A Theoretical Investigation of Asian Economic Integration Process in ASEAN+3

By

Major in International Relations

GRADUATE SCHOOL OF INTERNATIONAL STUDIES,

SOGANG UNIVERSITY

December 2013

Table of Contents

List of Tables and Figures

Acronyms

Abstract

Chapter I. Introduction...…………………………………………………..1

1. Research Purpose…………………………………...……………...............1

2. Literature Review…………………………………..……….……..............3

3. Research Scope and Methodology…...……………….…………...............6

Chapter II. Overview of Asian Economic Integration Process in

ASEAN+3……..............…………...……………….……….....9

1. From the 1997 Asian Financial Crisis to the CMIM.……………...............9

2. The Level of Asian Economic Integration Process: from Mistrust to

Delegated or Pooled Sovereignty……………..………………………….12

i

Chapter III. Theoretical Framework: Andrew Moravcsik’s Liberal

Intergovernmentalism ….…………………..………………14

1. Framework of Analysis: Assumptions, Two Stages and Outcome….….14

2. Empirical Research Example: The European Union …………………...16

3. Implications on Regional Integration Process ………….………………..27

Chapter IV. The Liberal Intergovernmentalist Approach to ASEAN+3...31

1. Assumptions ……………………………………………………………31

2. Two Stages: National Preferences and Interstate Bargaining…………….33

2.1 National Preferences in ASEAN+3: Geopolitical or Economic

Interests…………………………………………………………..…..33

2.1.1 Geopolitical Interests in ASEAN+3..…………………………34

2.1.2 Economic Interests in ASEAN+3…………………………….39

2.1.3 National Preference Formation in ASEAN+3…………………44

2.2 Interstate Bargaining with Asymmetrical Interdependences in

ASEAN+3…………………………………………………………....45

ii

2.2.1 The Threat of Non-Agreement.……………..………………...46

2.2.2 The Threat of Exclusion……………………………………....50

2.2.3 Side-payment and Linkage at the Margin……………….…….58

3. Outcome: Institutional Choice in ASEAN+3…………………….………62

3.1 From the CMI to the CMIM: the efficiency and a two-level game…..63

3.2 Surveillance Mechanism..........………………………...……………..72

Chapter V. Conclusion……………………………………………………75

BIBLIOGRAPHY

iii

LIST OF TABLES AND FIGURES

TABLES

Table 1: Lending and Borrowing Funds and Share of Total Funds in 2009……………..….67

FIGURES

Figure 1: Exports of Goods and Services………………………………………..…………..40

Figure 2: Imports of Goods and Services………………………………………..…………..40

Figure 3: Nominal GDP………………..………………………………………..…………..40

Figure 4: Ratio of Short-term Foreign Debt to Foreign Reserves..………………………….43

Figure 5: Trends in Foreign Reserves Accumulation in ASEAN+3..…………………….....43

Figure 6: Ratio of China’s Shares of Foreign Reserves in the World..……………………...48

Figure 7: Ratio of Foreign Reserves within ASEAN+3..…………………………………...48

Figure 8: Trends in Foreign Reserves in ASEAN..………………………………………....54

Figure 9: Trends in Foreign Reserves in South Korea..………………………………...…..56

Figure 10: Trade Volume and Foreign Reserves of GDP in South Korea…………………..57

Figure 11: Agreed Total Sizes under the CMI..……………………………………...……..65

Figure 12: Lending Funds Shares of Total Reserves in ASEAN+3 in 2009….....………….66

Figure 13: Shares of Lending Funds……...……………………………………..………….68

Figure 14: Shares of Borrowing Funds..…………………………………………………....69

Figure 15: Shares of Contributions and Voting Power in 2010..…………………………....71

iv

Acronyms

AMF

AMRO

APEC

ASA

ASEAN

ASEAN+3

BSAs

CMI

CMIM

EC

ERPD

EU

GDP

IMF

MSA

WTO

Asian Monetary Fund

Asia Pacific Economic Cooperation

ASEAN+3 Macroeconomic Research Office

ASEAN Swap Arrangement

Association of Southeast Asian Nations

Association of Southeast Asian Nations and Plus Three

Bilateral Swap Arrangements

Chiang Mai Initiative

Chiang Mai Initiative Multilateralization

European Community

Economic Review and Policy Dialogue

European Union

Gross Domestic Product

International Monetary Fund

Multilateral Swap Arrangement

World Trade Organization

Abstractv

While in 1997 the Asian financial crisis was a tragedy in Asian

regions, it might be allegedly an opportunity for Asian countries to attempt

and fuel their cooperation, especially in the economic and financial field.

Following negotiations on approaches to the Asian economic cooperation, in

2000 the Chiang Mai Initiative (CMI) was created and later developed into

the Chiang Mai Initiative Multilateralization (CMIM). Both the CMI and the

CMIM are the cooperative outcomes among ASEAN+3 countries, grounded

on bilateral and multilateral swap arrangements.

The establishment of the CMIM is one of successful outcomes in the

ASEAN+3 cooperation, whereas several obstacles to the concrete

cooperation still remain such as oppositions to an independent unit of

surveillance mechanism. Considering both sides of the outcomes, a

theoretical analysis of the cooperation process is likely to draw feasible

directions towards the future of the ASEAN+3 economic cooperation.

Among theories of international relations is the theory of liberal

intergovernmentalism improved by the regional integration studies of

Andrew Moravcsik that focus on not only shared economic interests of

national preferences but also roles of governmental leaders. As for the current

outcomes stemming from interstate bargaining in ASEAN+3 based on

vi

economic interests with respect to the 1997 Asian financial crisis, liberal

intergovernmentalism assesses the ASEAN+3 economic cooperation process

and in turn suggests the direction of developing the cooperation.

Keywords: CMIM, ASEAN+3, Liberal Intergovernmentalism, Asian

Economic Integration

vii

Chapter I. Introduction

1. Research Purpose

In 1997 when Asian countries were eager to develop their

economies, the sudden financial shocks had highly impacted on regional

countries, which triggered the necessity of a regional economic or financial

cooperation. Due to not only the tremendous financial shocks to regional

economies but also external influences of the International Monetary Fund

(IMF) backed by the United States, Southeast Asian countries, where highly

impacted by the financial crisis, started to recognize an institution based on

the perspectives of the Asian regional economic integration.

Going through attempts to collective activities such as a proposal for

regional institution or executive meetings, thirteen countries of the

Association of Southeast Asian Nations (ASEAN) and Plus Three countries

(ASEAN+3)—South Korea, China and Japan—finally reached an agreement

to establish a new concept for the Asian financial cooperation, the Chiang

Mai Initiative (CMI), in 2000 which was based on the principle of bilateral

1

swap arrangements (BSAs)1 among members. The result of the CMI led an

annual ASEAN+3 financial meeting. Later in 2009 the CMI evolved into the

Chiang Mai Initiative Multilateralization (CMIM) based upon a multilateral

swap arrangement (MSA) of a multilateral reserves pooling mechanism.

Although the creation of the CMIM might be an unprecedented

success of the regional economic integration process in Asia, several

obstacles to a solid regional integration still remain: the absence of a regional

independent unit, or political sensitivity of losing sovereignty. Nevertheless,

grounded on lessons from the history of the ASEAN+3 economic cooperation

process such as the establishment of the CMIM and its several additional

outcomes like debates on surveillance mechanism, a theoretical analysis of

the cooperation is necessary, because the results of the analysis are likely to

show a series of directions towards the future of the regional economic

integration.

1 A currency swap is a foreign-exchange agreement between two parties, namely central banks, of their countries for exchange of the principal and interest of a loan in a certain currency at its present value respectively.

2

2. Literature Review

It is relevant to identify how the CMI was created and to what extent

the CMIM developed. As many experts were emphasizing the developments

of the CMI in 2000 and the CMIM in 2009, they reviewed the possibility of

the regional institution in Asia. One of studies, prior to the visible CMIM,

described that the CMI was not an actual independent institution insulated

from the IMF or the US, because the ASEAN+3 cooperation could not afford

to consider developing the initiative without external and western clouts.

Accordingly, it would be a long way to go with many problems including, of

course, the IMF approval mechanism and a weak surveillance mechanism.2

Moreover, compared with the European case of creating the European

Monetary Integration, when the ‘European convergence criteria’ were

hypothetically applied to ASEAN+3 cases, the possibility of Asian Monetary

Integration was assessed to be low, because of the different historical

backgrounds between Europe and Asia .3

2 C. Randall Henning, “The Future of the Chiang Mai Initiative: An Asian Monetary Fund?” Policy Brief, No. PB09-5, (Washington, D.C: Peterson Institute for International Economics, 2009), pp. 3-8.

3 Hyun-Jae Lee. “Primarily Investigation on Monetary Integration of ASEAN+3 Countries: Focusing on European Monetary Integration Criteria,” Korean East-West Economic Studies, Vol.18, No.1 (Aug. 2006), pp. 17-42. [in Korean]

3

According to overall assessments of the CMIM, however, the efforts

of ASEAN+3 countries are significant increasingly. Most of all, changes in

the way of pooling the funds from bilateral to multilateral swaps prove that

the ASEAN+3 collaboration may be on the way to a feasible and regional

institutional outcome. New plans with the CMIM are accompanying explicit

responses to questions of the feasibility of narrowing down their negotiations:

agreements to quota and voting systems, borrowing rules and settlements for

creating an independent surveillance unit.4 In this context, the CMIM seems

to possibly lead the regional and stronger self-help liquidity support

mechanism with developing the surveillance process.5

While the existing studies focus on assessing the origin and the

developments of ASEAN+3 negotiations, contributions to theoretical

explanations are relatively low. Nevertheless, the constructivist approach is

impressive in that the approach tried to reveal the process of ASEAN+3

cooperation. As for a main factor of developing their cooperation, one of

constructivists emphasizes a sort of shared identity among Asian countries,

established by continuous efforts to come together within the Asian bloc.6 4 John D. Ciorciari, “Chiang Mai Initiative Multilateralization,” Asian Survey, Vol. 51, No. 5 (September/October 2011), pp. 935-947.

5 Chalongphob Sussangkarn, “The Chiang Mai Initiative Multilateralization - Origin, Development and Outlook,” ADBI Working Paper Series, No. 230 (July 2010), pp. 10-15.

