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

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

By

Major in International Relations

GRADUATE SCHOOL OF INTERNATIONAL STUDIES,

SOGANG UNIVERSITY

December2013

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

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 toASEAN+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

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

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

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

Abstract

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+3cooperation,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 economic interests with respect to the 1997 Asian financial crisis, liberal intergovernmentalismassesses 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

1

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 tremendousfinancial 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 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 surveillancemechanism, a theoretical analysis of the cooperation is necessary, because the results of the analysis arelikely to show a series of directions towards the future of the regional economic integration.

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 couldnot afford to consider developing the initiative without external and western clouts. Accordingly, it would bea long way to gowith many problems including, of course, the IMF approval mechanism and aweak 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]

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 collaborationmay 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] 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 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 cannotaddress 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 key question that which theory of international relations and to what extent it can explain the Asian economic integration processin 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 AndrewMoravcsik’s liberal intergovernmentalism can explainthe 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.

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 findingsincluding implications and limitations.

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,SakakibaraEisuke, 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 theJapan’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 swapsbetween members. The total size of the BSAs began to expand as of 2002 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 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.

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 overcomesensitivity 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 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.

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 systemin international relations. Even if the EUcould 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.

Under the above assumptions, the theory of liberal intergovernmentalism can explain the context of causes, negotiations and results with respect totheregionalcooperation 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.

2. Empirical Research Example: The European Union

AndrewMoravcsikcontributed 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 thenegotiating 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]