Mon, Jul 12, 2004 - Page 9 News List

Just say no to Asian monetary union

Asia is suited poorly to an EU-style currency arrangement, but that hasn't stopped some pundits from trying to give the idea credibility

By Christopher Lingle


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.

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.

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