6 Takashi Terada, “Constructing an ‘East Asian’ concept and growing regional identity: from 4

While constructivist approach to ASEAN+3 Summits are based on

developments of the shared identity, this theoretical framework has some

weaknesses with regard to the ASEAN+3 cooperation process: how to

measure the shared ideas; and ex post explanation rather than parsimonious

or predictive.

Considering characteristics of East Asian counties, therefore, as one of

prominent theories in international relations especially interested in regional

integrations, liberal intergovernmentalism is likely to shed light on what

causes a regional cooperation, how to implement the regional cooperation, or

how to predict results of the cooperation. Emphasizing economic interests

and governments’ roles, this theory can contribute to constructive and

predictive explanations of the ASEAN+3 cooperation process, allegedly on

the basis of economic terms such as swap agreements, and annual Summits

among thirteen members. At an initial step of the CMI, there was a previous

study that applied the theory of liberal intergovernmentalism to ASEAN+3

negotiations. But at that time the study was focusing on bilateral Free Trade

Agreements as intra-region trades rather than predicting an increase in

BSAs.7 In this study, therefore, as embracing recent outcomes of the CMIM

EAEC to ASEAN+ 3,” The Pacific Review, Vol. 16, Issue 2 (2003), pp. 267-269.

7 Soon Ok Shin, “Regional Cooperation in East Asia: A State-Centric View,” Master Thesis, Ehwa Univ., 2003, pp. 63-65. [in Korean]

5

and its accompanying discussions, the theory of liberal intergovernmentalism

is expected to reveal the extent to which the Asian economic integration

process by ASEAN+3 countries has progressed.

3. Research Scope and Methodology

This study is concentrating on the ASEAN+3 financial cooperation

process since 1997. Although ASEAN+3 cannot address the whole picture of

all Asian countries, they are not only containing the primary actors like China

and Japan regionally and internationally but also covering a geographically

broad view of the Asian cooperation including East and South Asian regions.

In addition, while developments of the CMI and the CMIM are emphasizing

the cooperation in financial fields, in the broad economic point of views, the

progress of their financial cooperation will lay a cornerstone of the future of

the economic cooperation and finally economic integration. In this regard, the

study of the ASEAN+3 financial cooperation process is expected to reveal

the degree of the Asian economic integration process.

In order to find out apparent and feasible directions towards the

possibility of the actual Asian economic integration, this study starts with a 6

key question that which theory of international relations and to what extent it

can explain the Asian economic integration process in ASEAN+3. For a

response to the question, this research will use ‘theory-confirming and

theory-infirming case studies’ which depend on whether a theory fits a series

of case studies.8 If a case study is confirmed in terms of the theory, then the

related hypothesis will be intensified, and vice versa. In addition, during the

hypothesis testing, tasks of comparative studies will be added. Through

comparing cases in ASEAN+3 based on the theoretical framework, each step

is expected to draw conclusions as a result of analysis.

In this study, here is a hypothesis in a response to the question that

the theory of Andrew Moravcsik’s liberal intergovernmentalism can explain

the extent to which the Asian economic integration process in ASEAN+3 is

going on as emphasizing the abilities of governments. Thanks to great efforts

by Moravcsik, liberal intergovernmentalism could interpret and analyze the

European integration process as focusing on roles of governmental leaders

based on shared national preferences. Likewise, while this research tests the

hypothesis, the cooperative cases of ASEAN+3 are expected not only to

identify their shared interests but also to shed light on causes and outcomes

of interstate bargaining.

8 Arend Lijphart, “Comparative Politics and the Comparative Method,” The American Political Science Review, Vol. 65, No. 3 (Sept. 1971), p. 692.

7

This study is divided into largely four sections. Prior to details of the

theoretical framework and its analysis of Asian cases, chapter II reviews the

history of the Asian economic cooperation process in ASEAN+3. Chapter III

introduces the theoretical framework of liberal intergovernmentalism and

explores its research example. Chapter IV shows applications of the theory to

cases of the ASEAN+3 economic cooperation process. Finally, Chapter V

concludes with brief summaries of the findings including implications and

limitations.

8

Chapter II. Overview of Asian Economic Integration Process

1. From the 1997 Asian Financial Crisis to the CMIM

Actually the ASEAN cooperation started before the 1997 financial

crisis, but it didn’t work to help member countries to cushion the impact of

the crisis at that time. Right after the 1997 crisis happened, Japanese Vice

Finance Minister, Sakakibara Eisuke, proposed a creation of $100 billion in

the name of Asian Monetary Fund (AMF). But his proposal failed to bring

other Asian countries into a debate about the creation, because of serious

opposition from the United States backing the IMF and China’s fears

regarding the expectation of the Japan’s regional leadership.9 Nevertheless,

Asian countries continued to discuss the regional cooperation against fears of

reiterating the financial shocks domestically and internationally.

After the finance ministers’ meeting started in 1999, ASEAN and

Plus Three countries reached an agreement to establish the CMI in 2000 in

Chiang Main, Thailand, which included the principle of bilateral swaps

between members. The total size of the BSAs began to expand as of 2002

9 John D. Ciorciari, op.cit., p. 928.9

when six BSAs included $17 billion.10 As a result of annual meetings, in 2004

the total size increased to $36.5 billion more than double the initial stage of

$17 billion and later increased to $80 billion in 2008.11

As recognizing the cooperation progress towards multilateralizing

the CMI as of 2005,12 ASEAN+3 countries finally reached an agreement of

creating the CMIM as a multilateral reserves pooling mechanism with the

total size of $120 billion in 2009,13 which later in 2010 was finalized with

some adjusted rules including contributions, borrowing and voting power.14

ASEAN+3 are continuously committed to developing the CMIM as not only

increasing the total size of the funds to $240 billion in 2012, but also

10 “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers Meeting in 2002,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20020510.htm. (Search date: Sept. 9, 2013)

11 “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers Meeting in 2004,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20040515.htm, (Search date: Sept. 9, 2013), and “The Joint Ministerial Statement of the 11th ASEAN+3 Finance Ministers’ Meeting in 2008,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20080504.htm. (Search date: Sept. 9, 2013)

12 “The Joint Ministerial Statement of the 8th ASEAN+3 Finance Ministers’ Meeting in 2005,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20050504.htm. (Search date: Sept. 9, 2013)

13 “The Joint Ministerial Statement of the 12th ASEAN+3 Finance Ministers’ Meeting in 2009,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20090503.pdf. (Search date: Sept. 9, 2013)

14 “The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting in 2010,” http://www.asean.org/archive/documents/JMS_13th_AFMM+3.pdf. (Search date: Oct. 31, 2013)

10

establishing the ASEAN+3 Macroeconomic Research Office (AMRO), a

regional and independent surveillance unit under the CMIM.15 Although

details about surveillance mechanism are still progressing and face various

political obstacles, if it succeeds, explicit developments of surveillance

system are likely to lead ASEAN+3 towards the future of Asian economic

integration.

15 “The Joint Ministerial Statement of the 15th ASEAN+3 Finance Ministers and Central Bank Governors’ Meeting in 2012,” http://www.mof.go.jp/english/international_policy/convention/asean_plus_3/20120503.pdf. (Search date: Sept. 9, 2013)

11

2. The Level of Asian Economic Integration Process: from Mistrust to

Delegated or Pooled Sovereignty

Before the turmoil of the 1997 financial crisis, efforts to enhance the

Asian cooperation were not relevant. The uncertainty and mistrust about the

regional cooperation had prevailed across Asian regions. However,

experiences of regional financial shocks became a momentum to evolve into

a striking regional cooperation. At first, the 2000 CMI was nothing but a

normal cooperation similar to the previous cooperation progress like Asia

Pacific Economic Cooperation (APEC). Through annual Summits, despite

the slow progress of the cooperation, ASEAN+3 continued to increase the

symbolic size of BSAs from $17 billion in 2002 to more than four times as

$80 billion in 2008 and right before a new multilateral mechanism, increased

to $90 billion in 2009.

Although the combined total size of BSAs among members

rose, the level of the regional integration was not enough to overcome

sensitivity of national sovereignty, because they still faced the lack of debates

on an independent mechanism. In 2010, however, the finalized version of the

CMIM became a milestone towards the progress of the regional economic

12

integration. ASEAN+3 agreed to pool the funds of contributions from each

government as including a certain decision-making rule for a consensus

approval. In addition, AMRO as a new introduced surveillance unit is now at

the initial stage and is still likely to face serious political obstacles. If it

evolves into a strong delegation system insulated from political pressures in

the future, then the progress of the Asian economic integration will be

accelerated. Unlike the reserves pooling system, considering political risk

with respect to losing national sovereignty, delegation system is not likely to

be easily coordinated.

13

Chapter III. Theoretical Framework: Andrew Moravcsik’s Liberal

Intergovernmentalism

1. Framework of Analysis: Assumptions, Two Stages and Outcome

The theory of liberal intergovernmentalism has been improved by

Andrew Moravcsik’s efforts which explained the process of the European

Union (EU) in a different way, compared with previous studies that focused

on the roles of supranational institutions. Liberal intergovernmentalism has

combined two theories: a liberal theory and an intergovernmental theory. This

theory is based on two basic assumptions.16 First, states are actors. That is,

states pursue their foreign policy goals as actors under the anarchic system in

international relations. Even if the EU could be treated as a centralized

authority, it was a result of works that member states achieved their goals to

converge some specific issues such as the monetary union. Second, states are

rational. States as rational behaviors pursue the ones that maximize the utility

of the actions under the analysis of costs and benefits. When states face under

economic interdependence, states calculate and choose as alternatives as

possible under the utility maximization.16 Andrew Moravcsik and Frank Schimmelfennig, “Liberal Intergovernmentalism,” Antje Wiener and Thomas Diez, European Integration Theory, 2nd ed. (Oxford: Oxford University Press, 2009), pp. 68-69.

14

Under the above assumptions, the theory of liberal

intergovernmentalism can explain the context of causes, negotiations and

results with respect to the regional cooperation through the process of two

stages and outcomes:17 states first define a set of preferences; then bargain

themselves to make sure their preferences; and accordingly create institutions

as outcomes to secure the credible commitments to member states. As in the

first stage, while considering various domestic preferences according to

liberal theories, states reach national preference formation, which shapes the

demand side. Then in the second, interstate bargaining provides the intensity

of national preferences or alternative coalitions according to

intergovernmental theories, as shaping the supply side.18 Finally as a result of

the process of two stages, institutional creation will secure maintaining and

developing their credible commitments.

