Following the experiences of the EU's euro-zone region, a common currency area for Asia is being widely discussed. Even though an Asian monetary union is a fantasy that ignores both economic and political realities, even respectable economists have opined on the matter.
For example, Robert Mundell, a Nobel laureate in economics, has made statements in support of the creation of an Asian monetary union. Citing exchange rate volatility between the Japanese yen and the US dollar as being a problem for Asian economies, he suggested introducing a common currency area patterned on the euro-zone.
A private study group of the International Bureau of the Japanese Finance Ministry has promoted the idea of a unified currency for Asia.
ILLUSTRATION MOUNTAIN PEOPLE
Unsurprisingly, it begins with a plan for greater use of the yen in transactions in the region. The final report of the Study Group for the Promotion of the Internationalization of the Yen indicated that a unified currency would increase financial and economic cooperation among ASEAN countries, Japan, China and South Korea.
These proposals have not gone unheeded. ASEAN countries, along with Japan, China, and South Korea set up a system of swap agreements in May 2000 to reduce volatility in exchange rate fluctuations and to protect their currencies from speculative attacks.
In fact, there are many reasons that Asian countries should hesitate before making radical moves toward increased cooperation of their monetary authorities. In the first instance, coordinated monetary policy leads to a reduction in sovereignty. When an economy has free trade but fixed exchange rates, the domestic price level will fluctuate in order to absorb changes in international trade and financial flows. In the case of Hong Kong, it also brought a long cycle of deflation.
A more important point is that Asia does not constitute what economists refer to an "optimum currency area" whereby a single currency would generate net economic benefits. Supporters of an Asian currency union make a heroic assumption that East Asia might constitute such an area. However, this assertion reflects a political judgment that had little to do with the interconnectedness of Asian economies.
While there is more convergence in economic and political conditions in Europe, it is not clear that it is so well-suited to be a common currency area. One key element in the theoretic models is the high mobility of labor.
Language and cultural differences along with distrust of outsiders renders much of Europe's labor relatively immobile.
Needless to say, such differences in Asia are much wider than they are in Europe. Never mind migration barriers and diverse political regimes in Asia, there are widely uneven economic development patterns both within and between countries. While many rural areas depend upon agricultural output while urbanized regions depend upon manufacturing and energy production, the more advanced urban areas and city-states depend more heavily upon services. Consequently, external shocks will have asymmetrical impacts on different economic sectors of each country. And these shocks will impact upon the different geographical regions across countries and within each country. A single currency would eliminate the shock-absorbing capacity offered by national currencies. Without the safety-valve effect of a fluctuating local currency, unequal development between and within countries will become amplified and rigid.
An argument behind having a single currency is that it would reduce the costs of exchanging currencies by tourists, businesses and governments.
Added to the saving from avoiding these "transactions costs," there would be a reduction in the risk associated with holding foreign currencies. However, the reduction of money-changing costs does not require a unified currency. Technology has helped to reduce the costs to tourists of having national currencies that are supposed to be eliminated by currency union. Something as simple as credit cards has allowed people to minimize the costs of using multiple currencies.
Costs to tourists of transacting many different foreign currencies are trivial in value and volume to those that might confront companies with multinational dealings. And so it is that the development of new currency instruments allowed hedging strategies that are relatively low-cost for businesses. Innovations in the "financial derivatives" markets allow enterprises to avoid or minimize most of the risks of fluctuations in foreign currencies.
There is a case where a common currency can emerge spontaneously to benefit trading partners. As it is, the US dollar is already a commonly accepted currency used primarily for international trade. Local settlements could be carried out in the US currency that would circulate alongside national currencies. Following Gresham's Law, the less reliable currency would drive the good one out of circulation as a medium for transactions. The sounder money will become the basis of savings. If a local currency begins to weaken, savings can be converted into the dollar while the local currency would be used in daily transactions.
The good news is that implementing such a proposal does not require armies of researchers and international bureaucrats to hold conferences in five-star resorts. Of course, the bad news is that the people who benefit from such largesse would rather not give up the perks and importance.
Given the interventionist inclinations of politicians and international agencies, the construction of a single Asian currency is likely to be a complicated and evolutionary process. The first steps would involve closer coordination of monetary policies and some fixing of exchange rates.
Indeed, this is what happened in Europe with the so-called exchange-rate mechanism (ERM) that created massive short-run instability. In the early1990s, the Fed became concerned about holding down inflation and raised interest rates. As rates in the US rose, it caused pressures to de-link European currencies.
Eventually, the ERM broke down as massive currency realignments took place.
Attempts to rig foreign exchange markets have reinforced macroeconomic instability within much of Asia. Instead of spending time and money concocting pipe dreams that enrich researchers, it would be far better to initiate policies that promote investment by allowing private entrepreneurs to keep more of the fruits of their efforts.
Only politicians and social engineers believe that economic developments follow political constructions. In the real world, economic forces set limits and provide the momentum for the success of political arrangements.
When these forces clash, politics will ultimately be the loser.
Unfortunately, the adjustment periods involve real economic pain due to dislocations, misallocations and inefficiencies arising from political decisions that conflict with economic forces.
Christopher Lingle is professor of economics at Universidad Francisco Marroque in Guatemala.
From the Iran war and nuclear weapons to tariffs and artificial intelligence, the agenda for this week’s Beijing summit between US President Donald Trump and Chinese President Xi Jinping (習近平) is packed. Xi would almost certainly bring up Taiwan, if only to demonstrate his inflexibility on the matter. However, no one needs to meet with Xi face-to-face to understand his stance. A visit to the National Museum of China in Beijing — in particular, the “Road to Rejuvenation” exhibition, which chronicles the rise and rule of the Chinese Communist Party — might be even more revealing. Xi took the members
Taiwan’s higher education system is facing an existential crisis. As the demographic drop-off continues to empty classrooms, universities across the island are locked in a desperate battle for survival, international student recruitment and crucial Ministry of Education funding. To win this battle, institutions have turned to what seems like an objective measure of quality: global university rankings. Unfortunately, this chase is a costly illusion, and taxpayers are footing the bill. In the past few years, the goalposts have shifted from pure research output to “sustainability” and “societal impact,” largely driven by commercial metrics such as the UK-based Times Higher Education (THE) Impact
The inter-Korean relationship, long defined by national division, offers the clearest mirror within East Asia for cross-strait relations. Yet even there, reunification language is breaking down. The South Korean government disclosed on Wednesday last week that North Korea’s constitutional revision in March had deleted references to reunification and added a territorial clause defining its border with South Korea. South Korea is also seriously debating whether national reunification with North Korea is still necessary. On April 27, South Korean President Lee Jae-myung marked the eighth anniversary of the Panmunjom Declaration, the 2018 inter-Korean agreement in which the two Koreas pledged to
I wrote this before US President Donald Trump embarked on his uneventful state visit to China on Thursday. So, I shall confine my observations to the joint US-Philippine military exercise of April 20 through May 8, known collectively as “Balikatan 2026.” This year’s Balikatan was notable for its “firsts.” First, it was conducted primarily with Taiwan in mind, not the Philippines or even the South China Sea. It also showed that in the Pacific, America’s alliance network is still robust. Allies are enthusiastic about America’s renewed leadership in the region. Nine decades ago, in 1936, America had neither military strength
RSS