MANILA, Philippines, July 30 (UPI) -- A common currency for the ASEAN countries may be four decades away, but governments should seriously start to consider the possibility now as the benefits of such currency outweigh the disadvantages, says an Asian Development Bank economist.
Srinivasa Madhur, principal economist of the bank's Regional Economic Monitoring Unit, is in charge of preparing a report on monetary and financial cooperation in East Asia, a road map of policy options for greater monetary cooperation.
"The report will be finalized in September and will be presented to ASEAN (Association of Southeast Asian Nations) deputy finance ministers at their meeting in Tokyo in November," Madhur told United Press International.
The study was commissioned last year, under the Kobe Research Project, which was set up in January 2001 to facilitate interregional research.
Since the Asian financial crisis of 1997, ASEAN countries have been increasingly interested in promoting regional monetary and financial cooperation. More recently, many countries have also started looking beyond the U.S. dollar's fluctuations to consider the activity of the Japanese yen and euro.
"There is a need for intra-regional currency stability," Madhur noted.
The first important initiative was the ASEAN Surveillance Process, established by the association in October 1998, which helps finance ministers exchange information, undertake peer review of economic policies and consider individual and collective responses to events that could negatively impact the region.
The second significant step set up currency swaps within ASEAN plus 3 (China, Japan, South Korea) under the Chiang Mai Initiative in May 2000. Now many governments in the region have agree to bilateral currency swaps worth more than $20 billion in case of currency crisis, and more deals are being negotiated.
"This is not a project that will have a lot of success if you're taking a 5-year horizon," Madhur noted, referring to a common currency for the region.
"If one goes by the European experience, it could be a four-decade project, which if even more of a reason to start now looking into the technical details that will be required in terms of institutions building, political cooperation," Madhur argued. "If after giving it enough thought, government decides against, so be it, but the preparatory ground work should be done now."
But Madhur also pointed that ASEAN countries have now the benefit of the European insight. "My hunch is that the latecomers could leapfrog. Look at what happens with technologies. Let's not forget that the ASEAN capacity for time compression is very good," Madhur said.
Madhur believes the proliferation of small independent countries since World War II is one factor encouraging a common currency. "Does every country need their own currency, their own monetary policy? I don't think so. Running a decent monetary policy is a very difficult job, especially when you have a thin capital market and a weak central banking institution," he said.
"I'm happy that East Timor has decided against taking its own currency, and instead chose the U.S. dollar," he added.
"Many countries are struggling with monetary policies. The main argument against a common currency is the loss of national autonomy on monetary policy, but I think that over time, economists have realized the benefits of an independent currency for small countries are negligible," he said. Indeed, a common currency, which would come under a credible supranational institution, could encourage many of those countries to tighten fiscal policies, improve their inflation track record, he argued.
But Madhur also recognized the difficulties of setting up such a supranational institution in Asia. "I believe serious discussions of setting up a supranational, like the European Monetary Institute (a precursor to the European Central Bank), would be a decade away," he said.
Eventually, one intermediary way toward a common currency could be having currencies in the region pegged to a common basket of currencies, some economists argue.
One of the other key benefits of a common currency could be seen on the trade front. "Up to recently, it was generally believed that you would need to have trade integration as a precursor for monetary integration. But there has been a lot of recent research showing that countries that have a common currency tend to trade more amongst themselves than with others," Madhur noted.
Japanese researchers have just released a separate report under the Kobe project, which included some of the ABD's own recommendations. The key points were: the need to set up a new regional economic surveillance and monitoring unit, which could be a new institution or part of an existing one; the need to enhance the Chiang Mai initiative to develop greater foreign exchange reserves pooling; and the need for greater regional cooperation in financial sector reforms.
Madhur recognized that there will be several key constraints to a common currency, especially the diversity in the level of economic development across countries, when the per capita income of Singapore is about 40 times that of Indonesia, and the weakness of the financial sectors of many of them.
But the most important constraint could be the lack of political preconditions. Economists argue that while ASEAN may satisfy the economic requirements for a common currency as much as the European Union did, it has not yet developed the political preconditions necessary for such currency.
But Madhur noted that countries could now be ready to make the necessary political compromises in order to reap the economic benefits.