17 Andrew Moravcsik, “Preferences and power in the European Community: A Liberal Intergovernmentalist approach,” Journal of Common Market Studies, Vol. 31, No. 4 (Dec. 1993), pp. 481-482.

18 Ibid.15

2. Empirical Research Example: The European Union

Andrew Moravcsik contributed to the theoretical explanation for the

process of the European Union. Under the theoretical framework of liberal

intergovernmentalism, he made a great effort to link the uniting process to

each step—national preference formation, interstate bargaining, and

outcomes—with empirical analysis. Some critics argued that the three steps

made so neat an impression with respect to the negotiating process that they

could not afford to shed light on irrational behaviors.19 Yet, the assumption of

rational actors is expected to reduce the burden of irrationality. In the case of

the EU, economic issue areas had relatively easily been collected into issue-

specific ones, while non-economic issue areas (e.g. security) were seldom

cooperated or coordinated. According to the liberalist approach, national

preferences of EU member states could be categorized into largely three

parts: commercial liberalization, socio-economic public goods provision, and

political and institutional policies.20

First, commercial liberalization refers to mainly the liberalization of

19 H. Wallace, “Piecing the Integration Jigsaw Together,” H. Wallace et al., “Review section symposium: The choice for Europe: Social purpose and state power from Messina to Maastricht,” Journal of European Public Policy, Vol. 6, Issue 1 (1999), p. 158.

20 Andrew Moravcsik (1993), op. cit., p. 488.16

market for private goods and services on the basis of the calculable costs and

benefits, such as, in the EU cases, agricultural price policy and industrial

policy of tariffs or quotas.21 While exporters are willing to agree with free

trade, importers tend to stick to uncompetitive positions that in turn result in

oppositions to free trade. Yet, if different patterns of interests will be offset

and balanced in favor of political coordination or cooperation, oppositions to

liberalization will be undermined.22 In addition, when the effects of policies

are uncertain, the opposition will be weakened as well.

Secondly, for socio-economic public goods policies, when

macroeconomic policies such as inflation or social welfare policies fail to

stabilize domestically and internationally and in turn trigger the negative

externalities and policy failure, governments will have a momentum to propel

independent initiatives with less intervention of interests groups.23 For

example, European monetary integration drew the reflection of

macroeconomic policies like ‘Maastricht convergence criteria’ including

certain standards of inflation and interest rates as acting exclusively with

domestic interests groups.24 In addition, the trans-border problems like air

21 Ibid.

22 Ibid., p. 489.

23 Ibid., p. 493.

24 Charles Harvie, “European Unification: Between Reality and Myth,” Ammon Levy-17

and water pollution are less interested in domestic interest groups. For that

reason, the issues of the public goods provision are likely to implement the

international cooperation.

Third, political and institutional policies rely on whether the

implications of the policies are calculable. For example, in order to achieve

the expected and calculable specific interests, national power and authority

were in part delegated to European Community (EC) institutions, including

the European Commission’s rule under majority voting, as representing the

EC members in international negotiations.25 In contrast, if the implications

are uncertain or less calculable, governments and politicians are willing to

enjoy their autonomy in favor of nationality or ideological issues.

In the next step, interstate bargaining explains how to realize

distributional outcomes based on national preferences, that is, it is the process

of cooperation or coordination over national preferences. The cases of

interstate bargaining had some critical comments to case selection because

functionalists showed the slow and different patterns of negotiations like

Livermore (ed.), Handbook on the Globalization of the World Economy (Cheltonham: Edward Elgar, 1998), pp. 269-270.

25 Andrew Moravcsik (1993), op. cit., pp. 494-495.18

trade and labor mobility.26 Nonetheless, in that the kinds of case selection are

expected to make a clear and neat impression on the result of negotiations,

interstate bargaining still matters.27 Before identifying the distributional

outcomes, bargaining games in this theory suggest three assumptions: first,

the cooperation among member states is voluntary without a coercive voting

system, second, negotiating members have plenty of information about the

preferences of counterparts, leading to low bargaining costs, and third,

benefits from bargaining depend on the relative power based on asymmetrical

interdependence as one of international relations’ phenomena.28

Normally in the negotiating environment, relative power is important

because it is related to the identification of who will get bargaining leverage.

Based on the above assumptions, the interstate bargaining theory offers three

determinants of intergovernmental bargaining power. The first of three is

‘unilateral alternatives and the threat of non-agreement:’ If there exist

unilateral alternatives in a country, it is likely to threaten non-agreement on

26 James A. Caporaso, “Toward a Normal Science of Regional Integration,” H. Wallace et al., “Review Section Symposium: The Choice for Europe: Social Purpose and State Power from Messina to Maastricht,” Journal of European Public Policy, Vol. 6, Issue 1 (1999), p. 162.

27 Ibid., pp. 162-163.

28 Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (New York: Cornell University Press, 1998), pp. 60-62.

19

negotiations, thereby bargaining power rising.29 Bargaining power over

threats of non-agreement comes from asymmetrical interdependence: while a

government is dependent on internal trade, the other is less dependent.

Germany and Britain at that time had their own unilateral alternatives to the

agreements on cooperative negotiations, which therefore led counterparts to

accept their preferences: the monetary integration agreement embraced the

demand of German’s low-inflation standard; and as British interests, foreign

policy options of other members were restricted.30

Other examples are related to negotiations over agricultural prices

and industrial markets. In the agricultural price policies, French producers

with lower prices were highly interested in access to German markets which

were profitable well but protected at the high price level. In that case,

Germany had more bargaining power than France, thereby leading the

common EU price level to the relatively high German level.31 In contrast, for

industrial markets, other members except Germany had bargaining power,

because Germen markets at that time were already open and less interested in

the forthcoming industrial market.32 If Germany wanted to keep its market

29 Andrew Moravcsik (1993), op. cit., pp. 499-500.

30 Ibid., p. 501.

31 Andrew Moravcsik and Frank Schimmelfennig, op.cit., pp. 77-79.

32 Andrew Moravcsik (1993), op. cit., pp. 501-502.20

open, its government was forced to agree with negotiations over industrial

goods; namely, Germany had no unilateral policy options over industrial

negotiations.

The second one is ‘alternative coalitions and the threat of exclusion:’

While unilateral alternatives threaten non-agreement over negotiations, there

is a government that tries to avoid the threat of exclusion in the case of that it

calculates benefits from an agreement or from alternative coalitions joined,

because the exclusion is likely to create negative policy externalities, say,

losing market confidence.33 In the 1950s-60s, Britain at first refused to join

the Common Market. After the British government continued to fail to

implement its own strategies for neutralizing the Common Market, it could

no longer afford to deny the EC membership.34 So did it again in negotiations

over the Single European Act.

Now, the final determinant of interstate bargaining is ‘side-payment and

linkage at the margin.’35 National preferences are various and differential

across issues. That is the forthcoming problem. Linkage is a main strategy to

33 Andrew Moravcsik (1998), op. cit., p. 64.

34 Andrew Moravcsik, (1993), op. cit., p. 503.

35 Ibid., p. 504.21

overcome the problem: how to link issues to institutions. The biggest obstacle

to the linkage strategy is the domestic opposition. In order to turn the

opposition’s eyes away, linkage should be placed under the limited

circumstances: minor issues, package deals at the margin, closely related

issues, and losses compensated by side-payments.36 In the 1950s and 1960s,

while the French industrial markets were opposed to the Common Market,

actually at that time the French industry’s opposition was trivia.37 However,

here is a criticism about considering linkage issues that package deals like

transport and postal services concluded with constitutional changes like a

series of Treaties, not intergovernmental bargaining.38 Yet, there is also a

rebuttal of that view: the criticism ignored the fact that constitutional changes

resulted from the way of intergovernmental negotiations.

As for outcomes, through previous two stages, the theory of liberal

intergovernmentalism is expected to conclude with a certain level of

supranational institutions. However, the process of outcomes tends to come

under criticism that this theory is ignoring the importance of the theory of

36 Ibid., pp. 505-506.

37 Ibid.

38 Fritz W. Scharpf, “Selecting Cases and Testing Hypotheses,” H. Wallace et al., “Review section symposium: The Choice for Europe: Social Purpose and State Power from Messina to Maastricht,” Journal of European Public Policy, Vol. 6, Issue 1 (1999), p. 167.

22

neo-functionalism that emphasizes the roles of supranational institutions.39

Yet, in that the outcomes rely on relative powers with domestic preferences

stemming from the liberal approach, liberal intergovernmentalism seems to

be more realistic and predictable. So, the residual tasks point to the way of

measuring and increasing relative powers.

In order to strengthen relative powers, governments are required to

approach in two ways. First, an increase in the efficiency of interstate

bargaining is necessary.40 Unlike the normal functional regime theory, which

focuses on reducing transaction costs with lowering uncertainty, the liberal

intergovernmentalist approach leads member states to delegate or pool

sovereignty about decision-making. If potential gains from cooperation are

greater, the level of uncertainty about the details of delegations and pooling

decisions is higher, and the level of political risk for governmental leaders is

lower, then delegated or pooled sovereignty will be more efficient.41 As a

result, a collective decision-making will be concluded.

When the efficient intergovernmental bargaining is guaranteed,

39 James A. Caporaso, op.cit., p. 163.

40 Andrew Moravcsik (1993), op. cit., pp. 507-508.

41 Ibid., pp. 509-510.23

delegated or pooled sovereignty is determined in three forms: a third-party

representation, an increase in agenda-setting power, and neutral enforcement.

42 First of all, a third-party representation features a neutral agent, common

positions for linkage issues, and even a right to scrutiny. For example, the

European Commission is representing the European Union in international

negotiations and is responsible for scrutiny whether the Treaties are

implemented. Secondly, as long as either an initiative is attractive to

individual governments or the status quo is unattractive to them, agenda-

setting power is likely to increase, thereby leading to collective decisions,

say, in the EU, telecommunications or environmental policy. Finally, member

states allow supranational institutions to implement neutral enforcement in

order to overcome the possible breakdown of negotiations. For example, the

European Court of Justice is responsible for interpreting and enforcing EC

laws at that time.

