Previous

Part - V

There is an increasing alignment of economic cycles across the world. We observe this phenomenon in Asia as well. Any news of slowdown in the Chinese economy triggers recessionary and bearish signals in other Asian economies as well, which is immediately manifested in the movements of respective stock markets. Having said this, the synchronization is not as great as it is in the case of business cycles of Asian economies with the American or European economies. The clear reason is the lack of integration and dependence of economies within Asian. Of course, in pockets the economic cycles have aligned to a great extent like the south east Asian economies. One very clear contrast is in the oil dominated middle east economy with the other economies. Rise in oil prices provides a boost to middle east economies but causes supply side driven inflation and subsequent slowdown in the other Asian economies.

The third condition is that the member states share a common economy. The single market must be complete so that goods, services, capital, and labor can move freely across the borders of the countries in response to price signals. However, if the single market remains incomplete, the increased competition generated by the common currency will have an even more dramatic impact on less competitive businesses and it will restrict the ability of industries to adjust.

The currencies of the various countries should be fully convertible amongst each other and trade shall not find any constraints through policy of any country. Capital markets should be well-developed and integrated such that goods, services, capital can move freely across the borders of the countries in response to price signals. Besides, free mobility of labor is another important factor which helps the purpose. However, if the single market remains incomplete, the increased competition generated by the common currency will have an even more dramatic impact on less competitive businesses and it will restrict the ability of industries to adjust. As we can see in Asia, there is no free movement of capital and labor. For eg. the permission from central bank is required both in China and India if capital has to move in or out of the country. Though India is moving in the direction of full capital account convertibility, there is still a long way to go. There is no PAN-ASIA free trade agreement as such. We can easily basket Singapore and Philippines as countries having a capitalist approach, whereas China has a communist approach and India is perceived as a socialistic country. All this leads us to believe that Asia does not meet the third criterion.

Next

* Contributed by -
Harshdeep Jolly, Anshul Mittal & Pankaj Jain,
PGP 2,
IIM Bangalore.