State of Asian politics gives little hope for monetary union
That old chestnut, Asian monetary union, is back on the economic menu. But despite the best efforts of the idea's backers, there is little real appetite among the region's policymakers for greater financial integration.
Asian monetary union - and its ultimate objective, a single Asian currency - would hold huge benefits for businesses. It would impose fiscal discipline on governments, which in the long run would help hold down interest rates. It would also boost exchange rate stability - an important factor with intra-regional trade volumes rising fast - reducing businesses' risk and cutting hedging costs.
A single currency would go further, eliminating intra-regional exchange rate risk and doing away with cross-border transaction costs. According to Princeton University economics professor Peter Kenen, countries in the eurozone have enjoyed a 15 per cent increase in trade volumes directly attributable to the single currency in the six years since its introduction.
Yet, despite the advantages, there is little prospect of meaningful progress towards monetary union at any time in the foreseeable future. For the idea to work, participating countries would have to surrender some degree of their domestic economic policymaking power to a supranational body, such as a regional central bank.
The potential forerunner of such a body already exists in the form of the Chiang Mai initiative - a network of bilateral arrangements between the individual central banks of China, South Korea, Japan and the 10 members of the Association of Southeast Asian Nations, to provide each other with liquidity in a currency crisis by lending from their foreign-exchange reserves.
The backers of monetary union want to pool the funds earmarked under the Chiang Mai initiative into a single multilateral facility, which in effect would become an Asian Monetary Fund. But although regional finance ministers agreed to expand the cash available under the initiative to US$79 billion from US$39.5 billion in May, they have shied away from any moves towards setting up a multilateral institution.
That is not surprising. For any multilateral body to be effective, it would need a surveillance arm to monitor compliance with agreed economic policy objectives and to decide when to deploy the pooled reserves.
In other words, regional governments also would have to jettison their jealously guarded doctrine of non-interference in each other's affairs and surrender a portion of their economic and financial sovereignty to an international body.
That is a step Asia's governments are extremely reluctant to take, especially now that they are sitting on plentiful foreign reserves and the 1997 crisis is a receding memory.
To support their case, backers of Asian monetary union often cite the European precedent, but the comparison is misguided. In Asia, the arguments in favour of greater integration are economic. In Europe, the fundamental purpose of currency union was to tie the member countries into a closer political union. Economic integration was the means, not the end.
Asian political systems range from vigorous democracies to brutal dictatorships. With zero prospect of political union, there is no meaningful chance of monetary union, let alone a single currency, ever reaching the table.