As for the second point of relative powers, an increase in the

autonomy of national political leaders should be considered. The autonomy

relies on overcoming domestic oppositions under a ‘two-level game,’ which

is formed in two ways according to the theoretical framework of liberal

intergovernmentalism: an increase in domestic political legitimacy over

42 Ibid., pp. 511-512.24

governmental policy initiatives on the one hand, and an increase in domestic

agenda-setting power over them on the other hand.43 Based on the two-level

game, if supranational institutions give the domestic legitimacy to the

governmental initiatives, which in turn can be independent of the domestic

political pressure, then domestic agenda-setting powers become increasingly

greater, and therefore the initiatives will be taken.

In contrast to the two-level game, it has been argued that

supranational institutions, once established, could have a monopoly on

decision-making rules as well as an autonomy of enhancing the integration

process.44 Instead of an emphasis of ‘what happened,’ however, if the trend in

‘why happened’ is concentrated, then national political leaders would be

more influential in the integration process than supranational agents.45 In the

1950s, when the industrial trade liberalization prevailed in Europe, according

to the legitimacy granted by the EC, the French officials were more in favor

of modernizing the French industry than its expected increase in exports to

German.46 In the 1980-90s, anti-inflationary policies achieved the political

43 Ibid., p. 515.

44 Donald J. Puchala, “Institutionalism, Intergovernmentalism and European Integration: A Review Article,” Journal of Common Market Studies, Vol. 37, No. 2 (1999), p. 318.

45 Ibid., p.328.

46 Andrew Moravcsik (1993), op. cit., p.516.25

legitimacy from the EC, thereby leading to low costs of domestic economic

disciplines within member states.47 Later the legitimacy with respect to the

macroeconomic policies came to be one of main factors leading the European

monetary integration.

47 Ibid.26

3. Implications on Regional Integration Process

By the mid-1970s it was obvious that neo-functionalism was one of big

prominent theories in international relations that explained the process of the

European integration and predicted the future of it. According to ‘spillover’

effects as a key determinant of measuring and predicting the European

integration process, various and scattered views of a certain issue in

European countries were expected to converge into a single and common

field, leading to spillover effects on other issues, thereby encouraging and

accelerating the integration progress in Europe. Unlike the expectations,

however, spillover effects of the European integration lost momentum, and

sometimes negotiations on the integration process reached an impasse. For

example, in the middle of the monetary union process, negotiations failed to

make Britain join a circle of the process. Due to slow and twisted

negotiations and unexpected outcomes, instead of strengthening neo-

functionalism, liberal intergovernmentalism by Moravcsik was developed.

While the debates between neo-functionalism and liberal

intergovernmentalism still remain, the contributions to the mix of liberal and

intergovernmental sides are expected to move the debate into a constructive

27

dialogue in three ways. First, while initial theories of a regional integration

consider geopolitical ideology and national identity as indispensible

ingredients, liberal intergovernmentalism focuses on instead only economic

interests, thereby leading to the possibility of the regional integration

stemming from rational behaviors.48 Affected by historical backgrounds or

unexpected and sudden events, ideological perspectives can’t guarantee

current activities as well as possible outcomes. However, a set of common

economic interests at least can give some guarantees to secure explanatory

activities based on the assumptions of rational actors.

Secondly, contrary to neo-functionalism on the emphasis of necessary or

irreversible spillover effects, liberal intergovernmentalism is emphasizing

deliberate or calculated developments of the regional integration progress.49

Based on spillover effects of neo-functionalism, supranational institutions are

looking forward to playing an important role to create and strengthen

common policies among members, while just dreaming on the future desires.

In contrast, according to the Moravcsik’s theory, governments are important

to shed light on variations in institutional outcomes.50 As accounting for the

48 Todd Alan Good. “Review of Moravcsik,” http://www.h-net.org/reviews/showrev.php?id=4515. (Search date: Sept. 2, 2013)

49 H. Wallace, op. cit., p. 159.

50 Andrew Moravcsik (1993), op.cit., pp. 478-479.28

extent to which members in the integration process negotiate about certain

common issues and lead current activities, liberal intergovernmentalism may

review how they reach the cooperation or coordination to generate

institutional outcomes.

Finally, the regional integration deals with various phenomena and

relations among member countries. In order to take into account calculable

and predictable outcomes among a variety of cooperative activities, the

regional integration process should be parsimonious. In this respect, rather

than strengthening neo-functionalism, the combined theory of liberal

intergovernmentalism on the basis of both the liberal approach and

intergovernmental bargaining would be more reasonable.51 As a result of

considering above three views of the implications, the combined theory can

reach expected and rational approaches to the regional integration process.

Accordingly, even this approach can be considered one that possibly

generalizes the analysis in terms of the regional integration process with the

Moravcsik’s theory. With the help of efforts to unveil the implications, the

liberal intergovernmentlist approach is expected to make explicit

interpretations and evaluations in terms of the ongoing Asian economic

integration process stemming from the ASEAN+3 counties cooperation.

51 Ibid., p. 480.29

Chapter IV. The Liberal Intergovernmentalist Approach to ASEAN+3

1. Assumptions

Prior to details about the ASEAN+3 cooperation based on the theory of

liberal intergovernmentalism, basic assumptions are required to support a sort

of a parsimonious model in order to shed light on the development process of

the ASEAN+3 cooperation and its outcomes. First of all, considering

backgrounds of this theory, governments as rational actors should be assumed

as well. When facing negotiations, governments are expected to choose one

that maximizes utility with less costs and more benefits under specific

circumstances featuring governmental interests as well as differential relative

power between governments.

The second assumption for ASEAN+3 cases is about unit of

analysis. This study limits unit of analysis to four units: South Korea, China,

Japan and ASEAN. Before ASEAN+3 Summits, since 1967 ten countries of

ASEAN have been already discussing regional issues such as economic

growth, peaceful responses to geopolitical and historical differences and

30

regional stability.52 While formal ASEAN Summits continued to discuss and

resolve intra-regional issues, ASEAN members were forced to strengthen and

expand their idea, because their discussion showed no sign of feasible joint

statements of the Summits. As a result, thanks to the regional financial shock

in 1997, ASEAN began to collaborate with Plus Three countries with respect

to financial issues.

Third, when it comes to the assumption of excluding external

interventions including the IMF as an international institution or the United

States as one of super powers, the analysis of intergovernmental bargains

would be more parsimonious than expected. Actually, according to

Moravcsik’s work, the regional integration process is under controls of

intergovernmental bargaining among only member countries, except external

influences. That’s because the feasibility of negotiations relies on the

legitimacy of domestic political leaders or the degree of domestic opposition,

not external or third-party’s interventions.

52 “History,” http://www.asean.org/asean/about-asean/history. (Search date: Nov. 9, 2013)31

2. Two Stages: National Preferences and Interstate Bargaining

According to the principle of theory of liberal intergovernmentalism,

the regional cooperation process corresponds to two well-constructed stages

including national preferences and interstate bargaining. Prior to interstate

bargaining, following discussions on possible national preferences in

ASEAN+3 in two ways of geopolitical and economic interests, shared

national preferences will be formed. Next, the process of interstate bargaining

will be divided into three ways: the threat of non-agreement, the threat of

exclusion, and side-payment and linkage at the margin. During discussions

on two stages, the range of unit of analysis will be limited to four units based

upon above assumptions.

2.1. National Preferences in ASEAN+3: Geopolitical or Economic

Interests

Prior to the formation of national preferences with respect to the

liberal theory, it is required to see that what kinds of preferences can reach

32

common interests within ASEAN+3. Despite the assumption of rational

actors, here are some questions. Can geopolitical perspectives reach a certain

shared level? Out of various economic interests, what kinds of ones will be

narrowed down to the level of common positions among members? In the

course of negotiations on cooperation or coordination with respect to

geopolitical and economic perspectives, primary concerns will be discussed.

While geopolitical interests will include debates about military alliances and

settlement for territorial disputes, economic interests will deal with debates

about nightmare of the 1997 financial crisis and foreign reserves

accumulation.

2.1.1. Geopolitical Interests in ASEAN+3

Military Alliances

For military alliances in Asia, it is obvious that impacts of the United

States—allying with South Korea, Philippine and Japan—would be great. In

this study, however, based on the assumptions and the theory of liberal

intergovernmentalism, external intervention influences like the U.S. will be

exempted. When it comes to the military cooperation in Asia, interests of 33

military alliances have seldom collected into a certain common position in

the past and now.

John J. Mearsheimer is skeptical of the trend in the rising China, as

arguing that the China’s growing regional hegemony in Asia would be likely

to raise tensions between China and an anti-China balancing coalition

including South Korea and Japan.53 According to the 2003 US Department of

Defense report, in the early 2000s, while emphasizing economic

developments as a top priority, China also regarded the military

modernization as one of primary concerns not only to secure its rising

economy but also to enhance the regional predominant power in Asia.54

Accordingly, instead of military alliances with Japan and other Asian

countries, China continues to check the Japan’s growing military operations

as well as any signs of the resurgent militarism in Japan, on the one hand; in

other Asian regions, Beijing seeks to counterbalance challenges of Southeast

Asia to differing claims with respect to military issues as contributing to

economic supports, on the other hand.55

53 John J. Mearsheimer, “China’s Unpeaceful Rise,” Current History, Vol. 105, No. 690 (2006), p. 162.

54 Department of Defense, “Annual Report On The Military Power Of The People’s Republic Of China,” http://www.defense.gov/pubs/2003chinaex.pdf, p. 14. (Search date: Nov. 9, 2013)

55 Ibid., p. 15.34

Territorial Disputes

Since the 1972 normalization of diplomatic relations in China and

Japan, the degree of two countries’ tensions has been moving up and down.56

For example, due to a series of Japan’s violence such as disputes about a

distortion of Japanese history textbook or attempts to a new permanent

member of the UN Security Council in 2004, anti-Japanese sentiments in

China surged.57 Contrary to the tensions, later political leaders of two sides

contributed to efforts to revive two countries’ relations.58 However, when it

comes to territorial issues between two countries including the

Senkaku/Diaoyu islands dispute—Japan’s sovereignty claims to uninhabited

islands in East China Sea,59 their diplomatic tensions were by no means

healed. Especially since the 2010 Chinese incursion with respect to territorial

waters, fishing rights and even military rivalries, the islands dispute has been

fueled as adding conflicting public opinions of both sides.

56 Sheila A. Smith, “Japan and the East China Sea Dispute,” Orbis: A Journal of World Affairs, Vol. 56, Issue 3 (2012), p. 371.

