision in Investment Chapter
“Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory”
i.e. NO Capital Controls over inflow and outflow of capital
This is more restrictive than IMF conditions
34
Proposed Balance of Payment Safeguards
If free capital flows threaten or cause serious balance of payment difficulties and/or
In exceptional cases, macro-economic difficulties for monetary and exchange rate policies
then
Temporary measures of capital controls may be adopted
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However, series of limiting conditions are stipulated
Non-discriminatory
Consistent with IMF articles
Avoid unnecessary damage to commercial, financial interests
Temporary & be phased out as situation improves
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Comments on Free Capital Flows
Who defines temporary and for how long? Same for serious & exceptional
The country affected should judge for itself when it is prudent to phase out the controls, i.e. self judging and not imposed from outside
The limitation clauses are too restrictive and defeat the purpose & effectiveness of control measures
37
Relation btw Fin Crises & Cap & Fin Deregulation-1880s to 2009
38
Reinhart & Roghoff – This Time is
Different: Eight Centuries of Financial Folly (2009)
“Periods of high international capital mobility have repeatedly produced international banking crises, not only in the 1990s but historically”
“In 18 out of 26 banking crises, the financial sector had been liberalized within the preceding 5 years” (p.155)
39
Two Recent Financial Crises
Asian Financial Crisis of 1997 and Global Financial Crisis of 2007 both a result of excessive financial deregulation and liberalization
In Asia, 2 countries that escaped the Asian Financial Crisis – China and India had kept capital controls ability
40
BIS 71st Annual Report June 2001
“When financial systems were heavily regulated … the scope for damaging financial cycles were constrained…Such regulated environments…were less proned to large cyclical swings seen in today’s more liberalized environment”
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Costs of Financial Crises
Countries Fiscal Costs
% GDP
Output Loss %
GDP
Indonesia 55 40
Thailand 35 40
Malaysia 16 33
Philippines 13 10
US Subprime $ 1 trillion 8%
US GDP
Reinhart & Roghoff
At least 5 years output loss and employment loss after financial crisis
Government debt increase by average of 86% after 3 years
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Due to Dangers of Financial Crisis -Govts Need Policy Space To:
Prevent and Avoid financial crisis -regulate capital inflows
To Manage and Overcome financial crisis – regulate capital outflows
To do Sovereign Debt Restructuring
44
Two Examples where Capital Controls Had Positive Results
Malaysia imposed temporary capital controls during the Asian Financial Crisis. Result it recovered faster from the crisis than Indonesia & Thailand.
Even the IMF admits today that capital controls helped Malaysia’s recovery
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U.S. Use of Capital Controls (Moffitt, The World’s Money 1983:pp41-47)
1963 – US imposed Interest Equalization Tax (IET) on USD bonds issued by foreign companies to stem capital outflows & balance of payment problem. Result -
International bonds issued in the USD in US dropped from 72% (1963) to 55% (1964) and 28% (1968)
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Even IMF Concerned Over Constraints on Capital Account Restrictions
“The limited flexibility afforded by some bilateral and regional agreements in respect to liberalization obligations may create challenges for the management of capital flows” (IMF, Liberalizing Capital Flows & Managing Outflows. 2012).
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THANK YOU
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