Benefits of a Common Currency
Discuss about the International Financial Markets and Institutions for Dollar.
Although there are a number of currencies in the world, the two most prominent currencies are Dollar and Euro. While the former one is a single currency, the later one is a common currency as adopted by the European Union and is being used in the 17 countries throughout Europe. The 28 nation European Union had introduced Euro as the new currency on January 1st, 1999 (Leonard & Taylor, 2016). Before the introduction of the Euro as the common currency, there existed a number of the domestic currencies and the role of Euro was restricted to be used as the exchange currency only among the member countries of the union. However, Euro replaced the domestic currency usage in most of the member states within the span of three years. The successful introduction of Euro as the common currency among the member states of the European Union and the aftermath of the financial crisis of the year 1997 had initiated the surge for regional integration among the member countries of ASEAN. This has further raised the question as to whether a similar approach as to the introduction of Euro for the European Union, would be suitable for the member countries of Association of Southeast Asian Nations (ASEAN). The ASEAN was formed on August 8th, 1967 and is the world’s second most successful regional organization having 10 member countries as of now namely Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam (Mahbubani, & Sng, 2017). The essay presents an insight of the significant benefits of adoption of a common currency on the lines of the Optimum Currency Area theory, prima facie challenges in the implementation of the same and the related implications for the member states of ASEAN. The essay concludes that in spite of the existence of few challenges, the introduction of a common currency union for the ASEAN countries on the lines of the European Union can be beneficial in the long run.
The Asian continent does not possess any common currency, accordingly, the international trade governing the Asian countries takes place by first exchanging these domestic currencies into major currencies like Yen, Euro or Dollar. As a result, the Asian currencies face high competition in terms of value. The question as to what are the major benefits of the usage of the common currency has been answered as under. Firstly, the introduction of common currency allows smooth flow of trade among the member countries. The basic aim towards the introduction of Euro currency was also to build a common market for trade and to allow free movement of capital, goods, and people (European Union, 2018). The facilitation of trade occurs by the reduction of transaction costs and the avoidance of fluctuations arising out of exchange rate differences among various countries. Eventually, there is an enhancement in the overall growth rate in the field of trade and commerce at both the national and international levels. The trade statistics of ASEAN countries for the year 2015, show that Intra-ASEAN exports accounted for the US $ 305,693 million, while the Intra-ASEAN imports accounted for US $ 238,059 million (ASEAN, 2016). In percentage terms, the total intra trade accounted for about 24 % of the total trade (ASEAN, 2016). As depicted by the figures, ASEAN member countries are already dependent on each other for about a quarter of their total trade and therefore, the adoption of a single currency would aid in the trade by increasing the openness in trade practices and the volume of the intraunion trade. The second major advantage of common currency introduction which is in line with the first one is that common currency would lead to access to goods and services at competitive prices by lowering the prices of the trading of goods and services in between the member countries. As inside the Eurozone, reduction in the bilateral trade cost and other transaction costs such as hedging cost has lowered the marginal cost of the bilaterally traded goods, further leading to efficient price-cost markup. The common currency adoption has led to the creation of tourism opportunities and has also reduced the cost of traveling for the European nations not only for the business purposes but also for studies and holidaying (Santana-Gallego, Ledesma-Rodríguez & Pérez-Rodríguez, 2016). Following the European’s Central Bank’s monetary policies, prices have also become stable in the European Union member states, with inflation rates only being around 2 percent annually over the years (Riet, 2017). In addition to the above as stated by the European Commission, higher trade integration leads to the synchronization of the national business cycles, eventually leading to the uniform shocks (Di Giorgio, 2016). That means a boom in one country can trigger the boom in another country. The same benefits can be yielded for the member states of the ASEAN as well. The third significant benefit of opting common currency would be the integration of the regional currencies of the member nations. After the financial crisis of the year 1997, it was quite evident that almost every ASEAN country’s currency was losing its value in light of speculation (Harvie, & Van Hoa, 2016). The issue can be resolved if currency integration is achieved which will allow a stable exchange rate system for the ASEAN countries and flexibility against the strong international currencies like US Dollar, Yen, and Euro. For instance, the euro exchange rate causes unification of the means of exchange in all the member countries of the Eurozone, leading to the predictability of the exchange rates and a means against the shock of exchange rate volatility as against other currencies of the world. The benefit can be described with the help of an example. Suppose a company in Thailand decided to buy a machinery from a company in Singapore, and there is no fixed rate system. The rate of exchange at the time of contract between the Singapore Dollars and Thai Baht was 1 SGD to 25 Thai Baht. The company thus decided to pay 250,000 Thai baht i.e. 10000 SGDs. However, due to some economic shocks, the exchange rate on the settlement date changes to 1 SGD = 30 Thai Baht. Accordingly, the company in Thailand would be required to pay 300,000 Thai baht for the said machinery. If only there was a single common currency between the two nations, one gets rid of the exchange risk and the resulting fluctuations. A single currency makes it easier to plan the business and as a result the investment increases. The fourth major benefit of the introduction of the common currency for ASEAN is that it will assist in the economic integration amongst the member countries, as stated by the Optimum Currency Theory. Robert Mundell had developed the Optimum Currency Theory in the year 1961 (Johnson & Swoboda, 2013). According to the Optimum Currency Theory, the option of the creation of a common currency union must be opted for, if the economic costs in relation to its creation are less than the economic benefits. This can take place only if the transfer of labor and capital is high among the countries joining the union. As a result in the event of the crisis in one member country, labor and capital are free to move to the other member country and having a better economic performance and this, in turn, will prevent the situation of unemployment. The microeconomic fundamentals are good among the ASEAN6 and there has also been a strong track record of regional cooperation in the past years (Richard, Masahiro & Ganeshan, 2014).