57 Jung-Ho Bae, Recent China-Japan Relations and Analysis of Conflict Factors, Vol. 2005-12 (Seoul: Korea Institute for National Unification, 2005), pp. 3-5. [in Korean]

58 Sheila A. Smith, op.cit., p. 372.

59 A group of the islands is named ‘Senkaku’ in Japanese, while named ‘Diaoyu’ in Chinese.35

There are also rising tensions in the South China Sea between China

and four ASEAN members—the Philippines, Brunei, Malaysia, and Vietnam.

With China’s claims to maritime boundaries, the tensions largely stem from

three conflicting reasons: first, the South China Sea provides a part of crucial

routes for maritime trade such as energy supplies of oil and natural gas; the

second one is the perception that undiscovered oil reserves may be deposited

near the South China Sea;60 and third, it is related to the food security of

fishing catches.61 Although in 2002 ASEAN and China led the Declaration on

the Conduct of Parties in the South China Sea including a provision of

putting aside the islands dispute, the features of non-binding agreements

made the tensions fail to be calmed down.62

Despite the Japanese illegal and brutal occupation of the Korean

Peninsula from 1910 until 1945, after the period, economic relations between

both countries have been rising. However, two countries also face territorial

disputes of Dokdo (Takeshima) islands, although South Korea has occupied

60 While the U.S. estimated the area holds around 11 billion barrels (bll) of oil reserves and 190 trillion cubic feet (Tcf) of natural gas reserves, China did approximately 125 bll of oil and 500 Tcf of natural gas. See “South China Sea,” http://www.eia.gov/countries/regions-topics.cfm?fips=SCS. (Search date: Nov. 11, 2013)

61 Clive Schofield, “Increasingly contested waters? Conflicting maritime claims in the South China Sea,” http://nsc.anu.edu.au/documents/occasional-5-brief-2.pdf. (Search date: Dec. 4, 2013)

62 Ibid., pp. 19-20.36

and controlled effectively Dokdo islands for a long time. According to a

study of Ralf Emmers, if Japan were to admit Korea’s sovereignty to the

islands and at the same time Korea were to permit a Japanese access to

resources surrounding the islands, the Dokdo dispute and their conflicts

would disappear.63 Yet, as long as there exists the importance of relation

between territory and economic interests, and even the historical deep

animosity remains, the Dokdo (Takeshima) islands dispute is unlikely to be

resolved.

63 Ralf Emmers, “Japan-Korea Relations and the Tokdo/Takeshima Dispute: The Interplay of Nationalism and Natural Resources,” RSIS Working Paper, No. 212 (2012), pp. 23-24.

37

2.1.2. Economic Interests in ASEAN+3

Nightmare of the Financial Crisis

The prevention of the future financial crisis in Asia is one of main

concerns among ASEAN+3 members. The repercussion effects from the

1997 financial crisis proved that the regional financial issues were of concern

to not only ASEAN but also Plus Three countries. When the financial crisis

started from Thailand at that time, instead of further contagion of the crisis

within ASEAN regions, its impact reached South Korea as passing through

Indonesia. Despite the continuous contagion to other continents except Asia,

the regional impacts of the crisis were substantial (see Figure 1, 2, and 3).

The financial crisis started from one or two countries, but ASEAN and +3

countries all struggled from economic instabilities, thereby leading to high

unemployment or domestic political instabilities, say, the former Indonesia

President Suharto was under pressure to resign after the crisis. From this

desperate experience, avoiding another financial crisis undoubtedly becomes

one of shared concerns in Asia.

Figure 1. Exports of Goods and Services [Billion US$ ] 38

SOURCE: UNCTADstat Database (Search date: Nov. 11, 2013)

Figure 2. Imports of Goods and Services [Billion US$]

SOURCE: UNCTADstat Database (Search date: Nov. 11, 2013)

Figure 3. Nominal GDP [Billion US$]

SOURCE: UNCTADstat Database (Search date: Nov. 11, 2013)

NOTE: In Figure 1 to 3, right after the 1997 crisis, in 1998 ASEAN and Plus Three

countries recorded decreases in exports, imports and nominal GDP.

39

Foreign Reserves Accumulation

It was obvious that the financial crisis resulted from various reasons

including liquidity issues, structural problems, or large current deficits.

Among them, according to some studies, if the countries—South Korea,

Thailand and Indonesia—suffering from liquidity crises were guaranteed to

be aided prior to sudden shocks, a series of bankruptcies in 1997-98 might

have been avoided.64 Those countries in liquidity crises were forced to be

under later bailout packages with IMF bailout and its conditionality: in South

Korea $57 billion, in Thailand $20.1 billion, and in Indonesia $40.1 billion.65

One of primary indicators showing the liquidity crisis was a high

ratio of short-term foreign debt to foreign reserves: in 1996 South Korea

recorded around 195% of the ratio, Thailand 110%, and Indonesia 167%

respectively (see Figure 4). Given a sense of powerlessness of self-help

mechanism stemming from liquidity crises, it might be reasonable that

accumulating foreign reserves of mainly dollars was now of primary interests

to countries in liquidity risks for the sake of their own safety net (see Figure

64 Chalongphob Sussangkarn, “The Chiang Mai Initiative Multilateralization - Origin, Development and Outlook,” op. cit., p. 2.

65 Michael Bordo and Anna J. Schwartz, “Measuring real economic effects of bailouts: historical perspectives on how countries in financial distress have fared with and without bailouts,” Carnegie-Rochester Conference Series on Public Policy, Vol. 53, Issue 1 (2000), p. 104.

40

5). So, the impact of the 1997 crisis led ASEAN+3 to accumulate

increasingly foreign reserves. Fiercely struggling from the lack of short-term

foreign reserves in need, South Korea accumulated the reserves increasingly

from $20 billion in 1997 to $96 billion in 2000 at the initial time of the CMI,

a more than 4.5 times increases. The rest of members accumulated the

reserves as well. During the same period of Korea, as for the reserves

accumulation, ASEAN increased over 1.2 times ranging from $145 billion to

$187 billion, China did around 1.2 times ranging from $236 billion to $276

billion, and Japan 1.6 times ranging from $220 billion to $356 billion.

Actually the trends in the incremental accumulation have continued; in 2012

South Korea recorded $323 billion, ASEAN did $791 billion, China $3.6

trillion, and Japan $1.2 trillion respectively. For the sake of strong liquidity

support mechanism in the future financial crisis, common interests of

accumulating foreign reserves resulted in bilateral and multilateral swap

agreements under the CMI and the CMIM.

41

Figure 4. Ratio of Short-term Foreign Debt to Foreign Reserves [%]

SOURCE: “Asian Development Bank, Key Indicators 2001,” quoted in

Chalongphob Sussangkarn, “The Chiang Mai Initiative Multilateralization -

Origin, Development and Outlook,” op. cit., p. 2.

NOTE: Prior to the 1997 financial crisis, in 1995-96, above three countries faced

more than 100% of ratio of short-term foreign debt to foreign reserves.

Figure 5. Trends in Foreign Reserves Accumulation in ASEAN+3 [Billion US$]

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

NOTE: Since 1997, ASEAN+3 countries tended to increase the accumulation of foreign reserves.

42

2.1.3. National Preference Formation in ASEAN+3

Before entering negotiations for the cooperation progress, national

preferences should be converged in advance and the convergent preferences

would be formed in terms of shared interests among members. Based upon

the assumption of rational actors and specific experiences like the regional

financial crisis, instead of geopolitical interests including military alliances or

settlements for territorial disputes, economic interests are likely to lead

members to join the negotiation table. In Asia experiences of the regional

financial shocks generated the shared interests of both avoiding the potential

financial crisis and accumulating foreign reserves, which in the next section

would be the medium of interstate bargaining.

43

2.2. Interstate Bargaining with Asymmetrical Interdependence in

ASEAN+3

Grounded on national preference formation in ASEAN+3, the

forthcoming cooperation process corresponds to ways of interstate bargaining

in which governmental leaders or even domestic interest groups play an

important role. However, interstate bargaining of liberal

intergovernmentalism is considered under asymmetrical interdependence

among members participating in negotiations. Accordingly, the bargaining

process is divided into three steps: the threat of non-agreement, the threat of

exclusion, and side-payment and linkage at the margin. Based upon

asymmetrical interdependence, each unit of analysis will join a step of

interstate bargaining corresponding to its own features of the unit.

44

2.2.1. The Threat of Non-Agreement

China

According to some experts, China feared that, just before the CMI

creation, the Japan’s regional leadership was expected to rise with the help of

both a future regional institution likely led by Japan and a superpower status

as the second largest of the world economies at that time. China didn’t want

to lose the regional leadership against Japan.66 In addition, thanks to annual

GDP growths of around 10 percent, China wanted to increase the size of

regional markets including South Asian countries. Adding to that, during the

period of the 1997 financial crisis, as part of efforts to raise its trust in Asian

countries, China promised them not to devalue its currency of the renminbi.67

The China’s pledge seemed to be trustful at that time. The kinds of desires

and efforts in China was alleged to help form the ASEAN+3 cooperation

later.

However, there was little evidence that the ASEAN+3 economic

cooperation fueled the economic increase in China. Instead, China has been

66 John D. Ciorciari, op.cit., p. 928.

67 Takashi Terada, op.cit., p. 266.45

earning the growth benefits from not only the traditional leverages such as

labor-abundant economies and commercial relations with Hong Kong,

Taiwan and Southeast Asia, but also the market transition.68 While China’s

trade openness—total trade as % of GDP—recorded less than 40% in the

1990s, after a new WTO membership in 2001 as well as a series of trade

policy reforms regarding trade liberalization, its trade openness rose to over

50% in 2003, exceeding 60% in 2005.69 Actually the devaluation was not of a

primary interest to China throughout the 1997-98 crisis. Due to the sustained

current account surplus including large demands from the United States,

China had less pressure on devaluing the renminbi. Chinese officials were

instead worried about the loss of confidence possibly stemming from the

devaluation.70

Thanks to economic developments and the regional experience of

the Asian crisis, China was also eager to accumulate foreign reserves

incrementally. With the help of efforts to accumulate the reserves and stick to

the open economy, China pioneered its own way to fight the future financial

68 Barry Naughton, The Chinese Economy: Transitions and Growth, (Cambridge: The MIT Press, 2007), pp. 6-8.

69 “Asian Development Bank, Economic and Financial Indicators 2013,” http://www.aric.adb.org/integrationindicators. (Search date: Oct. 31, 2013)

70 John Kirton, “The G7 and China in the Management of the International Financial System,” http://www.g8.utoronto.ca/scholar/kirton199903/. (Search date: Oct. 31, 2013)

46

crisis regionally and globally (See Figure 6 and 7). As for the reserves

accumulation, while China accounted for just 14% of the world and 38% of

ASEAN+3 countries in 2000, its shares increased to 32% of the world and

61% of ASEAN+3 in 2010.

