Three decades of financial crises culminating in the global financial crisis have prompted the development of multilayered global financial governance. This article examines the relationship between the global and regional layers by analyzing the case of the global and ASEAN+3 financial safety nets. Making use of regime theory, we examine the evolution of the characteristics, main institutions, goals, and behavioral expectations of these two nets. The article argues that the ASEAN+3 regional financial safety net, which was mostly developed following the East Asian financial crisis of 1997, complements rather than undermines the global financial safety net. Similar characteristics, goals, and behavioral expectations underpin this complementarity. Keywords: global financial safety net, ASEAN+3 regional financial safety net, regime theory.
The global financial crisis (GFC) and previous regional crises underline the importance of developing solid multilateral financial safety nets to preempt recurrence in the future. (1) Nonetheless, there is no agreement regarding the optimal geographical scope of these safety nets. Options include a global financial safety net (GFSN), a multitude of regional financial safety nets (RFSNs), domestic safety nets, or a combination of them. This is a relevant issue insofar as contemporary financial flows have become globalized, yet the failure of the GFSN during the GFC and previous crises raises doubts regarding the effectiveness or even adequacy of a single-layer net.
The case of the Association of Southeast Asian Nations plus China, Japan, and South Korea (ASEAN+3) RFSN is particularly useful to explore the relationship between regional and global safety nets. Prior to the GFC, the 1997 East Asian financial crisis (EAFC) was regarded as the most damaging in decades in terms of its impact both on the economy of the affected countries and beyond. Due to the EAFC, several countries in the region started to develop financial safety nets to prevent and manage future crises. These countries grouped themselves under the ASEAN+3 RFSN. Following the GFC, existing institutions have been upgraded and new ones have been launched.
An ASEAN+3-specific related net, however, did not emerge in a vacuum. Global and pan-Asian institutions are also in place. Indeed, the International Monetary Fund (IMF) and the Basel Committee on Banking Supervision (BCBS) were already involved in financial governance well before the EAFC. At the pan-Asian level, the Executives' Meeting of East Asia Pacific Central Banks (EMEAP) was already running when the EAFC struck. Several East Asian countries were members of these institutions. This suggests recognition by government officials that an effective financial safety net requires multilateral cooperation at the global level.
Furthermore, the EAFC compelled countries in the region to develop domestic safety nets. These were divided into two forms of self-insurance: central bank reserves and bilateral arrangements--mainly central bank currency swap agreements. Thus, China, Japan, Taiwan, South Korea, Hong Kong, Singapore, and Thailand were among the top fifteen countries by foreign exchange reserves as of 2014. Meanwhile, central banks in the region have signed several currency swap agreements. Even though domestic safety nets, by definition, are designed to enhance the stability of only the country developing them, their simultaneous adoption by most countries in a particular region supports RFSNs. Space constraints, however, prevent us from exploring the role of domestic safety nets.
The RFSN centered around ASEAN+3 is therefore part of a wider institutional framework with global, regional, and domestic layers linked to each other. This safety net is especially interesting insofar as ASEAN+3 lacks the legal and political framework that underpins financial governance in the European Union (EU). Concurrently, ASEAN+3 is arguably more integrated in other safety layers than is the eurozone.
The sophistication of the ASEAN+3 RFSN raises one important question: how does the ASEAN+3 financial safety net interact with the GFSN? The global framework centered around the BCBS and the IMF, regional institutions, and domestic arrangements simultaneously boosts and potentially undermines the ASEAN+3 safety net. The relationship among all of them serves to determine the role of a well-developed regional layer in the GFSN.
In this article, we prove that RFSNs complement rather than replace the GFSN. Building on regime theory, we analyze how the shortcomings of the GFSN explain the development of RFSNs. The latter, however, have certain institutional characteristics underpinning their complementarity with the GFSN. We use a detailed case study of East Asia's RFSN--ASEAN+3--to guide our investigation of the extent to which RFSNs complement the GFSN.
