Economic disparities portend four speed for proposed ASEAN monetary union Wenfa Ng figshare 27 Oct 2016.pdf (203.54 kB)
Economic disparities portend a four speed proposed ASEAN monetary union with implications for regional financial and economic stability
Version 2 2016-10-27, 14:39
Version 1 2016-10-27, 09:47
journal contribution
posted on 2016-10-27, 14:39 authored by Wenfa NgWenfa NgCommon market is the initiator of
the European common currency and holds significant attraction for policy makers
interested in export driven growth to a greater populace and enjoying lower
import duties. But, a common market requires not only political concessions
from nation states, it also meant that significant amount of economic
integration in the areas of regulation, and cross border flows of funds and
reduced import tariffs need to be put in place, an area where steep negotiation
and harmonization of regulations is necessary. Moving on from a common market
to a free trade area and on to a common currency represents a challenge of
different nature and greater difficulty, chief amongst which the relinquishment
of significant hold on monetary policy making and, most importantly, cross
border financial flows, known to have potentiated financial disequilibrium in
the recent past. Despite not being an optimal currency area where the relative
economic strengths of nation states fall within narrow bounds and minor
concessions in rules concerning financial flow, bank reserve requirements,
emergency lending and tariffs ensure financial stability in the bloc, the
Eurozone remains economically stable despite a currency crisis due in large
part to the emergency lending facility and quantitative easing program of the
European Central Bank. However, stability does not hide deep structural
problems in the two speed bloc as the industrial north of the region enjoys the
benefits of a cheaper currency while the poorer south experienced gradual
deindustrialization due to the punitive effects of a common currency stronger
than its economic fundamentals. Similarly, the Association of South East Asian
Nations (ASEAN), a grouping of 10 nation states with widely different economic
strengths is working towards first a common market and a free trade area, and
maybe, a future common currency. Based on economic mix and strength, the region
can be divided into four groups: (i) Singapore (a mixed industrial and services
economy), (ii) Malaysia, Indonesia and Thailand (industrial economies with
substantial agricultural sectors), (iii) Philippines and Vietnam (agricultural
economies with an industrialization program), and (iv) Cambodia, Myanmar, and
Laos (mainly agricultural economies with revenues from tourism contributing
significantly to national income). Brunei, with its oil and gas reserve, is the
odd nation out in this analysis, and its fortunes fluctuates with that of its
exchange rate with the U.S. dollar as well as macro trends with crude oil
prices. The price of the future common currency is likely to be on par with the
economic fundamentals of Indonesia and Thailand, a setting which would have
deep implications for other nations. Asking a prospective question on the
differential impacts of an ASEAN common currency on various member states
highlights the risks to economic and political stability of an overvalued
currency with respect to Philippines, Vietnam, Cambodia, Myanmar and Laos,
where exports would be less competitive and imports more expensive. Laos, in
particular, would likely suffer the most given its dependence on agriculture
and tourism, and may require subsidies and transfer payments from richer member
states such as Singapore, Thailand, Malaysia, Brunei and Indonesia to remain economically
viable. Using a comparison, Laos’s structural problems may be more severe than
those of Greece in the Eurozone. Singapore, on the other hand, would likely
enjoy a boost to exports from a cheaper common currency, but would nonetheless
need to do the heavy lifting together with Malaysia, Thailand, Brunei and
Indonesia to ensure regional economic and financial stability. Collectively,
while the idea of first a common market and free trade area that subsequently
moves on to a common currency and monetary union is seductive, deeper analysis
of the economic mismatch and structural problems in poorer members of ASEAN
portends significant economic dislocations, and in a worse case scenario,
progressive economic collapse in Laos (and maybe a few other countries) should
the ASEAN common currency come into being. Economic subsidies and transfer
payments from rich to poor member states would add tensions both within the
bloc and in individual member states; leading to possible disintegration of the
grouping founded for maintaining regional peace and stability.