It was one morning during one of those ugly winters in Ann Arbor when I found myself sitting close to the front row of an economics class. The professor sounded odd but then again, I am sure I sounded odd to my friends here.
Regardless, with me still half awake, I heard the professor say something about the amount of trade between Vancouver and Seattle corresponding to the distance between the Earth and the moon. Was the professor nuts or maybe I was dreaming?
That statement was so out of this world that it halted my descent to slumberland. It turned out that the professor was discussing the relationship between trade and currency. Yawning widely, I straightened my back to have another shot at staying awake.
On the screen up front, there was a table listing trade volume between various US cities and with cities in other countries. There was a typical regression model projected on the screen too. I do not particularly remember the exact equation but the conclusion was clear: monetary union encourages trade.
Trade volume between New York and Seattle was much higher than that between Seattle and Vancouver. This was despite the fact that New York is located on the East Coast while Vancouver is situated on the West Coast just a few hundred miles up north where the people speak rather strangely. New York and Seattle, of course ,use the US dollar while Vancouver uses something else entirely.
The whole class then mentally swam across the Atlantic to trace the evolution of the Euro. The conclusion was reinforced: trade substantially increased after the Eurozone countries adopted a single currency.
The virtue of a single currency was hammered home further by another graph indicating how fluctuation of exchange rates between countries within the Eurozone virtually disappeared: uncertainty eliminated. The professor with his New Zealand accent announced that the Europeans got tired of the exchange rate fluctuation so they decided to get rid of it altogether.
I was stranded somewhere in Minneapolis when the Euro was officially introduced to the public on Jan 1, 2002. Reactions to the introduction ranged from celebratory to bitterness at the loss of local currencies. Anecdotes by individuals having trouble adjusting to the new reality were amusing but I was merely a curious observer across the Atlantic.
Close to three years later, I found myself in a class undergoing official economic training in Ann Arbor. That particular class made me an Aseanist: I became a monetary unionist. I want to see Asean repeating the same experiment the Eurozone is undergoing, hoping this will bring on yet another halcyon period of prosperity for Southeast Asia.
The years leading to the late 1990s were great but those days are gone. Sure, we have learned one or two things from the Asian financial crisis but nothing beats the feeling of being on top of the world. When Deng Xiaoping visited Southeast Asia back in those days, he was expecting to see backwaters cities but boy, he had the shock of his life. Not only were the cities modern then, they out-rivalled those of China’s. Nowadays, the feeling is almost reversed.
The rise of Southeast Asia is a story of trade and it goes all the way back to the era of Srivijaya in the first millennium. The prosperity of this region has always been linked with trade. The prosperity of this country as a small open economy has always been linked to trade.
Asean already has a regional free trade agreement in place and progress so far has been encouraging, especially when compared to the disappointing Doha Round. We could probably see the full effect of the FTA by 2015 when all tariffs imposed on almost all Asean-based goods must be lowered to 0%. That should fuel inter-Asean trade but as demonstrated by the experience of the Eurozone, trade could be enhanced further with the introduction of a monetary union.
p/s — the article was first published by The Malaysian Insider.
2 replies on “[1677] Of greater trade with monetary union”
I concur.
Any union should come in stages and I agree with you that the first countries that should come together are Brunei, Malaysia and Singapore. The way their economies are interlinked with each other makes a union an absolute sense.
The CMLV (minus Vietnam) countries could come later.
I don’t think a monetary union is feasible on an ASEAN scale in the forseable future. With the euro, there was some level of macroeconomic standards that needed to be implemented (low inflation, low fiscal deficits, etc.) before Euro could come in.
But consider such standards are difficult to set. Singapore and Brunei (themselves in an monetary union) would probably want a really high standard, having been used to monetary stability and a strong, hard currency for some time. Whereas, it is difficult to imagine Laos, Myanmar, or even big countries like the Philippines and Indonesia agreeing to such macroeconomic standards.
In ASEAN, the strongest currency (in terms of reserves, stability, purchasing power) is the Singapore/Brunei dollar – both the smallest and second smallest countries in ASEAN. Germany had Europe’s strongest currency at that time – and was also Europe’s largest country and economy.
That said, I think there ought to be some sort of monetary union between Malaysia, Singapore and Brunei – they were all in a monetary union pre-Hussein Onn. Malaysia can afford – and needs – the sort of fiscal and monetary discipline Singapore and Brunei goes through.