Baby steps to a common Asian currency
By Shehla Raza Hasan
KOLKATA - The concept of an Asian Currency Unit (ACU) was resurrected last month by the Asian Development Bank (ADB) and will be considered again at the bank's annual meeting early this month in Hyderabad, India. After that it could be launched as early as the end of June.
The unit was born as a concept almost 10 years ago, prior to the Asian currency meltdown. It is a notional unit of exchange based on a "basket" or weighted average of currencies used in the 10 member states of the Association of Southeast Asian Nations plus South Korea, China and Japan (ASEAN plus 3).
It was primarily mooted to help develop regional bond markets and promote monetary cooperation among Asian economies. This # idea, contemplated on and off over the years, got a big boost last month, and the ADB seemed definitely committed. The launch was held up by the need to settle some divisive views and political anxieties: Inclusion of the currencies of Taiwan, Hong Kong, Australia and New Zealand, an idea strongly contested by China and the ASEAN states.
# Exclusion of India in the first round of talks. It is important for India to be part of the initial negotiations so that it reflects the interests of Indian business. It is believed that Singapore, a strong ally of India, is pushing for its inclusion in the first stage of talks, which will develop the concept of the unit.
# Need for consensus relating to the weighting and components of the ACU based on countries' share of nominal gross domestic product (GDP) as well as trade volume, the level of capital flows or convertibility of their currencies.
Some of the long-term issues that need attention are:
Hegemony of stronger states. Smaller Southeast Asian states allegedly feel threatened by China's growing economic power and Japan's isolationist economic policy. They also question whether the currencies of Australia and New Zealand should be included with India in the second round. It is argued that it was impossible to replicate the euro experience because Europe had sorted out the question of hegemony long before the question of a single currency was mooted.
Substantial diversity in Asian economies. Critics also point out that the concept of Asia has been defined only by its geography. There is a substantial gap in the growth and development of countries within this region. Cambodia and Laos have a substantial chunk of population below the poverty line.
The euro experience - a good learning process. The architects of the ACU are making efforts to point out that they are not trying to make the ACU the Asian equivalent of the euro. The unit would merely be an indicator of exchange rates, with no exchange-market interventions. There is also talk of changing the name to "Asian currency index" to set it apart from the European Currency Unit, which was the precursor of the euro.
The primary purpose of the ACU would be to facilitate the development of an Asian multi-currency bond market, strengthening of capital markets to make them resistant to external shocks. The ACU would reflect how the region's currencies as a whole move against the dollar and the euro and how each currency in the ACU moves against the average level of participating currencies. The evolution of the euro could at best be a good learning process.
The ideal preconditions that existed in Europe prior to the introduction of the euro, but either don't exist in Asia or are only emerging, were pointed out by Roberto F De Ocampo, former Philippine finance secretary:
# High trade interdependencies.
# Common acceptance of basic political and social values (democracy, a market economy with a strong welfare state).
# Fairly even economic development and comparable living standards.
# Strong commitment to solidarity.
The past few years have witnessed higher trade interdependencies in East Asia than ever before. Reportedly, this is happening at a much faster rate than Europe ever experienced. Trade volume among the ASEAN plus 3 countries has swelled, with trade between China and ASEAN poised to reach US$200 billion before 2010. Trade between India and China increased more than 12 times over the past five years.
Financial analysts point out that it will not be long before ASEAN plus 3 set up a mechanism for exchange-rate stability, not necessarily for safeguarding financial stability in Asia but purely for self-interest. Japan is a proactive member of the club, as Tokyo is not too comfortable with China's emergence and the fact that the yen may be overshadowed by the yuan. It has shed its isolationist tendencies for this reason.
It is therefore understood that several steps need to be taken toward creation of a unified currency structure in Asia. Certain absolutely necessary requirements are information exchange and policy dialogue on surveillance, initiation of a central reserve pool for financing the liquidity needs of member countries, and cooperation in developing suitable mechanisms for regulation and supervision.
Nevertheless, this initial step toward a single common currency needs to be preceded by a common single market. The benefits of an eventual single currency are numerous. It will increase market transparency by making prices more easily comparable. Cross-border transactions will also become more attractive as market operators will no longer be exposed to exchange-rate risks, and costs associated with currency conversion will be eliminated.
The single market will become one of the main pillars of economic and monetary integration. However, any expectations of a common Asian currency in a holistic sense is a long way off. This trend, which began in East Asia, will have to be popularized in the more difficult terrains of South and Central Asia. The toughest challenge will perhaps come when it is time for West Asia to be part of the system.
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