Asia is again grappling with a problem not of its own making. A little more than a year ago it was worried about the future of the dollar and the repercussions on the region following the dollar?s decline as the anchor currency of the world. Similarly, debt and fiscal problems in Europe have begun troubling Asia about the capacity of the euro to keep functioning as another anchor currency. So, within 15 to 20 months, Asia has found itself pondering over impacts of malaises that are not its creations.
Much of Asia?s anxieties arise from a strange dichotomy. It has integrated heavily with the non-Asian world as well as within itself through dense financial transactions. But the financial integration has probably made the region more dependent on western currencies like the dollar and euro. Bulk of Asia?s trade and commercial exchange with the rest of the world is invoiced in these two currencies. Hence, the prospects of the dollar and euro have major bearings on future macroeconomic management and outlooks of Asian economies. Realignments in the dollar or euro precipitated by changes in policies of western monetary and financial authorities, or from upheavals generated by unexpected changes in western financial markets, continue to affect Asia.
It is unfortunate that the otherwise noticeable shift in favour of Asia in the balance of power, in the world economy, has not been accompanied by a corresponding change in the ?ownership? of anchor currencies. The Yen is the only Asian currency serving as the occasional anchor. But does it enjoy the confidence of the global community as an anchor for superseding the euro? Assuming that Asia will play a bigger role in global economic activity, isn?t it important for the region to throw up a widely traded currency, other than the Yen, which will aspire to become another global anchor currency?
Unfortunately, most major Asian currencies have tended to stay rooted to the dollar or euro, on account of the region?s overwhelming imperative to remain export competitive in North American and European markets. The resultant exchange rate policies have led to regional currencies being mostly pegged against the dollar. On the other hand, currencies like the rupee that float, usually do so in a ?managed? manner, allowing sufficient scope for central bank interventions to influence nominal currency values.
Asian economies are yet to prepare themselves for the possibility of shifting to alternative Asian anchor currencies in the event of declines in the euro or dollar. It is surprising that despite being projected as two of the world?s future economic powerhouses, neither China nor India have currencies that can chip in as tradable anchors in place of the euro. The RMB largely follows the dollar. The rupee, despite being more market-determined, is often constrained from discovering its real value due to lobbyist pressures, primarily from exporters.
There have been efforts to move towards a common currency for Asia. However, these have remained ?non-starters?. Several factors are responsible for that. One is the changing economic balance within Asia. The Asian financial crisis had encouraged closer alignment of financial architectures and exchange rate policies. Japan had played a major role in this regard. There were expectations of the Yen playing a role in building an integrated Asian currency similar to that played by the Mark in shaping the euro. However, a similar role by Japan now is less likely, given the greater China-centric character that the region has acquired between the Asian meltdown and the latest global financial crisis. Korea, India and Asean?s roles in the regional economic architecture have also become larger than before. It will now require a greater degree of consultation among these economies for closer coordination of their macroeconomic policies to move towards a common currency. Such consultation and coordination requires considerable political will. At the same time, it also requires a more vigorous effort by regional forums such as the East Asia Summit for enhancing greater dialogue and cooperation.
While Asian economies are hopefully aware of the pending agenda, for the time being they have little option other than hoping that Europe and the euro take good care of themselves. Currency anchoring is an aspect of the international financial architecture where Asia has not decoupled from the West. Such decoupling, if it at all happens, is unlikely in near future.
?The author is visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. Views are personal