Barry Eichengreen

There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. That purpose, of course, is to create an Asian Monetary Fund, i.e., a regional alternative to the International Monetary Fund, whose tender ministrations during the 1997-98 financial crisis have not been forgotten or forgiven.

So far, however, the CMI has been all horse and no saddle. Its credits and swaps have never been activated. The distress following the failure of Lehman Brothers would have been an obvious occasion. Yet, revealingly, the Bank of Korea, the central bank hit hardest, negotiated a $30 billion foreign-currency swap with the United States Federal Reserve, not with its ASEAN+3 partners.

Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called Chiang Mai Initiative Multilateralization (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool. The goal was set in 2005, and last month ASEAN+3 finance ministers negotiated the details. They specified contributions to their $120 billion pool, set down borrowing entitlements, and allocated voting shares.

The agreement on contributions is significant, it is said, because China and Japan will both contribute 32%. In previous regional agreements, like capital subscriptions to the Asian Development Bank, China had always been treated as a second-rate power and asked to contribute less. Indeed, China had shunned Japan's 1997 proposal to create an Asian Monetary Fund precisely because it worried that it would play second fiddle. That China is now acknowledged as a co-equal means that it will not stand in the way of further cooperation.

Also significant, we are told, is the agreement to make decisions by simple majority, with countries' votes to be roughly in proportion to their contributions. This means that no single country can block action, in contrast to the IMF executive board, which makes decisions by consensus, giving large countries like the United States de facto veto power.

But do these new rules really matter? Disbursing more than 20% of the credits available to a country still requires that it first reach an agreement with the IMF, and 20% of a country's entitlement is actually less than it contributes to the pool. This would appear to nullify the very purpose of the arrangement, which is to free Asia from the IMF. While there is a plan to raise and then eliminate the 20% threshold, this is left to some future, unspecified date.

The reason for the contradiction is straightforward. Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid.

But regional neighbors find it hard to criticize one another's policies and demand course corrections. Political sensitivities run especially high in Asia. Even in Europe, with its long history of cooperation, surveillance and conditionality are outsourced to the IMF. Revealingly, the Fund, not the European Union, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia.

Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another's policies and to demand difficult policy adjustments. Here ASEAN+3 talks the talk. Its May agreement included a commitment to establish a regional surveillance unit.

But there is no agreement on where to situate it or how to staff it. It could be placed within ASEAN's Secretariat in Jakarta. It could be placed inside the Asian Development Bank in Manila. It could be given to the neutral Northeast Asian country, Korea. The outcome matters - which is why governments are fighting over it. Recall how the fateful decision to situate the IMF in Washington, DC enhanced the influence of the US Treasury just down the street.

These dilemmas can be finessed by giving both surveillance responsibilities and the actual power to disburse funds to an independent board insulated from national politics. Its members, with statutory independence and long terms in office, could function like the monetary policy committee of a central bank. They could issue a Financial Stability Report that bluntly flags weak policies and financial vulnerabilities. And they could demand policy adjustments as a condition for disbursing funds. The IMF could then be shown the door.

This scheme wouldn't solve all of Asia's problems. But it would at least head off one danger, namely the urge to accumulate even more reserves. Recent volatility reinforces this temptation. If Asian countries succumb, global imbalances and all their associated problems will return. Pooling regional reserves as a way of making them go further is a better alternative. But making this vision a reality requires further bold thinking.