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Home > Macroeconomic Issues Viewpoints > A Single Currency for Asia?

Macroeconomic Issues Viewpoints

A Single Currency for Asia?

by Amitendu Palit

Is Asia Ready?

On paper, a common currency has several benefits for Asia. These include more seamless integration of trade and capital flows within the region. This follows from avoiding costs of invoicing products and services in different currencies when they cross borders. Apart from cutting transaction costs of paperwork and procedures, a single currency also helps traders to avoid the risks of exchange rate fluctuations. These risks often force traders to hedge against fluctuations by entering into futures contracts. More predictability and less uncertainty are clear benefits of a common currency. Given that the region has extensive intraregional trade, a common currency should ideally be a welcome option.

The early moves toward the ARU involved China, Japan, South Korea, and the 10 ASEAN economies. This is the ASEAN+3 grouping that spans across South East Asia and North East Asia. How feasible is it for the group to work toward a common currency?

The ASEAN is the most cohesive regional grouping in Asia. But it is different from the European Union in several respects. The most important difference, perhaps, is the lack of regional institutions with the capacity to serve as overarching regulators. The ASEAN secretariat is hardly equivalent to the European Commission. More importantly, ASEAN does not have the equivalent of a European Central Bank. Individual ASEAN members continue to retain sovereignty over their monetary policies. Such sovereignty must be sacrificed if the move to a common currency is to be made.

Progress on a common currency is inseparable from progress on regional integration. The conditions for moving to a common currency must take shape within the ASEAN, which is the most visible structure of a regional bloc in Asia. If ASEAN cannot produce the enabling conditions for a common currency, it is difficult to perceive how the ASEAN+3 can do so. This appears all the more difficult given that South Korea, Japan, and China are unlikely to agree easily on various aspects of convergence of their monetary policies and exchange rate management.

The EU experience shows that some members can retain their individual currencies. Those EU members outside the Eurozone, such as the United Kingdom, Denmark, Switzerland, and Sweden, have different currencies. Can Asia adopt such a system? Reproducing the current EU structure with similar features would require creating a “eurozone” within Asia. More specifically, in the context of the ASEAN+3, either the ASEAN or a subgroup within ASEAN needs to replicate the “eurozone” by giving up sovereignties on monetary and exchange rate policies and establishing a supranational regulator to manage the group collectively. Such a scenario appears distant within the ASEAN.

The milestones that have been mentioned to achieve the ASEAN Economic Community (AEC) by 2015 do not include steps for moving to a single currency. The plan proposes the establishment of a regional economic zone enabling free flows of goods, services, capital, investment, and labor. But it refrains from proposing more ambitious plans of monetary policy convergence or establishing a regional regulator for managing monetary policy and moving toward a common currency. Indeed, it does not even propose the establishment of a parallel currency on the lines of the ACU. Similarly, the idea of a common currency does not find mention in other regional economic integration initiatives, such as the one being pursued by the East Asia Summit.

It appears that ASEAN and the Asian region are not yet ready to embrace the notion of a common currency. One of the main reasons for the unwillingness is the heterogeneity among the economies. There are considerable differences within the ASEAN economies in the degree of economic development and in their economic structures. The relative differences increase if the pool is enlarged to include China, Japan, South Korea, India, Australia, and New Zealand. Apart from the obvious differences in economic features and the nature of economic institutions, there are noticeable differences in the economic policy management systems as well.

One of the best examples of the heterogeneity in the region in the context of a single currency is the difference between the exchange rate systems of the various economies. While most economies follow the floating exchange rate system, there are variations in the nature of the float. Many prefer the “managed” float where, despite allowing the exchange rates of national currencies to be market-determined, central banks intervene at periodic intervals to influence the values of the currencies through their sales and purchases. The interventions are usually influenced by the desire to control large appreciations of currencies, which can erode the competitiveness of a country’s goods and services.

Indonesia, Malaysia, Thailand, and India are examples of managed floats, while Japan and South Korea have more free floats, in contrast to the “peg” arrangements of China and Vietnam. In several countries of South East Asia, such as Cambodia, Myanmar, Indonesia, and Vietnam, the US dollar is unquestionably accepted as the legal tender. With such wide differences in exchange rate regimes and monetary policy frameworks, moving to a common currency through convergence of institutions and systems is seemingly difficult.

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Further reading

Book:

  • Das, Sanchita Basu (ed). Achieving the ASEAN Economic Community 2015. Singapore: Institute of Southeast Asian Studies (ISEAS), 2012. Online at: muse.jhu.edu/books/9789814379656

Articles:

  • Grenville, Stephen. “The euro crisis: Lessons for East Asia.” The Interpreter (November 29, 2011). Online at: tinyurl.com/q8u6s77
  • Henning, C. Randall. “The future of the Chiang Mai Initiative: An Asian monetary fund.” Policy brief PB09-5. Peterson Institute for International Economics, February 2009. Online at: www.piie.com/publications/pb/pb09-5.pdf
  • Sen Gupta, Abhijit. “Prospects for a single Asian currency.” Public Policy Review 6:5 (June 2010): 873–892. Online at: tinyurl.com/oo2kohy [PDF].
  • Sen Gupta, Abhijit, and Amitendu Palit. “Feasibility of an Asian currency unit.” Working paper no. 208. Indian Council for Research on International Economic Relations (ICRIER), March 2008. Online at: tinyurl.com/oyd5drt [PDF].

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