The twenty-first century can be truly Asia?s if the current trend of rapid growth rates in China and India can be sustained. A study by Goldman Sachs has projected that China, India and Japan would have about 57 per cent share in world GDP by 2050 ? roughly the share Asia had in global GDP up to 1820 AD, as estimated by an OECD study by economist Angus Maddison.
In other words, Asia is on course to regain its place as the centre of gravity in the world economy. This transformation, however, will depend on Asia?s ability to manage the growing global macroeconomic imbalances without affecting the external demand that has fuelled a part of its rapid growth rates over the past decades.
The global imbalances are primarily linked to the growing current account deficit of the US economy that has crossed 5 per cent of GDP. The US deficit is reflective of excess consumption. This excess consumption has helped some Asian countries like China grow fast by providing them a market for their goods. China, for instance, has about $100 billion trade surplus with the US. The US current account deficit in turn is financed by large Asian savings that are invested in US securities. There is a growing realisation that this pattern is not sustainable. However, any exercise of restraint by the US on its consumption can adversely affect the external demand, and hence growth, in Asian countries especially China. The US has already started to put pressure on China to float its currency yuan that has been pegged with the US dollar at about 8.26 to a dollar since 1996. A floating yuan will tend to appreciate given China?s rising stockpile of forex reserves of about $400 bn. The rising yuan may affect the competitiveness and can bring down China?s trade surplus with the US. This would imply a major burden of adjustment if it is not to adversely affect the growth prospects of the region.
The burden of adjustment can be considerably reduced with greater financial and monetary cooperation in Asia.
The challenge is to establish an institutional infrastructure to recycle Asian countries? substantial savings of foreign exchange into demand generation for the region to more than compensate for any loss of demand in the US.
What could be such an institutional modality for monetary and financial cooperation in Asia? In the wake of the East Asian crisis in 1997, Japan had made a proposal of an Asian Monetary Fund, as a regional lender of last resort. Although the proposal to set up an Asian Monetary Fund did not take-off, the region has begun to move in the direction of greater financial and monetary integration with a number of proposals taking shape. Of all these initiatives, the Chiang-Mai Initiative (CMI) is probably the most concrete and active regional financial arrangements to take off in Asia. CMI was established by the ASEAN-plus-3 (China, Japan, and Korea) finance ministers at Chiang Mai in Thailand in May 2000 and provides for linking the international reserves of these countries with a series of bilateral swaps to provide for exchange rate stability. At the meeting of deputy finance ministers of CMI countries at the Asian Development Bank?s annual meeting in South Korea in mid-May 2004, these bilateral swaps are likely to be consolidated into a single multilateral facility. Another significant attempt towards financial integration is creation of the Asian Bond Fund (ABF) floated in 2003 within the framework of Asian Cooperation Dialogue set up at the initiative of Thai Prime Minister Thakshin.
The steps taken so far in the direction of monetary and financial integration are in the right direction but are too modest and symbolic to make much difference to the development prospects. Just to put the scales in perspective, the swaps entered into under CMI total about $40 bn and the initial target of the ABF was just $1 bn (although India alone contributed $1 bn). These amounts are insignificant in comparison to the combined reserves of Asian countries that now reportedly exceed $2 trillion. With these modest amounts at their disposal, these initiatives can hardly make a difference in terms of financing of large projects and thus create demand.
Time has come to think about bolder approaches for monetary and financial integration in Asia. As a part of its studies on the Asian Economic Community, RIS has made a proposal for setting up a Reserve Bank of Asia (RBA) with at least $ 100 bn of capital contributed by the member governments which may include all JACIK countries (viz Japan, ASEAN, China, India and Korea). On the strength of this capital, the RBA should be able to evolve a regional unit of account viz, an Asian Currency Unit (ACU) and be able to lend for large development projects in multiples and even earn seigniorage.
With a major programme of lending, RBA can contribute not only to development of regional infrastructure such as an Asian Gas Grid, or an Asian Satellite, Asian Railway among many others, but also generate enough demand in Asia to make up for any loss of it in the US. Hence, it will help Asia manage the adjustment smoothly besides enabling it to employ its savings for its own development. RBA will also help the countries in the region manage their foreign exchange reserves that at present are invested in low interest bearing securities in the US and elsewhere and earn a better return. CMI and ABF can be the building blocs for more ambitious approaches to monetary and financial integration in Asia as the RBA.
Prime Minister Vajpayee had stressed on the importance of an Asian Economic Community covering JACIK as a way forward for the Asian economic integration at the Bali Summit of ASEAN and India in October 2003. In the same vein, India should become part of the CMI process and push it forward to evolve into a more ambitious vehicle for regional monetary cooperation. Given the abundance of foreign exchange reserves, the monetary and financial union could justifiably be the way forward for Asian economic integration.
The author is Director General, Research and Information System for the Non-aligned and Other Developing Countries. These are his personal views. Email: nkumar@ris.org.in.