REGIONALISM AND EAST ASIA: WITHER ASEAN AND WELCOME ASEAN+3
...ows, thus increase in global economic welfare. It is believed that because regionalism concerns few countries, it is able to achieve more of these gains than possible within a larger group (Fukase and Martin, 2001). Feet dragging by EU and U.S at WTO on issues of farm subsidies, tariffs and quotas and various NTBs continue to hurt Asian trade to those regions and slow progress at WTO. Although AFTA as a smaller group has been able to even fast-track liberalization ahead of initial target, have moved beyond tariff reduction to greater cooperation, and trade within the region has increased. Regionalism diverts trade from the international system, and rules of regionalism contradict international free trade regimes. The exact effect of PTA’s depend on the modus operandi of the particular PTA, and according to ADB (2001), although PTAs can facilitate trade between members and non-members as well, the increased trade amongst members are often at the expense of non-members—a trade diversion. Increased trade within East Asia can be seen at the expense of declining exports to U.S and EU vindicating the argument that trade is not created but diverted. However, statistical evidence on this argument is not conclusive, (See Table.1, and Annex-VI). The discriminatory and preferential treatment offered to members over non-members of AFTA conflicts with the MFN provisions of WTO. This brand of regionalism creates protective inward-looking blocs, and inter-bloc competition and rivalry will stifle and undermine global trade liberalization. Here again, although statistical evidence shows that bulk of global trade being transacted within regional groups, the positive or negative effect on world trade in the absence of regional groups cannot be determined. It is better for smaller and less developed countries to pursue free trade, as a member of a regional group rather than going it alone through the multilateral system. The smaller and less developed economies of AFTA like Cambodia, Laos and Myanmar are given special status under AFTA (Fukase and Martin, 2001): more flexible and extended deadline for tariff reduction, opportunities to learn from the know-how and expertise of other members, and developmental assistance both financial and non-financial for building infra structure and legal institutions. Regional forum can be a training ground for members to advance negotiation tactics, and members have stronger bargaining position as a member of a group than they would as individuals. A positive in the view of ADB (2001) for ASEAN is that the disparity in economic development, structure and to a lesser extent resources—criteria for facilitating specialization and therefore greater exchanges within the region. Disparity within regional groups prevents members gaining equal benefits, and the group think hurts multilateral negotiation. The lower level of investments in productive economic sectors and education, lack of infrastructure and weak institutional frameworks, and a general lack of economic activities amidst continued civil strife have rendered countries like Cambodia, Laos, and Myanmar to embark integration from the lowest rungs of regional economic ladder in ASEAN. For these reasons, these countries will not be able to reap much benefit from AFTA as compared to other members. The more developed members will be able to exploit this situation to their advantage while the weaker ones will continue struggling to catch up. Besides individual countries having to sacrifice some of their national interests to fall in line with the group, group dynamics are also hampering multilateral negotiations. Symmetry of socio-cultural and economic factors can speed up regional free trade. Member countries of AFTA lie in the same geographical region and have similar physical characteristics, including productive natural resources, seasons and natural environment. Although not strictly homogeneous, with the influence of Buddhism, Confucianism and Islam, there are certain values inherent cultural values generally referred to as Asian values. These values—including respect for authority and seniority, consensual decision-making, importance of family structure, avoidance of communal disharmony at any cost, and priority of group interest over individual rights—defines the attitude towards one another thus helping forge closer cooperation. Proponents of regionalism argue that these features make regional groupings more coherent and therefore the best vehicles ( ADB, 2001) to pursue free trade. Symmetry of economic factors makes regional countries competitors rather than collaborators. Critics of regionalism argue that since countries of the same region, as in AFTA, possess similar economic resources, it is likely that they would be good at producing similar services, raw materials and products. They also argue that this situation makes the region better suited to trade with the outside world as there would be little demand for the regions outputs within the