Academic journal article Journal of Southeast Asian Economies

Convergence and Its Implications for a Common Currency in ASEAN

Academic journal article Journal of Southeast Asian Economies

Convergence and Its Implications for a Common Currency in ASEAN

Article excerpt

I. Introduction

The recent successful introduction of a common printed currency in the euro zone brings renewed interest to the topic of whether similar approaches might be successfully implemented in other regions. One region that may be a promising candidate for this process is Southeast Asia, comprising the ASEAN member countries. Like the European Union (EU), the integration of the ASEAN nations was initiated for political reasons. Many of these issues were resolved after the middle of the 1970s, and thus economic issues became more important. Over time, the ASEAN nations have slowly increased their overall level of integration. The formation of a common currency area would be the ultimate level of economic integration, yet it is an open question as to whether this is an achievable, or even a desirable, goal.

II. Steps Towards a Single Currency

ASEAN was established in August 1967, with five original member countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Currently there are ten member countries, the additional ones being: Brunei, Vietnam, Laos, Myanmar, and Cambodia. The ASEAN nations have long seen the value of co-operation in order to promote peace, stability, and perhaps most importantly, economic growth. In practical terms, ASEAN has not reached any significant level of regional integration, even though it is only ten years younger than the European Economic Community (EEC). ASEAN's most prominent development is the ASEAN Free Trade Area (AFTA), introduced in 1992, to lower the tariff and non-tariff barriers among member countries. By contrast, in 1992 the EU had completed the single market programme, with the main objective of having a single market for capital, labour, services, and goods. During that same period, the EU was on its way to completing the third stage of the Economic and Monetary Union (EMU) to introduce a single currency. Thus, the trajectory of integration in the ASEAN region has been somewhat different from that of the EU. Perhaps this is due to the fact that the ASEAN nations do not have political incentives to drive the economic integration, as has been the case for the EU. As Eichengreen and Bayoumi (1996) have pointed out, East Asian countries in general lack the political links to drive for full monetary union.

Despite the ASEAN nations being still loosely integrated, the notion of adopting a single currency, or pegging currencies to an "anchor currency" like the Japanese yen, has been discussed in recent years for the following reasons. First, the success of AFTA has helped to enforce the idea of having closer economic integration. According to the ASEAN Secretariat (2002), only three years after the launching of AFTA trade volumes in the region had increased dramatically: exports among the ASEAN nations increased from US$43.68 billion in 1993, to almost US$81 billion in 1996, or around 28.3 per cent a year. The share of intra-regional trade as a proportion of ASEAN's total trade also increased, from 20 per cent to almost 25 per cent during the same period. However, during the Asian crisis, intra-regional trading volumes dropped from US$85.35 billion in 1997 to US$69.31 billion in 1998. This amounted to an erasure of three years of growth, as the 1998 volumes were approximately equivalent to the export volumes of 1995. Nonetheless, exports quickly bounced back to US$95.28 billion in 2000. The increase in exports can be attributed to trade with countries outside the region, because the share of intra-regional trade to total world trade remained at 23 per cent in 2000.

Second, in light of the Asian crisis, the countries in the region have a need for an exchange rate system that will help to make them more resilient against future currency attacks and help stabilize their exchange rates. Therefore, one possible alternative is to form a single currency area, as in the case of the EMU. Third, in order to ensure that the region will benefit from the forces of globalization opening up their markets, initiatives that eliminate exchange rate risks would provide a better trade and investment climate. …

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