Figure 6. Ratio of China’s Shares of Foreign Reserves in the World [%]

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

Figure 7. Ratio of Foreign Reserves within ASEAN+3 [%]

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

Although China paved the road for sustaining and more increasing

47

its economy, the regional leadership was increasingly a serious concern to

China. From lessons of the United Kingdom in the 1800s and the United

States in the late 1900s, a rising economic power would be enough to lead the

country to favor a regional or global hegemony, for example, as inducing a

membership of a certain community like an ideal of globalization or the

World Trade Organization (WTO). In this respect, my way of China without a

membership in Southeast Asia will not be able to guarantee to raise the

regional leadership.

Considering China’s perspectives including complex interests within

ASEAN+3 countries, their negotiations have been coordinated towards the

way of relatively soothing the China’s concerns. In 2000, the CMI just

welcomed China to join ASEAN+3 members. During the CMI era, the degree

of China’s contributions to BSAs relied on the China’s will. Later in 2010,

the CMIM concluded with relatively the lightened burden of the funds in

China, compared with a portion of GDP and foreign reserves respectively

among thirteen members: while China’s GDP and reserves within ASEAN+3

accounted for 42% and 61% respectively, its contributions to CMIM shared

just 32% even including Hong Kong.

As reducing the funds’ burden and participating in the sustained

ASEAN+3 cooperation, China seemed to hold guarantees for both the 48

economic stability and the regional leadership. But it doesn’t mean that the

cooperation in Asia would be concentrated on the rising China’s power as a

Samuel Huntington’s opinion.71 Instead, while China might threaten the

exclusion of non-agreements, a membership of the ASEAN+3 cooperation

would be required to secure China’s interests regionally and internationally.

2.2.2. The Threat of Exclusion

Japan

Right after the 1997 financial crisis, the former Japanese Vice

Finance Minister, Sakakibara Eisuke, proposed building the AMF including

regional foreign reserves of $100 billion, which could be utilized effectively

when members were in danger of liquidity. At that time, however, the

proposal failed, due to the oppositions of mainly the U.S., whose worries

were the possibility of undermining the IMF roles such as IMF-conditioned

loans, and China which feared an increase in the potential regional leadership

in Japan and a decrease in the US-China relations before joining the WTO.72

71 Samuel P. Huntington, “The Clash of Civilizations?” Foreign Affairs, Vol. 72, No. 3 (1993), pp. 27-28.

72 John D. Ciorciari, op. cit., pp. 927-928.49

Nevertheless, Japan continued to seek an increase in the regional

leadership. In 1999, during ASEAN+3 Summit Meeting, the former Japanese

Prime Minister Keizo Obuchi announced the so-called ‘Obuchi Plan’ of the

plan for enhancing Human Resources Development and Human Resources

Exchanges in East Asia, which continued to develop after the 2000 CMI.73

Mr. Obuchi added other suggestions including a trilateral meeting among

South Korea, China and Japan apart from ASEAN+3 Summits and an

introduction of the ASEAN+3 Foreign Ministers’ Meeting in order to

underpin the concrete ASEAN+3 cooperation.74 Yet, Japan’s proposals all

didn’t seem to be successful. The field of foreign policies didn’t go to the

further explicit ASEAN+3 cooperation like the CMI, because foreign affairs

were seldom easily cooperated towards the specific shared issues, even

resulting in bitter enemies between China and Japan, South Korea and Japan,

or China and South East Asia.

Despite contrasting foreign policies, Japan’s efforts for financial

negotiations continued to develop. From lessons of the failure of the earlier

and impatient AMF proposal, Japanese officials instead supported the long-

term and sustainable plans to improve the ASEAN+3 cooperation. As

73 Takashi Terada, op. cit., pp. 267-268.

74 Ibid.50

providing technical assistance to training and seminars for financial officials

in Asia, Japan backed down on the burden of China’s funds and a tension

between China and Japan over how to involve Hong Kong as a member of

ASEAN+3.75 After Japan included China as a member of the CMI in 2000,

compared with the China’s size of foreign reserves accumulation, the less

burden of funding was attractive to China when the CMIM was created.

When it comes to the issue of the Hong Kong involvement, as Japan

accepting China and Hong Kong as ‘the co-equal contributors,’ the 2009

ASEAN+3 cooperation concluded with the CMIM: Japan sharing 32% of the

total $120 billion; and China with Hong Kong 32% as well. With a serious of

Japan’s efforts and concessions, while ASEAN+3 Summits continue to reflect

advances to a concrete and regional institution, Japan seeks to continuously

hold the opportunity for the potential regional leadership.

ASEAN

ASEAN countries also were eager to stockpile foreign reserves to

ensure counterbalancing the potential crisis due to the experience of the 1997

Asian financial crisis (see Figure 8). ASEAN countries increased the level of

75 Richard Pomfret, “Regionalism in the Asia-Pacific region: How wide, How deep?” The Journal of the Korean Economy, Vol. 10, No. 3 (Dec. 2009), p. 293.

51

foreign reserves to $671 billion in 2010 by more than three times, from $187

billion in 2000. Considering the size of the reserves accumulation, however,

ASEAN all together relatively stockpiled smaller than China, because the

size of the economy and the annual growth rate in ASEAN was not sufficient

to meet a certain reasonable level to fight the future liquidity crisis without

help of Plus Three countries. Although in 2010 the level of the reserves

accumulation rose over three times than in 2000, the ASEAN portion of the

reserves within ASEAN+3 reduced to 13% in 2010 from 20% in 2000 (see

Figure 7). Given growing economic interconnectedness and accordingly the

rising size of potential financial shocks, the reduced portion of ASEAN

shares would be enough to lead Plus Three countries to join a new ASEAN+3

community.

In addition, the cooperation progress of ASEAN members was not

strengthened than expected, instead leading to an air of uncertainty of the

ASEAN itself cooperation. One of primary reasons about the uncertainty

stemmed from divergent interests within ASEAN regions, often based on

differing political backgrounds. There were either conflicts between

democratic countries like the Philippines and Thailand and authoritarian

countries like Vietnam, or debates about the rule for possible problem

52

solutions between interference and non-interference perspectives.76

Figure 8. Trends in Foreign Reserves in ASEAN [Billion US$]

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

Given both their small economic size compared with huge and

complex world economy, and non-shared interests in consolidating the

ASEAN itself cooperation, a new attempt was required to keep maintaining

the idea of a regional cooperation and a counterbalance to potential financial

shocks. Considering the economic size and regional interests, the attempt to

cooperate with Plus Three countries was necessary to not only deal with

possible external influences but also enhance the degree of the regional

cooperation. In this context, as joining and sustaining a membership of

ASEAN+3, ‘the threat of exclusion’ is expected to be reduced.

76 Richard Stubbs, “ASEAN plus three: emerging East Asian regionalism?” Asian Survey Vol. 42, No. 3 (2002), pp. 447-448.

53

South Korea

South Korea had an experience of shocks from liquidity crisis during

the 1997 crisis and therefore was forced to be under IMF conditionality

programs. Figure 4 showed how desperate Korea was in 1995-96 before the

financial crisis. Out of three IMF-supported countries, in 1996 Korea

recorded the highest of a ratio of short-term foreign debt to foreign reserves;

while in 1996 the Korea’s ratio had 195.4%, that of Indonesia and Thailand

had 167.2% and 110.3% respectively. Due to the struggled experience, South

Korea has been also eager to accumulate foreign reserves to counterbalance

external financial shocks (see Figure 9). Compared with of $20 billion of the

reserves at the time of the 1997 crisis, the amount of the reserves continued

to rise by more than four times in 2000 ($96 billion), over seven times in

2003 ($155 billion), and around ten times in 2010 ($292 billion).

Figure 9. Trends in Foreign Reserves in South Korea [Billion US$]

54

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

In addition, South Korea has been traditionally an export-led country,

which is highly likely to be influenced by outside impacts (see Figure 10).

The total trade volume including imports and exports has been over 50

percent of Gross Domestic Product (GDP). The trade volume continues to

increase and in 2008 starts to reach over 100% of GDP, which means that the

Korea’s economy highly relies on external economies, thereby likely to be

more vulnerable to potential external shocks than before. Out of total trades,

the volume of exports has been bigger than that of imports. However,

considering the ratio of exports to GDP, say, less than 50% of GDP in the late

2000s, extra safety net would be required. Moreover, even though Korea

continues to increasingly accumulate foreign reserves, the degree of the

reserves has been ranging from 20 to 30 percent of GDP. Given less than a

half share of exports of GDP, self-help efforts to counter potential external

shocks would be limited.

55

Figure 10. Trade Volume and Foreign Reserves of GDP in South Korea [%]

SOURCE: UNCTADstat Database (Search date: Nov. 3, 2013)

NOTE: The graph shows the ratio of exports, imports, total trades of exports and

imports and foreign reserves compared with GDP from in 1997 to in 2012.

In this respect, South was required to participate in a new and

explicit cooperation community. Based on regional shared interests with

respect to avoiding the future financial crisis as well as ambitions to foreign

reserves, Korea was also interested in the regional cooperation in ASEAN+3.

Contrary to conflicting geopolitical issues, economic and financial issues

tended to face less domestic oppositions to the cooperation with China and

Japan. Indeed, continuous threats to possible liquidity crisis encouraged

Korea to participate in the ASEAN+3 cooperation.

2.2.3. Side-payment and Linkage at the Margin

56

According to liberal intergovernmentalism, it is important to identify

the extent to which members finally make an agreement. If happens, the

agreement points to the tipping point of negotiations. In order to ensure

finalizing interstate bargaining, it is required to review the extent to which

national preferences would be possible to induce less domestic oppositions. It

depends on how minor national preferences are. While interstate bargaining

takes place, relatively minor issues at the domestic level may reach linkage at

the margin among members in order to get the tipping point. If it is necessary,

side-payments or compensations will be required in order to sustain and

develop the regional cooperation .