region. International and regional politics warrant close regional economic cooperation. Recent political events around the globe have proved that economically and militarily powerful nations can impose their will on the weak. Similarly the war on terrorism and unilateral military action by individual countries on other sovereign states has made regional security an important global concern. The philosophy that has historically connected economics and war seems to be still relevant (Choosing…2003)-. Modern history’s worst wars have been tied to economic issues over other reasons. Closer regional economic connections will deter and minimize the incentives to wage war within the region. In fact regional forums like the annual meeting of ASEAN foreign ministers, ADB (2001) believes are important avenues for communication and although no formal dispute settlement mechanism exists, the forum provides an opportunity for discussing them. Similarly, the need to protect existing economic relations will force regional countries to work together to ensure security form terrorism or other nations. From Mercosur to ASEAN regional economic cooperation have helped deter eruption of regional hostilities. In fact ASEAN, ADB (2001) says is a classic case in this sense. Regionalism can be compatible with Multilateralism. The main justification for multilateralism lies in the equation that open trade leads to increased economic welfare. While stressing this point, WTO laments that the exceptions provided under WTO for forming RIAs are becoming the rule, and dismantling of national trade barriers are being compensated with the erection of new regional barriers. However, in recent times WTO has become more pragmatic about regionalism, and is especially upbeat about the emerging concept of ‘Open Regionalism’—currently embraced by Mercosur and APEC. Besides being part of this process within the framework of APEC, AFTA itself is also moving toward more open regionalism; where it has previously rejected Australia’s request to join the group, it is networking through FTAs with countries beyond the region (e.g. India). Gradual convergence of world economies through ‘Open Regionalism’ may provide the most promising path to global free trade. These arguments and their supporting evidence seem to fare more positively on the merits of regionalism than its demerits. Against the background of these arguments, and from the pattern in the upsurge of regionalism, it can also be probed if and how relevant the ‘Spaghetti Bowl’ of regional networks will remain in future international trade. PART-II ANALYTICAL DISCUSSIONS CURRENT TRENDS IN THE PROLIFERATION OF REGIONALISM While economic regionalism is not a new trend, considering that the oldest existing RIA in Europe was established in 1958, the proliferation RIAs during the past two decades are intense and thought-provoking. The evolution of regionalism (as discussed in Part-I) are evident in the emerging brands of regionalism. And this development has not been limited to a specific economic or geographic hemisphere but is global, and the momentum continues to gather pace. Although the quantity of RIAs has multiplied, there is great disparity in their quality in terms of advancement. While some have advanced to Customs Union (Mercosur) and Economic Union (EU), most are at FTA (AFTA, NAFTA etc.) level and yet others have been stuck at the PTA level (SAPTA) or remain mere talk shops (ACP—72 members). By analyzing the features of existing RIAs across the globe, the existence of a specific trend and its rationale can perhaps be ascertained. Since EEC in 1958 and upto 1980, there have been relatively few RIAs and the majority of them provided reduction of tariffs and quotas, and opening of markets for trade in goods, were geographically based ad shaped by regional politics, and the economies of members had similar features. Since 1980, RIAs have increased by several folds in all regions of the world and their features show fundamental differences from the old RIAs. They cover beyond tariffs and quotas and can include services, harmonization of rules and standards, freer flow of money, people and ideas. Besides, the members need not have similar economic features or level of development (eg Mexico in NAFTA). Since 1995 and the formation of WTO, there has been an explosion in RIAs, especially in bilateral ones. The rush to forming bilateral FTAs within and outside regional blocs also underscores the diminished importance of geographical proximity and are facilitated by e-commerce and elements of globalization. Increasingly, the newer RIAs are also at odds with the multilateral system prompting WTO to label them as a threat to global free trade. Perhaps the most important developments in recent manifestations of RIAs are the depth of integration, rate and scope of expansion and changing legal or institutional nature of the emerging RIAs. The newest RIAs cover nearly all trade related areas, although some sensitive sectors of the economy are still protected. Not only have the global