The article is organized as follows. First, we explain the key aspects of regime theory. Next, we analyze the GFSN by looking at its different layers, characteristics, and main goals. Subsequently, we analyze the ASEAN+3 regional layer in detail. Finally, we summarize our argument in a concluding section.
Several scholars have advanced different definitions of regime. The most often used is that of Stephen D. Krasner, who considers "regimes" as "principles, norms, rules and decision-making procedures around which actor expectations converge in a given issue-area." (2) This definition is similar to those proposed by Robert O. Keohane and Joseph S. Nye and by Oran R. Young. (3)
These definitions point out three characteristics of international regimes. First, regimes are created around a particular issue or area. This might be narrowly or broadly defined, but it has to be clear. Otherwise, the regime will be ineffective insofar as participating actors will disagree on the object of the regime. Second, regimes have goals. These relate to the particular issue or area around which a regime is built, giving it purpose. Thus, regime participants understand what they should strive to achieve. Finally, regimes create behavioral expectations. To attain the goals of a particular regime, participants have to act according to certain patterns of codified and non-codified conduct. This way, participants in a regime can predict their peers' actions.
Why are regimes constructed? Drawing from functionalist approaches to international regimes, Robert O. Keohane argues that regimes are created when the anticipated (positive) effects of a regime outweigh the benefits of not having the regime. (4) States will hold the belief that regimes are useful if three conditions are met: legal liability, which refers to the organization of relationships in mutually beneficial ways; a rearrangement of transaction costs, making noncompliance with the regime more costly than compliance; and a reduction in uncertainty as a result of the provision of reliable information. (5)
Stephan Haggard and Beth A. Simmons indicate that regime theories based on functionalism do not particularly excel at explaining causality. (6) Nevertheless, Keohane's analysis of the conditions under which regimes are constructed carries explanatory power. The three conditions listed by Keohane double as the effects of well-functioning regimes. They amount to reciprocity, which is the cornerstone of international regimes and the main reason behind cooperation. (7)
As Robert Axelrod explains, stable reciprocity among a few actors is sufficient for cooperation to begin. Cooperation can then expand to other issues and include more actors. Similarly, international regimes can be constructed by a few states seeking the effects of legal liability, transaction costs rearrangement, and reliable information provision. If these are achieved, regimes endure and might expand to cover new issues and accommodate more states. (8)
Regimes, therefore, are not static. They evolve over time in at least four ways: strength, organizational form, scope, and allocation mode. Strength refers to the degree of compliance with the regime; organizational form makes reference to its design and operation, whether institutionalized or not; scope alludes to the range of issues covered by a regime; and allocation mode refers to the different social mechanisms to allocate resources. (9)
Change in an international regime can occur for different reasons. Following from the functionalism that underpins our approach to regimes, it would be argued that change takes place when a regime becomes dysfunctional. (10) Regimes evolve when they do not perform properly, leading to the creation of new regimes with the potential to work well. (11) When dysfunction happens, regimes tend to metamorphose rather than disappear.
Adopting a functionalist approach to international regimes is not without its challenges. As Susan Strange argues, a significant risk associated with this approach stems from its state centeredness, which results in a focus on the positive aspects of regimes. (12) Meanwhile, Nicholas Onuf points out that the construction of regimes is a goal in and of itself, which is often neglected in the study of international regimes. (13) More fundamentally, Friedrich Kratochwil and John Gerard Ruggie argue that this approach to the study of international regimes too easily assumes that goals can be distinguished from means. However, this distinction is not always clear. (14) These challenges potentially could render a functionalist study of international regimes obsolete.
Notwithstanding these challenges, a functionalist approach retains its explanatory power. It calls attention to the potential for regimes to enhance cooperation among states. Cooperation will result from the benefits of a regime outweighing the benefits of its nonexistence, as explained above. Thus, a functionalist approach serves to recognize the benefits that states seek to obtain from a regime, along with the concomitant...