Discuss about the International Financial Markets and Institutions for Common Currency.
The Asian financial crisis occurred in 1997 raised many questions about the aptness of the regimes related to exchange rates for the economies in the region. After the crisis, many countries have shifted themselves towards the flexible exchange rates, probably because of the various reasons among which one is the fear of floating. Since the Asian crisis, adopting a common currency or formation of monetary union for the Association of Southeast Asian Nations (ASEAN) is being a popular topic between the policymakers and academic economists. The debate on this hot topic has slowly emerged as a result of the Asian crisis and specifically after the acceptance of single currency for Europe, the Euro. ASEAN is a political, cultural and economic organization which represents the nation or countries in South Asia. The organization is a set of somewhat dissimilar nations which focused on enhancing the economic interests of associated countries and promotes cultural and political development. The main goal of ASEAN is to maintain regional stability and development (Association of Southeast Asian Nations (ASEAN). 2018).
There are many perspectives discussed on the optimum currency area which lay down several advantages and constraints of forming a currency union. It is mentioned in the literature that the economic cost include in the formation of currency by the group of countries is considered as loss of autonomy on national level, in monetary policy. In other words, in accepting single currency criteria there is a loss of monetary policies independence. However, such loss or cost depends upon the efficiency of individual nations in steering their monetary policies before entering into the currency union (Madhur, 2004). According to Barro, the economic loss of giving up the independent policies is not very large of the countries. In fact, establishment of a currency union will enhance and provide greater macroeconomic stability from such countries. He quoted that a currency is like a language. As the common language enables effective communication, in a similar way a common currency will enhance trading and investment among the member countries of the union. Another benefit of having a common currency is that it will stimulates the trade and investment among the union countries by reducing the transaction cost and eliminating the unpredictability of the exchange rates across the union. This will eventually help the countries to increase their income growth within the region (Alesina & Barro, 2013).
Furthermore, in the system of floating exchange rates, using a single currency could alleviate the adverse effects of the system. Also from economic view point, a group of republics should adopt shared currency only when the loss of national sovereignty can be set off from the benefits of developing a currency union. However, there is no specific method to measure such costs and benefits. OCA literature provides some guidelines which compare them accordingly. The benefits of currency union increases and the cost reduces when there is a superior flexibility in the prices and wages among the set of countries. Also, when greater mobile production factors and symmetric shocks are there across the countries. Huge share of trade and openness between the nations also led to the rise in benefits and fall in costs. With help of such guidelines, one can somehow quantify the cost and benefits of adopting common currency like Euro in ASEAN countries (Madhur, 2004).
Euro is considered to be the best example of common currency as Europe has proved that the concept of having single currency can and does work in the world of global trading. As it is a fact that Asia is too emerging as the economies growing at fast pace in the world. It has most integrated regions with intra-regional trade accounting along with the emerging production networks and intra-regional investments (Kumar, 2006). The Asian nations are becoming large source of investments for each other and the integration is boosted by the involvement of various FTAs among the countries. Therefore, it could be said that a common currency can be desirable as it facilitates and enhances intra-regional trading and investments.
However, this might be a reason for the creation of Asian Currency Unit (ACU) by Asian Development Bank, taking a step towards the establishment of single currency system. In order to have an optimal currency area, the region has to fulfil some criteria, besides the strong coordination in monetary terms erosion of the monetary dominance of members. The creation of ACU is similar to the European Currency Unit (ECU) preceding Euro (Kumar, 2006).The ACU will not impact the sovereignty of monetary policies while exercising the benefits of common currency (Caporale, Gil-Alana & You, 2018). It will eventually lay more emphasis on enhancing the intra-regional trade and financial transactions by reducing the dependence on currencies like dollar (SENG, WONG, CHIN & MOHAMED, 2015). In addition to this, ACU will cut down the transaction costs by giving stable exchange rates and practicing mutual trading between the regions. In order to be effective, the formation of ACU must include all the major countries of the region (Kumar, 2006).