trading system seen the highest increase of RIAs in the past few years, existing geographic blocs are also forming FTAs with individual countries within and beyond he region and in some cases merging with other blocs. Institutionally, most RIAs within a bloc are being governed by supranational legal entities formed by the bloc. Rather than individual, common policy stands and members’ interests are represented and negotiated by the bloc at international forums including at WTO. These trends and features are not exceptions but rule as can be seen from around the globe including East Asia. In Europe, the EU is not only expanding within Europe encompassing Easter European countries, but also negotiating cooperation with Mediterranean and North African states, and has already concluded transatlantic dialogue mechanism, ASEAN and Europe Meeting (ASEM), while individual countries can also form bilateral arrangements. In Americas NAFTA, Mercosur, Andean and Pact etc, may soon be merged to form FTAA to encompass all except communist Cuba. NAFAT members are also members of APEC, and individual countries the RIA in America have already formed bilateral FTAs US-Sin, Chile-Korea etc. In East Asia, ASEAN members are also common membership with APEC as well as ASEM. And ASEAN as a bloc is negotiating FTAs within and outside the region. While ASEAN has already concluded FTAs with China, Japan AND South Korea within East Asia, it is also negotiating for an FTA with India. All the while some member countries are aggressively pursuing bilateral FTAs lie Singapore-Us Singapore-Australia, Malaysia- Japan?? This tangled web of RIAs with conflicting interests, of many different rules will according top some analysts create confusion and increase cost of transactions—the ‘Spaghetti Bowl’ effect. In fact, multilateral negotiations are seen as the battlegrounds for these groups and are making the WTO ineffective. The failed talks in Cancun and continued stalemate ti proceed the Doha agenda are result of inter rivalry between developed and less developed countries on issues like agricultural subsidies (EU, U.S) and labor standards, environment, intellectual property issues etc. Nonetheless not recent developments are gloom. WTO lauds the new concept of ‘Open Regionalism’ under the convergence of blocs and where they have agreed to simultaneously reduce tariffs for non-members. Despite this positive outlook for open regionalism, the impact of RIAs in general still remains a controversy (de Melo and Panagiriya, 1992). And irrespective of what these new developments will lead to in terms of global trade liberalization under WTO, regionalism is a currently the trend across the globe. Some of the arguments for RIA s are very sound and may well find itself a home in East Asia, giving a new boost to making the Aean+3 initiative a reality. FROM ASEAN TO ASEAN+3 The changing landscape and dynamics of RIAs also reflect certain facts and inevitabilities in the global political economy. On one hand global trade and economic relations including multilateral trade talks are dominated by regional groupings with 2/3rd of world trade taking place within RIAs. On the other, while there is merit in the notion that with globalization, economics shape politics rather than vice versa (e.g. China), the influence of politics impacting economic relations should not be ignored (How China…2003). In fact they go hand in hand. It follows then that the bigger or stronger a group is economically and politically, the better placed it is to reap economic benefits to individual members as well as the group as a whole. When this logic is applied in the context of East Asia, the rationale for greater regional integration—the scenario of Asean+3 replacing ASEAN—comes in full view as the overwhelmingly sound option for the region. DIMINISHING IMPORTANCE OF ASEAN ASEAN as a body for regional cooperation has been in existence over thirty years and achieved progress in many spheres of common interest. Similarly, ASEAN’s free trade initiative AFTA launched in 1992 have progressively reduced tariff levels to near elimination with six founding members reaching full implementation of 0%-5% target effective January 1, 2003 (Mukherjee, 2003). Others will follow suit in 2004 (Vietnam), 2006 (Laos and Myanmar) and 2008 (Cambodia). Frameworks also have been established to collaborate on investments, service, intellectual property, and negotiations regarding harmonization of regulations, industrial standards and e-commerce. On the political front, except Myanmar all members have democratic systems, there are no major flashpoints between member countries and except for Indonesia and Philippines, there are no major internal security problems. Problems in these two countries are more of terrorism nature and require broad-based regional and global collaboration. Thus it would seem that although there is no limit to increasing cooperation, ASEAN has passed its prime time and there would be few if any opportunities for it achieve dramatic outcomes. The vast