What the US didn’t learn from the Asian Financial Crisis

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By Daniel Moss

IS the US better off trying to shape the world as party to an imperfect international accord, or as an outsider insisting on better terms?

One lesson from the Asian financial crisis of 1997-1998 ought to be: Rejecting ideas from allies merely opens the door to alternatives over which the US will have zero control. This wisdom is newly relevant, not only because President Donald Trump is chipping away at the Iran nuclear deal. Today the US frets about increasing Chinese influence in Asia and beyond — and halfheartedly toys with the idea of maybe, potentially, kinda sorta considering joining the revised Trans-Pacific Partnership.

With some emerging markets once again under pressure from a stronger dollar and rising US interest rates, there are echoes of two decades ago, when panic spread through Asian economies. Global powers responded, with mixed results. It’s worth reflecting on what worked and what didn’t, and what never got a chance to succeed.

The need for an Asian lender, independent of the Bretton Woods institutions of the International Monetary Fund and the World Bank, was apparent early in the Asian financial crisis.

When the US refused to participate in the rescue package for Thailand in 1997, beyond indirect aid through the IMF, America’s Asian allies were bitterly disappointed. The Clinton administration had just two years earlier backstopped the IMF rescue of Mexico. There was also chafing at strict conditions imposed with the IMF loans in Asia.

Japan began putting together an idea that came to be known as the Asian Monetary Fund, a fund to shore up Asian financial systems that wasn’t reliant on the approval of the US or the IMF.

Once the US got wind of Japan’s idea, President Bill Clinton’s Treasury worked overtime to kill the proposal. Faced with fierce US opposition and silence from China, Japan had to retreat, as chronicled by Stanford’s Phillip Lipscy in a 2003 review of the episode. The shattered Southeast Asian economies and South Korea were supportive, but it wasn’t enough. Japan, dependent on the US for defense and with its own economy weakening, was unable to pursue the AMF in the face of US opposition.

The US would have been better advised to let Japan run with its idea for a while. Given the close political and financial links between the two nations, Washington would have been able to exert influence on the Asian lender even though it wasn’t the Treasury department’s idea. Instead the idea of an Asian Monetary Fund died… only to be resurrected and revised by China in recent years, to suit Beijing’s agenda rather than Washington’s.

The China-led venture, the Asian Infrastructure Investment Bank, is aimed at development of poor economies rather than stability, more of an Asia-focused World Bank than a rival to the IMF. The Obama administration opposed this institution and discouraged allies from supporting it.

The Asian Development Bank, the US-blessed established lender, held its annual meeting last weekend in Manila, and officials were peppered with questions about AIIB. How would the two work together? Would Japan, a strategic client of the US and the dominant player at the ADB, drop its resistance to joining the AIIB? And so on. It was the ADB’s meeting, but the AIIB was everywhere.

The idea that Asia needed its own fund, its own arrangement not dependent on overlords continents away, can be traced to the Asian financial crisis. Japan failed, but the idea lived on.

Something like the Asian Monetary Fund, some Asian pool of money, was bound to come along from somewhere. The need and pull of regionalism was always great, along with resentment at how IMF programs in the financial crisis were used to force political change. The idea just needed a sponsor unbeholden to the US.

The US is unlikely to become a party to AIIB anytime soon. That would require congressional approval.

As I wrote this week, in the era of America First, any new development aid commitment is a tough sell politically. It was tough enough to get the Treasury to sign off on more cash for the World Bank, an institution founded in the US.

That doesn’t mean the US had to oppose the AIIB so trenchantly. Just imagine if, back in the 1990s, the US had taken a constructive role when Japan proposed the Asian Monetary Fund.

Japan has again shown leadership in the past year by putting the pieces of the Trans-Pacific Partnership back together, after the Trump administration pulled out. (The new trade deal, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, is most easily known as TPP-11.)

Will Japanese efforts once again be spurned or unrewarded, to America’s long-term detriment? The omens aren’t great.