Negotiating Financial Agreement in East Asia

Kaewkamol Karen Pitakdumrongkit

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317613961
• Edition: 1
• Topic: Commerce
• Subtopic: Finance

Every international negotiation bears a risk of collapse, as even among like-minded countries, different players often have different priorities and interests. This can result in conflict as states clash over certain agreement details, and their disputes can escalate and founder the entire negotiation, missing an opportunity to realize potential initiatives. However, other circumstances have witnessed the cases of successful deals. This begets a puzzle: What did these states do to salvage their talks and seal their deals?

This book examines East Asian financial negotiation processes and seeks to explain why some negotiations are successful despite the risk of bargaining failure. Using the Chiang Mai Initiative Multilateralization (CMIM) talks as the case study, the book analyses how states with little prior experience at dealing with certain aspects of an agreement manage to avert negotiation failure and successfully conclude their final deal. Using extensive archival research, in-depth interviews with involved negotiators and experts, and process-tracing method, it reconstructs the making of the CMIM agreement. The multi-country analysis reveals the roles played by key actors, namely China, Japan, South Korea, Indonesia, Malaysia, and Thailand, in shaping the agreement terms. The book goes on to argue that preventing a stalemate or succeeding in concluding arrangements like the CMIM is a product of various strategies and tactics employed by negotiators. These include employing bargaining strategies and tactics that help avoid a negotiation deadlock, and assessing the conditions under which such strategies and tactics are likely - or unlikely - to achieve the objective of avoiding bargaining failure.

As a study of East Asian economic negotiation processes, this book will be of huge interest to students and scholars of East Asian cooperation and regionalism as well as finance, international business, international relations and international political economy.

1 Introduction

When most of us hear about the conclusion of an international negotiation, a contract-signing ceremony comes to mind. Country leaders come on a stage and give a speech on how fruitful a relationship among them is. Then they proceed to sit on a table and ink the agreement. What usually follow are shake hands and smiles to a camera. These are the common pictures of celebrations. But how many of us have ever wondered how a negotiation is conducted? How do governments, with their different priorities and interests, manage to bargain and seal their deal?

This book is about negotiation processes of financial cooperation among East Asian countries. It will walk you through how international agreements, especially economic ones are made. The actual processes are usually quite far from handshaking and smiling displayed in the media. They are often bumpy, involving several twists and turns. Shifting stances, wavering opinions, siding with particular parties, concealing one's agendas and bluffing are prevalent in international bargaining. Therefore, at each stage of a negotiation, there always exists a potential risk of deadlock.

This risk heightens especially when countries are negotiating certain agreement details which they have neither before adopted nor familiar with. Because countries possess little knowledge about these "new' elements, and they become uncertain whether to proceed with a negotiation and strike a deal. However, we have witnessed in several occasions that states were able to reach their deals. The Chiang Mai Initiative Multilateralization (CMIM) agreement is a prime example such a success story. CMIM is a financial arrangement among the finance ministries and central banks of ASEAN+3 countries together with the Hong Kong Monetary Authority. ASEAN+3 is a forum that coordinates cooperation among the ten member countries of the Association of Southeast Asian Nations (ASEAN)¹ and the three Northeast Asian nations of China, Japan and South Korea (the +3). CMIM is aimed to set up to be a regional mechanism that provides financial support to members in crisis times.

As mentioned earlier, this book will delve into the processes of international negotiations. However, the bargaining dynamics of financial cooperation in the context of East Asia have so far been under-examined in the recent literatures. Most extant studies tend to examine factors that initiated East Asian financial cooperation (Rajan 2002; Grimes: 2009; Sohn 2005; Sohn 2007), or suggests ways to enhance the functioning of certain regional mechanisms such as Chiang Mai Initiative (CMI) and Chiang Mai Initiative Multilateralization (CMIM) (Kawai 2005; Kawai and Houser 2007; Sussangkarn and Vichyanond 2007). Another line of research attempts to explain negotiation outcomes by relying on the three traditional levels of analysis in the field of International Relations (Waltz 1959; for examples, see Sohn 2005; Grimes 2006). This research strand does shed some useful insights, but its explanatory power is somewhat limited. This is mainly because the three levels of analysis can at best set a wide range of possible outcomes, but they are unable to determine which choice states finally selected among the possible options to evade bargaining deadlock. In short, what has been lacking in the recent literature regarding East Asian financial cooperation is a study of micro-processes, namely analysing bargaining strategies and tactics negotiators use to achieve agreement outcomes. Such scholarship neglect yields substantive practical implications. Without knowledge concerning bargaining dynamics, negotiators may not know how to break a negotiation logjam or save the talk from falling apart, which can obstruct efforts to further regional cooperation.