Linkage at the Margin

Normally, trade fields like tariff or quota tend to generate serious

domestic oppositions by particularly interest groups or parties of, say,

agricultural unions or labor unions. In that sense, negotiations on trade fields

are unlikely to be minor issues. In contrast, foreign reserves are controlled by

central banks through mechanism of sterilization.77 Instead of domestic 77 Sterilization refers to actions taken by central banks, where are willing to neutralize the effect of foreign exchange operations on the domestic money supply. For example, when capital inflows happen and in turn inflation or currency appreciation are expected, through open market operations as selling government bonds to decrease the money supply, the effects can be neglected. See Paul Krugman, Maurice Obstfeld, and Marc Melitz,

57

interests groups, governments’ political leaders are able to influence on the

level of the foreign reserves accumulation. If a country’s economy is

dependent on exports or external economies, controls on exchange rates

would be of an interest to politicians of the government. Currency

depreciation of a country can make the value of its currency more

competitive, which means that its products become more cheaper than those

of other countries in international market, thereby generating increases in

exports, and for currency appreciation, vice versa. Considering the lack of

natural resources, less advanced economic systems, and huge population

compared with lands, Southeast Asian countries tend to lean on export-led

economies.

In this context, grounded on national preferences including avoiding

the future financial crisis and ambitions to foreign reserves, interstate

bargaining in ASEAN+3 faces relatively less domestic opposition, which

means that common issues formed by national preferences are domestically

minor. With the combination of less domestic oppositions and shared

experiences of the past crisis, their primary economic interests within

ASEAN+3 could be closely related as reaching linkage at the margin.

International Economics, 9th ed. (Boston: Pearson Education, 2011), pp. 497-498.58

Side-payments

Through the process of linkage at the margin of interested issues,

ASEAN+3 countries are likely to reach a certain level of cooperation. But,

there is a reminder that interstate bargaining is grounded on asymmetrical

interdependence. Negotiations are often dependent on relative powers; a

country gaining relative power is highly possible to lead a conclusion

favorable to its interests, compared with counterparts in negotiations.

However, this context cannot apply to every bargaining. Even though the

large power is able to draw more advantageous agreements, extra efforts are

required to develop more concrete and converged coordination or

cooperation. The efforts depend on the extent to which less relative powers

could be compensated. Although small powers want and need to cooperate

with big ones, if they detect the larger losses than expected or recognize little

guarantees from the cooperation, the agreements are possible to be broken

down. In this respect, in order to prevent small countries from withdrawing

from the cooperation, a series of side-payment could be a possible option to

be considered.

In the case of ASEAN+3 negotiations, in 2009, when the CMIM was

developed from the CMI, an attempt to compensate smaller countries was

implemented. Under $120 billion as the total size of the CMIM, borrowing 59

rules were defined as including extra compensations as a result of members’

agreements. Borrowing multiples of Japan and Korea are equivalent

respectively up to 0.5 times or 1 times of their financial contributions to $120

billion. On the contrary, some of ASEAN like Indonesia and Thailand are

capable of borrowing up to 2.5 times their financial contributions, whereas

smaller members like Vietnam and Cambodia are allowed to borrow up to 5

times their contributions.78 As a result of side-payment, borrowing multiples

of ASEAN can reach at least more than 1 times individual contributions.

Although there exists another borrowing rule that borrowing funds are

limited up to 20% of the available funds without an IMF program in 2010,

the attempt to side-payment is so far enough to sustain the negotiation and

cooperation in ASEAN+3. As for developments of the ASEAN+3

cooperation, increases in contributions and side-payment should be

considered continuously.

78 “The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting in 2010,” Annex 1, op.cit.

60

3. Outcome: Institutional Choice in ASEAN+3

As a result of previous two stages for the cooperation, depending on the

theory of liberal intergovernmentalism, outcomes would be institutional

choices. Negotiations on the ASEAN+3 financial cooperation resulted in the

CMI and later evolved into the CMIM, which could be regarded institutional

outcomes in terms of the pooling funds based on respectively bilateral and

multilateral swap arrangements among members. The rules of lending,

borrowing and the accompanying voting power generated primary concerns

about the funds management. The extent to which those rules have been

negotiated would be depending on the level of the efficiency of interstate

bargaining and a two-level game. The two-level game relies on both domestic

political legitimacy for national preference formation and domestic agenda-

setting powers for the implementation of governmental initiatives. In

addition, discussions on regional and independent surveillance mechanism

would also be part of institutional outcomes in ASEAN+3

3.1. From the CMI to the CMIM: the efficiency and a two-level game61

According to results of the CMI and the CMIM, debates about the

funds were concentrated. It seems to be reasonable to understand the debates,

because the key to explaining two initiatives lies in recognizing how to lend

or borrow the funds, based on BSAs in the former and MSA in the latter. As

starting with each swap arrangement, ASEAN+3 have been continuing a set

of negotiations ranging from managing the funds to establishing a

surveillance unit. In this chapter, negotiations on the management of the

funds would be focused. How to divide the degree of the contributions to the

funds among members? How to share the contributions to the funds as

allowing borrowing rights? How to share voting powers under the CMIM?

Who will get a bigger voting power? At a macro view, those are key debates

about the management of the funds: lending, borrowing, and decision-making

or voting power.

Based upon the theory of liberal intergovernmentalism, outcomes

would be considered with both the efficiency of interstate bargaining and a

two-level game. The efficiency of interstate bargaining depends on whether

to increase potential gains from cooperation and the level of uncertainty, and

whether to decrease the level of political risk for governments, which

therefore is likely to lead to delegation system or pooled sovereignty. The 62

two-level game is composed of domestic political legitimacy and domestic

agenda-setting power.

Lending and Borrowing Rules

Considering perspectives to less domestic oppositions and less

potential financial shocks, the increase in contributions to the funds granted

domestic political legitimacy and domestic agenda-setting power to members

in need. The growing total size of the funds are expected to lead domestically

direct or indirect effects of accumulating foreign reserves, which likely make

an impact on potential gains from the cooperation. According to the features

of BSAs and MSA, the CMI and the CMIM determined individual shares of

contributions to the funds, namely, shares of the lending funds. However, as

for the fact that contributions are trivia compared with the total foreign

reserves of each government, the political risk will be lower than expected.

Detailed explanations will be followed with related data.

The CMI was grounded on the BSAs under the agreed total size of

the funds, which continued to rise through annual ASEAN+3 financial

meetings (See Figure 11). The increase in available lending funds means

rising borrowing funds of countries in need. In 2009 and right before starting

63

the CMIM, the agreed total size of BSAs among members reached $90

billion and, if extra $2 billion of ASEAN Swap Arrangement was included,

increased to $92 billion.79

Figure 11. Agreed Total Sizes under the CMI [Billion $US]

SOURCE: “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers’

Meeting in from 2003 to 2009,” op. cit.

NOTE: Under the CMI, the total size was decided based on finally explicit

agreements between members, instead of earlier agreed plans. Apart from BSAs,

$1 billion of the ASEAN Swap Arrangement (ASA) in 2001 was included and

doubled to $2 billion in 2005. If ASA was included, the total size of BSAs would

be $92 billion in 2009, before starting the CMIM.

At that time, the increase in the total size might be acceptable

because each governmental share of contributions was quite trivia in

comparison to the total foreign reserves that each government held (See

79 “Network of Bilateral Swap Arrangements (BSAs) under the Chiang Mai Initiative (CMI),” http://www.mof.go.jp/english/international_policy/financial_cooperation_in_asia/cmi/CMI_0904.pdf. (Search date: Nov. 15, 2013)

64

Figure 12). The total size of BSAs in 2009 accounted for merely 2.04% of the

total foreign reserves, around $4.5 trillion, deposited in central banks in

ASEAN+3. Even as for Japan which funded $44 billion, the largest

contributions (48%) under the CMI, the share of the reserves deposited in

Japan’s central banks accounted for just 4.3% (See Table 1). The trivial

shares led to the small burden of lending funds as effecting on less political

risk of the cooperation.

Figure 12. Lending Funds Shares of Total Reserves in ASEAN+3 in 2009 [%]

SOURCE: “Network of Bilateral Swap Arrangements (BSAs) under the Chiang

Mai Initiative (CMI),” op. cit., and UNCTADstat Database (Search date: Nov. 3,

2013)

65

Table 1. Lending and Borrowing Funds and Share of Total Funds in 2009

China (with

Hong Kong)Japan Korea ASEAN Total

Lending [bn US$]

(Shares)

16.5

(18%)

44

(48%)

18.5

(20%)

13

(14%)

92

(100%)

Borrowing [bn US$]

(Shares)

7

(8%)

15.5

(17%)

23.5

(25%)

46

(50%)

92

(100%)

SOURCE: “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers’

Meeting in 2009,” op. cit., and UNCTADstat Database (Search date: Nov. 3, 2013)

In 2009, a milestone of the Joint Ministerial Statement of the

ASEAN+3 Meeting was an advance to a multilateral reserves pooling

mechanism from a bilateral mechanism, as developing the CMI

Multilateralization.80 While since 2000 ASEAN+3 have been developing the

funds under the CMI and now the CMIM, they continue to reaffirm that

developing swap agreements is necessary to sustain their cooperation and

prevent the future financial crisis in advance. As a result, the multilateralized

total size of the funds has been increasing from $120 billion in 2009 to $240

billion in 2012, which later is likely to continue to rise.

As introducing the multilateral pooling mechanism, the CMIM faced 80 Chalongphob Sussangkarn, “The Chiang Mai Initiative Multilateralization - Origin, Development and Outlook,” op. cit., p. 8.

66

challenges to the way of how to distribute shares of both lending funds as

contributions and borrowing funds. As long as the political risk is not serious

as much as domestic oppositions, the agreements on distributing the burden

of funding are likely to be accepted. In order to encourage members to

continuously sustain and develop the cooperation, lending and borrowing

rules were decided at a certain reasonable level. Under the BSAs of the CMI,

China tended to pursue passive aspects about increasing contributions

compared with Japan, whereas the pooling scheme of the CMIM led China to

agree with the increased level of China’s shares of contributions to the funds,

which almost corresponds to the level of Japan’s shares: $38.4 billion in 2010

and $76.8 billion in 2012 separately (See Figure 13).

Figure 13. Shares of Lending Funds [%]

SOURCE: “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers’

Meeting in 2009, 2010, and 2012,” op. cit.

