Asia's Foreign Reserves - A New Pool

Businessweek reports that a group of Asian nations who collectively hold 65% of the world's foreign exchange reserves has agreed to create a new "pooling arrangement" to help prevent fallout in the aftermath of incidents like the 1997 Asian Contagion that rapidly spread throughout the region. The group is motivated by the perception that the IMF, the global body usually acting as a lender of last resort in these types of scenarios, imposed conditions like higher interest rates and lower government spending in exchange for loans.

The first obvious implication of this unprecedented regional cooperation is that China, Japan, and the rest of southeast Asia are finally willing to cooperate without outside interference to advance their own interests. The continued economic dynamism of the region will ensure that an increasing share of the global economy will depend on the institutions constructed by the region. Despite the recent historical weakness of these financial institutions, this new multilateral endeavor indicates that the major players have internalized the importance of cooperation.

The second, far less positive implication is that much of the region, and China in particular, is interested in constructing a parallel global economic framework that embraces nonintervention in nation economics as a first order principle. The real concern here is that enabling despotic regimes such as Thailand, Myanmar, or even North Korea will result in humanitarian disasters. But just as frightening to the economies of the region is a commitment to not imposing fiscal reforms. The real causes of financial collapse are weak institutions and poor policy. By setting up an additional bulwark against failure before intervention by the IMF, this "pooling arrangement" is going to ensure that weaker, less wide-ranging reforms are enacted at the conclusion of each economic shock, making future failures more likely.

The good done by increasing political cooperation between these critical components of the global economy is at least partially offset by the purpose of their cooperation. The world would be much better off if China and the rest of the region put their reserves into existing institutions like the IMF in exchange for increased consideration. With the failure of the Doha Round at the WTO, the world looked immediately to bilateral agreements to continue trade progress. While regional cooperation is superior to earlier bilateral cooperation, only truly global cooperation will best advance everyone's interests.