Unlike these previous studies, this book will fill important intellectual gaps by examining the making of the CMIM agreement through the lens of bargaining strategies and tactics, which can provide lessons for policy makers to enhance financial cooperation in East Asia and other regions. To tell the story of how states employed such strategies and tactics to prevent negotiation failure, this study chooses to focus on the Chiang Mai Initiative Multilateralization (CMIM).

The case of the Chiang Mai Initiative Multilateralization (CMIM)

Speaking about East Asian financial cooperation, CMIM comes to mind. The mechanism is significant to East Asian financial cooperation mainly because it is the most advanced form of such cooperation to date, containing several new features that have never been adopted by the regional states previously. For example, CMIM sets up a regional fund to provide its members with financial or "liquidity" support in crisis times. Second, it set up an independent surveillance unit called the ASEAN+3 Macroeconomic Research Office (AMRO) which oversees the members' economies. Third, CMIM is the first time that regional states agreed to use a weighted-voting system to govern the decision-making processes, namely the decision to disburse financial assistance to borrowers. The adoption of a weighted-voting system was unprecedented in the history of East Asian financial cooperation. As one expert puts it,

One of the most striking innovations of CMIM is the introduction of weight voting for lending decisions. This development has been exciting for [Asian Monetary Fund or] AMF proponents, who have long assumed that a voting procedure would be a necessary element of an autonomous regional funding mechanism.

(Grimes 2011a: 95)

The fact that these new elements were included into the CMIM framework in turn enhances the importance of studying CMIM negotiations. Doing so, we can extract additional insights into how East Asian economic cooperation might evolve in the future as these features, such as the use of a weighted-voting system, may be applied into other regional agreements to come.

As CMIM contains significant new-fangled features never embraced by the regional states before, it bears a high risk of a negotiation collapse. It is because these stakeholders might be uncertain about how to handle such new details or clash over the issue which could ultimately break down the whole negotiation. Yet, against the odds, ASEAN+3 states in the end succeeded in concluding the deal. How did these countries managed to ride the turbulence and arrive at the most advanced financial agreement? Therefore, examining the CMIM negotiation will help shed light on a broader question: how do states with little prior experience at dealing with certain aspects of an agreement manage to avert a negotiation failure and successfully arrive at their final deal? In the sections and chapters that follow, this book will explore: (1) bargaining strategies and tactics that help break out of a bargaining deadlock, and (2) the conditions under which such strategies and tactics are likely (or not likely) to achieve the objective of avoiding bargaining failure. In other words, I will demonstrate that CMIM was neither created in a vacuum nor it could emerge naturally. Rather, the facility came into being because of these states' efforts to prevent a potential stalemate. The success of such arrangement is a product of various strategies and tactics employed by the involved negotiators.

Members' financial contributions and their voting power

Although the making of the CMIM agreement involved negotiations over several aspects, this study chooses to primarily focus on the two issues of members' financial contributions and voting power. They were chosen because the conclusion of CMIM negotiations largely hinged on whether states succeeded in cutting their deals on these components. As one source highlights, the participants regarded these matters as the most important under negotiation and bargained hard accordingly (Henning 2009; Rathus 2010).