Borrowing rules were also mediated to a certain legitimate level (See

67

Figure 14). The CMIM agreements are allowing ASEAN to borrow 50%

from the total funds that are similar shares corresponding to available

borrowing funds under the previous CMI. South Korea can get similar

borrowing shares in proportion to China and Japan, about 16% of total funds,

despite less contributions than the rest of Plus Three.

Figure 14. Shares of Borrowing Funds [%]

SOURCE: “The Joint Ministerial Statement of the ASEAN+3 Finance Ministers’

Meeting in 2009, 2010, and 2012,” op. cit.

As a result, in the process of developments of lending and borrowing

rules, the CMIM seems to be on the way to the explicit and apparent

cooperation. In that sense, the level of uncertainty about the pooling

decisions becomes low. In addition, the level of lending funds is trivia in

comparison to foreign reserves deposited in ASEAN+3 central banks, thereby

leading to lower political risk for governmental leaders than expected and

greater potential gains from the cooperation. In this context, domestic

68

political legitimacy can be granted and in turn domestic agenda-setting power

is likely to grow.

Decision-making or Voting Power

As creating the mutilateralized CMI with a reserves pooling scheme,

decision-making process based on voting power started to be considered.

While BSAs under the CMI were mainly determined by bilateral agreements,

the CMIM and its related issues would be determined by consensus, which

gave rise to voting power debates, say, who will get higher voting power? or

how to soothe smaller countries? Japan wanted to set the voting power rule in

proportion to contributions to funds. But the Japan’s proposal was likely to

trigger resistance of ASEAN due to smaller shares of contributions than Plus

Three.81

In the 2010 Joint Ministerial Statement of the ASEAN+3 meeting,

voting power was divided among members as granting voting shares

grounded on the combination of both basic votes of uniformly 1.6 and

financial-contributions-based votes. (see Figure 15). Although all members

were granted uniformly 1.6 votes, basic votes were so small that additional

81 John D. Ciorciari, op. cit.,pp. 939-940.69

votes based on contributions were enough to be determinants for the finalized

voting power.

Figure 15. Shares of Contributions and Voting Power in 2010 [%]

SOURCE: “The Joint Ministerial Statement of the 13th ASEAN+3 Finance

Ministers’ Meeting in 2010,” Annex 1, op. cit.

Accordingly, a consensus approval concluded with a two-thirds

majority rule. Plus Three countries all together account for 71.59%, more

than two-thirds, which may be another fear that ASEAN countries can

imagine. If Plus Three countries are willing to make an agreement to lead a

certain rule such as strict conditionality or changes in borrowing rules, their

voting shares are enough to introduce new policies interested in only +3

countries, regardless of voting shares of ASEAN.82 However, this scenario

will not be likely to happen soon. First of all, without ASEAN, the CMIM

82 Chalongphob Sussangkarn, “Note on Chiang Mai Initiative Multilateralization (CMIM),” http://policydialogue.org/files/events/Chalongphabs_Note.pdf. (Search date: Nov. 15, 2013)

70

has no explicit momentum to implement the ASEAN+3 cooperation towards

the Asian economic integration. Second, considering the historically residual

animosity among China, Japan and Korea, their cooperation by only Plus

Three will not be easily negotiated. In addition, given a rising regional rivalry

between China and Japan, under the rule of 2/3 majority, South Korea may be

likely to hold a casting vote if it is necessary. As a result, the current rules in

terms of voting power may lead to less political risk.

3.2. Surveillance Mechanism

As for a self-help support mechanism pursuing the well-constructed

regional cooperation, a strong surveillance system is necessary. In order to

sustain and consolidate the CMIM towards the reliable regional cooperation

unit, it should be guaranteed that borrowers pay back the borrowed funds. For

the purpose of securing the system, a surveillance unit should be introduced

as including the functions of the early risk-detecting mechanism and ex post

remedial actions for economic shocks. Actually due to nightmare of IMF

conditionality after the 1997 financial crisis,83 ASEAN+3 have been focusing

83 John D. Ciorciari, op. cit., p. 944.71

on developments of surveillance system “to monitor and analyze regional

economies in order to contribute to the early detection of risk, swift

implementation of remedial actions, and effective decision-making of the

CMIM.”84

Despite the recognition of the necessity for the regional surveillance

system, efforts to create regionally independent surveillance system are not

yet successful. In 2000, after recognizing the need for self-help mechanism,

ASEAN+3 began to negotiate in order to introduce Economic Review and

Policy Dialogue (ERPD) as a surveillance system.85 Although they made

efforts to strengthen the ERPD process as discussing a monitoring of capital

flows and an early warning system, without strong willingness to actions, the

ERPD could not afford to sustain the surveillance system. Instead of critical

and constructive approaches to improving the ERPD process, annual

meetings were merely restricted to conventional discussions including the

formal questions and answers.86 In addition, member countries tended to be

84 “The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting in 2010,” op. cit.

85 Haruhiko Kuroda and Masahiro Kawai, “Strengthening regional financial cooperation in East Asia,” PRI Discussion Paper Series, No. 03A-10 (2003), p. 15.

86 Jennifer A. Amyx, “A regional bond market for East Asia? The evolving political dynamics of regional financial cooperation,” Pacific Economic Papers, No. 342 (2004), p. 7.

72

reluctant to submit official data or reports as facing political sensitivities.87

Later in 2010 when the CMIM was introduced, ASEAN+3 agreed with

official plans to create an ASEAN+3 Macroeconomic Research Office

(AMRO) as a regional and independent surveillance unit under the CMIM.

AMRO is not a new type of surveillance mechanism, but instead ASEAN+3

believe that the approach to using and developing the former ERPD process

will help strengthen the surveillance mechanism.88 Despite efforts to enhance

surveillance, as long as the AMRO’s authority fails to lead submission of

periodic surveillance reports, the strong surveillance will not be guaranteed

again. Accordingly, unless AMRO staffs are insulated from political

pressures, the future of AMRO will be nothing but a verbal discussion. As a

result, the surveillance mechanism is expected to generate the stabilization of

potential gains, whereas the possibility of political risk or high political

sensitivity is unlikely to guarantee prospective developments of AMRO.

87 John D. Ciorciari, op. cit., p. 945.

88 “The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting in 2010,” op. cit.

73

Chapter V. Conclusion

The theory of liberal intergovernmentalism seeks to explain the

process of the regional integration based on the principle of basic

assumptions, two stages and outcome. As applying the theoretical framework

to the ongoing ASEAN+3 cooperation process, this study sets the analytical

background under the circumstances with respect to ASEAN+3 negotiations.

For the assumptions, governments are regarded as rational actors; unit of

analysis is limited to four units of ASEAN, South Korea, China and Japan;

and accordingly, this study would be parsimonious.

Before inducing the institutional choice in the regional integration

process, two stages are necessary to be considered: as a demand side, national

preferences on the one hand; and as a supply side, interstate bargaining on the

other hand. According to national preferences in ASEAN+3, economic

interests are likely to be collected into a certain shared level than geopolitical

interests. In the case of ASEAN+3, nightmare of the financial crisis and the

foreign reserves accumulation could be decided as shared interests among

members. Interstate bargaining is composed of three bargaining strategies.

China is taking an advantage of the first strategy of ‘the threat of non-

74

agreement’ towards joining the ASEAN+3 membership. The rest of units of

analysis rely on the second one of ‘the threat of exclusion.’ Lastly, interstate

bargaining with asymmetrical interdependence would be compensated by the

last strategy of ‘side-payments and linkage at the margin.’

As a result of the process of demand and supply sides by two stages,

outcomes are expected to become a form of institutional choice under the

principle of both the efficiency of interstate bargaining and a two-level game

endorsed by domestic political legitimacy and domestic agenda-setting

power. After the CMI came into effect in 2000 based on bilateral swaps, the

CMIM recently developed into the level of a multilateral reserves pooling

mechanism including the rules of lending, borrowing and voting power. As

for the CMIM, greater potential gains and less political risk are expected.

Accordingly, the results of the CMIM are likely to go along with gains of

domestic political legitimacy and domestic agenda-setting power. On the

contrary, for the surveillance process, political sensitivities are likely to be

higher. As for a strong surveillance unit, therefore, domestic political

legitimacy and agenda-setting power are unlikely to be given easily.

75

As applying the theory of liberal intergovernmentalism to the case of

the ASEAN+3 economic or financial cooperation, this study reviews the

extent to which the Asian economic integration process is noteworthy.

National preferences of the ASEAN+3 cases result in some points of shared

interests. Based on asymmetrical interdependence, each unit of analysis has a

motivation to join the ASEAN+3 cooperation. Although negotiations on

surveillance mechanism have been slow in progress, outcomes of the CMIM

and its accompanying collateral agreements like voting rules could be

definitely a substantial issue towards the future of the Asian economic

integration.

Despite those remarkable results of a theoretical analysis regarding

the Asian economic integration process, some limitations are challenged. The

first limitation stems from the basic theoretical framework of liberal

intergovernmenalism. Unlike the assumptions, external influences such as the

IMF and the U.S. could not be neglected in the process of the regional

cooperation in Asia, because of closely interconnected network of the

international economy and the high level of the U.S. clout in the Asian

regions. Actually, borrowing rules have a limitation on the available

borrowing funds. When borrowers face the sudden liquidity problem, as of

2012 the CMIM allows borrowers to borrow the funds by up to 30% of funds

76

without an IMF program.89

The second one is relevant to differences between examples of the

theory application. While countries in the European integration case are all

democratic, some of ASEAN+3 countries are not democratic such as China

and part of ASEAN like Vietnam and Myanmar, where it would be hard to

measure or consider the degree of domestic oppositions to ASEAN+3

cooperation issues, namely national preferences. The third is also related to

the theoretical framework of an emphasis of governmental activities,

especially by political leaders. In democratic countries, roles of the election

system and domestic political parties could not be ignored, because public

opinions about conflicting issues tend to be reflected through the election

system.

Nevertheless, this study of the theoretical investigation of the

ongoing Asian economic integration process gives some directions towards

the explicit regional integration in the future. As analyzing the degree of

interstate bargaining by member states, the liberal intergovernmentalist

approach suggests the future study in order to accelerate the Asian integration

89 “The Joint Ministerial Statement of the 15th ASEAN+3 Finance Ministers and Central Bank Governors’ Meeting in 2012,” op. cit.

77

process, for example, the way of reducing political risk. Especially, the

feasibility of strong regional surveillance mechanism is likely to intensify the

regional integration process.

78

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