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A Single Currency for Asia?
ADB Review [ July - August 2004 ]

East Asia should start addressing the challenges of adopting a single currency

By Graham Dwyer (gdwyer@adb.org)
External Relations Specialist

"Before creating a single currency, the East Asian countries would have to overcome several hurdles"

Haruhiko Kuroda, Special Adviser to the Cabinet in Japan

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.

Introducing the seminar, “A Single Currency for East Asia: Lessons from Europe,” held ahead of the opening of the 37th Annual Meeting of ADB’s 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 Association of Southeast Asian Nations (ASEAN)+3 finance ministers in May 2000; greater regional bond market development; trade cooperation through free trade agreements hand in hand with the fourth step, cooperation on intraregional 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 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 support 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.

“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, said 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 shows that the highest per capita income in Asia is about 140 times that of the lowest as of 2001, in contrast with Europe, where countries were more on a par with each other.

“The key challenge facing the move toward 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 said there is a major difference between the common locking of exchange rates by 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.”

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