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Common currency for Asia not feasible now: economists

Star Business Report
Asia can think of a common currency in the long run as Europe's ongoing crisis makes such possibility unfeasible for the moment, said top economists yesterday.
"A common currency is not feasible for Asia for the moment," said Lei Lei Song, a principal economist at the Office of Regional Economic Integration in Asian Development Bank (ADB).
"In the very, very long run, there might be a common currency. But it would be a very, very long run," he said.
His colleague, Iwan Azis, head of ADB's Office of Regional Economic Integration since 2010, said a common currency has never been a concrete plan in Asia.
He said the issue was discussed among scholars and analysts. But the policymakers did not discuss it. "Realistically, a basket currency can be anticipated but in a very long run."
They made the observations while taking part in a live online discussion styled "Will Asia continue to integrate its economies?" from Manila.
Song said, this is a hard lesson from the Eurozone crisis. "There are many more preconditions for a common currency than we previously thought. And Asia is far from satisfying those preconditions."
He said, even if Asia does not have a common currency in the foreseeable future, Asia needs to discuss exchange rate policy in order to facilitate intra-regional trade.
"This is where a basket currency comes into the picture. A basket currency could be a benchmark for countries to discuss their exchange rate policies. The purpose is to maintain some sorts of intra-regional exchange rate stability, while keeping exchange rate flexibility against the major currencies outside of the region."
Song said the common regional currency is not feasible in the foreseeable future, yet regional anchor currencies (RMB, won and
yen) are emerging, as countries in the region use those increasingly in trade settlements and financial transactions.
These currencies have become more important in determining the value of other currencies, he added.
He said the global financial crisis and the Eurozone debt crisis showed that Asean is quite resilient, as all the members are not affected much. And they are most likely going to withstand a possible contagion.
"The region does have some vulnerabilities such as fast credit growth in some economies and elevated inflation in others."
Azis, who specialises in macro-financial economics and regional economic modelling and institutions, said Asian integration would
continue despite geopolitical tensions.
"On the ground, in the last few years, especially after the Lehman collapse in 2008, the business sector in Asia has continued working on its business with other Asian countries and emerging markets outside Asia. The integration process in the region is more market-driven than in Europe."
Azis said, on the trade side, in the first round effect, those countries not very dependent on exports would be able to withstand the effect of contagion, but given the increased trade integration in Asean, eventually these countries will feel the impact.
Through the financial channel, those countries where the exposure to foreign
claims, especially from Europe, is smallest will withstand the contagion effect best, he said.
Azis said food price increases would obviously affect inflation, especially in Asia where the food component constitutes a large portion of total inflation.
The most affected will be large foodimporting countries. But whether the monetary policy will be much affected by this depends on the specific condition in each country, he said.
He said when the source of inflation is supply-side (such as weather related), monetary policy will not be effective to counter the resulting inflationary pressure. It is the same thing for the budgetary issue.
Azis said providing subsidies is often problematic not because of the subsidy itself but because of the design of the subsidy and the lack of preparation. When subsidies are extended for political reasons, it is usually not sustainable and can be damaging. Not so with well designed subsidies that can raise the real purchasing power of most citizens.
Song said economic integration in Asia will continue, despite difficulties in the short term. "Asian economies will integrate further. Integration in Asia is market-driven, institution light and multi-track."
"And economic agents will have the incentives to integrate further, as integration will expand markets and input resources, and therefore will facilitate more efficient resource allocation. This will accelerate productivity and thus economic growth."
Song said to fully tap the potential of these developing-country markets as new sources of growth, policymakers must remove barriers to “South-South" trade and investment, which are still higher than those with the industrialised world.
Azis said the risks of integration are always there. But as the integration grows, these risks will get more attention.
Song said Asean agreed to hasten the establishment of the Asean Economic Community by 2015 and to transform Asean into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital.
He said there might be risks that Asean may not be able to achieve the ambitious goal, and every member country has to work hard to get there. Integration could increase the risk of financial contagion, trade diversion and income inequality within countries.
He said the step-by-step process of integration and cooperation that has been taking place in Asean since its formation is the right formula and hence needs to be pursued to ensure a "smooth process."