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Asia must act quickly on monetary cooperation


THE US dollar is on the skids and it is time for Asia to put on its skates with regard to regional monetary cooperation. The connection between the two things should be obvious, although many Asian policymakers (including those in Japan who see themselves as leaders of the pack) continue to utter facile comments to the effect that it would take ’40 years’ for Asia to catch up with Europe on monetary affairs.

This is complacent and irresponsible nonsense. The dollar is sliding so far and so fast that its future role as a reserve and transaction currency is being called into question almost daily. The euro is becoming the currency of first choice (if not yet last resort) for official and private investors alike, but it cannot carry the burden of diversification by itself for too long.

Asia has a responsibility not just to itself, but also to the rest of the world, to come up with a new regional currency (be it a composite of the yen, yuan and won plus Asean currencies – or whatever) in order to create a new tri-polar world of global currencies. The euro alone cannot be expected to bear the burden of reserve diversification from the dollar or of becoming the preferred denominator for transactions as the use of the dollar declines.

The question that Asian policymakers should be asking themselves as they bask in the illusion that global currencies are other people’s business is, where would they be now if European leaders had not had the vision to conceive of and create a common currency? The answer is, utterly dependent upon a declining dollar.

The dollar was big enough to take over from the pound when the Sterling Area collapsed, but the euro is less able to assume this role.

The Americas, as well as Europe, are ahead of Asia in thinking about the implications of what is happening to the dollar now. And, for a continent that boasts thousands of years of history as Asia does, this is a sad reflection.

The US, Canada and Mexico have at least begun to talk about the possibility of a common currency – the ‘Amero’ – to succeed the declining dollar, while Asia is content simply to dismiss the idea of a common currency as a pipe dream.

Asean has come up with a formal charter of incorporation, or constitution, if you will. This is a first step along the road to formal integration among the 10 countries, and it is a sad commentary on the lack of leadership in other parts of the region that Japan, China and South Korea at least have as yet not even begun marching down the road towards similar integration, let alone being in the vanguard of the movement.

Utterances from East Asian policymakers about ‘market-led’ integration being preferable to government or institution-led integration are lamentably lame and naive.

Markets or business can create production networks across Asia, as they have done already, but they cannot provide the monetary infrastructure needed to support such networks. Nor can they create the kind of monetary integration needed to underpin the intensity of trade and investment transactions that characterise economic relations among nations of this region.

This is another reason why Asia has to get its act together, and quickly, on monetary cooperation instead of treating the subject as though it were fit only for rarified discussion within academic circles.

Instead of contributing to global monetary cooperation, Asia is creating currency wars through its narrow focus on preserving national currencies instead of thinking about a regional currency.

China often seems to be ahead when it comes to intellectual appreciation (or at least articulation) of such concepts. People’s Bank of China deputy governor Wu Xiaoling has pointed out the fact – which should have been obvious to Japan and other Asian nations (as well as to US Treasury Secretary Henry Paulson) – that the yuan has become a proxy for the yen and other Asian currencies in taking the heat for the ‘underpriced’ exports of Asia Inc.

China is merely the sales department for the Asian factory. If this degree of economic and trade interdependence does not argue in favour of the need for exchange rate coordination among East Asian currencies, and eventually for a common currency, it is difficult to see what could.

It is in Asia’s interest to cooperate on monetary matters in order to ensure burden-sharing on a regional basis. And it is equally in the interest of the wider world for Asia as a bloc to share in the burden of global currency transactions. Time to face up to new responsibilities and not just lament the dollar’s decline.


Source: Business Times 22 Nov 07


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