The Parallel-Currency Approach to Asian Monetary Integration

Since the crisis of 1997–1998, there has been a proliferation of proposals for fostering Asian monetary integration. Asian countries, it is suggested, should collectively peg their currencies to the dollar, the yen, or a dollar-yen-euro basket, or establish a multilateral currency grid like the European Monetary System (EMS). The resulting exchange rate stability would promote intraregional trade, simplify investment planning, and encourage cross-border participation in local bond markets. Experience with establishing and maintaining a system of stable exchange rates would help ready the region for the introduction of a single currency. Asia, in this view, should emulate Europe’s approach to regional monetary integration. Along with the attractions of the European example, however, there are also dangers. Defending a system of currency pegs in the presence of high capital mobility requires the close convergence of policies and the maintenance of confidence. If either precondition is disturbed, a country will require extensive financial support in order to defend its peg or to undertake an orderly realignment. In practice, Asian countries possess neither the willingness to subordinate other policies to these imperatives nor the solidarity needed to offer extensive financial supports. Absent an appetite for political integration, there is little readiness to create a regional central bank like the European Central Bank, since there is no counterpart to the European Parliament to hold it accountable for its actions. Hence, there is little prospect of early monetary union to tie down expectations. A system of Asian currency pegs would consequently be fragile and crisis-prone. As a road to monetary unification, it would be a dead end. It would be better for governments to create an Asian Currency Unit (ACU), constituted as a weighted average of Asian currencies, and allow it to circulate alongside their national currencies. This would have three advantages. First, it would not be necessary to stabilize exchange rates between the currencies comprising the basket; hence, fragility would be less. Second, the parallel currency would be more stable than any one national currency in terms of aggregate Asian production and exports; it would, thus, be a vehicle for encouraging intraregional trade and investment. Third, the decision to move to a single currency could be driven by economics rather than politics. Only when a critical mass of producers, exporters, and investors had adopted the parallel currency would it be clear that Asian economies were ready for monetary unification.