The case for a common Asean currency
It’s fair to say there exists a level of social and economic inequality within Asean.
Following the 1997 Asian financial crisis that exposed Asean’s vulnerability to cross-border capital flows, the region has undergone a significant transformation, from a bloc of mostly underdeveloped and developing countries to one with the world’s most dynamic economies collectively.
However, rapid development has led to rising income disparity and high levels of inequality, which undermine the fight against poverty, slow down economic growth and threaten social cohesion.
It was after the Asian financial crisis that Mahathir Mohamad, then the prime minister of Malaysia, floated the idea of having a common currency for the region. In 2019 he reiterated the proposal, stating that such a currency was “not to be used locally but for the purpose of settling of trade”. It would be pegged to gold, with the intention of creating a currency that replaces the US dollar as the medium of regional trade and investment.
Why the push for a common currency in Asean? All we need to do is look at Europe. In the 23 years since the euro was adopted, it has contributed to the stability, competitiveness and prosperity of European economies. The single currency has helped to keep prices stable and protected participating economies from exchange-rate volatility.
However, while Europe has shown that a common currency does and can work in a globalised world, there needs to be cautious. We all recall how the European sovereign debt crisis of a decade ago was indirectly brought about by the euro’s single monetary policy that did not fit local economic conditions.
FLOATING RATE RISKS
Under floating exchange rate regimes, currencies tend to be more volatile than is warranted by the economic fundamentals of an economy. This is especially true of small developing economies with thin capital markets.
Many Asian emerging market economies hold significant US dollar-denominated reserve assets to guard against potential financial instability. With this level of reliance on the dollar, Asian countries are highly exposed to shocks arising from changes in economic policy and conditions related to the US. Our economies are subject to global financial cycles in capital flows, asset prices and credit growth.
Developing countries with large unhedged foreign currency liabilities, therefore, often “fear to float”. Monetary policies in such countries tend to be pro-cyclical rather than counter-cyclical.
Belying the expectations of advocates of floating exchange-rate regimes, flexible rates have often become a source of shocks rather than shock absorbers. Disproportionate volatility in exchange rates has led to increased uncertainty, lower trade and investment and reduced overall economic growth.
What benefits can a common currency bring to Asean — and more specifically to Thailand?
Just as a common language facilitates effective communication among people, a common currency could help eliminate exchange-rate uncertainty, guard against speculative attacks and raise Asean’s bargaining power.
Long-term interest rates may potentially decline and become less volatile. A common currency will also facilitate greater flows of intraregional trade, thus putting pressure on prices and resulting in cheaper goods and services.
Individuals will also benefit because they will no longer have to change money when travelling within the region and will be able to compare prices more readily. Given Thailand’s prime location, this could further intra-Asean trade interests for the country.
Services such as healthcare, education and tourism will potentially become more affordable to other Asean citizens, increasing demand in these sectors. Manpower and talent can be easily interchanged, leading to greater employment opportunities as well as increased economic integration among Asean countries.
However, sustaining a common currency at a practical level might be more difficult than adopting it.
According to an Asian Development Bank report, factors that hinder adoption include very different levels of economic development, weaknesses in the financial sectors of many countries, and inadequacy of “resource pooling mechanisms” and institutions required for a currency union. Most importantly, the region lacks the political preconditions for monetary cooperation, the bank said.
A common currency needs robust financial systems and markets, as well as strong institutional support. Not all Asean countries have such institutions to deal with threats to the financial sector, which have increased in recent years.
In Thailand, the return of political protests following the easing of mobility restrictions could set the stage for political, and therefore economic, uncertainty.
Then there is the lack of control over national monetary and fiscal policies, restricting governments’ sovereignty and autonomy. Not all Asean members are willing to accept this in a heartbeat.
Perhaps the adoption of a digital currency, which countries such as Singapore and Cambodia are currently exploring to enhance payment efficiency, could be the key to solving the issues posed above. Digital currencies and other innovations in payment systems could increase the speed of domestic and cross-border transactions, reduce transaction costs, and eventually broaden access to the financial system for poor and rural households.
Economically, a common currency can serve to benefit countries that have weighed the costs of potentially losing monetary autonomy against the benefits of a currency union.
The growth and development of Asean may be uplifted with a common currency – helping the region improve its financial stability and contributing to the world economy. Bangkok Post