Is there a single currency in Asia’s near future? Tharman Shanmugaratnam, Singapore’s Minister for Education and Second Minister for Finance, weighed the prospects for Asian monetary integration in the September 17 Per Jacobsson Foundation lecture and concluded that continuing evolution toward managed floats with inflation targeting, rather than pursuit of the European model, is likely to hold the answer for Asia.
Shanmugaratnam first took stock of trade and financial integration in the region, where intraregional trade already constitutes 50 percent of total trade. And, unlike in Europe, trade integration in Asia has been a bottom-up, supply-driven process linked to the region’s (and, more specifically, China’s) integration with the world economy. Ten years from now—given increased foreign direct investment within Asia, a growing middle class, and development of free trade associations—60 percent of Asian trade will likely be intraregional.
Financial market integration, however, has lagged. Asian financial markets outside Tokyo are small and ill equipped, especially bond markets, and equity markets are less liquid than those in developed markets, causing Asians to look elsewhere to invest. But Shanmugaratnam expressed optimism that several complementary financial hubs may emerge as the region benefits from an easing of capital controls, more flexible exchange rates, and harmonized regulations and improved infrastructure for cross-border trading, clearing, and settlement systems.
Alternatives to the European model
Could a common currency or pegging to a common basket foster intraregional trade, investment, and financial flows? In Shanmugaratnam’s view, the European model, which started with trade and moved on to monetary integration, is not appropriate for Asia. He stressed that “Asia’s strength is its diversity.” The continent is diverse in income and economic structures, he said, and “this diversity is what makes intraregional trade so attractive, such a compelling economic proposition. It is also what helps the diversification of financial portfolios across Asia—but it is the same diversity that militates against monetary integration, that raises the costs of monetary integration and the risks of destabilization arising from monetary integration.”
Shanmugaratnam noted that two alternatives that had been proposed each had drawbacks. Asian countries could manage their currencies against a common currency basket, but the transition to this system would be challenging because the loss of independent monetary policy among the diverse economies of the region would likely be destabilizing and because there is no political commitment to union, as there was in Europe. The stresses would risk not only destabilizing monetary integration but also eroding confidence in Asian trade and finance.
The second possibility was a parallel currency— an Asian currency unit (ACU)—that could promote a regional capital market in Asia but not represent monetary integration. It would, however, be a slow process for an ACU to be accepted in the market.
Shanmugaratnam believed the solution lay in a continuation of the evolution already under way: “a shift toward managed floats as the dominant regime in Asia,” together with a movement toward low and stable inflation as the clear objective of monetary policy. This de facto move toward monetary policy coordination “is not a bad way to go,” he observed. It preserves flexibility when required; allows effective exchange rates to diverge over time, reflecting countries’ different rates of productive growth; and retains national ownership of policies and the agenda for change—which is essential for such change to occur.
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