An important instance of regional cooperation in Asia is the Chiang Mai Initiative (CMI) for swap lines and credits agreed to by the ASEAN+3 countries in May 2000. This agreement reflects the desire to buttress financial stability following the searing crisis of 1997–98 and the recognition that governments can better achieve this collectively than individually. The question is to what end the resources of the CMI will be directed. This paper argues that using the swap lines and credits of the CMI to support a system of common basket pegs for East Asian currencies would not enhance financial stability; to the contrary, it would be a costly mistake. It would be better to devote these resources to a collective effort to develop securities markets in the region, thereby addressing the fundamental problem, of which exchange-rate instability is one symptom.


This paper was supported by the Japanese Ministry of Education for presentation at the Asian Economic Panel meeting, 13–15 May 2002, Keio University, Tokyo. It builds on earlier work by the author commissioned by the World Bank and Asian Development Bank, neither of which may necessarily wish to be associated with the conclusions. I thank Jeffrey Sachs and Yunjong Wang for helpful comments and Calvin Ho and Pipat Leungnaruemitchai for research assistance.

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