A Roadmap for East Asian Monetary Integration

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A Roadmap for East Asian Monetary Integration
2006. 10

• Kyungtae Lee and Deokryong Yoon

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List of Contents

• I. Introduction
• II. The Need Why Are We Talking about Monetary
  Integration in East Asia?
• III. The Feasibility of Monetary Integration in
  East Asia
• IV. The European Experience and Implications
• V. A Roadmap for Monetary Integration in East
  Asia
• VI. A Common Vision as the Basis for a Roadmap
• VII. Conclusion

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II. The Need

• 1. To stabilize the exchange rate
• High proportion of trade in GDP
• Avoid competitive devaluation
• 2. Contagion Effect
• High intra-regional trade 16.1?23.7 (China,
  Japan, Korea, 19932003)
• High intra-regional investment
  8.1?18.7n(China, Japan, Korea, 19932003)
• 3. Speculative Attack
• - Small sized currency is easier to attack.
• 4. Efficient use of regional resources
• East Asia is the largest capital exporter and
  importer
• 5. New engine of economic growth
• - Asia accounted for over half of the worlds
  growth since 2001(in ppp)

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II. The Need Why Are We Talking about Monetary
Integration in East Asia?
ltTable 1gt Weights of Exports and Imports among
China, Japan, and Korea
Source IMF. 2006. Direction of Trade Statistics
Database.
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III. The Feasibility of Monetary Integration in
East Asia

• Three criteria to appraise the feasibility
  Self-sustainability, Optimum-Currency Area,
  Non-economic conditions
• Self-sustainability
• - Size almost equal GDP in ppp, to Europe, North
  America,
• 2nd greatest trade volume but rapid growing/
• Largest foreign reserve (See Table2)
• - External dependency external dependency
  decreased and influence of East Asia increased
• ? 1 economic growth of world economy induced
• 1970s 1 , 1980s 0.2 economic growth in East
  Asia
• ? 1 economic growth of US economy induced
• 1970s 0.8 , 1980s 0.2 economic growth in
  East Asia

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III. The Feasibility of Monetary Integration in
East Asia

• 2. OCA-Criteria
• Openness Higher intra-regional trade in East
  Asia (23.7) than in Europe (21.3)
• Inflation East Asia(6.0) shows higher average
  inflation rate than the Europe (4.3), but
  stabilizing trend.
• Volatility of real exchange rate higher in East
  Asia than in Europe
• Business cycle synchronization Lower degree of
  co-movement in East Asia
• Degree of financial integration East Asian
  countries invest 14.3 in the region whereas
  European countries put 57.2 in the region.

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III. The Feasibility of Monetary Integration in
East Asia

• 3. Non-Economic Conditions
• A broad spectrum of political systems
• Historical legacy
• Low profile of regional identity
• Lack of experience for cooperation
• Different religious/cultural backgrounds
• Low expectation to receive external support

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III. The Feasibility of Monetary Integration in
East Asia
ltTable 2gt Economic Indicators of the Three Blocks
(2004)
(billion dollars)
East Asia includes Japan, NICs (Korea, Taiwan,
Singapore, Hong Kong), ASEAN 4 (Indonesia,
Malaysia, the Philippines, Thailand), and
China. GDP (market exchange rates) was
calculated with the data provided in WDI 2005.
Sources of other data IFS (International
Financial Statistics), IMF World Factbook
(http//www.odci.gov/NS-search-pageresults),
CIA WDI (World Development Indicators).
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III. The Feasibility of Monetary Integration in
East Asia
ltFigure 1gt East Asian Economic Dependency on
External Economies
Each number shows the result of rolling
regression using the economic growth of ten
years (by that year) of the East Asian economy
without Japan. Source Rhee (2004).
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 4gt Trade-GDP Relations (19902003
Average)
(percent)
The figures show the relation of average
exports and imports between two countries to GDP.
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 5gt Average and Standard Deviation of
Inflation 197589, 19902003
(percent)
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 6gt Indicators of Price Synchronization
The figures are calculated according to
Alesina, Barro, Tenreyro (2002) and the high
figure implies low synchronization.
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 7gtProduct (Net GDP) Synchronization
A high figure means low synchronization of the
business cycle.
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 8gt East Asias Stock of Financial Assets
(2003)
(million dollars )
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III. The Feasibility of Monetary Integration in
East Asia
ltTable 9gtInternational Investment in East Asia,
2003
(million dollars)
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IV. The European Experience and Implications

• The European Experience
• The process of monetary integration
• ltPolicy coordination and exchange rate
  cooperationgt ?ltA Common exchange rate systemgt ?
  ltMonetary uniongt
• Policy coordination and exchange rate
  cooperation channels to share important
  information and to avoid policy- conflict
• Common exchange rate system
• EMCF precondition for intervention
• Snake problem of double bands (internal and
  external)
• EMS ECU, ERM, EMCF (three pillars)
• EMU EMI, ECB, Convergence criteria
• ? What is important is political initiative!

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IV. The European Experience and Implications

• 2. Major components of a Roadmap
• The process of monetary integration
• Information sharing and policy dialogue ? Loose
  exchange rate cooperation and policy coordination
  ? Close exchange rate cooperation and policy
  coordination ? A fixed exchange rate system ? A
  currency union through substituting national
  currencies with a common currency
• Timing and sequencing
• - Multi-track approach
• - Need conditions to select the countries which
  can go over to next stage

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V. A Roadmap for Monetary Integration in East Asia

• Current cooperation mechanism
• Policy dialogue Economic Review and Policy
  Dialogue (ERPD)
• Financial Arrangements Chiang Mai Initiative
  (CMI) ? Post-CMI
• ? Crisis prevention mechanisms, not for
  accelerating monetary integration
• 2. Suggestions
• Rana(2006)
• - develop CMI into Asian Monetary
  Cooperation Fund (AMCF), then Asian Central Bank
  (ACB)
• - AMCF can issue Asian Currency Unit and
  introduce exchange rate mechanism
• - ACB issues single currency

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V. A Roadmap for Monetary Integration in East Asia

• 2. Suggestions
• Haihong (2006)
• - Short term institutionalize policy dialogue
  and surveillance mechanism
• - Medium term AMF and regional exchange rate
  mechanism
• - Long term Monetary union
• 3. European experience Three stages
• -1st stage Creation environment for coordinated
  policy making
• -2nd stage Establish common exchange rate
  mechanism
• -3rd stage Create regional central bank
• ?East Asia needs a detailed Road Map for monetary
  integration.

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V. A Roadmap for Monetary Integration in East
Asia
ltTable 3gt The Three Stages of the Monetary
Integration Process
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VI. A Common vision as the Basis for a Roadmap

• Monetary integration will take a long time ?
  Setting a long term Asian vision will be
  necessary
• To use RCU in the private sector, the official
  use must precede it. ? Long term vision of
  monetary integration needed
• Long-term vision of monetary integration will
  encourage the countries to introduce regional
  exchange rate mechanism
• Declaration of a vision would not incur any
  costs, but high profit.
• Start the monetary cooperation process with
  setting a common vision

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VII. Conclusion

• East Asian countries realize the need of regional
  cooperation
• - To prevent a possible recurrence of crisis
• - To maintain exchange rate stability
• Lack of roadmap and lack of common vision
• The most important thing to start the monetary
  integration process is to arrive at a common
  vision for East Asia and draw a roadmap to
  realize the vision.

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Thank you for your attention!