Getting back to the guidelines given by OCA literature, the cost and benefits of having a single currency can be quantified for ASEAN countries. Starting with the cost of giving up independent monetary policy, it can be said that many countries of the region has a bad track record of conducting such policies which makes the loss of national autonomy minor. The formation of currency union can benefit such countries by conducting the monetary policy though a central regional bank which will have accurate and effective track records. Countries having issues related to inflation control and exchange rate management can also be benefited by common currency. So, basically such convergence is a benefit and not a cost. Looking at the mobility factor, ASEAN have high labour and capital mobility (Borner & Grubel, 2016). People from countries like Malaysia, Thailand and Philippines comprises of 10% of the employment in Singapore. Also, ASEAN has high level of flexibility in price and wages as compared to European Union (EU). It is been a fact that in earlier times also Asian nations are known for their flexibility and speedy adjustments to the stocks. All this make an impression that ASEAN have high flexible labour markets as compared to Western Europe.
The ratios like trade-to-GDP and trade-intensity of several ASEAN nations are higher than the Western Europe. The share of intra-regional trade in overall Asian trade is almost 25 percent, though lower than in the EU with 40 percent. In addition to this, despite of having inter-country differences, the symmetry in shocks among various nations in the region can be compared to EU (Kabir & Salim, 2014). The economic slowdown of 2001 is another proof of high degree of symmetry in shock among the region (Eichengreen, 1996). Overall, it is been observed that the indices of OCA that takes into account flexible wages and prices, intra-regional trade and investments, labour mobility and shock symmetry are similar to those of European Union. As a result, Eichengreen and Bayoumi concluded that common currency is suitable for ASEAN from a pure economic perspective and by examining various indicators of the literature (Bayoumi, Eichengreen & Mauro, 2000).
In present era, ASEAN is the seventh largest market in the world having the third biggest labour force after China and India. In the last five years, it has been noted that Asian nationals had developed to a great extent in terms of economy and growth. For investors, the region has presented various potential opportunities almost in every field. Also the trade and investment barriers are cut down which enables ASEAN to become a huge market for the investors. So the move towards common currency and integrated banking system is the new step of ASEAN countries to become more diversified and avail the benefits of having single currency like Euro for the purpose of trading and making investments. Despite of various benefits, there was an article published in BBC news that stated that it might be difficult for the ASEAN countries to go for single currency concept. The article mentioned that the Eurozone experience was been called as a “lesson” by the trade minister of Indonesia. He said that having a common currency is not a bad idea, it just that it is never been a topic for the South Asia nations (Launey, 2012). However, many South Asia countries already have a common currency, the US dollar. He said that there are several obstacles in adopting single currency for the region as the Eurozone crisis represented that the problems faced by weaker economies can create problems for the strong performers. Therefore, according to him instead of going towards common currency thing, ASEAN needs to focus on its objective of global integration made in 2015. The region needs to become stronger and should take its own path instead of being a carbon copy (Launey, 2012).
Another article published in Rappler stated the reasons for unacceptance of single currency by ASEAN countries. The crisis reflected that adoption of common currency by the states members of EU has faced many economies problems that have created problems for the strong performers. The gap between wealthy Singapore and weak Cambodia is the obstacle in the path of developing single currency in ASEAN. Also the political systems of ASEAN countries is varied as compared to EU (Rappler, 2014). Talking in a broader term, sustaining the common currency is way more difficult than developing it. The four major constraints that are identified are variety in the economic development of countries, weakness in the economies and financial sectors of many nations, inappropriate pooling mechanisms for resources required for developing and forming currency union and absence of political prerequisites for the purpose of monetary cooperation (Sussangkarn, 2015). In context of degree of diversity, Singapore is the wealthiest country as per its per capita income whereas Myanmar, Cambodia are the poorest countries in economic terms. This gap is higher in ASEAN as compare to EU which make it problematic to maintain a monetary union. In order to develop a currency union for the set of countries that have large differences in economic development, a free flow of capital and labour is required across the region. ASEAN governments need to focus on this area by formulating strategies and mechanisms that will empower the greater flexibility of both the labour and capital.
