Published on Asia Times Online on 15 January 2004.

South Asian currency: Peace driver or pipe dream?
By Shehla Raza Hasan

KOLKATA - When Indian Prime Minister Atal Bihari Vajpayee gave new life to the idea of a South Asian currency last month ahead of the The South Asian Association for Regional Cooperation (SAARC) summit in Islamabad, it was hailed by academics and economists as a visionary idea. The hug and handshake between the leaders of the South Asian neighbors at the close of the summit was undoubtedly heart-warming for South Asians.

While a common South Asian currency on the lines of the euro would be more than welcome to a region beset by half a century of internal problems, skeptics fear this might be an offshoot of the “feel good factor” in the Indian economy triggered not only by a good monsoon but an even better supply of foreign exchange reserves, which crossed the US$100 billion mark last month.

A recent Goldman Sachs report that India would be the world’s leading economy after 50 years has created a new euphoria. The visible growth of the infrastructure sector, especially roads; buoyancy of the stock markets; the continuing IT boom and the incredible penetration of telecommunications - rounded off by GDP growth of over 7 percent - all add up to make a comfortable and confident picture.

While 2004 promises to be a year of the “feel better factor”, the Indian prime minister’s peace initiative and efforts to build bridges with Pakistan could easily be misunderstood as election year rhetoric. Nevertheless, what the premier is suggesting is novel. Instead of following the well-worn track of dispelling political tensions first and then following up with economic cooperation, he is using economic cooperation to bridge political differences, points out the Confederation of Indian Industry Director General, Tarun Das.

There is no doubt that what Vajpayee is proposing is achievable and acceptable for the common South Asian good. A common currency would foster closer economic ties and nations could tackle problems such as drug trafficking, money laundering and smuggling. According to the Research and Information System for the Non-Aligned and Developing Nations think tank, a common currency could help to double trade among South Asian nations to $10 billion.

The benefits of a common currency are numerous, consisting primarily of the following points:

* Reducing transaction costs across the frontiers. Conversion of one currency to another involves costs that increase production and distribution costs.

* Facilitating the movement of scientific, technical and technical manpower among member-nations, as conversion losses will be neutralized.

* As conversion costs are eliminated, a common currency could play a major role in formal trade. If free trade is permitted in the region, much of the informal trade might be translated into formal trade, which, in turn, would earn valuable revenue for the governments.

* Pre-empting a South Asian Central Bank, which will facilitate further economic integration.

A common currency for any region needs to have strong fundamentals. Prolonged periods of economic cooperation, cooperation in matters relating to trade, investment and the flow of people are some of the necessary trends that normally precede the creation of a common currency. Other issues that need to be addressed include lowering tariffs - or better still - tariff-free imports between SAARC countries and freer investment norms and visa regimes.

According to Karachi-based economist, S Akbar Zaidi, India and Pakistan are in the “pre-historic age” of economic and trade cooperation. Both have been trading for all but nine of the last 56 years. This trade has been miniscule, as both countries export only five percent of their total exports to the region. In order to establish a common currency, important lessons need to be taken from the European Union. Patience, mutual trust and confidence among the 1.4 billion people in the seven South Asian nations will be essential.
The peace initiative between India and Pakistan has only just begun. Europe emerged as a common currency zone 50 years after the end of World War II. India and Pakistan have not been talking to each other since December 2000. The move towards a common currency may be lauded and the reaction euphoric, but collective decision-making is a slow affair in the SAARC network. Even matters of vital importance lie in balance for decades without any decision being made. The creation of the South Asian Free Trade Area is a good case in point. The creation of this earlier would have enabled all countries of the region to derive vital producer and consumer surpluses. But decisions on these issues have been notoriously slow.

No other South Asian nation has reacted to the notion of a common currency so far, and India’s efforts have mostly been viewed as hegemonic. In addition, weak economic fundamentals plague the region. For the creation of the monetary union, controlling inflation within a fixed range is a pre-requisite. In the South Asian region, different countries are at different levels of economic development. For instance, India’s economy is 78 percent the size of the region. In the 1990s, India grew at a rate of more than 6 percent, compared to Pakistan’s rate of close to 3.5 percent.

While it is evident is that massive work is required to achieve this coveted objective. A common South Asian currency would be used skillfully in the future as the main driver of peace and deter any nuclear sabre-rattling by India, Pakistan or China. In the long run, if this currency becomes a reality, China could be brought into the common market fold as well. Once South Asia and China forge common economic ties, a huge market would emerge, covering half the world’s population and three-fourths of its markets in terms of consumers under the age of 40.

Therefore, it is high time that South Asian nations took note of this possibility and worked toward this common goal. It may be easy to dismiss the idea as euphoric or a pipe dream in an election year, but it will be a wise move to work toward. A boost to overall economic growth and regional development would automatically dispel mistrust and a lack of confidence in the long run. This is the opportunity, and South Asia as a whole must seize it.

  

Posted on January 15th, 2004 by jl
Filed under: Intl Currency