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

May 11, 2006

Regional Anatomy I Ken JIMBO

Review 1) Divergence of East Asia: Four Dimensions

Cultural Diversity Language Religion

Historical Background China-Centered Tribunal

System (Pre-Modern) Great Power Imperialism

(Modern) Cold-War Fragmentation (Post

WWII)

Political Diversity Liberal Democracy Authoritarian Communism

Economic Diversity Advanced Growing Under-Developed

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

Asian Financial Crisis in 1997

Asian Financial Crisis

Capital Flows capital inflow :$93 billion into ASEAN5

(Thailand, Malaysia, Indonesia, Philippines) and Korea

In 1997: net outflow of $12 > Large Scale Capital Flight

Abrupt Crisis end-1997 Currency Devaluations Stock Market Collapses

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%

> From East Asian Miracle to East Asian Meltdown?

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 CrisisDeterioration of Balance Sheet

Policy Prescriptions

(1) Capital Controls overshort-term inflows

(2) More appropriate exchange rate regime

Domestic credit Absorbtion increases (3) Maturity transformation:expansion Domestic boom a. Strenghtening monitoring

functions by banks and supervision b. Development of corporate

Current account Bubble burst Maturity mismatch Currency mismatch bond and equity marketsdeficit widens Excess capacity

(4) Good corporate governance

Rapid deterioration of the balance sheet(5) Sequencing issue between strenghtening the finance systemand capital account convertibility.

+ [=Twin Crises]

Two Major Components of the Crisis

I. Massive Volume of Capital Inflows surpassing underlying current account deficit

II. Composition of Capital Inflows dominated by short-term loans

Balance of payments surplus:Externals reserves increase

"Double Mismatches"

Reversal of capital inflows,sudden and massive

Balance of payments deficit:Reserves drain

Currency crisis Banking crisis

Masaru Yoshitomi, “Capital Account Crisis and Appropriate Policy Responses”

IMF Rescue Package

The Rescue Package (P. Krugman, 1998) Loan on the condition of economic reform Korea:

US$58.4, Thailand:$17.2, 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

IMF ConditionalityIMF ConditionalityIndonesia 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

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 Organi

zation IMF Mechanism to Provide Short-Term Credits

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

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” Japan’s 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

Rise of Regional Financial Cooperation (1998.1-)

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.

ASEAN+3 Process

Creation Process Hashimoto Proposal “ASEAN-Japan” Summit ASEAN Counter-Proposal “ASEAN+3

Summit” Asian Crisis Management

Chaing Mai Initiative Joint Declaration of East Asian Cooperation

Functional Cooperation 17 Areas 48 Meetings

2001: East Asian Vision Group (EAVG) Final Report

2002: East Asian Study Group (EASG) Final Report

2004: ASEAN+3 Summit (Vientiane)

2004: ASEAN+3 Foreign Minister’s Meeting (Jakarta)

Progress of ASEAN+3

“Issue Paper” on East Asian Community, Functional Cooperation,

East Asian Summit

Decision to Hold East Asian Summit

Progress of ASEAN+3

１９９７ : The First ASEAN+3 Summit

1999: Joint Statement on East Asian Cooperation (The Third ASEAN+3 Summit)

1997: Asian Financial Crisis

Related Events

1999: ASEAN+3 Finance Ministers’ Meeting1999: ASEAN10 (Cambodia)

2001: September11 Terrorist Attack

2002: Koizumi Singapore Speech2002: ASEAN-India Summit Meeting

2003: Japan-ASEAN Special Summit Meeting2003: China-ASEAN Strategic Partnership2003: Bali Concord II

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

2005: ASEAN Emergency Summit Meeting (Tsunami Disaster Relief)

1997: ASEAN Vision20201998: Hanoi Plan of Action

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

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 ASEAN+3 Summit and East Asian Summit

Objectives and Agendas Membership

Organizational Questions Who will Take a Lead ? (Who Sits on the Driver’s Seat?) Who will Host the Meeting? Who will Chair the Meeting?

East Asian Summit Political Process　Ｉ

Bi-Annual MeetingAlternative Host: ASEAN / Non-ASEANMembership: ASEAN + 3ASEAN+3 Summit Coexist

【 Modality A 】（ Oct 2004 ）

2005 Host C: Malaysia 2007 Host C: China (Chinese

Proposal)

【【 JPN Counter ProposalJPN Counter Proposal 】（】（ July 2004July 2004～～ March 2005March 2005））1)1) East Asian Summit should be Co-hosted by ASEAN and East Asian Summit should be Co-hosted by ASEAN and

Non- ASEAN Member States. The First Meeting in Kuala Non- ASEAN Member States. The First Meeting in Kuala Lumpur should be Co-hosted by Malaysia and JapanLumpur should be Co-hosted by Malaysia and Japan

2)2) Australia and NZ should be invited to EAS as Dialogue-Australia and NZ should be invited to EAS as Dialogue-Partners (two-tier approach)Partners (two-tier approach)

【 Philippines’ Response 】　 Philippines will be a chair country for ASEAN in 2007. If China holds EAS in 2007, ASEAN+3 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)

【 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

ASEAN+3+3 = 16 Member States

【 Modality B 】 (April 2005) 2005 Host C: Malaysia2005 Host C: Malaysia 2006 Host C: ASEAN2006 Host C: ASEAN

【【 JPN Counter ProposalJPN Counter Proposal 】（】（ July 2004July 2004 ～～ March 2005March 2005 ）） 1) East Asian Summit should be Co-hosted by ASEAN and Non- 1) East Asian Summit should be Co-hosted by ASEAN and Non-

ASEAN ASEAN Member States. The First Meeting in Kuala Lumpur should Member States. The First Meeting in Kuala Lumpur should

be Co- be Co- hosted by Malaysia and Japanhosted by Malaysia and Japan 2) Australia and NZ should be invited to EAS as Dialogue-2) Australia and NZ should be invited to EAS as Dialogue-

Partners Partners (two-tier approach)(two-tier approach)

Mod B. ApprovalSingaporeIndonesiaVietnam

Additional Approval

【 Agreed Modality 】1) ASEAN sits on a Driver’s Seat2) Inclusive Membership3) Co-exist with ASEAN+3 Summit

East Asian Summit Political Process II

【 Modality A 】（ Oct 2004 ）

2005 Host C: Malaysia 2007 Host C: China (Chinese

Proposal)

Bi-Annual MeetingAlternative Host: ASEAN / Non-ASEANMembership: ASEAN + 3ASEAN+3 Summit Coexist

Some US Responses: Another Side of Coin

　 “　 “ My view is this is a thinly veiled way to make the point thaMy view is this is a thinly veiled way to make the point tha

t the United States is not totally welcomed in Asia. I think tt the United States is not totally welcomed in Asia. I think that's a real mistake.“hat's a real mistake.“

"But it's the direction. What worries me about it (is) if it's th"But it's the direction. What worries me about it (is) if it's the beginning of an erosion."e beginning of an erosion."

"It seems that China is quite willing to be involved "It seems that China is quite willing to be involved in fora that don't include the United States,"in fora that don't include the United States," 　　

　　－　　－ Richard Armitage, Asahi Shimbun May 1, 2005Richard Armitage, Asahi Shimbun May 1, 2005

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.

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.

East Asian Summit (Dec 14, 2005)

Joint Statement II