One may wonder, what makes the two features of members' financial contribution and vote shares so significant that the life and death of the whole CMIM negotiation leaned on them? This was because financial contributions and voting power are linked. Some of the countries' vote shares are proportionally calculated based on the amount of contributions they make to the CMIM reserve pool. States contributing more to the CMIM fund have a larger share of votes, which can be used to influence certain decisions such as approving financial support to crisis economies. The CMIM votes can also be used to extend states' clout beyond the facility itself. For example, the members with greater voting power may force their counterparts requesting to borrow from the CMIM mechanism to make certain concessions in other areas outside the CMIM (e.g. trade) in exchange the former's votes to approve the lending. Unsurprisingly, "[i]t took a long time before the amount of contributions from the various countries in the current CMIM can be agreed upon, as the contributions are related to the weight, and hence influence, of the country in the CMIM" (Sussangkarn 2011b: 14).

It should be noted that although the centre of this study was on examining how the CMIM members arrived at their contribution amounts and voting power, I will also explore how bargained to arrive at some other CMIM aspects, namely the decision to multilateralize CMI and the selection of the first director of the ASEAN+3 Macroeconomic Research Office (AMRO). These additional intellectual exercises are purposed to shed further shed light on the negotiation processes of East Asian financial cooperation.

History of the Chiang Mai Initiative Multilateralization (CMIM)

Cooperation in East Asia is not a new phenomenon. However, the process of regional financial cooperation does not have a long historical mileage because it did not actually begin until the late 1990s. Before this period, the governments exhibited little interest in such cooperation at a region-wide level. For example, ASEAN was initially aimed to be a security organization, with a focus on dealing with international security issues such as the impacts of the Vietnam War on the region. Economic cooperation, including the area of finance, was not the organization's original main focus.

The 1997-1998 Asian financial crisis (AFC) fostered a new interest in East Asian cooperation as the event exposed the vulnerability of the region's banking and financial systems, which "seemed to suggest that the cost of defending diverse national currencies was, for most regional governments, becoming too high to bear" (Cohen 2003: 285). The AFC started in Thailand after its central bank's attempt to defend the value of the country's currency, the baht, against market speculations failed. It was at first viewed that the problem would be contained within Thailand and did not spread. However, the opposite occurred. The contagion soon swept the region. The collapse of the Thai baht in July 1997 triggered a financial panic leading to a series of currency devaluations in other East Asian economies. Bangkok resorted to the International Monetary Fund (IMF) for liquidity assistance and was put under the Fund's programme in August. Thailand's financial turmoil sent out repercussions and put pressure on the Indonesian rupiah and South Korean won. Both countries soon found themselves walking on the same path as Thailand. Jakarta and Seoul eventually got financial help from IMF in November and December 1997, respectively. For those countries that did not resort to the IMF facilities, they too experienced severe economic downturn or recessions. The Asia's financial meltdown in the late 1990s heightened the realization of economic interdependency that "East Asian economies were inextricably linked to each other and could not afford to ignore what was happening elsewhere within the region" (Sussangkarn 2011a). Therefore, it became necessary for regional states to pursue financial cooperation for the purpose of preventing and/or managing such crises in the future.

Another reason why the idea of regional financial cooperation gained a momentum in East Asia was due to the effects of the IMF rescue packages on the regional economies. The programmes were mainly crafted by the Fund, with major influence of the US Federal Reserve and Treasury. East Asia viewed that Washington was to some degree behind the IMF's bailouts and hence the conditionality details reflect certain US interests.

The IMF imposed on the borrowing states the conditionalities which was heavily criticized as ill-suited for East Asia. For example, Jeffery Sachs (1997) discriminated the East Asian crisis from the previous ones where the problem was triggered by the actions of the public sector, namely governments with budget deficits choosing to print out money to finance themselves. Hence, the IMF's former "patients" were characterized by inflation with a weakening currency and foreign-reserve depletion. In contrast, East Asia's experience was quite different. In regard to Indonesia, Malaysia, the Philippines and Thailand, the governments had been doing well before the crisis. They usually ran budget surpluses, or even accumulating foreign reserves into their central bank's vault. The major culprit this time was actually the private sector which used short-term borrowing to fund its long-term investment in non-exporting sectors such as real estate. Therefore, the same bailouts of slashing the budget deficit and imposing restrictions on a central bank's lending to the public sect...