Has dollar pegging paid off for Asia?

• Position: Economic conditions in Asia

Mention Asia and currencies, and most people think of China. But setting China aside for a moment, has dollar pegging paid off for the rest of Asia? Since 1997-98, most emerging Asian market economies have run a de facto or explicit peg against the U.S. dollar. Many U.S. commentators view this as an expensive form of insurance against currency speculators, an approach with significant costs to domestic Asian households and business purchasing power. Other Asian observers believe that this strategy is in keeping with the long-term bias toward savings and export-oriented growth. As international pressure mounts for the dollar to adjust downward against Asian currencies, have the last six years of this policy on the whole been a success for the Asian markets?

Three top experts offer their views.

TADASHI NAKAMAE

President, Nakamae International Economic Research

Eight years ago, at the height of the Asian currency crisis, the fundamental objective for the economies of Asia (excluding China and Japan) was to curb over-investment and to increase domestic consumption. In fact, as the capital investment bubble subsided, Asian consumption increased only marginally, whereas exports grew massively. Now therefore, with pressure mounting on the United States to save more and spend less on imports, the export-dependent economies of Asia look increasingly vulnerable.

Dollar pegging was a necessary expedient to stabilize the markets. By keeping Asian currencies undervalued, it was partly to blame for Asia's shift to an economic structure that is overly dependent on exports. But I lay greater blame at the door of the U.S. Federal Reserve. The Fed's unduly expansionary monetary easing, first in response to the Asian, LTCM, and Russian crises, then with redoubled intensity following the September 11 attacks, created successive demand bubbles in the United States which lured Asia off course.

Take Thailand, for example, where the Asian currency crisis began. Fixed capital formation in Thailand subsided from 41 percent of GDP in 1996 to 24 percent in 2003, a decline of 17 percentage points. The GDP share of personal consumption increased by only around 3 percentage points over the period. Net exports, meanwhile, registered a 13 percentage point increase from minus 6 percent in 1996 to 7 percent of GDP in 2003. Gross exports rose from 39 percent to 66 percent of Thai GDP.

True, most of the increase in Thai exports has been in exports to China, not to the United States. But how much Chinese demand would there be for Thai products without sustained U.S. demand for Chinese products? I fear the day is coming when we will find out.

Ironically, the operations of Asian central bankers have hastened the advent of that day. Central bank intervention to maintain the dollar peg caused the accumulated foreign exchange reserves of the Asian...