Champions of here and now European-style integration have been raising their voice in many parts of the world, most notably in Asia in recent times. The present euro-crisis offers invaluable lessons to them on the immense homework needed before proceeding towards an economic and monetary union. At the very least, the crisis has awoken the world to the perils of putting the cart before the horse.
There is no doubt that as Asia advances, it will need to reduce its dependence on the dollar. A recent study prepared for the HSBC points out that China, India and Japan will be three of the top four global economies by 2050 with a combined GDP of $39 trillion. Intra-Asian trade constitutes a significant proportion of the total trade of Asian countries and it is only set to grow. Trade between India and China surpassed the targeted $60-billion mark last year, up from the $42.4 billion clocked in 2009-10. China emerged as India’s largest trading partner in 2008 and India is already one of China’s top 10 trading partners. China is also Japan’s largest import partner. China’s exports account for 18.3% of Japan’s imports. Japan is also China’s most important import origin country. The potential is even greater. Given these facts, a common currency is essential not only because it will bring down transaction costs but also in order to avoid external influence on domestic policy, a fallout of dependence on currencies like the US dollar. According to the European Commission, the annual savings associated with a single European currency has been about 1% of GDP in Europe.
Asian policy-makers have been heading in the direction of closer cooperation since the formalisation of the network of emergency central bank loans, set up in Thailand in 2000 to try to prevent a repeat of the 1997-98 financial crisis. The early success of the euro was their inspiration. More recently, the East Asia Summit has been working towards this goal. However, they forget that Asia’s challenges dwarf those of Europe. The present turmoil in Europe highlights the need to ensure crucial prerequisites before initiating monetary integration. The countries of Europe painstakingly knitted together their economies, and then their exchange rates, over the course of nearly half a century before they were ready to create the euro. And yet they failed. Asia clearly lacks that degree of integration.
The first step would be to bring down the barriers so that investment, trade, finance and people can move freely across economies. Provisions need to be made for the transfer of fiscal funds from the rich to the poorer economies. Before they signed on to a common currency, euro-zone countries were able to devalue their individual currencies in order to boost international competitiveness and strengthen their balance of payments positions. A single interest rate scheme can also lead to disaster. Tensions will arise when an economy such as India’s needs lower borrowing costs while another, say Pakistan, needs to clamp down on credit growth.
Such complex coordination entails high level of statistical honesty by member countries. It is difficult to imagine that Asian nations with varied political systems would be ready to give up their economic sovereignty.
Moreover, even to imagine that wealthy Asian countries like Singapore and Japan will partner with poverty-infested Bangladesh and Myanmar is a folly. Geopolitics will ensure that economic considerations would always be superseded by the political in the region. This is more than illustrated by the South Asian Association for Regional Cooperation initiative in South Asia, which yet remains a mere talking shop. To add to this is the issue of terrorism. Asian economies that are relatively better-off at present would not want to risk disrupting their current growth trajectories by opening up their borders and economies to rogue States that nurture terrorists.
Clearly, while it is imperative that the Asian agreement evolves way beyond the Maastricht Treaty, it should take one step at a time. The Asian common currency should be evolved based on economic and political realities, not in spite of them.
Since Asia lacks a EU-like arrangement to push integration, incremental trade and investment integration would be the ideal way forward. Leap-frogging into utopian ventures like a monetary union will not only endanger the integration initiative itself, but will also reverse the trade linkages that Asia has already achieved. If the currency crashes, the risk of controls on capital flows by individual nations cannot be ruled out. And that would reinforce protectionist tendencies among the countries of the fledgling Asian Union.
( Rohit Viswanath is with the Indian Council for Research on International Economic Relations, New Delhi )
The views expressed by the author are personal