Challenges to the Adoption of a Common Currency
Though a few challenges of common currency implementation in the ASEAN countries exist. These are described as follows. The first major challenge is that there is a wide gap between the levels of economic development and the income differentials between the member countries of ASEAN, unlike amongst the member countries of European Union. For instance, the GDP per capita of Singapore for the year 2016 was $ 55,241 as compared to that of Burma- Myanmar, which was $ 1196 in 2016 (Country economy, 2018). As it is seen, the Singapore’s per capita GDP is around 48 times higher than that of Burma. The bigger the gap is, the more difficult it is for the countries to economically integrate with each other. While the degree of diversity among the European nations is lower, and hence monetary union sustainability is much easier for the countries of European Union. The second major challenge posted on the way of the common currency adoption is the cooperation and the harmonization of the banking and other financial sectors of the member countries. Among the member countries of ASEAN, Singapore has the most sound banking and financial system. In order to introduce a common currency like Euro, the resource pooling system enhancement is must in order to sustain the exchange rate crisis. The issue can be sorted with the creation of the institutions like European Council, European Central Bank, and European Commission.
The creation of the Asian Free Trade Area (AFTA) is a significant move aimed at the elimination of tariff and liberalization of trade practices, in order to economically integrate the countries in Asia (Okabe & Urata, 2014). The ASEAN Swap Arrangement (ASA) covering the ten ASEAN member countries has been extended to South Korea, China, and Japan in the year 2000 (Kawai, 2015). In addition to this in June 2003, the central banks of Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand have been working for the Asian Bond Fund (ABF) in order to meet the financial crisis (Emery, 2018). The efforts for the establishment of ASEAN Economic Community (AEC) by 2020 are on, as decided in the Bali Concord held in Bali in the year 2003 (Menon & Melendez, 2017).
As per the discussion in the previous parts, it can be concluded that adopting a common currency in the globalization era can have significant benefits for the member countries of the ASEAN. Though it had taken about fifty years for the countries of Europe since the start of economic integration, until the adoption of the common currency. Therefore it can be said, for single currency adoption in ASEAN, it would still take few more years to achieve the goal. Over the years, these countries have already tapped successful economic goals implementation at an unparalleled pace. But the first stage to such adoption would be to pursue a set of systematic background efforts that act as the base for an effective framework for common currency usage. Greater efforts towards political integration between the member countries are needed to approach faster towards the common currency introduction. The resulting major benefits occur on the lines of the creation of a large common market for trade and commerce, eventually leading to the growth of the volume of trade at both national and international levels. This is followed by the integration of the economies leading to better allocation of resources. In addition to this, greater facilitation of trade would reduce the cost of the goods and services and the goods and services would be available at competitive quality and prices. The benefits continue to trickle down to common citizens as the cost of traveling for studies or business purpose would be reduced as it did, in the case of the European nations. Achieving price stability, avoidance of exchange rate fluctuations and business synchronization are some other benefits. The creation and implementation of the international institutions and agreements like AFTA, ASA, ABF, and AEC would prove to be a strong base for the regional and economic integration before the common currency adoption. The road to common currency adoption for ASEAN is not that smooth though. The challenges of diversity in the economic developments of the member countries as depicted by the differences in the per capita GDP, correlation of the banking and other financial resources, needs to be overcome first in order to successfully implement the common currency for the said countries. Also at first stage, it is recommended that the adoption be made in the developed countries having similar GDPs and later on be implemented in the other countries of ASEAN.
References
Association of Southeast Asian Nations. (2016). External Trade Statistics. Retrieved from: https://asean.org/storage/2016/11/Table18_as-of-6-dec-2016.pdf
Country Economy. (2018). Country Comparison Singapore vs Burma- Myanmar. Retrieved from: https://countryeconomy.com/countries/compare/singapore/burma
Di Giorgio, C. (2016). Business Cycle Synchronization of CEECs with the Euro Area: A Regime Switching Approach. JCMS: Journal of Common Market Studies, 54(2), 284-300.
Emery, R. F. (2018). The bond markets of developing East Asia. Oxon: Routledge.
Europen Union. (2018). Goals and values of the EU. Retrieved from: https://europa.eu/european-union/about-eu/eu-in-brief_en
Harvie, C., & Van Hoa, T. (2016). The causes and impact of the Asian financial crisis. New York: Springer.
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Mahbubani, K., & Sng, J. (2017). The ASEAN miracle: A catalyst for peace. Singapore: NUS Press.
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Santana-Gallego, M., Ledesma-Rodríguez, F., & Pérez-Rodríguez, J. (2016). The euro effect: Tourism creation, tourism diversion and tourism potential within the European Union. European Union Politics, 17(1), 46-68. doi: https://doi.org/10.1177%2F1465116515600533
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