A Single Asian Currency: Prospects and Challenges
Haruhiko Kuroda, who took over as ADB president in February 2005 after years at Japan’s finance ministry, has been quietly circulating a proposal for an Asian Currency Unit—a basket index of thirteen regional currencies that would function, in his vision, as a reference rate for exchange-rate coordination across East Asia. The technical work is still in progress; the announcement is expected sometime in the spring. Call it the ACU. Call it ambition. The real question is whether the structural conditions exist to make it more than a basket.
The European comparison is irresistible and misleading in equal measure. The euro emerged from forty years of political integration, two failed exchange-rate mechanisms, the Delors Report, and a treaty signed at Maastricht that legally bound sovereign governments to fiscal targets. Asia has none of this. What it does have, since the expanded agreement of May 2005, is the Chiang Mai Initiative: a network of bilateral currency swap lines totaling roughly $39 billion among the ASEAN+3 members. CMI is a crisis liquidity tool. It is not a monetary union in embryo. The distinction matters.
Robert Mundell, whose 1961 paper on optimum currency areas is still the framework everyone reaches for, identified the conditions under which a single currency generates net benefits: high factor mobility, synchronized business cycles, openness to intra-regional trade, and some mechanism for fiscal transfers when asymmetric shocks hit. Run that checklist against East Asia and the results are not encouraging. Labor mobility between Japan and Vietnam is negligible—not just legally but linguistically and culturally. Business cycles remain substantially unsynchronized; China’s 9% growth trajectory in 2005 bears little relation to Japan’s fragile 2.7% recovery from more than a decade of near-stagnation. There is no Asian federal budget, no transfer mechanism, no institution with the political authority the ECB holds.
The income dispersion alone is staggering. Japan’s GDP per capita is around $35,000. South Korea is near $16,000. China comes in at roughly $1,700. Vietnam is below $650. Fixing a single exchange rate across that range would require either perpetual capital transfers from rich to poor members—which Tokyo and Seoul will not accept—or wage and price adjustments so painful they would make the Irish adjustment of the 1980s look gentle. The ECB managed Eurozone entry with a spread between Luxembourg and Portugal of perhaps three to one. The Asia spread is sixty to one.
The political problem may be worse than the economic one. China and Japan together account for more than 70% of the proposed ACU basket’s weight. Any governance structure for a joint monetary authority would need both Beijing and Tokyo to accept binding constraints on their monetary policy. Given that the two governments cannot agree on a comfortable framework for bilateral diplomatic summits—visits to Yasukuni Shrine have kept prime-ministerial meetings suspended since late 2005—the idea of joint rate-setting deserves some skepticism.
None of this means the ACU is worthless. As a reference index for monitoring exchange-rate misalignments across the region, it has genuine analytical value. The Eurozone itself began as the European Unit of Account in the 1970s, a basket that nobody confused with real money. If the ACU generates better data on intra-regional currency movements and creates habits of coordination among finance ministries, that is something. It is not the euro.
What Asia actually needs in the near term is deeper bond markets in local currency—the Asian Bond Markets Initiative is a start—and credible current-account surveillance that does not depend entirely on Washington pressing Beijing on the renminbi. The swap lines under CMI help at the margin. A shared index helps a little more. A monetary union is a generational project, if it is a project at all, and the honest answer is that nobody in the region is ready to pay its political price.
Readers tracking Korea’s own position in this architecture will find our piece on South Korea and the Asian development model useful—Seoul’s negotiating stance on regional monetary questions is inseparable from its chaebol-driven export dependence. The income and growth divergence between the region’s two largest economies is examined in more detail in China and India: Who Is Hot in 2006?. And for a reminder that currency architecture is not only an Asian problem, the discussion of Mexico’s banking system and its dollar dependence offers a Latin American angle on the same structural question.