Strengthening regional financial cooperation in East Asia

Abstract

The 1997–98 financial crisis prompted East Asian economies to realise the potential benefits of installing stronger cooperative mechanisms for crisis prevention, management and resolution. This paper argues that a regional financial architecture needs to be firmly established in East Asia, outlines recent developments in financial cooperation in the region, and provides possible directions for the future. We recommend a more effective surveillance process and consider the option of creating a common pool of foreign exchange reserves to allow flexible financial support at times of crises and contagion while minimising the problem of moral hazard. The arrangement must be consistent with the global framework; in particular, it must involve international creditors from outside the region for crisis management and resolution. We suggest that exchange rate regime choice should be coordinated at the regional level, with a long-term vision of regional monetary integration.