Economic Disparities Portend a Four Speed Proposed ASEAN Monetary Union with Implications for Regional Financial and Economic Stability

Posted: 29 Oct 2016

See all articles by Wenfa Ng

Wenfa Ng

National University of Singapore (NUS)

Date Written: October 27, 2016

Abstract

Common market is the initiator of the European common currency and holds significant attraction for policy makers interested in export driven growth to a greater populace and enjoying lower import duties. But, a common market requires not only political concessions from nation states, it also meant that significant amount of economic integration in the areas of regulation, and cross border flows of funds and reduced import tariffs need to be put in place, an area where steep negotiation and harmonization of regulations is necessary. Moving on from a common market to a free trade area and on to a common currency represents a challenge of different nature and greater difficulty, chief amongst which the relinquishment of significant hold on monetary policy making and, most importantly, cross border financial flows, known to have potentiated financial disequilibrium in the recent past. Despite not being an optimal currency area where the relative economic strengths of nation states fall within narrow bounds and minor concessions in rules concerning financial flow, bank reserve requirements, emergency lending and tariffs ensure financial stability in the bloc, the Eurozone remains economically stable despite a currency crisis due in large part to the emergency lending facility and quantitative easing program of the European Central Bank. However, stability does not hide deep structural problems in the two speed bloc as the industrial north of the region enjoys the benefits of a cheaper currency while the poorer south experienced gradual deindustrialization due to the punitive effects of a common currency stronger than its economic fundamentals. Similarly, the Association of South East Asian Nations (ASEAN), a grouping of 10 nation states with widely different economic strengths is working towards first a common market and a free trade area, and maybe, a future common currency. Based on economic mix and strength, the region can be divided into four groups: (i) Singapore (a mixed industrial and services economy), (ii) Malaysia, Indonesia and Thailand (industrial economies with substantial agricultural sectors), (iii) Philippines and Vietnam (agricultural economies with an industrialization program), and (iv) Cambodia, Myanmar, and Laos (mainly agricultural economies with revenues from tourism contributing significantly to national income). Brunei, with its oil and gas reserve, is the odd nation out in this analysis, and its fortunes fluctuates with that of its exchange rate with the U.S. dollar as well as macro trends with crude oil prices. The price of the future common currency is likely to be on par with the economic fundamentals of Indonesia and Thailand, a setting which would have deep implications for other nations. Asking a prospective question on the differential impacts of an ASEAN common currency on various member states highlights the risks to economic and political stability of an overvalued currency with respect to Philippines, Vietnam, Cambodia, Myanmar and Laos, where exports would be less competitive and imports more expensive. Laos, in particular, would likely suffer the most given its dependence on agriculture and tourism, and may require subsidies and transfer payments from richer member states such as Singapore, Thailand, Malaysia, Brunei and Indonesia to remain economically viable. Using a comparison, Laos’s structural problems may be more severe than those of Greece in the Eurozone. Singapore, on the other hand, would likely enjoy a boost to exports from a cheaper common currency, but would nonetheless need to do the heavy lifting together with Malaysia, Thailand, Brunei and Indonesia to ensure regional economic and financial stability. Collectively, while the idea of first a common market and free trade area that subsequently moves on to a common currency and monetary union is seductive, deeper analysis of the economic mismatch and structural problems in poorer members of ASEAN portends significant economic dislocations, and in a worse case scenario, progressive economic collapse in Laos (and maybe a few other countries) should the ASEAN common currency come into being. Economic subsidies and transfer payments from rich to poor member states would add tensions both within the bloc and in individual member states; leading to possible disintegration of the grouping founded for maintaining regional peace and stability.

Keywords: transfer payments, subsidies, common currency, currency union, monetary union, fiscal union, free trade area, trade liberalization, tariffs, Eurozone,

Suggested Citation

Ng, Wenfa, Economic Disparities Portend a Four Speed Proposed ASEAN Monetary Union with Implications for Regional Financial and Economic Stability (October 27, 2016). Available at SSRN: https://ssrn.com/abstract=2860123

Wenfa Ng (Contact Author)

National University of Singapore (NUS) ( email )

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