disparity between the original six members and the rest in terms of economic development, together with the similarity of economic factors are also diminishing the potential for any reasonable increase in intra-regional trade. Besides, ASEAN with half a billion people and US$8 billion annual trade (Cheow, 2003) is still insignificant in global economy, and is being increasingly dwarfed on the region by the now more prominent and larger bloc APEC and new economic power house, Chin. The argument that ASEAN as a single regional entity is irrelevant, is also strengthened by the renewed interest in the region by the more advanced, and larger economic and political power houses Japan, Chin and Korea. CHANGING ATTITUDES OF +3 COUNTRIES Owing to China’s slow liberalization policies in the past and self-sufficiency, and in case of Japan and Korea due to their stronger advanced level of economic development as well as the special relationship with U.S—which opposed previous ASEAN attempts for expansion—these economies have been operating from a position of strength and saw little need for integrating with the rest of Asia. And until recently, none of these countries belonged to any RIAs, and gave only a lukewarm reaction to early proposals from ASEAN for regional cooperation. In more recent times however, there has been a sea change in the attitude of the +3 countries towards ASEAN, shaped by new realities and culminating in new relationships. China’s drive for modernization coupled with the collapse of USSR and the emergence of USA as the only superpower prompted China to rethink how it responded to the world. With priority of economic development over politics and the desire to join WTO, China became more engaging especially in the region; China not only saw economic benefits of closer cooperation but also considered it a less aggressive way of boosting its political and military ambitions to counter US influence in the region, (Choosing…2003). Since the Plaza Accord of 1980s Japan had been increasing its economic relations with ASEAN, and while its trading problems with US were worsening, it was also becoming wary of China replacing it as the dominant economic power in the region (World Economic Forum, 2003). Yet, due to its tainted history in the region and not to upset US Japan moved slowly in the direction. As for Korea, closer cooperation among the regional powers and also with the rest of Asia will help not only resolve its precarious security situation but help boost its economy. The greatest impetus for closer regional cooperation may have come from the aftermath of Asian Crisis of 1997 and 9/11 terror attacks on US. Both events showed the interdependent nature of economies of the region, effects of economic and security crisis, and the need to cooperate to deal with both economic and security issues. The change in attitude and the gravitation towards close regional integration were also hastened by border global events and realities. Changing Political and Economic Landscape in East Asia: More Recent Developments On the political front, the 9/11 terror attack on US and the consequent war on terror are causing the most dramatic impacts on global political relations and establishments, since WW-II. Reversal of US foreign policies and rules of engagement are rewriting the dynamics of bilateral and multilateral relations around the globe including East Asia where profound changes are taking place in this context. In this region, China and US are shaping politics. China with its military ambitions in the region, veto power in UN, claim on Taiwan and status as a key element—being an ally of North Korea—in solving the conflict in Korean Peninsular is an imposing giant in the region. Japan with its brutality on China and Korea, aggressive behavior on the rest in WW-II and long-standing threat from North Korea could not fully trust the neighbors for its security. However, its post-war constitution and the fear of provoking historical sentiments from neighbors, Japan could not rebuild its military muscle, hence must continue relying on US. Continued military commitments in Korea and Japan, the presence of extremist Islam in the region and therefore the need to collaborate with governments of the region to fight terrorism has further increased US interest in the region. Whilst all countries have pledged to cooperate with US to fight terror countries of Asian region are divided in their support to US approach. While those with military ties with US (Japan, Korea, Singapore and Philippines) support the unilateral and aggressive US policies, others—notably Muslim-dominated Indonesia and Malaysia oppose them. On the whole, China with its clean record (on militarism) and ‘sunshine’ diplomacy, is looked upon positively over the more intimidating and aggressive U.S. On the economic front too, changes had been frantic and in tandem and close association with politics. From the petty politics of Malaysia-Singapore tilting their economic relations on and off to the use of economic leverage to positively