Previous

Part - II

Introduction

After the roller coaster ride of the 1990s, Asia has receded from the headlines. Most of the countries in the region have largely recovered from the 1997 financial crisis and a number have made credible efforts in trying to convert their societies to consumer-led demand. Now, when things are more quiet than before, it is an opportune time to ask "What next?" The surprising answer is that Asia is a logical candidate to take a leadership role in the reform of global currency markets-by creating a common Asian currency.

Asia would seem to be a strange candidate for such a radical step at first blush. After all, the key nations in the region each have separate strong identities and have developed on separate, parallel tracks. Until recently, countries such as Japan, China and South Korea seemed to place more importance on their relations with countries outside the region than with each other. Thus it is not surprising that Asia is a patchwork of different economic systems that interact in a highly unsystematic way. The effects are often extremely unwelcome. As a result, while trade and capital flows stay within Asia more often than before, these transactions are generally denominated in a third party's currency-the U.S. dollar. This exposes Asian companies to unnecessary risks. It is well known that the U.S. monetary authorities rarely accommodate the needs of the ``other side'' (in this case, the economic conditions in Asian countries). For short time-horizon transactions, there are unwelcome hedging costs. And for longer-term investments, there is unwelcome exposure to substantial exchange rate fluctuations. The current state of affairs effectively obstructs the emergence of deeper and more efficient financial cooperation in Asia and this raises the cost of capital for borrowers in the region. Currencies are a natural place, therefore, to focus future cooperation. In addition, nobody needs a reminder that this is where the last big crisis started. The currency relationships of Asia are therefore a key piece of the economic policy puzzle in the region.

A Currency Union is usually defined as an area throughout which a single currency circulates.Currently, the countries in Southeast Asia are all members of a regional grouping called the Association of Southeast Asian Nations (ASEAN). In January 1992, the members of ASEAN agreed to establish an outward-looking and market-based ASEAN Free Trade Area. The final goal is the creation of a regional market with low effective tariffs (0-5 per cent) and no non-tariff barriers, through the Common Effective Preferential Tariff (CEPT) scheme. The creation of the free trade area in ASEAN could help set the stage for the creation of a currency union among the member countries. This is because a currency union eliminates exchange rate fluctuations among the countries involved and the transaction costs associated with them. This tends to promote increased trade and investment among the countries in the union.

Next

* Contributed by -
Vipul Mittal,
First Year, MBA (Global),
IMT, Nagpur.