June 15, 2006
JS-4323

Remarks by
Under Secretary for International Affairs
Timothy D. Adams
at the World Economic Forum- East Asia
Panel on Asia’s Financial Integration:
A Miracle in the Making?

Tokyo, Japan--Thank you for this opportunity to speak on this panel.  East Asia has made incredible progress since the Asian financial crisis.  The East Asian region is of critical importance to the global economy and to the U.S. Treasury.  The last few years have seen an intense discussion of financial sector reform and regional financial initiatives in Asia.  It is clear that what comes out of this discussion will be important both for the region, and for the global economy and financial system.

I wish to organize my remarks today around four topics:

I. The U.S. view of Asian regional financial initiatives
II. Where we see real value in regional financial initiatives
III. Those initiatives that raise questions for us
IV. Our efforts to reform the governance of the international financial institutions – which would increase the representation of Asian countries.

To begin, I want to emphasize that growth and stability in the region are of great importance to the U.S. and global economies.  Five of the America's largest trading partners are from East Asia, while three of the world's four largest economies (on a purchasing power parity basis) are in the region.  Regional economic integration is an important factor contributing to this regional dynamism.  Intra-regional trade reached over 40 percent of total trade in 2005, up from 30 percent in 1990, a level comparable to that reached in the NAFTA. 

Second, we are convinced that financial sector reform and opening are critical to sustaining East Asian growth.  The Asian Financial Crisis in 1997 underlined the importance of strong, developed, and well supervised financial markets.  And a variety of studies have clearly shown that countries with open, well-developed financial markets grow faster than countries that do not.  Regional financial initiatives that encourage economies to reform and strengthen domestic financial systems – and particularly those that encourage development of domestic bond markets – are extremely valuable.  We also see merit in sustaining and strengthening the international financial architecture, and we therefore support regional cooperation that is consistent with multilateral frameworks.

Where do we see regional financial initiatives that contribute to domestic financial sector reform?  The Asian Bond Markets Initiative (ABMI) is one example.  The ABMI has encouraged the development of securitization and credit ratings agencies, as well as improvements in listing and disclosure requirements.  I applaud efforts by the region's finance ministers and central bankers to develop domestic markets for local currency bonds.  As we know from emerging market crises, well-developed local currency bonds reduce the risks from currency mismatches and shield economies against balance sheet vulnerabilities.  Establishing the Asian Bond Fund 2 and working on ABMI have encouraged structural improvements such as the loosening of restrictions on nonresident bond issuance and investment and also the liberalization of foreign exchange administration rules.

But, some developments do give me pause.  Specifically, we see room for further clarity on the Chiang Mai Initiative (CMI).  Too little is known by the markets or by borrowers about amounts available absent IMF adjustment programs, and the conditions, if any, CMI creditors would impose.  More clarity on these issues would aid an assessment of the CMI's compatibility with the international system.

With respect to an Asian Currency Unit (ACU), there has been some confusion about the U.S. position on this topic.  The ACU is an index of currencies, a way to gauge movements of currencies in the region vis-à-vis each other.  We do not see the ACU as a competitor to the dollar, any more than we see the JP Morgan exchange rate indices as a competitor to the dollar. We believe that greater exchange rate flexibility is desirable for the region, but are open-minded as to whether that involves currency cooperation within the region.  We view proposals for Asian currency cooperation with interest, although wide differences across Asian economies suggest that a common currency may be difficult to achieve for some time.

But I do want to underscore our strongly-held belief that greater exchange rate flexibility is in the interest of large economies of the region and beneficial for the region as a whole.  Since they abandoned pegged exchange rates during the Asian crisis, several Asian economies have been able to achieve sustained growth and price stability with inflation-targeting monetary policy regimes and flexible exchange rates.  South Korea stands out as an example.  We encourage other large Asian economies to continue their efforts to move to greater exchange rate flexibility.

I also wish to emphasize our position that Asia, along with other regions contemplating integration initiatives, must not tear down intra-regional walls only to erect new ones that exclude the rest of the world.  Closed regionalism would have negative implications for the region, given the continued importance of the extra-regional economies – particularly the United States – to trade and capital flows in the region.  Open regionalism can – and is clearly more likely to – benefit regional and extra-regional actors alike.

Finally, I want to emphasize that we are also working to make international financial institutions more reflective of the current state of the global economy and thereby more responsive to their members.  In particular, the IMF's governance structure should ensure that every member has a voice, with each country's vote scaled to reflect its weight in the world economy.  The world economy has evolved considerably in the past decades, and the IMF structure should reflect these changes.  An IMF that better reflects its members would be more effective in its operations, in part because its legitimacy would be enhanced. 

To this end, we have been urging a fundamental overhaul of the IMF's governance structure to increase the Board representation and quota shares of fast growing emerging markets, many of which are in Asia.  This process will take time and cooperation from other members, particularly in Europe, but we hope to achieve the first step at the meetings in Singapore in September. 

In closing, allow me to summarize my points.  First, we support outward-oriented Asian regional economic integration.  Second, we think that financial sector reform and opening is critical to sustaining Asian growth.  The emphasis that Asian regional financial initiatives have put on domestic financial market development – particularly domestic bond market development – is particularly welcome and valuable.  Third, we think it's important that Asian regional financial initiatives complement and strengthen the multilateral framework.  And finally, we believe that the governance of the international financial institutions should change to reflect the realities of the current global economy.  We are actively working to bring these reforms about, and they would result in greater representation and voice for Asian countries overall.