engage North Korea and Myanmar—two thorns on East Asia’s back—can be seen in this light. From GATT to WTO, the multilateral free trade negotiations have been dominated by the hegemonies: U.S and Europe and hampered by their refusal to compromise on their strong position and double standards often imposed on the rest. This has resulted in regional blocs engaging in freer trade outside WTO, through both bilateral and region-based multilateral RIAs. EU and US are also at the forefront of this race, forcing others to follow. In East Asia, the Asian Crisis of 1997 and the realization that regional economies are interdependent and contagion effects can be devastating prompted renewed interest for regional cooperation. The US’s hands-off approach and refusal to help the affected economies during the crisis convinced the nations that their destiny must be shaped and controlled by themselves. China’s accession to WTO in 2001, its potential to provide the engine of growth for the region and the follies of over-reliance on US—which became evident after 9/11, provided further impetus for region-based economic collaboration. In the mean time, US realizing East Asia’s new bargaining power, dropped its opposition to deeper integration within East Asia and instead have begun to engage with Asean bilaterally as well as through APEC. The result has been numerous bilateral and regional FTAs, some already concluded and others on the negotiation table. INCREASING IMPORTANCE OF ASEAN+3 Certainly, these developments have made, if anything, regionalism and bilateralism the ‘in thing’ and vehicle for greater liberalization of trade across the globe. They also vindicate the arguments that WTO, like its predecessor have become too slow, plagued by in-fighting and unable to move forward-thus making regionalism more relevant and irreversible. Whether it calls for new regional arrangements or adaptation or complete shelving of existing ones must be judged in the context of the specific region. For ASEAN, it doesn’t mean total doom and the progress made thus far under ASEAN still remains relevant and stepping stones for further integration. Having said that ASEAN has lived its most productive period, its now time for its members to rethink newer directions reflective of current realities both economic and political affecting the region. Increasingly, members of ASEAN are having to rely on their neighbors especially China for economic growth (World Economic Forum, 2003). Survival of these economies lie not on competing birth cooperating with China—which is far ahead in what used to be ASEAN strengths, and most ASEAN and other global investments including threat from Japanese moving to China. China has the potential not only to flood ASEAN with cheap imports but also purchase raw materials from ASEAN to feed its insatiable manufacturing demand. China’s future consumerism will also be able to absorb most of ASEAN produce. Japan and Korea too stands to gain in similar manner, in addition to investment opportunities in China. Besides, with huge Chinese diasporas in ASEAN, not becoming part of an extend ASEAN -China economic deal would isolate and hurt both Korae and Japan. Korea and Japan being more advanced than ASEAN can still reinstate their ‘flying-geese’ style win-win development relationship but with limited potential for success. Besides, APEC with its diverse membership and views, open regionalism, US hegemony and ‘Gentleman’s Agreement’ is seen too ambitious and unrealistic. While talking open regionalism, its members are aggressively pursuing discriminatory bilateral and regional deals, like the many bilateral FTAs and US’s brainchild for the Americas, the FTAA. Therefore it makes more sense than before for East Asia to form a more cohesive regional grouping. FROM ASEAN TO ASEAN+3 AND TO ASIAN ECONOMIC COMMUNITY From the foregone discussions in this section, there are plenty of justifications and thus a clear rationale for closer and deeper integration East Asia. The question now is what form this integration should take. There are many different options for ASEAN and the choice ASEAN opts would also answer the most eminent question within policy circles that whether ASEAN is still relevant. EAFTA: A region wide FTA of 13 countries (10 members of ASEAN, China, Japna and Korea) as EAFTA (East Asian Free Trade Area). While this option would be most desirable, as it would create the world largest FTA covering 2 billion consumers and could be the stepping stone for an EU style Asian Economic Community aspired by some visionary leaders of the region. With huge developmental gaps and other disparities, reaching this goal seems cumbersome and unrealistic (Low, 1999), at this stage. Although Japan and Korea are not as keen as China for this option at present, this may very well be the future scenario and all in the region stand to gain from such comprehensive integration. And although with the huge disparity, there would be the effect of ‘hub and spoke’ effect on some members, on the whole, the gains would be far