REGIONAL ECONOMIC POLICY: by Colin TeeseNews Weekly
A single currency for East Asia? (Part 1)
, April 15, 2006
In the first of two articles, former deputy secretary of the Department of Trade, Colin Teese, examines Japan's push for an Asian euro
.None of us can forget that, towards the end of the 1990s, many of the economies of East and Southeast Asia were thrown into economic chaos, when large chunks of speculative investment were withdrawn without warning. The currencies of the affected countries collapsed, and the effect on individual economies and their peoples was devastating.
With unseemly haste, the International Monetary Fund was quick to absolve speculative currency movements from blame for the crisis. These had nothing to do with the shortcomings of unregulated financial markets, insisted the IMF. It was all owing to what the IMF chose to call "crony capitalism" - as if these circumstances could occur only in the emerging Asian economies.Defaulted
Borrowers in those countries had defaulted on financial obligations owed to international financial institutions, and, ultimately, it was up to their governments to pay back these private borrowings - if necessary through IMF loans.
The IMF would set policy for borrowing governments, including the running of budget surpluses to allow the IMF to be repaid, no matter the hardship and disruption these policies might cause. That was the penalty people must pay where governments had permitted crony capitalism to flourish.
Never mind that the loans accounted for private transactions: governments were still held responsible and had to run budget surpluses in order to make repayment possible, no matter what the personal suffering that might cost. (Our own Government, which keeps telling us that Australia's enormous privately-incurred $470 billion net foreign debt is not its concern might take note of this IMF view).
Some of the wiser heads in South-East Asia, led by Malaysia, ignored the IMF and reordered their financial market so as to halt speculative money movements. Financial journals around the world, including in Australia, predicted dire consequences to follow what they regarded as rogue acts by irresponsible governments. As it turned out, these were the economies which recovered quickest; others such as Indonesia, which followed the IMF prescription, are still trying to recover.
There can be no doubt that the reputation of the IMF suffered serious damage from this experience, the full implications of which are perhaps now becoming obvious.
We know that the important Latin American countries, including Brazil and Argentina - both of whom were seriously burned after following IMF economic prescriptions - learned their lesson. They have paid off all borrowings to the Fund, and their future intention is to arrange their economic affairs independently of IMF financial orthodoxies.
It now appears that the important Asian economies might be preparing to follow suit. The behaviour of the IMF during the Asian crisis undermined regional confidence in the Fund. At the time, Japan, it will be recalled, went so far as to suggest that the region should establish its own Asian Monetary Fund to deal with any future crises. It was even prepared to put up what amounted to seed money in order to start such a fund.
This positive idea was roundly condemned by the IMF and the United States. Australia jumped in behind them with what seemed, even at the time, ill-judged support for the IMF.
Japan's quite moderate proposal would have included funds from both Europe and the United States. Had that happened, both the US and the European Union would have retained an important influence over the creation and operation of what might have been an effective Asian Monetary Fund.
Perhaps, at the time, the IMF and its supporters breathed a sigh of relief as the AMF proposal foundered. If so, they are probably changing their minds.
Recently, the Australian Financial Review
's Asia-Pacific editor Greg Earl published a long article, "Japan leads push for Asian euro" (AFR
, March 27, 2006), about an Asian initiative for our region, which it appears to be developing within the Asian Development Bank and with Japan strongly behind it.Ambitious
It seems to be much more revolutionary and ambitious than the AMF idea of eight years ago. It has probably been driven, in part, by the monetary crisis in the region during 1997-98. But it is also taking into account more recent concerns of the lender countries of the region about developments in the United States.
An uneasiness has sprung up about US borrowing - and its corollary, the amount of lending by the saving economies needed to support US consumption. Japan is said to be particularly concerned.
It is being said that the time has come for the spending countries to do some saving. The major target was obviously the US, but we cannot assume that Australia was excluded from the group. Japan seems to be saying that, in the face of a falling dollar, US Treasury Bonds become an asset of declining value and attraction. The question is whether, under these circumstances, the Japanese will still be prepared to underwrite US spending sprees.
This is especially so, given what seem to be more promising investment opportunities in Asia, and all the more so if the major Asian economies - that is, the Association of Southeast Asian Nations (ASEAN), plus Japan, China, India and Korea - could be brought into closer financial co-operation.
A first step, apparently suggested by the Asian Development Bank, is to work towards the creation of an Asian currency unit (ACU). This would follow the example of what was done by the European Union - then the European Community - 30 years ago.
At that time, the EC created the European currency unit (ECU), which was a kind of nominal currency for the European Community. Each member country would keep its own currency, but an agreed-upon mechanism and supervision arrangements, from within the banking system, would endeavour to keep the individual currencies of the member countries in reasonably stable relationships with each other. By this means, the member countries, when conducting various transactions with each other, would avoid the worst disadvantages of floating exchange rates and thus make possible closer economic cooperation.
For the European Union, the ECU became the launching pad for progress towards a single currency for the union.
The ultimate aim of the Asian idea is, if possible, to achieve a single currency, though given the European experience, that could, realistically, take 25 to 30 years.
Even the first step, the establishment of the nominal ACU for the Asian economies mentioned, would be no easy task. It could take several years. But if the countries want it enough, it will happen. Certainly, it is much more achievable than the unrealistic and ideologically-driven free-trade proposal that was once being discussed at the Asia-Pacific Economic Cooperation (APEC) forum.
Devising a workable system for the mechanisms and machinery to keep the existing currencies in reasonably stable relationships will certainly require protracted negotiations. And, once in place, careful and constant cooperation will be needed to keep it functioning. That certainly was, and continues to be, the experience of Europe. But the Asians, in their own way, can be quite good at this sort of thing.
The importance of this development is hard to exaggerate. As an experiment in regional cooperation, it is no less important than was the beginnings of European integration 50 years ago. Its impact on the rest of the world is likely to be at least as great.
It is difficult to evaluate, but it does suggest important changes in attitudes within the region. It may be that Japan, for one, sees a more positive future for closer Asian cooperation than ever before. And perhaps, also, it sees its future more closely aligned with Asia than with the United States.
If true, this is a very important development. And, no less important, would be if Japan is able at least to contemplate a kind of accommodation with China, which would have seemed impossible only a few years ago. Perhaps, Japan has even come to believe that, for the future, investing in the productive capacity of Asia is potentially more beneficial than anything it might do with the West.Shaken off dependence
This, at least, is understandable. Japan's economy has shaken off its dependence on consumer goods exports of the kind it had when we began talking about its economic miracle. The Japanese home market is now much more important than it was then.
Japan is now more interested in exporting capital goods to countries such as China, which are producing consumer goods. Apparently, as a capital exporter, Japan is losing interest in funding the US deficit.
We can expect to hear more about this issue. We can expect, too, that much of the Western-sourced comment about it will be negative.
But we would do better to ignore the negatives, and, on the assumption that it will happen, try to understand what it might mean for Australia.
- Colin Teese is a former deputy secretary of the Department of Trade.