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

The Case for Asian Monetary Union

From an economic perspective, it is as close to an airtight case as you can get. Asia is thirsty for investment; in infrastructure alone it needs billions annually. The existence of over two dozen currencies, however, produces foreign-exchange risks that hamper capital markets. A resultant over-reliance on banking has made financing more expensive than it need be. The consequences of all the above can be dire, as they were in the 1997 currency meltdown in Asia.

The solution would clearly seem to be a single Asian currency. Even seen from the outside, monetary union would be ideal. A common Asian currency would join the dollar and the euro in anchoring the world’s financial system, even if the three were not interlocked. Minnow currencies would dart here and there beneath the Big Three, but their movements would pose no danger to global monetary stability.

There’s only one catch, but it’s not small. Politically, Asia remains stubbornly fragmented. The idea that the new currency would be a Japanese yen written large does not sit well with many Asians who have memories of World War II. A different scenario - that it could be a yuan written large - troubles others who are wary of China’s authoritarian regime and the resulting potential for instability.

The political obstacles drive some officials to despair. Haruhiko Kuroda, a special adviser to the Japanese cabinet, was refreshingly candid on the matter when he told a meeting of the Asian Development Bank (ADB) in Korea’s Cheju Island last month:
“The more we think about a single currency the greater the political factor seems to dominate. Especially in Asia, where political systems vary so much from country to country and political rivalries between countries are still so intense, we tend to be pessimistic about a single currency even in the long run.”

Mr. Kuroda nonetheless ended his speech on a positive note, adding that “however, if we look at the younger generations who are free from old nationalistic sentiment, we can be more optimistic. ” All the same, 13 Asian nations meeting on the margin of the ADB conference made no progress toward a unified currency.

Originally, the 10 members of the Association of Southeast Asian Nations (Asean) plus China, Japan and South Korea - a group known as Asean Plus Three - had planned to wrap up a review of a four-year currency swap arrangement agreed to in Chiang Mai, Thailand in 2000. That could have opened the way for further steps toward monetary union. Instead, finance ministers ordered “further studies” so they can talk about the issue again in a year’s time.

Though experimental as a safety net against the type of speculative attacks against currencies seen in 1997, the so-called Chiang Mai Initiative has been a relative success. In four years there has been some $36.5 billion worth of swaps. The swap facility and a related Asian Bond Fund have allowed central bankers to start experimenting with the tools of a unified monetary policy.

In 2004, with close to $2 trillion tucked away in official reserves in central banks, the Asean Plus Three governments apparently feel strong enough to withstand another 1997-type attack. The confidence is misplaced, however, for several reasons. Even $2 trillion can be frittered away in a snap in a world where foreign exchange transactions are equal to or exceed that amount every day. Rather than wasting reserves, Asian central banks would be in a far better position to resist speculation with a system based on a reference value, keying on its price to control the supply of money.

An important case in point is China. Though lately Beijing’s policy of fixing the yuan to the dollar has come under attack from U.S. protectionists, the peg has worked. As the nearby graph demonstrates, China’s economic growth was maintained virtually unchanged through the 1997 crisis and its aftermath, while countries that went off the dollar standard suffered reverses. In a region that needs around $250 billion a year in infrastructure investment, according to the ADB, reduced fears of speculative attack would enable more of that $2 trillion in reserves (mostly invested in U.S. treasurys) to be put to work in Asia.

Asians are lucky in that they have a laboratory experiment that indicates how well these ideas work: the euro. There, the new absence of foreign-exchange risk has been an elixir to sovereign and corporate bond markets. According to Merrill Lynch, euroland’s share of the euro bond market grew to $2.866 trillion in 2003 from $592 billion in 1998, before the inception of the common currency. (In the same period, the value of Japan’s corporate bond market shrank to $837 billion, from $1.015 trillion, while Asia as a whole has remained heavily dependent on bank financing.)

The establishment of a euro currency area has also allowed funds to flow to states pursuing pro-growth policies-such as Ireland and Spain-from those parts where socialism still reigns, such as France and Germany. Today’s Eurosocialists are still hard at work trying to turn the euro into a vehicle for state intervention. Asians can also learn from these mistakes, by avoiding them.
Asian economic integration in terms of commerce is evolving rapidly, as ADB President Tadeo Chino explains in an article nearby. In a recent paper for the Washington D.C.-based Progressive Policy Institute, Edward Gresser even postulates an Asian economic union, in which “China’s manpower and low costsare united with the money and technology of Japan, Korea, Taiwan, Hong Kong and Singapore.”

No, one can’t ignore the fact that, politically, these six entities eye each other warily. But this adds even more urgency to thinking about currency union. If the economic case is strong, so are the political dividends.

  

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