greater on the region as a whole. ASEAN+1: Forming FTAs separately with each of the +3 countries (ASEAN and China FTA, ASEAN and Japan FTA, and ASEAN and Korea FTA) China has been the most responsive to ASEAN’s overtures and has agreed to conclude an FTA with ASEAN by 2010 for 6 founding members and by 2015 for the new 4 members. ASEAN stands to gain more from the huge market than it will loose from the hollowing out effect. Although China has seen immense potential for growth in ASEAN, the more mature economies are not as keen. But the move by China has prompted Japan and Korea to follow although no dates for an FTA has been agreed yet. Besides, without bilateral or trilateral trade within the three the arrangement would not be cohesive. ASEAN+3: Thus can be achieved in two separate ways, ASEAN joining an FTA among the +3 or with a network of FTAs—in addition to ASEAN forming FTA with China, Japan and Korea individually, the +3 countries can also form bilateral FTAs at the same time. Japan being a developed economy, it would be barred by WTO rules to engage in a discriminatory bilateral arrangement with China. Japan and Korea both being mature economies, may have little to offer to each other. A network of so many different FTAs will sophisticate the processes and also have difference in tariffs and other measures, making economic transactions more costly. Thus considering that ASEAN alone is too small to make an impression at the global level, competing with China and others will continue ASEAN loosing out and the potential benefits of collaboration give compelling reasons for greater integration in East Asia. While first option is most desirable second option provides the more practical and realistic option for the time being. It will allow China to flex its economic muscles, allow Japan and Korea to move cautiously and not upset US—as different from a full-fledged FTA. The second option—as the current direction of East Asian Regionalism—will also leave ASEAN intact allowing it to further consolidate its position and ongoing projects and be a more dynamic partner in time for closer integration. Therefore, ASEAN has not become irrelevant, but less relevant with a future likelihood of obsolescence in accordance with the gradual and cautious regional integration. Besides, ASEAN is still a strong and an aggressive proponent of cooperation beyond free trade—the most notable being monetary cooperation. ASIAN BOND FUND One of the ironies of the Asian Economic Crisis had been the posthumous realization that the crisis could have been avoided altogether had the countries of the region coordinated their monetary policies and arrangements. And if there was something positive about the crisis it’s the increased potential for greater regional cooperation. Leaders of the East Asia meeting in the aftermath of the crisis in 1997 under the banner of ASEAN+3 dialogue partners to discuss the crisis were unanimous on the view that lack of discipline in international financial markets and lack of prudence in the local financial systems of the affected countries were responsible for the financial meltdown. Participants aiming to remedy the situation and to prevent future crisis pledged to establish a region-based financial system. Due to opposition from US and IMF to the idea and to Japan’s initial offer of a bailout package, the idea was reduced to forming bilateral currency swap arrangements. Despite this, the idea for a regional monetary system was set in motion. LESSONS FROM ASIAN FINANCIAL CRISIS The often shallow and quick-fix mentality of some Western journalists and theory-freak economists immediately tied the crisis to apparently chronic crony capitalism in Asia along with Asian Economic Model and Asian Values. However, the more analytical diagnosis of the crises was not so simple and proved quite otherwise. According to them although cronyism was not totally absent from the scene along with a host of other factors, the Financial Crisis which in tern caused Economic Crisis were largely caused by the unscrupulous behavior of unregulated international financial markets—including notorious hedge fund managers and facilitated by weak banking and financial institutions in the region. The Financial Crisis not only exposed the dubious tactics employed by international fund managers but also the unsustainable lending and borrowing practices by local players, the inherent danger of which were shrouded due lack of transparency. Internally, local investors were borrowing heavily from short term dollar-denominated funds to finance long term projects. Local banks were lending without proper evaluation the feasibility of projects and without securing them against collaterals. Externally, foreign investors were flooding the markets with ‘hot money’ dominating the regional financial markets and also appreciating the local currencies beyond their true value. All these were happening at a time when local financial markets without proper prudential measures or regulatory mechanisms in place, while international financial markets remained dangerously unregulated. The chain of events that followed when speculators attacked the Thai Baht was devastating and taught few lessons to Asian countries, but the hard way. 1- Fearing the impact of the reckless and speculative behavior of US-based currency traders, Thailand petitioned U.S months before the crisis, to control the speculators were unheeded by U.S authorities, suggesting they best be left to market forces. 