This was published on page A11 of Tuesday’s, 01 June 2004, edition of AWSJ.

Consider a Single Asian Currency
by Tadao Chino

Renewed economic strength and robust intra-regional trade open a window for East Asia to move rapidly on the next steps towards potential monetary integration. It will be a long road. But the potential benefits in terms of smoother trade and investment, lower cross-border transaction costs, and stable exchange rates make it incumbent on the region to start seriously considering the possibility of a single currency and the transitional measures required to achieve it.

There will be no shortage of hurdles to overcome. East Asia includes countries with widely different levels of income and development. Some economies are open and integrated into global markets. Others are moving in that direction at varying speeds.

But the 1997 financial crisis made it painfully clear that the region’s economies are tightly linked. In recent years those ties have deepened further and intra-regignal trade is now a key driver of growth in East Asia. For this dynamic process of regional integration through trade and investment to be sustainable, intra-regional exchange rate stability and predictability are crucial.

At their recent meeting on the island of Cheju in South Korea during ADB’s Annual Meeting, Asean Plus Three finance ministers focused on a series of ongoing initiatives designed to achieve closer financial and monetary cooperation in the region. These initiatives are now reaching a critical point. The key question is how to sequence the next steps to support the market-driven process of integration and how fast to move.

East Asia’s monetary and financial cooperation falls into three broad categories: information exchange and policy dialogue, reserve sharing and pooling, and regional bond market development. In each of these areas substantive progTess has been made. The Asean Plus Three Informal Policy Dialogue Process is now well established. Regional reserve sharing is a reality under the Chiang Mai Initiative. And for the first time concrete steps toward local bond market development are being taken through the Asian Bond Markets Initiative. These initiatives are historic and unprecedented.

Expanded information exchange and policy dialogue will be central to substantive moves toward regional monetary and financial integration. Countries can only make confident and informed policy choices if they have access to appropriate and reliable information. Frequent and detailed policy dialogue will help build the mutual trust that will allow the formulation of common positions on key policy and development issues.

One way to further strengthen regional information exchange, economic monitoring, and policy discussion would be to establish independent technical as well as decision-making bodies at the regional level in the next few years. The technical body would monitor regional economies and provide independent analysis on economic and development issues to the decision-making body.

The Chiang Mai Initiative, which now involves 16 bilateral currency swap arrangements worth $36.5 billion among Asean Plus Three members, is a commendable initiative. But it remains small compared to both the foreign exchange reserves of member countries and the emergency assistance provided during the 1997 financial crisis.

The CMI needs to be multilateralized to increase its effectiveness in helping prevent or manage crises. Over the next few years, there is a strong case for either seeking to enlarge the swap lines under the initiative and multilateralize the swap activation process, or consider earmarking a portion of foreign exchange reserves for financing the short-term liquidity needs of member countries. This could lead in three to five years to
the creation of a centralized reserve pool.

Bond market development has long been on the agenda of a number of countries in the region. For the first time, Asean Plus Three, under the Asian Bond Markets Initiative, and other groups are taking concrete steps to complement individual countries’ efforts to build stronger, deeper and more liquid bond markets.

These initiatives will help avoid the double mismatch of currencies and maturities that was at the heart of the 1997 financial crisis. And they will play an important role in transforming Asia’s large savings into long-term investments within the region, which will be essential for sustainable economic growth.

Progress in each of these three areas over the past few years has been real and impressive. The work outlined above represents the first steps toward greater monetary integration in the region and will help develop the access to information, trust, confidence and cooperation that are the crucial building blocks to a potential single currency. It is now time to move quickly to strengthen each of these blocks and expedite the day East Asia will enjoy the advantages of a unified currency.

Achieving monetary union would require greatly improved policy coordination, stronger regional institutions, and political consensus across countries. It will also be important to ensure that region-level efforts at monetary and financial integration complement, and do not compete with, global and national initiatives.

Europe’s experience shows that creating a regional currency is a massive and slow job. However, East Asia has the advantage of learning from Europe and shortening the process of monetary integration. East Asia’s economic dynamism will further help accelerate the process.

Mr. Chino is president of the Manila-based Asian Development Bank.

  

Posted on June 1st, 2004 by jl
Filed under: Regional Financial Concerns: Asia