The Asian financial crisis has impacted the financial and banking sectors of many nations in the region. The ASEAN needs to focus on restructuring the banking systems and the sectors before going towards common currency. However, it will be of a great help to the region as it will bring harmonization in the system and the financial sectors of ASEAN countries. Inappropriate mechanisms for pooling resources and reserves along with the absence of regional institution is consider to be another hurdle in common currency (Almekinders, Mourmouras, Zhou & Fukuda, 2015). Given that there is a total absence of such things in East Asia would be a major challenge for the nations of South Asia. Also the economic requirements of OCA might got satisfied by ASEAN but it has not developed the political requirements which are necessary and important for common currency. Integration of economy and political environment is required to be developed by ASEAN countries.
Overall it can be said that, there are many benefits of having a common currency as it will reduce the transaction cost and dependency of external currencies. It creates harmonization and promotes integrated trading in the intra-regional transactions. Therefore, ASEAN countries should adopt the concept of single currency but before doing that the region needs to break all the barriers and needs to deal with the constraints that are in a way of developing or establishing common currency in ASEAN.
References
Alesina, A., & Barro, R. J. (2013). Currency unions. Hoover Institution Press.
Almekinders, G., Mourmouras, M. A., Zhou, M. J. P., & Fukuda, S. (2015). ASEAN financial integration (No. 15-34). International Monetary Fund.
Association of Southeast Asian Nations (ASEAN). (2018). Retrieved from https://www.state.gov/p/eap/regional/asean/
Bayoumi, T., Eichengreen, B., & Mauro, P. (2000). On regional monetary arrangements for ASEAN. Journal of the Japanese and International Economies, 14(2), 121-148.
Borner, S., & Grubel, H. (Eds.). (2016). The European Community after 1992: perspectives from the outside. Springer.
Caporale, G. M., Gil-Alana, L. A., & You, K. (2018). Exchange rate linkages between the ASEAN currencies, the US dollar and the Chinese RMB. Research in International Business and Finance, 44, 227-238.
Eichengreen, B. (1996). A more perfect union? The logic of economic integration (No. 198). International Economics Section, Departement of Economics Princeton University,
Kabir, S., & Salim, R. A. (2014). Regional economic integration in ASEAN: how far will it go?. Journal of Southeast Asian Economies, 313-335.
Kawai, M., Park, Y. C., & Wyplosz, C. (Eds.). (2015). Monetary and Financial Cooperation in East Asia: The State of Affairs After the Global and European Crises. OUP Oxford.
Kumar, N. (2006). Can a common currency work in Asia? Yes – Times of India. Retrieved from https://timesofindia.indiatimes.com/home/sunday-times/all-that-matters/Can-a-common-currency-work-in-Asia-Yes/articleshow/1528730.cms
Launey, G. D., (2012). Asean single currency unlikely after eurozone ‘lesson’. Retrieved from https://www.bbc.com/news/business-17595960
Madhur, S. (2004). Costs and benefits of a common currency for the ASEAN. East Asia’s Monetary Future: Integration in the Global Economy, 231.
Rappler, (2014). Why ASEAN will not have a common currency. Retrieved from https://www.rappler.com/business/economy-watch/38664-why-asean-will-not-have-a-common-currency
SENG, K., WONG, K., CHIN, L., & MOHAMED, A. (2015). Yen Synchronization among ASEAN-5, Korea and Japan: Evidence from the Multivariate GARCH Model. International Journal of Economics & Management, 9(1).
Sussangkarn, C. (2015). Forging Regional Cooperation. In Rebalancing for Sustainable Growth (pp. 221-250). Springer, Tokyo.
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