2- A relatively minor problem of Thailand facing a current account deficit—which could have been overcome if it were allowed and without further damage—speculators seized the opportunity attack other regional currencies leading to capital flight and the contagion. 3- Although US investors had gained immensely from Asia’s open financial markets and US fund managers responsible for the crisis, US maintained an arms-length approach, refused to help the economies and instead direct them to IMF. 4- The effort led by Japan in late 1997 to remedy the situation through an Asian Monetary Fund was boycotted by US and IMF saying it will undermine IMF. 5- IMF which is often criticized as being a tool used by US and other rich Western countries came in with their strict conditionality. The cookie-cutter IMF conditions further worsened the situation. 6- With IMF action, local businesses-devalued and indebted beyond liquidity were available to US and European investors at rock bottom prices. 7- With neither the economic means nor the institutional frameworks available to either mitigate these events or to control them, the affected economies were at the mercy of IMF and foreign multinationals. The root causes of the financial crisis stemmed from the pre-crisis dynamics of financial markets both regionally and internationally. Since the lessons leaned also taught the countries, there are measure that they can take internally within the region to mitigate future crises prompted the movement towards closer monetary cooperation. THE NEED FOR CLOSER MONETARY COOPERATION Monetary cooperation, including the establishment of an Asian Bond Fund are part of the broader integration agenda that have been pursued under the Asean+3 framework. The overriding aim of closer monetary union is to prevent a repeat of the 1997 crisis, but members also feel that with closer economic integration gaining speed, monetary cooperation should also follow simultaneously to make the region more dynamic. Besides IMF, the region requires a local mechanism that will be in a better position and more willing to consider local conditions in dealing with crises. The region also needs to reduce the dependence on Western financial markets which proved detrimental during the past crisis. The region needs a better mechanism than the current bilateral swap arrangements that countries can turn to in case of severe currency shortages. Developing capital markets and issuing regional bonds would not only provide the capital regional investors need, but also make the region more attractive for foreign investors. The region also needs to find a way to better utilize the massive savings and make the reserves more broad-based than just keeping US dollars only. Asia also must take a gradual and step-by-step approach like the EU. The time may be right for Asia to move from the currency swap arrangements to an Asian Bond Fund on the way to comprehensive monetary union. POTENTIAL FOR ESTABLISHMENT OF ABF Asian Crisis has resulted in the countries reforming their financial structures and applying corporate governance and other accountability measures, among range of steps to strengthen and reform the financial apparatus that not only failed to prevent the crisis but also manage it when it happened. Traditionally, Asians save a substantial amount of their earnings and some of the East Asian countries carry huge foreign reserves normally in US Dollars, amounting to USD 40 billion in 2002. Although some countries still lag behind in financial reforms and may require making their institutions more robust for an effective bond market, the region possess the capacity for an ABF, provided that the economic powers in the region commit themselves for the endeavor. The initial attempt by Japan was rebuffed by USA, IMF and China as well in late 1997. Like other major ASEAN+3 aspiration (EAEC), U.S always has an excuse to oppose East Asian regional projects by pressuring Japan and South Korea, and as always East Asia finds a way out to anyhow achieve its goals. Unlike the Asian Monetary Fund proposal the ABF did not meet US opposition—perhaps due to the inclusion of some Pacific Rim nations or perhaps due to the realization that with China and Japan, East Asia can count U.S out. IMF too has pledged its support to the idea. Major economies of the region have already pledged to participate in the fund which will also have a rating function to boost investment credibility in the fund. With these positive developments, and the existing 13 swap agreements accounting for 33 Billion, ABF seems to be the next natural step. ...