time. While many technical problems concerning the fund have yet to be solved, East Asian countries face bigger challenges from their different views on financial policy, defects in their financial systems and the absence of a regional financial regulation mechanism.

The Asian financial crisis in 1997 was the direct motivation for East Asian countries to collaborate in the financial field. The International Monetary Fund often attached harsh conditions to its assistance to the crisis-ridden countries in East Asia, prompting them to seek an alternative. Finance ministers from ASEAN countries, China, Japan and South Korea adopted the Chiang Mai Initiative at their meeting in Chiang Mai, Thailand, in May 2000. In addition to expanding ASEAN's swap network, the ministers called on ASEAN countries to sign bilateral swap agreements with China, Japan and South Korea according to mutually agreed principles on a voluntary basis. Under this arrangement, when a country has low foreign exchange reserves, other countries will provide emergency funds to stabilize the region's financial market. This bilateral arrangement is the prototype for the multilateral East Asian foreign exchange currently under discussion. Within the framework of the Chiang Mai Initiative, the countries also agreed to create a reliable support system to monitor their financial conditions. Today, efforts to establish this system are still focused on strengthening the existing "economic review and policy dialogue mechanism."

In fact, the Chiang Mai Initiative largely aimed to address the havoc caused by international hot money t o small and medium-sized enterprises and prevent regional chain reactions. A notable feature of the Asian financial crisis in 1997 is that international speculators amplified the fallout from Thailand's collapsing economic bubbles, creating a domino effect in the region.

Mutual foreign exchange assistance would help offset these amplifying effects. But whether this approach can apply to the global financial crisis today remains to be seen. The major challenge facing East Asian countries in this crisis is the destruction of their real economies due to slumping export markets. East Asian countries should be alert to its potential economic repercussions. For South Korea, the problem lies in the fact that the openness of its financial system has outpaced economic development. South Korea should therefore first redress its own institutional problems.

Judging from the considerable rebound of the dollar despite the worsening financial crisis, U.S. hot money may be withdrawing from overseas markets due to aggravating cash flow problems at home. The exchange rate fluctuations arising from large-scale capital movements can hardly be mitigated through regional foreign exchange assistance.

A long-term endeavor

Internal needs will eventually replace external factors to become the driving force behind East Asian financial cooperation. Most people are discussing the implications of the Asian financial crisis and the weakening dollar for promoting East Asian financial cooperation and the possible catalyzing effect of the ongoing U.S. financial crisis. But the real reason the dollar is central to East Asian financial stability is that East Asian economies compete with each other for external markets, which they all rely on.

A change from export-oriented economies to ones driven by domestic demand is far from enough to resolve this structural dilemma. East Asian countries should develop cooperative mechanisms in the research and development of products and technologies, as well as the cash flow of their manufacturing enterprises, to forge a regional synergy. The creation of a foreign exchange fund is only a prelude to broader and deeper regional financial cooperation. To prevent crises from developing, the countries should work closely together in financial market regulation and cultivation of regional capital markets. Only when mutual investment among countries in the region becomes dominant will East Asian countries be able to effectively address the harm done by international capital movements. They should also carry out financial cooperation in the context of regional economic integration and use it to propel the integration process.

The author is an associate research fellow with the China Institute of International Stdies