Prospects of Asian monetary integration
| Author | Marina Primorac |
| Position | IMF External Relations Department |
| Pages | 273-294 |
Page 273
Would a single currency be right for Asia? In his Per Jacobsson Foundation lecture, Singapore's Tharman Shanmugaratnam argued that the European Monetary Union model is not applicable. He was also unconvinced by arguments for a basket against which countries would manage their currencies or for a parallel composite currency that could promote a regional capital market.
He envisaged a continuation of the recent shift toward managed floats and inflation targeting, which would entail increasing monetary policy coordination.
Page 294
Is there a single currency in Asia's near future? Tharman Shanmugaratnam, Singapore's Minister for Education and Second Minister for Finance, weighed the prospects for Asian monetary integration in the September 17 Per Jacobsson Foundation lecture and concluded that continuing evolution toward managed floats with inflation targeting, rather than pursuit of the European model, is likely to hold the answer for Asia.
Shanmugaratnam first took stock of trade and financial integration in the region, where intraregional trade already constitutes 50 percent of total trade. And, unlike in Europe, trade integration in Asia has been a bottom-up, supply-driven process linked to the region's (and, more specifically, China's) integration with the world economy. Ten years from now- given increased foreign direct investment within Asia, a growing middle class, and development of free trade associations-60 percent of Asian trade will likely be intraregional.
Financial market integration, however, has lagged. Asian financial markets outside Tokyo are small and ill equipped, especially bond markets, and equity markets are less liquid than those in developed markets, causing Asians to look elsewhere to invest. But Shanmugaratnam expressed optimism that several complementary financial hubs may emerge as the region benefits from an easing of capital controls, more flexible exchange rates, and harmonized regulations and improved infrastructure for cross-border trading, clearing, and settlement systems.
Could a common currency or pegging to a common basket foster intraregional trade, investment, and financial flows? In Shanmugaratnam's view, the European model, which started with trade and moved on to monetary integration, is not appropriate for Asia...
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