An Asian Common Currency Jude Wanniski May 18, 2004

Memo To: Website Fans, Browsers, Clients
From: Jude Wanniski
Re: An Easier Way to Get There

It was Robert Mundell, the Nobel Laureate who teaches at Columbia University, who first conceived of a common currency for Europe when he was the chief international economist at the International Monetary Fund in the early 1960s. When it came to monetary policy, Mundell was my teacher during my years at The Wall Street Journal editorial page. Art Laffer's specialty was fiscal policy, which he taught me along with his Laffer Curve. Now that the euro is firmly established in Europe as its common currency, with all the advantages it offers to trade and travel within Euroland, it is causing other regions to think and talk of doing the same. Mohammed Mahathir, the former prime minister of Malaysia, is traveling around the Islamic nations talking up a gold dinar, and may soon have some initial success. Now we have discussions at the Asian Development Bank about following the euro roadmap. ADB President Tadao Chino last week said at the bank's annual meeting in South Korea that this would be a long, slow process and the first steps would be the most important. He's right about that.

I'm trying to get in touch with Mr. Chino through a mutual acquaintance, and when I do I will suggest that what he should learn from the euro experience is that it could be done much more quickly and easily on a path paved with gold. In other words, he should merge his efforts with Mr. Mahathir's, pulling all the Asian currencies together behind a "gold yuan," with China anchoring the regional monetary system. If China were to cut its link to the U.S. dollar and instead link its currency to gold, every other country in Asia -- including Malaysia, India, Indonesia and Japan -- would be able to fix their currencies to the gold yuan and have no fear of failure. If any Asian country did not wish to fix to the gold yuan, it could instead fix to gold itself, while the ADB worked out the mechanisms by which the system could quickly evolve into a single currency.

The way the Europeans went about it in getting to the euro was to rationalize all sorts of trading and fiscal policies within each of the participating countries. Even so, the United Kingdom refuses to participate, preferring not to give up sovereignty over fiscal and regulatory policies as well as monetary policy. The net result is a workable euro, but a wobbly one, which continues to inflate and deflate, but at least doing so together. How much easier for all Asian countries to give up sovereignty on monetary policy to the Asian marketplace, via the market price of gold, instead of a new layer of bureaucrats in an Asian Central Bank.

China can certainly show the way as it has successfully managed its economy well enough over the last decade by linking the yuan to a very wobbly dollar. It does so by managing the balance sheet of the central bank, adding yuan when the dollar price of gold rises and subtracting yuan when the dollar/gold price falls. Nobody thinks of the process in those terms, but that's the practical effect. The yuan/gold price has changed in proportional terms to the dollar/gold price with great precision over the last decade, and if it did not, the yuan/gold link would have broken. Instead of decades of planning that the euro route would take, by starting with gold the process could be achieved in years, certainly by the end of this decade. No kidding. Ask Bob Mundell.

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East Asia Should Start Addressing Challenges of Adopting a Single Currency, Seminar Told

REPUBLIC OF KOREA (14 May 2004) JEJU - East Asia should consider whether to follow the global trend toward currency consolidation by moving toward the adoption of a single currency over the long run, ADB President Tadao Chino told a seminar in Jeju today.

Introducing the seminar, "A Single Currency for East Asia: Lessons from Europe," held ahead of tomorrow's opening of ADB's 37th Annual Meeting of its Board of Governors, Mr. Chino said if the region decides to go for a single currency, the groundwork would require considerable effort, judging from the European experience.

"The time required to complete the process, including the transitional exchange rate arrangements and policy coordination, also will not be short," he said.
He added that from a global perspective, two sets of factors are likely to encourage the adoption of common currencies - the increased number of countries in the world and the trend toward globalization.

"In an increasingly globalizing world, there is likely to be a greater synchronization of business cycles," he said. "Hence, the benefits of having fewer currencies to conduct cross-border business, especially at the regional level, are likely to increase."

There was a general consensus among the speakers at the seminar that East Asia should intensify its various initiatives at monetary and financial integration over the next few years, to achieve over the long run - perhaps the very long run - the objective of adopting a single currency.

In a long journey, the first few steps are crucial; if you get them right, the ultimate destination becomes easy to reach, participants heard.

The conditions and necessary steps to introduce a single currency in Asia are many and daunting, but they could be carried out in the long run, said Haruhiko Kuroda, Special Adviser to the Cabinet in Japan.

Mr. Kuroda said there are five major steps to be taken toward a single currency - strengthening of the Chiang Mai Initiative that was put in place by the ASEAN+3 finance ministers in May 2000; greater regional bond market development; trade cooperation through free trade agreements (FTAs) hand in hand with the fourth step, cooperation on intra-regional exchange rate stability. The fifth step is the application of policy convergence criteria and the introduction of a single currency.

"Before creating a single currency, the East Asian countries would have to overcome several hurdles," he said. These include fully integrating goods and services markets in the region, greater labor market integration, a large integrated capital market, and a convergence in the economic structures and level of economic development of the participating countries.

"On the monetary side, of course, participating countries would have to give up independent monetary policy and be subject to a single regional authority," he said. "On the fiscal side, participating countries would be required to improve their fiscal positions."

In the long run, he added, there may be many more countries that could join the single currency, such as India, which might want to increase trade and investment integration with East Asia.

"This means that the size of the optimum currency area in Asia should be expanded through intensified economic integration and convergence as time passes," he said.

He added that a global single currency, which has been advocated by some, is a far more difficult prospect than a regional single currency. Even a regional central bank is not easy to operate and a global central bank would be almost impossible at this stage.

"Anyway, the current as well as prospective status of global economic integration has not yet made a global single currency a necessary or desirable institution, let alone a possible or likely one."

Although the European experience is seen as a model for the way forward on financial integration, the question arises whether such a model would apply to East Asia, added Robert F. de Ocampo, former Secretary of Finance of the Philippines.

"In the case of Asia, the concept of 'region' is premised on geographical reasons," he said. "The economic reality, however, is that there is substantial diversity in the economies, each with its own idiosyncracies."

He cited that ADB's Key Indicators show that the highest per capita income in Asia is about 140 times that of the lowest as of 2001, in contrast with Europe, where the countries were more on a par with each other.

"The key challenge facing the move towards greater cooperation and integration within the region is to find a way forward, that is, set priorities and sequence activities," he said.

"The European experience does suggest that the adoption of a common currency is the last step in the process of regional economic integration, and hence takes a long time."

Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank said Asia could benefit from reviewing Europe's experience.

"The key challenge is to create an exchange rate or monetary arrangement that is consistent with the underlying economic order," he said. "Since the economic order is evolving all the time, the monetary order can be expected to need adjustment."

He pointed out there is a major difference between the common locking of exchange rates by a number of different countries that still retain monetary sovereignty and the introduction of a single currency, central bank, and monetary policy.

"At the same time, given the increasing importance of economic relations within the region and the noticeable advancements in regional cooperation, some adjustments in the region's monetary order may become helpful at some perhaps not too distant point in the future and may well entail a greater regional component."